Q4 2020 CynergisTek Inc Earnings Call
[music].
Please standby.
Yeah.
Well go to say logistics, 'twenty 'twenty fourth quarter and year end earnings Conference call Today's conference is being recorded.
Joining us today from the company are Mr. Caleb Barlow, President and Chief Executive Officer, and Mr. Paul Anthony Chief Financial Officer.
Before we begin the formal presentation I would like to remind everyone that some statements made on the call and webcast, including those regarding future financial results and industry prospects among others are.
Forward looking.
These forward looking statements can be identified by the use of forward looking terminology such as believes expects anticipates would could intend may will or similar expressions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the conference call.
Certain of these risks and uncertainties are or will be described in greater detail in the company's S. E SEC filings.
Given the risks and uncertainties listeners should not place undue reliance on any forward looking statement and should recognize that these statements are predictions of future results, which may not occur as anticipated.
Just six under no obligation and expressly disclaims any such obligation to update or alter its forward looking statements, whether as a result of new information future events or otherwise.
At this time I would like to turn the call over to Caleb Barlow.
2020 is behind Us and it's great from talking with all of you know as a company that is heavily penetrated in the healthcare provider market. Our clients have been and continue to be on the front lines of this pandemic and our business saw the impact almost immediately and hospital day room for COVID-19 patients.
From elective procedures on hold and stop doing anything it was not directly tied to patient care.
Last year about this time, when our business slowed down roughly we did not stop working.
We started asking what changes what does this new normal look like.
How do we refine our strategy.
Telemedicine is accelerated by five to 10 years working from home outside the protection of the corporate network is now the norm versus an exception and the concept of a healthcare breach is no longer just about moving data license major entire institution walk us ransomware and it becomes difficult to treat patients.
As customers pulled back we started to innovate and develop entirely new post COVID-19 relevant offerings will be in demand by our clients compromise assessments privilege access management services and security validation just to name a few we also started the relative focus on expanding our addressable market.
And our relevancy and close Adjacencies to health care, while at the same time, we opened the door to new regulated markets.
Leverage our skills processes technologies, and our existing resources.
In Q4, we saw the start of a rebound of our professional services, which we highlighted in our announcement in January of a $700000 deal with a large health system. We saw new logo sign that our services continue to be in demand, including deals with valley health and Feraheme sales.
We're starting to see the benefits of our diversification strategy into close Adjacencies of health care that are causing low volumes of protected data during the pandemic with the signing of a deal with a large state department of public health and our announcement of a contract with ball State University and.
And we saw expansion in existing clients across our base, including a large academic medical center system and expanded deal with Logitech.
The late in Q4 budget began to free up and we saw the first increase in our bookings for the quarter in over a year, which manifested itself in a 10% increase and a pretty solid revenue and a more diversified pipeline positioning us well for growth in 2021.
Vaccines become available healthcare workers have been the first to get sharpen their arms as well that makes us opportunistic and optimistic that this will also accelerate a return to pre pandemic business conditions. So that's the story in health care, but it's by no means all we've been up to in my first investor call just over a year.
Though I talked about the opportunity we saw to expand the company beyond health care that diversification has been core to <unk> strategy and tubes.
Hey, I wanted to talk with you about the opportunity we see to be a big part of securing the defense industrial base.
Unfortunately, cyber attacks on Americans defense industrial base or will not unusual as evidenced by the most recent solar winds breach and the Microsoft exchange vulnerabilities, making headlines. This month, it's estimated that the United States is losing $600 billion a year before an adversary to exploration data theft.
And the loss of intellectual property to address this threat U S. Military defense acquisition is moving from a self assessment model to a rigorous framework that requires third party assessment for all 300000 vendors and with the price industrial base that handle controlled unclassified information This new initiative.
As noted from cyber security maturity model certification or CMC.
C M. A C is unlike other cyber security regulations as it requires a comprehensive security maturity that hopeful breadth and depth.
It also has real teeth.
Simply put if you do not need the requisite security requirements.
We will not win your government contract to.
To prepare secure and assess 300000 defense contractors over the next few years will require a small army of consultants that are sectors likely several thousand strong.
We believe the emerging market opportunity for both assessments and the remediation services, which we expect to be three times the opportunity of assessments alone to be in the tens of billions over the next five years.
We recognize the opportunity more than a year ago, and we believe we are uniquely positioned to capitalize on it.
Not a government supplier to that we are completely independent and that's an advantage.
All of our current employees in the U S citizens and approximately 17% of them are U S military veterans.
With CMC Leverages nearly identical frameworks to what we use in health care, where we already have intellectual property in place, including automation and training and quality control.
Most importantly, we have 60 assessors already in position that we believe can meet the required qualifications. Once the certification process fully opens up allowing us to enter this market with existing resources and capabilities.
Now, becoming a CMC assessor is not a trivial process required training credential background checks with people or with new controls procedures and an enhanced security posture of our organization is significant.
We are one of the first companies to be approved as a third party assessment organization, we have a provisional certified access or the ranks that represents one of the first 100 in the program.
We are registered provider organization authorizing us to do consulting work now and I wanted to announce today that we have already begun closing consulting deals helping government suppliers prepare for the <unk> initiative. The next critical step for us in this process, which is already underway and will continue over the next few.
<unk> is to have the department of defense conduct a review of our security posture our strategy is twofold.
Remaining focused in health care, and we're seeing the signs of recovery, but we also believe that the seamless effort along with customer diversification efforts.
And our go to market into new industries can you get us growing at a much higher rate than our baseline growth strategy with that let me turn the call over to Paul.
Thank you Caleb this year was all about constantly reacting to what the market through at us during the pandemic.
Reaction included numerous efforts to reduce costs improve efficiencies and respond to customer pullback due to budgetary constraints.
As a result of the impacts from the pandemic last year, we expect Q1 2021 to be our revenue low point down approximately 10% from Q4 of 2020.
But as Ken said, we are seeing strong signs of a rebound with an increase in our pre sold revenue in our Q4 bookings were the highest we've experienced in over two years.
Given that our revenue in some cases can lag bookings by several quarters and our emphasis on closing long term recurring revenue contracts that we.
We'll take some time to show in our numbers.
From a balance sheet and financial resources perspective, we ended the year with $5 $6 million in cash that included a net issuance of $1 8 million of the 5 million eligible to take down the ATM under our shelf registration.
This was done at an average price of $1 54, and the total share issuance of one 3 million shares.
We still have the $2 8 million of debt that we received under the Paycheck protection program and.
And we expect the majority of the loan will be forgiven.
We're also expecting tax relief as a result of the cares Act, we expect to carry back available losses from this year to the extent possible, which at this point exceeds $1 million.
Outlet outlining our Q4 standard financial disclosures revenue decreased $1 1 million to $4 7 million, but it was up 4% over Q3 day.
The decrease from prior year was due to lower revenue from managed services, which reduced by <unk> 3 million to $2 8 million due to the impact of some customers canceling or delaying renewals and a reduction in net new customers due to the pandemic.
Professional and consulting services decreased $2 8 million.
The $1 9 million due to lower revenue from synergistic business as a result of the pandemic offset by an increase of <unk> $2 million of revenues from backbone.
Again, this backbone increase was lower than we had projected due to a pullback by our customers use of third party services again directly related to the pandemic.
Gross margin was 37% for Q4 2020 compared to 40% for 2019.
And it improved from 35% of Q3.
As I mentioned in my highlights the improvement in gross margin is due to the staff and expense reductions we have made over the last couple of quarters.
Along with reduced travel and reaction to the lower.
Revenue in the Covid related travel restrictions.
Sales and marketing expenses decreased to $1 1 million from Q4 2020 compared to $1 4 million for the same period in 19.
This decrease was due to lower head count as we look to rebuild part of the sales team and lower stock based comp.
We do expect this to increase as we get back to full head count levels and our investment in marketing to support our increased go to market activities.
G&A expense decreased by $1 million to $1 1 million for Q4 2020 compared to the same period of 19.
The decrease is due to $1 1 million in temporary and permanent expense reduction efforts taken to improve operating margins from 2020.
Offsetting a $5 1 million in additional cost for backbone.
We do expense do you expect <unk> expenses to increase going into 'twenty. One 2021, as we start to reinstate some employee benefits that were suspended in 2020 and reaction to the pandemic, but we will react as we see how 2021 shapes up.
During the quarter, we did record a noncash impairment of goodwill and intangibles amounting to $16 5 million.
Our non-GAAP adjusted EBITDA loss was <unk> 3 million for Q4 2020 compared to <unk> 4 million from Q4 dollars $19 8 million in Q3 of this year.
Full year financials, and reconciliation of GAAP to non-GAAP information can be found in the earnings release that came out today.
Caleb highlighted our growth strategy during his discussion earlier funding through the ATM was a step in supporting these initiatives with the small infusion of capital we're bullish on the long term prospects for the company.
Any subsequent capital raises would be with a mind to accelerating growth and creating incremental value for shareholders beyond the current plan.
This concludes the financials and prepared remarks from Q4 2020, operator, please open the floor for questions.
Certainly everyone to ask a question. Please press Star then one on your telephone keypad. Please.
Please note that if you're on a speaker phone please pick up the handset or depression from Shanghai to all that signal from HR system.
Again that is star one to ask a question.
And we'll go first to Matt Hewitt of Craig Hallum Capital Group.
Good afternoon. Thank you for taking the questions and it's nice to hear that things are starting to free up a little bit here.
I guess a few questions first off on the CMC opportunity you said that you started to close some deals maybe if you could help provide a little bit of detail regarding deal size timing might be.
The evaluation versus consulting any additional color would be helpful.
Sure first of all thanks for thanks for asking the question Matt.
<unk>.
Okay. So the way you have to look at this is this is a government initiative and.
It's really in all the bias if things are slow and bureaucratic and there are multiple hurdles to go through and that's not unusual in our space, but I'll explain in a second Matt why that's actually proven to be very advantageous.
The reality here is that we today can go out and make money doing consulting work to help companies prepare for the CMC initiative and it's an enormous amount of work. We just went through it ourselves and <unk>.
We're a security company, we have lots of these policies and procedures in place.
You had to put new solutions in place enormous amounts of documentation, it's not unlike a its not like unlike what financial folks go through in a sarbanes Oxley audit and preparing for that right. Its rigorous detailed you have to have multiple forms of evidence to prove that each controls in place and working.
Properly.
So that work, we're actually authorized to do right now and we started closing deals there.
On the other side of actually doing the assessments.
One of the first companies Thats kind of cleared the hurdles to be authorized to do that and what's most important. There is there is only 100 people out there today that have the credential that had been trained and authorized by the Dod to do this work during their provisional period, we have one of those assessors on our staff what we are.
Waiting for now before the Dod will open this up more wisely.
Is the actual assessment of our security posture, so us and the other leading companies that are in the first wave are going through that security assessment now and as soon as that is completed.
And then the the actual assessment work, we'll open up now so.
The prep work the consulting work in these deals can vary anything from.
Hey, I need some I need a few hours of time from somebody to understand what's really involved here too I need help building the comprehensive documentation which could be.
Literally thousands of hours of work.
Okay got it so as far as.
Timing so revenues from this is probably more we should be thinking about the Q2 Q3. When these will start to layer in.
We're starting to see revenue from it now I would say when I think this is really going to heat up when the government starts opening up contracts that will actually require the CMC certification.
Initial approach was to have 1500.
Government contractors through the process. This calendar year, it looks like Youre, a little bit behind in that now I will tell you as much as this is <unk>.
Cumbersome and there's a lot of steps to go through you got to remember every step every hurdle that we have to go to also weeds out competition in that space. So.
Yeah.
I just become more and more bullish the further we get into this realize the sophistication of it and the fact that a lot of companies are going to be able to handle it.
Got it got it Okay, and then on the healthcare side.
It sounds like things are starting to free up and obviously as we start to see the vaccinations, having an impact and we start to see the.
Elective procedures happening in hospital budgets starting to.
Improve a little bit.
Maybe walk through are there.
So we've got a pipeline of opportunities some of which may be were put on pause last year some of which are.
Or maybe new given even the Microsoft situation here, a couple of weeks ago, but.
How quickly do you anticipate being able to close some of those and how all of that to start to be reflected in the financials.
So what happened here Q4, obviously saw a list of opportunities that in my opinion had been delayed during the year as people those it had budget left to spend in Q4.
I think as we kind of look forward from there we are definitely starting to see things pick up in almost every case the actual buyer is ready to go.
We may still see some extra hurdles with procurement and financial teams as they work through debt the challenges of Recalibrating finances, and budgets coming out the other side of the pandemic, but overall, we're really starting to see that return.
The other thing not to lose sight of is there were some very significant.
Well somewhat catastrophic impact late in Q4 to many hospitals due to ransomware and this was no longer the case, just a hospital going down average series, we're targeting entire systems.
Saar in two cases, the remediation costs exceed $60 million.
And I think those have the attention of cyber insurers better now looking at real risk in this case, but also the recognition from many systems that they're realizing they don't show up their defenses. They are not going to be able to stay open in a ransomware incident.
Interesting okay.
And maybe one last question for Paul I think in your prepared remarks, you talked about expenses.
Starting to maybe ramp up a little bit here in fiscal 'twenty, one and just for point of clarification are you talking about kind of recovering a little bit vs Q4 or are you talking year on year. So for example, sales and marketing call. It $1 1 million in Q4 that was down from $1 5 million in Q1 of 'twenty.
Well Q1, you start to see that grow off of the $1 1 million and maybe.
Getting closer to where you were in Q1 of 'twenty or just to help us think about the ramp in those expenses over the course of the year. Thank you.
Yeah.
Specifically as it relates to sales and marketing that's exactly right. We're looking at for the Q1 numbers to ramp that.
You want and really into Q2 to get back up to that Q1 number.
That's what we're expecting the run rate to be about the same as we saw in Q1 of 'twenty.
Okay got it alright, thank you.
Thanks, Matt.
Our next question will come from Jeff Bash question.
Hi, Jeff.
Jeff.
Okay.
I have a couple of housekeeping questions for Bob.
That's my view for scale.
Sure.
When.
What would you guess is your goal.
Hope towards he loses the distributions of business income.
Few years between healthcare and.
The defense industrial space.
50 50.
Whats your image of what you'd like to see.
It's a great question, Jeff I mean, the first thing to remember is although you say, we say health care and government I think most people's first reaction, but it sounded like two very different animals. The reality of our side. If you put yourself from the sort of one of our one of our assessors.
Almost identical work so the.
Even though we're moving more into government.
A lot of the same thing we do today, here's the way I look at it.
We're about 5000 ish hospitals in the United States. So that equates debt. This is rough math.
Let's say roughly 500 systems that are slowly consolidating down to even less so thats your addressable market in health care, right 50, and 100 systems.
Actually there are adjacencies to health care, but if we think it providers, which is kind of our strong suit. If we then pivot over to the government side. There is 300000 military contractors and Thats just to the U S. Military there are already signs in interest and other parts of the government, particularly homeland security in leveraging the same model for their suppliers. So.
The addressable market here on the government side is what $35 40 times larger than the addressable market.
On the healthcare side and I think we've done a nice job at capturing a decent market share in health care providers I'd like to do the same thing as part of the CMC initiative.
That suggests I presume.
The growth rate because.
Obviously higher.
Down the road.
A fair assessment.
Well I think it is a.
Let's put it this way I would love to say, yes to your question. The only thing holding you back from that Jeff is it's government right. There are hurdles, we have to get through and a lot of this is going to come down to the number of contracts and the pace of contracts that the government decides to put underneath there this initiative.
They have said that they want to get all 300000 vendors through this program in the next five years and if that is the case I do think the growth rate here could be quite significant.
Great and then I have a couple of housekeeping questions.
Paul.
Paul on the 68 million write off.
The casual view would suggest let me as a former management, including too.
They'll pay twice as much as they share the synergistic acquisition.
So there might have been just driven by the stock price declines.
We're forced to review it.
The same accounting rules right could you give us a little more color on the right conclusion to draw from these logos.
You understand the accounting rules are better than most yes, so Jeff Youre, absolutely right we had to.
The stock price in and of itself require put us in a position where we we definitely had to analyze the business.
More detail.
Take the steps that we did.
In addition, we came to a conclusion.
We had to use our market cap at the end of the year as a barometer for what the ultimate fair value.
Comes too so we're really.
The share price at the end of the year had a lot to do with ultimately where we are.
Where we ended up.
Okay.
So I just wanted to be sure.
And then the other question is you have two 8 million PPP loans are you still expecting.
Almost all of it has to be written off in the.
Within a reasonable period of time.
That's our expectation we've submitted all the paperwork with the SBA bankers authorizes submission to the SBA. So they did their part and.
Put forward debt that recommendation and then given the requirement given the size of the.
Alone we have to fill out the necessity questionnaires.
That was the last night in addition to the process and so we're in.
So its been its IND submission.
It's really a black hole to me right now.
Okay. Thank you very much.
Yeah.
Yeah.
Thank you Joe.
Yeah.
And next we have RBC share as long cast advisers.
Hi, Thanks for taking all the questions.
Hey, Paul one.
Quick two quick questions what is the share count today, and where are we at with pre sold revenues as of today.
In the 10-K, we announced where we got $17 2 million.
Pre sold.
And then that sounds share yes.
Okay.
Okay.
And then from an outstanding share count.
12, $12 1 million.
Yeah.
And so is the pre sold through where we are today is it higher than it was at the end of the year.
Uh huh.
It should be yes, but I don't we don't have final numbers too.
Gross quarter Okay.
And if you said if I gathered what you said in your prepared remarks youre looking at <unk>.
Starting with <unk>, you are looking at a down 10% year over year.
For our revenue.
Down 10% from Q4.
Right Oh from Q from from Q4 of <unk>.
Q4 2020 correct.
Okay, and that's more than 10%.
Year over year.
And is most of that's driven by I mean, you talked about a client who either didn't renew or.
Uh huh.
Or a client is that most of it is from that.
Is that a single client theres, a large versus true.
A large percentage of the drop in pre sold and the drop in revenue was from a specific client largest managed services clients at the time.
We may add to cancel due to budgetary reasons.
So again just to clarify a large percentage of this decline is because of the client that cancel that you've previously talked about.
Correct.
Revenue did the contract continued through the first quarter of this year.
Okay.
For the renewal and go forward.
Expansion of the business.
So just from a.
A little confusion out of the first quarter for <unk> 'twenty, one you're guiding to 10% sequential decline.
That is that's still includes that client or any of that is due to that Glenn. It does we have the base business was at the base business.
<unk> went through Q1 of this year.
Correct.
So can you elaborate a little bit on the decline if it is not because of this large client who is cancel what why do we see such a big decline and more broadly speaking you talked about a lot of the issues there wasn't a full quarter. It wasn't a full quarter. It wasn't a full quarter of revenue. So that's one.
We had a number of cancellations and things that occurred throughout the year. Those cancellations again didn't occur upon the date that canceled they may have extended for additional periods. It just did indicated they wouldn't be renewing the business. So we still had revenue tailing off or trailing off.
This first quarter and have any I can't really sales or non renewals indicated net debt.
Debt now that business has improved for them they would come back.
Not at this point for those that had actually canceled we have not seen them for.
For those that are delayed and you have seen we have seen delays come back in and ultimately side renewal.
Just a quick question for you and then I'll turn it over but.
You talked about the dynamics in the health care space.
I've talked to some other cyber security company, that's even smaller than you but in their hospital.
Approach to health care space are talking about them they have to rebound in 2021 and I'm just trying to get an understanding of what what what what aspect of your business as it is.
<unk>.
Working properly so that youre not.
Participating in what seems to be a rebound in the cyber security in the hospital and health care space that some of your competitors are seeing thank you.
I think that's your conclusion online I mean, we are absolutely seeing things pick up I think the.
Not only are you seeing budgets come back but.
And in fact, many of you've asked US before when does health care start to take security seriously. Many of them saw that during the pandemic I mean imagine having an entire system locked up with ransomware from months, where you can barely treat patients in the middle of a pandemic.
Simple half of 12 hospitals went through that in November of last year. So the whole dynamic has changed and I think debt theyre starting to take security very seriously budgets is starting to open up and I'm very bullish on where were headed over 2021.
So do you expect there I guess inquiries at <unk> will be the low point of revenues for the year.
Yes, I mean, the challenge you've got here on revenue was it always trailing because of the managed services business right. So where we were getting beat up in March April May and then the heat of the pandemic when everything is closed down and hospitals had to clear out all of their elective surgeries.
That trail just works its way through in this quarter right. So.
And a lot of ways youre seeing the tail of that work its way through the system.
Okay. Thank you for your questions.
Thanks Avi.
Our next question will come from Michael Potter of monarch capital.
Hey, guys.
Hey, Michael.
Good the tone seems to be improving so so certainly yeah.
Good to hear.
Just want to follow up on on kind of the last theme.
Sure.
We're seeing activity pick up.
With health systems.
Do you anticipate that we're going to start hearing about more contract signings over the next 60 to 90 days.
They can't put the software.
A lot of those out from startup.
Yeah, I mean, the simple math on this right is on right at the end of the quarter. So our focus right now as you can imagine is on doing everything we can to get every deal over the wall here before the.