Good day ladies and gentlemen, and welcome to the Q3 2015 DLH Holdings Corp. Earnings Conference Call. My name is Mark and I’ll be your operator for today. And at this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Casey Stegman, with Stonegate Capital Partners. Please proceed sir.

Thank you, Mark. Good morning everyone and thank you for joining us for today's conference call. My name is Casey Stegman, with Stonegate Capital Partners, Investor Relations Adviser to DLH Holdings Corp. On the call with me today is Zach Parker, President and Chief Executive Officer of DLH; and Kathryn Johnbull, Chief Financial Officer of DLH. Earlier today, the Company posted its earnings release, which outlines the topics that management intends to discuss today. Should you have missed that release, it can be found on the investor page of DLH's corporate website at www.dlhcorp.com. As a part of today's call, we have provided a slide show presentation that can be accessed on the DLH website. Go to the Investor Relation’s tab towards the right-side of the page and click on Presentations under the drop-down menu. We're also providing a simultaneous webcast of today's call with the replay available later today on our website. Please note that this conference may contain certain forward-looking statements as defined by the federal securities laws. Statements in this call regarding DLH Corp.'s business, DLH Holding Corp.'s business, which are not historical facts, are forward-looking statements that involve risks and uncertainties. While these statements reflect DLH's current views and outlook, they are subject to factors that could cause its future results to differ materially. These risks and uncertainties are discussed in detail in our documents filed with the SEC, specifically, the most recent reports on Form 10-Q and 10-K. 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. All comparisons throughout this call will be on a year-over-year basis unless stated otherwise. With that said, it's my pleasure to turn the call over to Zach Parker, President and Chief Executive Officer of DLH. Zach?

Thank you, Casey. Good morning and welcome to our shareholders and other interested parties. We appreciate your participation in this conference call and webcast. I will provide a few brief comments regarding our Q3 performance and then turn the call over to our CFO, Kathryn Johnbull, and we will then return with some questions and answers. Earlier today we posted our third quarter fiscal year 2015 financial results. We are very pleased with our third quarter operating performance as we achieved record levels in our key operating metrics. Third quarter revenue of $16.8 million was a record high since we began our corporate transformation in 2010 and grew nearly 7% over the prior year's third quarter. Gross margin of $3 million was also a record high and improved nearly 32% over the prior year. Our mix of new business awards and contract – improved contract performance has generated a gross margin rate of return of 18.1% for the quarter, an improvement of 3.4% over the prior year third quarter. our highest rate of return since our business transformation as well, DLH’s income from operations and adjusted EBITDA more than doubled over the prior year third quarter, showing sustained growth and profitable operations. Our strong cash position of nearly $5 million, working capital surplus of $1.6 million, no debt, and asset-backed credit limit of $6 million and early interest from potential financing partners has positioned us to set our sights on acquiring a strategic business to expand our service offerings and increase our revenue and market share. That continues to be a part of our long-range strategy. Our operating results reflect our strategy to expand our business within our key customer base and into adjacent federal markets. Our business capture initiatives include military and veteran requirements for telehealth services, behavioral health…

Thank you, Zach and good morning everyone. We appreciate your joining us today. Our third quarter and year-to-date results continued our trend of improving our key metrics as we delivered growth in revenue, gross margins, income from operations and adjusted EBITDA, compared to the prior year period. Detailed financial results for the third quarter ended June 30, 2015 versus the prior year third quarter are as follows. Revenue of $16.8 million increased $1.1 million or 6.9% over the prior year third quarter with the increase due principally to a new business awarded in late in 2014 and expansion on current programs. Gross margin of $3 million increased by $0.7 million or 31.6% over the prior year third quarter. As a percentage of revenue, our gross margin rate of 18.1% improved by 3.4% over the prior year third quarter. Favorable margin results are attributable to improved contract performance, and higher margins on new business. G&A expenses, which include general, administrative, operating and business development activities, were $2.4 million, an increase of $0.3 million over the prior year third quarter due principally to planned expenses related to managing and growing our contract base. As a percent of revenue, G&A expenses were 13.5% of revenue, an were within anticipated levels required to manage and grow our contract base. Income from operations was approximately $0.8 million, an increase $0.5 million or 185% over the prior year third quarter due to improved gross margins, partially offset by increased G&A expenses as described above. Net income was approximately $0.4 million or $0.05 per basic and $0.04 per diluted share compared to net income of $0.3 million or $0.03 per basic and diluted share in the prior year period. The improved profit is due principally to higher gross margins partially offset by additional expenses allocated to grow…

[Operator Instructions] Your first question comes from Dan Trang from Stonegate Capital Partners. Please proceed.

Hi, thanks for taking my call. Just wondering about the improvement in the gross margin now at 18.1 if I am correct, right?

Right.

That’s correct.

Are you going to be able to sustain that gross margin going forward?

Good question. Good morning Dan. I appreciate your call, and yes, we do have a high degree of confidence and we’ll be able to sustain that. As you look at certainly our trend and the trajectory of our gross margins in our earnings presentation online, you’ll see that we’ve had a pretty steady trend to get here and those are largely a function of what we consider fundamentals and some impacts, some substantial impacts of initiatives that we’ve put into place, both to drive higher margin business in and but more – just as importantly to manage elements of cost which quite frankly years ago we just didn’t have the tools and the resources to be able to do that. So we feel very confident that this will at least be sustainable and that’s important, because as you all know, we talk a lot about our new business being that we are focusing on being a higher complexity of work which would drive greater margins, gross margins as well and that’s going to be important for us to deliver the type of value to the shareholders that we have in our pockets. Kathryn, do you want to add anything to that?

I am reinforcing that comment. I do expect that this is a sustainable trend and it does represent the fruits of the efforts we put into improving contract performance for our current organic business base as well as pursuing higher return new work.

Okay. And currently, you guys have no debt on the books. I am wondering if there is a situation where you may have to add debt whereas then not in the foreseeable future?

Well, a function that – with growth sometimes comes from upfront investment cause that, we weigh the nature of that each of those individual opportunities and then of course the acquisitive component of our long-term strategy also has a potential for us and we’ll review those on a case-by-case basis, Kathryn?

Exactly, right. Yes, so we do expect that, even in terms of the business in the government space, of course it’s extremely cash flow positive and has very, very favorable payment terms. So, generally the outstandings on that are 45 days. So, in the front-end of a contract, it’s not so unusual it will have a little bit of consumption of cash, but that’s a fairly short-term phenomena and then what you get cash flow going on that, it shouldn’t need debt to fund that, but and then in further as Zach said, we do have as part of our long-term strategy, potential acquisitions, strategic acquisitions, tuck-in and we may require a borrowing to finance that.

Okay. Thank you

You bet. Thank you.

Your next question comes from Richard Greulich from REG Capital Advisors.

Hi, Rich.

Hello Rich.

Wanted to focus, I mean, I am always – I am continuing to be not amazed but very pleasantly surprised how you keep improving the profitability of the business without any major improvements, just these are kind of your pumping along adding $0.5 million here, $0.5 million there. Well, I was surprised that the revenues actually were as strong as they were, because there were no major contract announcements or new adds in that regard?

Yes. Good question. I’ll do the reversal, let me talk on the revenue side. That top-line is a function of, as we’ve talked a lot this year and you’ve probably seen from our peer and benchmark companies, the government has - still been really quite slow with a lot of awards for new contracts and I am going to talk a little bit about new contracts shortly. And so we have had an increased focus for this year in order to continue to drive some positive performance and create new opportunities for growth to really look at expanding on some of our existing contracts. We refer to this frequently as on contract growth and we’ve had some good growth there as well. A good part of those are we are really focusing on some of our newer business that we’ve won and reported over the course of the last year, year and a half and helping the customers to find added solutions that would net out of this growth for us both on the top-line and a bit on the bottom-line. So we are going to continue to do that without taking our eye off of really the major contract awards we just released out there we are going to need to continue to have positive growth despite some of the delays in the new contract awards. With regard to the overall profitability, do you want to talk to Kathryn?

Right, so that is, as we talked on a few occasions on a few calls before, I mean, we do have a organic book of business that we are very – of course very long tenure list, but – and we have them operating smoothly and they deliver certain level of returns, but there are always opportunities to both continue to improve your performance of cost there. There are a number of our causes we’ve talked about before fairly fixed because some of those positions are subject to service contracts back in labor cost prescribed. But there is still some degree of variable cost that if you are actively managing you can continue to deliver improvements in and we are seeing some of that show up as well as expansion as Zach mentioned earlier, some of the opportunities for expansion are more value-added services. And so, we talked about how from our perspective where we do of course we are able to serve our customer the value proposition on what we contribute and how we improve our operations, how we deliver productivity gains for them and then what we might be able to do in terms of expanding our reach for them and naturally the way we attempt to expand our reaches in the higher return areas of the program is where we think we have better ability to differentiate ourselves and more opportunities to deliver value to the customer. So that’s showing up in the numbers.

Thank you for your comments and thank you for your good work.

Thank you, Richard.

Thank you.

Your next question comes from Howard Brous of Wunderlich Securities. Please proceed.

Zach, Kathryn, congratulations on another good quarter. I can sit here and keep being amazed to the continuation. I have basically two questions. One, you started out and the – with a question of delays in new contract awards, I must apologize, I wasn’t on the whole call, so, I don’t know what was said earlier. Could you talk about that delays in new contract awards?

Sure, and I will use that opportunity to add another bit of information as well. So, we didn’t elaborate on the delays in the new contract awards, but this year has been another year where – and particularly in the Department of Defense and the Department of Veteran Affairs, there has continued to be a lag of a lot of contracts being awarded. A number of these contracts amongst our peer companies and several that we have bid in the course of the last year, year and a half, just have not – the government has not made a decision on the awards which means they’ve also not obligated the funding for these, Some of these contracts are new work and others are recurring work with existing incumbents and so what we have seen is, a pattern of extending the incumbent contracts until the contracts and acquisition community can make the decisions on awards of contracts. So we’ve seen a fair amount of that, we’ve talked in some prior quarters about few of the bids that we’ve had in place in to the aids now in excess of 15 months and that continues and some of those key awards we are still hoping will drive some of the relatively near term growth. But the other news I would like to share is, relatively had off the press and subsequent to the quarter and just the reason we have just been notified of a new contract award that we are a part of that was recently notified as announced as a multiple award contract that would be indefinite delivery indefinite quantity, the term we use IDIQ for the United States Army’s Medical Material Development Activity, we refer to them as USAMDA. It’s a very large ceiling contract over 10 years is…

So, congratulations.

Thanks

Certainly, you are in order. You talked earlier about business opportunities in the next 18 to 24 months. Can I assume that, those business opportunities would contain similar gross margins as exists in the base business or greater? Should they happen?

Good question. As we grow that pipeline and we’ll be giving at the end of the year our usual quantitative description of our pipeline, but our objective, as Kathryn mentioned a little bit earlier is to ensure that the majority of our new business pipeline is a character of work that is higher margin, gross margin than our current book of business. So we expect that to move north of where we are delivering today. The nature of that work much like the work that we just described with this new contract will be back into the higher professional level and more complex type work that generally when you add value, and in the best value environment with clients like this as opposed to the lowest bidder, we generally will see better margins come out of that. So, we expect it to be higher rather than straight-line.

Last question, I want to pose. As a shareholder, what can I wish for, say in two years from now, three years from now, that the company will achieve certain goals?

Very good question. I am not going to give you a very high level, but I want to – let me introduce that with also some additional news that we are posting on our website. Next month, Kathryn and I will be participating in the Ideas Investor Conference in Chicago. It’s one that’s generally is targeted for small caps and at that meeting one of the things we are going to disclose is, little greater – quite a bit of more color around our growth plan and that growth game plan in and of itself will address certainly organically where we see ourselves differentiating what types of expectations we can see in the 18 to 36 month window. I can tell you that we have recently completed some long range forecast is what we think the odd of the possible will look like with a combination of sustainable organic growth around our pipeline with the type of tuck-in acquisitions that have various characteristics over the course of the next 36 to 48 months. And that will probably be a good opportunity for us to get into greater disclosure while we are still in this phase of course of not providing not guidance. Kathryn, do you want to add anything?

I think that’s entirely consistent with where we are headed and we are working with Stonegate in assisting us in that development of greater granularity and greater vision on where we are headed, more specifically there. And the Ideas Conference is just in case you are interested in checking it out it’s the last week of August. So, snuck up on us already, it’s August 25th through 27th, we are presenting on the 26th.

I’ll keep that in mind and you know we have a client up there.

It’s indeed.

Oh yes, we will be posting – runs a quick review of our public disclosures. It is our intent to make everything public coincident with the conference of it.

Right.

You will have the same information that we will furnish with those folks as well.

Zach, Kathryn, again, congratulations. Great job, really.

Good to hear from you, Howard.

My pleasure. Thank you.

[Operator Instructions] I would now like to hand the call back over to Zach for closing remarks.

Well, thank you, Mark and thank you all again for participating in today’s conference call. Should you have any additional questions, please feel free to contact myself or Kathryn. We thank you for your interest and support and look forward to talking with you again in December as we report the fourth quarter and our fiscal year 2015 results. Thank you and have a blessed day.

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.