Q2 2020 CynergisTek Inc Earnings Call

Please standby.

Well just logistics 2022nd quarter earnings Conference call Today's conference is being recorded.

Joining us today the company it sounds Mr. Kim.

Chief Executive Officer, Mr., Podiatry, Chief Financial Officer before it begins.

Sure Mike are ones that some statements made on calling webcast.

Those regarding future financial results in Sri prospects among others for looking at me be subject to a number of risks and uncertainties.

Actual results to differ materially skills described at the conference call.

These risks and uncertainties.

He described in greater detail in the company's FCC filings.

So just to kind of an obligation and expressly disclaims any obligation to update or alter its one of these statements well there was no information future events or otherwise.

It sounds like the turn call over twice field killer.

Good afternoon, everyone just couldn't quarter continued you'd be defined by the quarter virus pandemic any impact health care industry, and more specifically health care providers that make up the bulk of our business.

Well the pandemic is probably good fundamental shifts and how providers treat patients accelerated technology adoption curve for years to bumps in the immediate term many of our customers are still struggling financially.

The impact was a drop in our pre sold revenues due to cancellations restructuring the wage and renewals of current contracts from approximately 15% of all customers and a shortfall in our projections for net new business. We also saw professional services and consulting revenues effectively pause as customers reduced spending.

What's third party vendors anywhere there was not tied to a long term contracts Wong with furloughs reductions to their own back office stuff.

Halfway through the third quarter now we believe things it's leveled off that are starting to see signs of recovery remote work and telemedicine definitely here to stay and they both coupled with significant new security and privacy issues, but the market.

Collectors are just now beginning to understand.

Now also realized well speak kids will probably be back in school and we may all be eating at our favorite restaurant once again, well before hospitals have covered by GE patients out of their rights to use.

We anticipate that health care providers will wait a bit slower than other registries to bounce back as we get all the other side. This crisis. So put us in perspective, the American Hospital Association indicate that hospitals and health systems reporting average inpatient volume declined 19%.

30, 45% in outpatient volumes relative to 29 cheap.

Many hospitals are reporting, but they do not expect volumes to returned to pre cat pandemic levels for the rest of 2020.

Additionally, we've seen and expect to continue to see consolidation within the health care space over the next 18 months.

Which we anticipate.

We'll have an impact on our client base now, although consolidation well can be disruptive, but it may mean that we need to resell our capabilities to new leadership, we have been successful with us in the past.

We believe we could open the door to new opportunities, but we could be dealing with the market with fewer and much larger hospital systems moving forward.

We believe this will play to our strikes, but it becomes a comment on our team to ensure that our offerings. Our people our capabilities are relevant in a much larger practice that we typically serve today.

Now turning my commentary to the bad guys well, we know the threat landscape continues to evolve to the negatives and health care continues to be one of the hardest hit industries.

New data from I'd be I'm at a total audience to show the average cost of the health care data breach is up 10.5% for last year with an average cost of $7.1 billion that is nearly double the average cost of the data breach in other industries.

We also know from Oh soon to be published research et cetera, just like the security maturity of America's hospitals is falling behind the escalating sophistication of attackers.

It's not that hospitals are adopting security, but there are simply not investing enough to keep up with the abbott's areas. In this game of cat and mouse in 29% alone 12.6% of the U.S. population had their health care records exposed impermissible, you disclosed or stolen in a single year.

Going to the Doctor has become incredibly whiskey from a cyber security and privacy perspective.

And that makes but what we do all craft all the more important coming out of this crisis, which is accelerated these risks.

We started to close deals with new customers and our pipeline is increasing and we continue to refine our sales approach and the team.

We recognize the days a face to face selling well the largely over at least for the foreseeable future.

Well, we continue to refine and adapt our go to market approach. This included the hiring of a new sales later this quarter and a planned transition from prior leadership.

Quite sure Reengaging or delivery calendar between now and we ended the year, it's almost fully booked as clonch catch up on work that had been delayed the last two quarters.

I also want to make a call onto our employees well they've continued to be there for our clients are people understand the mission and they are dedicated to it I.

Our delivery organization or particular has used this tied to well sharpen the saw it ways. It makes me very proud of the leading all the organization over the coming months, you're going to see a springboard new research. They will help the market better understand the security and privacy applications, a crisis well be launching new offerings didn't prove out relevancy larger health care product.

Just as we prepare for consolidation and you'll see new partnerships like a recent announcement with a week security an AI enabled platform backed by some of the largest species in the U.S. It gives us the ability to offer a compromise assessments and incredibly important service. They can identify abbott several activity coming out of the.

Rapid expansion of customer networks get to tell a medicine will walk you have search facilities.

Our delivery team that's been a significant amount of time with our sales organization identifying and targeting key new existing contacts to make our sales and marketing efforts more effective and efficient at the same time, we'll continue to implement a new delivery and project management model they'll improve the efficiency of our delivery, resulting in improved margins in summary.

Well this is that a bumpy road, but we're moving forward we work through the process of managing the business responsibly to the enormous challenges our clients. It employs faced while moving to a completely remote BARDA.

We're ready for what comes next well lot leaner more efficient and much more relevant to what we think the market will look like moving forward.

And our people are incredibly motivated by the work they do.

Let me now turn the call over to our CFO, Paul appetite for a discussion of our financial performance Paul.

Thanks, Joe I'd first like to summarize the impact we saw from Cold and then get into the standard financial disclosures, we saw 25% reduction at our pre sold revenue due primarily to delays in renewals, but also some cancellations and restructure of contracts as we discussed above.

We saw a reduction in professional services and consulting approximately one point threemillion when compared to prior year and our projections.

It's to revenue resulted in a 10% dropped in gross margins for the quarter.

To respond in late Q1 in Q2, we executed on permanent annualized cost reductions of approximately 3.3 billion, which when combined with Calebs expense reduction initiatives that he started at the end of 2019 will translate into more than four and a half a million an annualized expense reductions.

Additionally, we took steps to temporarily reduced 2020 projected costs by 3 million that are primarily related to compensation.

As a reminder, we received 2.8 million under the Paycheck protection program.

Until we determine the final amount forgiving the full amount remains as debt on the balance sheet.

Recent developments with this program reinforce our expectations that a large portion of this loan will be forgiven.

We also expect some tax really fit to resolve the Corona virus aid relief and economic Security Act Cares Act, which among other things permits and allow carryovers.

And carry backs to offset 100% of taxable income for years, beginning before 2021.

In addition to care exact allows any wells incurred in 18 1920 to be carried back each of the five preceding taxable years to generate a refund of previously paid income taxes, we do expect to carry back available losses to the extent possible, which at this point, we believe will exceed $1 million.

[noise] outlining our standard financial disclosures revenue decreased 2.5 million to 4.6 million due to lower revenue for professional and consulting services and the impact from clients moving services out into Q3 in Q4 do the effects of covert 19.

Breaking down revenue for Q2, 2020 versus 19 managed services revenue increased slightly to 2.9 million.

Professional consulting services decreased 23% to 1.6 million.

Backbone consultants, which was acquired into Q4 19 contributed point 8 million in the quarter.

Gross margin was 27% for Q2 2020 compared to 41% 2019.

Gross margins were down due to the revenue shortfall and an increase in labor costs as a percent of revenue.

Due to additional cost and attracting cyber security employees.

Cost associated with ramping up new services.

We continue to Medac staff reductions during the quarter that should improve margins going forward.

Sales and marketing expenses increased to 1.7 million for Q2 2020 compared to 1.3 million for the same period at 19.

This increase was due to an increase in headcount spore efforts to grow revenue and additional systems cost to support automation.

Good day expense increased point Threemillion to 1.8 million for Q2 2020 compared to the same period at 19.

The increase is due to point fourmillion and severance related costs associated with expense reduction efforts taken to improve operating margins.

And 1 million in additional stock based compensation point 2 million in cost for backbone and these were offset by point fourmillion and spend reductions associated with the reaction to covert.

Our non-GAAP adjusted EBITDA loss was 1.3 million for the for Q2 2020, when compared to point 4 million for 19.

The full financials and reconciliation of GAAP to non-GAAP information can be found in the earnings release that came out today.

This concludes the financials and his prepared remarks for Q2 2020, operator, please open the floor for questions.

Thank you.

To ask a question please signal by pressing star one or telephone keypad, if you're using the speaker phone. Please make sure. Your mute function has turned off to listen to treat sorry equipment again press star one to ask a question.

Just a moment so that when an opportunity to step up for questions.

Well take our first question today from Matt Hewitt with Craig Hallum Capital Group.

Good afternoon, thanks for taking the questions.

But was hoping to Doug dig into the markets a little bit I think you mentioned that it's stabilized and maybe you're starting to see some signs of improvement.

How much of that I guess, improving trend is reliant on budgets versus where we're at what the pandemic <unk> are you going to need to see.

Possible budgets improves.

In order to start seeing you know somebody's bigger deals come through or do you need to see whether it's a vaccine or better treatments or just a decline in coated ER positive test before you start to see it and maybe even at the point, where the budgets haven't necessarily approved but.

What comes first I guess.

Well no. That's that's a great question and frankly, I wish I knew the answer.

It's we're asking a lot of the same questions as well in fact I was just came off the call prior to this with a half a dozen Ceos and csos at various hospital systems, where we're all asking exactly those questions, but here's a few things we now so first of all.

There are some hospital systems that are still in varying levels of crisis mode, and that's problematic when they cannot bring in various types of elected work elective surgeries and things like that ultimately what that means that their business model is often not that it now that varies a lot by system that sizes.

The system and their various sources of funding and the Dauman right. This second but that's the first thing to understand is what do they have for cash coming in the door. The second piece of this is and I wouldn't even say so much their budget as it is their purchasing process. You know there are other teams and other.

Parts of the organization that step forward as potential barriers now to close deals whether that is and I see team that suddenly can't review when new application because they're understaffed wore it could be a procurement action, saying, hey look we need to caught all cost by 30, 40%.

I take some draconian actions those types of staffs, we've definitely seen size that they're starting to turn around I think most of our clients not all but most of them are starting to try to get out of the crisis get a little bit back to normal you know I'm, even hopeful there are some systems that may have.

A little bit of money left in there you know copper before the ended the year and are looking to spend it.

No I don't think that this necessarily at this stage has a whole lot to do with the budget Oh, I think the budget and a lot of ways, it's kind of thrown out the wall brought thrown out the door or when the whole public thing started now.

The bigger question, though his budget related which is what does the budget look like and moving forward I've. As if you think we know first of all the things that they had to do in order to address the crisis rapidly deploy tele medicine moved their back office to remote work, you're never going to get that.

Genie back in the model.

Even when we see.

Providers returned to normal in terms of there.

You know there incoming revenue odds are there will be a lot more remote workers in the war in the past odds are telemedicine is here to stay so those things calm with new privacy and security applications that the industry frankly, just beginning to grapple with and you know what I'm hopeful that city is that at the.

They start to understand those they're gonna have to put budget to securing them.

That's that's really helpful. Thank you and I guess kind of following on that the tele medicine opportunity.

You know this has been a development for a number of years, but it really took a pandemic to drive very rapid adoption in some cases I think it'll be much like with electronic Health Records, where there was a lot of vendors out there and hey, we could do this for you and you use in you have to plug it in right away and kicked off.

Hi, Good then after you've got again, you kind of figure out away. The second this isn't as good as we thought or there's others out there that might about a better fit for what we're hoping to accomplish I would imagine the same will be true with telemedicine. The one thing that you don't hear about with Tele medicine is the cyber security angle to that I mean, you're basically taking your piece.

And visit now online and I'm curious, where do you fit in that model and what types of discussions have you been having what's up and have you been talking to market leaders, such as and while it teladoc and others.

Well you know the thing that so fascinating about this is so first of all I think it's fair to kind of acknowledge that.

Health care was probably moving a little bit slower than a lot of other industries in adoption of remote work remote collaborative tools I mean for though you know in most cases, even the back office functions like you know traditional administrative functions like billing. For example, you had to go to hospital to do that.

Work in addition to that the tooling that being used historically was special purpose to it.

You know there specifically designed for telemedicine and you know you as you referenced kind of the deployment of electronic health care Records remember, yes, those capabilities, where there but at the end of the day that was accelerated because of regulation.

The difference in this case is that it was accelerated literally overnight because of a crisis. The tools that were used to ramp things off included not only those purpose built tools, but also consumer great tools, I mean literally tools like zoomed whenever design for this.

So I.

I think the opportunity here is actually much bigger than most people realize in that there's an opportunity with tools that were purpose built and working with and collaborating with vendors like some of the ones you mentioned.

But also I you know and this is more of a gas than anything else, but I think we're going to see a lot of these consumer grade tools rely that they've made a whole lot of money off the telematics in the last few months and they're probably not going to want to give it up and as a very good chance, they're gonna be thinking about hey, what do I need to do to make.

My consumer grade tool robots enough for this so some of the areas, we're paying a lot of attention to like how does a whole lot of conversations about our third party <unk> you know that will be used to access these records and enable more collaboration and health care record, we're spending a lot of time also.

Looking at how do hospital system shore up their remote workers and how do you deal with somebody telemedicine tools and most importantly.

This security of the telemedicine tools is one part of the puzzle.

In a lot of ways that easy part the harder part is how do you deal with the privacy outside of it all of the exhaust data that comes out of the usage of these tools, whether that's a record session and image that might be shared a even a chat is that store locally on a device was it encrypted in transit.

What happens to that data and how do we find it and how do we build the policy to manage it and then how do we enforce it if you will what probably the biggest step that we can talk about so far we've taken there is the partnership with a wake security so what a wake allows.

Just to do.

He is remember all of these things were deployed in a hurry right. So effectively it's kind of like you know I imagine that evil hassle, where you know you had the wall the archers on the wall. The moat around the castle covert happens you drop the drawbridge can you tell everybody to run out of the castle, because they need to social distance. So.

All your security provisions are effectively gone right. The princesses running out before we did jewels around her NAC trying to protect yourself basically so.

The opportunity for compromise for bad Guy didn't get into that castle Lucky will buy the drawbridge was down is quite high and what a weight allows us to do his duties compromise assessments, where we can look for both.

So it's not just looking for work in terms of how to be sure things out but are you already infected by bad Guy that may have gotten then why the drop which is down.

Interesting. Okay. That's helpful. Maybe one last one and that all I'll hop back off given the tight labor market has it you made a comment about it in your prepared remarks that I even in the 10-Q you commented that you have been able to higher on the sales and marketing front in particular, but given that the labor marketing.

Kind of the <unk> furloughed employees and people that have been laid off has that created more opportunity for you to attract talent or is your pocket or the markets still in such high demand that you know.

The the cost of hiring is still there and it's still difficult to find the right level of candidates.

So initially as comedy started to lay off in furlough employees. There was definitely talent available on the market. According to a cyber seek which is a website. It tracks kinda cyber security job openings literally down at the state level, There's 507.

Thousand open until cyber security jobs right now just in the United States and I I think that numbers actually Bob off from what it's been historically now.

Here's where that gets really interesting for us the demand for the type of work. We do in terms of people that can go in and assess security is likely only to continue to grow.

Outside of health care, where thing other industries expressed interest in starting to bear wire assessments and as those types of regulations come on board. There will continue to be in demand for the types of talent that we hire I think the biggest impact Oh.

Is that.

Historically.

We could get access to talent relatively easily added a pretty good discount because we didnt care, where the talent lift you know prior we were always a basically a remote workforce now we traveled a lot on planes, which we don't do day, we're face to face with our clients, but only a small.

Number of our people actually came into an office and that allowed us to recruit people well from almost anywhere you know and the thing in the United States is there a couple of cities that have really high abundance of cyber security talent right. So you know your historically looking at the San Francisco area, the Boston area.

Yeah at Atlanta, Austin, Texas, as an example, well.

The problem now is everybody's room out so company you know big Cyber security company that would only historically recruit in that cities, where they had a presence now don't care there recruiting everywhere. So we are definitely having to compete nationally now for talent and.

Do you think the cost of that talent will go up.

That's the bad news.

Good news for Us I, probably not the good news for our clients is that it's going to be even harder I think for our clients to recruit because they're gonna not only run into the same national versus local problem, but I do think that it will be increasingly difficult.

For a let's say mid size hospital to compete to get access to that talent.

That talent can get access to jobs now on a national level.

Got it okay, great. Thank you very much.

Next we'll hear from Jeff fast with Fintech capital.

Yeah, Hi, Caleb I ball a joke.

As for any questions.

Not to minimize the impact on the family of I mean, that's from covert but when this whole thing started.

The National initiative was to flatten the curve.

So the hospitals will not be overwhelm them, they would be able to handle people appropriately and folks wouldn't be done from locker proper care.

It seems that by and large that as long as soon as happened, but the national press seems to be.

[noise] seems to have rules to more of a if anyone does go over its absolutely.

Dreadful, which is far from the initial.

Oh perspective was was but everything including does over a longer period of time.

How do you feel the hospitals have reacted to let's say that changed smells, Wisconsin or they feeling comfortable with where they sit now on.

Really interested in getting back to normal like sort of into it or are they.

It's sort of been poor census, if anybody dieses standard a worldwide those thinking.

Well I mean, I think there's a couple of pieces. So first of all you know it varies dramatically based on where that health systems. Located there are some of our clients that have no cobot patients at all in their hospital there are others that have a lot.

There are some that are still in various levels of surge capacity.

In addition to that you were at some points in this crisis hospitals that were put into a surge capacity, but never saw that surge, which can be a bit frustrating I think the biggest challenge now and you know I I don't want to dive into kind of a political conversation here, but it's the challenge now is that.

It's gotten wrapped up in a whole election season, and that's just causes a level of frustration and anxiety in our clients I don't necessarily think Thursday specific outcome people are expecting there other than begging people to wear masks, but you don't get certainly is a factor and.

Everything that they're looking at and a you know they're asking questions everything from.

You know whatever reimbursement levels going to look like in the future too you know like I said this has become unfortunately political so you know from a public health perspective, getting the social destined getting getting bass wearing it's important to hospitals for two reasons. One you know they care about the patients but.

Do they also recognize that their bottom line doesn't start to come back until they can get back to the normal business at hand.

Okay. Thank you.

Yes.

Following up on the discussion we decide.

No you were at about the labor market.

Yes.

Because I believe that your contracts did not adequately provides for the increase in cost of labor.

Required by the market, even perhaps before covert start.

Where are you, saying no you a situation where contract renewal your love you're able to make an adjustment for that situation or.

You're sort of faced with a hard nosed person, saying you was removed all its the same place type of thing.

Uh huh.

Well welcome to my World over the last three months Jeff.

Your your hitting its bought all right in that.

We definitely have some challenges there as people come out of that I think that.

You know our clients realize that we're talking about cyber security talent, if they'd had a fixed price for that for a three year period, it's very logical that that's going to increase I don't think that surprises anybody on the same front in many cases for are you talking about a renewal that like let's say, it's hitting the last two months.

That might be a really tough pill for clients to swallow exceptionally if they're being asked to cut costs right now and this is where we've gotten created and working with clients right Weve.

Filed in some cases ways to continue their pricing for a period of time in some cases were changing up the services. They need in some cases were getting a bit of financial release on a short term basis. So you know this is where myself and you know my direct reports it hasn't really roll off our sleep and get created at it.

It's on a situation by situation basis, but.

I look forward to the day, where we are.

Able to really try to get our clients solid enough that.

You know, they're able to really come to us about where they want to grow their program versus just trying to maintain their programs and you know again, we are seeing some early signs you know we've been able to close in that new logos that always is a great side right in the middle that's but you know I think.

The reality as many of these hospitals and you know when I say these comments I'm, specifically talking about the providers. If we look outside of the provider segment. A you know for example medical device manufacturers things like that they've also been hit but our client outside of the provider space if they hit its nowhere.

Here's dramatic.

Okay, and finally, a I like the awake announcement as.

You know very interesting way to move forward, but I wonder if.

The company has an either or any interest are up it's only with perhaps affiliate.

With a larger or more stable.

A couple.

No stabilize operations and finance was going forward. So there's no question about your they will survive.

And on their demos consequences.

Well I you know as you now we're always looking for new partnerships opportunities and a ways. We can align and we'll always continue to stay focused on what's the best sensors and our shareholders.

Okay. Thank you that's it.

That's yeah, good talking to.

Once again press Star one if you have a question.

And this concludes the question answer session that were not handed over to kill a bottle for any closing remarks remarks killer. Please go ahead.

Well look in closing I, just want to thank all of our shareholders customers and employees for their ongoing support as we get back to the were a growing this business and you know I think Jeff had a a really great point. He brought up there a which is you know what's it going to take to get health care back to normal its going to take a.

Lot of the same thing stocks to get us back to normal which is you know get out there where are your math be safe and well get through this thank you everyone.

That does conclude today's conference. Thank you for participation you may now disconnect.

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