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 March 31, ~~2019~~2020

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 (State or other jurisdiction of incorporation or organization)		22-1899798 (I.R.S. Employer Identification No.)
3565 Piedmont Road, NE, Building 3, Suite 700 Atlanta, Georgia (Address of principal executive offices)		30305 (Zip Code)

(770) 554-3545

(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 Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	DLHC	Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller Reporting Company x
		Emerging Growth Company o

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: ~~12,036,161~~12,354,406 shares of Common Stock, par value $0.001 per share, were outstanding as of April 30, ~~2019.~~2020.

DLH HOLDINGS CORP.

FORM 10-Q

Table of Contents



	Page No.
Part I — Financial Information	3
Item 1. Financial Statements	3
Consolidated Statements of Operations for the three and six months ended March 31, ~~2019~~2020 and ~~2018~~2019 (Unaudited)	3
Consolidated Balance Sheets as of March 31, ~~2019~~2020 (Unaudited) and September 30, ~~2018~~2019	4
Consolidated Statements of Cash Flows for the six months ended March 31, ~~2019~~2020 and ~~2018~~2019 (Unaudited)	5
Consolidated Statements of Shareholders' Equity for the three and six months ended March 31, 2020 and 2019 ~~and 2018 (unaudited)~~(Unaudited)	6
Notes to Consolidated Financial Statements (Unaudited)	78
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1822
Item 3. Quantitative and Qualitative Disclosures about Market Risk	2729
Item 4. Controls and Procedures	2829
Part II — Other Information	2830
Item 1. Legal Proceedings	2830
Item 1A. Risk Factors	2830
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	2831
Item 3. Defaults Upon Senior Securities	2931
Item 4. Mine Safety Disclosures	2931
Item 5. Other Information	2931
Item 6. Exhibits	3032
Signatures	3133

PART I — FINANCIAL INFORMATION

ITEM I: FINANCIAL STATEMENTS

DLH HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(~~Amounts in~~In thousands, except per share amounts)


	(unaudited)				(unaudited)					(unaudited)				(unaudited)
	Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
	March 31,				March 31,					March 31,				March 31,
	2019		2018		2019		2018			2020		2019		2020		2019
Revenue	$	33,756	$	34,401	$	67,508	$	64,616		$	54,798	$	33,756	$	107,036	$	67,508
Direct expenses	25,682		26,953		51,647		50,636
Gross margin	8,074		7,448		15,861		13,980
General and administrative expenses	5,188		4,684		9,855		9,564
Cost of Operations:
Contract costs										42,941		26,250		84,281		52,706
General and administrative costs										6,260		4,477		12,174		8,653
Acquisition costs										—		143		—		143
Depreciation and amortization	560		560		1,123		1,066			1,760		560		3,619		1,123
Total operating costs										50,961		31,430		100,074		62,625
Income from operations	2,326		2,204		4,883		3,350			3,837		2,326		6,962		4,883
Interest expense, net	544		261		721		539			906		544		1,846		721
Income before income taxes	1,782		1,943		4,162		2,811			2,931		1,782		5,116		4,162
Income tax expense	517		627		1,207		4,346			855		517		1,488		1,207
Net income (loss)	$	1,265	$	1,316	$	2,955	$	(1,535	)
Net income										$	2,076	$	1,265	$	3,628	$	2,955

Net income (loss) per share - basic	$	0.11	$	0.11	$	0.25	$	(0.13	)
Net income (loss) per share - diluted	$	0.10	$	0.10	$	0.23	$	(0.13	)
Net income per share - basic										$	0.17	$	0.11	$	0.30	$	0.25
Net income per share - diluted										$	0.16	$	0.10	$	0.28	$	0.23
Weighted average common stock outstanding
Basic	12,036		11,889		11,999		11,863			12,299		12,036		12,193		11,999
Diluted	13,087		12,886		13,030		11,863			13,003		13,087		12,886		13,030

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

DLH HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

(~~Amounts in~~In thousands, except par value of shares)


	March 31, 2019			September 30, 2018			March 31, 2020			September 30, 2019
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,461		$	6,355		$	1,124		$	1,790
Accounts receivable	9,396			10,280			34,948			23,226
Other current assets	1,509			760			2,952			1,831
Total current assets	16,366			17,395			39,024			26,847
Equipment and improvements, net	1,328			1,566			4,275			5,343
Operating leases right-of-use assets							22,816			—
Deferred taxes, net	3,160			4,137			1,087			2,345
Goodwill	25,989			25,989			52,758			52,758
Intangible assets, net	12,483			13,365			38,799			41,208
Other long-term assets	201			89			665			757
Total assets	$	59,527		$	62,541		$	159,424		$	129,258

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Operating lease liabilities - current							$	1,311		$	—
Debt obligations - current							2,000			—
Accrued payroll	5,217			4,983			10,765			8,852
Accounts payable, accrued expenses, and other current liabilities	11,305			10,950			22,913			20,633
Total current liabilities	16,522			15,933			36,989			29,485
Total long term liabilities	201			7,190
Long-term liabilities:
Debt obligations - long term, net of deferred financing costs							50,910			53,629
Operating lease liabilities - long-term							22,128			—
Other long-term liabilities							—			573
Total long-term liabilities							73,038			54,202
Total liabilities	16,723			23,123			110,027			83,687
Commitments and contingencies
Shareholders' equity:
Common stock, $0.001 par value; authorized 40,000 shares; issued and outstanding 12,036 and 11,899 at March 31, 2019 and September 30, 2018, respectively	12			12
Common stock, $0.001 par value; authorized 40,000 shares; issued and outstanding 12,354 and 12,036 at March 31, 2020 and September 30, 2019, respectively							12			12
Additional paid-in capital	84,716			84,285			85,314			85,114
Accumulated deficit	(41,924		)	(44,879		)	(35,929		)	(39,555		)
Total shareholders’ equity	42,804			39,418			49,397			45,571
Total liabilities and shareholders' equity	$	59,527		$	62,541		$	159,424		$	129,258

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

DLH HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(~~Amounts in~~In thousands)


	(unaudited)						(unaudited)
	Six Months Ended						Six Months Ended
	March 31,						March 31,
	2019			2018			2020			2019
Operating activities
Net income (loss)	$	2,955		$	(1,535	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income							$	3,628		$	2,955
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	1,123			1,066			3,619			1,123
Amortization of deferred financing costs	534			132			374			534
Stock based compensation expense	392			928			384			392
Deferred taxes, net	978			4,166			1,258			978
Non-cash gain from lease modification							(121		)	—
Changes in operating assets and liabilities
Accounts receivable	884			(427		)	(11,722		)	884
Other current assets	(749		)	(347		)	(1,211		)	(749		)
Accrued payroll							1,913			234
Accounts payable, accrued expenses, and other current liabilities	589			(31		)	2,280			355
Other long term assets/liabilities	73			44
Other long-term assets/liabilities							260			73
Net cash provided by operating activities	6,779			3,996			662			6,779

Investing activities
Purchase of equipment and improvements	(4		)	(588		)	(141		)	(4		)
Net cash used in investing activities	(4		)	(588		)	(141		)	(4		)

Financing activities
Repayments on senior debt	(7,708		)	(4,793		)
Repayments of capital lease obligations	—			(5		)
Borrowing on revolving line of credit, net							2,000			—
Repayments of senior debt							(3,000		)	(7,708		)
Payment of debt financing costs							(3		)	—
Repurchase of common stock							(211		)	—
Proceeds from issuance of common stock upon exercise of options	39			46			27			39
Net cash used in financing activities	(7,669		)	(4,752		)	(1,187		)	(7,669		)

Net change in cash and cash equivalents	(894		)	(1,344		)	(666		)	(894		)
Cash and cash equivalents at beginning of period	6,355			4,930			1,790			6,355
Cash and cash equivalents at end of period	$	5,461		$	3,586		$	1,124		$	5,461

Supplemental disclosures of cash flow information
Cash paid during the period for interest	$	234		$	427		$	1,583		$	397
Cash paid during the period for income taxes	$	247		$	578		$	409		$	269
Supplemental disclosures of non-cash financing activity
Derivative warrant liability reclassified as equity	$	—		$	(306	)
Non-cash issuance of stock upon exercise of options	$	—		$	25
Supplemental disclosures of non-cash activity
Non-cash cancellation of common stock							$	211		$	—

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

DLH HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(~~Amounts in~~In thousands)

(unaudited)

Common Stock
Additional
Paid-In
Capital

Accumulated
Deficit
Total Shareholders' Equity
Shares Amount
Six Months Ended March 31, 2019
Balance at September 30, 2018 11,899
$ 12
$ 84,285
$ (44,879 ) $ 39,418
Directors' stock grants and expense 102
—
263
—
263
Expense related to employee stock options —
—
129
—
129
Exercise of stock options 35
—
39
—
39
Net income —
—
—
2,955
2,955
Balance at March 31, 2019 12,036
$ 12
$ 84,716
$ (41,924 ) $ 42,804
Three Months Ended March 31, 2019
Balance at December 31, 2018 12,036
$ 12
$ 84,517
$ (43,189 ) $ 41,340
Expense related to director restricted stock units —
—
132
—
132
Expense related to employee stock options —
—
67
—
67
Net income —
—
—
1,265
1,265
Balance at March 31, 2019 12,036
$ 12
$ 84,716
$ (41,924 ) $ 42,804



	Common Stock				Treasury Stock						Additional Paid-In Capital			Accumulated Deficit			Total Shareholders' Equity
	Shares		Amount		Shares			Amount			Additional Paid-In Capital			Accumulated Deficit			Total Shareholders' Equity
Six Months Ended March 31, 2020
Balance at September 30, 2019	12,036		$	12	$	—		$	—		$	85,114		$	(39,555	)	$	45,571
Cumulative-effect adjustment for adoption of ASC 842	—		—		—			—			—			(2		)	(2		)
Expense related to director restricted stock unit	90		—		—			—			173			—			173
Expense related to employee stock options	—		—		—			—			211			—			211
Exercise of stock options	345		—		—			—			27			—			27
Repurchases of common stock	—		—		28			(113		)	—			—			(113		)
Cancellation of common stock	(117	)	—		(28		)	113			(211		)	—			(98		)
Net income	—		—		—			—			—			3,628			3,628
Balance at March 31, 2020	12,354		$	12	—			$	—		$	85,314		$	(35,929	)	$	49,397
Three Months Ended March 30, 2020
Balance at December 31, 2019	12,124		$	12	$	27		$	(111	)	$	85,249		$	(38,005	)	$	47,145
Expense related to director restricted stock unit	—		—		—			—			87			—			87
Expense related to employee stock options	—		—		—			—			95			—			95
Exercise of stock options	325		—		—			—			—			—			—
Repurchases of common stock	—		—		1			(2		)	—			—			(2		)
Cancellation of common stock	(95	)	—		(28		)	113			(117		)	—			(4		)
Net income	—		—		—			—						2,076			2,076
Balance at March 31, 2020	12,354		$	12	—			—			$	85,314		$	(35,929	)	$	49,397

Common Stock
Additional
Paid-In
Capital

Accumulated
Deficit
Total Shareholders' Equity
Shares Amount
Six Months Ended March 31, 2018
Balance at September 30, 2017 11,767
$ 12
$ 82,687
$ (46,844 ) $ 35,855
Directors' stock grants and expense 93
—
797
—
797
Expense related to employee stock options —
—
131
—
131
Exercise of stock options 39
—
46
—
46
Change in accounting principle - reclassification of warrant liability —
—
177
129
306
Net income —
—
—
(1,535 ) (1,535 )
Balance at March 31, 2018 11,899
$ 12
$ 83,838
$ (48,250 ) $ 35,600
Three Months Ended March 31, 2018
Balance at December 31, 2017 11,882
$ 12
$ 83,644
$ (49,566 ) $ 34,090
Expense related to director stock grants —
—
104
—
104
Issuance of common stock 17
—
23
—
23
Expense related to employee stock options —
—
67
—
67
Net income —
—
—
1,316
1,316
Balance at March 31, 2018 11,899
$ 12
$ 83,838
$ (48,250 ) $ 35,600



	Common Stock			Treasury Stock				Additional Paid-In Capital		Accumulated Deficit			Total Shareholders' Equity
	Shares	Amount		Shares		Amount		Additional Paid-In Capital		Accumulated Deficit			Total Shareholders' Equity
Six Months Ended March 31, 2019
Balance at September 30, 2018	11,899	$	12	$	—	$	—	$	84,285	$	(44,879	)	$	39,418
Directors' stock grants and expense	102	—		—		—		263		—			263
Expense related to employee stock options	—	—		—		—		129		—			129
Exercise of stock options	35	—		—		—		39		—			39
Net income	—	—		—		—		—		2,955			2,955
Balance at March 31, 2019	12,036	$	12	—		$	—	$	84,716	$	(41,924	)	$	42,804
Three Months Ended March 31, 2019
Balance at December 31, 2018	12,036	$	12	$	—	$	—	$	84,517	$	(43,189	)	$	41,340
Expense related to director restricted stock unit	—	—		—		—		132		—			132
Expense related to employee stock options	—	—		—		—		67		—			67
Net income	—	—		—		—		—		1,265			1,265
Balance at March 31, 2019	12,036	$	12	—		$	—	$	84,716	$	(41,924	)	$	42,804

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

DLH HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, ~~2019~~2020

1. Basis of Presentation

The accompanying consolidated financial statements include the accounts of DLH Holdings Corp. and its subsidiaries (together with its subsidiaries, "DLH" or the "Company" and also referred to as "we," "us" and "our"), all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with U.S. 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. GAAP for complete financial statements. Certain figures presented for comparative purposes have been reclassified to conform to the presentation adopted on Form 10-K for the year ended September 30, 2019. The Company implemented this reclassification as it determined that including these indirect overhead costs within the category of “contract costs” rather than “general and administrative expenses” better reflects the relationship of these overhead costs to contract performance, as these costs are generally variable based on fluctuations in business volume. This reclassification does not result in any changes to the Company’s total operating costs and previously reported operating income, income before income taxes, or net income.

In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended March 31, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending September 30, ~~2019.~~2020. Amounts as of and for the periods ended March 31, ~~2019~~2020 and March 31, ~~2018~~2019 are unaudited. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, ~~2018~~2019 filed with the Securities and Exchange Commission on December ~~12, 2018.~~11, 2019.

2. Business Overview

~~DLH~~The Company is a full-service provider of technology-enabled health and ~~readiness enhancement~~human services, providing solutions to ~~government agencies including the Department of Veteran Affairs ("VA"), Department of~~three market focus areas: Defense and Veterans' Health Solutions, Human Solutions and Services and Public Health and ~~Human Services ("HHS"), Department of Defense ("DoD"),~~Life Sciences. We deliver domain-specific expertise, industry best-practices and ~~other government agencies.~~innovations to customers across these markets leveraging seven core competencies: secure data analytics, clinical trials and laboratory services, case management, performance evaluation, system modernization, operational logistics and readiness, and strategic digital communications. The Company manages its operations from its principal executive offices in Atlanta, Georgia, and we have a complementary headquarters office in Silver Spring, Maryland. We employ over ~~1,600~~1,950 skilled employees working in more than 30 locations throughout the United ~~States.~~States and one location overseas.

~~Presently,~~At present, the Company derives ~~100% of its~~essentially all revenue from agencies of the ~~federal~~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 two largest ~~customer continues to be~~customers are the ~~VA, which~~Department of Health and Human Services ("HHS") and the Department of Veteran Affairs ("VA"). HHS comprised approximately ~~67%~~47% and ~~63%~~31% of revenue for the six months ended March 31, 2020 and 2019, respectively, and ~~2018, respectively. Additionally, HHS, which~~the VA comprised approximately ~~31%~~46% and ~~33%~~67% of revenue for the six months ended March 31, 2020 and 2019, ~~and 2018, respectively, represents a major customer. Our current contracts are within the following markets: Defense/VA (69%), Human Services and Solutions (29%) and Public Health/Life Sciences (~~2%~~); of which 97% of these contracts have been awarded on a Time and Materials basis, 2% are Cost Plus Fixed Fee contracts and 1% are Firm Fixed Price contracts. For additional information, see~~ ~~Note 4, Revenue Recognition~~.

In addition, substantially all accounts receivable, including contract assets, are from agencies of the U.S. Government as of March 31, 2019 and September 30, 2018. We generally operate as a prime contractor, but have also entered into contracts as a subcontractor. The Company's current business base is 99% prime contracts and 1% subcontracts. 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.~~

The VA comprised approximately 67% and 63% of revenue for the six months ended March 31, 2019 and 2018, which 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 program. Approximately 58% of the Company's current business base with the VA is derived from nine contracts (for pharmacy services), which are currently operating under extensions through October 31, 2019 pending completion of the procurement process for a new contract. We believe further extensions are possible until the procurement is completed. A single renewal request for proposal ("RFP") has currently been issued for these contracts that requires the prime contractor be a service-disabled veteran owned small business (SDVOSB), which precludes the Company from bidding on the RFP as a prime contractor. The Company has joined an SDVOSB team as a subcontractor to respond to this RFP. Should the contract be awarded to an SDVOSB partner of DLH, the Company expects to continue to perform a significant amount of the contract's volume of business. The remaining seven contracts for logistics services to the VA are performed under contracts that the Company anticipates will be extended through November 2019. Additionally, the Company believes that these contracts will be similarly extended during the procurement process, and may be subject to the same requirement of awarding to a SDVOSB prime contractor.

~~Further, the Company's contract with HHS in support of its Head Start program generated 28% and 31% of our revenue for the six months ended March 31, 2019 and 2018,~~ respectively. This contract is on a time and materials basis and consists of a base period of four option periods for a total term of five years through April 2020. The Company's Danya subsidiary has provided these and similar services to HHS since 1999. Danya was acquired by the Company in May 2016.

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, or if the amount of services we provide to them was materially reduced. Given the uncertainty regarding both the outcome and the timing of the VA RFP discussed above, the Company has not reflected any current impact to its financial statements from this event.

3. New Accounting Pronouncements

In February 2016, the FASB issued ~~new accounting guidance~~an Accounting Standard ~~Codification~~Update ("~~ASC"~~ASU") ~~842 related to leases. This new accounting guidance is intended~~2016-02, Leases (Topic 842), to improve financial reporting about leasing transactions. This accounting standard ~~will require~~requires organizations that lease assets, referred to as ~~“Lessees”~~"Lessees", to recognize on the balance sheet ~~the~~right-of-use assets and lease liabilities. Per the ASU, we determine if a contract contains a lease by identifying an asset and determining if we have the right to control the use of the identified asset for a period of time in exchange for consideration. A contract conveys the right to control the use of an identified asset when the lessee has the right to direct the use of the identified asset and obtain substantially all economic benefits from its use throughout the period of its use. We also determine if a lease qualifies as an operating or finance lease. All Company leases at standard adoption were operating leases. The ASU also require lessees to identify and separate lease and non-lease components. The Company elected not to separate lease and non-lease components per the practical expedient provided in ASU 2018-11. Upon lease commencement, the lease liability and right-of-use asset are recorded on the balance sheet. The lease liability is measured as the present value of

future minimum lease payments, including all probable renewals, to be made during the lease term. The right-of-use asset is measured as the present value of future minimum lease payments to be made during the lease term, including all probable renewals, plus lease payments made to the lessor before or at commencement and indirect costs paid less lease incentives received. DLH adopted this standard on October 1, 2019 and recognized initial right-of use assets and lease liabilities ~~for~~of $17.4 million and $18.0 million, respectively. At adoption, the ~~rights~~Company elected several practical expediencies to facilitate the implementation of the new standard and ~~obligations created by those~~did not recast comparative prior year information. As such we did not reassess and include initial direct costs in the measurement of right-of-use assets, capitalize leases with terms of ~~more than twelve months. An organization is~~12 months or less, nor reassess lease classification of existing leases.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires companies to ~~provide disclosures designed to enable users~~record an allowance for expected credit losses over the contractual term of certain financial assets, including short-term trade receivables and contract assets. Additionally, it expands disclosure requirements for credit quality of financial ~~statements~~assets. ASU 2016-13 becomes effective for the Company in the first quarter of fiscal year 2021. We do not expect a material impact to ~~understand the amount, timing, and uncertainty of~~our operating results, financial position or cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a ~~finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, new guidance will require both types~~result of leases (i.e., operating and finance) to be recognized. Finance leases will be accounted for in substantially the same manner as capital leases. Public companies will be required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all companies and organizations. Accounting Standard Update ("ASU") 2018-11 allows companies to elect not to recast comparative period presented when transitioning to ASC 842. The Company does not have a large portfolio of leases and is not likely to see a significant increase in balance sheet assets and liabilities resulting from the adoption ofadopting this new ~~lease accounting guidance. As shown in~~ ~~Note 10, the Company currently has approximately $2.3 million of lease obligations as of March 31, 2019 that would be evaluated as the implementation of this guidance becomes effective.~~standard.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies that an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new standard is effective for fiscal years beginning after December 15, 2019 for both interim and annual reporting periods. The Company ~~is currently assessing the potential impact of the adoption of ASU 2017-04 on its consolidated financial statements.~~

In May 2017, the FASB issued Accounting Standards Update ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Companyhas adopted this standard in the first quarter of fiscal ~~2019~~2020 and adoption did not have ~~a material~~an impact on the ~~Company’s~~Company's consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07 Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently assessing the potential impact on the Company’s consolidated financial statements and related disclosures.

4. Revenue Recognition

On October 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers using the modified retrospective method. ASC 606 outlines a five-step model whereby revenue is recognized as performance obligations within the contract are satisfied. ASC 606 also requires new, expanded disclosures regarding revenue recognition. We recognized the impact of adopting ASC 606 but did not record an entry as the impact was immaterial at less than $10 thousand. Results for reporting periods beginning after October 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and will continue to be reported under ASC 605, the accounting standards in effect for those periods. In past periods, the Company recognized and recorded revenue on government contracts when: (a) persuasive evidence of an arrangement existed; (b) the services had been delivered to the customer; (c) the sales price was fixed or determinable and free of contingencies or significant uncertainties; and (d) collectibility was reasonably assured.

We account for a contract when both we and the customer approve and commit; our rights and those of the customer are identified, payment terms are identified; the contract has commercial substance; and collectability of consideration is probable. At contract inception, we identify the distinct goods or services promised in the contract, referred to as performance obligations. Then we determine the total transaction price for the contract; which is the total consideration which we can expect in exchange for the promised goods or services in the contract. The transaction price may include fixed or variable amounts. Due to our contracts being predominantly time and material, the Company does not have variable consideration. The transaction price is allocated to each distinct performance obligation using our best estimate of the standalone selling price for each service promised in the contract. The primary method used to estimate standalone selling price is the hourly billing rate for each labor category identified in the contract with the customer. Revenue is recognized when, or as, the performance obligation is satisfied.

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

Contract costs include labor, material and allocable indirect expenses. For time-and-material contracts, we bill the customer per labor hour and per material, and revenue is recognized in the amount invoiced since the amount corresponds directly to the value of our performance to date. We consider control to transfer when we have a present right to payment. Essentially, all of our contracts satisfy their performance obligations over time. Contracts are often modified to account for changes in contract specifications and requirements. 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. ~~The impact of adjustments in contract estimates can be reflected in either revenue or operating expenses on the consolidated statement of operations.~~

For time-and-materials contracts, revenue ~~was~~is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts ~~were~~is recorded as reimbursable costs ~~were~~are incurred, including an estimated share of the applicable contractual fees earned. Contract costs ~~were~~are expensed as incurred. Estimated losses ~~were~~are recognized when identified.

Contract assets - Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms. In part, revenue recognition occurs before we have the right to bill, resulting in contract assets. These contract assets are reported within receivables, net on our consolidated balance ~~sheet~~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 - ~~Presently, we do not receive advances from our customers that exceed revenue earned, resulting~~Amounts are a result of billings in ~~contract liabilities.~~excess of costs incurred.

The following table summarizes the contract balances recognized on the Company's consolidated balance sheets:


	(in thousands)				(in thousands)
	March 31,		September 30,		March 31,		September 30,
	2019		2018		2020		2019

Contract assets	$	183	$	214	$	10,196	$	4,302
Contract liabilities	—		—		$	41	$	92

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 ~~sub-contractor.~~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 presents our revenue disaggregated by these categories:

Revenue by customer:


	(in thousands)				(in thousands)				(in thousands)
	Three Months Ended		Six Months Ended		Three Months Ended				Six Months Ended
	March 31,		March 31,		March 31,				March 31,
	2019		2019		2020		2019		2020		2019

Department of Veterans Affairs	$	23,197	$	46,008	$	25,556	$	22,696	$	49,619	$	45,506
Department of Health and Human Services	9,706		19,973		25,861		10,424		49,951		20,691
Other	853		1,527		3,381		636		7,466		1,311
Total revenue	$	33,756	$	67,508	$	54,798	$	33,756	$	107,036	$	67,508

Revenue by contract type:


	(in thousands)				(in thousands)				(in thousands)
	Three Months Ended		Six Months Ended		Three Months Ended				Six Months Ended
	March 31,		March 31,		March 31,				March 31,
	2019		2019		2020		2019		2020		2019

Time and materials	$	32,625	$	65,415	$	38,162	$	32,625	$	74,603	$	65,415
Cost plus fixed fee	637		1,246
Cost reimbursable					15,430		637		30,046		1,246
Firm fixed price	494		847		1,206		494		2,387		847
Total revenue	$	33,756	$	67,508	$	54,798	$	33,756	$	107,036	$	67,508

Revenue by whether the Company acts as a prime contractor or a subcontractor:


	(in thousands)				(in thousands)				(in thousands)
	Three Months Ended		Six Months Ended		Three Months Ended				Six Months Ended
	March 31,		March 31,		March 31,				March 31,
	2019		2019		2020		2019		2020		2019

Prime	$	33,538	$	67,066
Prime contractor					$	50,920	$	33,538	$	99,815	$	67,066
Subcontractor	218		442		3,878		218		7,221		442
Total revenue	$	33,756	$	67,508	$	54,798	$	33,756	$	107,036	$	67,508

5. Leases

We have leases for facilities and office equipment. Our lease liabilities are recognized as thepresent value of the future minimum lease paymentsover the lease term. Our right-of-use assets are recognized as the present value of the future minimum lease payments over the lease term less unamortized lease incentives and the balance remaining in deferred rent liability under ASC 840 at September 30, 2019. 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 credit facility was used in determining the present value of future minimum lease payments. The Company does not have any finance leases.

Upon the adoption of ASC 842, we recorded operating lease right-of-use assets of $17.4 million, current and long-term operating lease liabilities of $3.6 million and $14.4 million, and a $2 thousand cumulative adjustment to accumulated deficit.

The impact of adopting the standard on our consolidated balance sheet at October 1, 2019 is as follows:



(in thousands)	Ref	September 30, 2019			ASC 842 Adjustments			October 1, 2019
Long-term assets:
Operating leases right-of-use assets		$	—		$	17,398		$	17,398

Current liabilities:
Deferred rent liability - short-term	(a)	44			(44		)	—
Operating leases liabilities - current		—			3,645			3,645

Long-term liabilities:
Deferred rent liability - long-term	(b)	276			(276		)	—
Unamortized tenant improvement allowance	(c)	297			(297		)	—
Operating leases liabilities - long-term		—			14,372			14,372

Shareholders' equity:
Accumulated deficit		(39,555		)	(2		)	(39,557		)

Ref (a): The balance of short-term deferred rent liability was presented in our most recent annual 10K report within accounts payable, accrued expenses, and other accrued liabilities on our consolidated balance sheet at September 30, 2019.

Ref (b): The balance of long-term deferred rent liability was presented in our most recent annual 10K report within total long-term liabilities on our consolidated balance sheet at September 30, 2019.

Ref (c): The balance of unamortized tenant improvement allowance was presented in our most recent annual 10K report within total long-term liabilities on our consolidated balance sheet at September 30, 2019.

The Company executed a modification of a lease during the fiscal quarter end December 31, 2019 and recognized adjustments to the right-of-use asset and lease liabilities in accordance with ASC 842. As a result of the modification, a gain of $0.1 million was recognized. The gain represents the difference between the change in values of the right-of-use-asset and lease liabilities, which were $7.3 million and $7.2 million, respectively. For the six months ended March 31, 2020, the increase to right-of-use assets and lease liabilities was $24.6 million and $25.3 million, respectively. For more information, refer to Note 6, Supporting Financial Information.

5.As of March 31, 2020, operating leases for facilities and equipment have remaining lease terms of 0.1 to 11 years.

The following table summarizes lease balances in our consolidated balance sheet at March 31, 2020:



	(in thousands)
	March 31, 2020
Operating lease right-of-use assets	$	22,816

Operating lease liabilities, current	$	1,311
Operating lease liabilities - long-term	22,128
Total operating lease liabilities	$	23,439

The Company's lease costs are included within general and administrative costs and for the three and six months ending March 31, 2020, total lease costs for our operating leases are as follows:



	(in thousands)
	Three Months Ended		Six Months Ended
	March 31, 2020		March 31, 2020
Lease Costs:
Operating	$	1,253	$	2,516
Short-term	47		103
Variable	3		23
Total lease costs	$	1,303	$	2,642

The Company's future minimum lease payments as of March 31, 2020 are as follows:



For the Fiscal Year Ending September 30,	(in thousands)
2020 (Remaining)	$	1,094
2021	3,156
2022	3,244
2023	3,264
2024	3,215
Thereafter	17,776
Total future lease payments	31,749
Less: imputed interest	(8,310		)
Present value of future minimum lease payments	23,439
Less: current portion of operating lease liabilities	(1,311		)
Long-term operating lease liabilities	$	22,128

Other information related to our leases are as follows:



	March 31, 2020
Weighted-average remaining lease term	9.7 years
Weighted-average discount rate	6.03	%



	(in thousands)
	Three Months Ended		Six Months Ended
	March 31, 2020		March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities	$	1,197	$	2,467
Lease liabilities arising from obtaining right-of-use-assets	$	—	$	245

6. Supporting Financial Information

Accounts receivable


		(in thousands)					(in thousands)
		March 31,		September 30,			March 31,		September 30,
	Ref	2019		2018		Ref	2020		2019
Billed receivables		$	9,213	$	10,066		$	24,752	$	18,924
Contract assets		183		214			10,196		4,302
Total accounts receivable		9,396		10,280			34,948		23,226
Less: Allowance for doubtful accounts	(a)	—		—		(a)	—		—
Accounts receivable, net		$	9,396	$	10,280		$	34,948	$	23,226

Ref (a): Accounts receivable are non-interest bearing, unsecured and carried at net realizable value. 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, ~~2019~~2020 or September 30, ~~2018.~~2019.

Other current assets


	(in thousands)				(in thousands)
	March 31,		September 30,		March 31,		September 30,
	2019		2018		2020		2019
Prepaid insurance and benefits	$	737	$	401	$	496	$	495
Other receivables and prepaid expenses	772		359
Other receivables					1,264		301
Other prepaid expenses					1,192		1,035
Other current assets	$	1,509	$	760	$	2,952	$	1,831

Equipment and improvements, net


		(in thousands)							(in thousands)
		March 31,			September 30,				March 31,			September 30,
	Ref	2019			2018			Ref	2020			2019
Furniture and equipment		$	326		$	326			$	1,262		$	1,262
Computer equipment		748			751				1,171			1,043
Computer software		1,738			1,731				3,998			3,985
Leasehold improvements		66			66				1,595			1,595
Total equipment and improvements		2,878			2,874				8,026			7,885
Less accumulated depreciation and amortization		(1,550		)	(1,308		)		(3,751		)	(2,542		)
Equipment and improvements, net	(a)	$	1,328		$	1,566		(a)	$	4,275		$	5,343

Ref (a): Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. Maintenance and repair costs are expensed as incurred. Depreciation expense was ~~$0.1~~$0.6 million and $0.1 million for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$0.2~~$1.2 million and ~~$0.2~~$0.2 million for the six months ended March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Intangible ~~Assets~~assets


		(in thousands)							(in thousands)
		March 31,			September 30,				March 31,			September 30,
	Ref	2019			2018			Ref	2020			2019
Intangible assets	(a)							(a)
Customer contracts and related customer relationships		$	16,626		$	16,626			$	45,600		$	45,600
Covenants not to compete		480			480				480			480
Trade name		517			517				2,109			2,109
Intangible assets		17,623			17,623
Total intangible assets									48,189			48,189
Less accumulated amortization
Customer contracts and related customer relationships		(4,850		)	(4,018		)		(8,870		)	(6,590		)
Covenants not to compete		(140		)	(116		)		(188		)	(164		)
Trade name		(150		)	(124		)		(332		)	(227		)
Total accumulated amortization		(5,140		)	(4,258		)		(9,390		)	(6,981		)
Intangible assets, net		$	12,483		$	13,365			$	38,799		$	41,208

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~~The total amount of amortization expense was ~~$0.4~~$1.2 million and $0.4 million for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$0.9~~$2.4 million and ~~$0.9~~$0.9 million for the six months ended March 31, 2020 and 2019, ~~and 2018,~~ respectively.


Estimated amortization expense for future years:	(in thousands)		(in thousands)
Remaining Fiscal 2019	$	883
Fiscal 2020	1,762
Remaining Fiscal 2020			$	2,409
Fiscal 2021	1,762		4,819
Fiscal 2022	1,762		4,819
Fiscal 2023	1,762		4,819
Fiscal 2024			4,819
Thereafter	4,552		17,114
Total amortization expense	$	12,483	$	38,799

Accounts payable, accrued expenses and other current liabilities

(in thousands)
March 31, September 30,
2019 2018
Accounts payable $ 3,818
$ 3,393
Accrued benefits 2,150
2,060
Accrued bonus and incentive compensation 1,051
2,191
Accrued workers compensation insurance 3,465
2,642
Other accrued expenses 821
664
Accounts payable, accrued expenses, and other current liabilities $ 11,305
$ 10,950



	(in thousands)
	March 31,		September 30,
	2020		2019
Accounts payable	$	11,604	$	10,054
Accrued benefits	2,769		2,252
Accrued bonus and incentive compensation	1,051		1,951
Accrued workers' compensation insurance	4,508		4,007
Other accrued expenses	2,981		2,369
Accounts payable, accrued expenses, and other current liabilities	$	22,913	$	20,633

Debt obligations

(in thousands)
March 31, September 30,
Ref 2019 2018
Bank term loan $ —
$ 7,708
Less unamortized debt issuance costs (a) —
(750 )
Net bank debt obligation —
6,958
Less current portion of bank debt obligations —
—
Long term portion of bank debt obligation $ —
$ 6,958

Ref (a): The remaining outstanding balance of the term loan was paid in full in the second quarter. As such, the remaining deferred financing costs attributable to the term loan were expensed in the period.



	(in thousands)
	March 31,			September 30,
	2020			2019
Bank term loan	$	53,000		$	56,000
Less unamortized deferred financing cost	(2,090		)	(2,371		)
Net bank debt obligation	50,910			53,629
Less current portion of term loan debt obligations	—			—
Long-term portion of bank debt obligation	$	50,910		$	53,629

Interest expense


		(in thousands)						(in thousands)							(in thousands)						(in thousands)
		Three Months Ended						Six Months Ended							Three Months Ended						Six Months Ended
		March 31,						March 31,							March 31,						March 31,
	Ref	2019			2018			2019			2018			Ref	2020			2019			2020			2019
Interest expense	(a)	$	(83	)	$	(208	)	$	(187	)	$	(427	)	(a)	$	(742	)	$	(83	)	$	(1,593	)	$	(187	)
Amortization of deferred financing costs	(b)	(461		)	(67		)	(534		)	(132		)	(b)	(164		)	(461		)	(374		)	(534		)
Other income (expense), net		—			14			—			20			(c)	—			—			121			—
Interest expense, net		$	(544	)	$	(261	)	$	(721	)	$	(539	)		$	(906	)	$	(544	)	$	(1,846	)	$	(721	)

Ref (a): Interest expense on ~~borrowing.~~borrowing

Ref (b): ~~Amortizations~~Amortization of expenses related to ~~securing financing; amounts for three~~term loan and ~~six months ended March 31, 2019 include write-off~~revolving line of ~~remaining deferred financing costs of $0.4 million related~~credit

Ref (c): Gain on lease modification due to ~~term debt that was fully satisfied by that date.~~a lease amendment

6.7. Credit Facilities

A summary of ~~our~~this loan ~~facilities and subordinated debt financing~~facility as of March 31, ~~2019~~2020, is as follows:



	~~As of March 31, 2019~~
~~Lender~~	~~Arrangement~~	~~Loan Balance~~		~~Interest~~	~~Maturity Date~~
~~Fifth Third Bank~~	~~Secured term loan $25 million (a)~~	$	—	~~LIBOR* + 3.0%~~	~~5/1/2021~~
~~Fifth Third Bank~~	~~Secured revolving line of credit $10 million ceiling (b)~~	$	—	~~LIBOR* + 3.0%~~	~~5/1/2021~~



Arrangement	Loan Balance			Interest	Maturity Date
Secured term loan $70 million (a)	$	53.0	million	LIBOR* + 3.5%	June 7, 2024
Secured revolving line of credit $25 million ceiling (b)	$	2.0	million	LIBOR* + 3.5%	June 7, 2024

*LIBOR rate as of March 31, ~~2019~~2020 was ~~2.49%~~0.99%

(a) Represents the principal amounts payable on our ~~Term Loan with Fifth Third Bank.~~secured term loan. The ~~$25.0~~$70.0 million secured term loan ~~from Fifth Third Bank~~ was secured by liens on substantially all of the assets of the Company. The principal of the ~~Term Loan was~~term loan is payable in ~~fifty-nine consecutive monthly~~quarterly installments ~~of $312,500~~ with the remaining balance due on ~~May 1, 2021. Through an excess cash flow payment and a series of voluntary prepayments, the Company has fully repaid the term loan as of March 31, 2019.~~

June 7, 2024.

The ~~Term Loan~~Credit 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:~~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 ~~1.35~~1.25 to ~~1.0~~1.00 commencing with the quarter ending ~~June~~September 30, ~~2016,~~2019, and for all subsequent periods, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of ~~2.99~~4.25:1.0 to 3.25:1.0 ~~at closing and thereafter a ratio ranging from 3.0 to 1.0 for the period through June 30, 2018 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~~non-recurring charges, losses or expenses -to include transaction and non-cash equity ~~grants.~~expense. The term loan has an interest rate spread range from 2.5% to 4.5% depending on the funded indebtedness to adjusted EBITDA ratio. We are in compliance with all loan covenants and restrictions.

In addition to ~~monthly~~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 ~~each~~the immediately preceding fiscal year in which ~~the Funded Indebtedness~~indebtedness to ~~Adjusted~~consolidated EBITDA ratio is greater than or equal to 2.50:~~1.0, or~~1.0; (b) 50% of the ~~Excess Cash Flow~~excess cash flow for ~~each~~the immediately preceding fiscal year in which the funded indebtedness to ~~Adjusted~~consolidated EBITDA Ratio is less than 2.50:1.0 but greater than or equal to ~~2.0:~~1.5:1.0; or (c) 0% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 1.5:1.0. ~~DLH made a voluntary~~In addition, the Company must make additional mandatory prepayment of ~~term debt~~amounts outstanding based on proceeds received from asset sales and sales of ~~$5.6 million in~~certain equity securities or other indebtedness. The Company has made voluntary principal prepayments that satisfy mandatory principal amortization until June 2022. For additional information regarding the schedule of future payment obligations, please refer to Note 11, Commitments and Contingencies.

On September ~~2018 and additional voluntary prepayments in February and March~~30, 2019, ~~resulting~~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 is $36 million that matures in 2024. The remaining outstanding balance of our term loan ~~being fully repaid as~~is subject to interest rate fluctuations. On the notional amount, the Company pays a base fixed rate of 1.61%, plus applicable credit spread. As a result, for the six months ended March 31, ~~2019.~~2020, interest expense has been reduced by less than $0.1 million.

(b) The secured revolving line of credit ~~from Fifth Third Bank~~ has a ceiling of up to ~~$10.0~~$25.0 million. Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company. The Company has accessed funds from the revolving credit facility during the quarter ending March 31, 2020. The outstanding balance owed is $2.0 million, which we subsequently paid in the following month.

The Company's total borrowing availability, based on eligible accounts receivables at March 31, ~~2019,~~2020, was ~~$7.2~~$21.3 million. ~~This capacity was comprised~~As part of ~~$1.1~~the revolving credit facility, the lenders agreed to a sublimit of $3 million ~~in a stand-by letter~~for letters of credit ~~and unused borrowing capacity~~for the account of ~~$8.3 million.~~the Company, subject to applicable procedures.

The revolving line of credit has a maturity date of ~~May 1, 2021~~June 7, 2024 and is subject to loan covenants as described above. DLH is fully compliant with those covenants.

8. Significant Accounting Policies

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible assets, interest rate swaps, stock-based compensation, right of use assets and lease liabilities, valuation allowances established against accounts receivable and deferred tax assets, and measurement of loss development on workers’ compensation 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.

Fair value of financial instruments

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

Goodwill and other intangible assets

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

At September 30, ~~2018,~~2019, we performed a goodwill impairment evaluation on the year-end carrying value of approximately ~~$26~~$53 million. We performed both a qualitative and quantitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, ~~2018.~~2019. For the six months ended March 31, ~~2019,~~2020, the Company determined that 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 is not expected to have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods’ results of operations.

~~Long lived assets~~Equipment and improvements

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.

Income taxes

~~DLH~~The Company accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that

deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. We had no uncertain tax positions at either March 31, ~~2019~~2020 or September 30, ~~2018.~~2019. We report interest and penalties as a component of income tax expense. In the three and six months ended March 31, ~~2019~~2020 and March 31, ~~2018,~~2019, we recognized no interest and no penalties related to income taxes.

Stock-based equity compensation

The Company uses the fair value-based method for stock-based equity compensation. Options issued are designated as either an incentive stock or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a binomial simulation option pricing model to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is credited to capital stock.

Cash and cash equivalents

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

Earnings 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, 2020, the Company did not hold any treasury stock.

Interest Rate Swap

The Company uses derivative financial instruments to manage interest rate risk associated with its variable rate 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 both are recognized in interest expense in the Consolidated Statements of Operations. The Company does not hold or issue any derivative instrument for trading or speculative purposes.

1518

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

Stock-based compensation expense

Options issued under equity incentive plans are designated as either an incentive stock or a non-statutory stock option. 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, ~~2019,~~2020, there were ~~1.5~~1.1 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~~statements of operations:


		(in thousands)									(in thousands)				(in thousands)
		Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
	Ref	March 31,								Ref	March 31,				March 31,
		2019		2018		2019		2018			2020		2019		2020		2019
DLH employees	(a)	$	67	$	67	$	129	$	131		$	95	$	67	$	211	$	129
Non-employee directors	(b)	132		104		263		797		(a)	87		132		173		263
Total stock option expense		$	199	$	171	$	392	$	928		$	182	$	199	$	384	$	392

Ref (a)~~: Equity grants of 35,000 stock options were made in the second quarter of fiscal year 2019 to employees in accordance with DLH compensation policy.~~

~~Ref (b)~~: Equity grants of restricted stock units, in accordance with DLH compensation policy for non-employee directors were made in the first quarter of fiscal ~~2019~~2020 and in total ~~90,000~~77,500 restricted stock units were ~~granted.~~issued and outstanding.

Unrecognized stock-based compensation expense


		(in thousands)			(in thousands)
		March 31,			March 31,
	Ref	2019		Ref	2020
Unrecognized expense for DLH employees	(a)	$	766	(a)	$	1,102
Unrecognized expense for non-employee directors	(b)	263			173
Total unrecognized expense		$	1,029		$	1,275

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~~On a ~~binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation~~weighted average basis, this expense is expected to be recognized ~~over~~within the ~~derived service period determined in the valuation. The remaining term for the weighted average expense of these shares will be 3.34~~next 3.82 years.

~~Ref (b): Unrecognized stock expense related to current year's equity grants of restricted stock units to non-employee directors in accordance with DLH compensation policy for non-employee directors.~~

Stock option activity for the six months ended March 31, ~~2019~~2020

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.

1619

(in years)
Weighted
Weighted Average (in thousands)
(in thousands) Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term Value
Options outstanding September 30, 2018 2,134
$ 4.33
6.2
$ 5,103
Granted 35
$ 5.25
—
—
Exercised (35 ) $ 1.12
—
—
Options outstanding, March 31, 2019 2,134
$ 4.36
6.2
$ 8,056



						(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, 2019		2,134		$	4.36	5.9	$	4,815
Granted	(a)	250		$	4.17	—	—
Exercised/canceled		(505	)	$	1.04	—	—
Options outstanding, March 31, 2020		1,879		$	4.60	6.6	$	2,878

Ref (a): Utilizing a volatility of 50% along with assumptions of a 10-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 December 31, 2019, as follows using the Monte Carlo Method.



									Volatility
									50%
						Vesting		Expected
		Strike		Stock		Threshold		Term	Calculated
Grant Date	Ref	Price		Price		Price		(Years)	Fair Value
October 18, 2019	(a)	$	4.17	$	4.17	Service		10	$	2.54
October 18, 2019		$	4.17	$	4.17	$	8.00	10	$	2.56
October 18, 2019		$	4.17	$	4.17	$	10.00	10	$	2.53
October 18, 2019		$	4.17	$	4.17	$	12.00	10	$	2.51

Notes:
Results based on 100,000 simulations

Ref (a): Options granted vest after completion of a one year service period.

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


		(in thousands)			(in thousands)
		March 31,	September 30,		March 31,	September 30,
	Ref	2019	2018	Ref	2020	2019
Vested and exercisable	(a)	1,300	1,335	(a)	955	1,300
Unvested		834	799	(b)	924	834
Options outstanding		2,134	2,134		1,879	2,134

Ref (a): Weighted average exercise price of vested and exercisable shares was $1.68 and $1.51 at March 31, 2020 and September 30, 2019, respectively. Aggregate intrinsic value was approximately $2.5 million and $3.9 million at March 31, 2020 and September 30, 2019, respectively. Weighted average contractual term remaining was 3.5 and 3.8 years at March 31, 2020 and September 30, 2019, respectively.

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

~~9. Earnings Per Share~~

Basic earnings per share is calculated by dividing 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 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.

Three Months Ended Six Months Ended
March 31, March 31,
2019 2018 2019 2018
Numerator:
Net income (loss) $ 1,265
$ 1,316
$ 2,955
$ (1,535 )
Denominator:
Denominator for basic net income (loss) per share - weighted-average outstanding shares 12,036
11,889
11,999
11,863
Effect of dilutive securities:
Stock options and restricted stock 1,051
997
1,031
—
Denominator for diluted net income (loss) per share - weighted-average outstanding shares 13,087
12,886
13,030
11,863

Net income (loss) per share - basic $ 0.11
$ 0.11
$ 0.25
$ (0.13 )
Net income (loss) per share - diluted $ 0.10
$ 0.10
$ 0.23
$ (0.13 )

1720

10. Earnings Per Share

The below details the calculation of basic and diluted earnings per share for the periods indicated:



	(In thousands, except per share amounts)
	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2020		2019		2020		2019
Numerator:
Net income	$	2,076	$	1,265	$	3,628	$	2,955
Denominator:
Denominator for basic net income per share - weighted-average outstanding shares	12,299		12,036		12,193		11,999
Effect of dilutive securities:
Stock options and restricted stock	704		1,051		693		1,031
Denominator for diluted net income per share - weighted-average outstanding shares	13,003		13,087		12,886		13,030

Net income per share - basic	$	0.17	$	0.11	$	0.30	$	0.25
Net income per share - diluted	$	0.16	$	0.10	$	0.28	$	0.23

11. Commitments and Contingencies

Contractual obligations as of March 31, ~~2019~~2020


			Payments Due By Period											Payments Due by Period
			Next 12		2-3		4-5		More than 5					Next 12		2-3		4-5		More than 5
(Amounts in thousands)	Total		Months		Years		Years		Years		Ref	Total		Months		Years		Years		Years
Debt obligations											(a)	$	55,000	$	2,000	$	5,750	$	47,250	$	—
Facility leases	$	2,315	$	912	$	694	$	680	$	29		31,640		2,662		6,362		6,365		16,251
Equipment operating leases	27		16		11		—		—			109		37		45		27		—
Total obligations	$	2,342	$	928	$	705	$	680	$	29		$	86,749	$	4,699	$	12,157	$	53,642	$	16,251

Ref (a): The $2 million amount due in the next twelve months was paid in the subsequent month.

Worker's compensation

We accrue worker's compensation expense based on claims submitted, applying actuarial loss development factors to estimate the costs incurred but not yet recorded. Our accrued liability for claims development as of March 31, ~~2019~~2020 and September 30, ~~2018~~2019 was ~~$3.5~~$4.5 million and ~~$2.6~~$4.0 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 regarding our employment practices or other matters. The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows.

~~11.~~12. Related Party Transactions

The Company has determined that for the three and six months ended March 31, ~~2019 and 2018~~2020 there were no significant related party transactions that have occurred which require disclosure through the date that these financial statements were issued.

~~12. Income Taxes~~21

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.

As of March 31, 2019 and September 30, 2018, the Company is reporting a $3.2 million and $4.1 million, respectively, deferred tax asset, which is presented on the balance sheets as deferred taxes in the long-term assets section.

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

Forward Looking and Cautionary Statements

You should read the following discussion in conjunction with the Consolidated Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended September 30, ~~2018,~~2019, 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. ~~Those~~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 outbreak of the novel coronavirus (“COVID-19”), including the measures to reduce its spread, and its impact on the economy and demand for our services, are uncertain, cannot be predicted, and may precipitate or exacerbate other risks and ~~uncertainties include, but are~~uncertainties; the risk that we will not ~~limited to,~~realize the ~~following: failure to achieve~~anticipated benefits of an acquisition; the challenges of managing larger and more widespread operations resulting from the acquisition; contract awards in connection with re-competes for present business and/or competition for new business; ~~the risks~~compliance with new bank financial and ~~uncertainties associated with client interest in and purchases of new services;~~other covenants; changes in client budgetary priorities; government contract procurement (such as bid protest, small business set asides, loss of work due to organizational conflicts of interest, etc.) and termination ~~risks of government contracts;~~risks; the ability to successfully integrate the operations of ~~our recent and any~~ future acquisitions; 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, ~~2018,~~2019, 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. Such forward-looking statements are made as of 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~~We are a provider of technology-enabled business process outsourcing and program management solutions, primarily to improve and better deploy large-scale federal health and human service initiatives. DLH derives ~~100%~~essentially all 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 ~~focused on~~aligned to three ~~primary sources of revenue~~market focus areas within the federal health services market ~~space,~~space.

Defense and Veteran Health Solutions;

Human Services and Solutions;

Public Health and Life Sciences;

Distribution of Services and Solutions in Our Markets

We operate primarily through prime contracts awarded by the government through competitive bidding processes. We have a diverse mix of contract vehicles with various agencies of the United States Government, which supports our overall corporate growth strategy. Our revenue is distributed to time and materials contracts (70%), cost reimbursable contracts (28%) and firm fixed price contracts (2%). We provide services under IDIQ and government wide acquisition contracts, such as ~~follows:~~General Services Administration ("GSA") schedule contracts. We currently hold multiple GSA schedule contracts, under which we provide services that constitute a significant percentage of our total revenue. These Federal contract schedules are renewed on a recurring basis for a multi-year period.

~~Department of Defense and veteran health solutions, comprising approximately~~ ~~69%~~ ~~of our current business base;~~22

~~Human services and solutions, approximately~~ ~~29%~~ ~~of our current business base; and~~

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

Major Customers

Our two largest customers ~~continue~~are HHS and the VA. The following table summarizes the revenues by customer for the six months ended March 31, 2020 and 2019, respectively:



	(in thousands)
	Six Months Ended
	March 31,
	2020				2019
	Revenue		Percent of total revenue		Revenue		Percent of total revenue
Department of Health and Human Services	$	49,951	47	%	$	20,691	31	%
Department of Veterans Affairs	49,619		46	%	45,506		67	%
Customers with less than 10% share of total revenue	7,466		7	%	1,311		2	%
Total revenue	$	107,036	100	%	$	67,508	100	%

Major Contracts

The revenue attributable to 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 program. Nine contracts for pharmacy services, which represent revenues of approximately $27.8 million and $26.4 million for the six months ended March 31, 2020 and 2019, are currently operating under extensions through October 2020. The remaining seven contracts for logistics services, which represent approximately $21.8 million and $19.1 million of revenues for the six months ended March 31, 2020 and 2019, have been extended through June 2021.

As previously reported, a single renewal request for proposal (“RFP”) had been issued for the nine (9) pharmacy contracts that required the prime contractor be a service-disabled veteran owned small business (“SDVOSB”), which would have precluded us from bidding on the RFP as a prime contractor. We had joined a SDVOSB team as a subcontractor to respond to this RFP. However, the government has canceled the previously issued RFP for these contracts. The government has neither indicated nor announced its future procurement strategy. Due to the time required to conduct a procurement process, we expect these contracts to be extended beyond the current period of performance.

The remaining seven contracts for logistics services, which represent approximately $21.8 million and $19.1 million of revenues for the six months ended March 31, 2020 and 2019, have been extended through June 2021. A renewal RFP for the seven logistics contracts has been issued and provides for evaluation and award of the contract based on the classification of the bidder, with preference given to a SDVOSB prime contractor. The Company has joined a SDVOSB team to respond to this RFP. We believe that these contracts will be extended during the procurement process. The government has not provided any updated guidance with respect to this procurement.

The Company's contract with HHS in support of its Head Start program generated $18.7 million and $19.1 million of its revenue for the six months ended March 31, 2020 and 2019, respectively. This contract was awarded on a time and materials basis and provided for a base period and four option periods for a total term of five years through April 2020. We have received a fully funded contract extension through August 2020. The customer is expected to issue an RFP in fiscal 2020.

We remain dependent upon the continuation of our relationships with the VA and HHS. ~~As of March 31, 2019, contracts with VA and HHS have anticipated periods of performance up to November 2019 and April 2020, respectively, pending further extension or recompete.~~ Our results of operations, cash flows, and financial condition would be materially adversely affected if we were unable to continue our relationship with either of these customers, orif we were to lose any of our material current contracts, of if the amount of services we provide to them was to be materially reduced. ~~For further discussion, see "Potential Impact of Federal Contractual Set-aside Laws and Regulations".~~

~~Defense and veterans’ health solutions:~~ DLH provides critical healthcare services and delivery solutions to the Department of Veteran Affairs, Navy Bureau of Medicine and Surgery, Defense Health Agency and Army Medical Command. We believe that our DLH-developed tools and processes, including e-PRAT^®~~and SPOT-m~~^®~~, along with our cloud-based case management system have been major contributors in differentiating the Company within this Federal market secto~~r.

DLH is on the forefront of ensuring that veterans receive their out-patient prescriptions on time, each day, through the VA CMOP pharmacy program which has been recognized for service excellence, earning the top position in the JD Powers evaluation of mail order pharmacies for each of the past eight years. We believe that our operational efficiency and expertise is well-aligned with the VA strategic goals to manage and improve operations and to deliver seamless and integrated support. Our unique capabilities and solutions help the VA optimize efficiency and help ensure program accountability as well as better service.

DLH provides a range of case management, physical and behavioral health examinations and associated medical administration services to enhance the assessment and transition process for military personnel readiness commands and individual service members. We deliver clinical drug and alcohol counseling services to Navy installations worldwide as part of the clinical preceptorship program, thereby improving sailor health and readiness. 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.

~~Human services and solutions:~~ DLH provides a wide range of human services and solutions to the Department of Health and Human Services' Office of Head Start and the Department of Homeland Security. DLH provides a systems-based approach toward assuring that underserved children and youth throughout the country are getting proper educational and environmental support, including health, nutritional, parental, and behavioral services during their formative years. Performance verification of

1923

grantors 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 require innovative monitoring and systems integration to ensure productive and cost-effective results, which we deliver. Finally, DLH provides the enterprise-level IT system architecture design, migration plan, and ongoing maintenance (including call center) to manage the system implementation using experienced subject matter experts and project management resources.Backlog

~~Public health~~Backlog represents total estimated contract value of predominantly multi-year government contracts and ~~life sciences:~~ ~~DLH provides~~will vary depending upon the timing of new/renewal contract awards. Backlog is based upon customer commitments that the Company believes to be firm over the remaining performance period of our contracts. The value of multi-client, competitive Indefinite Delivery/Indefinite Quantity ("IDIQ") contract awards is included in backlog computation only when a ~~wide range~~task order is awarded or if the contract is a single award IDIQ contract. While no assurances can be given that existing contracts will result in earned revenue in any future period, or at all, the Company’s major customers have historically exercised their contractual renewal options. At March 31, 2020, our total backlog was approximately $426.4 million compared to $414.1 million as of September 30, 2019.

Backlog value is quantified from management's judgment and assumptions about the volume of services ~~to Department~~based on past volume trends and current planning developed with customers. Our backlog may consist of ~~Health~~both funded and ~~Human Services' Center for Disease Control~~unfunded amounts under existing contracts including option periods. At March 31, 2020, our funded backlog was approximately $106.0 million, and Prevention, the Department of the Interior, and the Department of Agriculture. DLH services include advancing disease prevention methods and health promotion to underserved and 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 seasonal with regard to resources and funding.unfunded backlog was $320.3 million.

Forward Looking Business ~~Trends:~~Trends

~~DLH's mission is~~COVID-19 Impact

We are exposed to ~~expand our position as a trusted provider of technology-enabled healthcare~~ and ~~public health services, medical logistics,~~impacted by macroeconomic factors and ~~readiness enhancement services~~U.S. government policies. Current general economic conditions are highly volatile due to ~~active duty personnel, veterans,~~the COVID-19 pandemic, resulting in both market size contractions due to economic slowdowns and civilian populations and communities. Our primary focus within the defense agency markets include military service members and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, health IT commodities, process management, clinical systems support, and healthcare delivery. Our primary focus within the civilian agency markets include healthcare and social programs delivery and readiness. These include compliance monitoringgovernment restrictions on large scale programs, technology-enabled program management, consulting, and digital communications solutions ensuring that education, health, and social standards are being achieved within underserved and at risk populations.movement. We believe, ~~these business development priorities~~however, that our contract base is largely insulated from negative impacts due to the outbreak of COVID-19 as the services we provide are largely deemed essential by the federal agencies we support resulting in a stable level of work, we have partnered with our clients to adopt particular measures to protect our employees at distribution centers, and we expect to execute on remainder of our contracts through remote and teleworking arrangements. While the pandemic will ~~position DLH~~have minor offsetting impacts due to ~~expand within top national priority programs~~social distancing and ~~funded areas.~~travel restrictions, we do not expect material impacts from COVID-19 in this fiscal year.

~~Federal budget outlook~~In the future, the pandemic may cause reduced demand for ~~2019~~:certain services we provide, particularly if it results in a recessionary economic environment or the spending priorities of the U.S. government shift in ways adverse to our business focus. Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our employees. We have endeavored to follow recommended actions of government and health authorities to protect our employees and were able to broadly maintain our operations. We intend to continue to work with government authorities and implement our employee safety measures to ensure that we are able to continue our operations during the pandemic. However, uncertainty resulting from the pandemic could result in an unforeseen disruption to our operations (for example a closure of a key distribution facility) that may not be fully mitigated.

~~On January 25, 2019~~Due to our ability to continue to perform under our contracts and ~~February 14, 2019, Congress approved~~our cash flow generation, we do not presently expect liquidity constraints related to COVID-19. We are presently in compliance with all covenants in our term loan and have access to a revolving line of credit to meet any short-term cash needs that cannot be funded by operations. Due to our reduction in term loan principal, we do not have a scheduled amortization payment until June 2022. 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 ~~President signed legislation~~fair value of our assets due to ~~appropriate funds for several departments and agencies affected by~~ the ~~partial shutdown that began on December 22, 2018. The appropriations legislation funds these agencies for the remaining government fiscal year, which ends September 30, 2019.~~COVID-19 pandemic.

~~On March 11, 2019, the President submitted his administration’s budget request for fiscal year 2020. Due~~For additional information on risk factors that could impact our results, please refer to ~~certain provisions~~“Risk Factors” in Part II, Item 1A of that request, including the imbalance between defense and non-defense discretionary spending requests, it is generally expected that budget negotiations will be protracted and may result in short-term shutdowns of certain government agencies after September 30, 2019.this Form 10-Q.

~~The Company continues to believe that its key programs benefit from bipartisan support and does not expect a material impact from any delays in approving the federal budget for fiscal year of 2020.~~

~~Department of Veterans Affairs (VA) health spending trends:~~

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

~~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.~~

2024

~~Large defense companies divesting from Federal services market~~:

Certain 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:~~

There has been active consolidation and a strong increase in merger and acquisition activity among federal government contractors over the past few years that we expect to continue, fueled by public companies leveraging strong balance sheets. Companies often look to acquisitions that augment core capabilities, contracts, customers, market differentiators, stability, cost synergies, and higher margin and revenue streams. 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 Impact~~Results of ~~Federal Contractual Set-aside Laws and Regulations:~~

The Federal government has an overall goal of 23% of prime contracts flowing through small businesses. As previously reported, various agencies within the federal government have policies that support small business goals, including the adoption of the “Rule of Two” by the VA, which provides that the agency shall award contracts by restricting competitionOperations 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.

At present, the Company derives 100% of its revenue from agencies of the Federal government, including 99% as a prime contractor. Our largest customer continues to be the VA, which comprised approximately 67% and 63% of revenue for the quarterthree months ended March 31, ~~2019~~2020 and ~~2018, respectively. HHS which comprised approximately 31% and 33% of revenue~~2019

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



	Three Months Ended
	March 31, 2020				March 31, 2019				Change
Revenue	$	54,798	100.0	%	$	33,756	100.0	%	$	21,042
Cost of operations:
Contract costs	42,941		78.4	%	26,250		77.8	%	16,691
General and administrative costs	6,260		11.4	%	4,477		13.3	%	1,783
Acquisition costs	—		—	%	143		0.4	%	(143		)
Depreciation and amortization	1,760		3.2	%	560		1.7	%	1,200
Total operating costs	50,961		93.0	%	31,430		92.8	%	19,531
Income from operations	3,837		7.0	%	2,326		6.9	%	1,511
Interest expense, net	906		1.7	%	544		1.6	%	362
Income before income taxes	2,931		5.3	%	1,782		5.3	%	1,149
Income tax expense	855		1.6	%	517		1.5	%	338
Net income	$	2,076	3.7	%	$	1,265	3.8	%	811
Net income per share - basic	$	0.17			$	0.11			$	0.06
Net income per share - diluted	$	0.16			$	0.10			$	0.06

Revenue

Revenue for the three months ended March 31, ~~2019 and 2018, respectively,~~2020 was $54.8 million, an increase of $21.0 million or 62.3% over the prior year period. The increase in revenue is ~~also a major customer. Our results~~due primarily to the revenue contribution of operations, cash flows and financial condition would be materially adversely affected if we were unable to continue our relationship with either of these customers, or if the amount of services we provide to them was materially reduced.approximately $18.7 million by Social & Scientific Systems, Inc. ("S3"), as well as increased volume in legacy contracts.

~~Our revenues~~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, 2020, contract costs increased by approximately $16.7 million, principally due to the addition of S3 and increased direct labor on legacy contracts.

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 $1.8 million primarily from the ~~VA are derived from 16 separate contracts covering our performance~~inclusion of ~~pharmacy~~S3 and ~~logistics services in support~~increased business development cost.

For the three months ended March 31, 2020, depreciation and amortization costs were approximately $0.6 million and $1.2 million, respectively, as compared as compared to approximately $0.1 million and $0.4 million for the prior fiscal year period. The increase of $1.2 million was principally due to the amortization of the ~~VA’s consolidated mail outpatient pharmacy program. Approximately 58%~~acquired definite-lived intangible assets of S3.

Interest Expense, net

Interest expense, net, includes items such as, interest expense and amortization of deferred financing costs on debt obligations.

For the ~~Company’s current business base with the VA is derived from nine contracts (for pharmacy services) that are currently operating under extensions through October~~three months ended March 31, 2020 and 2019, ~~pending completion of the procurement process for a new contract. A single renewal RFP has currently been issued for these nine contracts~~interest expense was approximately $0.9 million and ~~we expect further extensions until the procurement process is completed.~~$0.5 million, respectively. The RFP, however, requires the prime contractor be a SDVOSB, which precludes us from bidding on the RFP as a prime contractor. We have joined an SDVOSB team as a subcontractor to respond to this RFP. Should the contract be awarded to an SDVOSB partner of DLH, we expect to continue to perform a significant amount of the contract’s volume of business. The remaining seven contracts for logistics servicesincrease in interest expense was due to the ~~VA are performed under contracts that~~borrowing required to finance the Company anticipates will be extended through November 2019. Additionally, we believe these contracts will be similarly extended during the procurement process, and may be subject to the same requirementacquisition of ~~awarding to a SDVOSB prime contractor.~~S3.

Income Tax Expense

For the three months ended March 31, 2020 and 2019, DLH recorded a $0.9 million and $0.5 million provision for tax expense, respectively. The award of any contract is subject to an evaluation of proposals submitted and adjudication of any and all protests filed. The Company believes that protests may be filed for any award announcement. Based on historical experience, the Company believes that final resolution of such protests could require an extended period of time, during which the Company would expect to continue to perform as prime contractor. Should the VA fail to receive proposals from two qualified SDVOSB companies which is required in ordereffective tax rate for the ~~work to be eligible for set aside status, the Company expects that the VA would reissue the RFP on a full~~three months ended March 31, 2020 and open basis in which DLH can respond as a prime contractor. The Company believes that its past performance in this business and track record of successfully vying for renewals provide a competitive advantage. While the effect of set-aside provisions may limit our ability to compete for prime contractor positions on programs that we recompete or that we have targeted for growth, DLH may elect to join an SDVOSB team as a subcontractor in support of such small businesses for specific pursuits that align with our core markets and corporate growth strategy.2019 was 29%.

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Results of Operations for the ~~three~~six months ended March 31, ~~2019~~2020 and ~~2018~~2019

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

Three Months Ended
March 31, 2019 March 31, 2018 Change
Revenue $ 33,756
100.0 % $ 34,401
100.0 % $ (645 )
Direct expenses 25,682
76.1 % 26,953
78.3 % (1,271 )
Gross margin 8,074
23.9 % 7,448
21.7 % 626
General and administrative expenses 5,188
15.4 % 4,684
13.6 % 504
Depreciation and amortization 560
1.7 % 560
1.6 % —
Income from operations 2,326
6.9 % 2,204
6.4 % 122
Interest expense, net 544
1.6 % 261
0.8 % 283
Income before income taxes 1,782
5.3 % 1,943
5.6 % (161 )
Income tax expense 517
1.5 % 627
1.8 % (110 )
Net income (loss) $ 1,265
3.7 % $ 1,316
3.8 % (51 )
Net income (loss) per share - basic $ 0.11
$ 0.11
$ —
Net income (loss) per share - diluted $ 0.10
$ 0.10
$ —

~~Revenue~~

Revenue for the three months ended March 31, 2019 was $33.8 million, a decrease of $0.6 million or 1.9% over the prior year period. The decrease in revenue is due primarily to the timing of workload volumes on our HHS contracts in the current period versus the prior year period.

~~Direct Expenses~~

Direct expenses are generally comprised of direct labor (including benefits), taxes and insurance, workers compensation expense, subcontract cost, and other direct costs. Direct expenses for the three months ended March 31, 2019 were $25.7 million, ~~a decrease~~ of $1.3 million, or 4.7% over the prior year principally due to decreased professional service and travel costs attributed to decreased revenue. As a percentage of revenue, direct expenses were 76.1%, compared with 78.3% in the prior year period.

~~Gross Margin~~

Gross margin for the three months ended March 31, 2019 was approximately $8.1 million, an increase of $0.6 million, or 8.4%, over the prior year period, largely driven by improving quality of revenue through increased revenue contribution from internal resources.

~~General and Administrative Expenses~~

General and administrative (“G&A”) expenses primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contracts administration, human resources, management information systems, and business development. G&A expenses for the three months ended March 31, 2019 were approximately $5.2 million, an increase of $0.5 million or 10.8% over the prior year period principally due to increased corporate development costs.

~~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 March 31, 2019 and March 31, 2018, depreciation and amortization were approximately $0.6 million and $0.6 million, respectively.

~~Income from Operations~~

~~Income from operations for the three months ended March 31, 2019 was approximately $2.3 million,~~ ~~an increase~~ ~~of approximately $0.1 million over the prior year period, due primarily to the~~ ~~improved~~ ~~gross margin.~~

~~Interest Expense~~

Interest expense includes interest expense on the Company's term loan and amortization of deferred financing costs on debt obligations. For the three months ended March 31, 2019 and 2018, interest expense was approximately $0.5 million and $0.3 million, respectively. The increase from the prior period was principally due to the write-off of unamortized deferred financing costs from the term loan being repaid in current quarter of $0.4 million.

~~Income before Income Taxes~~

For the three months ended March 31, 2019, income before taxes was approximately $1.8 million, a decrease of approximately $0.2 million over the prior year period, principally due to increased G&A expenses.

~~Income Tax Expense~~

For the three months ended March 31, 2019 and 2018, DLH recorded a $0.5 million and $0.6 million provision for tax expense, respectively. The effective tax rate for the three months ended March 31, 2019 was 29%.

~~Net Income~~

Net income for the three months ended March 31, 2019 was approximately $1.3 million, or $0.11 per basic and $0.10 per diluted share, a decrease of approximately $0.1 million primarily due to increased G&A expenses and the write-off of deferred financing costs as interest expense.

~~Results of Operations for the six months ended March 31, 2019 and 2018~~

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


	Six Months Ended									Change in			Six Months Ended								Change
Consolidated Statement of Income:	March 31, 2019				March 31, 2018					$			March 31, 2020				March 31, 2019				$
Revenue	$	67,508	100.0	%	$	64,616		100.0	%	$	2,892		$	107,036	100.0	%	$	67,508	100.0	%	$	39,528
Direct expenses	51,647		76.5	%	50,636			78.4	%	1,011
Gross margin	15,861		23.5	%	13,980			21.6	%	1,881
Cost of Operations:
Contract Costs													84,281		78.7	%	52,706		78.1	%	31,575
General and administrative expenses	9,855		14.6	%	9,564			14.8	%	291			12,174		11.4	%	8,653		12.8	%	3,521
Transaction expenses													—		—	%	143		0.2	%	(143		)
Depreciation and amortization	1,123		1.7	%	1,066			1.6	%	57			3,619		3.4	%	1,123		1.7	%	2,496
Total operating costs													100,074		93.5	%	62,625		92.8	%	37,449
Income from operations	4,883		7.2	%	3,350			5.2	%	1,533			6,962		6.5	%	4,883		7.2	%	2,079
Interest	721		1.1	%	539			0.8	%	182			1,846		1.7	%	721		1.1	%	1,125
Income before income taxes	4,162		6.2	%	2,811			4.4	%	1,351			5,116		4.8	%	4,162		6.2	%	954
Income tax expense, net	1,207		1.8	%	4,346			6.7	%	(3,139		)	1,488		1.4	%	1,207		1.8	%	281
Net income (loss)	$	2,955	4.4	%	$	(1,535	)	(2.4	)%	$	4,490
Net income													$	3,628	3.4	%	$	2,955	4.4	%	$	673

Net income (loss) per share - basic	$	0.25			$	(0.13	)			$	0.38
Net income (loss) per share - diluted	$	0.23			$	(0.13	)			$	0.36
Net income per share - basic													$	0.30			$	0.25			$	0.05
Net income per share - diluted													$	0.28			$	0.23			$	0.05

Revenue

Revenue for the six months ended March 31, ~~2019~~2020 was ~~$67.5~~$107.0 million, an increase of ~~$2.9~~$39.5 million or ~~4.5%~~58.6% over the prior year period. The increase in revenue is due primarily to ~~expansion~~the contribution of ~~the workload volumes on our VA and HHS~~approximately $35.9 million of revenue by S3, as well as increased volume in legacy contracts.

~~Direct Expenses~~Cost of Operations

~~Direct expenses~~Contract costs primarily include the costs associated with providing services to our customers. These costs are generally comprised of direct labor ~~(including benefits), taxes~~ and ~~insurance, workers compensation expense,~~associated fringe benefit costs, subcontract cost, ~~and~~ other direct ~~costs. Direct expenses for the six months ended March 31, 2019 were $51.6 million, an increase of $1.0 million, or 2.0% over the prior year principally due to increased direct labor~~ costs, ~~attributed to~~ ~~increased~~ ~~revenue for the year to date period. As a percentage of revenue, direct expenses were 76.5%, a favorable reduction of 1.9%.~~

~~Gross Margin~~

Gross margin for the six months ended March 31, 2019 was approximately $15.9 million, an increase of $1.9 million, or 13.5%, over the prior year period, largely driven by improving quality of revenue through increased revenue contribution from internal resources.

~~General and Administrative Expenses~~

General and administrative (“G&A”) expenses primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contracts administration, human resources, management information systems, and business development. G&A expenses for the six months ended March 31, 2019 were approximately $9.9 million, an increase of $0.3 million or 3.0% over the prior year period, primarily driven by growth in our corporate development costs.

~~Depreciation and Amortization~~

~~This category comprises non-cash expenditures related to depreciation on fixed assets~~ and the ~~amortization of acquired definite-lived intangible assets. As a professional services organization, DLH does not require significant expenditures on capital equipment~~related management and ~~other fixed assets.~~infrastructure costs. For the six months ended March 31, ~~2019~~2020, contract costs increased by approximately $31.6 million principally due to the addition of S3.

General and ~~2018,~~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 same period in the prior fiscal year by $3.5 million primarily from the inclusion of S3.

For the six months ended March 31, 2020, depreciation and amortization costs were approximately ~~$1.1~~$1.2 million and ~~$1.1~~$2.4 million, respectively, as compared to approximately $0.2 million and $0.9 million for the prior fiscal year period. The increase of $2.5 million was principally due to the amortization of the acquired definite-lived intangible ~~assets.~~

~~Income from Operations~~

~~Income from operations for the six months ended March 31, 2019 was approximately $4.9 million, an increase~~assets of ~~approximately $1.5 million over the prior year period. The improvement is principally due to increased gross margin, offset in part by increased G&A expenses.~~S3.

Interest Expense, net

Interest expense, net, includes interest expense on the Company's term loan and amortization of deferred financing costs on debt obligations, for the six months ended March 31, 2019 and 2018, interest expense, net was approximately $0.7 million and $0.5 million, respectively. The increase from the prior period was principally due to the write-off of unamortized deferred financing costs of $0.4 million from the term loan being repaid in the current quarter.

~~Income before Income Taxes~~

obligations. For the six months ended March 31, 2020 and 2019, ~~income before taxes were~~interest expense, net was approximately ~~$4.2~~$1.8 million ~~an improvement of approximately $1.4~~and $0.7 million, ~~over the prior year period, principally~~respectively. The increase in interest expense was due to ~~increased gross margins derived from higher revenue for~~ the ~~current year period.~~borrowing required to finance the acquisition of S3.

Income Tax Expense

For the six months ended March 31, 2020 and 2019, DLH recorded a $1.5 million and $1.2 million provision for tax expense, ~~a decrease of approximately $3.1 million from the prior year period.~~respectively. The ~~prior year~~effective tax ~~provision was primarily driven by the $3.4 million write-down of deferred tax assets due to the revaluation of our net operating loss carryforwards from the previously recognized federal~~ rate ~~of 34% to the 21% rate in the 2017 Tax Cut and Jobs Act enacted in December 2017. Net of this write-down, tax expense was $1.2 million and $1.0 million~~ for the six months ended March 31, 2020 and 2019 ~~and 2018, respectively. Net of the write-down, the effective tax rates were 29.0% and 34.9% for the six months ended March 31, 2019 and 2018.~~

was 29%.

2426

~~Net Income~~

~~Net income for the six months ended March 31, 2019 was approximately $3.0 million, or $0.25 and $0.23 per basic and diluted share, respectively,~~ ~~an increase~~ of approximately $4.5 million or $0.38 and $0.36 per basic and diluted share over the prior year period. The write-down of our deferred tax assets in first quarter fiscal 2018, due to the Tax Cut and Jobs Act of 2017, was a one-time event. The event's non-recurring nature was the primary cause of net income improvement in fiscal 2019.

Non-GAAP Financial Measures

On a non-GAAP basis, Earnings Before Interest Tax Depreciation and Amortization ("EBITDA") for the three months ended March 31, 2019 was approximately $2.9 million, an increase of approximately $0.1 million, or 4.4% over the prior year three months ended. The increase is attributable principally to improved gross margin.

The Company uses EBITDA as a supplemental non-GAAP measure of our performance. DLH defines EBITDA as net income excluding (i) interest expense, (ii) provision for or benefit from income taxes, if any, and (iii) depreciation and amortization.

On ~~December 22, 2017,~~a non-GAAP basis, Earnings Before Interest, Tax, Depreciation, and Amortization ("EBITDA") for the ~~Tax Cut~~three and ~~Jobs Act~~six months ended March 31, 2020 was ~~enacted, which, among other things, reduced corporate tax rates~~approximately $5.6 million and ~~revised rules regarding~~$10.6 million, respectively. The increase of approximately $2.7 million and $4.6 million from the ~~usability of net operating losses. We are also reporting our net income excluding~~same periods in the ~~impact of the Tax Cut and Jobs Act of 2017 on the valuation of our deferred tax assets. These changes have resulted in a discrete charge~~prior fiscal year was principally due to the ~~first quarter tax provision for fiscal 2018~~contribution of ~~$3.4 million associated with revaluing~~S3, improved operating leverage achieved through the benefit of our net operating losses. Net of the write-down of our deferred tax assets, the increase to net income would have been $1.0 million or $0.08 and $0.08 per basic and diluted shares, respectively. Additionally, for comparability, the tax provision for the prior year periods has been restated using the current year rate of 29%. We are reporting this non-GAAP metric to demonstrate the impact of the tax law change.

These non-GAAP measures of our performance are used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and the Company's Board utilize these non-GAAP measures to make decisions about the useexpansion of the Company's ~~resources, analyze performance between periods, develop internal projections~~business base, and ~~measure management's performance. DLH believes that these non-GAAP measures are useful to investors~~volume growth 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 non-GAAP measure as a supplement to GAAP information, DLH believes this enhances investors understanding of its business and results of operations.legacy contracts.

Reconciliation of GAAP net income ~~(loss)~~ to EBITDA, a non-GAAP measure:


	Three Months Ended							Six Months Ended								Three Months Ended				Six Months Ended
	March 31,							March 31,								March 31,				March 31,
	2019		2018		Change			2019		2018			Change			2020		2019		2020		2019
Net income (loss)	$	1,265	$	1,316	$	(51	)	$	2,955	$	(1,535	)	$	4,490
(i) Interest expense	544		261		283			721		539			182
Net income																$	2,076	$	1,265	$	3,628	$	2,955
(i) Interest expense, net																906		544		1,846		721
(ii) Provision for taxes	517		627		(110		)	1,207		4,346			(3,139		)	855		517		1,488		1,207
(iii) Depreciation and amortization	560		560		—			1,123		1,066			57			1,760		560		3,619		1,123
EBITDA	$	2,886	$	2,764	$	122		$	6,006	$	4,416		$	1,590		$	5,597	$	2,886	$	10,581	$	6,006

~~Reconciliation of GAAP net income (loss) to net income adjusted for the effect of the 2017 Tax Act, a non-GAAP measure:~~

Six Months Ended
March 31,
2019 2018 Change
Net income (loss) $ 2,955
$ (1,535 ) $ 4,490
Write-down of deferred tax assets —
3,365
(3,365 )
Pro-forma impact of tax rate change —
166
(166 )
Net income, adjusted for the effect of the 2017 Tax Act $ 2,955
$ 1,996
$ 959

Net income (loss) per diluted share $ 0.23
$ (0.13 ) $ 0.36
Impact of write-down of deferred tax asset $ —
$ 0.28
$ (0.28 )
Pro-forma impact of tax rate change $ —
$ 0.01
$ (0.01 )
Net income per diluted share, adjusted for the effect of the 2017 Tax Act $ 0.23
$ 0.16
$ 0.07

~~Sources of cash~~Liquidity and ~~cash equivalents~~capital management

As of March 31, ~~2019,~~2020, 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~~$25 million, subject to certain conditions including eligible accounts receivable. As of March 31, 2020 we have $21.3 million of available borrowing capacity on the revolving line of credit. The outstanding balance on our revolving credit facility at March 31, 2020, was $2.0 million. As of March 31, 2020 we have $21.3 million of available borrowing capacity on the revolving line of credit.

The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. Our current investment and financing obligations are adequately covered by cash generated from profitable operations and planned operating cash flow should be sufficient to support the Company's operations for twelve months from issuance of these consolidated financial statements.

~~Loan~~A summary of the change in cash and cash equivalents is presented below:



	Six Months Ended
	March 31,
	2020			2019
Net cash provided by operating activities	$	662		$	6,779
Net cash used in investing activities	(141		)	(4		)
Net cash used in financing activities	(1,187		)	(7,669		)
Net change in cash and cash equivalents	$	(666	)	$	(894	)

For the six months ended March 31, 2020, the Company generated $1 million in cash flows from operations. The year over year decrease in operating cash flow was driven by an increase in receivables, which was primarily due to the financial system integration completed during the quarter. We anticipate increased operating cash flow for the fiscal third quarter.

Cash used in financing activities was $1.2 million during the six months ended March 31, 2020. We made net repayments under our credit facility of $1.0 million during the six months ended March 31, 2020. In the same period during the prior fiscal year, we repaid the remaining outstanding balance of the term loan under a prior credit facility.

Credit Facility

A summary of our secured loan ~~facilities and subordinated debt financing~~facility for the period ended March 31, ~~2019~~2020 is as follows:




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




Arrangement	Loan Balance			Interest*	Maturity Date
Secured term loan $70 million (a)	$	53.0	million	LIBOR* + 3.5%	June 7, 2024
Secured revolving line of credit $25 million ceiling (b)	$	2.0	million	LIBOR* + 3.5%	June 7, 2024

*LIBOR ~~Interest~~ rate as of March 31, ~~2019~~2020 was ~~2.49%~~0.99%. The credit facility has an interest rate spread range from 2.5% to 4.5% depending on the funded indebtedness to adjusted EBITDA ratio.

(a) aRepresents the principal amounts payable on our secured term loan. The $70.0 million secured term loan 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 ~~an original aggregate principal~~the remaining balance due on June 7, 2024.

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 is $36 million that matures in 2024. The remaining outstanding balance of our term loan is subject to interest rate fluctuations.

(b) The secured revolving line of credit has a ceiling of up to $25.0 million ~~(the “Term Loan”).~~and a maturity date of June 7, 2024. The Company has ~~fully repaid~~accessed funds from the ~~term loan as of March 31, 2019. See~~ ~~Note 6~~ ~~to the consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.~~

~~(b) a secured~~ revolving credit facility ~~in an aggregate principal amount of up to $10.0 million, subject to certain conditions including eligible accounts receivable (the “Revolving Credit Facility”).~~

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 withduring 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 June 30, 2018 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 totalMarch 31, 2020.

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.

The Term Loan and Revolving Credit Facility are secured by liens on substantially all of the assets of the Company. The provisions of the Term Loan and Revolving Credit Facility are fully described in Note 67 of the consolidated financial statements.

Contractual Obligations as of March 31, ~~2019~~2020


			Payments Due By Period											Payments Due by Period
Contractual obligations			Next 12		2-3		4-5		More than 5					Next 12		2-3		4-5		More than 5
(Amounts in thousands)	Total		Months		Years		Years		Years		Ref	Total		Months		Years		Years		Years
Debt Obligations											(a)	$	55,000	$	2,000	$	5,750	$	47,250	$	—
Facility Leases	$	2,315	$	912	$	694	$	680	$	29		31,640		2,662		6,362		6,365		16,251
Equipment operating leases	27		16		11		—		—			109		37		45		27		—
Total Obligations	$	2,342	$	928	$	705	$	680	$	29		$	86,749	$	4,699	$	12,157	$	53,642	$	16,251

Ref (a): The $2 million amount due in the next twelve months was paid in the subsequent month.

Off-Balance Sheet Arrangements

The Company did not have any material 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.

Significant Accounting Policies and Use of Estimates

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on historical experience and assumptions that are believed to be reasonable at the time. Actual results could differ from such estimates. Critical policies and practices are important to the portrayal of a company’s financial condition and results of operations, and may require management’s subjective judgments about the effects of matters that are uncertain. See the information underNote 78 "Significant Accounting Policies"in this Quarterly Report on Form 10Q or Note 6 of the consolidated financial statements in DLH’s Annual Report on Form 10-K for the year ended September 30, ~~2018,~~2019, as well as the discussion under the caption “Critical Accounting Policies and Estimates” therein for a discussion of our critical accounting policies and estimates. DLH senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies, or the estimates associated with those policies in the three months ended March 31, ~~2019.~~2020.

New Accounting Pronouncements

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

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~DLH does~~Except as described in this Item 2, the Company has not ~~undertake~~engaged 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. ~~DLH~~The 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 have~~On September 30, 2019, we executed a ~~material~~floating-to-fixed interest rate ~~risk~~swap with ~~respect to~~FNB as counter party. The notional amount in the floating-to-fixed interest rate swap is $36 million; 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 exposure~~term loan is subject to interest rate ~~fluctuations on its debt instruments is material, as~~fluctuations. We have determined that a 1.0% increase to the ~~Company presently does not carry an outstanding balance~~LIBOR rate would impact our interest expense by less than $0.2 million per year. As of March 31, 2020, the interest rate on the ~~bank term loan or line of credit.~~floating interest rate debt was 4.5%.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Our management, including our CEO and President and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Our management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the control system are met.

Changes in Internal Controls

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during the fiscal quarter ended March 31, ~~2019,~~2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II — OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

ITEM 1A: RISK FACTORS

Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended September 30, ~~2018~~2019 and in our other reports filed with the SEC ~~for a discussion of~~concerning the risks associated with our business, financial condition and results of operations. These factors, among others, could ~~have a material adverse effect upon~~materially 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 ~~its~~our reports are not the only risks facing us.For example, these risks now include the impacts from the novel coronavirus (“COVID-19”) outbreak on our business, financial condition and results of operations. 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. ~~Other than the risks described elsewhere in this Quarterly Report, we believe there have been no material changes~~See Item 1A, Risk Factors, in our 2019 Annual Report.

The following risk factor is provided to update the risk factors ~~from those~~previously disclosed under the heading “Risk Factors” in ~~our~~the Company’s Annual Report on Form 10-K for the ~~fiscal~~ year ended September 30, ~~2018.~~2019 and should be read in conjunction with the risk factors appearing in our 2019 Annual Report.

Our results of operations could in the future be materially adversely impacted by global, macroeconomic events, such as coronavirus pandemic (COVID-19), and the response to contain it.

The global spread of the coronavirus (COVID-19) has created significant volatility, uncertainty and economic disruption. The extent to which the coronavirus pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on our clients and client demand for our services and solutions; our ability to sell and provide our services and solutions, including as a result of travel restrictions and people working from home (as described on page 24, above, this has resulted in minor delays in our provision of services) and any closures of our and our clients’ offices and facilities, particularly at our pharmacy distribution centers. Furthermore, the significant increase in remote working of our employees may exacerbate certain risks to our business, including an increased demand for information technology resources and the increased risk of malicious technology-related events, such as cyberattacks and phishing attacks. Customers may also slow down decision making, delay planned work or seek to terminate existing agreements. Any of these events could materially adversely affect our business, financial condition, results of operations and the market price of our common stock.

The full extent to which the COVID-19 pandemic and the various responses to it impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the effect on our customers and customer demand for our services; and disruptions or restrictions on our employees’ ability to work and travel. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our business operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders. The potential effects of COVID-19 could also heighten the risks disclosed in many of our risk factors that are included in Part I, Item 1A, Risk Factors, in our 2019 Annual Report. Because the COVID-19 situation is unprecedented and continuously evolving, other potential impacts to our risk factors that are further described in our 2019 Annual Report are uncertain.

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

The following is a summary of our stock repurchase activity during the three months ended March 31, 2020:




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
January 2020	521	$	4.32	521	$	791,968
February 2020	600	4.34		600	789,364
March 2020	—	—		—	—
First Quarter Total	1,121	$	4.33	1,121

On September ~~18, 2013, the Company~~12, 2019, we announced that our Board of Directors ~~authorized~~approved a new stock repurchase program ~~(the Program) under which we could~~authorizing us to repurchase up to ~~$350 thousand~~$1.0 million of shares of ~~our~~the Company’s common stock through ~~open market transactions~~open-market purchases in compliance with ~~Securities and Exchange Commission~~SEC Rule 10b-18, ~~privately negotiated~~privately-negotiated transactions, block purchases or ~~other means. This repurchase program does not have an expiration date.~~

~~The following table provides certain information~~otherwise in accordance with ~~respect to~~applicable federal securities laws. On February 11, 2020, the ~~status of our publicly announced~~Company terminated the $1.0 million stock repurchase program ~~during second quarter ended March 31, 2019:~~

($ 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
January 2019 —
$ —
—
$ 77
February 2019 —
—
—
77
March 2019 —
—
—
77
Second Quarter Total —
$ —
—
$ 77

and no further shares will be repurchased under such program. At such time, there was $789,364 remaining for repurchases under the program.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

None.

2931

ITEM 6: EXHIBITS

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



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

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

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

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

101	The following financial information from the DLH Holdings Corp. Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, ~~2019,~~2020, formatted in XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; and, (iv) the Notes to the Consolidated Financial Statements.				X

3032

Signatures

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



	DLH HOLDINGS CORP.

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

	~~By:~~	~~/s/~~ Kathryn M. JohnBull
		Kathryn M. JohnBull
		Chief Financial Officer
		(On behalf of the registrant and as Principal Financial and Accounting Officer)

Date: May ~~7, 2019~~6, 2020

3133



					($ 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
January 2019	—	$	—	—	$	77
February 2019	—	—		—	77
March 2019	—	—		—	77
Second Quarter Total	—	$	—	—	$	77