UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended DecemberMarch 31, 20172023
 
o☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                        to
 
Commission File No. 0-18492
 
DLH HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
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
30305
Atlanta,Georgia
(Zip code)
(Address of principal executive offices)





30305
(Zip Code)


(770) 554-1647554-3545
(Registrant’s telephone number, including area code)

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Exchange ActAct:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockDLHCNasdaqCapital Market
  
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý☒     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý☒   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer☐Accelerated filer☒
Large acceleratedNon-accelerated filero
☐ 
Accelerated filer o
Smaller Reporting Company		☒
 
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller Reporting Company x
Emerging Growth Companyo

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o☐  No ý
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  11,882,494 sharesdate: 13,824,733 shares of Common Stock, par value $.001$0.001 per share, were outstanding as of January 31, 2018.

May 3, 2023.








DLH HOLDINGS CORP.
FORM 10-Q
For the Quarter Ended December 31, 2017
 
Table of Contents
 
Page No.
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2838

2


PART I — FINANCIAL INFORMATION

ITEM I: FINANCIAL STATEMENTS

DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts inIn thousands, except per share amounts)


  (unaudited)
  Three Months Ended
  December 31,
  2017 2016
Revenue $30,215
 $26,111
Direct expenses 23,683
 20,300
Gross margin 6,532
 5,811
General and administrative expenses 4,880
 4,721
Depreciation and amortization 506
 201
       Income from operations 1,146
 889
Interest expense, net 278
 364
Income before income taxes 868
 525
Income tax expense, net 3,719
 201
    Net income (loss) $(2,851) $324
     
Net income (loss) per share - basic (0.24) $0.03
Net income (loss) per share-diluted (0.24) $0.03
     
Weighted average common shares outstanding    
Basic 11,837
 11,201
Diluted 11,837
 12,690
(unaudited)(unaudited)
Three Months EndedSix Months Ended
 March 31,March 31,
 2023202220232022
Revenue$99,417 $108,699 $172,155 $261,500 
Cost of operations:
Contract costs78,238 88,831 135,494 221,517 
General and administrative costs10,693 7,733 18,117 14,644 
Corporate development costs— — 1,735 — 
Depreciation and amortization4,535 1,881 6,937 3,866 
Total operating costs93,466 98,445 162,283 240,027 
Income from operations5,951 10,254 9,872 21,473 
Interest expense4,765 554 6,595 1,226 
Income before provision for income taxes1,186 9,700 3,277 20,247 
Provision for income taxes381 2,522 925 5,265 
Net income$805 $7,178 $2,352 $14,982 
Net income per share - basic$0.06 $0.56 $0.17 $1.17 
Net income per share - diluted$0.06 $0.50 $0.16 $1.04 
Weighted average common stock outstanding
Basic13,75912,778 13,530 12,763 
Diluted14,600 14,442 14,447 14,368 
 
The accompanying notes are an integral part of these consolidated financial statements.

3




DLH HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(Amounts inIn thousands, except par value of shares) 

March 31,
2023		September 30,
2022
(unaudited)
ASSETS  
Current assets:  
Cash$137 $228 
Accounts receivable67,021 40,496 
Other current assets3,513 2,878 
Total current assets70,671 43,602 
Equipment and improvements, net1,558 1,704 
Operating lease right-of-use assets18,754 16,851 
Goodwill138,301 65,643 
Intangible assets, net133,109 40,884 
Other long-term assets183 328 
Total assets$362,576 $169,012 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current liabilities:  
Operating lease liabilities - current$3,452 $2,235 
Accrued payroll17,279 9,444 
Debt obligations - current, net of deferred financing costs33,267 — 
Accounts payable and accrued liabilities25,066 26,862 
Total current liabilities79,064 38,541 
Long-term liabilities:
Deferred taxes, net1,203 1,534 
Operating lease liabilities - long-term17,337 16,461 
Debt obligations - long-term, net of deferred financing costs162,636 20,416 
Other long-term liabilities396 — 
Total long-term liabilities181,572 38,411 
Total liabilities260,636 76,952 
Shareholders' equity:
Common stock, $0.001 par value; 40,000 shares authorized; 13,793 and 13,047 shares issued and outstanding at March 31, 2023 and September 30, 2022, respectively14 13 
Additional paid-in capital98,584 91,057 
Retained earnings3,342 990 
Total shareholders’ equity101,940 92,060 
Total liabilities and shareholders' equity$362,576 $169,012 

 December 31,
2017		 September 30,
2017
  
(unaudited)


  
ASSETS  
  
Current assets:  
  
Cash and cash equivalents $3,243
 $4,930
Accounts receivable 12,843
 11,911
Other current assets 586
 598
Total current assets 16,672
 17,439
Equipment and improvements, net 1,701
 1,391
Deferred taxes, net 6,100
 9,639
Goodwill and other intangible assets, net 40,676
 41,116
Other long-term assets 139
 139
Total assets $65,288
 $69,724
     
LIABILITIES AND SHAREHOLDERS’ EQUITY  
  
Current liabilities:  
  
Debt obligations - current $6,529
 $6,518
Derivative financial instruments, at fair value —
 306
Accrued payroll 3,592
 3,723
Accounts payable, accrued expenses, and other current liabilities 9,536
 10,895
Total current liabilities 19,657
 21,442
Total long term liabilities 11,541
 12,427
Total liabilities 31,198
 33,869
Commitments and contingencies 

 

Shareholders' equity:    
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 83,644
 82,687
Accumulated deficit (49,566) (46,844)
Total shareholders’ equity 34,090
 35,855
Total liabilities and shareholders' equity $65,288
 $69,724

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

4




DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts inIn thousands) 
(unaudited)
Six Months Ended
March 31,
 20232022
Operating activities  
Net income$2,352 $14,982 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:  
Depreciation and amortization6,937 3,866 
Amortization of deferred financing costs charged to interest expense904 319 
Stock-based compensation expense1,352 1,309 
Changes in operating assets and liabilities:  
Accounts receivable(1,057)(28,705)
Other current assets719 666 
Accrued payroll8 3,339 
Deferred revenue— (22,273)
Accounts payable and accrued liabilities(4,757)11,600 
Other long-term assets and liabilities404 82 
Net cash provided by (used in) operating activities6,862 (14,815)
Investing activities  
Business acquisition, net of cash acquired(180,711)— 
Purchase of equipment and improvements(463)(89)
Net cash used in investing activities(181,174)(89)
Financing activities  
Proceeds from revolving line of credit32,594 13,500 
Repayment of revolving line of credit(11,264)(13,500)
Proceeds from debt obligations168,000 — 
Repayments of debt obligations(7,125)(9,250)
Payments of deferred financing costs(7,622)— 
Proceeds from issuance of common stock upon exercise of options and warrants287 462 
Payment of tax obligations resulting from net exercise of stock options(649)— 
Net cash provided by (used in) financing activities174,221 (8,788)
Net change in cash(91)(23,692)
Cash - beginning of period228 24,051 
Cash - end of period$137 $359 
Supplemental disclosure of cash flow information  
Cash paid during the period for interest$5,714 $896 
Cash paid during the period for income taxes$3,202 $3,482 
Supplemental disclosure of non-cash activity
Common stock surrendered for the exercise of stock options$238 $— 
  (unaudited)
  Three Months Ended
  December 31,
  2017 2016
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 506
 201
Amortization of debt financing costs as interest expense 65
 60
Change in fair value of derivative financial instruments —
 79
Stock based compensation expense 757
 485
Deferred taxes, net 3,539
 —
Changes in operating assets and liabilities  
  
Accounts receivable (931) (655)
Other current assets 11
 (83)
Accounts payable, accrued payroll, accrued expenses and other current liabilities (1,486) (199)
Other long term assets/liabilities (4) 85
Net cash (used in)provided by operating activities (394) 297
     
Investing activities  
  
Acquisition net of cash acquired —
 (250)
Purchase of equipment and improvements (375) (41)
Net cash used in investing activities (375) (291)
     
Financing activities  
  
Repayments on senior debt (937) (938)
Repayments of capital lease obligations (5) (24)
         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 (1,687) (956)
Cash and cash equivalents at beginning of period 4,930
 3,427
Cash and cash equivalents at end of period $3,243
 $2,471
     
Supplemental disclosures of cash flow information  
  
Cash paid during the period for interest $219
 $225
Cash paid during the period for income taxes $480
 $300
Derivatives, financial instruments reclassified as equity (see Note 4) $(306) $—

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

5


DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands) 
(unaudited)
Common StockAdditional
Paid-In
Capital		Retained EarningsTotal Shareholders' Equity
(unaudited)SharesAmount
Six Months Ended March 31, 2023
Balance at September 30, 202213,047 $13 $91,057 $990 $92,060 
Issuance and fair value adjustment of common stock in business combination527 1 6,538 — 6,539 
Expense related to director restricted stock units— — 359 — 359 
Expense related to employee stock-based compensation— — 993 — 993 
Exercise of stock options286 — 287 — 287 
Common stock surrendered for the exercise of stock options(67)— (650)— (650)
Net income— — — 2,352 2,352 
Balance at March 31, 202313,793 $14 $98,584 $3,342 $101,940 
Three Months Ended March 31, 2023
Balance at December 31, 202213,757 $14 $97,958 $2,537 $100,509 
Fair value adjustment related to the issuance of common stock in a business combination— — (461)— (461)
Expense related to director restricted stock units— — 179 — 179 
Expense related to employee stock-based compensation— — 621 — 621 
Exercise of stock options36 — 287 — 287 
Net income— — — 805 805 
Balance at March 31, 202313,793 $14 $98,584 $3,342 $101,940 

Common StockAdditional
Paid-In
Capital		Accumulated
Deficit		Total Shareholders' Equity
(unaudited)SharesAmount
Six Months Ended March 31, 2022
Balance at September 30, 202112,714 $13 $87,893 $(22,298)$65,608 
Expense related to director restricted stock units— — 324 — 324 
Expense related to employee stock-based compensation— — 985 — 985 
Exercise of stock options26 — 262 — 262 
Exercise of stock warrants54 — 200 — 200 
Net income— — — 14,982 14,982 
Balance at March 31, 202212,794 $13 $89,664 $(7,316)$82,361 
Three Months Ended March 31, 2022
Balance at December 31, 202112,768 $13 $88,593 $(14,494)$74,112 
Expense related to director restricted stock units— — 162 — 162 
Expense related to employee stock-based compensation— — 647 — 647 
Exercise of stock options26 — 262 — 262 
Net income— — — 7,178 7,178 
Balance at March 31, 202212,794 $13 $89,664 $(7,316)$82,361 

The accompanying notes are an integral part of these consolidated financial statements.
6


DLH HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DecemberMarch 31, 20172023
 
1. Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of DLH Holdings Corp. and its wholly-owned subsidiaries all of which are wholly owned.(together with its subsidiaries, "DLH" or the "Company" and also referred to as "we," "us" and "our"). All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") 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")GAAP for complete financial statements.

In themanagement's 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 DecemberMarch 31, 20172023 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018.2023 or any future period. Amounts as of and for the periodsthree and six months ended DecemberMarch 31, 20172023 and DecemberMarch 31, 20162022 are unaudited. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual reportReport on Form 10-K for the year ended September 30, 20172022 filed with the Securities and Exchange Commission on December 9, 2017.5, 2022.


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.

  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

6






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.

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 66% and 61% of revenue for the three months ended December 31, 2017 and 2016, respectively. Additionally, HHS represents a major customer, comprising 32% of revenue for the three months ended 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 December 31, 2017 and September 30, 2017. We believe that the credit risk associated with our receivables is limited due to the creditworthiness of these customers. See Note 5, Supporting Financial Information-Accounts Receivable.

As of December 31, 2017, awards from VA and HHS have anticipated periods of performance ranging from approximately one to up to 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.
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 effective 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 is evaluating the effects 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 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 11, the Company currently has approximately $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.

ADOPTION OF NEW ACCOUNTING STANDARD

7




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

Accounts receivable

   (in thousands)
   December 31, September 30,
 Ref 2017 2017
Billed receivables  $12,843
 $11,862
Unbilled receivables  —
 49
Total accounts receivable  12,843
 11,911
Less: Allowance for doubtful accounts(a) —
 —
Accounts receivable, net  $12,843
 $11,911

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 December 31, 2017 and September 30, 2017.

Other current assets

   (in thousands)
   December 31, September 30,
 Ref 2017 2017
Prepaid insurance and benefits  $381
 $240
Other receivables and prepaid expenses  205
 358
Other current assets  $586
 $598

Equipment and improvements, net

8




   (in thousands)
   December 31, September 30,
 Ref 2017 2017
Furniture and equipment  $331
 $331
Computer equipment  753
 715
Computer software(a) 1,445
 1,108
Leasehold improvements  66
 66
Total fixed assets  2,595
 2,220
Less accumulated depreciation and amortization  (894) (829)
Equipment and improvements, net(b) $1,701
 $1,391

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. The asset was placed in service on January 1, 2018 with an estimated useful life 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 of equipment was $65 thousand and $85 thousand for the three months ended December 31, 2017 and 2016 respectively.

Goodwill and Intangibles




(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 (a): Intangible assets subject to amortization. The intangibles are amortized on a straight-line basis over their estimated useful lives of 10 years. Total amount of amortization expense for the period ended December 31, 2017 was $0.4 million.

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

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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

Debt obligations

   (in thousands)
   December 31,September 30,
 Ref 2017 2017
Bank term loan(a) $18,750
 $19,688
Less unamortized debt issuance costs  (889) (961)
Net bank debt obligation  17,861
 18,727
Less current portion of bank debt obligations  (6,529) (6,518)
Long term portion of bank debt obligation  $11,332
 $12,209

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
Interest expense

   (in thousands)
   Three Months Ended
   December 31,
 Ref 2017 2016
Interest expense(a) $(219) $(225)
Amortization of debt financing costs as interest expense(b) (65) (60)
Change in fair value of derivative financial instruments  —
 (79)
Other income (expense), net  6
 —
Interest expense, net  $(278) (364)

Ref (a): Interest expense on borrowing
Ref (b): Amortizations of expenses related to securing financing



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6. Credit Facilities

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

  ($ in Millions)
  As of December 31, 2017
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
*LIBOR rate as of December 31, 2017 was 1.69%

(a) Represents the principal amounts payable on our Term Loan with Fifth Third 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 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 3.0 to 1.0 for the period through December 31, 2017 to 2.5 to 1.0 for the period ending September 30, 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 annual payments of a percentage of excess cash flow, as defined in the loan agreement. The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75% of the excess cash flow for 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 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. 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 December 31, 2017, was $10.0 million. This capacity was comprised of $0.6 million in a stand-by letter of credit and unused borrowing capacity of $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.



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7. Significant Accounting Policies

Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, andthe 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. Significantperiods. The most significant of these estimates include valuationand assumptions relate to estimating revenues and costs including overhead and its allocation, estimating progress toward the completion of goodwillperformance obligations, assessing fair value of acquired assets and liabilities accounted for through business acquisitions, valuing and determining the amortization periods for long-lived intangible assets, valuation allowances established against accounts receivableinterest rate swaps, stock-based compensation, right-of-use assets and deferred tax assets, excess cash flow payments on our term debt, measurement ofleases liabilities, and loss development on workers’workers' compensation claims, and fair value of derivatives.claims. 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.

Revenue Recognition

DLH’s revenue isThe Company's revenues from contracts with customers are derived from professionalofferings that include technology-enabled business process outsourcing, program management solutions, and other specialized service offerings to US Government agencies through a varietypublic health research and analytics, substantially within the U.S. government and its agencies. The Company has various types of contracts someincluding time-and-materials contracts, cost-reimbursable contracts, and firm-fixed-price contracts.

We consider a contract with a customer to exist when there is a commitment by both parties (customer and Company), payment terms are determinable, there is commercial substance, and collectability is probably in accordance with Accounting Standards Codification ("ASC") No. 606, Revenue from Contracts with Customers ("Topic 606").

We recognize revenue over time when there is a continuous transfer of whichcontrol to our customer as performance obligations are fixed-price in nature and/or sourced through Federal Supply Schedules administered bysatisfied. For our U.S. government contracts, this continuous transfer of control to the General Services Administration (“GSA”) at fixed unit rates or hourly arrangements. Revenue oncustomer is transferred over time and materials contractsrevenue is recognized based on the extent of progress toward completion of the performance obligation. We consider control to transfer when we have a right to payment. In some instances, the Company commences providing services prior to formal approval to begin work from the customer. The Company considers these factors, the risks associated with commencing work, and legal enforceability in determining whether a contract exists under Topic 606.

Contract modification can occur throughout the life of the contract and can affect the transaction price, extend the period of performance, adjust funding, or create new performance obligations. We review each modification to assess the impact of these
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contract changes to determine if it should be treated as part of the original performance obligation or as a separate contract. Contract modifications impact performance obligations when the modification either creates new or changes the existing enforceable rights and obligations. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue and profit cumulatively. Furthermore, a significant change in one or more estimates could affect the profitability of our contracts. We recognize adjustments in estimated profit on contracts in the period identified.

For service contracts, we satisfy our performance obligations as services are rendered. We use cost-based input and time-based output methods to measure progress based on the contract type.
•Time and material - We bill the customer per labor hour and per material, and revenue is recognized in the amount invoiced as the amount corresponds directly to the value of our performance to date. Revenue is recognized to the extent of billable rates times hours performed times the applicable hourly rate,delivered plus materials and other reimbursable costs incurred.
•Cost reimbursable - We record reimbursable costs as incurred, including an estimated share of the contractual fee earned.
•Firm fixed price - We recognize revenue over time using a straight-line measure of progress

Contract costs generally include direct costs such as labor, materials, subcontract costs, and indirect costs identifiable with or allocable to a specific contract. Costs are expensed as incurred on the contract. Revenue on fixed fee for service contracts is recognized over the period of performanceand include an estimate of the contract. Revenue on cost reimbursable contracts is recognized equal to allowablecontractual fees earned. Contract 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. Our company's current business base is 95% prime contracts and 5% subcontracts. DLH recognizes and records revenue onfor U.S. government contracts, when: (a) persuasive evidence of an arrangement exists; (b) the servicesincluding indirect costs, are subject to audit and adjustment by various government audit agencies. Historically, our adjustments have not 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.material.

Business Combinations

InContract assets - Amounts are invoiced as work progresses in accordance with Accounting Standards Codifications 805, "Business Combinations" ("ASC 805")agreed-upon contractual terms. In part, revenue recognition occurs before we have the Company records acquisitions under the purchase methodright to bill, resulting in contract assets. These contract assets are reported within Accounts receivable, net on our consolidated balance sheets and are invoiced in accordance with payment terms defined in each contract. Period end balances will vary from period to period due to agreed-upon contractual terms.

Contract liabilities - Amounts are a result of accounting, under which the acquisition purchase price is allocatedbillings in excess of costs incurred or prepayment for services 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.be rendered.

Fair Value of Financial Instruments
 
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, unbilled revenues,contract assets, contract liabilities, 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.

GoodwillLong-lived Assets

Our long-lived assets include equipment and otherimprovements, intangible assets,

DLH right-of-use assets, and goodwill. The Company continues to review its goodwill and other intangiblelong-lived assets for possible impairment or loss of value at least annually, or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’sunit's carrying amount is greater than its fair value.

Equipment and improvements are recorded 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. Intangible assets (other than goodwill) are originally recorded at fair value and are amortized on a straight-line basis over their estimated useful lives of 10 years. Maintenance and repair costs are expensed as incurred.
At September 30, 2017, we performed a goodwill impairment evaluation on
Right-of-use assets are measured at the year-end carryingpresent value of approximately $26 million. We performed bothfuture minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs paid, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.

8


Lease Liabilities

The Company has leases for facilities and office equipment. Our lease liabilities are recognized as the present value of the future minimum lease payments over the lease term. Our lease payments consist of fixed and in-substance fixed amounts attributable to the use of the underlying asset over the lease term. Variable lease payments that do not depend on an index rate or are not in-substance fixed payments are excluded in the measurement of right-of-use assets and lease liabilities and are expensed in the period incurred. The incremental borrowing rate on our secured term loan is used in determining the present value of future minimum lease payments. Some of our lease agreements include options to extend the lease term or terminate the lease. These options are accounted for in our right-of-use assets and lease liabilities when it is reasonably certain that the Company will extend the lease term or terminate the lease. The Company does not have any finance leases.

Goodwill

The Company reviews goodwill for impairment on an annual basis and on a qualitative and quantitative assessmentquarterly basis the company assesses the impact of factorsany macroeconomic changes that may impact the business conditions to determine whether it was necessaryif these changes have any adverse impact to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no

12



impairment loss was warranted at September 30, 2017. For the three months ended 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 determined that no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill.

Long Lived Assets

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 lifeProvision for leasehold improvements.

Income Taxes

DLHThe Company accounts for income taxes in accordance with the asset and liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheetsheets 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"more-likely-than-not that the position will be sustained upon examination. We had no uncertain tax positions at either DecemberMarch 31, 20172023 or September 30, 2017.2022. We report interest and penalties as a component of provision for income tax expense. Intaxes. During the fiscal quartersthree and six months ended DecemberMarch 31, 20172023 and September 30, 2017,March 31, 2022, 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 option or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a Monte Carlo simulation option pricing modelmethod 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 capitalcommon 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(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.

Reclassification

We present financial statements consistent with a consolidation model for all entities. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These reclassifications had no effect on previously reported results of operations or accumulated deficit.



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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 December 31, 2017, there were 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:

   (in thousands)
   Three Months Ended
 Ref December 31,
   2017
 2016
DLH employees
 $64
 $6
Non-employee directors(a) 693
 479
Total stock option expense  $757
 $485

Ref (a): Equity grants of restricted stock, in accordance with DLH compensation policy for non-employee directors.

Unrecognized stock-based compensation expense

   (in thousands)
   Three Months Ended
   December 31,
 Ref 2017 2016
Unrecognized expense for DLH employees(a) $1,076
 $12
Unrecognized expense for non-employee directors(b) —
 8
Total unrecognized expense  $1,076
 $20

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 modelMonte Carlo method 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 inperiod.

9


Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain cash balances at financial institutions that are insured by the valuation. The remaining termFederal Deposit Insurance Corporation ("FDIC") up to $250,000.

Accounts Receivable

Receivables include amounts billed and currently due from customers where the right to consideration is unconditional and amounts unbilled. Both billed and unbilled amounts are non-interest bearing, unsecured, and recognized at an estimated realizable value that includes costs and fees, and are generally expected to be billed and received within a single year. We evaluate our receivables 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 either March 31, 2023 or September 30, 2022.

Earnings Per Share

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

Treasury Stock

The Company periodically purchases its own common stock that is traded on public markets as part of announced stock repurchase programs. The repurchased common stock is classified as treasury stock on the consolidated balance sheets and held at cost. As of March 31, 2023 and September 30, 2022, the Company did not hold any treasury stock.

Preferred Stock

Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock. As of March 31, 2023 and September 30, 2022, the Company has not issued any preferred stock.

Interest Rate Swap

The Company uses derivative financial instruments to manage interest rate risk associated with its variable debt. The Company's objective in using these interest rate derivatives is to manage its exposure to interest rate movements and reduce volatility of interest expense. The gains and losses due to changes in the fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt. Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt are recognized in interest expense in the consolidated statements of operations. The Company does not hold or issue any derivative instruments for trading or speculative purposes.

Risks & Uncertainties

Management evaluates the impact of global markets and economic factors on our industry and the potential for adverse effects on the Company's consolidated financial position and its operations. As of the date of these consolidated financial statements, there was no indication of any global or economic impacts to our industry.


3. New Accounting Pronouncements

In March 2020 and January 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope,” respectively (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. In December 2022, FASB issued ASU 2022-06 "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848" which defers the end date for electing the relief provided in Topic 848 from
10


December 31, 2022 to December 31, 2024. In the first quarter of fiscal 2023, the Company adopted the optional expedients and exceptions provided in Topic 848. The adoption did not have a material impact on the Company’s consolidated financial statements.


4. Business Combination

Acquisition of Grove Resource Solutions, LLC

On December 8, 2022, the Company acquired 100% of the equity interests of Grove Resource Solution, LLC ("GRSi") for a purchase price of $188.0 million, inclusive of the working capital adjustment completed and paid during this fiscal quarter. The acquisition was financed through a combination of:

•borrowings of $181.5 million under the Company’s amended and restated credit facility; and
•common stock issued of approximately 0.5 million shares, will be 59 months.which were valued at $6.5 million in the aggregate, based on the shares issued to the previous owners as determined by the equity purchase agreement and the stock price on the acquisition date.

Ref (b): UnrecognizedThe acquisition of GRSi was consistent with the Company’s growth strategy, as it provided contract diversification, addition of key capabilities and increased presence in the military health market. The estimated goodwill derived from this transaction is primarily due to these attributes.

The Company has used the acquisition method of accounting for this transaction, whereby the assets acquired and liabilities assumed are recognized based upon their estimated fair values at the acquisition date.
The purchase price for GRSi was $188.0 million adjusted to reflect acquired cash, assumed liabilities and net working capital adjustments.

The Purchase Agreement contains customary representations, warranties and covenants by the parties. Subject to certain limitations and conditions, the seller and the equity holders of the seller do not have indemnity obligation for damages resulting from breaches or inaccuracies of the representations, warranties, and covenants of the seller, GRSI and the equity holders as set forth in the Purchase Agreement. The Purchase Agreement also provided for the establishment of an escrow account in order to satisfy (i) any downward adjustment of the purchase price base on GRSI's net working capital at the closing and (ii) certain specified indemnification obligations of the seller and equity holders that may arise following the closing. The escrow account is funded by an aggregate amount of approximately $4.3 million and the stock consideration. A representations and warranties insurance policy has been purchased by the Company in connection with the Purchase Agreement, under which the Company may seek recourse for breaches of the representations and warranties of the seller, GRSI and the equity holders. The representations and warranties insurance policy is subject to certain customary exclusions and a deductible.

In accordance with ASU 2017-01, the Company evaluated the transaction as an acquisition of a business. The Company has assessed the acquisition price to the fair value of the assets and liabilities of GRSi at the acquisition date. Based on the unaudited financial statements of GRSi on December 8, 2022, we accounted for the total acquisition consideration and allocation of fair value of the related assets and liabilities as follows (in thousands):
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Purchase price for GRSi$187,997
Purchase price allocation:
Cash747 
Accounts receivable25,468 
Other current assets1,354 
Accounts payable and accrued expenses(2,449)
Payroll liabilities(7,826)
Other current liabilities(325)
Equipment and improvements, net463 
Other long-term assets and liabilities(781)
Intangible assets98,688 
Total identifiable net assets acquired115,339 
Goodwill$72,658 

All operating units are aggregated into a single reportable segment. The acquisition of GRSi did not create an additional reportable segment as all operations report to a single Chief Operating Decision Maker (CODM), serve a similar customer base, and provide similar services within a common regulatory environment. The goodwill represents intellectual capital and the acquired workforce, of which both do not qualify as a separate intangible asset.

During the three months ended March 31, 2023, following the completion of the acquisition, GRSi contributed approximately $32.6 million of revenue and $2.0 million of income from operations.
The following table presents certain results for the three and six months ended March 31, 2023 and 2022 as though the acquisition of GRSi had occurred on October 1, 2021. The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of our results if the acquisition had taken place on that date. The pro forma information was prepared by combining our reported historical results with the historical results of GRSi for the pre-acquisition periods. In addition, the reported historical amounts were adjusted for the following items, net of associated tax effects:

•The impact of recording GRSi's intangible asset amortization.
•The impact of interest expense for the new credit facility.
•The removal of legacy GRSi director's fees.
•The removal of transaction costs for the acquisition incurred by GRSi.
(in thousands)(in thousands)
Three Months EndedSix Months Ended
 March 31,March 31,
Pro forma results2023202220232022
Revenue$99,417 $134,615 $199,240 $313,469 
Net income (loss)805 4,001 2,945 10,852 
Number of shares outstanding - basic13,759 12,778 13,530 12,763 
Number of shares outstanding - diluted14,600 14,442 14,447 14,368 
Basic earnings per share (loss)$0.06$0.31$0.22$0.85
Diluted earnings per share (loss)$0.06$0.28$0.20$0.76



5. Revenue Recognition
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The following table summarizes the contract balances recognized on the Company's consolidated balance sheets as follows (in thousands):
March 31,September 30,
20232022
Contract assets$19,907 $7,682 

Contract assets are included presented as part of the accounts receivables on the consolidated balances sheets. Contract liabilities are presented as deferred revenue, which had a $0 balance for the as of March 31, 2023 and September 30, 2022.

Disaggregation of Revenue from Contracts with Customers

We disaggregate our revenue from contracts with customers by customer, contract type, as well as whether the Company acts as prime contractor or subcontractor. We believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following series of tables present our revenue disaggregated by these categories:

Revenue by customer for the three and six months ended March 31, 2023 and 2022 as follows (in thousands):
Three Months EndedSix Months Ended
March 31,March 31,
2023202220232022
Department of Veterans Affairs$34,883 $30,733 $68,591 $58,926 
Department of Health and Human Services38,204 27,584 65,509 50,710 
Department of Defense18,972 8,460 29,235 16,955 
Department of Homeland Security126 39,978 293 131,306 
Other7,232 1,944 8,527 3,603 
Total$99,417 $108,699 $172,155 $261,500 

Revenue by contract type for the three and six months ended March 31, 2023 and 2022 as follows (in thousands):
Three Months EndedSix Months Ended
March 31,March 31,
2023202220232022
Time and Materials$53,803 $85,860 $102,794 $218,400 
Cost Reimbursable17,260 12,275 29,840 22,385 
Firm Fixed Price28,354 10,564 39,521 20,715 
Total$99,417 $108,699 $172,155 $261,500 

Revenue by whether the Company acts as a prime contractor or a subcontractor for the three and six months ended March 31, 2023 and 2022 as follows (in thousands):
Three Months EndedSix Months Ended
March 31,March 31,
2023202220232022
Prime Contractor$93,826 $100,012 $161,807 $246,119 
Subcontractor5,591 8,687 10,348 15,381 
Total$99,417 $108,699 $172,155 $261,500 


6. Leases

The following table summarizes lease balances presented on our consolidated balance sheets as follows (in thousands):
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March 31,September 30,
20232022
Operating lease right-of-use assets$18,754 $16,851 
Operating lease liabilities, current$3,452 $2,235 
Operating lease liabilities - long-term17,337 16,461 
     Total operating lease liabilities$20,789 $18,696 

As of March 31, 2023, operating leases for facilities and equipment have remaining lease terms of less than 1 to 7.9 years.

For the three and six months ended March 31, 2023 and 2022, total lease costs for our operating leases as follows (in thousands):
Three Months EndedSix Months Ended
March 31,March 31,
2023202220232022
Operating$1,098 $863 $2,045 $1,815 
Short-term27 25 70 52 
Variable32 27 63 45 
Sublease income (a)(71)(50)(142)(119)
       Total lease costs$1,086 $865 $2,036 $1,793 

(a) The Company subleases a portion of one of its leased facilities. The sublease is classified as an operating lease with respect to the underlying asset. The sublease term is 5 years and includes two additional 1-year term extension options.

The Company's future minimum lease payments as of March 31, 2023 as follows (in thousands):
For the Fiscal Year Ending September 30,
2023 (remaining)$2,324 
20244,611 
20253,928 
20263,700 
20272,627 
Thereafter8,672 
Total future lease payments25,862 
   Less: imputed interest(5,073)
Present value of future minimum lease payments20,789 
   Less: current portion of operating lease liabilities(3,452)
Long-term operating lease liabilities$17,337 

At March 31, 2023, the weighted-average remaining lease term and weighted-average discount rate are 6.4 years and 6.4% respectively. The calculation of the weighted-average discount rate was determined based on borrowing terms from our secured term loan.

Other information related to prior year'sour leases for the six months ended March 31, 2023 and 2022 as follows (in thousands):

20232022
Cash paid for amounts included in the measurement of lease liabilities2,171 $1,729 
Lease liabilities arising from obtaining right-of-use assets3,541 $— 

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7. Supporting Financial Information

Accounts receivable

The following table summarizes accounts receivable presented on our consolidated balance sheets as follows (in thousands):

March 31,September 30,
20232022
Billed receivables$47,114 $32,814 
Contract assets19,907 7,682 
Allowance for doubtful accounts— — 
Accounts receivable$67,021 $40,496 


Other current assets

The following table summarizes other current assets presented on our consolidated balance sheets as follows (in thousands):

March 31,September 30,
20232022
Prepaid insurance and benefits$2,060 $737 
Prepaid licenses and other expenses297 $1196 
Other receivables1,156 945 
Other current assets$3,513 $2,878 

Equipment and improvements, net

The following table summarizes equipment and improvements, net presented on our consolidated balance sheets as follows (in thousands):

March 31,September 30,
20232022
Furniture and equipment$877 $893 
Computer equipment5,006 2,316 
Computer software1,733 4,407 
Leasehold improvements1,880 1,614 
Total equipment and improvements9,496 9,230 
Less: accumulated depreciation and amortization(7,938)(7,526)
Equipment and improvements, net$1,558 $1,704 

Depreciation expense was $0.2 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively. Depreciation expense was $0.4 million and $0.6 million for the six months ended March 31, 2023 and 2022, respectively.


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Intangible assets

The following table summarizes intangible assets, net presented on our consolidated balance sheets as follows (in thousands):

March 31,September 30,
20232022
Intangible assets
Customer contracts and related customer relationships$113,622 $47,044 
Covenants not to compete637 522 
Trade name13,034 3,051 
Backlog37,249 15,237 
Total intangible assets164,542 65,854 
Less: accumulated amortization
Customer contracts and related customer relationships(24,186)(19,731)
Covenants not to compete(346)(316)
Trade name(1,525)(1,048)
Backlog(5,376)(3,875)
Total accumulated amortization(31,433)(24,970)
Intangible assets, net$133,109 $40,884 

Amortization expense was $4.3 million and $1.6 million for the three months ended March 31, 2023 and 2022, respectively. Amortization expense was $6.5 million and $3.3 million for the six months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, the estimated amortization expense per fiscal year as follows (in thousands):

2023 (remaining)$8,193 
202416,386 
202516,386 
202615,652 
202714,624 
Thereafter61,868 
Total amortization expense$133,109 


Goodwill

The change in the carrying amount of goodwill as follows presented on our consolidated balance sheets as follows (in thousands):

Balance at September 30, 2022$65,643 
Increase from GRSi acquisition (a)72,658 
Balance at March 31, 2023$138,301

Ref (a) The Company has completed its valuation assessment of the GRSi acquisition. Please refer to Note 4 for more information.


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Accounts payable and accrued liabilities

The following table summarizes accounts payable and accrued liabilities presented on our consolidated balance sheets as follows (in thousands):

March 31,September 30,
20232022
Accounts payable$14,182 $11,886 
Accrued benefits4,341 3,857 
Accrued bonus and incentive compensation1,897 3,625 
Accrued workers' compensation insurance2,602 4,880 
Other accrued expenses2,044 2,614 
Accounts payable and accrued liabilities$25,066 $26,862 

Debt obligations

The following table summarizes debt obligations presented on our consolidated balance sheets as follows (in thousands):

March 31,September 30,
20232022
Secured revolving line of credit$21,330 $— 
Secured term loan182,875 22,000 
Less: unamortized deferred financing costs(8,302)(1,584)
Net bank debt obligations195,903 20,416 
Less: current portion of debt obligations, net of deferred financing costs(33,267)— 
Long-term portion of debt obligations, net of deferred financing costs$162,636 $20,416 

Interest expense

The following table summarizes interest expense presented on our consolidated statements of operations for the three and six months ended March 31, 2023 and 2022 as follows (in thousands):

Three Months EndedSix Months Ended
March 31,March 31,
2023202220232022
Interest expense (a)$4,160 $386 $5,714 $907 
Amortization of deferred financing costs (b)605 168 881 319 
Interest expense$4,765 $554 $6,595 $1,226 

(a) Interest expense on borrowing.
(b) Amortization of expenses related to secured term loan and secured revolving line of credit.


8. Credit Facilities

A summary of our credit facilities as of March 31, 2023 and September 30, 2022 is as follows (in millions):
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March 31, 2023September 30, 2022
ArrangementLoan BalanceInterestArrangementLoan BalanceInterest
Secured term loan (a) due December 8, 2027$182.9 SOFR* + 4.2%Secured term loan due September 30, 2025$22.0 LIBOR + 2.5%
Secured revolving line of credit (b) due December 8, 2027$21.3 SOFR* + 4.2%Secured Revolving line of Credit due September 20, 2025$— LIBOR + 2.5%

*Secured Overnight Financing Rate ("SOFR") as of March 31, 2023 was 4.81%.
On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter-party. The notional amount in the floating-to-fixed interest rate swap as of March 31, 2023 is $16.2 million, matures in 2024, and the fixed rate is 1.61%. On January 31, 2023, we executed an additional floating-to-fixed interest rate swap with FNB; the notional amount as of March 31, 2023 is $96.0 million, it matures in January 2026, and the fixed rate is 4.1%. The total floating-to-fixed swap balance as of March 31, 2023 is $112.2 million. As a result of entering these agreements, for the six months ended March 31, 2023, interest expense has been decreased by approximately $0.3 million.
(a) Represents the principal amounts payable on our term loan, which is secured by liens on substantially all of the assets of the Company. The principal of the term loan is payable in quarterly installments with the remaining balance due on December 8, 2027.

The Credit Agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions. Among other matters, we must comply with limitations on the following: 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 1.25 to 1.00, and (ii) a total leverage ratio not exceeding the ratio of 4.50:1.0 to 2.00:1.0 through maturity. The total leverage ratio is calculated by dividing the Company's total interest-bearing debt by net income adjusted to exclude (i) interest and other expenses, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) non-cash charges, losses or expenses, including stock-based compensation, and (v) non-recurring charges, losses or expenses to include transaction and non-cash equity expense. We are in compliance with all loan covenants and restrictions.

We are required to pay quarterly amortization payments, which commenced in December 2022. The annual amortization amounts are $14.3 million each for fiscal years 2023 and 2024, $19.0 million each for fiscal years 2025 and 2026, and $23.8 million for fiscal year 2027, with the remaining unpaid loan balance due at maturity in December 2027. The quarterly payments are equal installments. The Company made a mandatory prepayment of $3.6 million during the quarter ended March 31, 2023 bringing the outstanding principal balance on the secured term loan to $182.9 million. We have satisfied mandatory principal amortization until March 31, 2023.

In addition to quarterly payments of the outstanding indebtedness, the loan agreement also requires annual payments of a percentage of excess cash flow, as defined in the loan agreement. The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75% of the excess cash flow for the immediately preceding fiscal year in which the total leverage ratio is greater than or equal to 2.50:1.0; (b) 50% of the excess cash flow for the immediately preceding fiscal year in which the total leverage ratio is less than 2.50:1.0 but greater than or equal to 1.5:1.0; or (c) 0% of the excess cash flow for the immediately preceding fiscal year in which the total leverage ratio is less than 1.5:1.0. In addition, the Company must make additional mandatory prepayment of amounts outstanding based on proceeds received from asset sales and sales of certain indebtedness. For additional information regarding the schedule of future payment obligations, please refer to Note 11. Commitments and Contingencies.

(b) The secured revolving line of credit has a ceiling of up to $70.0 million; as of March 31, 2023 we had unused borrowing capacity of $27.3 million, which is net of outstanding letters of credit. Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company. The Company accessed funds from the revolving credit facility during the quarter, but had an outstanding balance at March 31, 2023 of $21.3 million
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The Company's total borrowing availability, based on eligible accounts receivable at March 31, 2023, was $70.0 million. As part of the revolving credit facility, the lenders agreed to a sublimit of $10.0 million for letters of credit for the account of the Company, subject to applicable procedures.

The revolving line of credit has a maturity date of December 8, 2027 and is subject to loan covenants as described above. The Company is fully compliant with those covenants.

9. Stock-Based Compensation and Equity Grants

Stock-based compensation expense
Options issued under equity incentive plans were designated as either incentive stock or non-statutory stock options. No option is 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 March 31, 2023, there were 0.8 million shares available for grant under the 2016 Omnibus Equity Incentive Plan.

Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our consolidated statements of operations for the three and six months ended March 31, 2023 and 2022 as follows (in thousands):

(in thousands)(in thousands)
Three Months EndedSix Months Ended
 March 31,March 31,
2023202220232022
DLH employees (a)$621 $647 $993 $985 
Non-employee directors (b)179 162 359 324 
Total stock option expense$800 $809 $1,352 $1,309 

(a) Included in this amount are equity grants of restricted stock units ("RSU") to non-employee directors, based onExecutive Officers, which were issued in accordance with the DLH long-term incentive compensation policy in this fiscal year, and stock option grants to employees during prior fiscal years. The RSUs totaled 337,578 and 161,485 issued and outstanding at March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023, 197,174 RSUs were granted to Executive Officers. Of the RSUs granted, 141,892 have performance-based vesting criteria and the remaining 55,282 have service-based vesting criteria. Utilizing a volatility of 50% along with assumptions of a 3-year term and the performance vesting criteria results in an indicated range of value, the RSUs granted during the quarter ended March 31, 2023, as follows using the Monte Carlo Method.

Volatility
50%
Calculated
Grant DatePerformance Vesting BasePerformance Vesting Criteria(Years)Fair Value
January 27, 2023RevenueRevenue increase at the end of the performance period as compared to the year ended September 30, 20223$3.51 
January 27, 2023Stock priceStock price is at least $33.21 per share average for the 30 days prior to the end of the performance period3$2.92 
Notes:
Results based on 100,000 simulations

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(b) Equity grants of RSUs were made in accordance with DLH compensation policy for non-employee directors.

directors and a total of 50,367 and 53,510 restricted stock units were issued and outstanding at March 31, 2023 and 2022, respectively. These grants have service-based vesting criteria and vest at the end of this fiscal year.


Unrecognized stock-based compensation expense

Unrecognized stock-based compensation expense is presented in the table below for the three months ended March 31, 2023 and 2022 as follows (in thousands):
 20232022
Unrecognized expense for DLH employees (a)$8,575 $5,982 
Unrecognized expense for non-employee directors359 324 
Total unrecognized expense$8,934 $6,306 

(a) On a weighted average basis, the unrecognized expense for the three months ended March 31, 2023 is expected to be recognized within the next 4.1 years.

Stock option activity for the threesix months ended DecemberMarch 31, 20172023

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.

(in years)
Weighted
WeightedAverage(in thousands)
(in thousands)AverageRemainingAggregate
Number ofExerciseContractualIntrinsic
SharesPriceTermValue
Options outstanding, September 30, 20222,392 $7.05 5.40$13,566 
Granted (a)400 11.66 — — 
Exercised(286)1.84 — — 
Cancelled(40)10.12 — — 
Options outstanding, March 31, 20232,466 $8.35 6.20$9,071 



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20



       (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, 2017  1,994
 $3.83 6.4 8,489
Granted  217
      
Exercised  (25)      
Options outstanding, December 31, 2017  2,186
 $4.37 6.9 $7,799

Indication of Value Summary

Ref (a): Utilizing a volatility range of 50% along with assumptions of a 10 year10-year term and the aforementioned 10-day stock price threshold results in an indicated range of value of the Options granted during the quarter ended March 31, 2023, as follows using the Monte Carlo Method.

Volatility
50%
VestingExpected
StrikeStockThresholdTermCalculated
Grant DatePricePricePrice(Years)Fair Value
January 26, 2023$11.66 $11.66 $15.00 10$7.41 
Notes:
Results based on 100,000 simulations

      Volatility
      50%
   Vesting Expected 
 StrikeStockThresholdRisk-FreeTermCalculated
Grant DatePricePricePriceRate(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    

Stock options shares outstanding, vested and unvested for the periodperiods ended as follows (shares in thousands):

March 31,September 30,
20232022
Vested and exercisable (a)1,841 2,117 
Unvested (b)625 275 
Options outstanding2,466 2,392 
   (in thousands)
   Number of Shares
   December 31,
 Ref 2017 2016
Vested and exercisable(a) $1,302
 $1,959
Unvested  884
 267
Options outstanding  $2,186
 $2,226


(a) The weighted average exercise price of vested and exercisable shares was $6.67 and $5.86 at March 31, 2023 and September 30, 2022, respectively. Aggregate intrinsic value was approximately $9.1 million and $13.6 million at March 31, 2023 and September 30, 2022, respectively. The weighted average contractual term remaining was 5.1 years and 4.9 years at March 31, 2023 and September 30, 2022, respectively.
Ref (a):
(b) Certain awards vest upon satisfaction of certain performance criteria.


9. Fair Value of Financial Instruments
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The Company has 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 December 31, 2017 and September 30, 2017 does not differ materially from the aggregate carrying values of these financial instruments recorded in the accompanying consolidated balance sheets. 


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

15



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

Earnings per share information is presented in the table below for the three and six months ended March 31, 2023 and 2022 as follows (in thousands except for per share amounts):
(In thousands)
 Three Months EndedThree Months EndedSix Months Ended
 December 31, December 31,March 31,March 31,
 2017 20162023202220232022
Numerator:    Numerator:
Net income (loss) $(2,851) $324
Net incomeNet income$805 $7,178 $2,352 $14,982 
Denominator:    Denominator:
Denominator for basic net income per share - weighted-average outstanding shares 11,837
 11,201
Denominator for basic net income per share - weighted-average outstanding shares13,759 12,778 13,530 12,763 
Effect of dilutive securities:    Effect of dilutive securities:
Stock options and restricted stock —
 1,489
Stock options and restricted stock841 1,664 917 1,605 
Denominator for diluted net income per share - weighted-average outstanding shares 11,837
 12,690
Denominator for diluted net income per share - weighted-average outstanding shares14,600 14,442 14,447 14,368 
    
Net income (loss) per share - basic $(0.24) $0.03
Net income (loss) per share-diluted $(0.24) $0.03
Net income per share - basicNet income per share - basic$0.06 $0.56 $0.17 $1.17 
Net income per share - dilutedNet income per share - diluted$0.06 $0.50 $0.16 $1.04 


11. Commitments and Contingencies

Contractual Obligationsobligations as of DecemberMarch 31, 20172023 are as follows (in thousands):
  Payments Due Per Fiscal Year
 (Remaining)
Total20232024202520262027Thereafter
Debt obligations$204,205 $17,804 $24,901 $19,000 $19,000 $23,750 $99,750 
Facility operating leases25,770 2,283 4,560 3,928 3,700 2,627 8,672 
Equipment operating leases92 42 50 — — — — 
Total contractual obligations$230,067 $20,129 $29,511 $22,928 $22,700 $26,377 $108,422 
    Payments Due By Period
Contractual Obligations   Next 12 2-3 4-5 More than 5
(Amounts in thousands)RefTotal 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

    
Worker'sWorkers' Compensation

We accrue worker'sworkers' 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 DecemberMarch 31, 20172023 and September 30, 20172022 was $2.06$2.6 million and $1.60$4.9 million, respectively.

Legal Proceedings
 
As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes arising in the course of its business, and inquiries and investigations by governmental agencies
22


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.


12. Related Party Transactions.Transactions

The Company has determined that for the quarterthree and six months ended DecemberMarch 31, 20172023 there were no significant related party transactions that have occurred which require disclosure through the date that these consolidated financial statements were issued.

13. Income Taxes


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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 LookingForward-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, 2017.2022, and in other reports we have subsequently filed with the SEC. 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 or that are not statements of historical fact (including without limitation statements to the effect that the Company or its management “believes”, “expects”, “anticipates”, “plans”, “intends” and similar expressions) should be considered forward-looking statements that involve risks and uncertainties which could cause actual events or DLH’s actual results to differ materially from those indicated by the forward-looking statements. Forward-looking statements in this report include, among others, statements regarding benefits of the acquisition, estimates of future revenues, operating income, earnings, earnings per share, backlog, and cash flows. These statements reflect our belief and assumptions as to future events that may not prove to be accurate. Our actual results may differ materially from such forward-looking statements made in this report due to a variety of factors, including: the continuation of the novel coronavirus (“COVID-19”), including the measures to reduce its spread, and its impact on the economy and demand for our services, which are uncertain, cannot be predicted, and may precipitate or exacerbate other risks and uncertainties; the failure to achieve the anticipated benefits of our acquisition of GRSi or any future acquisition (including anticipated future financial operating performance and results); the diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from our recent acquisition; the inability to retain employees and customers; contract awards in connection with re-competes for present business and/or competition for new business; our ability to manage our increased debt obligations; compliance with bank financial and other covenants; changes in client budgetary priorities; government contract procurement (such as bid and award protests, small business set asides, loss of work due to organizational conflicts of interest, etc.) and termination risks; the ability to successfully integrate the operations of GRSi or any future acquisitions; the impact of inflation and higher interest rates; and other risks described in our SEC filings. For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s periodic reports filed with the SEC, including our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as well as interim quarterly filings thereafter. The forward-looking statements contained herein 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 theseSuch forward-looking statements due to a numberare made as of factors.the date hereof and may become outdated over time. The Company does not assume any responsibility for updating forward-looking statements.

Business Overview:and Markets Overview

DLH is a provider of technology-enabled business process outsourcingenhances public health and program managementnational security readiness missions through science, technology, cyber, and engineering solutions and services. We are primarily to improvefocused on improving and better deploydeploying large-scale federal health and human service initiatives. DLHThe Company derives 100%99% of its revenue from agencies of the Federal government, providing services to several agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD").

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

, and Department of DefenseHomeland Security, ("DHS"). The following table summarizes revenue by customer for the three months ended March 31, 2023 and veteran health solutions, comprising approximately 66% of our current business base;2022 as follows (in thousands and percent):
Human services and solutions, approximately 32% of our current business base; and
Public health and life sciences, approximately 2% of our current business base.


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20232022
RevenuePercent of total revenueRevenuePercent of total revenue
Department of Veterans Affairs$34,883 35.1 %$30,733 28.3 %
Department of Health and Human Services38,204 38.4 %27,584 25.4 %
Department of Defense18,972 19.1 %8,460 7.8 %
Department of Homeland Security126 0.1 %39,978 36.8 %
Other customers with less than 10% share of total revenue7,232 7.3 %1,944 1.7 %
Total revenue$99,417 100.0 %$108,699 100.0 %

We provide solutions to three market focus areas: Defense and veterans’ health solutions: DLH provides a wide range of healthcareVeteran Health Solutions, Human Solutions and Services, and Public Health and Life Sciences. We deliver domain-specific expertise, industry best-practices and innovations to customers across these markets leveraging seven core competencies: secure data analytics, clinical trials and laboratory services, 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, 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, performance evaluation, system modernization, operational logistics and readiness, and strategic digital communications. The Company manages its operations from its principal executive office in Atlanta, Georgia, and we have been major contributorsa complementary headquarters office in differentiatingSilver Spring, Maryland. The Company employs over 3,200 skilled employees working throughout the company within this Federal market.United States and one location overseas.

Our services include advancing the technology readiness level of new development items, which is a critical priority ofAcquisitions

On December 8, 2022, we acquired Grove Resource Solutions, LLC. ("GRSi") to increase future organic growth, diversify our federal agency customers. Our project managerscustomer base, and biomedical engineers perform state-of-the-artto expand into adjacent markets. GRSi provides research and development, testingsystems engineering and evaluation,integration, and developmentdigital transformations solutions to federal agencies, notably the National Institutes of new medical systemsHealth ("NIH"), U.S. Navy and devices intendedU.S. Marine Corps. For further information, refer 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 drug and alcohol counseling services to Navy installations worldwide as partNote 4 of the clinical preceptorship program, thereby improving sailor health and readiness. DLH providesaccompanying notes to our consolidated financial statements contained elsewhere in this report.

Major Contracts

We operate primarily through prime contracts awarded by the government through competitive bidding processes. We have a rangediverse mix of case management, physical and behavioral health examinations and associated medical administration services to enhancecontract vehicles with various agencies of the assessment and transition processUnited State government, which supports our overall corporate growth strategy. Our Federal contract schedules are renewed on a recurring basis for military personnel readiness commands and individual service members. DLH is also engaged in efforts to alleviate homelessness among Veterans. We provide a range of professional case management services to support Veterans' transition back into the community. These services include mental health evaluations, behavioral readiness, skills assessment, career counseling, and job preparation services.

multi-year periods.
DLH works
The revenue attributable to ensure that veterans receive their out-patient prescriptions on time, each day, through the VA was derived from 16 separate contracts covering the Company's performance of pharmacy and logistics services in support of the VA's Consolidated Mail Outpatient Pharmacy ("CMOP") program.
•Nine contracts for pharmacy services, which represent revenues of approximately $39.4 million and $32.7 million for the six months ended March 31, 2023 and 2022, respectively, are currently operating under a bridge contract through October 2023.
•Seven contracts for logistics services, which represent approximately $29.2 million and $26.2 million of revenues for the six months ended March 31, 2023 and 2022, respectively, are currently operating under a bridge contract through November 2023.

The VA has issued a request for proposal for healthcare logistics and pharmacy services for each CMOP pharmacy program which has been recognizedlocation. The procurement was set-aside for a service-disabled veteran owned small business ("SDVOSB") to be solicited as the prime contractor. DLH maintains relationships with SDVOSB partners. Should the new contracts for performance of these services be awarded to a partner of DLH, the Company expects to continue to perform a significant amount of the contract’s volume of business as a subcontractor. Should the VA conclude that an award to an SDVOSB prime contractor is not in the best interest of the government, they may reissue a solicitation in an unrestricted competition. DLH believes that its service excellence citingover many years on the JD Powers evaluationprogram would provide an advantage in an unrestricted competition.

The Company's contract with HHS in support of mail order pharmacyits Head Start program generated $17.6 million and $15.7 million of its revenue for eachthe six months ended March 31, 2023 and 2022, respectively. This contract has a period of performance through April 2025.

We remain dependent upon the past eight years.We believe thatcontinuation of our operational efficiency and expertise is well-alignedrelationships with the VA strategic goalsand HHS. Our results of operations, cash flows, and financial condition would be materially adversely affected if we were unable to managecontinue our relationship with either of
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these customers, if we were to lose any of our material current contracts, or if the amount of services we provide to them was to be materially reduced.

Backlog

At March 31, 2023, our backlog was approximately $940.6 million, of which $132.0 million was funded backlog. At September 30, 2022, our backlog was approximately $482.5 million, of which $98.9 million was funded backlog.

We define backlog as our estimate of remaining future revenue from existing signed contracts, assuming the exercise of all options relating to such contracts and improve operationsincluding executed task orders issued under Indefinite Quantity/Indefinite Delivery ("IDIQ") contracts or if the contract is a single award IDIQ contract.

We define funded backlog as the portion of backlog for which funding is appropriated and to deliver seamless and integrated 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 solutionsallocated to the Departmentcontract by the customer and authorized for payment by the customer, once specified work is completed. Funded backlog does not include the full contract value as Congress often appropriates funding for contracts on a yearly or quarterly basis.

Circumstances and events may cause changes in the amount of Healthour backlog and Human Services' Officefunded backlog, including the execution of Head Startnew contracts, extension of existing contracts, non-renewal or completion of current contracts, early termination, and adjustments to estimates. Changes in funded backlog may be affected by the Departmentfunding cycles of Homeland Security. DLH provides a systems-based approach toward assuringthe government. While no assurances can be given that underserved children and youth throughout the country are getting proper educational and environmental support, including health, nutritional, parental, and behavioral 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 manage the implementation using experienced subject matter experts and project management resources.existing contracts will result in earned revenue in any future period, or at all, our major customers have historically exercised their contractual renewal options.


Public healthBacklog value is quantified from management's judgment and life sciences: DLH provides a wide rangeassumptions about the volume of services to Department of Healthbased on past volume trends and Human Services' Center for Disease Control and Prevention, the Department of the Interior, and the Department of Agriculture. DLH services include advancing disease prevention methods and health promotion to underserved at-risk communities through development of strategic communication campaigns, research on emerging trends, health informatics analyses, and 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 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 seasonalcurrent planning developed with regard to resources and funding.customers.


Forward LookingForward-Looking Business Trends:Trends

DLH'sOur mission is to expand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to active duty personnel, veterans, and civilian populations and communities. Our primary focus within the defense agency markets include military service membersmembers' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, health IT commodities, process management, clinical systems support, and healthcare delivery. Our primary focus within the civilian agency markets includeincludes 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 riskat-risk populations. We believe these business development priorities will position DLHthe Company to expand within top national priority programs and funded areas.

COVID-19 impact

We are exposed to and impacted by macroeconomic factors and U.S. government policies. While impacts due to the COVID-19 virus have notably decreased and general economic conditions have improved, we continue to monitor COVID-19 matters and
continue to work with our stakeholders to assess further possible implications to our business. We intend to continue with appropriate employee safety measures when warranted to ensure that we can continue our operations and take other actions where appropriate to mitigate other adverse consequences. Although we cannot currently predict the future course or overall impact of COVID-19, the longer the duration of the event, the more likely it is that it could have an adverse effect on our business, financial position, results of operations, billable expenses, and/or cash flows. However, we have seen continued demand for the services we provide under our current contract portfolio as the services we provide are largely deemed essential. For the three months ended March 31, 2023, the COVID-19 pandemic did not have a material impact to revenues and operating income.

Further, due to our ability to continue to perform on our contract portfolio and generate cash flow, we do not presently expect nor have experienced liquidity constraints related to COVID-19. We are presently in compliance with all covenants in our secured term loan and have access to a secured revolving line of credit to meet any short-term cash needs that cannot be funded by operations. As such, mandatory demands on our cash flow remain low. Further, we have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.

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Federal budget outlook for 20182024
:

On March 9, 2023, President Biden's administration released its budget request for fiscal year 2024. The administration's budget had several focus areas:
The President of•Lowering health care costs and expand access to healthcare
•Expanding access to affordable, high-quality early child care and learning
•Investing in cutting edge technologies
•Improving our global security posture

Over the United States’ broad agenda calls for increased militarycoming months, the administration will work with Congressional leaders to develop legislation that will fund the federal government's fiscal 2024 operations. We believe that the services and in certain cases, domestic spending, with reduced spending on foreign programs. Most relevantcapabilities we provide are key to DLH’s targeted markets, the President advocates the lifting of sequestration caps in the defense sector; increasing infrastructure spending in the United States;federal government executing its missions and tightening controls on immigration.meeting its strategic missions and goals.

A final FY2018 budget was not passed into law prior to October 1, 2017. Consequently, a continuing resolution was passed into 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 one year. Spending priorities under the new budget act, in addition to defense spending, including additional funds for a number of 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 bill to fundappropriations measures passed in December 2022 provide full funding for the federal government through the end of the 2018government fiscal year 2023, it is uncertain when in any particular government fiscal year that appropriations bills will be passed. In addition, in January 2023, the Bipartisan Budget Act provides a measureFederal debt ceiling was reached and the U.S. Department of stabilitythe Treasury is currently operating under “extraordinary measures.”

Adverse changes in fiscal 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 believeeconomic conditions could materially impact our business. Some changes that its key programs benefit from bipartisan support and that federal budgetary uncertainty will notcould have a materialan adverse impact on our current business base for fiscal year 2018.

Departmentinclude the implementation of Veterans Affairs (VA) healthfuture spending trends:

DLH continuesreductions (including sequestration), delayed passage of appropriations bills resulting in temporary or full-year continuing resolutions, extreme inflationary increases adversely impacting fixed-price contracts, inability to see critical need for expanded health care solutions within our sector ofincrease or suspend the Federal health market, largely focused on the needs of veteransdebt ceiling, 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.

potential government shutdowns.
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 believe there is a reasonable expectation that fiscal year 2018 funding will be consistent with the 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.

Industry consolidation among federal government contractors:contractors


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There has been active consolidation and a strong increase in M&Amerger and acquisition 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 team opportunities:impact of Federal Contractual set-aside Laws and Regulations:

The Federal government has an overall goal of 23% of prime contracts flowing tothrough small businesses. As previously reported, various agencies within the federal government have policies that support small business contractors, primarily throughgoals, including the useadoption of set-asidesthe “Rule of Two” by the VA, which provides that the agency shall award contracts by restricting competition for the contract to service-disabled or other veteran owned businesses. To restrict competition pursuant to this rule, the contracting officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States. When two qualifying small businesses cannot be identified, the VA may proceed to award contracts following a full and open bid process.

The Company believes that its past performance in Federal agency RFPs (requeststhis market and track record of success provide a competitive advantage. However, the effect of set-aside provisions may limit our ability to compete for proposal). As a part of our growth plan, DLHprime contractor positions on programs that we recompete or that we have targeted for growth. In these cases, the Company may elect to join a team with an eligible contractor as prime in support of such small businesses for specific pursuits that align with our core markets and corporate growth strategy.

Restatement
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In this Form 10-Q, we are restating (i) our audited consolidated balance sheetResults of Operations

For the Three Months Ended March 31, 2023 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.

Funding of the excess cash flow payment from cash on hand has no impactCompared 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.
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 DecemberThree Months Ended March 31, 2017 and 20162022
 
The following table summarizes, for the periods indicated, consolidated statements of incomeoperations data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue as follows (in thousands and percent):
 Three Months Ended
Consolidated Statements of Operations:March 31, 2023March 31, 2022Change
Revenue$99,417 100.0 %$108,699 100.0 %$(9,282)
Cost of operations:
Contract costs78,238 78.7 %88,831 81.8 %(10,593)
General and administrative costs10,693 10.8 %7,733 7.1 %2,960 
Depreciation and amortization4,535 4.5 %1,881 1.7 %2,654 
Total operating costs93,466 94.0 %98,445 90.6 %(4,979)
Income from operations5,951 6.0 %10,254 9.4 %(4,303)
Interest expense4,765 4.8 %554 0.5 %4,211 
Income before provision for income taxes1,186 1.2 %9,700 8.9 %(8,514)
Provision for income taxes381 0.4 %2,522 2.3 %(2,141)
Net income$805 0.8 %$7,178 6.6 %$(6,373)
Net income per share - basic$0.06 $0.56 $(0.50)
Net income per share - diluted$0.06 $0.50 $(0.44)

The following factors have affected our operating results for the second quarter of fiscal year 2023 as compared to the second quarter of our 2022 fiscal year:

•During the quarter ended December 31, 2022, we acquired GRSi. From the date of this acquisition, we have received the benefit of additional revenue, as well as incurred additional operating costs. In addition, we amended and restated our credit facility to fund the acquisition of GRSi and the cost of servicing this debt has resulted in an increase in our interest expense.

•Our results of operations for the quarter ended March 31, 2022 included revenues of approximately $39.8 million derived from the two task orders awarded under a FEMA contact to support the State of Alaska in its response to the COVID-19 pandemic. These task orders were completed during the quarter ended March 31, 2022 and there was no comparable revenue contribution from this work during the 2023 period.

Due to these developments, in the “Non-GAAP Financial Measures” section below, we have included a discussion of our adjusted financial performance to present our financial performance for the quarters ended March 31, 2023 and 2022 without the impact of the FEMA task orders.

Revenue
Revenue for the three months ended March 31, 2023 was $99.4 million, a decrease of $9.3 million. The decrease in revenue is primarily due to the $39.8 million revenue contribution in the quarter ended March 31, 2022 from two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19 in the first quarter of fiscal 2022. These tasks orders were completed during the quarter ended March 31, 2022. Included in revenue for this quarter is $32.6 million contribution from the acquisition of GRSi.

Cost of Operations

Contract costs primarily include the costs associated with providing services to our customers. These costs are generally comprised of direct labor and associated fringe benefit costs, subcontract cost, other direct costs, and the related management and infrastructure costs. For the three months ended March 31, 2023, contract costs decreased by approximately $10.6 million, principally due to the direct costs incurred during the prior year period associated with the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19 in the first quarter of fiscal 2021.

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General and administrative costs are for those employees not directly providing services to our customers, to include but not limited to executive management, bid and proposal, accounting, and human resources. These costs increased as compared to the prior fiscal year period by $3.0 million, primarily due to the inclusion of GRSi.

For the three months ended March 31, 2023, depreciation and amortization costs were approximately $0.2 million and $4.3 million, respectively, as compared to approximately $0.2 million and $1.6 million for the prior fiscal year period, respectively. The increase in amortization of $2.7million was principally due to the acquired definite-lived intangible assets of GRSi.

Interest Expense
Interest expense includes items such as interest expense and amortization of deferred financing costs on debt obligations.
For the three months ended March 31, 2023 and 2022, interest expense was approximately $4.8 million and $0.6 million, respectively. The increase in interest expense was primarily due to the borrowing required to finance the GRSi acquisition.

Provision for Income Taxes

For the three months ended March 31, 2023 and 2022, DLH recorded a $0.4 million and $2.5 million provision for tax expense, respectively. The effective tax rate for the three months ended March 31, 2023 and 2022 was 26% and 26%, respectively.


Results of Operations for the Six Months Ended March 31, 2023 and 2022
The following table summarizes, for the periods indicated, consolidated statements of operations data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue:
 Six Months EndedChange
Consolidated Statements of  Operations:March 31, 2023March 31, 2022$
Revenue$172,155 100.0 %$261,500 100.0 %$(89,345)
Cost of operations:
Contract costs135,494 78.7 %221,517 84.7 %(86,023)
General and administrative costs18,117 10.5 %14,644 5.6 %3,473 
Corporate development costs1,735 1.0 %— — %1,735 
Depreciation and amortization6,937 4.0 %3,866 1.5 %3,071 
Total operating costs162,283 94.2 %240,027 91.8 %(77,744)
Income from operations9,872 5.7 %21,473 8.2 %(11,601)
Interest expense6,595 3.8 %1,226 0.5 %5,369 
Income before provision for income taxes3,277 1.9 %20,247 7.7 %(16,970)
Provision for income taxes925 0.5 %5,265 2.0 %(4,340)
Net income$2,352 1.4 %$14,982 5.7 %$(12,630)
Net income per share - basic$0.17 $1.17 $(1.00)
Net income per share - diluted$0.16 $1.04 $(0.88)

The following factors have affected our operating results for the six months ended March 31, 2023 as compared to the same period in the 2022 fiscal year:

•During the quarter ended December 31, 2022, we acquired GRSi. From the date of this acquisition, we have received the benefit of additional revenue, as well as incurred additional operating costs. In addition, we amended and restated our credit facility to fund the acquisition of GRSi and the cost of servicing this debt has resulted in an increase in our interest expense.

•Our results of operations for the six months ended March 31, 2022 included revenues of approximately $130.9 million derived from the two task orders awarded under a FEMA contact to support the State of Alaska in its response to the
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COVID-19 pandemic. These task orders were completed during the quarter ended March 31, 2022 and there was no comparable revenue contribution from this work during the 2023 period.

  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)
Due to these developments, in the “Non-GAAP Financial Measures” section below, we have included a discussion of our adjusted financial performance to present our financial performance for the six months ended March 31, 2023 and 2022 without the impacts of the FEMA task orders and including the corporate development costs associated with the GRSi acquisition

Revenue
 
Revenue for the threesix months ended DecemberMarch 31, 20172023 was $30.2$172.2 million, an increasea decrease of $4.1$89.3 million or 15.7% over the prior year period. The increasedecrease in revenue is due primarily to expansionthe completion of workload volumes on existing contracts.two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19. The revenue contribution from those task orders was $130.9 million. The decrease in revenue was partially offset by the contribution from GRSi of $39.5 million

Cost of Operations
 
Direct Expenses
Direct expensesContract costs primarily include the costs associated with providing services to our customers. These costs are generally comprisecomprised of direct labor (including benefits), taxes and insurance, workers compensation expense,associated fringe benefit costs, subcontract cost, and other direct costs, and the related management and infrastructure costs. Direct expenses forFor the threesix months ended DecemberMarch 31, 2017 were $23.72023, contract costs decreased by approximately $86.0 million an increaseprincipally due to the completion of $3.4 million, or 16.7% over prior year due principallytwo task orders awarded under a FEMA contract to increased professional service costs attributedsupport Alaska with its response to increased revenue. As a percentage of revenue, direct expenses were 78.4%, compared with 77.7% the prior year period.COVID-19.

Gross Margin
Gross margin for the three months ended December 31, 2017 was approximately $6.5 million, an increase of $0.7 million, or 12.4%, over prior year period. As a percentage of revenue, our gross margin rate of 21.6% was 70 basis points lower than the prior year period, though within the expected 20-22% range for gross margins, based upon the current business.

General and Administrative Expenses
General and administrative (“G&A”) expenses primarily relatecosts are for those employees not directly providing services to functions such as operations overhead, corporateour customers, to include but not limited to executive management, legal, finance,bid and proposal, accounting, contracts administration,and human resources, management information systems, and business development. G&A expenses forresources. These costs increased by approximately $3.5 million from the threesame period in the prior fiscal year. The increase was principally due to the inclusion of GRSi.

For the six months ended DecemberMarch 31, 2017 were approximately $4.9 million, an increase of $0.2 million or 3.4% over the prior year period. As a percent of revenue, G&A expenses were 16.2%, an improvement of approximately 190 basis points over the prior year period, as the Company achieves additional scale on integration of its corporate functions.

Depreciation and Amortization
This category comprises depreciation on fixed assets and the amortization of definite-lived intangible assets. As a professional services organization, DLH does not require significant expenditures on capital equipment and other fixed assets. For the three months ended December 31, 2017 and December 31, 2016,2023, depreciation and amortization costs were approximately $0.5$0.4 million and $6.5 million, respectively, as compared to approximately $0.6 million and $0.2$3.3 million respectively. The December 31, 2016 value is net of an adjustment of depreciation expense associated with the May, 2016 acquisition.

Income from Operations
Income from operations for the three months ended December 31, 2017 was approximately $1.1 million, an increase of approximately $0.3 million over the prior fiscal year period.

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period, respectively.
  
Interest Expense, net
 
Interest expense, net, includes interest expense on the Company’sCompany's term loan and amortization of deferred financing costs on debt obligations, forobligations. For the threesix months ended DecemberMarch 31, 2017,2023 and 2022, interest expense, net was approximately $0.3$6.6 million a decrease of approximately $0.1and $1.2 million, overrespectively. The increase in interest expense was primarily due to the prior year period.borrowing required to finance the GRSi acquisition.

Income before Income Taxes

For the three months ended December 31, 2017, income before taxes was approximately $0.9 million, an increase of approximately $0.3 million over the prior year period, due principally to increased gross margin derived from higher revenue.

Income Tax Expense

For the threesix months ended DecemberMarch 31, 2017,2023 and 2022, DLH recorded a $3.7$0.9 million and $5.3 million provision for tax expense, including $3.4 million related to the write-down of deferredrespectively. The effective tax assets resulting from the 2017 Tax Act enacted in December 2017.

Net Income (Loss)

Net income (loss)rate for the threesix months ended DecemberMarch 31, 20172023 and 2022 was approximately $(2.9) million, or $(0.24) per basic26% and diluted share, a decrease of approximately $3.2 million primarily due to the write down of deferred tax assets described above which 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.29%, respectively.



Non-GAAP Financial Measures

On a non-GAAP basis, Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) for the three months ended December 31, 2017 was approximately $1.7 million, an increase of approximately $0.6 million, or 51.6% over the prior three months ended. The increase is attributable principally to increased gross margin from higher revenue.

The Company uses Earnings Before Interest Tax DepreciationEBITDA and Amortization ("EBITDA")EBITDA Margin on Revenue as a supplemental non-GAAP measuremeasures of our performance. DLH definesWe define EBITDA as net income excluding (i) interest expense, (ii) provision for or benefit from income taxes if any, and (iii)depreciation and amortization. EBITDA Margin on Revenue is EBITDA for the measurement period divided by revenue for the same period.

BeginningThe Company is presenting additional non-GAAP measures regarding its financial performance for the three and six months ended March 31, 2023. The measures presented are Adjusted Revenue, Adjusted Operating Income, Adjusted EBITDA, and Adjusted EBITDA Margin on Adjusted Revenue. In calculating these measures, we have added the corporate development costs associated with completing the first quarter ofGRSi acquisition to our results for fiscal year 2018,2023 and we have commenced reporting EBITDA rather than adjusted EBITDA, as a keyremoved the contribution from the FEMA task orders from the results for fiscal year 2022. These resulting measures present the quarterly financial performance compared to results delivered in the prior year period. Definitions of these additional non-GAAP financial measure of our business. measures are set forth below.

We believe that duehave prepared these additional non-GAAP measures 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 with peers. Non-GAAP measures for prior periods have been recast to 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 excludingeliminate the impact of the Tax Cut and Jobs Actitems that we do not consider indicative 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 netongoing 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.

performance due to their inherent unusual or extraordinary nature. These non-GAAP measures of our
29


performance are used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and the Company's Board utilize these non-GAAP measures to make decisions about the use of the Company's resources, analyze performance between periods, develop internal projections and measure managementsmanagement performance. DLH believesWe believe that these non-GAAP measures are useful to investors in evaluating the Company's ongoing operating and financial results and understanding how such results compare with the Company's historical performance. By providing this

These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry. Further, the additional non-GAAP measurefinancial measures we presented for the first quarter of fiscal 2023 excluded the contribution from GRSi due to the truncated consolidation period. Since GRSi was part of the consolidated financial performance for the full second quarter, we have included their results in both the three and six month periods ended March 31, 2023. Adjusted Revenue, Adjusted Operating Income, EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue, and Adjusted EBITDA Margin on Adjusted Revenue are not recognized measurements under accounting principles generally accepted in the United States, or GAAP, and when analyzing our performance investors should (i) evaluate each adjustment in our reconciliation to the nearest GAAP financial measures and (ii) use the aforementioned non-GAAP measures in addition to, and not as a supplementan alternative to, GAAP information, DLH believes this enhances investors understandingrevenue, operating income, net income or diluted EPS, as measures of its businessoperating results, each as defined under GAAP. We have defined these non-GAAP measures as follows:

“Adjusted Revenue” represents revenue less the contribution to revenue from the short-term FEMA task orders

“Adjusted Operating Income” represents operating income plus the corporate development costs associated with completing the GRSi acquisition incurred in fiscal 2023 less the contribution from the FEMA task orders, which occurred in fiscal 2022.

“Adjusted EBITDA” represents net income before income taxes, interest, depreciation and results of operationsamortization and the corporate costs associated with completing the acquisition, less the contribution from FEMA task orders. “Adjusted EBITDA Margin on Adjusted Revenue” is calculated as Adjusted EBITDA divided by Adjusted Revenue.
.

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22



Below is a reconciliation of Adjusted Revenue, Adjusted Operating Income, EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue and Adjusted EBITDA Margin on Adjusted Revenue reported for the three and six months ended March 31, 2023 and 2022 compared to the most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands except for per share amounts):
Reconciliation
Three Months EndedSix Months Ended
March 31,March 31,
20232022Change20232022Change
Adjusted Revenue
Revenue$99,417$108,699$(9,282)$172,155$261,500$(89,345)
Less: FEMA task orders to support Alaska (a)—39,764(39,764)—130,889(130,889)
Adjusted Revenue$99,417$68,935$30,482$172,155$130,611$41,544
Adjusted Operating Income
Operating Income$5,951$10,254$(4,303)$9,872$21,473$(11,601)
Corporate development costs (b)— ——1,735 —1,735
Less: FEMA task orders to support Alaska (c)—5,525(5,525)—11,871(11,871)
Adjusted Operating Income$5,951$4,729$1,222$11,607$9,602$2,005
EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue & Adjusted EBITDA Margin on Adjusted Revenue
Net Income$805$7,178$(6,373)$2,352$14,982$(12,630)
Depreciation and amortization4,535 1,881 2,6546,937 3,866 3,071
Interest expense4,765 554 4,2116,595 1,226 5,369
Provision for income taxes381 2,522 (2,141)925 5,265 (4,340)
EBITDA$10,486$12,135$(1,649)$16,808$25,339$(8,531)
Corporate development costs (b)— $——1,735 $—1,735
Less: FEMA task order to support Alaska (c)$—$5,525(5,525)$—$11,871(11,871)
Adjusted EBITDA$10,486$6,610$3,876$18,543$13,468$5,075
Net income margin on Revenue0.8%6.6%1.4%5.7%
EBITDA Margin on Revenue10.5%11.2%9.8%9.7%
Adjusted EBITDA Margin on Adjusted Revenue10.5%9.6%10.8%10.3%

(a): Represents revenue adjusted to exclude revenue from the short-term FEMA task orders during the three and six months ended March 31, 2022.

(b): Represents corporate development costs we incurred to complete the GRSi transaction. These costs primarily include legal counsel, financial due diligence, customer market analysis and representation and warranty insurance premiums.

(c): Adjusted operating income represents the Company’s consolidated operating income, determined in accordance with GAAP, adjusted to add the corporate development costs associated with the GRSi acquisition for fiscal year 2023 and adjusted to exclude the operating income derived from the FEMA task orders. Operating income for the FEMA task orders is derived by subtracting from the revenue attributable to such task orders during the three months ended March 31, 2022 of GAAP net$39.8 million the following amounts associated with such task orders: contract costs of $33.7 million and general & administrative costs of $0.6 million. Similarly, for the six months ended March 31, 2022 operating income for the FEMA task orders is derived by subtracting from the revenue attributable to EBITDA, a non-GAAP measure:the tasks orders of $130.9 million the following amounts associated with such task orders: contract costs $117.9 million and general & administrative costs of $1.1 million.

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  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


Liquidity and capital management
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 DecemberMarch 31, 2017,2023, the Company's immediate sources of liquidity include cash and cash equivalents,generated from operations, accounts receivable, and access to its secured revolving line of credit facility with Fifth Third Bank.facility. This credit facility provides us with access of up to $10.0$70.0 million, subject to certain conditions including eligible accounts receivable. As of March 31, 2023, we have $27.3 million of available borrowing capacity on the revolving line of credit and have an outstanding balance of $21.3 million.

The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. 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. DLH has not experienced any loss or denied any access to funds as a result of holding amounts in our bank accounts in excess to the FDIC limit. Our current investment and financing obligations are adequately satisfied by cash generated from operations and through access to our credit facility. Cash provided by operating activities is expected to be sufficient to support the Company's capital requirements and debt reduction goals.

A summary of the change in cash is presented below for the six months ended March 31, 2023 and 2022 as follows (in thousands):

20232022
Net cash provided by (used in) operating activities$6,862 $(14,815)
Net cash used in investing activities(181,174)(89)
Net cash provided by (used in) financing activities174,221 (8,788)
Net change in cash$(91)$(23,692)

The cash used in investing activities was primarily due to the acquisition of GRSi and the purchase of capital assets purchased during the six months ended March 31, 2023. Cash provided by financing activities was $174.2 million during the six months ended March 31, 2023 and were deployed to finance the GRSi acquisition. We intend to continue using cash to make debt prepayments in future quarters subject to available cash.

Sources of cash

As of March 31, 2023, our immediate sources of liquidity include cash of approximately $0.1 million, accounts receivable, and access to our secured revolving line of credit facility. This credit facility provides us with access of up to $70.0 million, subject to certain conditions including eligible accounts receivable. As of March 31, 2023, we had unused borrowing capacity of $27.3 million, which is net of outstanding letters of credit. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. We believe that our current investment and financing obligations are adequately covered by cash generated from profitable operations.

Management's assessment of cashoperations and cash equivalents at December 31, 2017

Management believes that: (a) cash and cash equivalents of approximately $3.2 million as of December 31, 2017; (b) the amount available under its line of credit that was in effect at 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'sour operations for twelve months from the date of issuance of these consolidated financial statements.

Loan FacilityCredit Facilities

A summary of our loancredit facilities and subordinated debt financing for the period ended DecemberMarch 31, 20172023 is as follows:follows (in millions):
ArrangementLoan BalanceInterest*Maturity Date
Secured term loan (a) due December 8, 2027$182.9 SOFR* + 4.2%December 8, 2027
Secured revolving line of credit (b) due December 8, 2027$21.3 SOFR* + 4.2%December 8, 2027

*SOFR as of March 31, 2023 was 4.81%.

On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter-party. The notional amount in the floating-to-fixed interest rate swap as of March 31, 2023 is $16.2 million, matures in 2024, and the fixed rate is 1.61%. On January 31, 2023, we executed an additional floating-to-fixed interest rate swap with FNB; the notional amount as of March 31, 2023 is $96.0 million, it matures in January 2026, and the fixed rate is 4.1%. The total floating-to-fixed swap balance as of March 31, 2023 is $112.2 million.
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(a) Represents the principal amounts payable on our term loan, which is secured by liens on substantially all of the assets of the Company. The principal of the term loan is payable in quarterly installments with the remaining balance due on December 8, 2027.
  ($ 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(b) The secured revolving line of credit has a ceiling of up to $70.0 million and a maturity date of December 8, 2027. The Company has accessed funds from the revolving credit facility during the quarter and has a balance outstanding at March 31, 2017 was 1.69%.2023 of $21.3 million.

(a) aThe secured term loan with an original aggregate principal amount of $25.0 million (the “Term Loan”).
(b) aand secured revolving credit facility in an aggregate principal amountline of up to $10.0 million (the “Revolving Credit Facility”) and

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 loanscredit are secured by liens on substantially all of the assets of the Company. The provisions of the Term Loan and Revolving Credit Facilityour credit facilities are fully described in Note 6 of8 to the consolidated financial statements.


Contractual Obligations as of DecemberMarch 31, 20172023

    Payments Due by Period
Contractual obligations   Next 12 2-3 4-5 More than 5
(Amounts in thousands)RefTotal 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
Payments Due by Period
Next 122-34-5More than 5
(in thousands)TotalMonthsYearsYearsYears
Debt obligations$204,205 $35,580 $35,625 $133,000 $— 
Facility operating leases25,770 4,637 7,962 5,668 7,503 
Equipment operating leases92 83 9 
Total contractual obligations$230,067 $40,300 $43,596 $138,668 $7,503 
    
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 expects to be able to modify its prices and cost structure to respond to inflation and changing prices.
SignificantCritical Accounting Policies and Estimates
Use of Estimates
 
Our consolidatedThe preparation of financial statements and accompanying notes are prepared in accordanceconformity 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 and liabilities revenues, expenses, and the related disclosure of contingent liabilities. These assumptions, estimatesassets and judgments are based on historical experience and assumptions that are believed to be reasonableliabilities at the time.date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible assets, stock-based compensation, and measurement of loss development on workers' compensation claims. In addition, the Company estimates overhead charges and allocates such charges throughout the year. Actual results could differ from suchthose estimates. CriticalFor a detailed discussion on the application of these and other accounting 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 7 "Significant Accounting Policies" to the consolidated financial statements in DLH’s Annual Report on Form 10-K for the year ended September 30, 2017, as well asyou should review the discussion under the caption “CriticalSignificant Accounting Policies in Note 2 of the notes to our consolidated financial statements contained elsewhere in this report.

Revenue Recognition

We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit, and Estimates” beginningtake control of any work in process. When control is transferred over time, revenue is recognized based on page 25 thereinthe extent of progress towards completion of the performance obligation. For services contracts, we satisfy our performance obligations as services are rendered. We use cost-based input and time-based output methods to measure progress.

For time and materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For firm fixed price contracts, the consideration received for our performance is set at a discussionpredetermined price. Revenue for our firm fixed price contracts is recognized over time using a straight-line measure of progress. Contract costs are expensed as incurred. Estimated losses are recognized when identified.

Refer to Note 5 of the accompanying notes to our critical accounting policies and estimates. DLH senior management has reviewed these critical accounting policies and relatedconsolidated financial statements contained elsewhere in this report.

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33



Long-lived Assets
disclosures
Our long-lived assets include equipment and determinedimprovements, right-of-use assets, intangible assets, and goodwill. The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that there werea reporting unit’s carrying amount is greater than its fair value.

Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements.

Costs incurred to place the asset in service are capitalized and costs incurred after implementation are expensed. Amortization expense is recorded when the software is placed in service on a straight-line basis over the estimated useful life of the software.

Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.

Intangible assets are originally recorded at fair value and amortized on a straight-line basis over their assessed useful lives. The assessed useful lives of the assets are 10 years.

Goodwill
The Company continues to review its goodwill for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. Based on the results of the work performed, the Company has concluded that no significantimpairment loss was warranted, as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill.

Our assessment incorporated effects of the COVID-19 pandemic, which did not have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in our critical accounting policies, orbusiness conditions could have a material adverse effect on the estimates associated with those policiesvaluation of goodwill in future periods and the three months ended December 31, 2017,resulting charge could be material to future periods’ results of operations.

Provision for Income Taxes
The Company accounts for income taxes in accordance with the exception of the change inliability method, whereby deferred tax assets and liabilities are determined based uponon the change in projecteddifference between the financial statement and tax bases of assets and liabilities, using enacted tax rates disclosed in Note 13, Income Taxes.effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. The Company has fully utilized its net operating loss carryforwards.

New Accounting PronouncementsStock-based Equity Compensation

A discussionThe Company uses the fair value-based method for stock-based 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 recentlymore 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 accounting pronouncementsupon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a Monte Carlo method to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is described in Note 4 in the Notescredited to Consolidated Financial Statements elsewhere in this Quarterly Report, and we incorporate such discussion by reference.capital stock.


ITEM 3:         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DLH doesExcept as described elsewhere in this report, the Company has not undertakeengaged in 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. DLHThe Company has limited foreign operations and therefore 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 haveOn September 30, 2019, we executed a materialfloating-to-fixed interest rate risk swap
34


with respect toFNB as counter-party. The notional amount in the floating-to-fixed interest rate swap is $16.2 million for the current quarter and the remaining outstanding balance of our prior workers’ compensation programs, for which funds were deposited into trust for possible future payments of claims. DLH does not believe the level of exposuresecured term loan is subject to interest rate fluctuations on itsfluctuations. On January 31, 2023, we executed an additional floating-to-fixed interest rate swap with FNB; the notional amount as of March 31, 2023 is $96.0 million, it matures in January 2026, and the fixed rate is 4.1%. The total notional amount for all the interest rate swaps is currently $112.2 million with the remaining balance of debt instruments is material given that the amount of our debt is subject to LIBOR plus 3.0% appliedfloating interest rates.

We have determined that a 1.0% increase to SOFR would impact our interest expense by the Lender.approximately $0.9 million per year. As of DecemberMarch 31, 20172023, the Lender's interest rate on the floating interest rate debt was 4.69%9.01%.

ITEM 4:         CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our CEO and President and Chief Financial Officer, after evaluatingevaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act)Act of 1934) as of the end of the period covered by this report, has concluded that, basedreport. 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 Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) 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 ControlsControl over Financial Reporting

ThereWith the exception of the matter described below there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act)Act of 1934) identified in connection with the evaluation of our internal controlcontrols that occurred during ourthe fiscal quarter ended
December March 31, 20172023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In December 2022, we acquired Grove Resource Solutions, LLC and are in the process of integrating this business into our existing control environment.
Part
PART II — OTHER INFORMATION 

ITEM 1:         LEGAL PROCEEDINGS

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

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25



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, 20172022, in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, and in our other reports filed with the SEC for a discussion ofconcerning the risks associated with our business, financial condition and results of operations. These factors, among others, could have a material adverse effect uponmaterially and adversely affect 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 we have identified by DLH in itsour reports are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial may 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 disclosedSee Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2022. We believe that there have been no material changes from the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022.

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 first quarter ended 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
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.

36


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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.
The exhibits designated with a number sign (#) indicate a management contract or compensation plan or arrangement.
ExhibitIncorporated by ReferenceFiled
NumberExhibit DescriptionFormDatedExhibitHerewith
ExhibitIncorporated by ReferenceFiled
NumberExhibit DescriptionFormDatedExhibitHerewith
10.1
#X
10.2
#X
31.1
      X
31.2
      X
��
32
      X
101101.0The following financial information from the DLH Holdings Corp. Quarterly Report on Form 10-Q for the fiscal quarter ended DecemberMarch 31, 2017,2023, formatted in XBRL (eXtensibleiXBRL (Inline 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
104.0Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)



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37



SignaturesSIGNATURES
 
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
   (On behalf of the registrant and as Principal Financial and Accounting Officer)
   
Date: February 13, 2018May 3, 2023   

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