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 ) 34 Consolidated Statements of Operations for the years ended September 30, 2025 and 2024 37 Consolidated Balance Sheets as of September 30, 2025 and 2024 38 Consolidated Statements of Cash Flows for the years ended September 30, 2025 and 2024 39 Consolidated Statements of Changes in Shareholders' Equity for the years ended September 30, 2025 and 2024 40 Notes to Consolidated Financial Statements 40 33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of DLH Holdings Corp.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of DLH Holdings Corp. and Subsidiaries (the “Company”) as of September 30, 2025 and 2024, 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, 2025, and the related notes (collectively referred to as the "consolidated financial statements"). 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, 2025 and 2024, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2025, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. 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 respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition Critical Audit Matter Description As described in Note 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 34 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. Response: The following are the primary procedures we performed to address this critical audit matter. To test the recognition of revenue, our audit procedures included among others, selecting a sample of revenue transactions and performing 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 inspected the signed contract related to the selected invoice, noting the period of performance was within the period of performance in the contract, and we recalculated the revenue to be recognized based on the contract terms. 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 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, 2025. Goodwill and Intangible Asset – Impairment Assessment Critical Audit Matter Description As described in Note 2 to the consolidated financial statements, management evaluates goodwill and intangible assets on an annual basis, or more frequently if impairment indicators exist. The Company estimates the fair value of the equity by weighting the results from the income approach and two market approaches. The income approach incorporates the use of cash flow projections. The cash-flow projections are based on financial forecasts developed by management that include revenue, weighted cost of capital (“WACC”), and gross margin projections. The market approach utilizes the Company’s market capitalization with the inclusion of a control premium, as well as guideline public company market multiples. Additionally, the fair value of the intangible assets was valued using an undiscounted cash flow. The determination of fair value involves significant judgment and estimation. Based on the methodologies described above, management concluded that no impairment of goodwill or intangible assets existed as of the measurement date. The principal considerations for our determination that performing procedures relating to the goodwill and intangible assets assessment as a critical audit matter was the significant judgment by management to determine the fair value estimates, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating management’s significant assumptions in determining fair value, including the involvement of professionals with specialized skill and knowledge. 35 Response: The following are the primary procedures we performed to address this critical audit matter. Our audit procedures included, among others, obtaining an understanding of and evaluating management’s process for identifying and evaluating potential triggering events. For the market approach, we performed procedures to test the control premium. Additionally, we evaluated the guideline public companies used for market multiples and analyzed the consistency of external market data and verified the completeness and accuracy of the underlying data. For the income approach, we evaluated management's forecasts for revenue, WACC , and gross margin. We evaluated management’s forecasting capabilities by comparing projections to the Company’s historical and current results and tested the reasonableness of these forecasts to ensure alignment with historical performance. Finally, we utilized professionals with specialized skills and knowledge to assist in (i) evaluating management’s methodology to determine fair value (ii) testing the mathematical accuracy of the models; and (iii) evaluating the reasonableness of the significant assumptions. /s/ WithumSmith+Brown, PC We have served as the Company's auditor since 2007. East Brunswick, New Jersey December 10, 2025 PCAOB ID Number  100 36 DLH HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share amounts) Year Ended September 30, 2025 2024 Revenue $ 344,497 $ 395,937 Cost of Operations Contract costs 279,333 318,447 General and administrative costs 31,199 35,538 Depreciation and amortization 17,179 17,052 Total operating costs 327,711 371,037 Income from operations 16,786 24,900 Interest expense 15,031 17,153 Income before provision for income taxes 1,755 7,747 Provision for income taxes 393 350 Net income $ 1,362 $ 7,397 Net income per share Basic $ 0.09 $ 0.52 Diluted $ 0.09 $ 0.51 Weighted average common shares outstanding Basic 14,387 14,169 Diluted 14,458 14,405 The accompanying notes are an integral part of these consolidated financial statements. 37 DLH HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands except par value of shares) September 30, 2025 September 30, 2024 ASSETS Current assets: Cash $ 125 $ 342 Accounts receivable 38,394 49,849 Other current assets 4,018 2,766 Total current assets 42,537 52,957 Goodwill 138,161 138,161 Intangible assets, net 91,865 108,321 Operating lease right-of-use assets 8,764 6,681 Deferred income taxes, net 7,947 6,245 Equipment and improvements, net 1,274 1,830 Other long-term assets 115 186 Total assets $ 290,663 $ 314,381 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 19,246 $ 25,290 Accrued payroll 12,153 12,848 Debt obligations - current, net of deferred financing costs 8,067 12,058 Operating lease liabilities - current 2,918 2,652 Other current liabilities 287 394 Total current liabilities 42,671 53,242 Long-term liabilities: Debt obligations - long-term, net of deferred financing costs 119,966 137,316 Operating lease liabilities - long-term 14,022 12,789 Other long-term liabilities 1,046 902 Total long-term liabilities 135,034 151,007 Total liabilities 177,705 204,249 Shareholders' equity: Common stock, $ 0.001 par value; authorized 40,000 shares; issued and outstanding 14,498 and 14,391 at September 30, 2025 and 2024, respectively 14 14 Additional paid-in capital 101,734 100,270 Retained earnings 11,210 9,848 Total shareholders’ equity 112,958 110,132 Total liabilities and shareholders' equity $ 290,663 $ 314,381 The accompanying notes are an integral part of these consolidated financial statements. 38 DLH HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended September 30, 2025 2024 Operating activities Net income $ 1,362 $ 7,397 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,179 17,052 Amortization of deferred financing costs charged to interest expense 1,742 1,839 Stock-based compensation expense 1,464 1,898 Deferred taxes, net ( 1,702 ) ( 3,175 ) Changes in operating assets and liabilities Accounts receivable 11,455 9,270 Other assets ( 3,190 ) 3,276 Accounts payable and accrued liabilities ( 6,043 ) ( 4,414 ) Accrued payroll ( 697 ) ( 946 ) Other liabilities 1,646 ( 4,831 ) Net cash provided by operating activities 23,216 27,366 Investing activities Purchase of equipment and improvements ( 241 ) ( 836 ) Net cash used in investing activities ( 241 ) ( 836 ) Financing activities Proceeds from revolving line of credit 253,181 361,720 Repayment of revolving line of credit ( 257,171 ) ( 359,208 ) Repayments of debt obligations ( 19,000 ) ( 27,313 ) Payments of deferred financing costs ( 202 ) — Proceeds from issuance of common stock upon exercise of options and warrants — 261 Payment of tax obligations resulting from net exercise of stock options — ( 1,863 ) Net cash used in financing activities ( 23,192 ) ( 26,403 ) Net change in cash ( 217 ) 127 Cash - beginning of year 342 215 Cash - end of year $ 125 $ 342 Supplemental disclosures of cash flow information Cash paid during the year for interest $ 13,505 $ 16,043 Cash paid during the year for income taxes $ 2,053 $ 3,264 Supplemental disclosures of non-cash activity Common stock surrendered for the exercise of stock options $ — $ 2,822 Lease liability recognized to acquire a right-of-use asset $ 4,187 $ 839 The accompanying notes are an integral part of these consolidated financial statements. 39 DLH HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended September 30, 2025 and 2024 (Amounts in thousands) Common Stock Additional Paid-In Capital Retained Earnings Total Shareholders' Equity Shares Amount Balance at September 30, 2024 14,391 $ 14 $ 100,270 $ 9,848 $ 110,132 Expense related to director restricted stock units — — 618 — 618 Expense related to employee stock-based compensation — — 846 — 846 Issuance of Common Stock upon vesting of restricted stock awards 123 — — — — Common shares surrendered for stock option exercises and restricted stock unit vesting ( 16 ) — — — — Net income — — — 1,362 1,362 Balance at September 30, 2025 14,498 $ 14 $ 101,734 $ 11,210 $ 112,958 Common Stock Additional Paid-In Capital Retained Earnings Total Shareholders' Equity Shares Amount Balance at September 30, 2023 13,950 $ 14 $ 99,974 $ 2,451 $ 102,439 Expense related to director restricted stock units — — 618 — 618 Expense related to employee stock-based compensation — — 1,280 — 1,280 Issuance of Common Stock upon vesting of restricted stock awards 62 — — — — Exercise of stock options 760 — 261 — 261 Common shares surrendered for stock option exercises and restricted stock unit vesting ( 381 ) — ( 1,863 ) — ( 1,863 ) Net income — — — 7,397 7,397 Balance at September 30, 2024 14,391 $ 14 $ 100,270 $ 9,848 $ 110,132 The accompanying notes are an integral part of these consolidated financial statements. 40 DLH HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2025 1. Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements include the accounts of DLH Holdings Corp. 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. Certain prior year amounts have been reclassified to conform to the fiscal 2025 presentation. 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 estimating costs including overhead and its allocation, valuing and determining the amortization periods for long-lived intangible assets, interest rate swaps, stock-based compensation, goodwill, and right-of-use assets and lease liabilities. 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. Segment Reporting The Company reports operating results and financial data in one operating and reportable segment. The Company provides technology-enabled business process, program management, and digital transformation solutions primarily to U.S. government agencies, which share similar economic characteristics, production processes, customer bases, and regulatory environments. The Chief Executive Officer serves as the Chief Operating Decision Maker ("CODM") and evaluates performance and allocates resources based on consolidated financial results. Significant expense categories regularly provided to the CODM to manage operations are those disclosed in the consolidated statements of operations. 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. 41 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. 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 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, accounts receivable, contract assets, 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 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. Specifically related to goodwill, if the qualitative analysis indicates a quantitative assessment is necessary, the Company utilizes multiple methods to determine its implied fair value. Each method utilizes a significant amount of judgment and may not be indicative of the Company's fair value on its own and therefore multiple methods could be combined to determine an implied fair value. Each method utilizes relevant publicly available information as well as observable market conditions. If the book value of goodwill exceeds its fair value, then an impairment is recognized and goodwill is written down to fair value. The impairment loss would be recognized as an operating expense. Equipment and improvements are recorded 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. 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. 42 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. 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, 2025, operating leases for facilities and equipment have remaining lease terms of less than 1.3 years to 7.3 years. Goodwill The Company performs impairment evaluation at least annually at the end of the fiscal year and between annual tests whenever there is an indication of impairment. The assessment at September 30, 2025 indicated a triggering event had occurred requiring that the Company perform additional quantitative assessments. The triggering event was primarily due to the decrease in the Company's share price resulting in a decline in market capitalization. Management then performed a series of quantitative assessments utilizing multiple evaluation methods. Those assessments included both market and income-based methods utilizing level 1 observable market data and level 3 estimates. Significant estimates in the market-based methods included identifying similar companies with comparable business factors such as service offerings, customers, size, growth, profitability, risk and return on investment, as well as assessing comparable market multiples and control premiums in estimating the fair value of the Company. For the market-based methods, the Company used the market capitalization with the inclusion of a control premium as one estimation of fair value. The other market-based method used publicly available market multiples of relevant publicly traded companies applied to our Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") and revenue for fiscal 2025 to estimate the Company's fair value. The income-based method is a discounted cash flow analysis and the significant estimates included expected growth rates, profitability and the weighted average cost of capital. The Company used a weighted average blend of these methods to assess its fair value. The results of those assessments indicated that the Company's fair value was in excess of the Company's book value and therefore its goodwill was not impaired. 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. There were no impairments during the years ended September 30, 2025 and 2024, respectively. 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 sheets 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, 2025 and 2024. We report interest and penalties as a component of provision for income taxes. During the years ended September 30, 2025 and 2024, we recognized no interest and no penalties related to income taxes. 43 Stock-Based Compensation The Company issues stock-based compensation through option and restricted stock unit ("RSU") grants and uses the fair value-based method to estimate stock-based compensation expense. Options issued are designated as either an incentive stock option 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 and RSU awards may depend on achievement of certain vesting criteria determined by the Compensation Committee of our Board. Shares issued upon RSU vesting and option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a Monte Carlo method to estimate the fair value as of the grant date for each grant that vest based on market or performance based criteria. Any consideration paid by the option holders to purchase shares is credited to common stock. Cash The Company considers 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 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 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, 2025 or September 30, 2024. 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, 2025 and 2024, the Company did not hold any treasury stock. Preferred Stock Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with 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, 2025 and 2024, 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 instruments for trading or speculative purposes. Risks and Uncertainties 44 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, 2025, there was no indication of any global or economic impacts to our industry. 3. New Accounting Pronouncements In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), which requires public entities to disclose significant segment expenses that are regularly provided to the Company’s Chief Operating Decision Maker (“CODM”) and included in the measure of segment profit or loss. The standard also requires disclosure of the title and position of the CODM, as well as a description of how the CODM uses segment profit or loss information in evaluating performance and allocating resources. The Company adopted ASU 2023-07 in its Annual Report on Form 10-K for the fiscal year ended September 30, 2025. DLH operates as a single reporting segment. Accordingly, the adoption of this standard did not have a material impact on the Company’s consolidated financial statements. 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. 15, 2024. We will adopt ASU 2023-09 in our Annual Report on Form 10-K for the fiscal year ending September 30, 2026. We are currently evaluating the impacts of the improvements to income tax disclosure. In November 2024, the FASB issued ASU 2024-03, “Income Statement - Reporting Comprehensive Income (Subtopic 220-40): Expense Disaggregation Disclosures”. To enhance transparency in financial reporting by requiring public business entities to disclose disaggregated information about expenses in their financial statements. The guidance mandates disclosure of specific cost components, such as inventory purchases, employee compensation, depreciation, and amortization, within relevant income statement expense captions, along with qualitative descriptions of any remaining undissected amounts. Entities must also disclose total selling expenses and define these annually. Effective for annual reporting periods beginning after December 15, 2026, and interim periods in 2027, the ASU allows prospective or retrospective application and permits early adoption. We are currently evaluating the impacts of the improvements to our disclosure. 4. Revenue Recognition The following table summarizes the contract balances recognized in accounts receivable within the Company's consolidated balance sheets at September 30, 2025 and 2024 (in thousands): 2025 2024 Contract assets $ 22,000 $ 23,945 Contract assets are included as part of accounts receivable on the consolidated balances sheets. The change from prior period was primarily due to invoice timing. There were no contract liabilities as of September 30, 2025 and September 30, 2024. The opening balance for contract assets for the fiscal year ended September 30, 2024 was $ 20,542 . 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: 45 Revenue by customer for the years ended September 30, 2025 and 2024 (in thousands): 2025 2024 Department of Health and Human Services $ 171,717 $ 184,544 Department of Veterans Affairs 116,422 139,945 Department of Defense 53,241 64,128 Other 3,117 7,320 Revenue $ 344,497 $ 395,937 Revenue by contract type for the years ended September 30, 2025 and 2024 (in thousands): 2025 2024 Time and Materials $ 177,067 $ 215,341 Firm Fixed Price 93,746 101,115 Cost Reimbursable 73,684 79,481 Revenue $ 344,497 $ 395,937 Revenue by whether the Company acts as a prime contractor or a subcontractor for the years ended September 30, 2025 and 2024 (in thousands): 2025 2024 Prime Contractor $ 315,505 $ 355,147 Subcontractor 28,992 40,790 Revenue $ 344,497 $ 395,937 5. Leases The following table summarizes lease balances presented on our consolidated balance sheets at September 30, 2025 and 2024 (in thousands): 2025 2024 Operating lease right-of-use assets $ 8,764 $ 6,681 Operating lease liabilities, current $ 2,918 $ 2,652 Operating lease liabilities, long-term 14,022 12,789 Operating lease liabilities $ 16,940 $ 15,441 As of September 30, 2025, operating leases for facilities and equipment have remaining lease terms of less than 1.3 years to 7.3 years. The non-cash increase in both lease liabilities and right-of-use assets during the current period was primarily attributable to an extension of an existing operating lease. The non-cash increase to lease liabilities from the lease extension was $ 4.2 million. For the years ended September 30, 2025 and 2024, total lease costs for our operating leases are as follows (in thousands): 2025 2024 Operating $ 3,288 $ 3,574 Short-term 785 147 Variable 187 135 Sublease income (a) ( 194 ) ( 266 ) Lease costs $ 4,066 $ 3,590 46 (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. The Company's future minimum lease payments as of September 30, 2025 are as follows (in thousands): Fiscal year ending: 2026 $ 3,993 2027 3,591 2028 3,468 2029 3,582 2030 3,194 Thereafter 2,697 Total future minimum lease payments 20,525 Less: imputed interest ( 3,585 ) Present value of future minimum lease payments 16,940 Less: current portion of operating lease liabilities ( 2,918 ) Long-term operating lease liabilities $ 14,022 At September 30, 2025, the weighted-average remaining lease term and weighted-average discount rate are 5.4 years and 6.9 %, 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 was as follows for the years ending September 30, 2025 and 2024 (in thousands): 2025 2024 Cash paid for amounts included in the measurement of lease liabilities $ 3,782 $ 4,572 Lease liabilities arising from obtaining right-of-use assets 4,187 839 Other lease information $ 7,969 $ 5,411 6. Supporting Financial Information Accounts receivable The following table summarizes accounts receivable presented on our consolidated balance sheets at September 30, 2025 and 2024 (in thousands): 2025 2024 Billed receivables $ 16,394 $ 25,904 Contract assets 22,000 23,945 Accounts receivable $ 38,394 $ 49,849 The opening balance for accounts receivable for the fiscal year ended September 30, 2024 was $ 59,119 . 47 Other current assets The following table summarizes other current assets presented on our consolidated balance sheets at September 30, 2025 and 2024 (in thousands): 2025 2024 Prepaid licenses and other expenses $ 1,892 $ 1,315 Prepaid insurance and benefits 1,015 545 Other receivables 1,111 906 Other current assets $ 4,018 $ 2,766 Goodwill There were no changes in goodwill for the year ended September 30, 2025. The balance of goodwill was approximately $ 138.2 million as of September 30, 2025 and 2024. Intangible assets, net The following table summarizes intangible assets, net presented on our consolidated balance sheets at September 30, 2025 and 2024 (in thousands): 2025 2024 Intangible assets Customer contracts and related customer relationships $ 113,622 $ 113,622 Backlog 37,249 37,249 Trade names 13,034 13,034 Covenants-not-to-compete 637 637 Total intangible assets 164,542 164,542 Less accumulated amortization: Customer contracts and related customer relationships ( 52,665 ) ( 41,297 ) Backlog ( 14,714 ) ( 10,994 ) Trade names ( 4,792 ) ( 3,488 ) Covenants-not-to-compete ( 506 ) ( 442 ) Total accumulated amortization ( 72,677 ) ( 56,221 ) Intangible assets, net $ 91,865 $ 108,321 Amortization expense for the years ended September 30, 2025 and 2024 was $ 16.5 million and $ 16.5 million, respectively. As of September 30, 2025, the estimated annual amortization expense was as follows (in thousands): For the Fiscal Year Ending September 30, 2026 $ 15,720 2027 14,694 2028 14,694 2029 13,734 2030 11,637 Thereafter 21,386 Total amortization expense $ 91,865 The weighted-average remaining amortization period at September 30, 2025: 48 Intangible assets Weighted-Average Remaining Amortization Period Customer contracts and related customer relationships 6.5 years Backlog 6.4 years Trade names 6.8 years Covenants not to compete 5.4 years Total 6.5 years 49 Equipment and improvements, net The following table summarizes equipment and improvements, net presented on our consolidated balance sheets at September 30, 2025 and 2024 (in thousands): 2025 2024 Computer equipment and software $ 4,217 $ 7,273 Leasehold improvements 1,567 1,614 Furniture and equipment 1,177 1,832 Total equipment and improvements 6,961 10,719 Less: accumulated depreciation and amortization ( 5,687 ) ( 8,889 ) Equipment and improvements, net $ 1,274 $ 1,830 Depreciation expense was $ 0.7 million and $ 0.6 million for the years ended September 30, 2025 and 2024, respectively. During the year ended September 30, 2025, the Company disposed of $ 3.9 million of equipment and improvements, primarily within the computer equipment and software category. All assets were fully depreciated and no longer in use. No cash proceeds were received as part of the disposal of these assets. Accounts payable and accrued liabilities The following table summarizes accounts payable and accrued liabilities presented on our consolidated balance sheets at September 30, 2025 and 2024 (in thousands): 2025 2024 Accounts payable $ 12,299 $ 13,421 Accrued benefits 1,214 4,519 Accrued bonus and incentive compensation 1,527 3,641 Accrued workers' compensation insurance 750 1,528 Accrued interest 474 619 Other accrued expenses 2,982 1,562 Accounts payable and accrued liabilities $ 19,246 $ 25,290 Accrued payroll The following table summarizes accrued payroll presented on our consolidated balance sheets at September 30, 2025 and 2024 (in thousands): 2025 2024 Accrued leave $ 8,112 $ 8,569 Accrued payroll 3,701 3,070 Accrued payroll taxes 340 981 Accrued severance — 228 Accrued payroll $ 12,153 $ 12,848 50 Debt obligations The following table summarizes debt obligations presented on our consolidated balance sheets at September 30, 2025 and 2024 (in thousands): 2025 2024 Secured term loan $ 123,500 $ 142,500 Secured revolving line of credit 8,067 12,058 Less: unamortized deferred financing costs ( 3,534 ) ( 5,184 ) Net bank debt obligations 128,033 149,374 Less: current portion of debt obligations, net of deferred financing costs (a) ( 8,067 ) ( 12,058 ) Long-term portion of debt obligations, net of deferred financing costs $ 119,966 $ 137,316 Through September 30, 2026, we have satisfied mandatory principal payments on our secured term loan. (a) As of September 30, 2025, the current portion was comprised of $ 8.1 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 The following table summarizes interest expense presented on our consolidated statements of operations for the years ended September 30, 2025 and 2024 (in thousands): 2025 2024 Interest expense (a) $ 13,360 $ 15,352 Interest income (b) ( 71 ) ( 38 ) Amortization of deferred financing costs (c) 1,742 1,839 Interest expense $ 15,031 $ 17,153 (a): Interest expense on borrowing. (b): Interest earned from customer payments received after the due date. (c): Amortization of expenses related to secured term loan and secured revolving line of credit. 7. Credit Facilities A summary of our credit facilities as presented on our consolidated balance sheets as follows (in millions): September 30, 2025 September 30, 2024 Arrangement Loan Balance Interest Arrangement Loan Balance Interest Secured term loan (a) due December 8, 2027 $ 123.5 SOFR 1 + 4.1 % Secured term loan (a) due December 8, 2027 $ 142.5 SOFR 1 + 4.1 % Secured revolving line of credit (b) due December 8, 2027 $ 8.1 SOFR 1 + 4.1 % Secured revolving line of credit (b) due December 8, 2027 $ 12.1 SOFR 1 + 4.1 % 1 Secured Overnight Financing Rate ("SOFR") as of September 30, 2025 and September 30, 2024 was 4.3 % and 5.2 %, 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. 51 On January 31, 2023, we executed a floating-to-fixed interest rate swap with First National Bank which has a notional amount of $ 74.0 million at September 30, 2025 , 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, 2025, interest expense has been decreased by approximately $ 0.2 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 1.15 to 1.00, and (ii) a total leverage ratio not exceeding the ratio of 4.75 :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, 2025. We are required to pay quarterly amortization payments, which commenced in December 2022. The annual amortization amounts are $ 19.0 million for fiscal year 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 outstanding principal balance on the secured term loan was $ 123.5 million as of September 30, 2025 . We have satisfied the mandatory principal payments through September 30, 2026. 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 10 Commitments and Contingencies . (b) As amended, the secured revolving line of credit has a ceiling of up to $ 50.0 million; as of September 30, 2025, we had unused borrowing capacity of $ 23.6 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 $ 8.1 million outstanding balance at September 30, 2025. 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. 8. 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, 2025, there were 1.2 million shares available for grant. Total stock-based compensation expense, presented in the table below, was recorded in general and administrative expenses included in our consolidated statements of operations for the years ended September 30, 2025 and 2024 (in thousands): 2025 2024 DLH employees (a) $ 846 $ 1,280 52 Non-employee directors 618 618 Stock-based compensation expense $ 1,464 $ 1,898 (a) 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, 2025, as follows using the Monte Carlo Method. Volatility 50 % Grant Date Performance Vesting Base Performance Vesting Criteria (Years) Calculated Fair Value December 20, 2024 Revenue Revenue increase at the end of the measurement period as compared to the year ended September 30, 2024 3 $ 0.65 December 20, 2024 Stock price Stock price is at least $ 23.04 per share average for the 30 days prior to the end of the performance period 3 $ 1.67 December 15, 2023 Revenue Revenue increase at the end of the measurement 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 3 $ 5.36 Notes: Results based on 100,000 simulations Unrecognized stock-based compensation expense Unrecognized stock-based compensation expense is presented in the table below for the years ending September 30, 2025 and 2024 (in thousands): 2025 2024 Unrecognized expense for stock compensation expense (a) $ 3,292 $ 4,417 (a): On a weighted average basis, this expense is expected to be recognized within the next 2.3 years. Restricted Stock Unit ("RSU") activity for the year ended September 30, 2025: Performance Vesting Service Vesting Total Outstanding, September 30, 2024 185,574 131,289 316,863 Granted (a) 156,453 235,009 391,462 Vested — ( 122,897 ) ( 122,897 ) Cancelled ( 109,566 ) ( 10,941 ) ( 120,507 ) Outstanding, September 30, 2025 232,461 232,460 464,921 Equity grants of RSUs were made in accordance with DLH compensation policy for non-employee directors and a total of 67,615 and 61,525 restricted stock units were issued and outstanding at September 30, 2025 and 2024, respectively. These grants have service-based vesting criteria and vest at the end of this fiscal year. Stock option activity for the year ended September 30, 2025: 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: 53 Weighted Average Weighted Remaining Aggregate Number of Average Contractual Intrinsic Shares Exercise Term Value (in thousands) Price (in years) (in thousands) Outstanding, September 30, 2024 1,236 $ 9.28 6.1 $ 1,313 Granted — — — — Exercised — — — — Cancelled ( 299 ) 9.39 — — Outstanding, September 30, 2025 937 $ 9.65 5.6 $ 10 Vested and exercisable, September 30, 2025 902 $ 9.59 5.5 $ 10 Stock options shares outstanding, vested and unvested for the years ended September 30, 2025 and 2024 (in thousands): Number of Shares 2025 2024 Vested and exercisable 902 1,176 Unvested (a) 35 60 Options outstanding 937 1,236 (a): Certain awards vest upon satisfaction of certain performance criteria. 9. 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, 2025 and 2024 (in thousands except for per share amounts): 2025 2024 Numerator: Net income $ 1,362 $ 7,397 Denominator: Denominator for basic net income per share - weighted-average outstanding shares 14,387 14,169 Effect of dilutive securities: Stock options and restricted stock 71 236 Denominator for diluted net income per share - weighted-average outstanding shares $ 14,458 $ 14,405 Net income per share - basic $ 0.09 $ 0.52 Net income per share - diluted $ 0.09 $ 0.51 54 10. Commitments and Contingencies Contractual Obligations as of September 30, 2025 (in thousands): Payments Due Per Fiscal Year Total 2026 2027 2028 2029 2030 Thereafter Debt obligations $ 131,567 $ 8,067 $ 23,750 $ 99,750 $ — $ — $ — Facility operating leases 20,525 3,993 3,591 3,468 3,582 3,194 2,697 Contractual obligations $ 152,092 $ 12,060 $ 27,341 $ 103,218 $ 3,582 $ 3,194 $ 2,697 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. 11. Related Party Transactions The Company has determined that for the years ended September 30, 2025 and 2024 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. 12. 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, 2025 and 2024 (in thousands): 2025 2024 Current expense $ 2,095 $ 3,525 Deferred benefit ( 1,702 ) ( 3,175 ) Provision for income taxes $ 393 $ 350 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, 2025 and 2024 (in thousands): 2025 2024 Income taxes at the federal statutory rate $ 387 $ 1,654 State taxes, net ( 25 ) ( 200 ) Permanent differences 152 ( 530 ) Prior year tax provision adjustments ( 260 ) ( 574 ) State tax rate changes 139 — Provision for income taxes $ 393 $ 350 An analysis of the Company's deferred tax assets and liabilities at September 30, 2025 and 2024 is as follows (in thousands): 55 2025 2024 Deferred tax assets: Net operating loss carry forwards, net $ 2,958 $ 1,903 Stock-based compensation 894 732 Accrued compensation 2,184 2,204 Capitalized transaction costs 587 532 Lease liability 3,830 1,682 Interest limitation 9,185 6,313 Total deferred tax assets 19,638 13,366 Less: valuation allowance ( 2,952 ) ( 1,894 ) Total deferred tax assets, net $ 16,686 $ 11,472 Deferred tax liabilities: Depreciation on fixed assets $ ( 302 ) $ ( 402 ) Amortization on identified intangibles and goodwill ( 5,321 ) ( 4,364 ) Accrued expenses ( 723 ) ( 461 ) Right-of-use asset ( 2,393 ) — Total deferred tax liabilities ( 8,739 ) ( 5,227 ) Net deferred tax assets $ 7,947 $ 6,245 As of September 30, 2025 the Company had gross state net operating loss carryforwards of approximately $ 51.2 million. The state net operating losses will not expire and can be carried forward indefinitely. The state net operating loss carryforwards have been reviewed and a net valuation allowance of $ 3.0 million has been recorded against those that are not likely to be utilized. The increase in the valuation allowance is attributable to additional state net operating losses generated during the year ended September 30, 2025. The One Big Beautiful Bill Act that amended Section 163(j) of the Internal Revenue Code introduced a change to the calculation of Adjusted Taxable Income ("ATI") that generally allows for a larger deduction of business interest expense. The primary change that makes the deduction more favorable and is likely to increase the company's deductible interest expense is the permanent reinstatement of EBITDA-based ATI. 13. Quarterly Financial Data (Unaudited) During fiscal year 2025, the Company made reclassification adjustments that resulted in certain transactions previously reported within general and administrative cost being reclassified to contract costs. These adjustments were applied to fiscal 2024 to conform to the current period presentation. The reclassifications did not impact total operating income, net income, or earnings per share for any period presented. The Company will continue this presentation convention in fiscal 2026. Management believes that these reclassifications enhance the presentation of the Company’s financial results by providing improved transparency and a clearer understanding of the nature of its costs of operations. 56 A summary of quarterly information for each fiscal year with the reclassified transactions is as follows (in thousands, except per share data) 2025 Quarters First Second Third Fourth Revenue $ 90,782 $ 89,212 $ 83,343 $ 81,160 Contract costs 72,771 71,594 67,649 67,319 General and administrative costs 8,067 8,238 7,631 7,263 Depreciation and amortization 4,307 4,265 4,308 4,299 Income from operations 5,637 5,115 3,755 2,279 Interest expense 4,133 3,877 3,540 3,481 Income (loss) before provision for income taxes 1,504 1,238 215 ( 1,202 ) Provision for income tax expenses (benefit from) 389 360 ( 74 ) ( 282 ) Net income (loss) $ 1,115 $ 878 $ 289 $ ( 920 ) Earnings per share: Basic $ 0.08 $ 0.06 $ 0.02 $ ( 0.06 ) Diluted $ 0.08 $ 0.06 $ 0.02 $ ( 0.06 ) 2024 Quarters First Second Third Fourth Revenue $ 97,850 $ 101,007 $ 100,694 $ 96,386 Contract costs 79,443 79,487 82,025 77,492 General and administrative costs 7,335 11,335 8,634 8,234 Depreciation and amortization 4,253 4,243 4,272 4,284 Income from operations 6,819 5,942 5,763 6,376 Interest expense 4,658 4,190 4,143 4,162 Income before provision for income taxes 2,161 1,752 1,620 2,214 Provision for income tax expenses (benefit from) 10 ( 60 ) 481 ( 81 ) Net income $ 2,151 $ 1,812 $ 1,139 $ 2,295 Earnings per share: Basic $ 0.15 $ 0.13 $ 0.08 $ 0.16 Diluted $ 0.15 $ 0.12 $ 0.08 $ 0.16 14. Employee Benefit Plans As of September 30, 2025, 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 $ 4.2 million and $ 3.4 million for the years ending September 30, 2025 and 2024, respectively. Participants are always fully vested in their elective contributions and immediately vest in Company matching contributions. 15. Subsequent Events Management has evaluated subsequent events through the date that the Company's unaudited consolidated financial statements were issued. Based on this evaluation, the Company has determined that no subsequent events have occurred which require disclosure through the date that these consolidated financial statements were issued. 57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.