Forward Looking and Cautionary Statements
You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K for the year ended
September 30, 2022. This discussion contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in this Management's Discussion and Analysis are forward-looking statements that involve risks and uncertainties. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and business. Our actual results could differ materially from the results contemplated by these forward-looking statements.
We are a provider of technology-enabled business process outsourcing and program management solutions, and public health research and analytics; primarily focused to improve and better deploy large-scale federal health and human service initiatives. We derive 99% of our revenue from agencies of the Federal government, providing services to several agencies including the
Department of Veterans Affairs, Department of Health and Human Services, Department of Defense, and Department of Homeland Security. The following table summarizes the revenues by customer for the years ended September 30, 2022and 2021, respectively (in thousands): 2022 2021 Revenue Percent of total Revenue Percent of total revenue revenue Department of Homeland Security $ 126,57632.0 % $ 2,4851.0 % Department of Veterans Affairs 126,106 31.9 % 110,078 44.7 % Department of Health and Human Services 102,201 25.9 % 91,543 37.2 % Department of Defense 33,612 8.5 % 30,930 12.6 % Customers with less than 10% share of total revenue 6,678 1.7 % 11,058 4.5 % Total revenue $ 395,173100.0 % $ 246,094100.0 %
See “Item 1A – Risk Factors – A significant portion of our revenue is
concentrated in a small number of contracts and we could be seriously
harmed if we were unable to continue providing services under, or
unsuccessful in our recompete efforts on, these contracts.” for a
discussion of concentration risk within our
The Company is a full-service provider of technology-enabled health and human services, providing solutions to three market focus areas: Defense and Veteran
Health Solutions, Human Solutions and Services, and Public Health and Life Sciences. We deliver domain-specific expertise, industry best-practices and innovations to customers across these markets leveraging seven core competencies: secure data analytics, clinical trials and laboratory services, case management, performance evaluation, system modernization, operational logistics and readiness, and strategic digital communications. The Company manages its operations from its principal executive offices in Atlanta, Georgia, and we have a complementary headquarters office in Silver Spring, Maryland. We employ over 2,400 skilled employees working in more than 30 locations throughout the United Statesand one location overseas. In recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets. On June 7, 2019we acquired Social & Scientific Systems, Inc.("S3") and on September 30, 2020, we acquired Irving Burton Associates, LLC("IBA").
The following table summarizes revenues by our markets for the years ended
2022 2021 Revenue Percent of total Revenue Percent of total revenue revenue Human Services and Solutions
$ 165,97042.0 % $ 37,26015.1 % Defense and Veteran Health Solutions 159,719 40.4 % 141,435 57.0 % Public Health and Life Sciences 69,484 17.6 % 67,399 27.9 % Total revenue $ 395,173100.0 % $ 246,094100.0 %
Forward Looking Business Trends:
Our mission is to expand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to active duty personnel, veterans, and civilian populations and communities. Our primary focus within the defense agency markets include military service members' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, process management, clinical systems support, and healthcare delivery. Our primary focus within the civilian agency markets includes healthcare and social programs delivery and readiness. These include compliance monitoring on large scale programs, technology-enabled program management, consulting, and digital communications solutions ensuring that education, health, and social standards are being achieved within underserved and at-risk populations. We believe these business development priorities will position the Company to expand within top national priority programs and funded areas.
We are exposed to and impacted by macroeconomic factors and
U.S.government policies. Current general economic conditions continue to be impacted by the COVID-19 pandemic, which resulted in both market size contractions due to economic slowdowns and government restrictions on movement during the height of the pandemic. While the rollout of vaccines has positively correlated to an improvement in macroeconomic indicators, the lifting of various public health constraints, and a reduction of many restrictions on economic activity, there continues to be significant uncertainty as to the effects of the pandemic on the economy, which may impact our results of operations or cash flows in future periods. We have seen continued demand for the services we provide under our current contract portfolio as the services we provide are largely deemed essential. Although we have also been successful in winning new contracts tied to the need to support public health initiatives in response to the pandemic, as the public health situation improves, there may be fewer such opportunities in the future. General uncertainty related to the pandemic, the long-term efficacy of vaccines and the spread of new variants, may nonetheless cause reduced demand for certain services we provide, particularly if it results in a recessionary economic environment or the spending priorities of the U.S.government shift in ways adverse to our business focus. Our ability to continue to operate without any significant negative impacts will in part depend on our continued ability to protect our employees. We have endeavored to follow recommended actions of government and health authorities to protect our employees and have been able to broadly maintain our operations. Further, we have partnered with our clients to adopt particular measures to protect our employees at distribution centers, and we have been and expect to continue to execute on the remainder of our contracts through remote and teleworking arrangements. We continue to monitor the evolving situation related to the COVID-19 pandemic and intend to continue to work with government authorities and other stakeholders to assess further potential implications to us, continue with employee safety measures to ensure that we are able to continue our operations during the pandemic, and take other actions where appropriate to mitigate other adverse consequences. However, uncertainty resulting from the pandemic could result in an unforeseen disruption to our operations (for example a closure of a key distribution facility) that may not be fully mitigated. To date we have experienced continuity in the majority of our work for our government clients. While there have been postponements of events and challenges around some project work requiring travel, overall, our government clients have continued to require our services. We are unable to predict whether, and to what extent, this trend will continue. It would be reasonable to expect some restriction of certain client activities due to COVID-19. Due to our ability to continue to perform on our contract portfolio and generate cash flow, we do not presently expect nor have experienced liquidity constraints related to COVID-19. We are presently in compliance with all covenants in our secured term loan and have access to a secured revolving line of credit to meet any short-term cash needs that cannot be funded by operations. As such, mandatory demands on our cash flow remain low. Further, we have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. For additional information on risk factors that could impact our results, please refer to "Risk Factors" in Part I, Item 1A of this Form 10-K. 24
Federal budget outlook for fiscal year 2023:
The President's budget proposal for fiscal year ("FY") 2023 outlines many initiatives that include investments to rebuild our country's physical infrastructure, strengthen supply chains, combat inflation, expand economic opportunity, respond to the changing climate, sustain and strengthen national defense, and bolster America's public health infrastructure. Specifically, the investment in public health infrastructure involves improving the nation's readiness for future pandemics and other biological threats, expanding access to vaccines and healthcare, and defeating diseases and epidemics such as, but not limited to, the opioid and HIV/AIDs epidemics. The budget's initiatives are further reflected in the budget requests for the
Department of Health and Human Services, Department of Veterans Affairs, and Department of Defense. While Congresshas not completed the final appropriation bills for the government's 2023 fiscal year, the Company continues to believe that its key programs benefit from bipartisan support and does not expect a material impact on its current business base from budget negotiations. If the appropriations bills are not timely enacted, government agencies operate under a continuing resolution ("CR"), which may negatively impact our business due to delays in new program starts, delays in contract award decisions, and other factors. On September 30, 2022, the President signed a CR providing funds to the federal government through December 16, 2022. When a CR expires, unless appropriations bills have been passed by Congressand signed by the President, or a new CR is passed and signed into law, the government must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity. We continuously review our operations in an attempt to identify programs potentially at risk from CRs so that we can consider appropriate contingency plans. Our customer's missions have received broad support from the legislative and executive branches of the federal government. As such, we do not anticipate or expect any significant changes to our operations.
VAis requesting a total of $301.4 billionfor FY 2023, an increase of $30.7 billionabove the FY 2022 request. It includes $139.1 billionin discretionary funding, an increase of $21.9 billion, and $161.3 billionin mandatory funding, an increase of $8.6 billionfrom FY 2022 enacted. The VAresearch program is expected to allocate increased funding to advance the Department's understanding of the impact of traumatic brain injury and toxic exposure(s) on long-term health outcomes, coronavirus related research and impacts, and precision oncology. The 2023 budget request for the VA'sresearch enterprise is $916 million, an increase of $34 millionfrom the 2022 budget, excluding mandatory funding. In addition, the 2023 budget estimates $4.8 billionwill be spent on telehealth treatment in 2023, an increase of $622 millionfrom the 2022 current estimate. The VAis continuing to expand this program because of its ability to leverage VAproviders and provide better services to veterans.
The FY 2023 budget request proposes
$127.3 billionin discretionary budget authority for HHS and $1.7 trillionin mandatory funding for the department. The budget proposes $63 billionin discretionary and mandatory resources for NIH, an increase of $16 billionabove FY 2022 enacted, to address the opioid crisis and ending HIV crises, make new investments in pandemic preparedness and nutrition research, and drive biomedical innovations. The budget also requests $45 millionfor telehealth, which is $9 millionabove FY 2022 enacted, to promote health services with telehealth technologies. The budget also provides for investment in programs that improve the health and well-being of young children and their families. This includes $12.2 billionfor the Office of Head Start, principally to expand eligibility for participation in the program.
The Military Health System("MHS") is one of the largest health care systems, serving over 9 million beneficiaries. As a part of the DoD, the Defense Health Agency("DHA") manages a global health care network of military and civilian medical professionals, military hospitals and clinics around the world, and supports the delivery of integrated health services to MHS beneficiaries. The funding and personnel to support MHS's mission is referred to as the Unified Medical Budget ("UMB"). The FY 2023 UMB request for the Defense Health Program ("DHP") is $36.9 billion, a decrease of $0.4 billionfrom FY 2022 enacted. It is anticipated that COVID-19 costs will decrease in FY 2023, driving a reduction in the budget request for DHP In Direct Care and Private Sector Care. 25 --------------------------------------------------------------------------------
Industry consolidation among federal government contractors:
There has been active consolidation and a strong increase in merger and
acquisition activity among federal government contractors over the past few
years that we expect to continue, fueled by public companies leveraging strong
balance sheets. Companies often look to acquisitions that augment core
capabilities, contracts, customers, market differentiators, stability, cost
synergies, and higher margin and revenue streams.
Potential impact of federal contractual set-aside laws and regulations:
The Federal government has an overall goal of 23% of prime contracts flowing through small businesses. As previously reported, various agencies within the federal government have policies that support small business goals, including the adoption of the "Rule of Two" by the
VA, which provides that the agency shall award contracts by restricting competition for the contract to service-disabled or other veteran owned businesses. To restrict competition pursuant to this rule, the contracting officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States. When two qualifying small businesses cannot be identified, the VAmay proceed to award contracts following a full and open bid process. The Company believes that its past performance in this market and track record of success provide a competitive advantage. However, the effect of set-aside provisions may limit our ability to compete for prime contractor positions on programs that we recompete or that we have targeted for growth. In these cases, the Company may elect to join a team with an eligible contractor as prime for specific pursuits that align with our core markets and corporate growth strategy.
Results of Operations
Fiscal Year Ended
The following table summarizes, for the years indicated, consolidated statements of operations data expressed (in thousands except for per share amounts, and as percentages of revenue): Year Ended September 30, 2022 2021 Change Revenue
$ 395,173100.0 % $ 246,094100.0 % $ 149,079Cost of operations Contract costs 322,886 81.7 % 194,614 79.1 % 128,272 General and administrative costs 30,730 7.8 % 25,054 10.2 % 5,676 Corporate development costs 614 0.2 % 1,088 0.4 % (474) Depreciation and amortization 7,665 1.9 % 8,115 3.3 % (450) Total operating costs 361,895 91.6 % 228,871 93.0 % 133,024 Income from operations 33,278 8.4 % 17,223 7.0 % 16,055 Interest expense 2,215 0.6 % 3,784 1.6 % (1,569) Income before provision for income taxes 31,063 7.8 % 13,439 5.4 % 17,624 Provision for income taxes 7,775 2.0 % 3,294 1.3 % 4,481 Net income $ 23,2885.8 % $ 10,1454.1 % $ 13,143Net income per share - basic $ 1.82 $ 0.81 $ 1.01Net income per share - diluted $ 1.64 $ 0.75 $ 0.89Revenue For the year ended September 30, 2022revenue was $395.2 million, an increase of $149.1 millionor 60.6% over the prior year period. The increase in revenue is due primarily to the two task orders awarded under a FEMAcontract to support Alaskawith its response to COVID-19. The revenue contribution from those task orders was $125.8 million. The remainder of our revenue growth of approximately $25 millionwas from our remaining contract portfolio was primarily due to additional contracts awarded in late fiscal 2021 and increased volume on existing contracts. 26 --------------------------------------------------------------------------------
Cost of Operations
Contract costs primarily include the costs associated with providing services to our customers. These costs are generally comprised of direct labor and associated fringe benefit costs, subcontract cost, other direct costs, and the related management and infrastructure costs. For the year ended
September 30, 2022, contract costs increased by approximately $128.3 millionprincipally due to the direct costs associated with the two task orders awarded under a FEMAcontract to support Alaskawith its response to COVID-19. General and administrative costs are for those employees not directly providing services to our customers, including but not limited to executive management, bid and proposal, accounting, and human resources. These costs increased as compared to the prior fiscal year by $5.7 millionto approximately $30.7 millionprimarily due to increased investment in the human capital and business development functions, increased regulatory compliance costs, primarily increased external accounting fees, and increased stock compensation expense from employees option grants awarded in the current fiscal year.. Corporate development costs are incremental due diligence costs, such as legal and accounting fees. Fiscal year 2021 costs were due to a transaction that was evaluated but was not executed.
For the year ended
aggregate decrease of
Interest expense includes items such as, interest expense and amortization of deferred financing costs on debt obligations. For the year ended
September 30, 2022, interest expense was $2.2 millioncompared to interest expense, net of $3.8 millionin the prior year, a decrease of approximately $1.6 millionover the prior year period. The decrease in interest expense was primarily due to the decreased balance on our secured term loan.
Provision for Income Taxes
Provision for Income taxes for the fiscal year ended
September 30, 2022was $7.8 million, an increase of approximately $4.5 millionfrom the prior fiscal year. The effective tax rate was 24.8% and 24.5% for the fiscal years ending September 30, 2022and 2021 respectively.
Non-GAAP Financial Measures for Fiscal 2022 and 2021
The Company uses EBITDA as a supplemental non-GAAP measures of our performance. The Company defines EBITDA as net income excluding (i) interest expense, (ii) provision for or benefit from income taxes, if any, and (iii) depreciation and amortization. On a non-GAAP basis, Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA") for the year ended
September 30, 2022was approximately $40.9 million, an increase of approximately $15.6 million, or 61.6%, over the prior fiscal year. The increase from the prior fiscal year was principally due to the two task orders awarded under a FEMAcontract to support Alaskawith its response to COVID-19. Those contracts contributed a significant percentage of the growth we experienced for the year-to-date period, reflecting stronger margins than initially anticipated. The increased margins were achieved by effectively staffing the projects with internal resources, rather than subcontractors, where appropriate. The Company is presenting additional non-GAAP measures to describe the impact from two short-term FEMAtask orders on its financial performance for the year ended September 30, 2022. The measures presented are revenue, operating income, net income, diluted earnings per share, and EBITDA for our enterprise contract portfolio less the respective performance on the FEMAtask orders. These resulting measures present the contract portfolio's financial performance compared to results delivered in the prior year period. Definitions of these additional non-GAAP measures are set forth in the footnotes to the reconciliation table below. These non-GAAP measures of our performance are used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and our Board utilize these non-GAAP measures to make decisions about the use of our resources, analyze performance between periods, develop internal projections and measure 27 -------------------------------------------------------------------------------- management's performance. We believe that these non-GAAP measures are useful to investors in evaluating our ongoing operating and financial results and understanding how such results compare with our historical performance. By providing this non-GAAP measure as a supplement to GAAP information, we believe this enhances investors understanding of our business and results of operations. GAAP net income to EBITDA, a non-GAAP measure for the years ended September 30, 2022and 2021 (in thousands): 2022 2021 Change Net income $ 23,288 $ 10,145 $ 13,143(i) Interest expense 2,215 3,784 (1,569) (ii) Provision for income taxes 7,775 3,294
(iii) Depreciation and amortization 7,665 8,115 (450) EBITDA
$ 40,943 $ 25,338 $ 15,605GAAP revenue, operating income, net income, diluted earnings per share, and non-GAAP EBITDA reported for the years ended September 30, 2022and 2021 to the same metrics for our contract portfolio less the FEMAtask orders (in thousands except for per share amounts): 2022 2021 Change Revenue (a) Total enterprise $ 395,173 $ 246,094 $ 149,079Less: FEMA task orders to support Alaska 125,773 1,727 124,046 Remaining contract portfolio $ 269,400 $ 244,367$ 25,033 Operating income (b) Total enterprise $ 33,278 $ 17,223$ 16,055 Less: FEMA task orders to support Alaska 12,479 117 12,362 Remaining contract portfolio $ 20,799 $ 17,106$ 3,693 Net income (c) Total enterprise $ 23,288 $ 10,145$ 13,143 Less: FEMA task orders to support Alaska 9,235 117 9,118 Remaining contract portfolio $
Diluted earnings per share (d) Total enterprise $ 1.64 $ 0.75 $ 0.89 Less: FEMA task orders to support Alaska 0.65 0.01 0.64 Remaining contract portfolio $ 0.99 $ 0.74 $ 0.25 EBITDA (e) Total enterprise
$ 40,943 $ 25,338$ 15,605 Less: FEMA task orders to support Alaska 12,479 117 12,362 Remaining contract portfolio $
(a): Revenue for the Company's remaining contract portfolio less the
FEMAtask orders represents our consolidated revenues less the revenues generated from the FEMAtask orders. 28
-------------------------------------------------------------------------------- (b): Operating income attributable to the remaining contract portfolio less the
FEMAtask orders represents the Company's consolidated operating income, determined in accordance with GAAP, less the operating income derived from the FEMAtask orders. Similarly, for the year ended September 30, 2022operating income for the FEMAtask orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 millionthe following amounts associated with such task orders: contract costs $112.1 millionand general & administrative costs of $1.2 million. (c): Net income attributable to the remaining contract portfolio less the FEMAtask orders represents the Company's consolidated net income, determined in accordance with GAAP, less the net income derived from the FEMAtask orders. For the year ended September 30, 2022net income for the FEMAtask orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 millionthe following amounts associated with such task orders: contract costs of $112.1 million, general & administrative costs of $1.2 million, and provision for income taxes of $3.2 million. (d): Diluted earnings per share (diluted EPS) for the FEMAtask orders is calculated using the net income attributable to such task orders as opposed to GAAP net income. Diluted EPS for the remaining contract portfolio (total contract portfolio excluding the FEMAtask orders) is calculated by subtracting the diluted EPS for the FEMAtask orders from the Company's total diluted EPS. (e): EBITDA attributable to the FEMAtask orders of $12.5 millionfor the year ended September 30, 2022, is arrived at through the same calculation as operating income as there are not any depreciation and amortization costs attributable to the FEMAtask orders. EBITDA for the remaining contract portfolio is calculated by subtracting the EBITDA attributable to the FEMAtask orders from the Company's total EBITDA.
Liquidity and Capital Management
For the year ended
September 30, 2022, the Company generated operating income of approximately $33.3 millionand net income of approximately $23.3 million. Cash flows from operations totaled approximately $1.2 millionand $45.7 millionfor the years ended September 30, 2022and 2021, respectively. The decrease in cash from operations was principally a result of performance of the deferred contract obligations on the FEMAtask orders, for which an advance payment was received at the end of fiscal 2021.
We used less than
during fiscal years 2022 and 2021, respectively. The cash utilized was
predominantly due to capital expenditures in fiscal year 2022 and 2021.
Cash used in financing activities during the fiscal years ended
September 30, 2022and 2021 was approximately $24.2 millionand $22.9 million, respectively. The activity in each fiscal year was primarily early repayment of principal on our secured term loan. During the year ended September 30, 2022and 2021, the Company repaid approximately $24.8 millionand $23.3 millionof secured term loan principal, respectively. We expect to continue to use operating cash flow to pay outstanding debt.
A summary of the change in cash is presented below for the years ended
Net cash provided by operating activities
Net cash used in investing activities (872)
Net cash used in by financing activities (24,194)
Net change in cash
$ (23,823) $ 22,694Sources of Cash As of September 30, 2022, our immediate sources of liquidity include cash of approximately $0.2 million, accounts receivable, and access to our secured revolving line of credit. This credit facility provides us with access of up to $25.0 million, subject to certain conditions including eligible accounts receivable. As of September 30, 2022, we had unused borrowing capacity of $23.0 million. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. We believe that our current investment and financing obligations are adequately covered by cash generated from profitable operations and that planned operating cash flow should be sufficient to support our operations for twelve months from the date of issuance of these consolidated financial statements. 29 --------------------------------------------------------------------------------
A summary of our credit facilities as of
September 30, 2022is as follows (in millions): Lender Arrangement Loan Balance Interest * Maturity Date First National Bank of Secured term loan (a) $ 22.0LIBOR* + 2.5% 09/30/25
First National Bank of Secured revolving line of $ - LIBOR* + 2.5% 09/30/25 Pennsylvania credit (b)
*LIBOR rate as of
from 2.5% to 4.5% depending on the funded indebtedness to adjusted EBITDA ratio.
(a) Represents the principal amounts payable on our secured term loan, which is secured by liens on substantially all of the assets of the Company. The principal of the secured term loan is payable in quarterly installments with the remaining balance due on
September 30, 2025. 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 as of September 30, 2022is $16.2 millionand matures in 2024. The remaining outstanding balance of our secured term loan is subject to interest rate fluctuations. (b) The secured revolving line of credit has a ceiling of up to $25.0 millionand a maturity date of September 30, 2025. The Company accessed funds from the secured revolving line of credit during the year, but has no outstanding balance at September 30, 2022. The secured term loan and secured revolving line of credit are secured by liens on substantially all of the assets of the Company. The provisions of the secured term loan and secured revolving line of credit, including financial covenants, are fully described in Note 7 to the consolidated financial statements.
Contractual Obligations as of
Payments Due By Period Next 12 2-3 4-5 More than 5 (Amounts in thousands) Total Months Years Years Years Debt obligations
$ 22,000$ - $ 22,000$ - $ - Facility operating leases 23,407 3,216 6,099 5,579 8,513 Equipment operating lease 135 83 52 - -
Total contractual obligations
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in
the United Statesrequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible assets, stock-based compensation, and measurement of loss development on workers' compensation claims. In addition, the Company estimates overhead charges and allocates such charges throughout the year. Actual results could differ from those estimates. 30
We recognize revenue over time when there is a continuous transfer of control to our customer. For our
U.S.government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S.government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. For services contracts, we satisfy our performance obligations as services are rendered. We use cost-based input and time-based output methods to measure progress. For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For firm-fixed-price contracts, the consideration received for our performance is set at a predetermined price. Revenue for our firm-fixed-price contracts is recognized over time using a straight-line measure of progress or using the percentage-of-completion method whereby progress toward completion is based on a comparison of actual costs incurred to total estimated costs to be incurred over the contract term. Contract costs are expensed as incurred. Estimated losses are recognized when identified.
Refer to Note 4 of the accompanying notes to our consolidated financial
statements contained elsewhere in this Annual Report on Form 10-K for discussion
relative to the Company’s revenue recognition in accordance with ASC-606.
Our long-lived assets include equipment and improvements, right-of-use assets, intangible assets, and goodwill. The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater than its fair value. Equipment and improvements are stated at cost. 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. Costs incurred to place the asset in service are capitalized and costs incurred after implementation are expensed. Amortization expense is recorded when the software is placed in service on a straight-line basis over the estimated useful life of the software. Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.
Intangible assets are originally recorded at fair value and amortized on a
straight-line basis over their assessed useful lives. The assessed useful lives
of the assets are 10 years.
GoodwillThe Company continues to review its goodwill for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater than its fair value. At September 30, 2022, we performed an internal goodwill impairment evaluation. We performed a qualitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, 2022, as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill. Our assessment incorporated effects of the COVID-19 pandemic, which did not have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods' results of operations. 31 --------------------------------------------------------------------------------
Provision for Income Taxes
The Company accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. The Company has fully utilized its net operating loss carryforwards.
Stock-based Equity Compensation
The Company uses the fair value-based method for stock-based equity compensation. Options issued are designated as either an incentive stock or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a
Monte Carlomethod to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is credited to capital stock.
New Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in Note 3 of the accompanying notes to our consolidated financial statements contained elsewhere in this Annual Report, and we incorporate such discussion by reference.
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