What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-07-29 compared with 2026-05-06 · 71 added, 76 removed, 267 unchanged (36% of the section changed)

8 unchanged sentences

Our actual results may differ materially from such forward-looking statements made in this report due to a variety of factors, including:

the failure to achieve the anticipated benefits of any future acquisition (including anticipated future financial operating performance and results);

the failure to achieve the anticipated benefits of any future acquisition (including anticipated

future financial operating performance and results);

the inability to retain employees and customers;

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government funding and spending patterns;

legislation that amends or changes discretionary spending levels or budget

legislation that amends or changes discretionary spending levels or budget priorities;

legal, regulatory, and political changes from the federal government that could result in economic uncertainty;

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Army Institute of Surgical Research ("USAISR"), and US Navy, rely on our information technology support to enable their vital missions.

Certified Information Security Officer ("CISO") / Information System Security Officer ("ISSO") support, risk management frameworks, Continuity of Operations ("COOP") / Disaster Recovery, services under Cybersecurity Maturity Model Certification ("CMMC") Level 2, and enterprise infrastructure and cloud governance focused on designing and implementing zero trust architecture.

We work with these customers to reduce risk and build resilience to cyber and physical threats to the federal government’s infrastructure, providing the full spectrum of cyber capabilities, cryptographic and true cyber engineering, Certified Information Security Officer ("CISO") / Information System Security Officer ("ISSO") support, risk management frameworks, Continuity of Operations ("COOP") / Disaster Recovery, services under Cybersecurity Maturity Model Certification ("CMMC") Level 2, and enterprise infrastructure and cloud governance focused on designing and implementing zero trust architecture.

Science Research and Development

We advance scientific knowledge and understanding through our extensive research portfolio and domain expertise.

We primarily provide large-scale data analytics, testing and evaluation, clinical trials research services, and epidemiology studies to support multiple operating divisions within HHS, including NIH and the Center for Disease Control and Prevention ("CDC"), as well as the Military Health System.

We primarily provide large-scale data analytics, testing and evaluation, clinical trials research services, and epidemiology studies to support multiple operating divisions within HHS, including NIH and the Centers for Disease Control and Prevention ("CDC"), as well as the Military Health System.

Our employees support innovative, cutting-edge research on emerging trends, health informatics analyses, and the application of best practices including mobile, social, and interactive media.

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Our employees provide expert knowledge and experience that supports the missions of our customers' mission.

System Engineering and Integration

Systems Engineering and Integration

Our employees specialize in delivering engineering solutions that support our customers' evolving needs by rapidly deploying resources, solutions, and services.

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The following table summarizes revenue by customer as follows (in thousands and percent):

Six Months Ended

Nine Months Ended

Revenue Percent of total revenue Revenue Percent of total revenue

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The revenue attributable to the VA was derived from separate task orders covering the Company's performance of pharmacy and logistics services at various regional locations, in support of the VA's Consolidated Mail Outpatient Pharmacy ("CMOP") program.

• CMOP pharmacy and logistic services represent approximately $19.7 million and $28.7 million of revenues for the three months ended March 31, 2026 and 2025, respectively, and $46.6 million and $62.8 million of revenues for the six months ended March 31, 2026 and 2025, respectively.

• CMOP pharmacy and logistic services represent approximately $6.3 million and $27.0 million of revenues for the three months ended June 30, 2026 and 2025, respectively, and $52.9 million and $89.8 million of revenues for the nine months ended June 30, 2026 and 2025, respectively.

As previously reported, the VA has been soliciting proposals for new contracts covering this work with a requirement for a Service-Disabled Veteran Owned Small Business, or SDVOSB, to perform as the prime contractor.

At the start of the second quarter, DLH performed services at three CMOP locations.

During the quarter, one site transitioned to a SDVOSB prime contractor at the end of February 2026.

Regarding the remaining two locations, one transitioned at the end of April and the other is expected to transition at the end of May 2026.

At March 31, 2026, our backlog was approximately $442.4 million of which $75.0 million was funded backlog.

At the start of the third quarter, DLH performed services at two CMOP locations, both of which transitioned to new contractors during the quarter.

At June 30, 2026, our backlog was approximately $408.5 million of which $66.7 million was funded backlog.

At September 30, 2025, our backlog was approximately $514.3 million, of which $114.1 million was funded backlog.

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We believe these priorities position the Company to expand within key national programs and mission-critical areas of health and national security.

However, additional factors that could affect federal government spending in our addressable market include changes in set-asides for small businesses, changes in budgetary priorities associated with the new administration, and the effect of initiatives such as the Department of Government Efficiency ("DOGE"), on limiting or reducing federal government spending in general.

However, additional factors that could affect federal government spending in our addressable market include changes in set-asides for small businesses, changes in budgetary priorities associated with the current administration, and the effect of initiatives aimed at improving governmental efficiency, on limiting or reducing federal government spending in general.

Further, the changing priorities of the new administration may have an adverse impact on our results and, as such new priorities are implemented, it may be difficult for us to accurately predict the effect they will have on our results.

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Ongoing and future reviews may lead to additional adjustments or cost reduction mandates.

On November 12, 2025, Congress passed and the President signed an appropriations bill to fund certain agencies and extend funding at current levels for the remaining agencies through January 30, 2026.

On February 3, 2026, Congress passed and the President signed appropriations for the remainder of the government fiscal year.

These appropriations covered nearly all major departments and agencies, including the HHS, VA, and DoD.

Although broader funding disruptions were partially addressed in early February 2026, funding for the Department of Homeland Security has remained subject to continued uncertainty, and full-year appropriations for the Department have not yet been enacted, resulting in ongoing funding instability for that department.

With minimal revenue generated from that department, we do not expect a significant impact from this budgetary instability.

In April 2026, the Administration released its proposed fiscal year 2027 budget, reflecting a continued emphasis on higher defense spending relative to previous levels.

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Results of Operations

The following table summarizes results of operations for the three months ended March 31, 2026 and 2025 (in thousands except for per share amounts, and percentage of revenue):

The following table summarizes results of operations for the three months ended June 30, 2026 and 2025 (in thousands except for per share amounts, and percentage of revenue):

Three Months Ended

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Diluted $ (1.16) $ 0.02 $ (1.18)

Revenue decreased $29.9 million for the three months ended March 31, 2026 over 2025 , primarily reflecting the conversion of certain contracts in our contract portfolio to small business contractors across our customer base.

Revenue decreased $39.1 million for the three months ended June 30, 2026 over 2025 , primarily reflecting the conversion of certain contracts in our contract portfolio to small business contractors across our customer base.

Cost of Operations

1 unchanged sentence

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.

Contract costs decreased $24.1 million for the three months ended March 31, 2026 over 2025;

Contract costs decreased $30.8 million for the three months ended June 30, 2026 over 2025;

the decrease was primarily due to the decrease in revenue volume.

General and administrative costs are for those employees not directly providing services to our customers, to include but not limited to executive management, business development, accounting, and human resources.

These costs decreased $0.7 million for the three months ended March 31, 2026 as compared to 2025.

These costs decreased $0.3 million for the three months ended June 30, 2026 as compared to 2025.

As a percentage of revenue, general and administrative costs increased to 16.6% from 9.2%, primarily due to the decrease in revenue volume.

1 unchanged sentence

The impact of the cost scaling initiatives is described in more detail in the Non-GAAP Financial Measures section.

For the three months ended March 31, 2026, depreciation and amortization expense were approximately $0.2 million and $4.1 million, respectively, as compared to approximately $0.2 million and $4.1 million for the three months ended March 31, 2025, respectively.

For the three months ended June 30, 2026, depreciation and amortization expense were approximately $0.2 million and $3.8 million, respectively, as compared to approximately $0.2 million and $4.1 million for the three months ended June 30, 2025, respectively.

Interest Expense, net

Interest expense, net, includes interest expense on the Company's term loan and amortization of deferred financing costs on debt obligations.

Interest expense decreased $0.7 million for the three months ended March 31, 2026 over 2025, primarily due to the prepayment of debt and a decrease in the floating interest rate.

Interest expense decreased $0.5 million for the three months ended June 30, 2026 over 2025, primarily due to the prepayment of debt and a decrease in the floating interest rate.

Provision for Income Taxes (Benefit)

Provision for income taxes decreased $1.0 million for the three months ended March 31, 2026 over 2025.

The effective tax rate for the three months ended March 31, 2026 and 2025 was 20.6% and 29.1%, respectively.

The decrease in the effective tax rate compared to the prior year period was primarily attributable to the Company’s pre-tax loss in the current period, which increased the relative impact of state income taxes and permanent differences.

Permanent differences primarily consist of non-deductible expenses, including stock-based compensation, executive compensation limitations under Section 162(m), and other non-deductible items, which do not provide a corresponding tax benefit in a loss position.

The Company’s effective tax rate differs from the federal statutory rate of 21.0% primarily due to state income taxes and permanent differences, partially offset by the impact of federal tax legislation enacted in July 2025.

The following table summarizes results of operations for the six months ended March 31, 2026 and 2025 (in thousands except for per share amounts, and percentage of revenue):

Six Months Ended

Provision for income taxes increased by $9.8 million for the three months ended June 30, 2026 over 2025.

The effective tax rate for the three months ended June 30, 2026 and 2025 was (139.4)% and (34.2)%, respectively.

The Company's effective tax rate differed from the federal statutory rate of 21.0% for the current period, primarily due to the establishment of a valuation allowance against deferred tax assets.

During the current period, the Company concluded that it is more likely than not that its deferred tax assets would not be realized based primarily on cumulative losses in recent periods.

The effective tax rate was also impacted by state income taxes and permanent differences.

Supporting Financial Information , Income Taxes, for additional information regarding the valuation allowance.

The following table summarizes results of operations for the nine months ended June 30, 2026 and 2025 (in thousands except for per share amounts, and percentage of revenue):

Nine Months Ended

Consolidated Statements of Operations:

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Diluted $ (1.42) $ 0.16 $ (1.58)

Revenue decreased $51.8 million for the six months ended March 31, 2026 over 2025, primarily reflecting the conversion of certain contracts in our contract portfolio to small business contractors.

Revenue decreased $91.0 million for the nine months ended June 30, 2026 over 2025, primarily reflecting the conversion of certain contracts in our contract portfolio to small business contractors.

Cost of Operations

1 unchanged sentence

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.

Contract costs decreased $41.5 million for the six months ended March 31, 2026 and 2025.

Contract costs decreased $71.8 million for the nine months ended June 30, 2026 over 2025.

The decrease was primarily due to the decrease in revenue volume.

These costs decreased $1.0 million for the six months ended March 31, 2026 over 2025.

These costs decreased $1.8 million for the nine months ended June 30, 2026 over 2025.

As a percentage of revenue, general and administrative costs increased to 12.8% from 9.1%, with the increase being primarily due to the change in revenue volume.

During the quarter, we made

additional reductions to general and administrative costs to align more closely with our expected revenue volume.

During the quarter ended June 30,

2026, we made additional reductions to general and administrative costs to align more closely with our expected revenue volume.

The impact of the cost scaling initiatives is described in more detail in the Non-GAAP Financial Measures section.

For the six months ended March 31, 2026, depreciation and amortization expense were approximately $0.4 million and $8.2 million, respectively, as compared to approximately $0.3 million and $8.2 million for the six months ended March 31, 2025, respectively.

For the nine months ended June 30, 2026, depreciation and amortization expense were approximately $0.6 million and $12.0 million, respectively, as compared to approximately $0.5 million and $12.3 million for the nine months ended June 30, 2025, respectively.

Interest Expense, net

Interest expense, net, includes interest expense on the Company's term loan and amortization of deferred financing costs on debt obligations.

Interest expense decreased $1.5 million for six months ended March 31, 2026 over 2025, primarily due to the prepayment of debt and a decrease in the floating interest rate.

Interest expense decreased $1.9 million for nine months ended June 30, 2026 over 2025, primarily due to the prepayment of debt and a decrease in the floating interest rate.

Provision for Income Taxes (Benefit)

Provision for income taxes decreased $2.0 million for the six months ended March 31, 2026 over 2025.

The effective tax rate for the six months ended March 31, 2026 and 2025 was 25.2% and 27.4%, respectively.

Provision for income taxes increased by $7.8 million for the nine months ended June 30, 2026 over 2025.

The effective tax rate for the nine months ended June 30, 2026 and 2025 was (69.7)% and 23.0%, respectively.

The Company's effective tax rate differed from the federal statutory rate of 21.0% for the current period, primarily due to the establishment of a valuation allowance against deferred tax assets.

During the current period, the Company concluded that it is more likely than not that its deferred tax assets would not be realized based primarily on cumulative losses in recent periods.

The effective tax rate was also impacted by state income taxes and permanent differences.

Supporting Financial Information , Income Taxes, for additional information regarding the valuation allowance.

Non-GAAP Financial Measures

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These resulting measures present our financial performance compared to the results delivered in the prior year period.

On a non-GAAP basis, EBITDA for the six months ended March 31, 2026 and 2025 was approximately $10.0 million and $19.3 million, and Adjusted EBITDA for such periods was $11.9 million and $19.3 million, respectively.

On a non-GAAP basis, Adjusted Income from Operations for the six months ended March 31, 2026 and 2025 was approximately $3.3 million and $10.8 million, respectively.

The year over year decrease in the foregoing measures was primarily due to the decrease in revenue volume driven by conversion of certain VA and HHS contracts to small business contractors.

On a non-GAAP basis, EBITDA for the nine months ended June 30, 2026 and 2025 was approximately $10.1 million and $27.4 million, and Adjusted EBITDA for such periods was $15.2 million and $27.4 million, respectively.

On a non-GAAP basis, Adjusted Income from Operations for the nine months ended June 30, 2026 and 2025 was approximately $2.6 million and $14.5 million, respectively.

The year over year decrease in the foregoing measures primarily reflects the conversion of certain contracts in our contract portfolio to small business contractors across our customer base.

These non-GAAP measures of performance are used by management to conduct and evaluate its business during its review of operating results for the periods presented.

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We have defined these non-GAAP measures as follows:

“Adjusted Income from Operations” represents income from operations before the costs associated with scaling general and administrative costs to revenue volume, referred to below as “Cost scaling initiatives”.

“Adjusted Income from Operations” represents income from operations before the costs associated with scaling indirect expenses within contract and general and administrative costs to revenue volume, referred to below as “Cost scaling initiatives”.

"EBITDA" represents net income before income taxes, interest, depreciation and amortization.

“Adjusted EBITDA” represents net income before income taxes, interest, depreciation and amortization, and the costs associated with scaling general and administrative costs to revenue volume.

Below is a reconciliation of Adjusted Income from Operations, EBITDA, and Adjusted EBITDA reported for the three months ended March 31, 2026 and 2025 to its most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands):

Three Months Ended Six Months Ended

March 31, March 31,

Below is a reconciliation of Adjusted Income from Operations, EBITDA, and Adjusted EBITDA reported for the three months ended June 30, 2026 and 2025 to its most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands):

Three Months Ended Nine Months Ended

June 30, June 30,

2026 2025 Change 2026 2025 Change

Adjusted Income from Operations

Adjusted Income (Loss) from Operations

Income (Loss) from Operations $ (3,932) $ 3,755 $ (7,687) $ (2,550) $ 14,506 $ (17,056)

$ (55) $ 5,115 $ (5,170) $ 1,382 $ 10,752 $ (9,370)

Cost scaling initiatives⁽¹⁾

3,283 — 3,283 5,174 — 5,174

Adjusted Income from Operations

$ 1,027 $ 5,115 $ (4,088) $ 3,272 $ 10,752 $ (7,480)

Adjusted Income (Loss) from Operations $ (649) $ 3,755 $ (4,404) $ 2,624 $ 14,506 $ (11,882)

EBITDA and Adjusted EBITDA

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$ 3,352 $ 8,063 $ (4,711) $ 15,224 $ 27,386 $ (12,162)

(1) Cost scaling initiatives consist of expenses incurred by the Company in scaling its business to align with its current contract volume resulting from the previously disclosed conversion of programs for which the Company previously served as prime contractor to small business contractors.

(1) Cost scaling initiatives represent expenses the Company has incurred as it scales its operations to align with its current contract volume, driven by the previously disclosed transition of programs from the Company's role as prime contractor to small business contractors.

These costs are reported within the contract costs and general and administrative line items.

Liquidity and capital management

Cash was approximately $0.1 million and $0.1 million as of March 31, 2026 and September 30, 2025, respectively.

Available borrowings under our revolving credit facility was approximately $9.7 million and $23.6 million for the periods ended March 31, 2026 and September 30, 2025, respectively.

The decrease is primarily due to a lower outstanding receivables balance at March 31, 2026.

Cash was approximately $0.2 million and $0.1 million as of June 30, 2026 and September 30, 2025, respectively.

Available borrowings under our revolving credit facility were approximately $5.0 million and $23.6 million for the periods ended June 30, 2026 and September 30, 2025, respectively.

The decrease is primarily due to a lower outstanding receivables balance at June 30, 2026.

A summary of the change in cash is presented as follows (in thousands):

Six Months Ended

Nine Months Ended

2026 2025 Change

Net cash provided by (used in) operating activities

$ (984) $ 2,965 $ (3,949)

Net cash provided by operating activities $ 3,219 $ 12,536 $ (9,317)

Net cash used in investing activities (39) (213) 174

Net cash provided by (used in) financing activities

1,029 (3,110) 4,139

Net cash used in financing activities (3,070) (12,471) 9,401

Net change in cash $ 110 $ (148) $ 258

Cash flows provided by (used in) operating activities totaled approximately $(1.0) million and $3.0 million for the six months ended March 31, 2026 and 2025, respectively.

Cash flows provided by operating activities totaled approximately $3.2 million and $12.5 million for the nine months ended June 30, 2026 and 2025, respectively.

The decrease in cash provided by operating activities is primarily due to a decrease in revenue volume as compared to the prior year.

Cash used in investing activities totaled $39.0 thousand and $1.0 thousand for the six months ended March 31, 2026 and 2025, respectively.

The cash utilized was predominantly due to capital expenditures in the six months ended March 31, 2026 and 2025, respectively.

Cash provided by (used in) financing activities during the six months ended March 31, 2026 and 2025 were approximately $1.0 million and $(3.1) million, respectively.

The cash provided by financing activities was primarily driven by net borrowings on the revolving credit facility, partially offset by term debt prepayment.

Cash used in investing activities totaled $39.0 thousand and $213.1 thousand for the nine months ended June 30, 2026 and 2025, respectively.

The cash utilized was predominantly due to capital expenditures in the nine months ended June 30, 2026 and 2025, respectively.

Cash used in financing activities during the nine months ended June 30, 2026 and 2025 were approximately $3.1 million and $12.5 million, respectively.

The cash used in financing activities was primarily due to prepayment of term debt.

Sources of cash

As of March 31, 2026, our immediate sources of liquidity include cash, accounts receivable, and access to our secured revolving line of credit facility.

As of June 30, 2026, our immediate sources of liquidity include cash, accounts receivable, and access to our secured revolving line of credit facility.

This credit facility provides us with access of up to $50.0 million, subject to certain conditions including eligible accounts receivable.

As of March 31, 2026, we had unused borrowing capacity of $9.7 million, which is net of outstanding letters of credit.

As of June 30, 2026, we had unused borrowing capacity of $5.0 million , which is net of outstanding letters of credit.

The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations.

We believe that our current investment and financing obligations are adequately covered by cash generated from profitable operations and that planned operating cash flow should be sufficient to support our operations for twelve months from the date of issuance of these consolidated financial statements.

We believe that our current investment and financing obligations are adequately covered by cash generated from operations and that planned operating cash flow should be sufficient to support our operations for twelve months from the date of issuance of these consolidated financial statements.

Credit Facilities

A summary of our credit facilities for the period ended March 31, 2026 is as follows (in millions):

A summary of our credit facilities for the period ended June 30, 2026 is as follows (in millions):

Arrangement Loan Balance Interest* Maturity Date

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December 8, 2027

1 Secured Overnight Financing Rate ("SOFR") as of March 31, 2026 wa s 3.8%.

1 Secured Overnight Financing Rate ("SOFR") as of June 30, 2026 wa s 3.7%.

On January 31, 2023, we executed a floating-to-fixed interest rate swap with FNB which had a notional amount of $74.0 million, and a fixed interest rate of 4.10%.

The swap matured on January 31, 2026.

As of March 31, 2026, no interest rate swaps were outstanding and all debt is subject to floating interest rates.

As of June 30, 2026, no interest rate swaps were outstanding and all debt is subject to floating interest rates.

(a) Represents the principal amounts payable on our term loan, which is secured by liens on substantially all of the assets of the Company.

1 unchanged sentence

(b) As amended, the secured revolving line of credit has a ceiling of up to $50.0 million and a maturity date of December 8, 2027.

The Company has accessed funds from the revolving credit facility during the quarter and has a balance outstanding at March 31, 2026 of $10.7 million.

The Company has accessed funds from the revolving credit facility during the quarter and has a balance outstanding at June 30, 2026 of $13.7 million.

The secured term loan and secured revolving line of credit are secured by liens on substantially all of the assets of the Company.

2 unchanged sentences

Contractual Obligations

Contractual obligations as of March 31, 2026 are as follows (in thousands):

Contractual obligations as of June 30, 2026 are as follows (in thousands):

Payments Due by Period

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Goodwill Impairment Testing

The qualitative assessment of goodwill at March 31, 2026 determined a triggering event occurred requiring that we conduct additional quantitative analyses.

The qualitative assessment of goodwill at June 30, 2026 determined a triggering event occurred requiring that we conduct additional quantitative analyses.

The triggering event was primarily due to the decrease in the Company's share price resulting in a decline in market capitalization.

Management's assessment was that the market capitalization at the end of the 2nd quarter was not indicative of the Company's fair value.

Management's assessment was that the market capitalization at the end of the third quarter was not indicative of the Company's fair value.

The Company performed a quantitative assessment to determine its fair value.

4 unchanged sentences

The income-based method is a discounted cash flow analysis and the significant estimates included expected growth rates, profitability and the weighted average cost of capital.

For the market-based methods, the Company used the average market capitalization over the current quarter with the inclusion of a control premium as one estimation of fair value.

For the market-based methods, the Company used the market capitalization over the current quarter with the inclusion of a control premium as one estimation of fair value.

The other market-based method used publicly available market multiples of relevant publicly traded companies applied to our expected EBITDA and revenue for fiscal 2026 to estimate the Company's fair value.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis