DLH Holdings Corp (DLHC) 2012 Q3 法說會逐字稿

Welcome to the DLH Holdings Corp. third-quarter and nine-months financial results conference call. My name is Janaida, and I will be your operator for today. 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 Mr. Adam Lowensteiner, Wolfe Axelrod Weinberger Associates, Senior Account Executive.

Thank you, Janaida. Good morning, and thank you, everyone, for joining us for today's conference call. I am Adam Lowensteiner, Senior Account Executive at Wolfe Axelrod Weinberger Associates, Investor Relations Counsel, on behalf of DLH Holdings Corp. On the call with me today is Mr. Zach Parker, President and Chief Executive Officer; Ms. Kathryn JohnBull, Chief Financial Officer, and Mr. John Armstrong, Executive Vice President.

Before I turn the call over to our hosts, let me take a moment to read the forward-looking statement. This conference call may contain forward-looking statements as defined by the federal securities laws. Statements in this conference call regarding DLH Holding Corp.'s business which are not historical facts are forward-looking statements that involve risks and uncertainties. DLH's actual results could differ materially from those described in such forward-looking statements as a result of certain risk factors and uncertainties. Including, but not limited to, our ability to continue to recruit and retain qualified temporary and permanent healthcare professionals and administrative staff on acceptable terms.

Our ability to enter into contracts with the government agencies and other customers on terms attractive to us, and to secure orders related to those contracts. Changes in the timing of customer orders for placement of temporary and permanent healthcare professionals and administrative staff. The overall level of demand for our services. Our ability to successfully implement our strategic growth, acquisition and integration plan. The effect of existing or future government legislation and regulation.

The loss of key officers and management personnel that could adversely affect our ability to remain competitive. Other regulatory and tax developments. And the effect of other events and important factors disclosed previously and from time to time and DLH's filings with the US Securities and Exchange Commission.

For a discussion of such risks and uncertainties, which cause actual results to differ from those contained in the forward-looking statements, see Risk Factors in the Company's periodic reports filed with the SEC. The information in this conference call should be considered accurate only as of the date of the call. DLH expressly disclaims any current intention to update any forecast, estimates or other forward-looking statements contained in this call.

With that out of the way, let me turn the discussion over to Zach Parker, President and CEO of DLH Holdings Corp. Zach, please proceed.

Thank you, Adam. Good morning, everyone, and thank you for joining us today for our quarterly report.

I would like to welcome shareholders, investors, and interested parties to our quarterly conference call to discuss the operational highlights and financial results for the third quarter and nine months of fiscal year 2012, ending June 30, 2012. As part of today's call, we have created a slide show presentation which can be accessed on our website at www.dlhcorp.com. Under the Investor Relations tab towards the right side of the page. And click on Presentations under the drop-down menu.

My plan is to first summarize the key highlights of the quarter, then hand the call over to Kathryn JohnBull for a brief discussion of our financial results for the quarter and fiscal year. I will then asked John Armstrong to address and update investors on business development initiatives. And afterwards we will open the call for a question-and-answer session.

Overall, I am pleased with our results reported for the third quarter ended June 30, 2012. The quarterly results reflect significantly improved results on the top line, due to the impact of our renewed and expanded business contracts. This second full quarter of the new contract included our work, of course, at several sites with the Veteran Affairs.

Revenues advanced 19.3% in the quarter despite government delays in major awards. The increase in operating revenue is due primarily to new business awards. Gross margins improved during the quarter to 12.6%, up from 10.3% in the second quarter.

While we are pleased with this improvement, we do understand that we have work to do. As we did incur operating losses in this quarter. This quarter's loss was due to higher G&A expenses stemming from business development efforts on key proposals and expenses related to staff adjustments in the quarter. Mr. Armstrong will address some of those for you a little bit later.

Operationally, we continue to be very prudent in our spending. But as noted in the rise in G&A expenses, we have incurred additional expense to prepare bids for contracts that are in our pipeline of business development. While we believe that we are well-positioned for these future growth opportunities, there is funding uncertainties at the federal government level, continue to lurk, which may create delays in awards.

While such delays are out of our control, our strategy to manage through them is to continue to keep lean internal structure. Focus on our existing contracts. Maintain an impeccable track record for performance. And continually refine our pipeline of business development pursuits in line with strategic markets.

As I alluded to before, the third quarter also enabled us to accomplish several in-house actions necessary to bolster our growth plans, including be successful rights offering of $4.2 million. Expansion of the Company's credit facility with our lender, Presidential Financial. And rebranding efforts to include our Company name change.

We have continued to attract talent with deep industry experience, including our new CFO, Kathryn JohnBull. All of these items will improve our competitive footprint and enable us to pursue bids for contracts that are in our business development pipeline. And those that we anticipate to add in the future.

We are also working to resolve open historical matters, like the retroactive billing adjustments. Although the timing, again, cannot be guaranteed, at present we expect to bill and collect such amounts sometime during the fiscal year 2012, based on our current discussions with the Department of Veteran Affairs and our collection efforts. Based on the contract modifications we received early in the third quarter, we are currently in the process of supporting any questions from the final government review. We're hopeful to receive these funds again and put this issue behind us. And, accordingly, we will keep shareholders apprised of this situation as we are more informed.

Moving on, I would like to take a few moments to share our view of contract activity coming out of Washington DC. The federal government continues to experience delays in awarding new contracts and committing new funds, while they debate means to reduce the national debt and stimulating the economy. The Administration is attempting to balance decisions regarding defense, homeland security and other federal spending priorities in a greatly restrained fiscal impairment, which is imposed by the enactment of the Budget Control Act of 2011. This further reduces defense spending by $487 billion over a 10-year period starting at the end of fiscal FY 2012.

From an overall budget perspective, it is likely that the government discretionary spending will be constrained for several years to come. So specific funding priorities are subject to change from year to year. We believe our strategic business alignment around DoD and Veteran's healthcare and logistics sustainment efforts remain very well-positioned to address what we consider are top national priority budget areas. This has been recently demonstrated by the current Administration, after the President addressed members of the Veteran of Foreign Wars in mid July. Indicating that their benefits and healthcare have been exempted from any automatic cuts that may arise, that includes sequestration.

While defense cuts are looming, these remarks by the President resonate very well for DLH services. And continues to give confidence to the management team as to our core business and how we can leverage that to obtain additional contracts that may be offered by DoD and the Department of Veteran Affairs. To summarize, we believe that the investments and improvements we have made this past quarter will only enhance our mission of identifying new business opportunities and strategic profitable growth.

Before I turn the call over to Kathryn JohnBull for a more detailed discussion of our financial results for the third quarter and nine months, I would like to formally introduce Kathryn to the investment community. She has a deep background in the defense and government services industry, delving both into the finance side and the operations side, as well. Kathryn has hit the ground running.

I am looking forward to continuing to work with her. And am confident that you will share my opinion that she is the right solution for the transition of this Company.

Kathryn, welcome aboard. And please proceed with your comments.

Good morning, everyone. Thank you, Zach, for that introduction. I'm glad to be onboard and I look forward to continuing to work with you and the DLH team, and building upon what has already been established.

Turning now to the results. Revenues for the three months ended June 30, 2012 and 2011 were $12.6 million and $10.6 million, respectively. Which represents an increase of $2 million or 19.3%. This growth was obtained due primarily to new business awards, despite extended government delays in major awards.

Revenue from DLH's operations for the nine months ended June 30, 2012 and 2011 were $36.7 million, and $31.6 million, respectively. Which represents an increase of $5.1 million, or 16.2% over the prior fiscal nine months. The increase in revenues for the nine-month period was due, again, primarily to the impact of new business awards.

Gross profit for the three months ended June 30, 2012 and 2011 was $1.6 million, and $1.5 million, respectively. Which represents an increase of $0.1 million, or 5.1%. Gross profit as a percentage of revenue was 12.6% and 14.3% for the three months ended June 30, 2012 and 2011, respectively.

Gross profit for the nine months ended June 30, 2012 and 2011 were $4.4 million, and $4.3 million, respectively. Which represents an increase of $0.1 million, or 2.7% over the prior fiscal year period. Gross profit as a percentage of revenue was 12.1% and 13.7% for the nine months ended June 30, 2012 and 2011, respectively.

While gross profit benefited from the additional volume of revenue that we discussed previously, the average unit price of hours delivered decreased year-over-year, reflecting the competitive marketplace and yielding lower gross margins overall as a percentage of revenue. Along with that, average cost of performance per hour decreased year-over-year, as well.

General and administrative expenses primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contracts administration, human resources, management information systems, and business development. G&A expenses for the three months ended June 30, 2012 and 2011 were $2.2 million, and $1.8 million, respectively. Which represents an increase of $0.4 million, or 23.9%.

The key contributors to the year-over-year growth in G&A expenses were the severance expenses of $0.2 million related to staff adjustments in the three-month period ended June 30, 2012. As well as expanded new business development activity related to proposals delivered, which John will discuss later.

G&A expenses for the nine months ended June 30, 2012 and 2011 were $5.8 million, and $4.9 million, respectively. Which represents an increase of $0.9 million, or 18.1%. The key contributors to the year-over-year growth in G&A expenses were, in many cases, the same as for the three months. The severance expenses of $0.2 million, the costs associated with new business development, costs associated with the start up of new contracts during the year, and non-cash expense related to stock grants.

Loss from operations for the three months ended June 30, 2012 was $0.6 million, as compared to loss from operations for the similar period in the prior year of $0.3 million. Loss from operations for the nine months ended June 30, 2012 was $1.4 million, as compared to loss from operations for the nine months ended June 30, 2011 of $0.6 million. The additional loss is principally related to increased G&A expenses for the three- and nine-month periods, as previously described.

Loss from continuing operations for the three months ended June 30, was $0.6 million, or $0.09 per basic and diluted share. As compared to loss from continuing operations of $0.4 million or $0.07 per basic and diluted share for the three months ended June 30, 2011. Costs from continuing operations for the nine months ended June 30, 2012 was $1.7 million, or $0.27 per basic and diluted share. As compared to loss from continuing operations of $0.9 million, or $0.17 per basic and diluted share for the nine months ended June 30, 2011.

The increase in loss from continuing operations reflects the same factors resulting in the increased loss from operations. It was principally due to the increase in G&A.

As of June 30, 2012, the Company had $3.1 million in cash and $0.6 million in unused availability under its credit facility. The Company believes that it has adequate liquidity resources to fund operations over the next 12 months in view of its existing cash position, additional funding committed by the Company's lender, forecasted cash flow from operations, and the effects of cost reduction programs and initiatives that continue to remain in place.

That concludes my discussion of the financial statements. I will now turn it back over to Zach.

That you, Kathryn. I'd now like to call upon John Armstrong, Executive Vice President, to briefly update us on Company initiatives. John, please proceed.

Thank you, Zach, and good morning.

Our opportunity pipeline is very strong. And the pace of our bid and proposal activity is accelerating. At the end of the third quarter we had new highs and submitted proposals under evaluation by the government, with the majority of those in new business. In addition, we expect to submit some rather strategic new business proposals during our fourth quarter, with the majority of those being for anticipated new business to DLH.

As Zach indicated, our view of the DLH addressable market remains positive. Following the President and Secretary of Defense announcement of the new DoD strategy and five-year defense budget request, we have done a preliminary update of our addressable market. And it reaffirms that the addressable market for DLH and our teaming partners remains quite viable. Our assessment of this addressable market will continue, as further details of the DoD strategic guidance are available, the President's budget request for fiscal year 2013 is released, and the implications of the upcoming elections and the threat of sequestration are realized.

Our solid third-quarter revenue numbers, despite government budget pressures, confirms that our strategy of aligning current and future business with the government's highest priority is working. Our focus on operational excellence is driving solid program performance, that is growing our operating margin, enabling our high re-compete win rate, and providing outstanding past performance credentials to win new business. Our continuous attention to cost and strategic growth bodes well of our future. We have great momentum going forward, and expect solid performance and growth for the not-too-distant future.

I will now turn it back to Zach.

Thank you, John. To conclude, we have made several permits during the third quarter which will position us well for growth and future opportunities to win new business. In the interim, we continue to keep tight expense controls, have secured additional capital, both to with our financial institutions and shareholders. And to have begun to move forward to convert our sizable business development pipeline into actionable contracts.

We believe we have set the stage to receive additional government contracts, thanks in part to our impeccable track record with our clients. And we are excited about our prospects, which are of most importance in our long-term goal of improving shareholder value.

That concludes my formal remarks. I would now like to open the call for any questions. Operator, please proceed.

(Operator Instructions)

Bhakti Pavani, C.K. Cooper & Company.

A quick question about the ongoing uncertainty in the economic environment. What kind of visibility do you have on the funding given by the government? And do you see any delays going forward? If you could share some of your visibility in that area, please.

Sure, I will start with that. This is Zach. Thank you for your question, Bhakti. That is probably the most consistent question today that those of us who are focused on the government must answer. Of course, we have no crystal ball. But we do stay very closely aligned with the folks on Capitol Hill. John stays particularly close with the folks in the Pentagon and in our defense areas. As well as our participation with organizations such as Professional Services Council. In all of our assessments, we recognize that there will be some very substantial cuts to the defense budget that will affect, of course, government services.

However, the good news for us is that the areas that we are strategically focused -- and those include healthcare for the veterans, healthcare for existing military folks, t includes logistics in the context of ensuring the readiness of existing systems -- seem to be very stable from a budgetary standpoint. Both on the Hill, as well as with the Pentagon. So we feel very encouraged that support for our veterans and for those who have served will continue in the not-too-distant future.

The second part of that is that we do see, with things such as sequestration looming ahead, that there will be a major impact to those companies that largely build systems in the large platforms, whether they are ships, aircraft, missiles, and the like. And we expect there to be some shifts in the competitive landscape as a result of that. And those companies, while they may be moving their guidance down for this year, that will not be palatable for them in the long-term. And we are already seeing evidence of mergers and acquisitions, and things of that nature, to help posture them for the kinds of markets that we are, of course, targeting. So we will see a competitive impact. But, knocking on wood right now, we feel very confident that the support for our veterans and support from a health perspective and readiness perspective for our troops remains alive and well.

Okay, that helps. If I understand it correct, the bid proposal activity has been increased. You guys are bidding on a lot of proposed contracts. So, are there any contract awards that you expect to receive in the fourth quarter of this year? Is there any that would excite you or that would be very good for the Company?

This is John, the Executive Vice President for DLH. Let me just tell you that on potential contracts that we looked at and identified 12 to 18 months ago, remain on plan. From what we see is that there has been very little shift of some contracts with the incumbent for an extended contract time. Very little, though. So, what we identified, customers that we meet with, industry days that we attend, remain still, what we see is a timeline and we expect those to be announced on plan.

This is Zach. Just to add a little bit to that. Again, we have no control over the government, the dates and times in which the government makes those decisions. But as the delays have occurred historically, they are creating a higher trajectory for us, if you will, for things in our backlog, the bid backlog, that could be awarded in the near term

Okay. You also raised about $4.2 million in the rights offering in this quarter, I believe, or the past quarter. Could you share with us how are you utilizing those funds? And are those funds entirely utilized? Or what is going on in that area?

We did close on that rights offering at the end of the quarter, or late June. And the primary purpose of the proceeds from the rights offering was to position the Company and allow us to handle and manage the growth that we are pursuing. It does, of course, take capital to be able to take on new contracts and build the business base. So that was the primary intent of that.

Okay.

And it's a very good question. We think it serves us will. And it relates very much to your prior question. Because some of these contracts that we are awaiting, can be fairly large. And they take some requirements for capital upfront. And it was very important for us to ensure that both our shareholder community and our excellent relationship with Presidential Bank were prepared to ensure that we could phase in those types of contracts. And so we're really thrilled and excited that we now have that bandwidth to be able to phase in those types of contracts, should the government award them in the very near term.

Okay. My next question was for Kathy again. This is in relation to the G&A spend increase of, I believe, all the $500,000 expense was related to the G&A. How much of that would be one-time or do you expect that to continue going forward?

A portion of it is maybe not precisely one-time, but, certainly, it is unusual in that it relates to severance and staff adjustments. And that was roughly $200,000. The balance of it is largely associated with these very key pursuits, business development pursuits we discussed. And so we, of course, want that to be ongoing on a very targeted and focused way.

This is Zach again. Just to tie that to our strategy. As John and I have shared, 1.5 years or so ago, we laid out the groundwork that our strategic plan is to prepare ourselves for some major growth. And the sales cycle for those are generally, in this space, 18- to 24-month cycle. And what John was just referring you to, as well, indicates that this is that heavy period. We're at that 18- to 24-month period when we implemented this new strategy. So the investments are going forward.

We do expect that there are still a couple of others that we will be investing in during this quarter. That involves developing a good technical strategy for these things, investments for the intelligence that we do. As well as subject matter expertise in building some of these proposals. Those are the nature of the kinds of things that we have incurred over the last quarter, 1.5 quarters. And we will have some of that again in Q4.

But we don't expect, again, these to be new to us. As John indicated, the infrastructure that he has put in place in terms of best practices, proposal development, have leveled off for us. And so we are very cost effective in this space. As you might see, our G&A as a percentage of sales is extremely competitive with the companies and peers in our space. So we're just looking for the government to make some of these decisions so we can, of course, get our bottom line and overall profitability to where we need it to be.

This is my last question. This is going to be a little tricky one but what kind of timeframe are you looking? When do think that the Company can post a positive EPS quarter? And how would you try to achieve that?

Very good question. I think my Chairman of the Board would probably go berserk if I gave you a specific answer on that. However, I can tell you that it is the top priority for me and our management team. We believe that the way we get there is by following the strategy that we have laid out. Kathryn has just particularly great qualifications and experience history in ensuring that the Company is taking a real hard look at the type of costs that we want to incur, to ensure that we can get to that profitability very soon. I can't give you, of course, a specific date. I can tell you that it is a very high and top priority for this management team. And we hope to do so sooner rather than later.

I'm sorry, I have one more. Are you guys looking to expand into different business segments, apart from what you are doing currently? Or are there any acquisition opportunities that you are looking for? If you could give some color or anything on that.

Sure. Just briefly, the last part first. We're always looking for acquisition entities where we think, of course, they would be accretive and very in line with our strategy. However, our first priority, we believe, needs to be to get us above the water first. But that doesn't keep us from looking and tee-ing up some of these things with our Board of Directors.

With respect to the first part of your question, we are really not going to be too diverse over the near term. It was very important for us two years ago to get a focus on a strategy of the new business. Because we can't afford to just go after anything that may be hitting the marketplace. So we won't diversify very much from our three core lines of business. The first of that is, of course, associated with healthcare delivery. The second part has to do with logistics, and include some of the engineering and technical services that we provide for other clients.

And then, of course, our heritage line of business, which is largely in the staff augmentation. That is less of an investment focus for us going forward. The majority of where John has us aligned in building our business is in the healthcare side and logistics. But it will be rare for us to pursue anything in the foreseeable future, anything outside of those lines.

Okay, thank you very much. I really appreciate you taking all my questions.

(Operator Instructions)

Mike Breard with Hodges Capital.

Just some background on the delays you are experiencing in the contract awards. Is it a case where the people you are making the bids to are saying we just don't know if we're going to grant this in September or November. Is it a case where they're saying we don't know if we will grant this at all because of spending cuts?

Excellent question. Right now, we're very fortunate that all of the bids we have right now it's a question of when, not if. The majority of the delays are attributed to, in large part, the government has very few resources to finish the evaluations, complete the evaluations and to make the awards. We refer to those as acquisition personnel. The second driver is related to your point. For programs that require new funding, this whole issue of dealing with the lack of a real government and Do budget causes a lot of the program managers to want to hold onto the implementation of new contracts. To hold onto their existing budget rather than commit them to new long-term contracts. And, as such, that has caused a little bit of a paralysis in their execution of the decisions. But we feel very confident. We have not yet had any contract that has died, that we have bid, that has died as a result of a budget cut or a decision to move elsewhere.

Okay. And then what has been your past record on the contracts that have been awarded? What percentage success do you have on the bids that you've made versus bids that have been awarded?

Michael, very good question. We don't publish a lot of very specific data there. But I can tell you that we have had an outstanding win rate for our new business and our re-competes. In fact, I've got to say that we have, over the last two years, under Kevin Wilson's leadership, with John on the business development support, that we have 100% of what we call our re-compete business that has been competed. And as we indicated, I believe, last quarter, we have a very good majority win rate for new business, as well. It's very important that we keep that. It goes, in part, to Bhakti's question with regard to us diversifying more. We are not out to do that right now because we want to maintain a very high win rate. We just can't afford to bid and to invest in too many diverse items.

Okay. And just one more question. Do you foresee after the election any particular, other than the budget, any particular change in staffing at the Department of Defense? Are people waiting to grant awards to see if they'll have a job in January? Could that possibly be a problem with turnover?

Michael, let me restate what I think I heard. I think your question was, do I see any impact of the elections upon our business.

Yes. Are the people you deal with so far down in the Defense Department pecking order that they don't have to worry about getting laid off when we have a new administration?

I got you. For the most part, the answer is, in our space, of course, which is largely DoD healthcare and logistics, the majority of that work force making the decisions are the acquisition community. And they are actually in the phase of growing. They are actually hiring. They have a shortage today of those kinds of professionals. And there's a strong commitment on both sides of the aisle to protect that, as we go forward.

However, there are potentially two major impacts that could have a major reduction on the defense side. One is the sequestration. And the sequestration has some plans to reduce and cancel some major programs, that there are a number of government folks that their livelihood is dependent upon those programs. So that is a potential. The other is, there's been talk from Secretary Panetta and others that the government may entertain, and Congress may entertain, another round of base realignment and closures. An acronym we refer to as BRAC. Should that occur, then there will also be closures. Those generally will be a few years out. But as folk start to look at budget constraints, they'll start making budgetary decisions earlier rather than later.

There will be a change in the guard. And during this period of lame duck, which is after November elections and before the new administration and congressional representatives take office in January, we expect there to be a lull in terms of contract acquisitions for new work during that time period, as well. Certainly there will be some impact. We believe that the majority of the contracts we have in the pipeline will continue independent of that. And that there may be some delays from some things that, of course, we have yet to bid. So we're going to monitor those, continue to monitor those very closely, as John alluded to earlier in his presentation.

Michael, this is John. I will add to it. Zach primarily spoke to DoD, Department of Defense. But our core competency rests right within the Department of Veterans Affairs. And the leadership across both parties have said that sequestration will have no or very little affect on what we do for veterans. And today our largest contracts are providing to veterans and their healthcare. So we don't see a change in there. We see that getting stronger all along.

Okay.

Good question, Mike.

Obviously you think the government would protect the veterans and cut spending on weapons or something first.

And we are very fortunate to have that as our major client base. As you all know, not too long ago there was a continuing resolution again from a budgetary standpoint, affects this year's budget. But with the Veterans Administration, again, there's a lot more flexibility with the way they handle their annual budgets. And that has consistently boded well for Kevin Wilson's operations and our clients.

Just one last question. Are you seeing more competition in the bids, or what is your competitive status?

Yes, the competitive landscape is changing. And we are still finding fierce competition. There are, we think, some new players in the market for us now, largely through mergers and acquisitions. And we stay very close to that. Because the competitive assessment is a very important part of our bid and no-bid decision. It will continue. We expect that to evolve at least throughout this period as the government starts to work and wrestle with their budget priorities. And since we happen to operate in the space that are high-priority budget areas, we expect the landscape to continue to get more and more competitive.

Okay, thank you very much.

Richard Greulich with REG Capital.

A couple balance sheet questions. Accounts receivable increased about $400,000 from the prior quarter Q2 to Q3. Sales were flat. So I'm curious as to why that was.

Good question, Rick. Largely that's a function of just some delay, slower than usual payment terms from a couple of customers. Though I would put that in the context of, if you're familiar with our balance sheet you know that a big part of the receivables is related to the retro's action, which we talked about earlier. Which is functioning under the contract modifications we got and that we're working through. So you need to put those on the side. And if you look at our net receivables, then, as days sales on revenue, we are below 30

You're right. If I take that out, it seems like the increase is a much larger percentage increase on the remaining accounts receivable.

Yes, it is. And it is purely a function of some of our very large programs still out on very short cycles. And so if someone on the government side that receives that invoice happens to take a two-week vacation, it slips a little bit beyond the end of the quarter.

Would you expect that to reverse in the next quarter?

While it's difficult to predict exactly how they're going to manage the payment, I do expect that we will return to our normal payment terms. And we do watch it, monitor it very closely, as you can appreciate, from a cash flow perspective. And, again, keep it in the context that consistently overall for the last four quarters our day sales have been well below 30.

There's no system-induced changes that would lead us to believe that we'll be degrading in the future.

Right.

This is a small item but just curious. In the other assets category, again, on a quarter-to-quarter basis, there was an increase of about $270,000. I'm just curious as to why that was.

That is principally due to funding of our workers compensation obligation. We do have a prepayment commitment on that for an escrow or trust commitment on that, as a result of our need to be prepared to settle a workers comp claim. So it's as the tail on open years becomes a little longer, the collateral builds up a little bit more.

The prior two quarters, the Company had indicated that there than been a spike in workers comp due to some legacy issues. What was the impact in the third quarter on that?

Within the quarter, the costs related to workers comp was actually lower than it had been in the prior two quarters. Though I think the outlook for the year is very consistent. The expense does come in at a very sloppy fashion. But within the current quarter that cost is lower than it has been.

I had thought that, that retroactive billing issue would've been settled. I thought this quarter. Wasn't there an announcement made, I think, last quarter that some terms had been agreed to? Or was I wrong on that?

The announcement was that the contracts had been formally modified to provide for the wage determinations that drive that issue. So the government paperwork has happened to allocate funds to the contract. But there's still a process that the government needs to go through to approve the underlying claim and get comfortable with that. And process the payment. It's a cycle. We do understand, as we say in our announcement, we understand it's our customer's desire to get that closed within their current fiscal year. Which aligns with our fiscal year. But, as you can appreciate, it's a large number and they're working through it carefully.

The first questioner had a lot of, I thought, good questions regarding the timing of the bids out there, et cetera. Is this too simplistic? Zach, earlier you say that 12 to 18- months ago, when contract opportunities were identified, and I think John had said there is very little shift out of those. And with those, there's an 18 to 24-month sale cycles. So if I go to the farthest one out, let's say 18- months ago identification, and at most there is a 24-month sales cycle on that one. What I'm saying is, it indicates to me that, really, over the probably next 4 to 12- months some of these contracts should be announced one way or the other.

That is our expectation. You're not oversimplifying it, I think. That's what we're hoping to see, as well.

Thank you very much.

At this time we have no further questions. I would now like to turn the call back over to Mr. Zach Parker for any closing remarks.

Thank you. I would just like, again, to thank everyone for participating in today's call. I do look forward to you joining us in the not-too-distant future on a call to address our year-end numbers, our Q4 results. And again, welcome you to participate in not only the call but feel free to work through with Wolfe Axelrod Weinberger for any follow-up context. Thank you and have a great afternoon.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.