SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30,~~December 31, 2017

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended ~~June 30,~~December 31, 2017

(Amounts in thousands except per share amounts)

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

(Amounts in thousands except par value of shares)

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

(Amounts in thousands)

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

~~June 30,~~December 31, 2017

1. Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of DLH and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended ~~June 30,~~December 31, 2017 are not necessarily indicative of the results that may be expected for the year ending September 30, ~~2017.~~2018. Amounts as of and for the periods ~~June 30,~~ended December 31, 2017 and ~~June 30,~~December 31, 2016 are unaudited. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual report on Form 10-K for the year ended September 30, ~~2016~~2017 filed with the Securities and Exchange Commission on December 9, ~~2016.~~2017.

2. Restatement of Previously Issued Financial Statements

In preparation of the Company’s condensed financial statements as of and for the three months ended December 31, 2017, the Company concluded it should correct the amount previously recorded as Debt obligations - current. In January 2018, the Company made an additional debt repayment of $2.9 million, resulting from an excess cash flow provision in its credit facility. This payment was calculated based upon the year ended September 30, 2017 operating results. As such, the $2.9 million should have been reflected within the Debt obligations - current on the Company’s Balance Sheet at September 30, 2017. In addition, the Company has concluded that based on its working capital position at June 30, 2017, it was more likely than not that an excess cash flow payment would be generated as of September 30, 2017. The Company’s estimate of the additional debt payment resulting from the projected excess cash flow provision totaling $2.2 million should have been reflected within the Debt obligations - current on the Company’s Unaudited Balance Sheet at June 30, 2017.

Funding of the excess cash flow payment from cash on hand has no impact to the Company’s net debt position, as the use of cash has an offsetting reduction to debt. From a liquidity position, the Company continues to have sufficient access to cash to support the operations of the business, through access to its revolving credit facility. The Company does not expect to make further excess cash flow payments under the provisions of the credit facility. See Note 6 for further information.

The following table summarizes the effect of the restatement to the Company’s financial statements for (i) its audited balance sheet as of September 30, 2017, and (ii) its unaudited condensed interim balance sheet as of June 30, 2017. The reclassification of an additional debt repayment resulting from an excess cash flow provision of our credit facility did not affect any previously reported operating results, net income, earnings per share, cash flows, total assets, total liabilities or stockholders equity.

3. Business Overview

DLH is a full-service provider of technology-enabled health and readiness enhancement services to government agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), Department of Defense ("DoD"), and other government agencies. DLH Holdings Corp. (together with its subsidiaries, "DLH" or the "Company" and also referred to as "we," "us" and "our") manages its operations from its principal executive offices in Atlanta, Georgia. We have complimentary headquarters offices in Silver Spring, Maryland. We employ over 1,400 skilled employees working in more than 30 locations throughout the United States.

On May 3, 2016, DLH acquired Danya International, LLC (“Danya”) which provides program management, information technology, consulting, training, and digital health promotion solutions to the federal government and other customers. We acquired Danya to expand our health IT capabilities, our presence in key targeted agencies, and raise our ability to compete and execute in more complex and challenging federal markets. This acquisition was in line with our strategic growth initiatives, and we intend to continue to consider other potential transactions to complement our organic growth in the future.

Presently, the Company derives 100% of its revenue from agencies of the federal 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 Company derives at least 10% of its revenues.

Our largest customer continues to be the VA, which comprised approximately ~~58%~~66% and ~~83%~~61% of revenue for the ~~nine~~three months ended ~~June 30,~~December 31, 2017 and 2016, respectively. Additionally, HHS represents a major customer, comprising 32% of revenue for the ~~nine~~three months ended ~~June 30, 2017.~~December 31, 2017 and 29% for the three months ended December 31, 2016. In addition, substantially all accounts receivable, including unbilled accounts receivable, are from agencies of the U.S. Government as of ~~June 30,~~December 31, 2017 and September 30, ~~2016.~~2017. We believe that the credit risk associated with our receivables is limited due to the creditworthiness of these customers. See Note 4,5, Supporting Financial Information-Accounts Receivable.

As of ~~June 30,~~December 31, 2017, awards from VA and HHS have anticipated periods of performance ofranging from approximately one to up to ~~three~~two years. These agreements are subject to the Federal Acquisition Regulations. 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 contract term. 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 relationship with VA or HHS.

3.4. New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued amended guidance for revenue recognition. Subsequently, the FASB issued an amendment to defer for one year the effective date of the new guidance on revenue recognition, as well as issued additional clarifying amendments. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires improved disclosure to help the users of the financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The new guidance supersedes most current revenue recognition guidance, including industry-specific guidance, and is ~~now~~ effective ~~commencing with our 2018 fiscal year.~~for annual periods (including interim periods therein) beginning after December 15, 2017. The guidance allows either a full retrospective or modified retrospective transition method. The Company ~~believes that~~is evaluating the ~~impact of adoption will be immaterial to the financial statements.~~

In June 2014, the FASB issued guidance related to accounting for share-based payments for certain performance stock awards. In March 2016, the FASB issued updated guidance intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The amendments in this update affect all entities that issue share-based payment awards to their employees. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has adopted this guidance and concluded that it will not significantly affect the Company.

In September 2015, the FASB issued guidance regarding business combinations for which the accounting is incomplete by the end of the reporting period in which the combination occurs, and during the measurement period have an adjustment to provisional amounts recognized. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in this update eliminate the requirement to retrospectively account for those adjustments. The amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update, with earlier application permitted for financial statements that have not been issued. Refer to Note 4 for the impact of the adoptioneffects of this guidance.

In February 2016, the FASB issued new accounting guidance related to leases. This update, effective for the Company beginning October 1, 2019, will replace existing guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for all ~~lease~~leases and disclose key information about leasing arrangements. When implemented, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. As shown in Note ~~10,~~11, the Company currently has approximately ~~$4.3~~$3.5 million of lease obligations that would be evaluated as the implementation of this guidance becomes effective.

In July 2017, the FASB issued new accounting guidance related to certain equity-linked financial instruments with down round features, such as warrants. The guidance provides for a scope exception from derivative accounting if the instruments qualify for equity classification. Should the instruments qualify for equity classification, they would no longer be considered liabilities subject to fair value measurement at each reporting period. This update is effective for the Company as of its fiscal year beginning October 1, 2019, with early adoption permitted. The Company has elected to adopt the provisions of this ASU as of December 31, 2017.

4.ADOPTION OF NEW ACCOUNTING STANDARD

Effective December 31, 2017, the Company adopted the provisions of Accounting Standards Update ("ASU") 2017-11, "Earning Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815). The provisions of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The fair value of a financial instrument with a down round features is now permitted to be classified as a component of stockholder's equity, as opposed to a liability as it was previously required to be reported. In addition, the recorded fair value of the financial instruments is no longer required to be subsequently revalued. Should the down round feature of the financial instrument be triggered due to a change in the underlying strike price, the change in the fair value would be treated as a dividend and as a reduction of income available to common stockholders in accordance with the guidance of ASC-260.

Prior accounting treatment In connection with issuing subordinated debt to finance its May 2, 2016 acquisition, the Company issued warrants to purchase 53,619 shares of Common Stock. These warrants contain certain pricing previsions which apply if the Company sells or issues Common Stock or Common Stock equivalents at a price that is less than the exercise price of the warrants, over the life of the warrants, excluding certain exempt issuances. In addition, these warrants may only be exercised with cash. Accordingly, the Company recognized a liability for these warrants based on their fair value as of the date of grant. The initial warrant liability recognized on the related warrants totaled $177 thousand. At each subsequent quarter end, the Company then remeasured the fair value of the warrants, and recorded the change in the warrant liability as a component of net income. As of September 30, 2017, the warrant liability was valued at $306 thousand.

Current accounting treatment.. The Company chose a modified retrospective adoption, and therefore, is recognizing the cumulative effect of the change as an adjustment to retained earnings in the period of adoption. The warrant liability has been eliminated from the Company's balance sheet for the quarterly period as of December 31, 2017. The fair value of the warrant liability has been reduced by $306 thousand by reclassifying this liability to retained earnings and additional paid in capital by $129 thousand and $177 thousand, respectively.

5. Supporting Financial Information

Ref (a): Accounts receivable are non-interest bearing, unsecured and carried at fair value, which is net of an allowance for doubtful accounts. We evaluate our receivables on a quarterly basis and determine whether an allowance is appropriate based on specific collection issues. No allowance for doubtful accounts was deemed necessary at both ~~June 30,~~December 31, 2017 and September 30, ~~2016.~~2017.

Other current assets

Equipment and improvements, net

~~Other current assets~~

~~Equipment and improvements, net~~

Ref (a): The Company is in the process of configuring a new Enterprise Resource Planning system. Capitalized costs include $1.0 million and $0.7 million as of December 31, 2017 and September 30, 2017, respectively, of software licenses and implementation labor related to application development. Since the asset has not been placed in service, no depreciation related to the asset has been recognized. ~~Prior to the~~The asset ~~being~~was placed in service aon January 1, 2018 with an estimated useful life ~~will be determined.~~of 5 years.

Ref (b): 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. Maintenance and repair costs are expensed as incurred. Depreciation ~~expense~~of equipment was $65 thousand and $85 thousand for the ~~periods~~three months ended ~~June 30,~~December 31, 2017 and ~~September 30,~~ 2016 ~~were $0.2 million for both periods.~~respectively.

Goodwill and Intangibles

Ref (a): Intangible assets subject to amortization.

~~Ref (a): Intangibles acquired during the acquisition of Danya included customer relationships, a covenant not to compete, and a trade name.~~ The intangibles are amortized on a straight-line basis over ~~the~~their estimated useful lives ~~(10 years). Net~~of 10 years. Total amount of amortization expense for the ~~quarter~~period ended ~~June 30,~~December 31, 2017 was ~~$.4~~$0.4 million. ~~The amortization for the nine months ended June 30, 2017 was $1.0 million.~~

Accounts payable, accrued expenses and other current liabilities



		(in thousands)
		December 31,		September 30,
	Ref	2017		2017
Accounts payable		$	4,070	$	5,205
Accrued benefits		2,283		1,831
Accrued bonus and incentive compensation		721		1,544
Accrued workers compensation insurance		2,062		1,598
Other accrued expenses		400		717
Accounts payable, accrued expenses, and other current liabilities		$	9,536	$	10,895

~~Other Income (Expense)~~

Ref (a): Interest expense on borrowing ~~related to acquisition of Danya~~

Ref (b): Amortizations of expenses related to securing financing ~~to acquire Danya~~

5.6. Credit Facilities

A summary of our loan facilities and subordinated debt financing as of ~~June 30,~~December 31, 2017 is as follows:

*LIBOR rate as of December 31, 2017 was 1.69%

(a) Represents the principal amounts payable on our Term Loan with Fifth Third ~~Bank that partially funded our acquisition of Danya on May 3, 2016.~~Bank. The $25.0 million term loan from Fifth Third Bank was funded at closing and is secured by liens on substantially all of the assets of the Company. The principal of the Term Loan is payable in fifty-nine consecutive monthly installments of $312,500 ~~beginning on June 1, 2016~~ with the remaining balance due on May 1, 2021.

The Term Loan agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions. We are in compliance with all loan covenants and restrictions.

Among other matters, we must comply with limitations on: granting liens; incurring other indebtedness; maintenance of assets; investments in other entities and extensions of credit; mergers and consolidations; and changes in nature of business. The loan agreement also requires us to comply with certain quarterly financial covenants including:

(i) a minimum fixed charge coverage ratio of at least 1.35 to 1.0 commencing with the quarter ending June 30, 2016, and for all subsequent periods, and

(ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 2.99 to 1.0 at closing and thereafter a ratio ranging from ~~3.5~~3.0 to 1.0 for the period through ~~September 30, 2016~~December 31, 2017 to 2.5 to 1.0 for the period ending September 30, ~~2018.~~2018 through maturity. Adjusted EBITDA ratio is calculated by dividing the Company's total interest-bearing debt by net income 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.

In addition to monthly payments of the outstanding indebtedness, the loan agreement also requires ~~prepayments~~annual payments of a percentage of excess cash flow, as defined in the loan agreement. ~~Accordingly, a portion of our~~The loan agreement states that an excess cash flow ~~from operations may~~recapture payment must be ~~dedicated~~made equal to (a) 75% of the ~~repayment~~excess cash flow for each year in which the Funded Indebtedness to Adjusted EBITDA ratio is greater than or equal to 2.50:1.0, or (b) 50% of ~~our indebtedness.~~the Excess Cash Flow for each fiscal year in which the funded indebtedness to Adjusted EBITDA Ratio is less than 2.50:1.0 but greater than or equal to 2.0:1.0. DLH made an excess cash flow payment of $2.9 million on January 16, 2018 (see Note 14). DLH does not expect to make any future excess cash flow payments.

(b) The secured revolving line of credit from Fifth Third Bank has a ceiling of up to $10.0 ~~million, of which $5.0 million was drawn at closing to cover partial financing of the Danya purchase.~~million. Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company.

The Company's total borrowing availability, based on eligible accounts receivables at ~~June 30,~~December 31, 2017, was ~~$6.7~~$10.0 million. This capacity was comprised of ~~$0.9~~$0.6 million in a stand-by letter of credit and unused borrowing capacity of ~~$5.8~~$9.4 million.

The revolving line of credit is subject to loan covenants as described above in the Term Loan, and DLH is fully compliant with those covenants.

Management believes that: (a) cash and cash equivalents of approximately $4.6 million as of June 30, 2017; (b) the amount available under its line of credit that was in effect at June 30, 2017; and (c) planned operating cash flow should be sufficient to support the Company's operations for twelve months from the date of these financial statements.

6.7. Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires 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, valuation allowances established against accounts receivable and deferred tax assets, excess cash flow payments on our term debt, measurement of loss development on workers’ compensation claims, and fair value of derivatives. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current and expected future outcomes, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. We revise material accounting estimates if changes occur, such as more experience is acquired, additional information is obtained, or there is new information on which an estimate was or can be based. Actual results could differ from those estimates. In particular, a material reduction in the fair value of goodwill could have a material adverse effect on the Company’s financial position and results of operations. We account for the effect of a change in accounting estimate during the period in which the change occurs.

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. Revenue on time and materials contracts is recognized based on hours performed times the applicable hourly rate, plus materials and other direct costs incurred on the contract. Revenue on fixed fee for service contracts is recognized over the period of performance of the contract. Revenue on cost reimbursable contracts is recognized equal to allowable costs incurred, plus a ratable portion of the applicable fee.

We generally operate as a prime contractor, but have also entered into contracts as a subcontractor. ~~The recognition of revenue from fixed rates~~Our company's current business base is ~~based upon objective criteria that generally do not require significant estimates.~~95% prime contracts and 5% subcontracts. 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.

Business Combinations

In accordance with Accounting Standards Codifications 805, "Business Combinations" ("ASC 805") the Company records acquisitions under the purchase method of accounting, under which the acquisition purchase price is allocated to the assets acquired and the liabilities assumed based upon the respective fair values. The Company utilizes some estimates and in some instances, may retain the services of an independent third-party valuation firm to assist in determining the fair values of assets acquired, liabilities, assumed, and contingent considerations granted. Such estimates and valuation require the Company to make significant assumptions. These assumptions may include projections of future events and operating performance.

Fair Value of Financial Instruments

The carrying amounts of the Company's cash and cash equivalents, accounts receivable, unbilled revenues, accrued expenses, accrued earn outs payable, and accounts payable approximate fair value due to the short-term nature of these instruments. The fair values of the Company's debt instruments approximate fair value because the underlying interest rates approximate market rates that the Company could obtain for similar instruments at the balance sheet dates.

Goodwill and other intangible assets

We have used the acquisition method of accounting for the Danya transaction, whereby the assets acquired and liabilities assumed are recognized based upon their estimated fair values at the acquisition date. The fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition date. The Company believes the information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. The Company finalized the fair values as of December 31, 2016. On the basis of the estimated assets acquired, the Company amortized $0.4 million and $1.0 million for the three and nine months ended June 30, 2017, respectively.

DLH continues to review its goodwill and other intangible 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.

At September 30, ~~2016,~~2017, we performed a goodwill impairment evaluation on the year-end carrying value of approximately ~~$35~~$26 million. 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, ~~2016.~~2017. For the ~~nine~~three months ended ~~June 30,~~December 31, 2017, the Company determined that no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill. 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.

~~The Company acquired certain long lived intangibles assets as part~~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 ~~acquisition of Danya. These assets are~~initial lease term or estimated ~~at a fair value and amortized on a straight-line basis over their assessed~~ useful ~~lives. The assessed useful lives of the assets are 10 years.~~life for leasehold improvements.

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 not be realized. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. We had no uncertain tax positions at either ~~June 30,~~December 31, 2017 or September 30, ~~2016.~~2017. We report interest and penalties as a component of income tax expense. In the fiscal quarters ended ~~June~~December 31, 2017 and September 30, 2017, ~~and June 30, 2016,~~ we recognized no interest and no penalties related to income taxes.

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 ~~binomial~~Monte Carlo simulation 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.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. Deposits held with financial institutions may exceed the $250,000 limit.

Earnings (Loss) per Share

Basic earnings per share is calculated by dividing ~~income~~income(loss) available to common shareholders by the weighted average number of common stock outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method.

We present financial statements consistent with a consolidation model for all entities. ~~In connection with ensuring that presentation among~~Certain reclassifications have been made to the ~~quarters was consistent, we reclassified an amount totaling $0.1 million in our income statement from general and administrative expense~~prior period financial statements to ~~direct expenses.~~conform to the current period presentation. These reclassifications had no effect on previously reported results of operations or accumulated deficit.

7.8. Stock-based Compensation, Equity Grants, and Warrants

Stock-based compensation expense

Options issued under equity incentive plans were designated as either an incentive stock or a non-statutory stock option. No option was granted with a term of more than 10 years from the date of grant. Exercisability of option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued shares. As of ~~June 30,~~December 31, 2017, there were ~~0.5~~0.2 million shares available for grant.

Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our statement of operations:

Ref (a): Equity grants of restricted stock, in accordance with DLH compensation policy for non-employee directors. The shares granted in the first quarters of fiscal years ending September 30, 2017 and 2016 vested immediately, and stock expense of approximately $456 thousand and $304 thousand, respectively were recognized accordingly.

Unrecognized stock-based compensation expense

Ref (a): Compensation expense for the portion of equity awards for which the requisite service has not been rendered is recognized as the requisite service is rendered. The compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance. For options that vest based on the Company’s common stock achieving and maintaining defined market prices, the Company values the awards with a binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation expense is recognized over the derived service period determined in the valuation. The remaining term for the weighted average expense of these shares will be ~~2.5 years.~~59 months.

Ref (b): Unrecognized stock expense related to prior year's equity grants of restricted stock to non-employee directors, based on performance criteria, in accordance with DLH compensation policy for non-employee directors.

Stock option activity for the ~~nine~~three months ended ~~June 30,~~December 31, 2017

The aggregate intrinsic value in the table below represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their in the money options on those dates. This amount will change based on the fair market value of the Company’s stock.

~~Ref (a): Options granted to DLH employees were valued using~~Indication of Value Summary

Utilizing a ~~Black Scholes calculation, under~~volatility range of 50% along with assumptions of a 10 year term and the ~~following criteria:~~

•~~average yield rate~~aforementioned 10-day stock price threshold results in an indicated range of ~~2.46% was used~~

•~~contractual lives and expected lives were 10 years for all grants~~

•~~probability of exercise was based on reaching the market price~~

•~~monthly price volatility factor of 12% was used~~

•~~no dividend yield was contemplated~~

~~The resulting fair values ranged from $0.93 to $1.47, depending on the market measure~~value of the ~~stock price~~Options as follows using the Monte Carlo Method.

Stock options shares outstanding, vested and unvested for the period ended

Ref (a): Certain awards vest upon satisfaction of certain performance criteria.

8.9. Fair Value of Financial Instruments

The Company measures certain financial assets and liabilities at fair value on a recurring basis. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three level hierarchy. These levels are:

~~Level 1 - Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.~~

~~Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.~~

~~Level 3 - Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.~~

~~Observable inputs are based on market data obtained from independent sources.~~

In May 2016 we issued warrants to purchase 53,619 shares of common stock. Using a binomial pricing model, we valued the warrants at $253 thousand and $204 thousand as of June 30, 2017 and September 30, 2016, respectively.

~~Assumptions used in valuing the warrants as of June 30, 2017 included:~~

The Company recorded a benefit on the revaluation of the warrant liability of $3 thousand for the quarter ended June 30, 2017. For the nine months ended June 30, 2017 the company recorded a charge of $49 thousand related to the revaluation of the warrant liability. The benefit is recorded and classified in other income (expense) in the accompanying consolidated statements of operations.

~~The Company~~ has ~~issued warrants to purchase stock as described above. The liability is classified as a Level 3 expense for all periods.~~

~~Change in Level 3 liabilities for the nine months ending June 30, 2017:~~

~~The Company has other~~ financial instruments, including accounts receivable, accounts payable, loan payable, notes payable, and accrued expense. Due to the short term nature of these instruments, DLH estimates that the fair value of all financial instruments at ~~June 30,~~December 31, 2017 and September 30, ~~2016~~2017 does not differ materially from the aggregate carrying values of these financial instruments recorded in the accompanying consolidated balance sheets.

9.10. Earnings (Loss) Per Share

Basic earnings per share is calculated by dividing ~~income~~income(loss) available to common shareholders by the weighted average number of common shares outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing ~~income~~income(loss) available to common shareholders by the weighted average number of

basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method.

~~10.~~11. Commitments and Contingencies

Contractual Obligations as of December 31, 2017

~~Ref (a): Amounts due under term loan agreement described in Note 5.~~

~~Ref (b):Represents amounts committed on facility lease agreements as of June 30, 2017.~~

~~Ref (c): Represents remaining amounts committed as of June 30, 2017 on operating lease arrangements..~~

~~Workers~~Worker's Compensation

We accrue ~~workers~~worker's compensation expense based on claims submitted, applying actuarial loss development factors to estimate the costs incurred but not yet recorded. Our accrued liability for claims development as of ~~June 30,~~December 31, 2017 and September 30, ~~2016~~2017 was ~~$1.25~~$2.06 million and ~~$0.98~~$1.60 million, respectively.

As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes arising in the course of its business, and inquiries and investigations by governmental agencies regarding our employment practices or other matters. The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows.

~~11.~~12. Related Party Transactions.

The Company has determined that for the quarter ended ~~June 30,~~December 31, 2017 there were no significant related party transactions that have occurred which require disclosure through the date that these financial statements were issued.

~~12.~~13. Income Taxes

DLH accounts for income taxes in accordance with the liability method. Under this method, 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 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.

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act significantly reduces U.S. federal tax rates, modifies rules regarding deductibility of executive compensation, limits deductions of interest expense, and revises rules regarding usability of net operating losses.

Net loss for the quarter ended December 31, 2017 includes an aggregate net discrete tax provision of $3.4 million as a result of the 2017 Tax Act, principally associated with revaluing the benefits of our net operating loss carryforwards from the previously recognized 34% federal rate to the 21% rate enacted.

14. Subsequent Events.

On January 16, 2018 the Company made an excess cash flow payment of $2.9 million as provided in its Loan Agreement. Management has evaluated subsequent events through the date that the Company's financial statements were issued. Based on this evaluation, the Company has determined that no other subsequent events have occurred which require disclosure through the date that these financial statements were issued.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended September 30, ~~2016.~~2017. This Quarterly Report on Form 10-Q 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. Any statements that refer to expectations, projections or other characterizations of future events or circumstances are considered 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. Actual results could differ materially from the results contemplated or implied by these forward-looking statements due to a number of ~~factors, including those discussed in other sections of this Quarterly Report on Form 10-Q and in our 2016 Annual Report on Form 10-K.~~factors.

Business ~~Overview~~Overview:

DLH is a ~~full-service~~ provider of technology-enabled business process outsourcing and program management solutions, primarily to improve and better deploy large-scale federal health and ~~readiness enhancement~~human service initiatives. DLH derives 100% of its revenue from agencies of the Federal government, providing services to ~~government~~several agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD"), and other government agencies On May 3, 2016, DLH acquired Danya International, LLC (“Danya”), strengthening the Company’s breadth of services and significantly increasing its size. Danya provides program management, information technology, consulting, training, and digital health promotion solutions to the federal government and other customers.

Publicly traded with more than 1,400 employees working in over 30 locations throughout the United States, DLH was recently recognized by GovWin IQ as a top service provider in the Health Services Spending category. Currently, DLH offers services and solutions within three key areas of the health services space: Defense and Veterans Health Solutions; Human Services and Solutions; and Public Health and Life Sciences. 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 those securing the freedom of our nation, veterans, and underserved communities. We intend to pursue growth ~~while maintaining our values of integrity and trust, performance excellence, agility, and inclusion and diversity.~~.

Our business offerings are now focused on three primary sources of revenue within the Federal health services market space, as follows:

Department of Defense and veteran health solutions, comprising approximately ~~55%~~66% of our current business base;

Human services and solutions, approximately ~~40%~~32% of our current business base; and

Public health and life sciences, approximately 5%2% of our current business base.

Defense and veterans’ health solutions: DLH provides a wide range of healthcare services and delivery solutions to the Department of Veteran Affairs, US Army Medical Materiel Command and its subordinate US Army Medical Research Acquisition Activity, Navy Bureau of Medicine and Surgery, ~~and the~~ Defense Health Agency and Army Medical Command. We believe that our DLH-developed tools and processes, including SPOT-m^{® TM}and e-PRAT^{® TM}, along with our cloud-based case management system have been major contributors in differentiating the ~~Company~~company within this Federal market.

Our services include advancing the technology readiness level of new development items, which is a critical priority of our federal agency customers. Our project managers and biomedical engineers perform state-of-the-art research and development, testing and 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 fielding these new systems and devices. Further, we deliver clinical ~~supervision to~~ drug and alcohol ~~counselors at~~counseling services to Navy installations worldwide as part of the clinical preceptorship program, thereby ~~contributing to workforce development and~~ improving sailor health and readiness. DLH provides a 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, including~~community. These services include mental health evaluations, behavioral readiness, skills assessment, career counseling, and job preparation services.

DLH ~~is on the forefront of ensuring~~works to ensure that veterans receive their out-patient prescriptions on time, each day, through the VA CMOP pharmacy ~~program.~~ ~~The~~ ~~Department's former Secretary~~program which has been recognized ~~the VA's CMOP program~~ for service excellence, citing the JD Powers ~~ranking and noting that cost advantage and cost avoidance has been significant.~~ evaluation of mail order pharmacy for each of the past eight years.~~In 2016 we obtained ISO 9001-2015 Certification, further validating our quality management systems, processes and procedures.~~ We believe that our operational efficiency and expertise is well-aligned with the VA strategic goals to manage and improve operations and to deliver seamless and integrated ~~support; our~~support. Our unique capabilities and solutions help the VA optimize efficiency and help ensure program accountability as well as better service.

Human services and solutions: DLH provides a wide range of human services and solutions to the Department of Health and Human Services' Office of Head Start and the Department of Homeland Security. DLH provides a systems-based approach toward assuring that underserved children and youth throughout the country are ~~receiving~~getting proper educational and environmental support, including health, nutritional, parental, and behavioral ~~services during their formative years - services that are critical to ensuring the long-term health of the nation.~~services. Performance verification of grantees delivering such services nationwide is conducted using an evolving system of monitoring, evaluation, tracking and reporting tools against selected key performance indicators relative to school readiness. Large scale federally-funded, regionally managed, and locally delivered services demand innovative monitoring and protocol systems integration to ensure productive and cost-effective results. DLH provides the enterprise-level IT system architecture design, migration plan, and ongoing maintenance (including call center) to ~~support customer requirements.~~manage the implementation using experienced subject matter experts and project management resources.

Public health and life sciences: DLH provides a wide range of services to Department of Health and Human Services' Center for Disease Control and Prevention, ~~(CDC),~~ the Department of the Interior, and the Department of Agriculture. DLH ~~continues to serve as a trusted partner to CDC by developing communication and public health strategies to~~ ~~reach important populations and other stakeholders to provide crucial health information for implementing positive public health outcomes.~~ ~~We deploy communication strategies powered by the latest technologies to maximize social and behavioral impact.~~ ~~Our~~ services include advancing disease prevention methods and health promotion to underserved at-risk communities through ~~social marketing and digital strategies to impact behavior change and improve health outcomes among at-risk populations. We develop and drive~~development of strategic communication campaigns, ~~identify and implement~~research on emerging trends, ~~and best-practices, conduct data~~health informatics analyses, and ~~manage specialized~~application of best practices including mobile, social, and interactive media. The company leverages evidence-based methods and web technology to drive health equity to our most vulnerable populations through public health trainings using interactive, web-based platforms to enhance public health efforts. In support of CDC’s High-Impact HIV Prevention initiative, we manage numerous training programs for the HIV prevention workforce. Through our re-design and maintenance of CDC’s Every Dose Every Day mobile application for Medication Adherence, DLH supports people living with HIV to improve their health outcomes and increase the prevention benefits of treatment.engagement. For at-risk wildlife, DLH conducts biological research and surveys covering waterways in key parts of the country to protect and conserve aquatic populations as well as manage wetlands and habitats through environmental assessments. Projects often involve highly specialized expertise and research methodologies. This work is often very seasonal with regard to resources and funding.

~~Growth Strategy~~

~~Organic~~:

DLH plans continued focus on core outsourcing opportunities in health and human services agencies, both within current customer base and in adjacencies. Our healthcare delivery within the military and defense market has trended upward over the past several years. We plan to pursue additional healthcare opportunities for our service members, in line with the high priority the new administration has placed on upgrading and growing the U.S. military.

~~Acquisitive~~:

DLH plans to consider potential select acquisitions which would expand and strengthen its position and broaden its footprint across known market areas, particularly within the health IT market. Plans include targeting companies that serve key federal agencies where DLH has existing relationships, including the VA, DoD, HHS, and CDC.

Forward Looking Business ~~Trends~~Trends:

~~DLH’s vision~~DLH's mission is to ~~become the most~~expand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to ~~those service members securing the freedom of our nation,~~active duty personnel, veterans, and ~~our at-risk~~civilian populations and ~~underserved~~ communities. ~~DLH plans to continue to shape and enhance~~Our primary focus within the ~~“sustainability and readiness posture" of our~~defense agency markets include military service members ~~veterans,~~ and ~~our children~~veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, health IT commodities, process management, clinical systems support, and ~~families, delivering value~~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 ~~our customers, stakeholders,~~expand within top national priority programs and ~~shareholders. Below is our view of market trends as they relate to our current and future growth in the Federal health services market.~~funded areas.

1918

~~Executive office priorities~~Federal budget outlook for 2018:

The President of the United ~~States'~~States’ broad agenda calls for increased military and, in certain cases, domestic spending, with reduced spending on foreign programs. Most relevant to DLH’s targeted markets, the President advocates the lifting of sequestration caps in the defense sector; increasing infrastructure spending in the United States; and tightening controls on immigration.

~~President Trump's plan~~A final FY2018 budget was not passed into law prior to end the defense sequester and rebuild our military, without increasing the national debt, faces similar hurdles as those experienced during the Obama administration. Democratic leaders have thus far refused to increase money for military programs unless the increases are included for other non-defense programs. BarringOctober 1, 2017. Consequently, a ~~spending caps fix in the next few months, Congress will need to start planning fiscal 2018 with the assumption that those funding limits will stay in place.~~

~~Federal budget outlook 2017 and 2018~~:

~~On May 5, 2017, a final fiscal year 2017 budget~~continuing resolution was passed into ~~law. The budget includes additional funding~~law on September 8, 2017 and, following a brief government shutdown in January 2018, was subsequently extended through February 8, 2018. On February 9, 2018, Congress passed, and the President signed, the Bipartisan Budget Act of 2018, which provides for a further short-term continuing resolution through March 23, 2018, along with an increase in federal spending for both defense and nondefense programs by approximately $300 billion over the next two years. The Bipartisan Budget Act of 2018 also extends the debt ceiling for ~~border security, but does not implement~~one year. Spending priorities under the new budget act, in addition to defense spending, including additional funds for a number of ~~non-defense~~federal health programs including allocations to address the opioid crisis, extending the Children’s Health Insurance Program and investments in community health centers.

While Congress will still need to enact a more comprehensive budget ~~cuts outlined by~~bill to fund the ~~President in March. Ongoing debate about budget priorities and implications to national debt are expected for~~federal government through the end of the 2018 fiscal year, ~~2018 budget.~~the Bipartisan Budget Act provides a measure of stability and a significant increase in federal funding for non-defense programs. While further delays in addressing funding may result in another government shutdown or otherwise impede the timing of awards for new business, the Company continues to believe that its key programs benefit from bipartisan support and that federal budgetary uncertainty will not have a material impact on our current business base for fiscal year 2018.

Department of Veterans Affairs (VA) health spending trends:

DLH continues to see critical need for expanded health care solutions within our sector of the Federal health market, largely focused on the needs of veterans and their families. Serving nearly nine million veterans each year, the VA operates the nation's largest integrated health care system, with more than 1,700 hospitals, clinics, community living centers, readjustment counseling centers, and other facilities.

On July 27, 2017, the House of Representatives approved the Department of Defense Appropriations Act for the 2018 fiscal year. The bill includes funding for the VA of $182.3 billion, an increase of $5.3 billion or 3% above the 2017 budgeted amounts. The fiscal 2018 VA funding includes Medical Care appropriations of approximately $69.0 billion, which is $5.7 billion (9.0%) above the 2017 budgeted level. The Trump administration has expressed strong support for veterans and members of the armed forces, and we ~~look to continuing our long-term customer relationship and growth opportunities within~~believe there is a reasonable expectation that fiscal year 2018 funding will be consistent with the ~~VA in the years ahead.~~House bill.

Department of Health and Human Services (HHS) spending trends:

HHS is the principal federal department charged with protecting the health of all Americans and providing essential human services. DLH has existing contracts with multiple agencies under HHS, and we are actively pursuing growth opportunities within this vital agency.

HHS spending priorities are being evaluated by the Trump administration with particular focus on the Affordable Care Act programs which are outside of our market space.

On July 19, 2017 the House Appropriations Committee approved a draft funding bill for Labor, Health and Human Services and Education. The bill cuts funding to lower-priority programs, while targeting investments in medical research, and biodefense. The draft FY2018 funding bill proposed an increase of $24 million for the Head Start program. While the new Administration’s budget priorities for HHS are evolving, Head Start has historically received strong bipartisan support.

Large defense companies divesting from Federal services market:

Large government contractors have been divesting from the Federal services market to increase their focus on advanced military products, which typically generate higher margins than services. This trend may open up increased opportunities for smaller Federal service providers such as DLH.

~~Continued~~Industry consolidation among federal government contractors:

There has been active consolidation and a strong increase in M&A activity among federal government contractors over the

past few years that we expect to continue into fiscal year 2018 and beyond, 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. We plan continued focus on our core capabilities, as we look at potential future strategic acquisitions to supplement our organic growth and enhance shareholder value.

Potential small business ~~participation in Federal contracting:~~team opportunities:

The Federal government has an overall goal of 23% of prime contracts flowing to small business contractors, ~~with a goal of this~~ primarily through the use of set-asides in Federal agency RFPs (requests for proposal). As a part of our growth plan, DLH may elect to team in support of such small businesses for specific pursuits that align with our corporate growth strategy.

20Restatement

In this Form 10-Q, we are restating (i) our audited consolidated balance sheet as of September 30, 2017, and (ii) our unaudited condensed consolidated balance sheet as of June 30, 2017. The reclassification of an additional debt repayment resulting from a excess cash flow provision of our credit facility did not affect any previously reported operating results, net income, earnings per share, cash flows, total assets, total liabilities or stockholders' equity.

The restatement results from a correction of the amount recorded as Debt obligations - current. In January 2018, the Company made an additional debt repayment of $2.9 million, resulting from an excess cash flow provision in its credit facility. This payment was calculated based upon the year ended September 30, 2017 operating results. As such, the $2.9 million should have been reflected within the Debt obligations - current on the Company’s Balance Sheet at September 30, 2017. In addition, the Company has concluded that based on its working capital position at June 30, 2017, it was more likely than not that an excess cash flow payment would be generated as of September 30, 2017. The Company’s estimate of the additional debt payment resulting from the projected excess cash flow provision totaling $2.2 million should have been reflected within the Debt obligations - current on the Company’s Unaudited Balance Sheet at June 30, 2017.

We have not amended our previously filed Annual Report on Form 10-K or Quarterly Report on Form 10-Q for (i) our audited consolidated balance sheet as of September 30, 2017, and (ii) our unaudited condensed consolidated balance sheet as of June 30, 2017 affected by the restatement. The financial information that has been previously filed or otherwise reported for these periods and which has been corrected by the foregoing information in this Quarterly Report on Form 10-Q is superseded by the financial information in this Quarterly Report on Form 10-Q, as described above and in Note 2 to the consolidated financial statements filed herewith.

The restatement is more fully described in Note 2 of the notes to the financial statements included herein.

Results of Operations for the three months ended ~~June 30,~~December 31, 2017 and 2016

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

Three Months Ended Change in
Consolidated Statement of Income: June 30, 2017 June 30, 2016 $ % of Rev
% of $
Revenue $ 29,256
100.0 % $ 24,989
100.0 % $ 4,267
— % 17.1 %
Direct expenses 22,871
78.2 % 19,533
78.2 % 3,338
— % 17.1 %
Gross margin 6,385
21.8 % 5,456
21.8 % 929
— % 17.0 %
General and administrative expenses 4,122
14.1 % 3,374
13.5 % 748
0.6 % 22.2 %
Depreciation and amortization 510
1.7 % 414
1.7 % 96
— % 23.2 %
Income from operations 1,753
6.0 % 1,668
6.7 % 85
(0.7 )% 5.1 %
Other income (expense), net (269 ) (0.9 )% (374 ) (1.5 )% 105
0.6 % (28.1 )%
Income (loss) before income taxes 1,484
5.1 % 1,294
5.2 % 190
(0.1 )% 14.7 %
Income tax expense (benefit), net 539
1.8 % 518
2.1 % 21
(0.3 )% 4.1 %
Net income $ 945
3.2 % $ 776
3.1 % 169
0.1 % 21.8 %

Net income per share - basic $ 0.08
$ 0.08
$ —

Net income per share - diluted $ 0.08
$ 0.07
$ 0.01



	Three Months Ended
	December 31,
	2017			2016		Change
Revenue	$	30,215		$	26,111	$	4,104
Direct expenses	23,683			20,300		3,383
Gross margin	6,532			5,811		721
General and administrative expenses	4,880			4,721		159
Depreciation and amortization	506			201		305
Income from operations	1,146			889		257
Interest expense, net	278			364		86
Income before income taxes	868			525		343
Income tax expense, net	3,719			201		3,518
Net income (loss)	$	(2,851	)	$	324	(3,175		)
Net income (loss) per share - basic	$	(0.24	)	$	0.03	$	(0.27	)
Net income (loss) per share-diluted	$	(0.24	)	$	0.03	$	(0.27	)

Revenue

Revenue for the three months ended ~~June 30,~~December 31, 2017 was ~~$29.3~~$30.2 million, an increase of ~~$4.3~~$4.1 million or ~~17.1%~~15.7% over prior year period. The increase in revenue is due primarily to ~~the acquisition on May 3, 2016, which contributed $10.6 million in the current year versus $7.4 million in the prior year. The increase is also due to the continued~~ expansion of workload volumes on existing ~~contract vehicles resulting from program management and customer satisfaction with our services.~~contracts.

Direct Expenses

Direct expenses generally comprise of direct labor (including benefits), taxes and insurance, workers compensation expense, subcontract cost, and other direct costs. Direct expenses for the three months ended ~~June 30,~~December 31, 2017 were ~~$22.9~~$23.7 million, an increase of ~~$3.3~~$3.4 million, or ~~17.1%~~16.7% over prior year due principally to ~~the acquisition and~~ increased professional service costs attributed to increased ~~revenue on legacy DLH contracts.~~revenue. As a percentage of revenue, direct expenses were ~~78.2%; consistent~~78.4%, compared with 77.7% the prior year period.

Gross Margin

Gross margin for the three months ended ~~June 30,~~December 31, 2017 was approximately ~~$6.4~~$6.5 million, an increase of ~~$0.9~~$0.7 million, or ~~17.0%~~12.4%, over prior year period. As a percentage of revenue, our gross margin rate of ~~21.8%~~21.6% was ~~consistent with~~70 basis points lower than the prior year ~~three month period. We continue to focus on internal productivity measures to control costs and improve our~~period, though within the expected 20-22% range for gross ~~margin.~~margins, based upon the current business.

General and Administrative Expenses

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. G&A expenses for the three months ended ~~June 30,~~December 31, 2017 were approximately ~~$4.1~~$4.9 million, an increase of ~~$0.7~~$0.2 million or ~~22.2%~~3.4% over the prior year period. As a percent of revenue, G&A expenses were ~~14.1%~~16.2%, an ~~increase~~improvement of approximately ~~0.6%~~190 basis points over the prior year ~~period. The increase in expenses was due primarily to~~period, as the ~~acquisition, and~~Company achieves additional ~~program and operational resources to manage and grow our business volume.~~

scale on integration of its corporate functions.

Depreciation and Amortization

This category comprises depreciation on fixed assets and the amortization of ~~acquired~~ definite-lived intangible ~~assets from the acquisition.~~assets. As a professional services organization, DLH ~~has~~does not ~~required~~require significant expenditures on capital equipment and other fixed assets. For the three months ended ~~June 30,~~December 31, 2017 and ~~June 30,~~December 31, 2016, depreciation and amortization were approximately $0.5 million and ~~$0.4~~$0.2 million, respectively. The ~~expenses were due principally to~~December 31, 2016 value is net of an adjustment of depreciation expense associated with the ~~amortization of acquired definite-lived intangible assets.~~May, 2016 acquisition.

Income from Operations

Income from operations for the three months ended ~~June 30,~~December 31, 2017 was approximately ~~$1.8~~$1.1 million, an increase of approximately ~~$0.1~~$0.3 million over the prior year period.

~~Other Income (Expense),~~

Interest Expense, net

~~Other~~Interest expense, net, includes interest expense on the Company’s term loan and amortization of deferred financing costs on debt obligations, ~~and other miscellaneous non-operational items. Prior year other expense includes non-operational acquisition expenses related to the Danya transaction. For~~for the three months ended ~~June 30,~~December 31, 2017, ~~other~~interest expense, net, was approximately $0.3 million, a decrease of approximately $0.1 million over the prior year period.

Income before Income Taxes

For the three months ended ~~June 30,~~December 31, 2017, income before taxes was approximately ~~$1.5~~$0.9 million, an ~~improvement~~increase of approximately ~~$0.2~~$0.3 million over the prior year period, due principally to ~~improved income~~increased gross margin derived from ~~operations and reduced other expenses.~~higher revenue.

Income Tax Expense

For the three months ended ~~June 30,~~December 31, 2017, DLH recorded a ~~$0.5~~$3.7 million provision for tax expense, including $3.4 million related to the write-down of deferred tax assets resulting from the 2017 Tax Act enacted in December 2017.

Net Income (Loss)

Net income (loss) for the three months ended December 31, 2017 was approximately $(2.9) million, or $(0.24) per basic and diluted share, a decrease of approximately $3.2 million primarily due to the write down of deferred tax assets described above which ~~was consistent with~~offset the increase in revenues and related gross margins. On a Non-GAAP basis net income excluding the write down of deferred tax assets would have been $0.5 million or $0.04 per diluted share, compared to $0.3 million or $0.03 per diluted share in the prior year period.

~~Net Income~~

Net income for the three months ended June 30, 2017 was approximately $0.9 million, or $0.08 per basic and diluted share, an increase of $0.2 million or $0.01 per diluted share, over the prior year period. Net income increased 22% year over year, mitigated by a 10% increase in weighted average shares outstanding.

~~Results of Operations for the nine months ended June 30, 2017 and 2016~~

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

Nine Months Ended Change in
Consolidated Statement of Income: June 30, 2017 June 30, 2016 $ % of Rev
% of $
Revenue $ 85,272
100.0 % $ 58,482
100.0 % $ 26,790
— % 45.8 %
Direct expenses 66,805
78.3 % 46,885
80.2 % 19,920
(1.9 )% 42.5 %
Gross margin 18,467
21.7 % 11,597
19.8 % 6,870
1.9 % 59.2 %
General and administrative expenses 12,722
14.9 % 8,402
14.4 % 4,320
0.5 % 51.4 %
Depreciation and amortization 1,264
1.5 % 456
0.8 % 808
0.7 % 177.2 %
Income from operations 4,481
5.3 % 2,739
4.7 % 1,742
0.6 % 63.6 %
Other income (expense), net (888 ) (1.0 )% (1,076 ) (1.8 )% 188
0.8 % (17.5 )%
Income (loss) before income taxes 3,593
4.2 % 1,663
2.8 % 1,930
1.4 % 116.1 %
Income tax expense (benefit), net 1,345
1.6 % 666
1.1 % 679
0.5 % 102.0 %
Net income $ 2,248
2.6 % $ 997
1.7 % 1,251
0.9 % 125.5 %

Net income per share - basic $ 0.20
$ 0.10
$ 0.10

Net income per share - diluted $ 0.18
$ 0.09
$ 0.09

~~Revenue~~

Revenue for the nine months ended June 30, 2017 was $85.3 million, an increase of $26.8 million or 45.8% over prior year period. The increase in revenue is due primarily to the acquisition on May 3, 2016, which contributed $31.0 million in the current year versus $7.4 million in the prior year. The increase is also due to the continued expansion on existing contract vehicles resulting from program management and customer satisfaction with our services.

~~Direct Expenses~~

Direct expenses generally comprise direct labor direct labor (including benefits), taxes and insurance, workers compensation expense, subcontract cost, and other direct costs. Direct expenses for the nine months ended June 30, 2017 were $66.8 million, an increase of $19.9 million, or 42.5% over prior year due principally to the acquisition and increased professional service costs attributed to increased revenue on legacy DLH contracts. As a percentage of revenue, direct expenses were 78.3%, a favorable reduction of (1.9)%.

~~Gross Margin~~

Gross margin for the nine months ended June 30, 2017 was approximately $18.5 million, an increase of $6.9 million, or 59.2%, over the prior year period. As a percentage of revenue, our gross margin rate of 21.7% increased by 190 basis points, or 1.9%, over the prior year nine-month period. Favorable gross margin results are due principally to contribution related to the acquired entity, more complex contracts, and effective assignment of staff to deliver strong contract performance. We continue to focus on internal productivity measures to control costs and improve our gross margin.

~~General and Administrative Expenses~~

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. G&A expenses for the nine months ended June 30, 2017 were approximately $12.7 million, an increase of $4.3 million or 51.4% over the prior year period. As a percent of revenue, G&A expenses were 14.9%, an increase of approximately 0.5% over prior year period. The increase in expenses was due primarily to the acquired entity, and additional program and operational resources to manage and grow our business volume.

~~Depreciation and Amortization~~

This category comprises non-cash expenditures related to depreciation on fixed assets and the amortization of acquired definite-lived intangible assets from the acquisition. As a professional services organization, DLH has not required significant expenditures on capital equipment and other fixed assets. For the nine months ended June 30, 2017, depreciation and amortization were approximately $1.3 million, due principally to the amortization of acquired definite-lived intangible assets. For the same period in the prior year depreciation and amortization was approximately $0.5 million.

~~Income from Operations~~

Income from operations for the nine months ended June 30, 2017 was approximately $4.5 million, an increase of approximately $1.7 million over the prior year period. The improvement is due principally to contribution from the acquired entity, and expansion on legacy programs.

~~Other Income (Expense), net~~

Other expense, net, includes interest expense and amortization of deferred financing costs on debt obligations, and other miscellaneous non-operational items. Prior year other expense includes non-operational acquisition expenses related to the acquisition. For the nine months ended June 30, 2017, other expense, net, was approximately $0.9 million, a decrease of approximately $0.2 million over the prior year period.

~~Income before Income Taxes~~

For the nine months ended June 30, 2017, income before taxes was approximately $3.6 million, an improvement of approximately $1.9 million over the prior year period. The increase is attributable to the contribution from the acquisition and improved performance on legacy programs.

~~Income Tax Expense~~

~~For the nine months ended June 30, 2017, DLH recorded a $1.3 million provision for tax expense, an increase of approximately $0.7 million over the prior year period due to higher income before taxes.~~

~~Net Income~~

Net income for the nine months ended June 30, 2017 was approximately $2.2 million, or $0.20 and $0.18 per basic and diluted share, respectively, an increase of approximately $1.3 million or $0.10 and $0.09 per basic and diluted share over the prior year period. The increase was due principally to the operating contributions from the acquisition, net of interest and amortization of deferred financing expenses and purchased intangibles.

Non-GAAP Financial Measures

On a non-GAAP basis, Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) ~~adjusted for other items (“Adjusted EBITDA”)~~ for the three months ended ~~June 30,~~December 31, 2017 was approximately ~~$2.3~~$1.7 million, an increase of approximately ~~$0.2~~$0.6 million, or ~~9.5%~~51.6% over the prior ~~year three-month period.~~three months ended. The increase is attributable principally to ~~improvements in net income.~~increased gross margin from higher revenue.

Adjusted EBITDA for the nine months ended June 30, 2017 was approximately $6.4 million, and improvement of approximately $2.8 million over the prior period. Growth is attributable to increased revenue and gross margin as previously described.

~~We use~~The Company uses Earnings Before Interest Tax Depreciation and Amortization ~~(“EBITDA”) adjusted for other items (“Adjusted EBITDA”~~("EBITDA") as a supplemental non-GAAP ~~measures~~measure of our performance. ~~We define Adjusted~~DLH defines EBITDA as net ~~income/(loss) adjusted to exclude~~income excluding (i) interest ~~and other expenses, including acquisition expenses, net,~~expense, (ii) provision for or benefit from income taxes, if any, and (iii)depreciation and ~~amortization, and (iv) G&A expenses — equity grants.~~amortization.

~~We exclude~~Beginning with the ~~following items in deriving Adjusted EBITDA:~~

~~Acquisition expenses are excluded in the prior~~first quarter of fiscal year ~~period. These expenditures related to the acquisition.~~2018, we have commenced reporting EBITDA rather than adjusted EBITDA, as a key non-GAAP financial measure of our business. We believe that ~~segregating these expenses allows for improved~~due to the growth and maturation of our business, this change will improve the transparency of our business performance and increase the comparability of our results ~~from period~~with peers. Non-GAAP measures for prior periods have been recast to ~~period.~~conform to this change in our reporting. It is important to note that our GAAP results and presentation of GAAP metrics do not change and this change has no effect on our business, nor how we manage our business.

In addition, for the quarter ended December 31, 2017, we are also reporting for the first time our net income excluding the impact of the Tax Cut and Jobs Act of 2017 on the valuation of our deferred tax assets. On December 22, 2017, the Tax Cut and Jobs Act was enacted, which, among other things, reduced corporate tax rates and revised rules regarding the usability of net operating losses. These changes have resulted in a tax provision of $3.4 million associated with revaluing the benefit of our net operating losses. We are reporting this non-GAAP metric beginning with this quarter since applicable guidance requires that the Company's deferred tax assets must be revalued immediately.

~~Equity compensation is excluded because it is non-cash in nature. We believe that excluding this expense allows for improved comparability of results from period to period.~~

~~Non-GAAP~~These 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~~Company's Board utilize these non-GAAP measures to ~~help~~ make decisions about the use of the ~~Company’s~~Company's resources, analyze performance between periods, develop internal projections and measure ~~management~~managements performance. ~~We believe~~DLH believes that these non-GAAP measures ~~can be~~are useful to investors in evaluating the ~~Company’s~~Company's ongoing operating and financial results and understanding how such results compare with the ~~Company’s~~Company's historical performance. By providing this non-GAAP ~~measures~~measure as a supplement to GAAP information, ~~we believe we are enhancing investors’~~DLH believes this enhances investors understanding of ~~our~~its business and ~~our~~ results of ~~operations.~~operations.

Reconciliation of GAAP net income to ~~adjusted~~ EBITDA, a non-GAAP measure:

Three Months Ended Nine Months Ended
June 30, June 30,
2017 2016 Change 2017 2016 Change
Net income $ 945
$ 776
$ 169
$ 2,248
$ 997
$ 1,251
(i) Interest and other (income) expense (net):
(i)(a) Interest and other expense 269
281
(12 ) 888
281
607
(i)(b) Acquisition expenses —
93
(93 ) —
795
(795 )
(ii) Provision for taxes 539
518
21
1,345
666
679
(iii) Depreciation and amortization 510
414
96
1,264
456
808
(iv) G&A expenses - equity grants 63
42
21
613
384
229
Adjusted EBITDA $ 2,326
$ 2,124
$ 202
$ 6,358
$ 3,579
$ 2,779



	Three Months Ended
	December 31,
	2017			2016		Change
Net income (loss)	$	(2,851	)	$	324	$	(3,175	)
(i) Interest expense	278			364		(86		)
(ii) Provision for taxes	3,719			201		3,518
(iii) Depreciation, amortization, and loss on fixed assets	506			201		305
EBITDA	$	1,652		$	1,090	$	562

Reconciliation of GAAP net income to net income excluding the effect of write-down, a non-GAAP measure:



	Three Months Ended
	December 31,
	2017			2016		Change
Net income (loss)	$	(2,851	)	$	324	$	(3,175	)
Write-down of deferred tax assets	3,365					3,365
Net income, excluding effect of write-down of deferred tax assets	$	514		$	324	$	190

Net income (loss) per fully-diluted share	$	(0.24	)	0.03		$	(0.27	)
Write-down of deferred tax assets	0.28					0.28
Net income (loss) per fully-diluted share, excluding effect of write-down of deferred tax assets	$	0.04		$	0.03	$	0.01

Sources of cash and cash equivalents

As of ~~June 30,~~December 31, 2017, the Company's immediate sources of liquidity include cash and cash equivalents, accounts receivable, and access to its secured revolving line of credit facility with Fifth Third Bank. This credit facility provides us with access of up to $10.0 million, subject to certain conditions including eligible accounts receivable. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. Our current investment and financing obligations are adequately covered by cash generated from profitable operations.

Management's assessment of ~~liquidity~~cash and cash equivalents at ~~June 30,~~December 31, 2017

Management believes that: (a) cash and cash equivalents of approximately ~~$4.6~~$3.2 million as of ~~June 30,~~December 31, 2017; (b) the amount available under its line of credit that was in effect at ~~June 30,~~December 31, 2017 (which is limited to the amount of eligible assets); and (c) planned operating cash flow should be sufficient to support the Company's operations for twelve months from ~~the date~~issuance of these financial statements.

Loan Facility

~~On May 2, 2016,~~A summary of our loan facilities and subordinated debt financing for the ~~Company entered into a Loan Agreement with Fifth Third Bank to establish a credit facility in the form of up to $35.0 million of secured debt. The Loan Agreement consists of:~~period ended December 31, 2017 is as follows:

~~(i)~~



	($ in Millions)

Lender	Arrangement	Loan Balance		Interest*	Maturity Date
Fifth Third Bank	Secured term loan $25 million ceiling (a)	$	18.8	LIBOR + 3.0%	05/01/21
Fifth Third Bank	Secured revolving line of credit $10 million ceiling (b)	$	—	LIBOR + 3.0%	05/01/18

*Interest rate as of December 31, 2017 was 1.69%.

(a) a secured term loan with an original aggregate principal amount of $25.0 million (the “Term Loan”).

(b) a secured revolving credit facility in an aggregate principal amount of up to $10.0 million (the “Revolving Credit Facility”) and

~~(ii) a secured term loan with an aggregate principal amount of $25.0 million (the “Term Loan”).~~

The Term Loan matures on May 1, 2021 and the Revolving Credit Facility matures on May 1, 2018.

The Term Loan and Revolving Credit Facility bear interest at the rate of LIBOR plus a margin of 3.0% and the loans are secured by liens on substantially all of the assets of ~~DLH, Danya and DLH’s other subsidiaries.~~the Company. The provisions of the Term

Loan and Revolving Credit Facility are fully described in Note 56 of the consolidated financial statements. ~~The outstanding balance of the Term Loan was $20.6 million~~

Contractual Obligations as of ~~June 30, 2017.~~December 31, 2017

~~Contractual Obligations~~

~~Our outstanding contractual obligations are described in Note 10 to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.~~



				Payments Due by Period
Contractual obligations				Next 12		2-3		4-5		More than 5
(Amounts in thousands)	Ref	Total		Months		Years		Years		Years
Debt Obligations		$	18,750	$	6,667	$	7,500	$	4,583	—
Facility Leases		3,450		911		1,423		656		460
Equipment operating leases		67		35		32		—		—
Total Obligations		$	22,267	$	7,613	$	8,955	$	5,239	$	460

Off-Balance Sheet Arrangements

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.

Effects of Inflation

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

Significant Accounting Policies and Use of Estimates

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and assumptions that are believed to be reasonable at the time. Actual results could differ from such estimates. Critical policies and practices are important to the portrayal of a company’s financial condition and results of operations, and may require management’s subjective judgments about the effects of matters that are uncertain. See the information under Note 67 "Significant Accounting Policies" to the consolidated financial statements in DLH’s Annual Report on Form 10-K for the year ended September 30, ~~2016,~~2017, as well as the discussion under the caption “Critical Accounting Policies and Estimates” beginning on page 2625 therein for a discussion of our critical accounting policies and estimates. DLH senior management has reviewed these critical accounting policies and related

disclosures and determined that there were no significant changes in our critical accounting policies, or the estimates associated with those policies in the ~~nine~~three months ended ~~June 30, 2017.~~December 31, 2017, with the exception of the change in deferred tax assets based upon the change in projected enacted tax rates disclosed in Note 13, Income Taxes.

New Accounting Pronouncements

A discussion of recently issued accounting pronouncements is described in Note 34 in the Notes to Consolidated Financial Statements elsewhere in this Quarterly Report, and we incorporate such discussion by reference.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 ~~believes that its~~does not believe the level of exposure to interest rate fluctuations on its debt instruments ~~can be managed with an~~is material given that the amount of our debt is subject to LIBOR plus 3.0% applied by the Lender. As of December 31, 2017 the Lender's interest rate ~~swap contract that it is securing.~~was 4.69%.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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.

Changes in Internal Controls

There ~~was~~were no ~~change~~changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during our fiscal quarter ended ~~June 30, 2017.~~

December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II — OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

ITEM 1A: RISK FACTORS

Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended September 30, ~~2016~~2017 and in our other reports filed with the SEC for a discussion of the risks associated with our business, financial condition and results of operations. These factors, among others, could have a material adverse effect upon our business, results of operations, financial condition or liquidity and cause our actual results to differ materially from those contained in statements made in this report and presented elsewhere by management from time to time. The risks identified by DLH in its reports are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may materially adversely affect our business, results of operations, financial condition or liquidity. We believe there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2016.~~2017.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the period covered by this report, the Company did not issue any securities that were not registered under the Securities Act of 1933, as amended, except as has been reported in previous filings with the SEC or as set forth elsewhere herein.

Registrant Repurchases of Securities

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.

The following table provides certain information with respect to the status of our publicly announced stock repurchase program during ~~third~~first quarter ended ~~June 30,~~December 31, 2017:

($ in thousands)
Period Total Number
of Shares
Purchased Average Price
Paid Per Share Total Number of
Shares Purchased As Part of Publicly
Announced Programs Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program
April 2017 —
$ —
—
$ 77
May 2017 —
—
—
77
June 2017 —
—
—
77
Third Quarter Total —
$ —
—
$ 77



					($ in thousands)
Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Programs	Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program
October 2017	—	$	—	—	$	77
November 2017	—	—		—	77
December 2017	—	—		—	77
First Quarter Total	—	$	—	—	$	77

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

None.

2826

ITEM 6: EXHIBITS

Exhibits to this report which have previously been filed with the Commission are incorporated by reference to the document referenced in the following table.



Exhibit		Incorporated by Reference				Filed
Number	Exhibit Description	Form	Dated	Exhibit		Herewith


31.1	Certification of Chief Executive Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a)					X

31.2	Certification of Chief Financial Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a)					X
					��
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 17 CFR 240.13a-14(b) or 17 CFR 240.15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code					X

101	The following financial information from the DLH Holdings Corp. Quarterly Report on Form 10-Q for the fiscal quarter ended ~~June 30,~~December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; and, (iv) the Notes to the Consolidated Financial Statements.					X

2927

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



	DLH HOLDINGS CORP.

	By:	/s/ Zachary C. Parker
		Zachary C. Parker
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Kathryn M. JohnBull
		Kathryn M. JohnBull
		Chief Financial Officer
		(Principal Accounting Officer)

Date: ~~August 10, 2017~~February 13, 2018

3028



New Jersey		~~22-1899798~~
(State or other jurisdiction of incorporation or organization)		22-1899798 (I.R.S. Employer Identification No.)

3565 Piedmont Road, NE, Building 3, Suite 700
Atlanta, Georgia		~~30305~~
(Address of principal executive offices)		30305 (Zip Code)



Large accelerated filer o		Accelerated filer o

Non-accelerated filer o(Do not check if a smaller reporting company)		Smaller Reporting Company x
~~(Do not check if a smaller reporting company)~~		Emerging Growth Company o



	Page No.
Part I — Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2017 and 2016 (Unaudited)	3
Consolidated Balance Sheets as of ~~June 30,~~December 31, 2017 (Unaudited) and September 30, ~~2016~~ 2017	4
Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~June 30,~~December 31, 2017 and 2016 (Unaudited)	5
Notes to Consolidated Financial Statements (Unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1817
Item 3. Quantitative and Qualitative Disclosures about Market Risk	2625
Item 4. Controls and Procedures	2625
Part II — Other Information	2725
Item 1. Legal Proceedings	2725
Item 1A. Risk Factors	2726
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	2726
Item 3. Defaults Upon Senior Securities	2826
Item 4. Mine Safety Disclosures	2826
Item 5. Other Information	2826
Item 6. Exhibits	2927
Signatures	3028


	June 30, 2017			September 30, 2016			December 31, 2017			September 30, 2017
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,601		$	3,427		$	3,243		$	4,930
Accounts receivable, net	8,624			6,637
Accounts receivable							12,843			11,911
Other current assets	620			542			586			598
Total current assets	13,845			10,606			16,672			17,439
Equipment and improvements, net	1,163			644			1,701			1,391
Deferred taxes, net	10,411			11,415			6,100			9,639
Goodwill and other intangible assets, net	41,557			42,304			40,676			41,116
Other long-term assets	105			105			139			139
Total assets	$	67,081		$	65,074		$	65,288		$	69,724

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Debt obligations - current	$	3,590		$	3,560		$	6,529		$	6,518
Derivative financial instruments, at fair value	253			204			—			306
Accrued payroll	3,445			3,616			3,592			3,723
Accounts payable, accrued expenses, and other current liabilities	8,826			7,136			9,536			10,895
Total current liabilities	16,114			14,516			19,657			21,442
Total long term liabilities	16,215			18,782			11,541			12,427
Total liabilities	32,329			33,298			31,198			33,869
Commitments
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value; authorized 5,000 shares, none issued and outstanding	—			—
Common stock, $.001 par value; authorized 40,008 shares; issued and outstanding 11,590 at June 30, 2017 and 11,148 at September 30, 2016	12			11
Common stock, $.001 par value; authorized 40,000 shares; issued and outstanding 11,882 at December 31, 2017 and 11,767 at September 30, 2017							12			12
Additional paid-in capital	82,624			81,897			83,644			82,687
Accumulated deficit	(47,884		)	(50,132		)	(49,566		)	(46,844		)
Total shareholders’ equity	34,752			31,776			34,090			35,855
Total liabilities and shareholders' equity	$	67,081		$	65,074		$	65,288		$	69,724


	(unaudited)						(unaudited)
	Nine Months Ended						Three Months Ended
	June 30,						December 31,
	2017			2016			2017			2016
Operating activities
Net income	$	2,248		$	997
Adjustments to reconcile net income to net cash provided by operating activities:
Net income (loss)							$	(2,851	)	$	324
Adjustments to reconcile net income(loss) to net cash (used in) provided by operating activities:
Depreciation and amortization expense	1,264			507			506			201
Amortization of debt financing costs	194			—
Amortization of debt financing costs as interest expense							65			60
Change in fair value of derivative financial instruments	49			—			—			79
Stock based compensation expense	613			384			757			485
Loss on retirement of equipment	—			3
Deferred taxes, net	1,004			453			3,539			—
Changes in operating assets and liabilities
Accounts receivable	(1,987		)	(3,990		)	(931		)	(655		)
Other current assets	(78		)	(870		)	11			(83		)
Accounts payable, accrued payroll, accrued expenses and other current liabilities	1,519			5,833			(1,486		)	(199		)
Other long term assets/liabilities	145			63			(4		)	85
Net cash provided by operating activities	4,971			3,380
Net cash (used in)provided by operating activities							(394		)	297

Investing activities
Acquisition of Danya, net of cash acquired	(250		)	(32,266		)
Acquisition net of cash acquired							—			(250		)
Purchase of equipment and improvements	(785		)	(462		)	(375		)	(41		)
Net cash used in investing activities	(1,035		)	(32,728		)	(375		)	(291		)

Financing activities
Net (repayments) borrowings on senior debt	(2,813		)	25,500
Net borrowing on subordinated debt	—			2,500
Deferred debt expense	—			(1,333		)
Repayments on senior debt							(937		)	(938		)
Repayments of capital lease obligations	(62		)	(70		)	(5		)	(24		)
Proceeds from issuance of stock	113			13
Net cash used in (provided by) financing activities	(2,762		)	26,610
Proceeds from issuance of stock upon exercise of options							24			—
Net cash used in financing activities							(918		)	(962		)

Net change in cash and cash equivalents	1,174			(2,738		)	(1,687		)	(956		)
Cash and cash equivalents at beginning of period	3,427			5,558			4,930			3,427
Cash and cash equivalents at end of period	$	4,601		$	2,820		$	3,243		$	2,471

Supplemental disclosures of cash flow information
Cash paid during the period for interest	$	662		$	105		$	219		$	225
Cash paid during the period for income taxes	$	390		$	105		$	480		$	300
Non-cash equity consideration for acquisition of Danya	$	—		$	2,500
Derivatives, financial instruments reclassified as equity (see Note 4)							$	(306	)	$	—



	In thousands
	As Previously Reported		Adjustments			As Restated
Balance sheet as of September 30, 2017 (audited)
Debt obligations - current	$	3,601	$	2,917		$	6,518
Total current liabilities	$	18,525	$	2,917		$	21,442
Total long term liabilities	$	15,344	$	(2,917	)	$	12,427
Total liabilities	$	33,869	$	—		$	33,869

Balance sheet as of June 30, 2017 (unaudited)
Debt obligations - current	$	3,590	$	2,154		$	5,744
Total current liabilities	$	16,114	$	2,154		$	18,268
Total long term liabilities	$	16,215	$	(2,154	)	$	14,061
Total liabilities	$	32,329	$	—		$	32,329



					(in thousands)
	Ref	Goodwill			Customer Relationships (a)		Non Compete Agreement (a)			Trade Name (a)		Total
Gross Balance at September 30, 2016		$	34,745		$	7,247	$	1,370		$	—	$	43,362
Measurement period adjustment		(8,756		)	9,379		(890		)	517		250
Adjusted Gross Balance at June 30, 2017		$	25,989		$	16,626	$	480		$	517	$	43,612



		(in thousands)
		as of December 31, 2017
	Ref	Goodwill		Customer Relationships (a)				Non Compete Agreement (a)			Trade Name (a)			Total
Gross Balance at December 31, 2017		$	25,989	$	16,626			$	480		$	517		$	43,612
Accumulated amortization at September 30, 2017		$	—	$	(2,355	)	—	$	(68	)	$	(73	)	$	(2,496	)
Current period amortization		—		(416		)		(12		)	(12		)	(440		)
Total accumulated amortization		—		(2,771		)		(80		)	(85		)	(2,936		)
Net balance at December 31, 2017		$	25,989	$	13,855			$	400		$	432		$	40,676



Ref (b): Estimated amortization expense for future years:	(in thousands)
Year 1	$	1,762
Year 2	1,762
Year 3	1,762
Year 4	1,762
Year 5	1,762
Thereafter	6,758
	$	15,568



Estimated amortization expense for future years:	(in thousands)
Year 1	$	1,762
Year 2	1,762
Year 3	1,762
Year 4	1,762
Year 5	1,762
Thereafter	5,877
	$	14,687



Ref (a): Maturity of the bank debt obligation as follows, in thousands:
Year 1	$	6,667
Year 2	3,750
Year 3	3,750
Year 4	4,583
Total bank debt obligation	$	18,750



					(in years)
					Weighted
				Weighted	Average	(in thousands)
		(in thousands)		Average	Remaining	Aggregate
		Number of		Exercise	Contractual	Intrinsic
	Ref	Shares		Price	Term	Value
Options outstanding, September 30, 2016		2,226		$1.43	5.8	$	7,581
Canceled		—
Granted	(a)	400		$5.94
Exercised		(397	)	$3.00
Options outstanding, June 30, 2017		2,229		$3.66	6.5	$	7,490



										Volatility
										50%
					Vesting				Expected
	Strike		Stock		Threshold		Risk-Free		Term	Calculated
Grant Date	Price		Price		Price		Rate		(Years)	Fair Value
11/29/2017	$	6.46	$	6.46	$	12.00	2.4	%	10	$	3.98
12/1/2017	$	6.28	$	6.28	$	8.00	2.4	%	10	$	3.87
12/1/2017	$	6.28	$	6.28	$	10.00	2.4	%	10	$	3.82

Notes:
Results based on 100,000 simulations


		Number of Shares			(in thousands)
		(in thousands)			Number of Shares
		June 30,	September 30,		December 31,
	Ref	2017	2016	Ref	2017		2016
Vested and exercisable		1,562	1,909	(a)	$	1,302	$	1,959
Unvested	(a)	667	317		884		267
Options outstanding		2,229	2,226		$	2,186	$	2,226



~~Risk free interest rate~~	~~1.55~~	%
~~Contractual term~~	~~5 years~~
~~Dividend yield~~	—	%
~~Expected lives~~	~~3.8 years~~
~~Expected volatility~~	~~143~~	%
~~Fair value per warrant~~	~~$5.29~~





	Beginning Balance		Realized/Unrealized		Purchases and		Ending Balance		Change in Realized (gains) losses for liabilities held at
	September 30, 2016		(Gains) Losses		Settlements		June 30, 2017		June 30, 2017
Warrant issued to acquire common stock	$	204	$	49	$	—	$	253	$	49


				Payments Due By Period											Payments Due By Period
Obligations				Next 12		2-3		4-5		More than 5
Contractual Obligations															Next 12		2-3		4-5		More than 5
(Amounts in thousands)	Ref	Total		Months		Years		Years		Years		Ref	Total		Months		Years		Years		Years
Debt Obligations	(a)	$	20,625	$	3,750	$	7,500	$	9,375				$	18,750	$	6,667	$	7,500	$	4,583	—
Facility leases	(b)	$	3,909	$	914	$	1,718	$	648	$	629		3,450		911		1,423		656		460
Equipment operating leases	(c)	434		102		204		128		—			67		35		32		—		—
Total Obligations		$	24,968	$	4,766	$	9,422	$	10,151	$	629		$	22,267	$	7,613	$	8,955	$	5,239	$	460



	Three Months Ended										Change in
Consolidated Statement of Income:	June 30, 2017					June 30, 2016					$		% of Rev		% of $
Revenue	$	29,256		100.0	%	$	24,989		100.0	%	$	4,267	—	%	17.1	%
Direct expenses	22,871			78.2	%	19,533			78.2	%	3,338		—	%	17.1	%
Gross margin	6,385			21.8	%	5,456			21.8	%	929		—	%	17.0	%
General and administrative expenses	4,122			14.1	%	3,374			13.5	%	748		0.6	%	22.2	%
Depreciation and amortization	510			1.7	%	414			1.7	%	96		—	%	23.2	%
Income from operations	1,753			6.0	%	1,668			6.7	%	85		(0.7	)%	5.1	%
Other income (expense), net	(269		)	(0.9	)%	(374		)	(1.5	)%	105		0.6	%	(28.1	)%
Income (loss) before income taxes	1,484			5.1	%	1,294			5.2	%	190		(0.1	)%	14.7	%
Income tax expense (benefit), net	539			1.8	%	518			2.1	%	21		(0.3	)%	4.1	%
Net income	$	945		3.2	%	$	776		3.1	%	169		0.1	%	21.8	%

Net income per share - basic	$	0.08				$	0.08				$	—
Net income per share - diluted	$	0.08				$	0.07				$	0.01