Q2 2024 DLH Holdings Corp Earnings Call

Operator: Hello and welcome to the DLH Holden Corp. Fiscal 2024 2nd Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to hand the call over to Chris Witty, Investor Relations Advisor. Please go ahead.

Hello, and welcome to the DLH holding Corp fiscal 'twenty 'twenty four second quarter earnings Conference call.

Speaker Change: All participants will be in listen only mode.

Operator: Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

Operator: After todays presentation, there will be an opportunity to ask questions too.

Chris Witty: To ask a question you May press Star then one on your telephone keypad.

Chris Witty: To withdraw your question. Please press Star then two.

Operator: Please note this event is being recorded.

Operator: I would now like to hand, the call over to Chris witty Investor Relations adviser. Please go ahead.

Chris Witty: Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer, and Kathryn JohnBull, Chief Financial Officer. The company's earnings release and PowerPoint presentation are available on our website under the Investor page. I would now like to provide a brief Safe Harbor Statement, which is also shown on slide 3 of the presentation. This column may include forward-looking statements that relate to the company's outlook for fiscal 2024 and beyond.

Chris Witty: Thank you and good morning, everyone on the call with me today is that Parker, President and Chief Executive Officer, and Catherine Jon Bell Chief Financial Officer.

Chris Witty: The company's earnings release, and Powerpoint presentation are available on our website under the Investor page I would now like to provide a brief safe Harbor statement, which is also shown on slide three of the presentation.

Chris Witty: These statements are subject to various risks and uncertainties, which could cause actual results and events to differ materially from such statements. Please refer to the risk factors contained in the company's annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking data. On today's call, we will be referencing both GAAP and non-GAAP financial measures. A reconciliation of our non-GAAP results to our reported GAAP results is included in our earnings release and in the investor presentation on DLH's website.

Chris Witty: This call May include forward looking statements.

Chris Witty: That relate to the company's outlook for fiscal 2024 and beyond.

Chris Witty: These statements are subject to various risks and uncertainties, which could cause actual results and events to differ materially from such statements. Please refer to the risk factors contained in the company's annual report on Form 10-K and in our other filings with the Securities and Exchange Commission, we do not undertake any duty to update any forward looking statement.

Chris Witty: On today's call, we will be referencing both GAAP and non-GAAP financial measures a reconciliation of our non-GAAP results to our reported GAAP results is included in our earnings release and in the Investor presentation on Dlh's website President and.

Chris Witty: President and CEO Zach Parker will speak next, followed by CFO Kathryn JohnBull, after which we'll open it up for questions. With that, I'd now like to turn the call over to Zach. Please go ahead, Zach.

Chris Witty: And CEO Zach Parker will speak next followed by CFO, Kathryn Jumbo after which we'll open it up for questions with that I'd now like to turn the call over to Zach. Please go ahead Zach.

Zachary C. Parker: Thank you, Chris, and good morning everyone. Welcome to our 2024 second quarter conference call. We remain on track for solid performance midway through the fiscal year.

Zachary C. Parker: Thank you, Chris and good morning, everyone. Welcome to our 2024 second quarter Conference call. We remain on track for solid performance midway through the fiscal year.

Zachary C. Parker: We would not be where we are today without the tremendous support and passion of our strong workforce, who remain laser focused on serving our customers. And they are dedicated to growing the company and instilling excellence in everything that they do. I would once again like to thank them for executing in a way that led to another great quarter of operating results, setting the stage for a bright future for DLH. Turning to slide four, I'll provide an overview of our financial results.

Zachary C. Parker: We would not be where we are today without the tremendous support and passion of our strong workforce, who remain laser focused on serving our customers.

Zachary C. Parker: We are dedicated to growing the company and instilling excellence in everything that they do.

Zachary C. Parker: I would once again like to thank them for executing in a way that led to another great quarter operating results setting the stage for a bright future for DLH.

Zachary C. Parker: Turning to slide four I'll provide an overview of our financial results.

Zachary C. Parker: We reported second-quarter revenue of $101 million and EBITDA of $10.2 million while generating operating cash of $5.2 million during the period, which translates to more than $10 million of cash flow year-to-date. This serves to underscore the cash-generating ability of our enterprise, as well as sound working capital management, as Kathryn will review in a moment. We also continued to de-lever the company, paying down $3.6 million of debt and ending the period with $170.8 million of total debt outstanding. Overall, we had a sound financial quarter that showed growth in key strategic markets and strong cash generation, laying the foundation for solid results going forward. Turning to slide five.

Zachary C. Parker: We reported second quarter revenue of 101 million and EBITDA of $10 2 million, while generating operating cash of $5 $2 million during the period, which translates to more than 10 million.

Zachary C. Parker: Cash flow year to date.

Zachary C. Parker: This serves to underscore the cash generating ability of our enterprise as well as the sound working capital management as Kathryn will review in a moment.

Zachary C. Parker: We also continued to Delever the company paying down three $6 million of debt and ended the period with $178 million of total debt outstanding.

Zachary C. Parker: Overall, we had a sound financial quarter that showed growth in key strategic markets and strong cash generation laying the foundation for solid results going forward.

Speaker Change: Turning to slide five I'd like to summarize important elements of our current positioning and outlook.

Zachary C. Parker: I'd like to summarize important elements of our current positioning and outlook. First, we increased our backlog sequentially from the end of Q1 by over 80 million to 736 million. We won several awards this past quarter, including two key recompetes that bolster our technology front at the National Institute of Health and provide an ample opportunity to expand our presence with this and other customers. FIRST provides IT services at the National Institute on Drug Abuse, the leading federal agency supporting scientific research on drug use and addiction, a growing problem in the United States and a priority for our federal government.

Zachary C. Parker: First.

Zachary C. Parker: We increased our backlog sequentially from the end of Q1 up over $80 million to $736 million.

Zachary C. Parker: We won several awards this past quarter, including two key recompete that bolster our technology front at the National Institute of health and providing ample opportunity to expand our presence with this and other customers.

Zachary C. Parker: The first provides.

Zachary C. Parker: Services at the National Institute on drug abuse, the leading Federal agency supporting scientific research on drug use and addiction.

Zachary C. Parker: Boeing problem in the United States and a priority for our federal government.

Zachary C. Parker: This award extends a partnership that began with our first contract with that customer in 2014. The contract value is approximately $23 million, of which approximately $10 million is for recurring services and the balance of $13 million for potential service expansion. Through the contract, we will help manage the agency's advanced clinical research informatics system, enabling sharing of data and resources in real time, a capability that we look to expand into adjacent markets.

Zachary C. Parker: This award extends our partnership began with our first contract with that customer in 2014.

Zachary C. Parker: The contract value was approximately 23 million of which approximately $10 million for recurring services and the balance of $13 million for potential service expansion.

Zachary C. Parker: Through the contract we will help manage the agency's advanced clinical research informatics system and.

Zachary C. Parker: Enabling sharing the data and resources in real time, our competency, which we look to expand into adjacent markets.

Zachary C. Parker: In addition, we won a contract to expand our IT services with the National Cancer Institute, the largest organization within the National Institute of Health and the government's principal agency for cancer research, training, and health information dissemination. This award utilized the contract which we announced last year with the Center for Biomedical Informatics and Information Technology, a multiple award, highly competitive contract. We are providing scientific computing and data analytics services to support the agency's research mission.

Zachary C. Parker: In addition, we won a contract to expand our services with the National Cancer Institute, the largest organization within the National Institute of Health and the government's principal agency for cancer Research training and health information dissemination.

Zachary C. Parker: This award utilized the contract, which we announced last year with the center for Biomedical Informatics and information technology, a multiple award highly competed contract.

Zachary C. Parker: We are providing scientific computing and data analytics services to support the agency's research mission.

Zachary C. Parker: The contract has a base value, including all option periods, of approximately $52 million over five and a half years, but it also has provisions for an additional $86 million in optional IT services, which, if fully exercised, will bring the total value to $138 million.

Zachary C. Parker: The contract has a base value, including all option periods of approximately $52 million over five and a half years, but it also has provisions for an additional $86 million.

Zachary C. Parker: Optional services, which if fully exercised will bring the total value to $138 million.

Zachary C. Parker: This award is a great example of the ongoing demand for our company's unique skill sets and integrated services as we'll be handling a broad range of requirements from hardware configuration, software management strategies, network connectivity, platform integration, engineering, and much more. We look forward to continuing our support of these and other NIH programs for years to come. These contract wins are illustrative of the value DLH brings to our customers, and we expect similar momentum during the second half of fiscal 2024, as we continue to invest in and reshape our portfolio through business development activities and respond to a variety of active pipeline opportunities.

Zachary C. Parker: This award is a great example of the ongoing demand for our company's unique skill sets and integrated services as we will be having a broad range of requirements from hardware configuration software management strategies network connectivity platform integration engineering and much more.

Zachary C. Parker: We look forward to continuing our support of these and other NIH programs for years to come.

Zachary C. Parker: These contract wins are illustrative of Vietnam.

Zachary C. Parker: The value DLH brings to our customers and we expect similar momentum during the second half of fiscal 2024 as.

Zachary C. Parker: As we continue to invest and reshape our portfolio with business development activities and respond to a variety of active pipeline opportunities.

Zachary C. Parker: I'd also like to comment on our legacy VA CMOP contracts, which are currently proceeding through the procurement process. As previously announced, the VA issued RFPs for medical logistics and pharmacy services for the 8 CMOP businesses. And these procurements were set aside for prime contractors that were service-disabled, veteran-owned small businesses.

Zachary C. Parker: I'd also like to comment on our legacy VA Cmos contracts, which are currently proceeding through the procurement process as.

Zachary C. Parker: As previously announced the VA issued Rfps for medical logistics and pharmacy services for the eight Cmos bids.

Zachary C. Parker: And these procurements, we're set aside for prime contractors that were service disabled veteran owned small businesses.

Zachary C. Parker: As such, we partnered with a highly qualified small business to bid this work as part of a joint venture. While these bids are evaluated, we continue to operate as the prime contractor for all CMOP locations. In late February, we were informed that the VA had made an initial award decision for one of the eight at the Chelmsford location, awarding the contract to a small business that is unaffiliated with our joint venture.

Zachary C. Parker: As such we partnered with a highly qualified small business to bid this work as part of the joint venture.

Zachary C. Parker: While these bids are evaluated we continue to operate as the prime contractor for all <unk> locations.

Zachary C. Parker: In late February we were informed that the VA had made an initial award decision.

Zachary C. Parker: For one of the eight.

Zachary C. Parker: Two the Chelmsford Chelmsford location awarding the contract to a small business that is unaffiliated with our joint venture <unk>.

Zachary C. Parker: However, that award remains subject to the completion of the VA's acquisition process, and I believe that our joint venture remains a viable contender for that work. While the VA continues to evaluate the eight separate procurements, we have been awarded a sole source IDIQ contract with a $200 million ceiling value to continue the VACMOP operations at all locations. This remains dynamic.

Zachary C. Parker: However that award remains subject to the completion of the <unk> acquisition process and I believe that our joint venture remains a viable continue.

Zachary C. Parker: Tinder for that work.

Zachary C. Parker: While the VA continues to evaluate the eight separate procurements.

Zachary C. Parker: We have been awarded a sole source <unk> contract with a $200 million ceiling value to continue.

Zachary C. Parker: Up operations at all locations.

Zachary C. Parker: This remains dynamic with.

Zachary C. Parker: With the initial task having a period of performance through July 31st of this year, with the potential for additional orders beyond the initial task. Overall, we see a wide array of opportunities across our core targeted markets in the coming quarters, including through the multi-year, large IDIQ contracts that we've discussed in the past, some of which are now starting to define specific task orders, and some of which we expect the governments to make decisions on later this year.

Zachary C. Parker: With the initial tasking, having a peer to performance through July 31, this year with a potential for additional orders beyond what.

Zachary C. Parker: Beyond the initial tasking.

Zachary C. Parker: Overall, we see a wide array of opportunities across our core targeted markets in the coming quarters, including through multiyear.

Zachary C. Parker: Multi year large Adi Q contracts that we've discussed in the past some of which are now starting to define a specific task orders.

Zachary C. Parker: And some of which we expect the government to make decisions on later this year.

Zachary C. Parker: Given the government is fully funded now through the remainder of the fiscal year, this is a time of healthy and heightened bid activity across the agencies that we serve. Our wide array of applications, research and development, digital transformation capabilities, and our highly credentialed workforce, along with our strong agency relationships, are anticipated to drive continued growth this year and beyond. Even with the CMOP uncertainty, the future of DLH looks tremendously bright. We have continued to build our new business pipeline, which aligns with federal budget priorities and our expanded capabilities in digital transformation and cyber security and its role, and their role, in enhancing science, research, and development, and readiness activities. With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Okay, Kathryn?

Zachary C. Parker: The government has fully funded now through the remainder of the fiscal year.

Kathryn M. JohnBull: As a time of healthy and heightened bid activity across the agencies that we serve.

Kathryn M. JohnBull: Our wide array of applications research and development and digital transformation capabilities and our highly credentialed workforce along with our strong agency relationships are anticipated to drive continued growth this year and beyond.

Kathryn M. JohnBull: Even with the Cmos and uncertainty of the future of DLH looks tremendously Brian.

Kathryn M. JohnBull: We have continued to build our new business pipeline, which aligns with federal budget priorities, and our expanded capabilities and digital transformation and cyber security.

Kathryn M. JohnBull: And his role there row, and enhancing science research and development and readiness activities.

Kathryn M. JohnBull: With that I'd now like to turn the call over to our Chief Financial Officer, Kathryn Jamba Kathryn.

Kathryn M. JohnBull: Thank you, Zach, and good morning, everyone. We're pleased to report our second quarter results for fiscal 2024. Turning to slide 7, I'd like to provide a high-level overview of some key financial metrics for the three months ended March 31, 2024. We reported revenue of $101 million in the second quarter versus $99.4 million in the prior year period. We saw expansion within our public health and enterprise IT management portfolios, partially offset by the impact of turnover of certain small business set-aside awards in our national security program area.

Kathryn M. JohnBull: Thank you Zach and good morning, everyone. We're pleased to report our second quarter results for fiscal 2024, turning to slide seven I'd like to provide a high level overview of some key financial metrics for the three months ended March 31, 2024, we reported revenue of $101 million in the second.

Kathryn M. JohnBull: <unk> versus $99 4 million in the prior year period, we saw expansion within our public health Enterprise management portfolios, partially offset by the impact from turnover of certain small business set aside awards in our National Security program area.

Kathryn M. JohnBull: We reported EBITDA of $10.2 million for the second quarter versus $10.5 million last year and generated cash from operations of $10.3 million year-to-date compared with $6.9 million in fiscal 2023, reflecting improved cash collection. This resulted in day sales outstanding of 50 days, which represents a decrease of 11 days over the comparable period in fiscal 2023. Our EBITDA for the quarter was in line with last year, even given approximately $1 million in aggregate of CMOP procurement-related legal costs and strategic positioning expenses.

Kathryn M. JohnBull: We reported EBITDA of one of $10 2 million for the second quarter versus $10 5 million last year and generated cash from operations of $10 3 million year to date compared with $6 9 million in fiscal 2023, reflecting improved cash collections. This result, this resulted in <unk>.

Kathryn M. JohnBull: Days sales outstanding of 50 days, which represents a decrease of 11 days over the comparable period in fiscal 2023.

Kathryn M. JohnBull: Our EBITDA for the quarter was in line with last year, even given approximately $1 million in aggregate have Cmos procurement related legal cost and strategic positioning expenses.

Kathryn M. JohnBull: Now, if you turn to slide 8, I'll provide an update regarding our deployment of the company's cash to reduce debt, strengthen the balance sheet, and lower interest expense. We paid off approximately $3.6 million of our higher interest floating rate debt during the quarter, ending the period with $170.8 million of total debt outstanding. Approximately $0.4 million of quarterly interest expense is non-cash amortization of financing arrangement fees. We remain on track to reduce debt to between $153 and $157 million at the end of the fiscal year, as we expect debt payments to accelerate in the second half of the fiscal year.

Kathryn M. JohnBull: Now if you'll turn to slide eight I'll provide an update regarding our deployment at the company's cash to reduce debt strengthen our balance sheet and lower interest expense, we paid off approximately $3 6 million of our higher interest floating rate debt during the quarter ending the period with $178 million of <unk>.

Kathryn M. JohnBull: Total debt outstanding approximately $4 million of quarterly interest expense is non cash amortization of financing arrangement fees.

Kathryn M. JohnBull: We remain on track to reduce debt to between $1 53, and $157 million at the end of the fiscal year as we expect that pellets to accelerate in the second half of the fiscal year. The debt reduction is expected to result in a leverage ratio below three five times, providing further cash savings and earnings.

Kathryn M. JohnBull: <unk> through reduced interest expense.

Kathryn M. JohnBull: The debt reduction is expected to result in a leverage ratio below 3.5 times, providing further cash savings and earnings expansion through reduced interest expense. This concludes my discussion of financial statements. With that, I would now like to turn the call over to our operator to open the call to questions. We will now begin

Speaker Change: This concludes my discussion of the financial statements with that I would now like to turn the call over to our operator to open for questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If you want to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster, and our first question will come from Joe Gomes of Noble Capital. Please go ahead.

Speaker Change: We will now begin the question and answer session.

Joseph Anthony Gomes: To ask a question you May press Star then one on your telephone keypad.

Operator: If you are using a speakerphone please pick up your handset before pressing the keys.

Operator: To withdraw your question. Please press Star then two.

Operator: At this time, we will pause momentarily to assemble the roster.

Operator: And our first question will come from Joe Gomes of Noble capital. Please go ahead.

Joseph Anthony Gomes: Good morning, and thanks for taking the questions.

Joseph Anthony Gomes: Good morning, and thanks for taking the questions Hey, Joe Good morning, Joe.

Zachary C. Parker: Hey, Joe. Good morning, Joe.

Joseph Anthony Gomes: So on the national security contracts that were awarded to small businesses, any way to size that, and then how much more of that, if any, is at risk?

Zachary C. Parker: So on the national security contracts that.

Joseph Anthony Gomes: We're awarded a small businesses any.

Joseph Anthony Gomes: Way to size that and then how much more of that if any is at risk.

Zachary C. Parker: Yeah, Joe, great question. As you may recall, during the end of 2022 and the early part of 2023, we did discuss that with the acquisition that we completed with GRSI, that there were some opportunities; some of their programs had previously been awarded in a small business environment. And so we did expect to have some runoff of those when they came around for re-competition, and that accounts for largely what you have seen thus far in that which Kathryn has referred to.

Joseph Anthony Gomes: Yes, Joe Great question as you May recall we.

Zachary C. Parker: During the end of 2022 early part of 2023, we.

Zachary C. Parker: We did discuss it with the acquisition that we completed with <unk> that there was some.

Zachary C. Parker: Some opportunities some of the programs had previously been awarded in the small business environment and so we did expect to have some runoff of those when they came around for re competition and that accounts for largely what you would have seen that.

Zachary C. Parker: Thus far in that which Kathryn referred to.

Zachary C. Parker: We still have a couple or a few of those that are still pending. We expect most of those decisions this fiscal year. And we, you know, we'll have some degree of certainty as to what that conversion rate will look like. As you know, some of these contracts, we can, you know, we would generally, if we were to re-compete those, we would re-compete them generally as a subcontractor position, which potentially affords us 49% retention of those contract values. And so we'll keep you all informed as to how these progress downstream.

Zachary C. Parker: Still have a couple or a few of those that are still pending we expect.

Zachary C. Parker: Most of those decisions this fiscal year.

Zachary C. Parker: And we will have some degree of certainty as to what that.

Zachary C. Parker: That conversion rate will look like as you know some of these contracts we can.

Zachary C. Parker: Generally.

Zachary C. Parker: Were to weaken recompete, those will recompete and generally as a subcontractor position, which potentially affords us 49%.

Zachary C. Parker: Retention as those contract values and so we will keep you all formed informed as to how those progress.

Zachary C. Parker: <unk>.

Kathryn M. JohnBull: Thanks for that, Zach. On the G&A, you mentioned some of the legal costs increased, driving some of the increase in G&A. Do you see that continuing going forward, or should G&A drop back down to the more historical type of run rate?

Speaker Change: Okay. Thanks for that Zach.

Kathryn M. JohnBull: On the G&A you mentioned some.

Kathryn M. JohnBull: The legal cost.

Kathryn M. JohnBull: Increased <unk>.

Kathryn M. JohnBull: Rivaling some of the increase in G&A do you see that continuing going forward or should G&A dropped back down.

Kathryn M. JohnBull: The more historical type of a run rate.

Kathryn M. JohnBull: Well, we do see it continuing, albeit likely at a lower level of consumption. However, I think even notwithstanding that, our GNA rate for the quarter was not particularly out of line. I think our Q1 was perhaps a little bit of an outlier to the favorable. If you look at the percent of GNA costs in Q1, it was really a function of us getting the operating leverage we expected to get post the integration of activities from the GRSI acquisition and not yet having fully, as is always our model, redirected those costs to really position the company for growth.

Kathryn M. JohnBull: Well.

Kathryn M. JohnBull: We do see it continuing albeit likely at a lower level of consumption.

Kathryn M. JohnBull: Consumption.

Kathryn M. JohnBull: However, I think or even even notwithstanding that our G&A rate for the quarter was not particularly out of line I think our Q1 was perhaps a little bit of an outlier to the favorable if you look at that if you look at the percent of G&A costs. In Q1. It was really a function of are getting the operating leverage we expect.

Kathryn M. JohnBull: To get post the integration of activities from the <unk> acquisition and not yet having fully.

Kathryn M. JohnBull: As is always our model redirected those costs to really position the company for growth really the emphasis now exactly go into this more as he talks about growth and.

Kathryn M. JohnBull: Really, the emphasis now, and Zach will go into this more as he talks about growth during the rest of this call and upcoming quarters, but really, as we've talked about before, our strategy for growth is working well to have each of the parties pursuing their own portfolios and really continuing to support their current customers and continuing to grow their independent lines of business. Where we're positioning and really investing is in cross-selling opportunities and really integrating the company and really making sure that we're pulling the capabilities together to pursue opportunities that would not have been viable for any of the independent parts of the company. And so we do expect to continue that in the coming quarters, and that is a bit of a backfill to some of the operating leverage savings we've achieved.

Kathryn M. JohnBull: The rest of this call and in upcoming quarters.

Kathryn M. JohnBull: But really as we've talked about before our strategy for growth, it's working well to have each of the each of the parties pursuing their own portfolios and really continuing to support their current customers and continuing to grow their independent lines business, where we're positioning and really investing is really the key.

Kathryn M. JohnBull: Cross selling opportunities and really integrating the company and really making sure that we're pulling the capabilities up to pursue opportunities that would not have been viable for any of the independent parts of the company.

Kathryn M. JohnBull: And so we do expect to continue that.

Kathryn M. JohnBull: In the out quarters and that is a bit of a backfill too some of the savings the operating leverage savings we've achieved.

Joseph Anthony Gomes: Okay. And on the VA contract, I mean, congratulations on getting it extended once again. But I don't know, Zach, if you can provide any more color as to what the VA's thinking is. They just seem to change gears at the drop of a moment's notice. And just trying to see if we could get a little better understanding of their whole thinking and process here. You know, like you said, the funding now is through the end of this fiscal year.

Kathryn M. JohnBull: Okay.

Kathryn M. JohnBull: The VA contract made congrats on.

Joseph Anthony Gomes: Kidding extent extended once again, but I don't know exactly if you can provide any more color as to what the va's thinking is they they.

Joseph Anthony Gomes: Just seem to change gears at the drop of a.

Joseph Anthony Gomes: At a moment's notice.

Joseph Anthony Gomes: And just trying to see if we could get a little better understanding of their whole thinking in process here.

Joseph Anthony Gomes: Like you said.

Joseph Anthony Gomes: And then, you know, potentially through October 25, which seems to be a long time for them to have to make a decision on these contracts, but we know this has happened in the past. So just any other insight you can give would be greatly appreciated.

Joseph Anthony Gomes: The funded now is through.

Joseph Anthony Gomes: At the end of this fiscal year.

Joseph Anthony Gomes: And then potentially through October 25.

Joseph Anthony Gomes: It seems to be a long time for them to have to make a decision.

Joseph Anthony Gomes: These contracts, but we know this has happened in the past so just any any other insight you can give would be greatly appreciated.

Zachary C. Parker: Sure. Thank you for the question, Joe. And again, yes, you're correct. As you may recall, this procurement cycle with Reconpeats for us started back in November of 2016. And in fairness to the VA acquisition community, there was a really heightened degree of commitment and new approaches associated with the, you know, the Kingdomware decisions that, you know, forced the VA at various acquisition shops to take a look at, you know, the appropriate acquisition strategies. And over the years, you know, the VA has had, you know, two versions, if you will, of this acquisition. And, of course, each was set back, in large part due to protest.

Zach: Sure. Thank you for the question Joe.

Zachary C. Parker: And again, yes, you're correct as you may recall this.

Zachary C. Parker: This procurement cycle.

Zachary C. Parker: With with recent piece for Us started.

Zachary C. Parker: Back in November of 2016.

Zachary C. Parker: And in fairness to the VA acquisition community there was really heightened.

Zachary C. Parker: Degree of commitment and new approaches associated with the <unk>.

Zachary C. Parker: The kingdom where decisions.

Zachary C. Parker: That forced.

Zachary C. Parker: Of course, the VA in various <unk>.

Zachary C. Parker: Acquisitions shops to take a look at the <unk>.

Zachary C. Parker: Appropriate acquisition strategies.

Zachary C. Parker: And over the years the VA has had.

Zachary C. Parker: Two versions if you will of this acquisition.

Zachary C. Parker: And of course, each was setback.

Zachary C. Parker: And so this is really, we're currently in, in this phase where it again, yet again, is another approach where we've had where it's by location, and it is combined both medical logistics and pharmacy. So it is kind of a first time for them in this arena, with, with it being exclusively set aside. And the way in which the process works is that, you know, first, the VA is required to do a thorough evaluation of the set aside, the set aside environment, and then make a determination around market best value to the government.

Zachary C. Parker: In large part due to a protest and so this is really we're currently in and in this phase where it again, yet again is another approach, where we've had where it's by location.

Zachary C. Parker: And it is combined both the medical logistics and pharmacy. So it is kind of a first time for them in this arena.

Zachary C. Parker: With.

Zachary C. Parker: With it being exclusively set aside.

Zachary C. Parker: And the way in which the process works.

Zachary C. Parker: Is that.

Zachary C. Parker: First the <unk>.

Zachary C. Parker: The VA is required to do a thorough evaluation of the set aside.

Zachary C. Parker: Set aside environment.

Zachary C. Parker: And then make a determination around market best value interest to the government and should they determine that.

Zachary C. Parker: And should they determine that awarding in a small business environment, a set aside environment, is not in their best interest, then they must restart a new acquisition. So it's, it's in large part driven by the formalized acquisition regulations that evolved from that law. And they're doing their best to try to get an acquisition strategy that will first evaluate the small business opportunities, and take a look at the risks associated with that.

Zachary C. Parker: Wording in.

Zachary C. Parker: Small business environment set aside environment is not in their best interest.

Zachary C. Parker: They must restart.

Zachary C. Parker: Our new acquisition. So this is in large part driven by the formalized acquisition regulations that evolved from from that law and they are doing their best to try to get an acquisition strategy that will first evaluate to small business opportunities take a look at what risks associated with that.

Zachary C. Parker: If that is suitable, then continue with the awards, and if not, then reopen it to an unrestricted environment. So we'll, you know, this is their first attempt at this new model of bundling, and we'll see how it goes in the future.

Zachary C. Parker: If that is suitable and continue with the awards.

Zachary C. Parker: And if not and then reopen it to unrestricted environment. So we'll this is therefore first attempt at this new model of bundling and we'll see how it yields in the future.

Joseph Anthony Gomes: Thanks for that insight, Zach. If you were to lose one or more of the eight contracts, how quickly could you get rid of the costs that are associated with serving those contracts?

Speaker Change: Thanks for that insight exactly.

Joseph Anthony Gomes: If.

Joseph Anthony Gomes: You were to lose one or more of the eight contracts.

Joseph Anthony Gomes: How quickly can you.

Joseph Anthony Gomes: Get rid of the cost that are associated with serving those contracts.

Zachary C. Parker: Yeah, great question. We have, as you might imagine, continued to model various scenarios that align with the new acquisition strategies, right? And of course, this strategy, which came out in the procurement phase last year, we have taken a look at that. We have, so we do have, you know, some step-down approaches and plans to execute them. It's going to be a function, Joe, of how many are awarded in a given time period, right?

Speaker Change: Yes, Great question, we have as you might imagine over the years continue to model.

Zachary C. Parker: Various scenarios that that align with the new acquisition strategies right and of course, this strategy, which came out in the procurement phase last year, we have taken a look at them we.

Zachary C. Parker: So we do have.

Zachary C. Parker: Some step down approaches and plans.

Zachary C. Parker: To execute them.

Zachary C. Parker: It's going to be a function Joe.

Zachary C. Parker: How many of them are awarded in a given time period right. Every indication is they would not award all seven or eight.

Zachary C. Parker: Every indication is that they would not award all seven or eight concurrently so that they can manage the phase-in process, which is ranging from 60 to 90 days in those solicitations. So if they were to do that, if you think about it, we have various models that would have a scale-down associated with, you know, the range of contracts. But we feel very comfortable that we will, within a full operating quarter, be able to hit, you know, a pretty quick reduction and be able to operate efficiently with regard to our EBITDA margin basis.

Zachary C. Parker: Concurrently.

Zachary C. Parker: So that.

Zachary C. Parker: They can manage the phase in process, which is ranging from 60 to 90 days and those solicitations. So if they were due to do that if you think about it we would be.

Zachary C. Parker: Various models that will have a scaled down associated with the range of contracts, but we but we feel very comfortable that we will within the within our full operating quarter.

Zachary C. Parker: Be able to hit.

Zachary C. Parker: Hit.

Zachary C. Parker: Pretty quick reduction.

Zachary C. Parker: Two.

Zachary C. Parker: Being able to operate efficiently with regard to our EBITDA margin basis.

Kathryn M. JohnBull: As a services business, of course, components of our costs are the direct cost of performing the contract, and that is, by far and away, the majority of the cost, and naturally, that scales if the contract moves; the costs move with it. There are also, of course, costs of running any particular part of our operation that is distinct from that operation, and CMOP, as we've described before, is a very large-scale Deceptively I mean, we think of it as it's a fulfillment of prescriptions, and of course, it is.

Zachary C. Parker: Yes, I mean, Thats a services business of course, our components of our cost are the direct cost of performing the contracts. So those are and that is by far and away. The majority of the costs naturally that scales up the contract lives the cost move with it.

Kathryn M. JohnBull: So of course cost of running any particular part of our operation that is distinct to that operation and Cmos as we've described before is a very large scale.

Kathryn M. JohnBull: Yeah.

Kathryn M. JohnBull: Deceptively complex I mean, we think of it as it's it's it's a fulfillment of prescriptions and of course it is but it is complex and in terms of the deployment of the workforce in response to variable demand.

Kathryn M. JohnBull: But it's complex in terms of the deployment of the workforce in response to variable demand. And so there is an infrastructure supporting that particular operation in a unique way, and that is, of course, scalable as the effort and the volume of business scales. And then there are, of course, the corporate costs of running the overall business. So as Zach suggests, the scaling will be, I expect, very well aligned with the timing of the revenue volume changes, and then we have to address the impact on the corporate infrastructure costs.

Kathryn M. JohnBull: So there is an infrastructure supporting that particular operation in an unique way and that is of course scalable as as the effort. The volume of the business scales and then there are of course, the corporate cost of running the overall business. So.

Kathryn M. JohnBull: Zach suggests the scaling will be I've I expect to be very well aligned with the timing of the revenue volume changes.

Kathryn M. JohnBull: And then we have to address the impact to that.

Kathryn M. JohnBull: Corporate infrastructure costs.

Kathryn M. JohnBull: As Zach said, we model this regularly, and we are prepared for this as an outcome, even as we continue to support VA as a key customer and something that we've invested in helping their outcomes be strong, and the operation can continue to improve.

Kathryn M. JohnBull: But we.

Kathryn M. JohnBull: We model this regularly and we are we are prepared for this as an outcome even as we continue to support <unk>.

Kathryn M. JohnBull: A key customer and something that we've invested in.

Kathryn M. JohnBull: And helping their their outcomes be.

Kathryn M. JohnBull: Strong and the operation.

Kathryn M. JohnBull: Continue to improve.

Joseph Anthony Gomes: Okay, one more for me, and I'll get back in queue. Zach, you guys haven't talked about the InfiniBite product here lately. I just wondered if you could give us kind of an update on how that is going out and being accepted.

Speaker Change: Okay, one more for me.

Speaker Change: Get back in queue.

Joseph Anthony Gomes: You guys haven't talked about the infinite by.

Joseph Anthony Gomes: Product here lately I was wondering if you could give us kind of an update and how that is.

Joseph Anthony Gomes: Going out and being accepted.

Zachary C. Parker: Great straight man, Joe. I appreciate that. You know, our federal government is really, you know, stepping up its activity with regard to security and cybersecurity across all agencies. Recently, in the last year, the White House issued some cybersecurity guidelines. There are implementing regulations being formed. There is a strong, strong commitment to the execution of sound cybersecurity principles, as well as a major commitment to cloud modernization for programs. We're starting to see those, and we're hearing more from those agencies who met with some of the highest levels in the leadership of the federal government just earlier this week in that regard.

Speaker Change: Great straight man Joe.

Speaker Change: I appreciate that.

Zachary C. Parker: Our federal government is really.

Zachary C. Parker: Stepping up this activity with regard to security and cyber security across across all agencies.

Zachary C. Parker: Recently.

Zachary C. Parker: Last year the white houses.

Zachary C. Parker: Issued.

Zachary C. Parker: Cyber security guidelines is implementing regulations being.

Zachary C. Parker: This is a strong strong commitment.

Zachary C. Parker: Two execution.

Zachary C. Parker: A sound cyber security.

Zachary C. Parker: Our principles.

Zachary C. Parker: As well as major commitment to cloud modernization for programs, we're starting to see those and we're hearing more from those agencies met with some of the highest levels in the leadership.

Zachary C. Parker: The government just earlier this week in that regard so.

Zachary C. Parker: So we believe that our InfiniByte solution still offers a very, very highly secure differentiating capability since we are one of the FedRAMP certified companies. So it still remains, we think, a strong, strong differentiator as we start to see those cybersecurity and information assurance opportunities coming down the pipeline. It is an area, Joe, where we have a strong campaign. It obviously was bolstered by the capabilities that we have brought in, both with the work that we're doing, the cybersecurity mission engineering work that we're doing for the Navy, and complemented by some exacting high security, up to and including zero trust architecture that we're doing within NIH in driving some of their transitions for the biomedical research community.

Zachary C. Parker: We believe that our infinite bi solutions still offers.

Zachary C. Parker: A very very highly secured differentiating capability. Since we are one of the one of the certified fed ramp certified companies. So it still remains we think are strong.

Zachary C. Parker: Strong differentiator is as we start to see those cyber security and information assurance opportunities coming down the pipeline. It is an area, Joe where we have a strong campaign.

Zachary C. Parker: Obviously was bolstered with the with the capabilities that we have brought in both with.

Zachary C. Parker: With the <unk>.

Zachary C. Parker: Work that we're doing the cyber security.

Zachary C. Parker: Engineering work that we're doing for the Navy.

Zachary C. Parker: Complemented by some exacting high security up to and including zero.

Zachary C. Parker: Trust architecture.

Zachary C. Parker: That we're doing within NIH and driving some of their transitions.

Zachary C. Parker: For the biomedical research community. So we're really excited about how we think infinite by both.

Zachary C. Parker: So we're really excited about how we think InfiniByte both complements and gives us a breadth and a capability that's somewhat unique, and we're looking to include that in our value propositions for these new bid backlogs that are finally starting to unwind a little bit with some budget certainty with some of these customers. But that would be a great example.

Zachary C. Parker: Both complements and gives us a breadth and a capability that is somewhat unique and we are looking to include that in our value propositions for this these new big backlogs that are finally, starting to uncork, a little bit with some budget certainty with some of these customers.

Zachary C. Parker: But that would be a great example, Joe, of what we talked about earlier in this call about cross-selling opportunities.

Zachary C. Parker: But that would be a great example of what we talked about earlier in this call about the cross selling opportunities.

Zachary C. Parker: Yes.

Zachary C. Parker: Okay.

Joseph Anthony Gomes: Great, thanks for taking the questions. I appreciate it and a nice strong quarter. Look forward to seeing how the second half of the year unfolds. We do, too. Once again, if you would like...

Speaker Change: Great Thanks for that.

Joseph Anthony Gomes: Taking the questions I appreciate it and nice strong quarter and look forward to seeing how the second half of the year unfolds.

Joseph Anthony Gomes: We do too.

Joseph Anthony Gomes: Okay.

Operator: Once again, if you would like to ask a question, please press star then 1. This concludes our question and answer session. I'd like to turn the call back over to Zach Parker for any closing remarks.

Speaker Change: Once again, if you would like to ask a question. Please press Star then one.

Operator: This concludes our question and answer session I would like to turn the call back over to Zach Parker.

Zachary C. Parker: For any closing remarks.

Zachary C. Parker: Thank you, Andrea, and thank you all for your attention today. Please stay tuned over the coming quarter. Kathryn and I will be providing some additional color around our pipelines and new business as well as updates on our current and organic contract growth opportunities and some upcoming investor conferences.

Zachary C. Parker: Thank you Andrea and thank you all for your attention today.

Zachary C. Parker: Please stay tuned over the coming quarter.

Zachary C. Parker: Kathryn and I will be providing some additional color around our pipelines of new business as well as update on our.

Zachary C. Parker: Current and.

Zachary C. Parker: Organic.

Zachary C. Parker: Contract growth opportunities and some upcoming investor conferences. Thank you all for your support and have a blessed day bye for now.

Zachary C. Parker: Thank you all for your support, and have a blessed day. Bye for now. The conference is now concluded. Thank you for attending.

Operator: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.

Zachary C. Parker: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Operator: Okay.

Operator: [music].

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