Business Combinations:

Acquisition of Social and Scientific Systems, Inc. ("SSS")

On June 7, 2019, the Company acquired 100% of the equity interests of SSS for a net purchase price of $66.5 million, or $69.6 million net of cash on hand of $3.1 million. The acquisition was financed through a combination of:


•	borrowings of $70 million under the Company’s new senior credit facility


•	cash on hand to pay transaction expenses and financings costs of $4.7 million

The acquisition of SSS is consistent with the Company’s growth strategy, as it provided contract diversification, addition of key capabilities and increased presence in the public health market.

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

The preliminary base purchase price for SSS was $70 million adjusted to reflect acquired cash, assumed liabilities and preliminary net working capital adjustments. The purchase price is subject to post-closing adjustments based on SSS’s final debt, transaction costs, net working capital, and other adjustments, as determined in accordance with the Purchase Agreement. The Company is continuing to evaluate all acquisition related adjustments.

Subject to certain limitations and conditions, the Company will be indemnified by the seller for damages resulting from breaches or inaccuracies of the representations, warranties, and covenants of the seller and SSS as set forth in the Purchase Agreement. The Purchase Agreement further provides that escrow funds of an aggregate amount of approximately $1.2 million have been established for the benefit of DLH in order to satisfy the purchase price adjustment and indemnification obligations of the seller that may arise following the closing of the acquisition. A representations and warranties insurance policy has been purchased by the Company in connection with the Purchase Agreement, under which the Company may seek recourse for breaches of the seller’s representations and warranties to supplement the indemnity escrow. The representations and warranties insurance policy is subject to certain customary exclusions and a deductible.

In accordance with ASU 2017-01, which was previously adopted, the Company is accounting for this transaction as an acquisition. We are in the process of allocating the acquisition price to the fair value of the assets and liabilities of SSS at the acquisition date. Initial estimates of the purchase price and its allocation are shown below but may be subject to change as we complete our assessment of the acquisition date balance sheet. Based on the unaudited financial statements of SSS on June 7, 2019, we estimate total acquisition consideration and the preliminary allocation of fair value to the related assets and liabilities as follows:



(Amounts in thousands)
Preliminary purchase price for SSS	$	69,558

Estimated net assets acquired
Cash and cash equivalents	$	3,037
Accounts receivable	12,819
Other current assets	1,418
Total current assets	17,274
Accounts payable and accrued expenses	(3,933		)
Payroll liabilities	(3,458		)
Estimated net working capital	9,883
Property and equipment, net	4,605
Net identifiable assets acquired	14,488
Goodwill and other intangibles	55,070
Net assets acquired	$	69,558

During the three and nine months ended June 30, 2019, SSS contributed approximately $4.5 million of revenue and $0.2 million of income from operations.

The following table presents certain results for the three and nine months ended June 30, 2019 and 2018 as though the acquisition of SSS had occurred on October 1, 2017. The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of our results if the acquisition had taken place on that date. The pro forma information was prepared by combining our reported historical results with the historical results of SSS for the pre-acquisition periods. In addition, the reported historical amounts were adjusted for the following items, net of associated tax effects:


•	The impact of acquisition financing.


•	The removal of certain SSS operations due to completed and nonrecurring contracts.


•	The removal of the legacy SSS Employee Stock Ownership Plan ("ESOP") expenses.


•	The removal of SSS's historical goodwill amortization.


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


•	The removal of SSS's historical debt-related interest expense.


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


•	The removal of legacy SSS director's fees.


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



	(in thousands)					(in thousands)
	Three Months Ended					Nine Months Ended
	June 30,					June 30,
Pro forma results	2019			2018		2019		2018
Revenue	$	51,344		$	53,578	$	151,654	$	154,570
Net income (loss)	(191		)	752		1,346		2,262

Number of shares outstanding - basic	12,036			11,899		12,011		11,875
Number of shares outstanding - diluted	13,077			12,884		13,048		12,872

Basic earnings per share (loss)	$(0.02)			$0.06		$0.11		$0.19
Diluted earnings per share (loss)	$(0.01)			$0.06		$0.10		$0.18