DLH HOLDINGS CORP. : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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, 2021, 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 ongoing impact of the novel coronavirus
("COVID-19") pandemic, 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 and award protests, small business set asides, loss of
work due to organizational conflicts of interest, etc.) and termination risks;
the ability to successfully integrate the operations of future acquisitions; the
impact of inflation and higher interest rates on our cost structure; 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, 2021, 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 and Markets Overview

DLH is a provider of technology-enabled business process outsourcing and program
management solutions, and public health research and analytics offerings. We are
primarily focused on improving and better deploying 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"), and Department of
Homeland Security ("DHS"). 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 June 7, 2019 we acquired Social & Scientific Systems, Inc. ("S3")
and on September 30, 2020, we acquired Irving Burton Associates, LLC ("IBA").

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;
                                       20

--------------------------------------------------------------------------------

•Public Health and Life Sciences;

The following table summarizes the revenues by market for the nine months ended
June 30, 2022 and 2021, respectively:

                                                                  Nine Months Ended
                                                                       June 30,
                                                                         2022                                 2021
                                                              Revenue    Percent of total          Revenue     Percent of total
             (in thousands)                                                   revenue                              revenue
Human Services and Solutions                                $ 156,326              47.7  %       $  26,711               14.8  %
Defense and Veteran Health Solutions                          117,497              35.8  %         105,539               58.3  %

Public Health and Life Sciences                                54,117              16.5  %          48,663               26.9  %
Total Revenue                                               $ 327,940             100.0  %       $ 180,913              100.0  %

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 93% of our revenue for the
nine months ended June 30, 2022;

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

•targeted expansion in critical national priority markets with Federal budget
stability and strong bipartisan support

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 for the nine months ended June 30, 2022
is distributed to time and materials contracts (80%), cost reimbursable
contracts (11%) and firm fixed price contracts (9%). 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.

Major Customers

A major customer is defined as a customer from whom we derive at least 10% of
our revenues. The following table summarizes the revenues by customer for the
nine months ended June 30, 2022 and 2021, respectively:

                                                                    Nine Months Ended
                                                                        March 31,
                                                                           2022                                 2021
                                                                Revenue    Percent of total          Revenue    Percent of total
              (in thousands)                                                    revenue                              revenue

Department of Homeland Security                               $ 126,397              38.6  %       $     523               0.3  %
Department of Veterans Affairs                                   92,270              28.1  %          83,010              45.9  %
Department of Health and Human Services                          78,452              23.9  %          66,748              36.9  %
Department of Defense                                            25,227               7.7  %          22,103              12.2  %
Other customers with less than 10% share of
total revenue                                                     5,594               1.7  %           8,529               4.7  %
Total Revenue                                                 $ 327,940             100.0  %       $ 180,913             100.0  %



                                       21

--------------------------------------------------------------------------------

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 ("CMOP") program. Nine
contracts for pharmacy services, which represent revenues of approximately $51.2
million and $47.5 million for the nine months ended June 30, 2022 and 2021, are
currently operating under a bridge contract through October 2022. The remaining
seven contracts for logistics services, which represent approximately $41.1
million and $35.5 million of revenues for the nine months ended June 30, 2022
and 2021, are currently operating under a bridge contract through November 2022.
The government has neither indicated nor announced its future procurement
strategy with respect to these contracts. Due to the time required to conduct a
procurement process, we expect these contracts to be further extended.

The Company's contract with HHS in support of its Head Start program generated
$25.9 million and $21.4 million of its revenue for the nine months ended
June 30, 2022 and 2021, respectively. This contract has a period of performance
through April 2025.

As previously announced, we were awarded two short-term task orders under a FEMA
contract to provide support for states seeking temporary medical staffing
support and COVID-19 related community testing, vaccination and therapy. Those
contracts generated $125.8 million of revenue for the nine months ended June 30,
2022. The contract to support COVID-19 related community testing, vaccination
and therapy ended on December 31, 2021. The contract to provide temporary
medical staffing support completed on March 20, 2022.

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.

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 June 30, 2022, our total backlog
was approximately $509.7 million compared to $651.5 million as of September 30,
2021.

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 June 30, 2022, our funded
backlog was approximately $87.4 million, and our unfunded backlog was $422.3
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, while improving, continue to be
highly volatile due to the COVID-19 pandemic, which resulted in both market size
contractions due to economic slowdowns and government restrictions on movement
during the height of the pandemic. While the rollout of vaccines has positively
correlated to an improvement in macroeconomic indicators, the lifting of various
public health constraints, and a reduction of many restrictions on economic
activity, there continues to be significant uncertainty as to the effects of the
pandemic on the economy, which may impact our results of operations or cash
flows in future periods. We have seen continued demand for the services we
provide under our current contract portfolio as the services we provide are
largely deemed essential. Although we have also been successful in winning new
contracts tied to the need to support public health initiatives in response to
the pandemic, as the public health situation improves, there may be fewer such
opportunities in the future.
                                       22

--------------------------------------------------------------------------------

General uncertainty related to the pandemic, the long-term efficacy of vaccines
and the spread of new variants, may nonetheless 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 have been 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 have been and expect to continue to execute on the remainder of our contracts
through remote and teleworking arrangements. We continue to monitor the evolving
situation related to the COVID-19 pandemic and intend to continue to work with
government authorities and other stakeholders to assess further potential
implications to us, continue with employee safety measures to ensure that we are
able to continue our operations during the pandemic, and take other actions
where appropriate to mitigate other adverse consequences. 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 restriction of certain client activities due to
COVID-19.
Due to our ability to continue to perform on our contract portfolio and generate
cash flow, 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 2023

The President's budget proposal for fiscal year ("FY") 2023 outlines many
initiatives that include investments to rebuild our country's physical
infrastructure, strengthen supply chains, combat inflation, expand economic
opportunity, respond to the changing climate, sustain and strengthen national
defense, and bolster America's public health infrastructure. Specifically, the
investment in public health infrastructure involves improving the nation's
readiness for future pandemics and other biological threats, expanding access to
vaccines and healthcare, and defeating diseases and epidemics such as, but not
limited to, the opioid and HIV/AIDs epidemics. The budget's initiatives are
further reflected in the budget requests for the Department of Health and Human
Services, Department of Veterans Affairs, and Department of Defense.

Department of Health and Human Services

The FY 2023 budget request proposes $127.3 billion in discretionary budget
authority for HHS and $1.7 trillion in mandatory funding for the department. The
budget proposes $63 billion in discretionary and mandatory resources for NIH, an
increase of $16 billion above FY 2022 enacted, to address the opioid crisis and
end HIV, make new investments in pandemic preparedness and nutrition research,
and drive biomedical innovations. The budget also requests $45 million for
telehealth, which is $9 million above FY 2022 enacted, to promote health
services with telehealth technologies. The budget also provides for investment
in programs that improve the health and well-being of young children and their
families. This includes $12.2 billion for the Office of Head Start, principally
to expand eligibility for participation in the program.

Department of Veterans Affairs

The VA is requesting a total of $301.4 billion for FY 2023, an increase of $30.7
billion above the FY 2022 request. It includes $139.1 billion in discretionary
funding, an increase of $21.9 billion, and $161.3 billion in mandatory funding,
an increase of $8.6 billion from FY 2022 enacted. The VA research program is
expected to allocate increased funding to advance the Department's understanding
of the impact of traumatic brain injury and toxic exposure(s) on long-term
health outcomes, coronavirus related research and impacts, and precision
oncology. The 2023 budget request for the VA's research enterprise is $916
million, an increase of $34 million from the 2022 budget, excluding mandatory
funding. In addition, the 2023 budget estimates $4.8 billion will be spent on
telehealth treatment in 2023, an increase of $622 million from the 2022 current
estimate. The VA is continuing to expand this program because of its ability to
leverage VA providers and provide better services to veterans.

                                       23

--------------------------------------------------------------------------------

Department of Defense

The Military Health System ("MHS") is one of the largest health care systems,
serving over 9 million beneficiaries. As a part of the DoD, the Defense Health
Agency ("DHA") manages a global health care network of military and civilian
medical professionals, military hospitals and clinics around the world, and
supports the delivery of integrated health services to MHS beneficiaries. The
funding and personnel to support MHS's mission is referred to as the Unified
Medical Budget ("UMB"). The FY 2023 UMB request for the Defense Health program
is $36.9 billion, a decrease of $0.4 billion from FY 2022 enacted.

In June 2022, the House Appropriations Subcommittee on Defense approved the
Defense Funding Bill for FY 2023, which would provide $38.1 billion in funding
for medical and health care programs of DoD. Of this, approximately $1.1 billion
would be made available to the Defense Health Agency to carry out
congressionally directed medical research programs.

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.

                                       24

--------------------------------------------------------------------------------

Results of Operations for the three months ended June 30, 2022 and 2021

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

© Edgar Online, source Glimpses