0000785557-21-000004.txt : 20210202 0000785557-21-000004.hdr.sgml : 20210202 20210202161654 ACCESSION NUMBER: 0000785557-21-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 72 CONFORMED PERIOD OF REPORT: 20201231 FILED AS OF DATE: 20210202 DATE AS OF CHANGE: 20210202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DLH Holdings Corp. CENTRAL INDEX KEY: 0000785557 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 221899798 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18492 FILM NUMBER: 21581666 BUSINESS ADDRESS: STREET 1: 3565 PIEDMONT ROAD, NE STREET 2: BUILDING 3, SUITE 700 CITY: ATLANTA STATE: GA ZIP: 30305 BUSINESS PHONE: 8669521647 MAIL ADDRESS: STREET 1: 3565 PIEDMONT ROAD, NE STREET 2: BUILDING 3, SUITE 700 CITY: ATLANTA STATE: GA ZIP: 30305 FORMER COMPANY: FORMER CONFORMED NAME: TEAMSTAFF INC DATE OF NAME CHANGE: 19990216 FORMER COMPANY: FORMER CONFORMED NAME: DIGITAL SOLUTIONS INC DATE OF NAME CHANGE: 19920703 10-Q 1 dlhc-20201231.htm 10-Q dlhc-20201231
DLH Holdings Corp.000078555710-QDecember 31, 2020false2021Q1September 30YesNon-accelerated FilertruefalsefalseYestruefalse12,543,906us-gaap:AccountingStandardsUpdate201602Memberus-gaap:AccountingStandardsUpdate201602Member00007855572020-10-012020-12-31xbrli:shares00007855572021-01-31iso4217:USD00007855572019-10-012019-12-31iso4217:USDxbrli:shares00007855572020-12-3100007855572020-09-3000007855572019-09-3000007855572019-12-310000785557us-gaap:CommonStockMember2020-09-300000785557us-gaap:TreasuryStockMember2020-09-300000785557us-gaap:AdditionalPaidInCapitalMember2020-09-300000785557us-gaap:RetainedEarningsMember2020-09-300000785557us-gaap:CommonStockMember2020-10-012020-12-310000785557us-gaap:AdditionalPaidInCapitalMember2020-10-012020-12-310000785557us-gaap:RetainedEarningsMember2020-10-012020-12-310000785557us-gaap:CommonStockMember2020-12-310000785557us-gaap:TreasuryStockMember2020-12-310000785557us-gaap:AdditionalPaidInCapitalMember2020-12-310000785557us-gaap:RetainedEarningsMember2020-12-310000785557us-gaap:CommonStockMember2019-09-300000785557us-gaap:TreasuryStockMember2019-09-300000785557us-gaap:AdditionalPaidInCapitalMember2019-09-300000785557us-gaap:RetainedEarningsMember2019-09-3000007855572019-10-012019-10-010000785557srt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:RetainedEarningsMember2019-09-300000785557srt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-09-300000785557us-gaap:CommonStockMember2019-10-012019-12-310000785557us-gaap:AdditionalPaidInCapitalMember2019-10-012019-12-310000785557us-gaap:TreasuryStockMember2019-10-012019-12-310000785557us-gaap:RetainedEarningsMember2019-10-012019-12-310000785557us-gaap:CommonStockMember2019-12-310000785557us-gaap:TreasuryStockMember2019-12-310000785557us-gaap:AdditionalPaidInCapitalMember2019-12-310000785557us-gaap:RetainedEarningsMember2019-12-31dlhc:business_areadlhc:marketdlhc:employee0000785557country:US2020-12-31dlhc:location0000785557us-gaap:NonUsMember2020-12-31xbrli:pure0000785557us-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerMemberdlhc:USGovernmentMember2020-10-012020-12-310000785557dlhc:DepartmentOfVeteransAffairsMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerMember2020-10-012020-12-310000785557dlhc:DepartmentOfVeteransAffairsMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:RevenueFromContractWithCustomerMember2019-10-012019-12-310000785557us-gaap:CustomerConcentrationRiskMemberdlhc:DepartmentofHealthandHumanServicesMemberus-gaap:RevenueFromContractWithCustomerMember2020-10-012020-12-310000785557us-gaap:CustomerConcentrationRiskMemberdlhc:DepartmentofHealthandHumanServicesMemberus-gaap:RevenueFromContractWithCustomerMember2019-10-012019-12-31dlhc:lease_concesion0000785557srt:MinimumMember2020-10-012020-12-310000785557srt:MaximumMember2020-10-012020-12-310000785557us-gaap:EmployeeStockOptionMember2020-10-012020-12-3100007855572019-10-012020-09-300000785557us-gaap:EmployeeStockOptionMember2020-12-310000785557dlhc:DepartmentOfVeteransAffairsMember2020-10-012020-12-310000785557dlhc:DepartmentOfVeteransAffairsMember2019-10-012019-12-310000785557dlhc:DepartmentofHealthandHumanServicesMember2020-10-012020-12-310000785557dlhc:DepartmentofHealthandHumanServicesMember2019-10-012019-12-310000785557dlhc:DepartmentOfDefenseMember2020-10-012020-12-310000785557dlhc:DepartmentOfDefenseMember2019-10-012019-12-310000785557dlhc:OtherCustomersMember2020-10-012020-12-310000785557dlhc:OtherCustomersMember2019-10-012019-12-310000785557us-gaap:TimeAndMaterialsContractMember2020-10-012020-12-310000785557us-gaap:TimeAndMaterialsContractMember2019-10-012019-12-310000785557dlhc:CostPlusFixedFeeContractMember2020-10-012020-12-310000785557dlhc:CostPlusFixedFeeContractMember2019-10-012019-12-310000785557us-gaap:FixedPriceContractMember2020-10-012020-12-310000785557us-gaap:FixedPriceContractMember2019-10-012019-12-310000785557us-gaap:SalesChannelDirectlyToConsumerMember2020-10-012020-12-310000785557us-gaap:SalesChannelDirectlyToConsumerMember2019-10-012019-12-310000785557us-gaap:SalesChannelThroughIntermediaryMember2020-10-012020-12-310000785557us-gaap:SalesChannelThroughIntermediaryMember2019-10-012019-12-310000785557dlhc:FacilitiesandEquipmentMembersrt:MinimumMember2020-12-310000785557dlhc:FacilitiesandEquipmentMembersrt:MaximumMember2020-12-31dlhc:subleasedlhc:sublease_option0000785557us-gaap:CustomerRelationshipsMember2020-12-310000785557us-gaap:CustomerRelationshipsMember2020-09-300000785557us-gaap:NoncompeteAgreementsMember2020-12-310000785557us-gaap:NoncompeteAgreementsMember2020-09-300000785557us-gaap:TradeNamesMember2020-12-310000785557us-gaap:TradeNamesMember2020-09-300000785557dlhc:IrvingBurtonAssociatesLLCMember2020-09-300000785557dlhc:IrvingBurtonAssociatesLLCMember2020-12-310000785557dlhc:IrvingBurtonAssociatesLLCMemberus-gaap:CustomerRelationshipsMember2020-12-310000785557dlhc:IrvingBurtonAssociatesLLCMemberus-gaap:NoncompeteAgreementsMember2020-12-310000785557dlhc:IrvingBurtonAssociatesLLCMemberus-gaap:TradeNamesMember2020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:RevolvingCreditFacilityMember2020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:RevolvingCreditFacilityMember2020-09-300000785557us-gaap:SecuredDebtMemberus-gaap:MediumTermNotesMember2020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:MediumTermNotesMember2020-09-300000785557us-gaap:SecuredDebtMember2020-12-310000785557us-gaap:SecuredDebtMember2020-09-300000785557us-gaap:SecuredDebtMemberus-gaap:LondonInterbankOfferedRateLIBORMemberus-gaap:MediumTermNotesMember2020-10-012020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:LondonInterbankOfferedRateLIBORMemberus-gaap:RevolvingCreditFacilityMember2020-10-012020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:LondonInterbankOfferedRateLIBORMemberus-gaap:RevolvingCreditFacilityMember2020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:LondonInterbankOfferedRateLIBORMemberus-gaap:MediumTermNotesMember2020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:MediumTermNotesMember2020-10-012020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:MediumTermNotesMembersrt:MaximumMember2020-10-012020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:MediumTermNotesMembersrt:MinimumMember2020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:MediumTermNotesMembersrt:MaximumMember2020-12-310000785557us-gaap:SecuredDebtMemberdlhc:ExcessCashFlowsGreaterThanOrEqualto2.50Memberus-gaap:MediumTermNotesMember2020-10-012020-12-310000785557us-gaap:SecuredDebtMemberdlhc:ExcessCashFlowsLessThan250Memberus-gaap:MediumTermNotesMember2020-10-012020-12-310000785557us-gaap:SecuredDebtMemberdlhc:ExcessCashFlowsLessThan250Memberus-gaap:MediumTermNotesMembersrt:MaximumMember2020-10-012020-12-310000785557us-gaap:SecuredDebtMemberdlhc:ExcessCashFlowsEqualto1.50Memberus-gaap:MediumTermNotesMember2020-10-012020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:MediumTermNotesMemberdlhc:ExcessCashFlowsLessThan1.50Member2020-10-012020-12-310000785557us-gaap:InterestRateSwapMember2020-12-310000785557us-gaap:InterestRateSwapMember2020-09-300000785557us-gaap:InterestRateSwapMember2020-10-012020-12-310000785557us-gaap:SecuredDebtMemberus-gaap:StandbyLettersOfCreditMember2020-12-310000785557dlhc:DLHEmployeesMemberus-gaap:SellingGeneralAndAdministrativeExpensesMember2020-10-012020-12-310000785557dlhc:DLHEmployeesMemberus-gaap:SellingGeneralAndAdministrativeExpensesMember2019-10-012019-12-310000785557dlhc:NonemployeeDirectorsMemberus-gaap:SellingGeneralAndAdministrativeExpensesMember2020-10-012020-12-310000785557dlhc:NonemployeeDirectorsMemberus-gaap:SellingGeneralAndAdministrativeExpensesMember2019-10-012019-12-310000785557us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-10-012020-12-310000785557us-gaap:SellingGeneralAndAdministrativeExpensesMember2019-10-012019-12-310000785557dlhc:DLHEmployeesMemberus-gaap:RestrictedStockUnitsRSUMember2020-10-012020-12-310000785557dlhc:NonemployeeDirectorsMemberus-gaap:RestrictedStockUnitsRSUMember2020-10-012020-12-310000785557dlhc:DLHEmployeesMember2020-12-310000785557dlhc:NonemployeeDirectorsMember2020-12-310000785557dlhc:DLHEmployeesMember2020-10-012020-12-3100007855572018-10-012019-09-300000785557dlhc:FacilityLeasesMember2020-12-310000785557dlhc:EquipmentLeasesMember2020-12-31

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 December 31, 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 classTrading Symbol(s)Name of each exchange on which registered
Common StockDLHCNasdaq 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: 12,543,906 shares of Common Stock, par value $0.001 per share, were outstanding as of January 31, 2021.









DLH HOLDINGS CORP.
FORM 10-Q
 
Table of Contents
 
Page No.
2



PART I — FINANCIAL INFORMATION

ITEM I: FINANCIAL STATEMENTS

DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three Months Ended
 December 31,
 20202019
Revenue$57,852 $52,238 
Cost of Operations:
Contract costs46,005 41,340 
General and administrative costs6,150 5,913 
Depreciation and amortization2,062 1,859 
Total operating costs54,217 49,112 
Income from operations3,635 3,126 
Interest expense, net1,080 941 
Income before income taxes2,555 2,185 
Income tax expense741 634 
Net income$1,814 $1,551 
Net income per share - basic$0.15 $0.13 
Net income per share - diluted$0.13 $0.12 
Weighted average common stock outstanding
Basic12,498 12,088 
Diluted13,445 13,014 
 
The accompanying notes are an integral part of these consolidated financial statements.
3



DLH HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value of shares) 
December 31,
2020
September 30,
2020
(unaudited)

ASSETS  
Current assets:  
Cash and cash equivalents$370 $1,357 
Accounts receivable44,885 32,541 
Other current assets3,468 3,499 
Total current assets48,723 37,397 
Equipment and improvements, net2,976 3,339 
Operating leases right-of-use assets21,737 22,427 
Deferred taxes, net 37 
Goodwill65,450 67,144 
Intangible assets, net52,408 52,612 
Other long-term assets572 606 
Total assets$191,866 $183,562 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current liabilities:  
Debt obligations - current, net of deferred financing costs$15,884 $6,727 
Operating lease liabilities - current2,053 2,045 
Accrued payroll10,073 10,611 
Accounts payable, accrued expenses, and other current liabilities27,392 28,578 
Total current liabilities55,402 47,961 
Long-term liabilities:
Deferred taxes, net589  
Debt obligations - long-term, net of deferred financing costs58,923 60,544 
Operating lease liabilities - long-term21,017 21,620 
Total long-term liabilities80,529 82,164 
Total liabilities135,931 130,125 
Shareholders' equity:
Common stock, $0.001 par value; authorized 40,000 shares; issued and outstanding 12,544 and 12,404 at December 31, 2020 and September 30, 2020, respectively
13 12 
Additional paid-in capital86,551 85,868 
Accumulated deficit(30,629)(32,443)
Total shareholders’ equity55,935 53,437 
Total liabilities and shareholders' equity$191,866 $183,562 
 
The accompanying notes are an integral part of these consolidated financial statements.
4



DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
(unaudited)
Three Months Ended
December 31,
 20202019
Operating activities  
Net income$1,814 $1,551 
Adjustments to reconcile net income to net cash used in operating activities:  
Depreciation and amortization expense2,062 1,859 
Amortization of deferred financing costs210 210 
Stock based compensation expense458 203 
Deferred taxes, net626 535 
Non-cash gain from lease modification (121)
Changes in operating assets and liabilities  
Accounts receivable (12,344)(4,769)
Other current assets284 (147)
Accrued payroll(538)(254)
Accounts payable, accrued expenses, and other current liabilities(1,185)(2,103)
Other long-term assets/liabilities95 152 
Net cash (used in) operating activities(8,518)(2,884)
Investing activities  
Purchase of equipment and improvements(53)(162)
Net cash (used in) investing activities(53)(162)
Financing activities  
Borrowing on revolving line of credit, net9,150 1,800 
Repayments of senior debt(1,750) 
Payment of debt financing costs(41)(3)
Repurchase of common stock (206)
Proceeds from issuance of common stock upon exercise of options225 27 
Net cash provided by financing activities7,584 1,618 
Net change in cash and cash equivalents(987)(1,428)
Cash and cash equivalents at beginning of period1,357 1,790 
Cash and cash equivalents at end of period$370 $362 
Supplemental disclosures of cash flow information  
Cash paid during the period for interest$852 $845 
Supplemental disclosures of non-cash activity
Non-cash cancellation of common stock$ $95 

The accompanying notes are an integral part of these consolidated financial statements.
5



DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands) 
(unaudited)
Common StockTreasury StockAdditional
Paid-In
Capital
Accumulated
Deficit
Total Shareholders' Equity
SharesAmountSharesAmount
Three Months Ended December 31, 2020
Balance at September 30, 202012,404 $12  $ $85,868 $(32,443)$53,437 
Expense related to director restricted stock unit78 — — — 116 — 116 
Expense related to employee stock based compensation— — — — 342 — 342 
Exercise of stock options62 1 — — 225 — 226 
Net income— — — — — 1,814 1,814 
Balance at December 31, 202012,544 $13   $86,551 $(30,629)$55,935 

Common StockTreasury StockAdditional
Paid-In
Capital
Accumulated
Deficit
Total Shareholders' Equity
SharesAmountSharesAmount
Three Months Ended December 31, 2019
Balance at September 30, 201912,036 $12 $ $ $85,114 $(39,555)$45,571 
Cumulative-effect adjustment for adoption of ASC 842
— — — — — (2)(2)
Expense related to director restricted stock unit90 — — — 87 — 87 
Expense related to employee stock options— — — — 116 — 116 
Exercise of stock options20 — — — 27 — 27 
Repurchases of common stock— — 27 (111)— — (111)
Cancellation of common stock(22)— — — (95)— (95)
Net income— — — — — 1,551 1,551 
Balance at December 31, 201912,124 $12 27 $(111)$85,249 $(38,006)$47,144 


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

6



DLH HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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.

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 December 31, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021. Amounts as of and for the periods ended December 31, 2020 and December 31, 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, 2020 filed with the Securities and Exchange Commission on December 7, 2020.


2. Business Overview

The Company is a full-service provider of technology-enabled health and human services, providing solutions to three market focus areas: Defense and Veterans' Health Solutions, Human Solutions and Services, and Public Health and Life Sciences. We deliver domain-specific expertise, industry best-practices and innovations to customers across these markets leveraging seven core competencies: secure data analytics, clinical trials and laboratory services, 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 2,200 skilled employees working in more than 30 locations throughout the United States and one location overseas.

At present, the Company derives 99% of its revenue from agencies of the Federal government, primarily as a prime contractor but also as a subcontractor to other Federal prime contractors.

Our two largest customers are the Department of Veteran Affairs ("VA") and the Department of Health and Human Services ("HHS"). The VA comprised approximately 48% and 46% of revenue for the three months ended December 31, 2020 and 2019, respectively, and HHS comprised approximately 35% and 46% of revenue for the three months ended December 31, 2020 and 2019, respectively.

3. New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updated ("ASU") 2016-13, Financial Instruments - Credit Losses, which requires companies to 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 assets. ASU 2016-13 became effective for the Company in the first quarter of fiscal year 2021. The adoption of this standard did not have a material impact on our operating results, financial position, or cash flows. For further detail of our outstanding receivables see Note 7.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for the application of U.S. GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") and other reference rates expected to be discontinued due to reference rate reform. ASU 2020-04 became effective on March 12, 2020 for all entities meeting certain criteria. The Company may elect to apply the amendments using a prospective approach through December 31, 2022. The Company is currently assessing the impact of electing this standard on its consolidated financial statements and related disclosures and does not expect the impact to be material.

7



In April 2020, the FASB issued a Staff Q&A, Topic 842 and 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic in order to provide clarity regarding the accounting treatment for lease concessions provided as a result of COVID-19. Under existing lease guidance, changes to certain lease terms not specified in the original lease agreement require modification accounting treatment. To provide relief, the FASB Staff Q&A permits alternatives to modification accounting under Topic 842. For concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or our obligations as the lessee, we are not required to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the lease agreement and can elect to apply or not apply the lease modification guidance in Topic 842. For the quarter ended December 31, 2020, we elected to account for lease concessions received for one of our operating leases as a resolution of a contingency, whereby we remeasured our lease liability and recorded the adjustment against the right-of-use asset, without reassessing lease classification or modifying the original discount rate. As a result of this election, our lease liability and right-of-use-asset decreased by less than $0.1 million.

In August 2020, the FASB issued ASU 2020-06, which amends the measurement and disclosure of convertible instruments, contracts in an entity's own equity, and EPS guidance. The guidance can be adopted using a modified retrospective method or a fully retrospective method. The amendments are effective for fiscal years beginning after December 15, 2021 for public entities, excluding those that are smaller reporting companies. For all other entities the amendments are effective for fiscal years beginning after December 15, 2023. The Company does not expect the update to have a material impact on its consolidated financial statements and related disclosures.


4. 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, 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.

Long-Lived Assets

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

Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. Intangible assets (other than goodwill) are originally recorded at fair value and are amortized on a straight-line basis over their estimated useful lives of 10 years. Maintenance and repair costs are expensed as incurred.
8




Leases

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

Goodwill

At September 30, 2020, we performed a goodwill impairment evaluation on the year-end carrying value of approximately $67 million. We performed a qualitative 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, 2020. For the three months ended December 31, 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.

Income Taxes

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 December 31, 2020 or September 30, 2020. We report interest and penalties as a component of income tax expense. During the three months ended December 31, 2020 and December 31, 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 option or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a Monte Carlo binomial and Black Scholes option pricing models, as appropriate 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 common 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.

9



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 December 31, 2020 and September 30, 2020, the Company did not hold any treasury stock.

Preferred Stock

Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock. As of December 31, 2020 and September 30, 2020, the Company has not issued any preferred stock.

Interest Rate Swap

The Company uses derivative financial instruments to manage interest rate risk associated with its variable 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 instruments for trading or speculative purposes.

Risks & Uncertainties

Management continues to evaluate the impact of the COVID-19 pandemic on the industry, primarily through the introduction of additional regulations and restrictions. Due to the nature of our work, we believe that these impacts are mitigated and concluded that while it is reasonably possible that the virus could have a negative effect on the Company's financial position and the results of its operations, the specific impact is not readily determinable as of the date of these financial statements.


5. Revenue Recognition
We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and 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.

For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. Contract costs are expensed as incurred. Estimated losses 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 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. Refer to the Liquidity and capital management located in Managements' Discussion and Analysis of Financial Condition and Results of Operations in this report for more information.
10




Contract liabilities - Amounts are a result of billings in excess of costs incurred. These contract liabilities are reported within accounts payable, accrued expenses, and other current liabilities on our consolidated balance sheets.

    The following table summarizes the contract balances recognized on the Company's consolidated balance sheets:
(in thousands)
December 31,September 30,
20202020
Contract assets$15,576 $7,943 
Contract liabilities$200 $200 


Disaggregation of revenue from contracts with customers

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

Revenue by customer:
(in thousands)
Three Months Ended
December 31,
20202019
Department of Veterans Affairs$27,642 $24,063 
Department of Health and Human Services20,163 24,089 
Department of Defense6,980 331 
Other3,067 3,755 
Total revenue$57,852 $52,238 

Revenue by contract type:
(in thousands)
Three Months Ended
December 31,
20202019
Time and materials$44,194 $36,441 
Cost reimbursable11,721 14,617 
Firm fixed price1,937 1,180 
Total revenue$57,852 $52,238 

11



Revenue by whether the Company acts as a prime contractor or a subcontractor:
(in thousands)
Three Months Ended
December 31,
20202019
Prime contractor$51,764 $48,896 
Subcontractor6,088 3,342 
Total revenue$57,852 $52,238 


6. Leases

We have leases for facilities and office equipment. Our lease liabilities are recognized as the present value of the future minimum lease payments over the lease term. Our 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. 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. Some of our lease agreements include options to extend the lease term or terminate the lease. These options are accounted for in our right-of-use assets and lease liabilities when it is reasonably certain that the Company will extend the lease term or terminate the lease. The Company does not have any finance leases. As of December 31, 2020, operating leases for facilities and equipment have remaining lease terms of 1.0 to 10.3 years.

The following table summarizes lease balances in our consolidated balance sheets at December 31, 2020 and September 30, 2020:
(in thousands)
December 31, 2020September 30, 2020
Operating lease right-of-use assets$21,737 $22,427 
Operating lease liabilities, current$2,053 $2,045 
Operating lease liabilities - long-term21,017 21,620 
     Total operating lease liabilities$23,070 $23,665 

The Company subleases a portion of one of its leased facilities. The sublease is classified as an operating lease with respect to the underlying asset. The sublease was assumed from the acquisition of Social & Scientific Systems, Inc. ("S3") in fiscal 2019. The sublease term is 5 years with two additional 1-year term extension options.

The Company's lease costs are included within contract costs in our Consolidated Statements of Operations. For the three months ended December 31, 2020 and December 31, 2019, total lease costs for our operating leases are as follows:
(in thousands)
Three Months Ended
December 31,
20202019
Operating $970 $1,312 
Short-term 29 56 
Variable 5 20 
Sublease income(95)(49)
       Total lease costs$909 $1,339 
12




The Company's future minimum lease payments as of December 31, 2020 are as follows:
For the Fiscal Year Ending September 30,(in thousands)
2021 (remaining)$2,454 
20223,501 
20233,375 
20243,251 
20253,092 
Thereafter14,684 
Total future lease payments30,357 
   Less: imputed interest(7,287)
Present value of future minimum lease payments23,070 
   Less: current portion of operating lease liabilities(2,053)
Long-term operating lease liabilities$21,017 

Other information related to our leases are as follows:
December 31, 2020
Weighted-average remaining lease term 8.9 years
Weighted-average discount rate5.99 %

(in thousands)
Three Months Ended
December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities$881 
Lease liabilities arising from obtaining right-of-use-assets$ 


7. Supporting Financial Information

Accounts receivable
(in thousands)
December 31,September 30,
Ref20202020
Billed receivables$29,309 $24,598 
Contract assets15,576 7,943 
Total accounts receivable44,885 32,541 
Less: Allowance for doubtful accounts(a)  
Accounts receivable, net$44,885 $32,541 

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 December 31, 2020 or September 30, 2020.

13



Other current assets
(in thousands)
December 31,September 30,
20202020
Prepaid insurance and benefits$431 $665 
Other receivables1,617 1,363 
Other prepaid expenses1,420 1,471 
Other current assets$3,468 $3,499 


Equipment and improvements, net
(in thousands)
December 31,September 30,
Ref20202020
Furniture and equipment$958 $958 
Computer equipment1,212 1,171 
Computer software4,353 4,341 
Leasehold improvements1,595 1,595 
Total equipment and improvements8,118 8,065 
Less accumulated depreciation and amortization(5,142)(4,726)
Equipment and improvements, net(a)$2,976 $3,339 

Ref (a): Depreciation expense was $0.4 million and $0.7 million for the three months ended December 31, 2020 and 2019, respectively.


Intangible assets
(in thousands)
December 31,September 30,
Ref20202020
Intangible assets(a)
Customer contracts and related customer relationships$62,281 $45,600 
Covenants not to compete522 480 
Trade name3,051 2,109 
Acquired intangibles - IBA acquisition(b)— 16,223 
Total intangible assets65,854 64,412 
Less accumulated amortization
Customer contracts and related customer relationships(12,707)(11,150)
Covenants not to compete(225)(212)
Trade name(514)(438)
Total accumulated amortization(13,446)(11,800)
Intangible assets, net$52,408 $52,612 

14



Ref (a): Intangible assets subject to amortization. The intangibles are amortized on a straight-line basis over their estimated useful lives of 10 years. The total amount of amortization expense was $1.6 million and $1.2 million for the three months ended December 31, 2020 and 2019, respectively.

Ref (b): Intangible assets reported at September 30, 2020 from the acquisition of IBA were based on an estimate and subject to revision. As of December 31, 2020, a third party valuation was completed and of the $17.7 million intangible assets acquired from the acquisition of IBA, $16.7 million was allocated to customer contracts and customer relationships, $0.1 million to covenants not to compete, and $0.9 million to trade name.

Estimated amortization expense for future years:(in thousands)
Remaining Fiscal 2021$4,939 
Fiscal 20226,585 
Fiscal 20236,585 
Fiscal 20246,585 
Fiscal 20256,585 
Thereafter21,129 
Total amortization expense$52,408 
    

Goodwill

The changes in the carrying amount of goodwill as of December 31, 2020 are as follows:
(in thousands)
RefTotal
Balance at September 30, 2019$52,758 
Preliminary increase from IBA acquisition14,386 
Balance at September 30, 202067,144 
Adjustment from IBA acquisition(a)(1,694)
Balance at December 31, 2020$65,450 

Ref (a): The adjustment was determined based on third party valuation.


Accounts payable, accrued expenses, and other current liabilities
(in thousands)
December 31,September 30,
20202020
Accounts payable$14,195 $14,645 
Accrued benefits2,719 2,833 
Accrued bonus and incentive compensation591 2,340 
Accrued workers' compensation insurance6,067 5,529 
Other accrued expenses3,820 3,231 
Accounts payable, accrued expenses, and other current liabilities$27,392 $28,578 


15



Debt obligations
(in thousands)
December 31,September 30,
20202020
Bank revolving line of credit$9,150 $ 
Bank term loan68,250 70,000 
Less unamortized deferred financing costs(2,593)(2,729)
Net bank debt obligations74,807 67,271 
Less current portion of bank debt obligations, net of deferred financing costs(15,884)(6,727)
Long-term portion of bank debt obligations, net of deferred financing costs$58,923 $60,544 
    
Interest expense
(in thousands)
Three Months Ended
 December 31,
Ref20202019
Interest expense(a)$(870)$(852)
Amortization of deferred financing costs(b)(210)(210)
Other income (expense), net(c) 121 
Interest expense, net$(1,080)$(941)

Ref (a): Interest expense on borrowing
Ref (b): Amortization of expenses related to term loan and revolving line of credit
Ref (c): Gain on lease modification due to a lease amendment


8. Credit Facilities

A summary of this loan facility as of December 31, 2020, is as follows:
($ in Millions)
As of December 31, 2020
LenderArrangementLoan BalanceInterestMaturity Date
First National Bank of Pennsylvania ("FNB")Secured term loan (a)$68.3 
LIBOR* + 3.5%
09/30/2025
First National Bank of Pennsylvania ("FNB")Secured revolving line of credit (b)$9.2 
LIBOR* + 3.5%
09/30/2025

*LIBOR rate as of December 31, 2020 was 0.15%. As of December 31, 2020, our LIBOR rate is subject to a minimum floor of 0.5%.
(a) Represents the principal amounts payable on our term loan, which is secured by liens on substantially all of the assets of the Company. The principal of the term loan is payable in quarterly installments with the remaining balance due on September 30, 2025.

The Credit Agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions. Among other matters, we must comply with limitations on the following: granting liens; incurring other indebtedness; maintenance of assets; investments in other entities and extensions of credit; mergers and consolidations; and changes in nature of business. The loan agreement also requires us to comply with certain quarterly financial covenants including: (i) a minimum fixed charge coverage ratio of at least 1.25 to 1.00, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 3.75:1.0 to 2.75:1.0 through maturity. Adjusted EBITDA ratio is calculated by dividing the Company's total interest-bearing debt by net income
16



adjusted to exclude (i) interest and other expenses, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) non-recurring charges, losses or expenses to include transaction and non-cash equity 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.

We are required to pay quarterly amortization payments, which commenced in December 2020 through September 2025. The annual amortization amounts are $7.0 million for fiscal years 2021 and 2022 and $8.75 million each for fiscal years 2023 - 2025. The quarterly payments are equal installments. In addition to quarterly payments of the outstanding indebtedness, the loan agreement also requires annual payments of a percentage of excess cash flow, as defined in the loan agreement. The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75% of the excess cash flow for the immediately preceding fiscal year in which indebtedness to consolidated EBITDA ratio is greater than or equal to 2.50:1.0; (b) 50% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 2.50:1.0 but greater than or equal to 1.5:1.0; or (c) 0% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 1.5:1.0. In addition, the Company must make additional mandatory prepayment of amounts outstanding based on proceeds received from asset sales and sales of certain equity securities or other indebtedness. For additional information regarding the schedule of future payment obligations, please refer to Note 11, Commitments and Contingencies.

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 for the current fiscal year is $28.8 million and matures in 2024. The notional amount was $36 million in the prior fiscal year. The remaining outstanding balance of our term loan 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 three months ended December 31, 2020, interest expense has been increased by less than $0.2 million.

(b) The secured revolving line of credit has a ceiling of up to $25.0 million. Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company. The Company accessed funds from the revolving credit facility during the quarter and has an outstanding balance of $9.2 million at December 31, 2020.
The Company's total borrowing availability, based on eligible accounts receivables at December 31, 2020, was $25.0 million. As part of the revolving credit facility, the lenders agreed to a sublimit of $5 million for letters of credit for the account of the Company, subject to applicable procedures.

The revolving line of credit has a maturity date of September 30, 2025 and is subject to loan covenants as described above. The Company is fully compliant with those covenants.

9. Stock-based Compensation and Equity Grants

Stock-based compensation expense
 
Options issued under equity incentive plans were designated as either 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 December 31, 2020, there were 0.5 million shares available for grant.

Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our Consolidated Statements of Operations:
(in thousands)
Three Months Ended
 RefDecember 31,
 20202019
DLH employees(a)$342 $116 
Non-employee directors(b)116 87 
Total stock option expense$458 $203 
17




Ref (a): Equity grants of restricted stock units were made in accordance with the DLH long-term incentive compensation policy for Named Executive Officers ("NEO") and totaled 147,431 restricted stock units issued and outstanding at December 31, 2020.

Ref (b): Equity grants of restricted stock units were made in accordance with DLH compensation policy for non-employee directors and totaled 63,177 restricted stock units issued and outstanding at December 31, 2020.

Unrecognized stock-based compensation expense
(in thousands)
 December 31,
 Ref2020
Unrecognized expense for DLH employees(a)$3,445 
Unrecognized expense for non-employee directors351 
Total unrecognized expense$3,796 

Ref (a): Compensation expense for the portion of equity awards for which the requisite service has not been rendered is recognized as the requisite service is rendered. The compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance. For options that vest based on the Company's common stock achieving and maintaining defined market prices, the Company values the awards with a Monte Carlo binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation expense is recognized over the derived service period determined in the valuation. On a weighted average basis, this expense is expected to be recognized within the next 4.51 years.

Stock option activity for the three months ended December 31, 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.
(in years)
Weighted
WeightedAverage(in thousands)
(in thousands)AverageRemainingAggregate
Number ofExerciseContractualIntrinsic
RefSharesPriceTermValue
Options outstanding, September 30, 20202,129 $6.14 7.4$6,593 
Exercised(62)$3.62 — — 
Granted(a)220 $10.05 — — 
Options outstanding, December 31, 20202,287 $6.95 7.7$10,261 

Ref (a): The options granted in the first quarter of fiscal 2021 occurred at the end of the period and an amount of less than $0.1 million was accrued as stock compensation expense.


18




Stock options shares outstanding, vested, and unvested for the periods ended
(in thousands)
December 31,September 30,
Ref20202020
Vested and exercisable(a)1,151 1,213 
Unvested(b)1,136 916 
Options outstanding2,287 2,129 

Ref (a): Weighted average exercise price of vested and exercisable shares was $2.18 and $2.25 at December 31, 2020 and September 30, 2020, respectively. Aggregate intrinsic value was approximately $8.2 million and $6.1 million at December 31, 2020 and September 30, 2020, respectively. Weighted average contractual term remaining was 3.8 and 4.6 years at December 31, 2020 and September 30, 2020, respectively.

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


10. 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.
(in thousands)
Three Months Ended
December 31,
20202019
Numerator:
Net income$1,814 $1,551 
Denominator:
Denominator for basic net income per share - weighted-average outstanding shares12,498 12,088 
Effect of dilutive securities:
Stock options and restricted stock947 926 
Denominator for diluted net income per share - weighted-average outstanding shares13,445 13,014 
Net income per share - basic$0.15 $0.13 
Net income per share - diluted$0.13 $0.12 


11. Commitments and Contingencies

Contractual obligations as of December 31, 2020
  Payments Due Per Fiscal Year
 (Remaining)
(Amounts in thousands)Total20212022202320242025Thereafter
Debt obligations$77,400 $14,400 $7,000 $8,750 $8,750 $38,500 $ 
Facility leases30,077 2,392 3,418 3,292 3,199 3,092 14,684 
Equipment operating leases280 62 83 83 52   
Total Contractual Obligations$107,757 $16,854 $10,501 $12,125 $12,001 $41,592 $14,684 
19




    
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 December 31, 2020 and September 30, 2020 was $6.1 million and $5.5 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.


12. Related Party Transactions

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

ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward Looking and Cautionary Statements
 
You should read the following discussion in conjunction with the Consolidated Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended September 30, 2020, and in other reports we have subsequently filed with the SEC. This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in this Management’s Discussion and Analysis are forward-looking statements that involve risks and uncertainties. Any statements that refer to expectations, projections or other characterizations of future events or circumstances or that are not statements of historical fact (including without limitation statements to the effect that the Company or its management “believes”, “expects”, “anticipates”, “plans”, “intends” and similar expressions) should be considered forward looking statements that involve risks and uncertainties which could cause actual events or DLH’s actual results to differ materially from those indicated by the forward-looking statements. Forward-looking statements in this report include, among others, statements regarding benefits of the acquisition, estimates of future revenues, operating income, earnings, earnings per share, backlog, and cash flows. These statements reflect our belief and assumptions as to future events that may not prove to be accurate. Our actual results may differ materially from such forward-looking statements made in this report due to a variety of factors, including: the 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; the risk that we will not realize the 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; compliance with new bank financial and 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; the ability to successfully integrate the operations of 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, 2020, 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.
20



Business and Markets Overview

DLH Holdings Corp. is a provider of technology-enabled business process outsourcing and program management solutions, and public health research and analytics; primarily focused to improve and better deploy large-scale federal health and human service initiatives. The Company derives 99% of its revenue from agencies of the Federal government, providing services to several agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD"). Incorporated in New Jersey in 1969, the Company contracts with its government customers through its subsidiaries.

In recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets. On September 30, 2020, we acquired Irving Burton Associates, LLC ("IBA") and in June 2019 we acquired Social & Scientific Systems, Inc. ("S3").

Our business offerings are aligned to three market focus areas within the federal health services market space.

Defense and Veteran Health Solutions;
Human Services and Solutions;
Public Health and Life Sciences;

The following table summarizes the revenues by market for the three months ended December 31, 2020 and 2019, respectively:
(in thousands)
Three Months Ended
December 31,
20202019
RevenuePercent of total revenueRevenuePercent of total revenue
Defense and Veteran Health Solutions$34,872 60 %$24,063 46 %
Human Services and Solutions7,439 13 %11,910 23 %
Public Health and Life Sciences15,541 27 %16,265 31 %
Total revenue$57,852 100 %$52,238 100 %


Position and Distribution of Services and Solutions in Our Markets

The markets in which we compete and the manner in which we are positioned within them are characterized by a number of features including, but not limited to:

specialized credentials and licenses held by a substantial component of our employee base;

prime contractor position in contracts representing 89% of our revenue;

strong past performance record, as evidenced by our VA customer scoring the highest in overall satisfaction in the J.D. Power National Pharmacy Study over the past nine years; and

targeted expansion in critical national priority markets with Federal budget stability to include public health and epidemiological support related to COVID-19.

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 (77%), cost reimbursable contracts (20%) and firm fixed price contracts (3%). We provide services under Indefinite Duration, Indefinite Quantity ("IDIQ") and government wide acquisition contracts, such as General Services Administration ("GSA") schedule contracts. The Company currently holds 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.

21



Major Customers

A major customer is defined as a customer from whom we derive at least 10% of our revenues. Our two largest customers are HHS and the VA. The following table summarizes the revenues by customer for the three months ended December 31, 2020 and 2019, respectively:
(in thousands)
Three Months Ended
December 31,
20202019
RevenuePercent of total revenueRevenuePercent of total revenue
Department of Veterans Affairs$27,642 48 %$24,063 46 %
Department of Health and Human Services20,163 35 %24,089 46 %
Department of Defense6,980 12 %331 %
Customers with less than 10% share of total revenue3,067 %3,755 %
Total revenue$57,852 100 %$52,238 100 %

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 $15.9 million and $13.3 million for the three months ended December 31, 2020 and 2019, are currently operating under extensions through October 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 further extended.

The remaining seven contracts for logistics services, which represent approximately $11.8 million and $10.8 million of revenues for the three months ended December 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. The RFP initially included award preference for a SDVOSB prime contractor. The government has since removed that preference thereby making the procurement a full and open acquisition, which allows for us to be evaluated as the prime contractor.

The Company's contract with HHS in support of its Head Start program generated $6.0 million and $9.5 million of its revenue for the three months ended December 31, 2020 and 2019, respectively. This contract has a period of performance through April 2025.

We remain dependent upon the continuation of our relationships with the VA and HHS. 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, if we were to lose any of our material current contracts, or if the amount of services we provide to them was to be materially reduced.

22



Backlog
Backlog represents total estimated contract value of predominantly multi-year government contracts and will vary depending upon the timing of new/renewal contract awards. Backlog is based upon customer commitments that the Company believes to be firm over the remaining performance period of our contracts. The value of multi-client, competitive Indefinite Delivery/Indefinite Quantity ("IDIQ") contract awards is included in backlog computation only when a 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 December 31, 2020, our total backlog was approximately $665.2 million compared to $688.4 million as of September 30, 2020.

Backlog value is quantified from management's judgment and assumptions about the volume of services based on past volume trends and current planning developed with customers. Our backlog may consist of both funded and unfunded amounts under existing contracts including option periods. At December 31, 2020, our funded backlog was approximately $103.9 million, and our unfunded backlog was $561.3 million.

Forward Looking Business Trends

COVID-19 impact

We are exposed to and impacted by macroeconomic factors and U.S. government policies. Current general economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions due to economic slowdowns and government restrictions on movement. We have seen continued demand for the services we provide under our current contract portfolio as the services we provide are largely deemed essential. While the pandemic has had minor offsetting impacts due to social distancing and travel restrictions, we do not expect material impacts to our consolidated results of operations from COVID-19 in this fiscal year.

The pandemic may cause reduced demand for 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 continued 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. Further, we have partnered with our clients to adopt particular measures to protect our employees at distribution centers, and we expect to execute on a remainder of our contracts through remote and teleworking arrangements. 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. To date we have experienced continuity in the majority of our work for our government clients. While there have been postponements of events and challenges around some project work requiring travel, overall, our government clients have continued to require our services. We are unable to predict whether, and to what extent, this trend will continue. It would be reasonable to expect some deterioration of certain client activities due to COVID-19. The longer the duration of the pandemic, the more likely it is that it could have an adverse effect on our business, financial position, results of operations and/or cash flows. However, we also believe that we are likely to see additional demand from federal agencies such as the CDC and the NIH for our services.

Due to our ability to continue to perform under our contracts and 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. As such, mandatory demands on our cash flow remain low. Further, we have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.


Federal budget outlook for 2021:

Our business is impacted by the overall federal government's spending priorities. As such, we continue to carefully follow federal budget, legislative and contracting trends and activities, and evolve our strategies to take these into consideration.

On December 27, 2020, the President signed into law the Consolidated Appropriations Act, 2021 (H.R.133), enacting consolidated appropriations and providing funding through September 30, 2021 for projects and activities of Federal Government agencies.

23



While the new Biden administration has not formally proposed its priorities via a budget submission, the President has signaled certain priorities. Among those priorities are a focus on combating the global COVID-19 pandemic, improving health care delivery to our nation's veterans, enhancing the IT infrastructure of many federal agencies to include the VA and HHS, and broadening opportunities and access to early childhood programs such as Head Start. We believe our competencies, customer portfolio, and company values are well aligned with the proposed vision of the incoming administration.

We recommend that you read this discussion and analysis in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, previously filed with the Securities and Exchange Commission.

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.

Potential impact 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 competition for the contract to service-disabled or other veteran owned businesses. To restrict competition pursuant to this rule, the contracting officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States. When two qualifying small businesses cannot be identified, the VA may proceed to award contracts following a full and open bid process.

The Company believes that its past performance in this market and track record of success provide a competitive advantage. However, 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. In these cases, the Company may elect to join a team with an eligible contractor as prime in support of such small businesses for specific pursuits that align with our core markets and corporate growth strategy.

Results of Operations for the three months ended December 31, 2020 and 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
December 31, 2020December 31, 2019Change
Revenue$57,852 100.0 %$52,238 100.0 %$5,614 
Cost of operations:
Contract costs46,005 79.5 %41,340 79.1 %4,665 
General and administrative costs6,150 10.6 %5,913 11.3 %237 
Depreciation and amortization2,062 3.6 %1,859 3.6 %203 
Total operating costs54,217 93.7 %49,112 94.0 %5,105 
Income from operations3,635 6.3 %3,126 6.0 %509 
Interest expense, net1,080 1.9 %941 1.8 %139 
Income before income taxes2,555 4.4 %2,185 4.2 %369 
Income tax expense741 1.3 %634 1.2 %107 
Net income$1,814 3.1 %$1,551 3.0 %263 
Net income per share - basic$0.15 $0.13 $0.02 
Net income per share - diluted$0.13 $0.12 $0.01 

24



Revenue
 
Revenue for the three months ended December 31, 2020 was $57.9 million, an increase of $5.6 million or 10.7% over the prior year period. The increase in revenue is due primarily to the inclusion of revenue from our acquisition of Irving Burton Associates, LLC ("IBA"), which generated $7.0 million of revenue, offset in part by reductions in organic revenue principally from reimbursement of travel expenses.

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 December 31, 2020, contract costs increased by approximately $4.7 million, principally due to the addition of IBA.

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 $0.2 million primarily from the inclusion of IBA, offset by reductions in travel, outside consultants, and other G&A costs as compared to the prior fiscal year period.

For the three months ended December 31, 2020, depreciation and amortization costs were approximately $0.4 million and $1.6 million, respectively, as compared to approximately $0.7 million and $1.2 million for the prior fiscal year period. The increase of $0.2 million was principally due to the amortization of the acquired definite-lived intangible assets of IBA.

Interest Expense, net
 
Interest expense, net, includes items such as interest expense and amortization of deferred financing costs on debt obligations.
For the three months ended December 31, 2020 and 2019, interest expense was approximately $1.1 million and $0.9 million, respectively. The increase in interest expense was due to the borrowing required to finance the acquisition of IBA.

Income Tax Expense

For the three months ended December 31, 2020 and 2019, DLH recorded a $0.7 million and $0.6 million provision for tax expense, respectively. The effective tax rate for the three months ended December 31, 2020 and 2019 was 29%.

Non-GAAP Financial Measures

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 a non-GAAP basis, Earnings Before Interest, Tax, Depreciation, and Amortization ("EBITDA") for the three months ended December 31, 2020 was approximately $5.7 million. The increase of approximately $0.7 million from the same period in the prior fiscal year was principally due to the contribution of IBA and effective management of general and administrative expenses.

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