UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Commission File No. 0-18492

DLH HOLDINGS CORP.

Securities registered pursuant to Section 12(g) of the Securities Exchange Act: NONE

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one):

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter March 31, 2015 $8,419,975.2016 $8,610,075.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: On November 30, 20152016 there were 9,550,53611,241,614 shares outstanding of common stock of the Registrant.

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933.

Certain information included or incorporated by reference in this document may not address historical facts and, therefore, could be interpreted to be “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including projections of financial performance; statements of plans, strategies and objectives of management for future operations; any statement concerning developments, performance or industry rankings relating to products or services; any statements regarding future economic conditions or performance; any statements of assumptions underlying any of the foregoing; and any other statements that address activities, events or developments that DLH intends, expects, projects, believes or anticipates will or may occur in the future. Forward-looking statements may be characterized by terminology such as “believe,” “anticipate,” “expect,” “should,” “intend,” “plan,” “will,” “estimates,” “projects,” “strategy” and similar expressions. These statements are based on assumptions and assessments made by the Company’s management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties that include but are not limited to the factors set forth under Item 1A, Risk Factors in this Annual Report on Form 10-K. Any such forward-looking statements are not guarantees of future performance (financial or operating), and actual results, developments and business decisions may differ materially from those envisioned by such forward-looking statements. The forward-looking statements included herein apply only as of the date of this Annual Report on Form 10-K. The Company disclaims any duty to update such forward-looking statements, all of which are expressly qualified by the foregoing.

ITEM 1. BUSINESS

Overview

DLH Holdings Corp. (“DLH” or the “Company” and also referred to as “we,” “us” and “our”) providesis a full-service provider of professional healthcare and social services to government agencies including the Department of Veteran Affairs ("VA"), Department of Health and solutions to the U.S. Government.Human Services ("HHS"), Department of Defense ("DoD"), and other government agencies. Incorporated in New Jersey in 1969, the Company principally operates through its wholly-owned subsidiarylegal entities DLH Solutions, Inc. ("DLH Solutions") and Danya International, LLC ("DLH Danya" or "Danya") and is headquartered in Atlanta, Georgia.

DLH Holdings Corp. was originally incorporated in New Jersey in 1969 as a payroll staffing company. In early 2010 the Company made the strategic decision to build around its government services entity, DLH Solutions, Inc. This transformation began with the divestitureThe foundations of its commercialour business and replacement of the CEO and CFO of the Company with executives whose skills and experience more closely aligned with the Company’s new direction. The Company isofferings are now completely focused on governmentthree primary sources of revenue within the Federal health services bothmarket space, as a prime contractor as well as a partner with other government contractors.follows:

Advancing the technology readiness level of new development items is a critical priority of our federal agency customers. Our project managers and biomedical engineers perform state-of-the-art research & development, testing & evaluation, and development of new medical systems and devices intended to enhance the medical readiness of troops in combat theaters across the globe. Our medical logistics support assists the uniformed services plan for our nation’s servicemen/womenfielding these new systems and veterans in various settings and facilities. These include Military Treatment Facilities (MTFs), Medical Centers, Community-based Outpatient Clinics (CBOCs), telehealth and virtual pharmacy centers, and Pharmacy Distribution Centers (including VA Consolidated Mail-order Outpatient Pharmacy).devices. We leverage our network of over 400 active clinicians, engineers, and other healthcare workers throughout selected regions in the US, applying differentiating tools, databases and technology to deliver these services.

For overdeliver clinical drug and alcohol counseling services to Navy installations worldwide as part of the clinical preceptorship program, thereby improving the sailor health and readiness. DLH provides a decade,range of case management, physical and behavioral health examinations and associated medical administration services to enhance the assessment and transition process for military personnel readiness commands and individual service members. DLH is also engaged in efforts to alleviate homelessness among Veterans. We provide a range of professional case management services to support Veterans' transition back into the community. These services include mental health evaluations, behavioral readiness, skills assessment, career counseling, and job preparation services.

Presently, the Company derives 100% of its revenue from agencies of the Federal government, primarily as a prime contractor but also provides professional staffas a subcontractor to other Federal prime contractors. A major customer is defined as a customer from whom the Company derives at least 10% of its revenues.

As of September 30, 2016, duration of contract awards from the VA and HHS range from approximately one to four years. These agreements are subject to the Federal government specializing in logistics, office administration, IT, and facilities/warehouse management.

At September 30, 2015,2016, the total backlog was approximately $146$233 million. Total backlog as of September 30, 20142015 was approximately $184$146 million. Backlog represents total estimated contract value of predominantly multi-year government contracts and will vary depending upon the timing of new/renewal contract awards. Backlog is based upon customer commitments that the Company believes to be firm over the remaining performance period of our contracts. Backlog value is based upon contract commitments, management judgment and assumptions about the volume of services, availability of customer funding and other factors. Our backlog may consist of both funded and unfunded amounts under existing contracts including option periods. At September 30, 2015,2016, our funded backlog was $50approximately $95 million and our unfunded backlog was $96$138 million.

The value of multi-client, competitive ID/IQIndefinite Delivery/Indefinite Quantity ("IDIQ") contract awards is included in backlog computation only when a task order is awarded. The award of an IDIQ contract does not represent a firm order for services and is subject to competitive bidding. Generally, under an IDIQ contract, the government is not obligated to order a minimum of services or supplies from its contractor, irrespective of the total estimated contract value. A number of U.S. Government programs with which we are associated are multi-year programs, and as such a substantial portion of our backlog is expected to be filled subsequent to fiscal 2016.2017. While no assurances can be given that existing contracts will result in earned revenue in any future period, or at all, the Company’s major customers have historically exercised their contractual renewal options.

Principal Executive Officers

Available Information

Presently, the Company derives all100% of its revenue from agencies of the federal government. ForFederal government, primarily as a prime contractor but also as a subcontractor to other Federal prime contractors. A major customer is defined as a customer from whom the fiscal yearsCompany derives at least 10% of its revenues.

Our largest customer continues to be the VA, which comprised approximately 72% and 95% of revenue for the twelve months ended September 30, 2016 and 2015, respectively. Additionally, HHS represents a major customer, comprising 13% of revenue for the twelve months ended September 30, 2016, after taking into account the Danya acquisition. In addition, substantially all accounts receivable, including unbilled accounts receivable, are from agencies of the U.S. Government as of September 30, 2016 and 2014, the Company derived approximately 95% and 96%, respectively, of its revenue from various contracts awarded by the DVA.2015. Accordingly, DLH remainswe remain dependent upon the continuation of its relationshipour relationships with the DVA. VA and HHS.

As of September 30, 2015, contract2016, awards from the DVA on our Federal supply schedule contract for professionalVA and allied healthcare services is in effect through June 2017. Our logistics worldwide services contract is in effect through November 2017. Both Federal contract schedules are renewed on a recurring basis for a multi-year period.HHS have anticipated periods of performance ranging from approximately one to four years. These agreements are subject to the Federal Acquisition Regulations, andRegulations. While there can be no assurance as to the actual amount of services that the Company will ultimately provide to VA and HHS under its current contracts, we believe that our strong working relationships and our effective service delivery support ongoing performance for the DVA under these awards. Moreover, these contracts are coming up for re-compete, and there is no guarantee that DLH will be the successful bidder. The Company's results of operations, cash flows and financial condition would be materially adversely affected in the event that we were unable to continue our relationships with the DVA.contract term.

Because we derive all of our revenue from contracts with the Federal government, the success and development of our business will continue to depend on our successful participation in Federal government contract programs. In recent years past, we have

 

We currently hold multiple GSA schedule contracts, including a Federal supply schedule contract for professional and allied healthcare services and the logistics worldwide services contract. If we were to lose one or more of these contracts or other contracting vehicles, we could lose a significant revenue source and our operating results and financial condition could be materially and adversely affected.

Our profitable financial results depend upon increasing our revenue while managing costs and expense. Our quarterly revenue and operating results may fluctuate significantly and unpredictably in the future. We have expended, and will continue to expend, substantial resources to enhance our health services offerings and expansion into the Federal health market. We may incur growth expenses before new business revenue is realized, thus showing lower profitability in a particular period or consecutive periods. We may be unable to achieve desired levels of revenue growth due to circumstances that are beyond our control, as already expressed regarding competition, government budgets, and the procurement process in general. Although we continue to manage our operating costs and expenses, there is no guarantee that we will significantly increase future revenue and profit in any particular future period. Revenue levels achieved from our customers, the mix of solutions that we offer and our performance on future contracts will affect our financial results.

U.S. Government programs are subject to annual congressional budget authorization and appropriation processes. For many programs, Congress appropriates funds on a fiscal year basis even though the program performance period may extend over several years. Consequently, programs are often partially funded initially and additional funds are committed only as Congress makes further appropriations. Further, congressional seats may change during election years, and the balance of spending priorities may change along with them. The election of a new President of the United States could also change Federal spending priorities. These potential shifts in spending priorities could result in lower funding for our VA and Head Start programs.

DVA programs, which accounted for approximately 95% of our revenue during the past two years, were exempt from the spending caps established under Federal government sequestration targets enacted in 2013. However, ourOur growth into other government markets may be impacted by measures in place since March 2013, when the federal government began operating under sequestration required by the Budget Control Act of 2011 (BCA). Under sequestration, reductions in both defense and civil agency expenditures have taken place in each of the government’s fiscal years since 2013 and, unless the BCA is amended or repealed, will continue through the government’s Fiscal Year 2021.

Many of our contracts and task orders with the Federal government are awarded through a competitive bidding process, which is complex and sometimes lengthy. We expect that much of the business that we will seek in the foreseeable future will continue to be awarded through competitive bidding. Many of our competitors are larger and have greater resources than we do,

This competitive bidding process presents a number of risks, including the following: (i) we expend substantial cost and managerial time and effort to prepare bids and proposals for contracts that we may not win, and to defend those bids through any protest process; (ii) we may be unable to estimate accurately the resources and cost structure that will be required to service any contract we win; and (iii) we may encounter expenses and delays if our competitors protest or challenge awards of contracts to us in competitive bidding, and any such protest or challenge could result in the resubmission of bids on modified specifications, or in the termination, reduction or modification of the awarded contract. There can be no assurance that we will win any particular bid, or that we will be able to replace business lost upon expiration or completion of a contract, and the termination or non-renewal of any of our significant contracts could cause our actual results to differ materially and adversely from those anticipated.

If a bid is won and a contract awarded, there still is the possibility of a bid protest or other delays in implementation. Our business could be adversely affected by delays caused by our competitors protesting major contract awards received by us, resulting in the delay of the initiation of work. It can take many months to resolve protests by one or more of our competitors of contract awards we receive. The resulting delay in the startup and funding of the work under these contracts may cause our actual results to differ materially and adversely from those anticipated, and there can be no assurance that such protest process or implementation delays will not have a material adverse effect on our financial condition or results of operations in the future.

 

Many federal government contracts require us to have security clearances and employ personnel with specified levels of education, work experience and security clearances. Depending on the level of clearance, security clearances can be difficult and time-consuming to obtain. If we or our employees lose or are unable to obtain necessary security clearances, we may not be

able to win new business and our existing clients could terminate their contracts with us or decide not to renew them. To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not derive the revenue anticipated from the contract, which could cause our results to differ materially and adversely from those anticipated.

Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years. The U.S. Government may modify, curtail or terminate its contracts and subcontracts for convenience and to the extent that a contract award contemplates one or more option years, the Government may decline to exercise such option periods. Accordingly, the maximum contract value specified under a government contract or task order awarded to us is not necessarily indicative of the revenue that we will realize under that contract. Due to our dependence on these programs, the modification,

Although we carry multiple lines of liability insurance (including coverage for medical malpractice and workers' compensation), they may not be sufficient to cover the total cost of any judgments, settlements or costs relating to any present or future claims, suits or complaints. If we are unable to secure renewal of our insurance contracts or the renewal of such contracts with favorable rates and with competitive benefits, our business could be adversely affected. In addition, sufficient insurance may not be available to us in the future on satisfactory terms or at all. Our placement of employees increases our potential liability for negligence and professional malpractice and such liabilities may not become immediately apparent. Any increase in our costs of insurance will impact our profitability to the extent that we cannot offset these increases into our costs of services. If the insurance we carry is not sufficient to cover any judgments, settlements or costs relating to any present or

We are highly dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations match employee resources and client assignments and track regulatory credentialing. They also perform payroll, billing and accounts receivable functions. While we have multiple back up plans for these types of contingencies, our information systems are vulnerable to fire, storm, flood, power loss, telecommunication outages, physical or software break-ins and similar events. If our information systems become inoperable, or are otherwise unavailable, these functions would have to be accomplished manually, which in turn could impact our financial viability, due to the increased cost associated with performing these functions manually.

One of our potential paths to key growth strategies is to selectively pursue acquisitions. Through acquisitions, we expect tomay be able to expand our base of federal government customers, increase the range of solutions we offer to our customers and deepen our penetration of existing markets and customers. We may encounter difficulty identifyingnot identify and executingexecute suitable acquisitions. To the extent that management is involved in identifying acquisition opportunities or integrating new acquisitions into our business, our management may be diverted from operating our core business. Without acquisitions, we may not grow as rapidly as expected,otherwise, which could cause our actual results to differ materially and adversely from those anticipated.

We may encounter other risks in executing our acquisition strategy,regard to making acquisitions, including:

Any of these risks could cause our actual results to differ materially and adversely from those anticipated.

The success of our acquisition strategy will depend upon our ability to successfully integrate any businesses we may acquire in the future. The integration of these businesses into our operations may result in unforeseen operating difficulties, absorb significant management attention and require significant financial resources that would otherwise be available for the ongoing development of our business. These integration difficulties include the integration of personnel with disparate business

backgrounds, the transition to new information systems, coordination of geographically dispersed organizations, loss of key employees of acquired companies, and reconciliation of different corporate cultures. For these or other reasons, we may be unable to retain key customers of acquired companies. Moreover, any acquired business may not generate the revenue or net income we expected or produce the efficiencies or cost-savings we anticipated. Any of these outcomes could cause our actual results to differ materially and adversely from those anticipated.

Our performance of government contracts may involve the issuance of subcontracts to other companies upon which we rely to perform all or a portion of the work we are obligated to deliver to our customers. Unsatisfactory performance by one or more of our subcontractors to deliver on a timely basis the agreed-upon supplies, perform the agreed-upon services, or appropriately manage their vendors may materially and adversely impact our ability to perform our obligations as a prime contractor.  A subcontractor’s performance deficiency could result in the government terminating our contract for default. A default termination could expose us to liability for excess costs of reprocurement by the government and have a material adverse effect on our ability to compete for future contracts and task orders. Depending upon the level of problem experienced, such problems with subcontractors could cause our actual results to differ materially and adversely from those anticipated.

At September 30, 2015,2016, we had net operating losses, or NOLs, of approximately $36.8$36 million and $2.4$3.6 million for U.S. and state tax return purposes, respectively. Our U.S. NOLs begin to expire in 2021 and continue to expire through 2033. The tax effect of these net operating losses are offset by valuation allowances of $1.8 million as of September 30, 2015. Due to our

recent trend of positive operating results, in the fiscal year ended September 30, 20152016 we realized a $5.5$0.9 million net tax benefit related to the release of a portion of our valuation allowance, to reflect the amount of our deferred tax asset that we expect to realize in future years. This release is based upon our current estimate of future taxable earnings based on results generated through the fiscal year ended September 30, 2015.2016. As a result of our non-cash valuation allowance release during our fiscal year ended September 30, 2015,2016, our U.S. tax provision expense in future periods may be at a higher effective tax rate, which will reduce our net income (or loss) and earnings (or loss) per share by a greater amount than it has in the past.

ITEM 1B. UNRESOLVED STAFF COMMENTS

ITEM 2. PROPERTIES

Operations and Facilities

In the fiscal year ended September 30, 2015,2016, DLH's total lease expense for operations was approximately $220,000,$573 thousand, which included the 1776 Peachtree StreetSilver Spring location in Atlanta and the vacated premise in Loganville Georgia.as of May 3, 2016. Annual lease payments for all of our two locations, shown in the table below, are approximately $252,000 for the first lease year commencing on September 1, 2015, increasing annually to approximately $307, 000 for the ninth lease year ending on April 31, 2024. These lease amounts assume that DLH will vacate the 1776 Peachtree Street location at the end of the lease term on July 31, 2017.$874 thousand per year.

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. Other than previously reported, 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.

 

Not applicable.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Principal Market

Market Information

Common Stock

Dividends

Approximate Number of Equity Security Holders

Sales of Unregistered Securities

Securities Authorized for Issuance under Equity Compensation Plans

On September 18, 2013, the Company announced that our Board of Directors authorized a stock repurchase program (the Program) under which we could repurchase up to $350 thousand of shares of our common stock through open market transactions in compliance with Securities and Exchange Commission Rule 10b-18, privately negotiated transactions, or other means. This repurchase program does not have an expiration date.

During fiscal fourth quarter ended September 30, 2015,2016, the Company did not repurchase any shares of its common stock pursuant to the program. As of September 30, 20152016 there is a total of $77 thousand remaining for repurchases under the program.

The following table provides certain information with respect to the status of our stock repurchase program as of fourth quarter ended September 30, 2015:2016:

ITEM 6. SELECTED FINANCIAL DATA

 

 

DLH providesis a provider of technology-enabled business process outsourcing and program management solutions, primarily to improve and better deploy large-scale federal health and human service initiatives. DLH is a pure-play federal contractor, providing services and solutions within two broad US Government markets: healthcare and logistics. Our offerings are segregated into two revenue streams: Healthcare Delivery Solutions and Logistics & Technical Services, which now includes our contingency staff augmentation service offering. Our services are provided to governmentseveral agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD"). On May 3, 2016, DLH acquired Danya International, LLC (“Danya”), strengthening the company’s breadth of services and othersignificantly increasing its size. Danya provides technology-enabled program management, consulting, and digital communications services to federal government clients.agencies. The results of Danya are included in our results of operations since the closing date.

The approximate percentagefoundations of our business offerings are now focused on three primary sources of revenue derived fromwithin the Federal health services market space, as follows:

DLH's mission is to become the most trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to active duty personnel securing the freedom of our nation, veterans, and civilian populations and communities. Our strategic business capture initiatives emphasizeprimary focus within the defense agency markets include military service members and veteransveterans' requirements for telehealth services, behavioral healthcare, medication therapy management, health IT commodities, process management, clinical systems support, and healthcare delivery. Our primary focus within the civilian agency markets include 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 DLH to expand within top national priority programs and funded areas.

The President’s proposed FY2017 budget submitted in February 2016 called for $4.2 trillion in federal government spending, representing a four percent increase over fiscal 2016. Of that, $1.15 trillion was for the discretionary spending budget that Congress legislates each year and nearly $2.8 trillion would be for mandatory spending authorized by recent bipartisanexisting law. Compared to 2016, discretionary spending would decrease in every category except veterans’ benefits and Pentagon supportlabor.

DLH continues to see a critical need for expanded health care solutions within our sector of the Federalfederal health market, largely focused on the needs of veterans and their families. The 2017 Budget and 2018 Advance Appropriations requests for VA fulfill the President’s promise to provide America’s veterans, their families, and Survivors the care and benefits they have earned through their service. Fiscal year 20162017 is the seventheighth year in a row that the President has requested, and Congress has approved, a significant funding increase for DVAVA to meet the Nation’snation’s obligations to our Veterans.veterans. Moreover, DVAVA programs were exempt from the spending caps established under Federalfederal government sequestration targets enacted in 2013.

The DVAVA operates the nation's largest integrated health care system - with more than 1,700 hospitals, clinics, community living centers, domiciliaries, readjustment counseling centers, and other facilities. The DVA anticipates that nearly 9.4facilities - serving approximately 8.76 million Veterans will be enrolled in VA health care in the year 2016, and that their largest staff increase will be in medical care services. According to the DVA, the number of unique Veteran clients who use the VHA healthcare system is up almost 20% over 2009.each year.

The DVA 2016 Budget and 2017 Advance Appropriations provisions fulfill President Obama’s promise to provide America’s veterans, their families, and survivors the care and benefits they have earned through their service,VA FY 2016-2017 agency priority goals are:

HHS is the principal federal department charged with protecting the health of all Americans and providing essential human services. The FY2017 budget prioritizes core services and programs and makes targeted investments in the training and support of health care providers, innovative biomedical research, food and drug safety, mental health services, health care for Native Americans and Alaska natives, early childhood programs, and services for other vulnerable populations.

HHS budget authority has continued to grow during the recent tight federal budget environment, having increased from $0.96 trillion in fiscal 2014 to $1.09 trillion for fiscal 2016.

According to HHS projections, national health insurance spending is expected to reach $5.43$5.63 trillion and comprise 19.6%20.1% of Gross Domestic Product (GDP) by 2024. The2025. Federal health expenditure projectionsexpenditures are expected to reach $1.75 trillion by 2024,2025, growing at a 5.1%4.9% compound annual growth rate (CAGR) from an estimated $1.02$1.04 trillion in 2014.2015.

The HHS FY2017 budget proposed over $1 billion to enablecombat the diagnosis, consultation, treatment,prescription opioid and care management of patientsheroin epidemic by health care providers. Telehealth technologies can transform health care delivery by improvingexpanding access to quality care by removing traditional barriers to health care delivery such as distance, mobility,evidence-based treatment, encouraging safe prescribing practices, and time constraints.

The U.S. Department of Health & Human Services National Health Expenditures Projections for 2014-2024 indicateHHS projects that prescription drug spending growth is projected to average 6.3 percent annual growthwill grow 6.7% annually from 20152016 through 20242025 due to improving economic conditions, changes in benefit management designed to encourage better drug adherence for people with chronic health conditions, and anticipated changing clinical guidelines designed to encourage drug therapies at earlier stages of treatment. These projected trends align with our expertise in managing large-scale prescription drug processing and delivery solutions, and we continue to assess additional opportunities in the Federal market as they arise.

LargeThere has been active consolidation and a strong increase in M&A activity among federal government contractors have begun divesting fromover the Federal servicespast few years that is expected to continue into fiscal year 2017 and beyond, fueled by public companies leveraging strong balance sheets to pursue strategic acquisitions that supplement organic growth and create shareholder value. Companies often look to acquisitions that augment core capabilities, contracts, customers, market differentiators, stability, cost synergies, and increasing theirhigher margin and revenue streams. DLH has become active in the M&A marketplace with the acquisition of Danya in May 2016. We plan continued focus on our core capabilities, as we look at potential future strategic acquisitions to grow our business and consolidation on advanced military products, which typically generate much higher margins than services. This trend may open up increased opportunities for smaller Federal service providers such as DLH.enhance shareholder value.

The Federalfederal government has an overall goal of 23% of prime contracts flowing to small business contractors, with a means of achieving these goalsprimarily through the structuringuse of set-asides in Federal agencies requestsagency RFPs (requests for proposal. Asproposal). The Veterans Benefits, Health Care, and Information Technology Act of 2006 requires the Secretary of Veterans Affairs to set annual goals for contracting with service-disabled and other veteran-owned small businesses. The Act’s “Rule of Two,” provides that the Department shall award contracts by restricting competition for the contract to service-disabled or other veteran owned small businesses. To restrict competition under the Act, the contracting officer must reasonably expect that at least two of these businesses will submit offers and that the award can be made at a part offair and reasonable price that offers best value to the United States. Recent Task Orders on the VA T4NG IDIQ contract have been awarded under these set-aside provisions. While this has impacted our growth plan,planned expansion using the T4NG contracting vehicle, DLH may elect, from time to time, to team with other contractors in support of thesesuch small businesses set-asides for specific pursuits that align with our strategic roadmap.corporate growth strategy.

 

The following table summarizes, for the periods indicated, consolidated statements of operations data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue:

Fiscal year 20152016 revenue was $65.3$85.6 million, an increase of $4.9$20.3 million or 8.0%31.0% over the prior year period. The increase in revenue is due primarilyprincipally to new contract awardsthe acquisition of Danya on May 3, 2016, which contributed $16.7 million, and $3.5 million from continued expansion on current programs.existing contract vehicles resulting from program management and customer satisfaction with our services.

 

Direct expenses are generally comprised ofcomprise direct labor (including benefits), taxes and insurance, workers compensation expense, subcontract cost, and other direct costs. FiscalDirect expenses for the year 2015 direct expensesended September 30, 2016 were $53.7$67.8 million, an increase of approximately $2.1$14.1 million, or 4.1%26.3% over the prior year perioddue principally to the acquisition of Danya and increased professional service costs attributed to increased revenue on higher revenue.legacy DLH contracts. As a percentage of revenue, direct expenses decreased by approximately (3.1)were 79.2%, a favorable reduction of (2.9)%, with the improvement attributable to increased contribution from Danya, effective program performancemanagement and cost management.efficiencies on existing contracts, partially offset by start-up costs on new contract awards. We continue to focus on internal productivity measures to control costs and improve our gross margin.

Gross margin for the year ended September 30, 20152016 was approximately $11.7$17.8 million, an increase of approximately $2.7$6.1 million or 30.5%52.5% over prior fiscal year on higher revenue and improved performance on contracts. As a percentage of revenue, our gross margin rate of 17.9% for the year ended September 30, 2015,20.8% increased by 3.1%290 basis points, or 2.9%, over the prior year period.year. Favorable gross margin results are due principally to increased contribution from Danya, more complex contracts, with commensurate rates of return,and effective assignment of staff to deliver strong contract performance, with emphasispartially offset by fiscal year start-up costs on improving productivity through application of our DLH differentiators ePRAT® and DLH SPOT-m™, as discussed earlier in this section, and dedicated management of variable costs.new contract awards. We continue to focus on internal productivity measures to control costs and improve our gross margin.

  

General and administrative (“G&A”) expenses primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contracts administration, human resources, management information systems, and business development. Fiscal year 20152016 G&A expenses were approximately $9.1$12.5 million, an increase of approximately of $1.0$3.4 million or 13.0% over the prior year period. The increase was due principally to managing our increased business volume,

37.0% over the prior year period. As a percentagepercent of revenue, G&A expenses were approximately 14.0% for 2015 and 13.5% for 2014,14.6%, an increase of approximately 0.6% over the prior year period. Excluding non-cash stock option expense noted above, G&AThe increase in expenses for fiscal year 2015 were 13.2%was due principally to the addition of revenue, an increase of 0.6% over prior year as described above.Danya, and additional program and operational resources to manage and grow our business volume.

 

DLH, asThis category comprises non-cash expenditures related to depreciation on fixed assets and the amortization of acquired definite-lived intangible assets from the acquisition of Danya. As a professional services organization, DLH has not required significant recurring expenditures on capital equipment and other fixed assets. For the twelve months ended September 30, 2016, depreciation and amortization were approximately $1.2 million, due principally to the amortization of acquired definite-lived intangible assets.

 

Income from operations for the year ended September 30, 20152016 was approximately $2.5$4.1 million, an increase of approximately $1.7$1.6 million over the prior fiscal year. The increaseimprovement is due principally to contribution from the acquisition of Danya and expansion on legacy programs, resulting in income in fiscal 2015 was due to improved gross margin of approximately $2.7$6.1 million, partially offset by expense growth of $1.0$3.4 million in G&A expenses as described above.

 

Other income (expense), net, typically includes items such as non-operational acquisition expenses, interest expense and amortization of deferred financing costs on debt obligations, and other one-time or non-operational items that may contribute to other income or other expense depending upon the transaction. For the year ended September 30, 2015,2016, other income (expense),expense, net, was approximately $(1.6) million compared to other income, net of $0.7 million in the prior year, resulting in an improvementunfavorable expense increase of approximately $0.7$(2.4) million over the prior fiscal year. The current year improvement is due principallyperiod. Current year other expense primarily includes non-operational pre-acquisition expenses, deferred financing and interest expense related to the acquisition of Danya in fiscal year 2016. Prior year other income, net, primarily includes a $1.5 million closurefavorable resolution of the legacy payroll tax issue, in fourth quarter 2015,that was partially offset by the $0.6$(0.6) million, net, March 2015 non-cash settlement of the retroactive payment issue.

DLH recorded a $5.5$0.9 million deferred tax benefit, net, for fiscal year ended September 30, 2015.2016. Current period includes a $1.8 million benefit from release of the valuation allowance. This represents a $0.9$4.6 million increasedecrease in tax benefit, net, over the prior year period, which included a $4.6$6.8 million deferred tax benefit related to the release of a portion of our valuation allowance, recorded to reflect the amount of our deferred tax asset that we expect to realize in future years.

 

Net income for the year ended September 30, 20152016 was approximately $8.7$3.4 million or $0.91$0.34 and $0.87$0.30 per basic and diluted share, respectively, compared to approximately $5.4$8.7 million over prior year period, or $0.56$0.91 and $0.54$0.87 per basic and diluted share. The total year net income increase was $3.4decrease of approximately $(5.3) million overcompared to prior year is attributable to improved operating margin of $1.7principally to: a $4.6 million a $0.9 million increasedecrease in tax benefit, fornet, compared to prior year; an increase of approximately $2.4 million other income and expense, net, as described above; partially offset by improved income generated from operations of $1.6 million during the current fiscal 2015, and $0.7 million net gain due principally to favorable closure of legacy payroll tax and retroactive payment claim issues.year.

 

We use Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) adjusted for other non-cash chargesitems (“Adjusted EBITDA”) and “Fully-diluted EPS on adjusted EBITDA” as a supplemental non-GAAP measures of our performance. We define Adjusted EBITDA as net income plusincome/(loss) adjusted to exclude (i) interest and other expenses, including acquisition expenses, net, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) G&A expenses — equity grants. We compute EPS on adjusted EBITDA using fully diluted shares outstanding as computed for GAAP.

Non-GAAP measures of our performance are presented here and used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and the Company’s Board utilize these non-GAAP measures to help make decisions about the use of the Company’s resources, analyze performance between periods, develop internal projections and measure management performance. We believe that these non-GAAP measures arecan be useful to investors in evaluating the Company’s ongoing operating and financial results and understanding how such results compare with the Company’s historical performance. By providing these non-GAAP measures as a supplement to GAAP information, we believe we are enhancing investors’ understanding of our business and our results of operations. A reconciliation

For the yeartwelve months ended September 30, 2015,2016, the Company generated operating income of $2.5$4.1 million and net income of approximately $8.7$3.4 million.

Our cash position has significantly improved during the year ended September 30, 2015. Selected sources and uses of cash are shown in the table below (amounts in millions):for the twelve months ended September 30, 2016.

Ref (a): At September 30, 2015,2016, the Company had cash deposits on hand of approximately $5.6$3.4 million.

Ref (b): The CompanyAt September 30, 2016, DLH had no borrowing on ourrepaid all of the revolving line of credit, at September 30, 2015.including a $5.0 million draw on May 3, 2016 to partially fund the acquisition of Danya, as well as interim borrowing to maintain operational cash flow during May and June.

Ref (c): At September 30, 2015, our available loan reserves were approximately $2.6 million,2016, the Company's total borrowing availability, based on eligible accounts receivables at September 30, 2016, was $5.0 million. This capacity was comprised of approximately $1.4$0.9 million in stand bya stand-by letter of credit, reserve$0.0 million in borrowing on the line of credit, and $1.3 millionunused borrowing capacity of unused loan capacity.$4.1 million.

Ref (d): Adjusted EBITDA of approximately $3.0$5.8 million represents income from operations before reductions for non-cash operating expenses, depreciation, and depreciation. It is an internal measure used by management to gauge the amount of cash generated from operations.amortization.

Ref (e): Cash flows from operating activities increased $2.0approximately $6.0 million for the twelve months ended September 30, 2016 due principally to improved profitability.profitable operations partially offset by acquisition related expenses.

Ref (f): Cash flows used in investing and financing activities, net, were approximately $(8.2) million for the yeartwelve months ended September 30, 2015 were approximately $(0.3) million2016. This was due principally to approximately ($0.1) million investment in IT upgrades and build-outour contribution of cash to fund our new office facilities in Atlanta and approximately ($0.2) million in repurchasesacquisition of our common stock.Danya.

TheAs of September 30, 2016, the Company's immediate sources of liquidity include cash and cash equivalents, accounts receivable, and access to its asset-basedsecured revolving line of credit facility with Presidential Financial Corporation. As described in greater detail below, presently, thisFifth Third Bank. This credit facility provides us with access of up $3.0 million with the ability for it to increase to $6.0$10.0 million, subject to certain conditions.conditions including eligible accounts receivable. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. The Company's operations may require working capital to fund the future growth of its business model with expanded business development efforts,Our current investment and planned capital expenditures to support a larger customer base.financing obligations are adequately covered by cash generated from profitable operations.

Management believes at present, that: (a) cash and cash equivalents of approximately $5.6$3.4 million as of September 30, 2015;2016; (b) the amount available under its line of credit that was in effect at September 30, 2016 (which is limited to the amount of eligible assets); and (c) planned operating cash

On July 29, 2010, DLH Solutions entered intoMay 3, 2016, the Company acquired 100% of the equity interests of Dayna International, LLC. We financed the acquisition, in part, through a Loan and Security Agreement (the “Loan Agreement”), as amended, with Presidential Financial Corporation (the “Lender”). Under the Loan Agreement, the Lender agreed to provide an initial two (2) year secured loancombination of borrowings of $30.0 million under our new credit facility with renewal options toFifth Third Bank, and $2.5 million from a subordinated loan arrangement with Wynnefield Capital. Concurrent with these new lending arrangements, we terminated any existing credit facilities that DLH Solutions. The current termor its acquired subsidiary had in place.

A summary of the Loan Agreement expires on July 29, 2015our loan facilities and thereafter shall automatically renew on each anniversary date thereof for subsequent twelve month terms unless terminated by either party. The current available line of credit maximum amount is $6.0 million, with an unbilled accounts facility of the Loan Agreement currently set at a maximum of $1.0 million. Presently, the maximum availability under this loan facility is $3.0 million (the "Sublimit"), subject to eligible accounts receivable, excluding retroactive billings. The Company’s ability to increase the Sublimit of its available credit is subject to the satisfaction of certain conditions, including (i) the Company's (a) demonstrated needsubordinated debt financing for the increase and (b) compliance with the Loan Agreement, and (ii) the Lender’s consent, in its sole discretion, to increase the Sublimit. Atperiod ended September 30, 2015, our loan availability was approximately $2.64 million, comprised of a $1.35 million letter of credit reserve and $1.29 million of unused loan capacity. As2016 is as follows:

In addition,(a) Represents the principal amounts payable on our Term Loan Agreement permits letterswith Fifth Third Bank that partially funded our acquisition of credit to be issued under the overall credit facility, subject to availability provided by eligible billedDanya on May 3, 2016. The $25.0 million term loan from Fifth Third Bank was funded at closing and unbilled accounts receivable and further subject to a limit of $1.35 million. The letter of credit had an expiration date of May 16, 2015, which was renewed for one year and will automatically extend for additional one-year periods unless either party provides written notice of non-renewal within 60 days of the annual expiration date.

The Term Loan Agreement has been amended, from time to time, to support the Company’s changing business requirements.

In addition to monthly payments of the outstanding indebtedness, the loan agreement we may not, without consentalso requires prepayments of the Lender, (i) merge or consolidate with another entity, form any new subsidiary or acquire any interest in a third party; (ii) acquire any assets exceptpercentage of excess cash flow, as defined in the ordinary course of business; (iii) incur debt or enter into transactions outside the ordinary course of business; (iv) sell or transfer collateral; (v) make any loans to, or investments in, any affiliate or enter into any transaction with an affiliate other than on an arms-length basis; (vi) pay or declare any dividends or other distributions; or (vii) redeem, retire or purchase anyloan agreement. Accordingly, a portion of our equity interests exceeding $50,000 or repay other outstandingcash flow from operations will be dedicated to the repayment of our indebtedness. Either party may terminateDLH is fully compliant with all covenants under the Loan Agreement at any time upon 60 days written notice and the Loan Agreement provides for customary events of default following which the Lender may, at its option, immediately terminate the loan agreement and accelerate the repayment of any amount outstanding. At present, the Company has not experienced, and the financial institution has not declared, an event of default.with Fifth Third Bank.

In prior periods, DLH had received notices from the IRS claiming taxes, interest and penalties were due related to payroll taxes. These notices were predominantly related to the former PEO operations which were sold in fiscal year 2003. Management believed that the notices were predominantly the result of misapplication of payroll tax payments between its legal entities, but accrued for the entire estimated remaining liability, inclusive of interest and penalties through the date of the financial statements. No payments were made in fiscal years 2015 and 2014. During fiscal year endedThe Company's total borrowing availability, based on eligible accounts receivables at September 30, 2015, DLH engaged tax counsel who2016, was able to demonstrate that there were no taxes due related to this legacy issue. In September 2015, DLH received confirmation from the IRS that no taxes, interest, or penalties were due or otherwise payable.$5.0 million. This capacity was comprised of $0.9 million in a stand-by letter of credit and unused borrowing capacity of $4.1 million.

 

The Company did not have any off-balance sheet arrangements subsequent to, or upon the filing of our consolidated financial statements in our Annual Report as defined under SEC rules.

 

 

Inflation and changing prices have not had a material effect on DLH’s net revenues and results of operations, as DLH has been able to modify its prices and cost structure to respond to inflation and changing prices.

 

 

 

 

DLH’s revenue is derived from professional and other specialized service offerings to US Government agencies through a variety of contracts, some of which are fixed-price in nature and/or sourced through Federal Supply Schedules administered by the General Services Administration (“GSA”) at fixed unit rates or hourly arrangements. We generally operate as a prime contractor, but have also entered into contracts as a subcontractor. The recognition of revenue from fixed rates is based upon objective criteria that generally do not require significant estimates that may change over time. DLH recognizes and records revenue on government contracts when it is realized, or realizable, and earned. DLH considers these requirements met when: (a) persuasive evidence of an arrangement exists; (b) the services have been delivered to the customer; (c) the sales price is fixed or determinable and free of contingencies or significant uncertainties; and (d) collectibility is reasonably assured.

 

DLH 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, 2015,2016, we performed a goodwill impairment evaluation. We performed both a qualitative and quantitative 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, 2015.2016. 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. If an impairment write off of all the goodwill became necessary in future periods, a charge of up to $8.6$42.3 million would be expensed in the Consolidated Statement of Operations. All remaining goodwill is attributable to the DLH Solutions operating subsidiary.

 

DLH 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

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 2014, respectively.non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a binomial option pricing model 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.

 

A discussion of recently issued accounting pronouncements is described in Note 3 in the Notes to Consolidated Financial Statements elsewhere in this Annual Report, and we incorporate such discussion by reference.

 

DLH does not undertake trading practices in securities or other financial instruments and therefore does not have any material exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk or other similar risks, which might otherwise result from such practices. DLH is not materially subject to fluctuations in foreign exchange rates, commodity prices or other market rates or prices from market sensitive instruments. DLH believes it does not have a material interest rate risk with respect to our prior workers’ compensation programs, for which funds were deposited into trust for possible future payments of claims. DLH does not believe the level of exposure to interest rate fluctuations on its debt instruments is material given that the amount of our debt is subject to variable interest rates and the prime rate interest rate floors of at least 3.25%LIBOR plus 3.0% applied by the Lender. As of September 30, 2016 the Lender's interest rate was 3.5%.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

 

Our CEO and President and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, has concluded that, based on the evaluation of these controls and procedures, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our CEO and President and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Our management, including our CEO and President and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the

design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Our management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the control system are met.

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:

(i)  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii)  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and

(iii)  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2015.2016. In making this evaluation, management used the 2013 framework on Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework on Internal Control-Integrated Framework, our management has concluded that our internal control over financial reporting was effective as of September 30, 2015.2016.

This annual report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fourth fiscal quarter of our Company’s fiscal year ended September 30, 2015,2016, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The financial statements and schedules of DLH are included in Part II, Item 8 of this report beginning on page F-1.

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

We have audited the accompanying consolidated balance sheets of DLH Holdings Corp. and Subsidiaries as of September 30, 20152016 and 2014,2015, and the related consolidated statements of operations, cash flows, and shareholders' equity for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of DLH Holdings Corp. and Subsidiaries as of September 30, 20152016 and 2014,2015, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ WITHUMSMITH+BROWN, PC

WithumSmith+Brown, PC

New York, New York

 

The accompanying notes are an integral part of these consolidated financial statements.