What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-12-04 compared with 2023-12-06 · 118 added, 184 removed, 551 unchanged (35% of the section changed)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

To the Board of Directors and Shareholders of

DLH Holdings Corp.:

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

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

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.

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

Revenue Recognition

Critical Audit Matter Description

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

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

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

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

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

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

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

As described in Note 4 to the consolidated financial statements, the Company’s consolidated revenues for the year ended September 30, 2024 were $395.9 million.

As described in Note 1 to the consolidated financial statements, the Company generally recognizes revenue over time as services are provided, as most of its contracts involve a continuous transfer of control to the customer.

The Company accounts for a contract when there is a commitment by both parties (customer and Company), payment terms are determinable, there is commercial substance, and collectability is probable.

When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation.

The Company satisfies performance obligations as services are rendered.

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 performance is set at a predetermined price.

Generally, the Company’s firm fixed price contracts are a fixed fee for monthly services and therefore recognized using a straight-line method for recognition as progress is made towards the completion of the performance obligations.

Contract modifications are reviewed to determine whether they should be accounted for as part of the original performance obligation or as a separate contract.

Contract modifications 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.

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 the measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue and profit cumulatively.

Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms.

In part, revenue recognition occurs before the Company has the right to bill, resulting in contract assets.

These contract assets are reported within Accounts receivable, net on the 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.

The principal consideration for our determination that performing procedures relating to revenue recognized over time is a critical audit matter is a high degree of auditor effort in performing procedures related to the Company’s revenue recognition, including testing of contract assets.

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.

To test the recognition of revenue, our audit procedures included among others, the testing of internal controls over the proper accumulation of labor costs by contract.

This testing covered the review and approval of timesheets, the review and approval of vendor invoices, the processing of the labor hours utilized in the sales invoices, the review and approval of sales invoices, the review and approval of sales contracts, and the review and approval of project setup in the general ledger system for the related revenue contracts.

Our control testing on contracts focused on inspecting the key provisions and deliverables within customer contracts.

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

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

for time and material contracts, we examined the recorded timesheet data related to the selected invoices, which corroborated management's assessment towards the completion of the performance obligation;

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

For cost reimbursable contracts, we examined the recorded timesheet data related to the selected invoices, which corroborated

management's assessment towards the completion of the performance obligation;

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

We also inspected the supporting evidence for any non-labor costs that are included in the transaction price.

For firm fixed price contracts, we examined the recorded timesheet data related to the selected invoices, which corroborated management's assessment towards the completion of the performance obligation;

and we inspected the signed contract related to the selected invoice, noting the period of performance was within the period of performance in the contract.

We also tested for proper revenue recognition cut off in relation to revenue in which recognition occurred before the Company had a right to bill.

To test the contract assets, we selected a sample of balances and reviewed the signed contract, timesheet data related to the contract assets, and invoices billed subsequent to year-end that related to the contract assets that existed as of September 30, 2024.

/s/ WithumSmith+Brown, PC

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Income before provision for income taxes 7,747 820

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

Provision for income tax expense (benefit)

Net income $ 7,397 $ 1,461

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Accounts payable and accrued liabilities $ 25,290 $ 29,704

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

Accrued payroll 12,848 13,794

Debt obligations - current, net of deferred financing costs 12,058 17,188

Operating lease liabilities - current 2,652 3,463

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Operating lease liabilities - long-term 12,789 15,908

Deferred taxes, net — 1,534

Other long-term liabilities 902 1,560

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Accrued payroll ( 946 ) ( 3,477 )

Deferred revenue — ( 22,273 )

Accounts payable and accrued liabilities ( 4,414 ) ( 75 )

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Payment of tax obligations resulting from net exercise of stock options ( 1,863 ) ( 650 )

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

Net cash (used in) provided by financing activities

( 26,403 ) 150,151

Net change in cash 127 ( 13 )

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Common Stock Additional

Capital Retained Earnings (Accumulated

Deficit) Total Shareholders' Equity

Capital Retained Earnings

Total Shareholders' Equity

Shares Amount

Year Ended September 30, 2023

Balance at September 30, 2023

13,950 $ 14 $ 99,974 $ 2,451 $ 102,439

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

Expense related to director restricted stock units — — 618 — 618

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Common Stock Additional

Capital Accumulated

Deficit Total Shareholders' Equity

Capital Retained Earnings

Total Shareholders' Equity

Shares Amount

Year Ended September 30, 2022

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

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

Exercise of stock warrants 54 — 200 — 200

Net income — — — 1,461 1,461

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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.

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

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.

The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Regulation S-X.

Accordingly, these statements do not include all of the information and footnotes required by GAAP for complete financial statements.

Significant Accounting Policies

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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.

The most significant of these estimates and assumptions relate to costs including valuing and determining the amortization periods for long-lived intangible assets, interest rate swaps, stock-based compensation, right-of-use assets and leases liabilities, and loss development on workers' compensation claims.

We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current and expected future outcomes, third-party evaluations, and various other assumptions that we believe are reasonable under the circumstances.

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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.

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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.

The Company reviews 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 ( 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.

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.

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

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As of September 30, 2024, operating leases for facilities and equipment have remaining lease terms of less than 1 year to 6.5 years.

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

The Company performs impairment evaluation at least annually and between annual tests whenever there is an indication of impairment.

We performed a qualitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test.

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Similarly, there were no impairments during the prior year ended September 30, 2023.

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.

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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.

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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 .

We maintain cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000.

Deposits held with financial institutions may exceed the $250,000 limit.

Accounts Receivable

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.

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

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

No allowance for doubtful accounts was deemed necessary at either September 30, 2024 or September 30, 2023.

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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

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

Risks and 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.

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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.

Business Combination

Acquisition of Grove Resource Solutions, LLC

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

The acquisition was financed through a combination of:

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

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

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

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

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

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

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

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

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

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

A representations and warranties insurance policy has been purchased by the Company in connection with the Purchase Agreement, under which the Company may seek recourse for breaches of the representations and warranties of the seller, GRSi and the equity holders.

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

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

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

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

Purchase price for GRSi $ 187,997

Purchase price allocation:

Accounts receivable 25,468

Other current assets 1,354

Equipment and improvements, net 463

Intangible assets 98,688

Accounts payable and accrued expenses ( 2,449 )

Payroll liabilities ( 7,826 )

Other current liabilities ( 325 )

Other long-term assets and liabilities ( 781 )

Identifiable net assets acquired

Goodwill $ 72,658

All operating units are aggregated into a single reportable segment.

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

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

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

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

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

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

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

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

• The removal of legacy GRSi director's fees.

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

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

Twelve Months Ended

September 30,

Pro forma results 2023 2022

Revenue $ 402,958 $ 507,251

Net income 2,054 18,912

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

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

Basic earnings per share $ 0.15 $ 1.47

Diluted earnings per share $ 0.14 $ 1.33

In November 2023, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 "Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures" which provides guidance intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, and each reported measure of segment profit or loss.

The ASU requires that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280.

The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024.

We are currently evaluating the impacts of the single reportable segment disclosures.

In December 2023, FASB issued ASU 2023-09 "Income Taxes (Topic 740):

Improvements to Income Tax Disclosures" which provides guidance on the requirements such as the requirement that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold.

DLH is a public company that reports income tax disclosures and therefore this ASU applies to the Company.

ASU 2023-09 is effective for public business entities for fiscal years beginning after Dec.

We are currently evaluating the impacts of the improvements to income tax disclosure.

In March 2024, FASB issued ASU No.

2024-01, "Scope Application of Profits Interest and Similar Awards".

The ASU clarifies how an entity determines whether a profits interest or similar award is (1) within the scope of ASC 718 or (2) not a share-based payment arrangement and therefore within the scope of other guidance.

The guidance in ASU 2024-01 applies to all entities that issue profits interest awards as compensation to employees or non-employees in exchange for goods or services.

We are currently evaluating the impacts of the improvements to our disclosure.

In March 2024, the Securities and Exchange Commission ("SEC") has released a final rule that requires registrants to provide comprehensive climate-related disclosures in their annual reports and registration statements, including those for IPOs, beginning with annual reports for the year ending December 31, 2027, for smaller reporting companies ("SRC").

Registrants must disclose climate-related financial metrics and impacts on their financial estimates and assumptions in a footnote to the audited financial statements.

The disclosures will also need to be addressed as part of management’s internal control over financial reporting ("ICFR") and will be subject to the financial statement and ICFR audit (if applicable) of an independent registered public accounting firm.

We are currently evaluating the impacts of the improvements to our disclosure.

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):

The following table summarizes the contract balances recognized in accounts receivable within the Company's consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

Contract assets $ 23,945 $ 20,542

The change from prior period is primarily due to invoice timing and increased revenue volume.

Disaggregation of revenue from contracts with customers

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Department of Defense 64,128 70,325

Department of Homeland Security 919 126,576

Other 7,320 5,374

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The following table summarizes lease balances presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

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

Operating lease right-of-use assets

$ 6,681 $ 9,656

Operating lease liabilities, current $ 2,652 $ 3,463

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$ 15,441 $ 19,371

(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, 2024 and 2023, total lease costs for our operating leases are as follows (in thousands):

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The Company's future minimum lease payments as of September 30, 2024 are as follows (in thousands):

For the Fiscal Year Ending September 30,

Fiscal year ending:

Thereafter 3,788

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Contract assets 23,945 20,542

Allowance for doubtful accounts — —

Accounts receivable $ 49,849 $ 59,119

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Other current assets $ 2,766 $ 3,067

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

Balance at September 30, 2022 $ 65,643

Increase from GRSi acquisition (a) 72,658

Tax Adjustment GRSI acquisition ( 140 )

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

Please refer to Note 4 for more information.

The balance of goodwill was $ 138,161 as of September 30, 2024 and September 30, 2023.

Intangible assets, net

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Intangible assets, net $ 108,321 $ 124,777

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.

Amortization expense for the years ended September 30, 2024 and 2023 was $ 16.5 million and $ 14.8 million, respectively.

As of September 30, 2024, the estimated annual amortization expense is as follows (in thousands):

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Thereafter 33,021

Amortization expense $ 124,777

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

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

Total amortization expense

At September 30, 2024, the weighted-average remaining amortization period in total was 7.4 years years At September 30, 2024, the weighted-average amortization period for customer contracts and related customer relationships, backlog, trade names and covenants-not-to-compete was 7.3 years, 7.6 years, 7.7 years, 5.5 years respectively.

Equipment and improvements, net

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Equipment and improvements, net $ 1,830 $ 1,590

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

Depreciation expense was $ 0.6 million and $ 0.8 million for the years ended September 30, 2024 and 2023, respectively.

Accounts payable and accrued liabilities

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The following table summarizes debt obligations presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

Secured revolving line of credit $ 9,546 $ —

Secured term loan $ 142,500 $ 169,813

Secured revolving line of credit 12,058 9,546

unamortized deferred financing costs ( 5,184 ) ( 7,024 )

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As of September 30, 2024, 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.

(a) As of September 30, 2024, the current portion comprises the $ 12.1 million outstanding balance on the secured revolving line of credit.

All fiscal 2025 mandatory loan amortization payments have been satisfied by voluntary prepayments.

Interest expense

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Interest expense on borrowing

Interest income

Interest earned from customer payments received after the due date.

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

Credit Facilities

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

A summary of our credit facilities as presented on our consolidated balance sheets as follows (in millions):

September 30, 2024 September 30, 2023

Arrangement Loan Balance Interest Arrangement Loan Balance Interest

1 unchanged sentence

$ 142.5 SOFR 1 + 4.1 %

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

Secured term loan (a) due December 8, 2027 $ 169.8 SOFR 1 + 4.1 %

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

$ 12.1 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 %.

Secured revolving line of credit (b) due December 8, 2027 $ 9.5 SOFR 1 + 4.1 %

1 Secured Overnight Financing Rate ("SOFR") as of September 30, 2024 and September 30, 2023 was 5.2 % and 5.3 %, respectively.

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

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

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

The notional amount in the floating-to-fixed interest rate swap on September 30, 2023 is $ 16.2 million and matures in 2024 and the fixed rate of 1.61 %.

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

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

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

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

On January 31, 2023, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") with FNB which has a notional amount of $ 80.0 million at September 30, 2024 , a fixed interest rate of 4.10 % and a maturity date of January 31, 2026.

As a result of entering interest rate swap agreements, for the twelve months ended September 30, 2024, interest expense has been decreased by $ 1.3 million, respectively.

The Credit Agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions.

11 unchanged sentences

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 annual amortization amounts are $ 14.3 million for fiscal year 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.

The Company made voluntary prepayments of $ 19.0 million during the twelve months ended September 30, 2024 bringing the outstanding principal balance on the secured term loan to $ 142.5 million.

We have satisfied the mandatory principal payments through September 30, 2025.

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.

29 unchanged sentences

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

December 15, 2023 Revenue Revenue increase at the end of the performance period as compared to the year ended September 30, 2023 3 $ 3.82

December 15, 2023 Stock price Stock price is at least $ 25.65 per share average for the 30 days prior to the end of the performance period

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

19 unchanged sentences

Outstanding, September 30, 2023

Granted (a) 470 11.57 — —

2,278 $ 8.40 5.8 $ 8,693

Exercised ( 760 ) 4.12 — —

1 unchanged sentence

Outstanding, September 30, 2024

1,236 $ 9.28 6.1 $ 1,313

Vested and exercisable, September 30, 2024

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

Results based on 100,000 simulations

1,177 $ 9.37 6.0 $ 1,313

Stock options shares outstanding, vested and unvested for the years ended September 30, 2024 and 2023 (in thousands):

22 unchanged sentences

Facility operating leases 18,538 3,536 3,305 2,706 2,557 2,646 3,788

Equipment operating leases 50 50 — — — — —

Contractual obligations

5 unchanged sentences

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.

The Company has determined that for the years ended September 30, 2024 and 2023 and through the filing date of this report, there were no related party transactions that have occurred which require disclosure through the date that these consolidated financial statements were issued.

Provision for Income Taxes

2 unchanged sentences

Deferred expense ( 3,175 ) ( 4,464 )

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

Income tax expense (benefit)

$ 350 $ ( 641 )

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, 2024 and 2023 (in thousands):

2 unchanged sentences

Other permanent items ( 1,104 ) ( 292 )

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

Income tax expense (benefit)

$ 350 $ ( 641 )

An analysis of the Company's deferred tax assets and liabilities at September 30, 2024 and 2023 is as follows (in thousands):

4 unchanged sentences

Capitalized transaction costs 532 973

Right of use asset/liability 1,669 —

Interest limitation 6,313 2,601

6 unchanged sentences

Accrued expenses ( 461 ) ( 515 )

Right of use liability — ( 104 )

Total deferred tax liabilities $ ( 5,227 ) $ ( 4,983 )

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

Net deferred tax assets

$ 6,245 $ 3,070

Employee Benefit Plans

4 unchanged sentences

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.

On November 6, 2024, the Company completed an amendment to its credit facility.

The amendment modified certain financial covenants thresholds for future measurement periods.

The modification did not change the financial covenants thresholds for September 30, 2024.

The amendment was approved by the Company's Board of Directors and Executive Management and the credit facility lenders.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data