Q1 2021 CynergisTek Inc Earnings Call
And the strategy will be complete which includes new brand positioning and websites with and elevated look and better user experience for both of the synergistic and Red spin brands initial testing of our messaging is resonating very well with our clients and more importantly is leading to pipeline growth of our managed services, including our advanced and validation services.
The better marketing also opens the door to services being considered and adjacent markets. Our outlook has given us the confidence to expand our efforts with the addition of multiple new sellers, who are experienced and adjacent markets, bringing our total to nine direct sellers.
Bottom line, we use the pandemic to completely retooled the company and that transformation is largely complete we feel good about where we're headed and the initiatives we have pursued to be more relevant and of changing healthcare cyber market expected to grow 16% per annum over the next five years and to be one of the first companies to capital.
Lies on the emerging multibillion dollar business opportunity securing the defense industrial base. All of this is expected to translate into a more profitable business the growth at a double digit CAGR over the next five years with that let me turn it over to Paul.
Thanks, Kevin and the key metric of precision.
Total revenue continues to grow following on the strong Q4, increasing by an additional $200017 4 million due to greater demand from our health care providers coming out of the pandemic. Additionally.
Additionally, we saw the cost reduction efforts improved earnings year over year by almost $1 million.
Our balance sheet ended the quarter with $4 4 million and cash Q1 traditionally has a higher cash burn due to annual software subscriptions and other beginning of the year cash outlays, but this was offset by the benefits from the employee retention credit provided under the cares Act that we qualified for for Q1 and expect to have and Q2.
Since the end of last year, we have not taken any additional stock issuances under the $5 million ATM under our shelf registration.
We still have the $2 8 million and debt that we received under the Paycheck protection program and <unk>.
Still expect the majority of alone will be forgiven, but of pending more back from the SBA.
We're also expecting the tax refund from the carry backs of available losses from 2020 to the extent possible, which at this point still exceeds over $1 billion.
Addressing the Q1 standard financial disclosures revo.
The revenue decreased <unk> 9 million to $4 2 million compared to Q1 2020.
The decrease from prior year was due to lower revenue from managed services, which reduced by <unk> 6 million to $2 4 million due to the impact of some customers canceling or delaying renewals and the reduction of net new customers due to the pandemic.
Consulting and professional services revenue decreased <unk> 3 million to $1 7 million due to lower revenue from two customers, who had completed contract work and the first half of 2020 and less business as a result of the pandemic because our customers and continue to minimize spend with third party contractors.
Gross margin was 50% for Q1 and 2021 on adjusted 39% when excluding the benefit from the employee retention credits.
This is an improvement when compared to 33% and Q1, and 2020 and 37% and Q4 the.
The increase in gross margins is due to the staff and expense reductions the reduced travel and the delivery efficiencies that we've been talking about on the last couple of calls.
Sales and marketing expenses decreased to $1 2 million for Q1 2021 compared to $1 5 million for the same period and 2020. This decrease was due to lower marketing and sales support payroll costs from the head count reductions less.
The less travel costs as well as the benefit from the employee retention credit.
These were partially offset by higher recruiting costs, we do expect sales and marketing to recover to levels similar to 2019.
And as we increased investment and marketing to support our expanded go to market activities.
Our G&A expense decreased by $4 million or one seven.
Two $1 7 million for Q1 2021.
The increase is due to the expense reduction efforts taken last year lower professional fees due to 2020 of being higher from strategic advisory and recruiting costs and the benefit from the employee retention credit as provided under the cares Act.
We do expect G&A expense to increase and the second half of the year as we start to reinstate some employee benefits that were suspended in 2020, we start to travel again as well as the.
<unk> retention credit going away.
Non-GAAP adjusted EBITDA loss was <unk> 6 million for Q1, 2021 compared to $1 4 million last year.
The full year financials, and reconciliation of GAAP to non-GAAP information can be found and the earnings release that came out today and.
In summary, taking into consideration of the drop in revenue the aggressive steps, we took to respond to the pandemic shows and this quarter's results when compared to last year with continued improvement in gross margins a reduction and our net loss of reduction and our adjusted EBITDA loss and continued reduction and our cash flow used from operations all of this.
Positions us well going into the rest of 2000 22021, where we are seeing things improving throughout the rest of the year.
This concludes the financials and the prepared remarks for Q1, operator, please open the floor for questions.
Thank you.
If you'd like to ask a question. Please sigma pressing star one on your telephone keypad. If you are using a speaker phone please make sure of that.
The function is turned off to one of your signal to reach our equipment.
And the star one if you'd like to ask a question.
Our first question from Matt Hewitt from Craig Hallum Capital. Please go ahead.
Thanks for taking the questions and.
And the update.
And maybe first off regarding the recent attacks and you're right.
That's still on the press release and your prepared remarks, but I'm curious if you're sensing a change from customers and potential customers. Following the recent attacks when in the past it's created maybe a flurry of activity and then things kind of seemed the die off but these seem to be a little.
The more critical and nature and are you seeing that have an impact in your discussions and quite frankly and the pipeline.
Yes, great question, Matt So on.
And the short answer to your question is yes, I mean look I don't.
I don't ever want to tie.
Level of success to what bad guys do but I do think the awareness here is the.
Definitely driving changes I mean.
And we're sitting here right now with two major portions of U S infrastructure impacted this week right. We have an entire hospital system down all of them.
The Scripps health out on the West coast. The ransomware at the same time, we have a U S.
Pipeline down due to a ransomware incident and.
Not only is this creating additional awareness because I think every organization is realizing that.
Proper preparation is going to be a whole lot less expenses and the cure.
But at the same time I think at the government level. We're also starting to realize that.
We're going to have to come up with the different way to deal with these adversary and this is not.
This is not normal criminal behavior. This is having a massive impact on the U S economy.
And the thing is there outside of the reach of traditional law enforcement right. So I don't know what to call. These people there theyre not traditional.
Criminals.
And theyre not necessarily terrorists, either and there is something in between but I think what you're starting to see the U S government ramp up to us at the time to have a more proportional response to this the per.
First step of which though is getting our defenses and order and I think a lot of what you saw on that executive order is.
And the desire to use the U S federal procurement process to ultimately drive changes that we see and the public sector excuse me and the private sector.
And Thats, probably a smart way to do it but just to put this in context right. When we look at the 500 plus ransomware incident occurred last year.
These are starting to have real numbers associated with them when the University of Vermont Health system went down the call and the National Guard and a coffee and over $60 million and that was one of several of these so you quickly realize with those kinds of losses.
Analysis of prevention is going to cost of a whole lot of loss.
Absolutely.
Yes.
And so you've got that and the headlines and obviously it appears that the situation is improving from the COVID-19 perspective, and Im curious if thats driving.
On some renewed.
The conversations with some of the customers that it may be delayed some of the renewals last year I know that you were able to sign the one contract in Q1, but are you seeing a similar impact with some of the other customers.
It's creating a of couple of things we are seeing having of macro level. So first of all at the <unk>.
The top line and things are definitely improving right.
Seeing far less pricing pressure in fact, if anything we're able to lean in on pricing.
We are starting to see people have more control over their budgets and starting to recognize that they need to invest and security and in many cases, they've got a technical debt that built up over the course of the pandemic and that they now need to catch up on.
One of the other trends that we're seeing that we're following very closely.
And there is also an emergence of kind of the haves and the have nots, particularly and our health care providers, where the larger systems. Those that are well funded are doing quite well and are starting to lean and very heavily on security they are starting to consolidate.
The example, we gave earlier on the call is the Great example, where they're now looking out to their affiliates and the rest of the network, saying, Hey, we need to see the same security posture that we have here back and at the home office.
We're also seeing the emergence of the have nots right, where there are some providers that will beat up very heavily.
And the during the crisis.
We are continuing to work with them.
And that's where they've got a little more pressure and frankly in a lot of cases, thats, where were and if deconsolidation, but the strategy. We put in place about a year ago, and we talked about it on these calls to start becoming much more relevant to the larger practices is working out well so and.
A lot of ways. We saw this shift at the start of the pandemic, we shifted to make sure our services are relevant and so far that's paying off.
That's great and then maybe shifting gears a little bit of the gross margin benefit and the quarter I understand some of it was.
Tax benefit related but grew 39% gross margin. It was a nice improvement year over year and sequentially I'm curious of that is sustainable do we do we grow from here or how should we be thinking about the base gross margin number.
Paul why don't we do think it has lots of to cover that one yes, no no no.
We do think of sustainable at these revenue levels, but then we obviously would expect it to improve as revenue growth.
Thanks, Okay.
Yes, that's it for me thank you very much.
Okay. Thanks, a lot of map.
Thank you once again the star one if you'd like to ask a question. There. The next question from Jerry William from Willy Fund.
Yeah. Good afternoon, guys say, just if you could give me and I know, it's a moving target quarter to quarter, but.
And actually adding some of the marketing expenses with growth opportunities, but trying to get a sense on kind of a breakeven revenue.
On cash flow neutral what revenue number do you need to get.
No.
Cash flow neutral on the EBITDA basis adjusted.
Yes, we still target around that five 5% to six range sort of target.
For the for the breakeven.
Yes.
Okay.
Thank you much all of health.
Thank you we'll hear next from Avi Fisher from loan cast advisors.
Hi, do you guys know of any restriction.
That prevents our board members from buying shares because I observe of lack of shareholder buying from our current board.
And the strategy that they are implementing one would assume.
Help me to growth and the future and it's just as a shareholder of Dismays me that they're not investing in it. So I wondered if you if there's any restrictions on that debt you could talk of it.
Now, we have been and a close window.
Avi for at least at this point and and.
The excess of six months, we've been on a close trading window. So yes, there has been some limitations on.
On the board and the ability to trade it.
Currently does that open at anytime soon so we can possibly see some insider buying.
Debt is the expectation as you know we didn't file our proxy we're still analyzing board agenda items. Those finalization of the board agenda items will limit our ability to open up that closed trading window, and we do anticipate getting that done and the next few weeks.
Okay and then.
<unk> of talks about and obviously a lot of people are aware of and environment that seems profoundly good for a company that provides cyber security services.
But your pre sold is roughly flat sequentially or deferred revenue is down 40% I'm trying to get a sense of kind of what are we missing here.
What does it going to take for us to sort of benefit from the overall environment.
I think the biggest thing Avi, which we.
And then we talked about last.
February and March we entered the pandemic.
We purposely pulled back.
Significantly from a marketing perspective.
That was a.
Roughly discretionary costs that gave us the ability to throttle back significantly.
And.
Not only was that about saving money at the time, but also it was nearly impossible to get the message out.
And with new cycles and <unk>.
Being shut down with both COVID-19 as well as all of the election Crazy and the capital riots.
Now we are starting to lean back and on that both from an investment perspective as well as there is an open window I mean, we've had three broadcast news segments and the last week.
Including NBC nightly earlier this week, you couldnt and done that three or four months ago. So.
We've still got work to do but at the end of the day. The the barrier of there for US is brand awareness and.
And getting that top of the funnel built so thats, where youre going to see us start to lean and heavily Avi.
The other thing here too I mean look if you take a look at our website.
Our website looks like it was built and 995 right we've got to get that retooled and thats. The other side of this that we're working on I mean that sounds minor, but it actually makes a really significant difference.
So I just wanted to dig into this a little of the cable it because you're talking about brand awareness, but we constantly come up on top within the healthcare industry of having a great brand.
So I'm just I'm trying to understand and I mean are we are we and I'm trying to understand your goals are we pursuing big elephant contracts are smaller contracts. How are we allocating of that and when I and one other question is when I talk to competitors many of them and saw the same thing as you saw during the COVID-19 early COVID-19 period, which was.
Huge retrenchment.
But many of them I talked to and it's all rebounded and were forecasting double digit growth. This year, yet we are not seeing the same thing and I'm just trying to understand why.
Yes.
As we said, we've delayed you're spending, but but the whole industry should help lift that's up to you.
The industry will certainly help investment in this area will help.
And we're starting to create slowly the free cash flow to be able to invest further in that.
In addition to that Avi I think the just like healthcare was the first to enter the pandemic.
And there'll be one of the last to clear out now granted I think they've started to accelerate their cyber security investments, but all of our restaurants are back open and most places most emergency room still have COVID-19 patients. So we've got a little bit of of delay there, but like I said and the earlier comments, we're very optimistic on where they're at.
And is headed but also of the difference here is we're not dependent on one market like we were before we've used this time to retool to make sure that we're relevant and Adjacencies and we started to see some nice progress there as well.
And finally can you would you disclose what pre sold is as of today or at least how it compares to how it was at quarter end.
Yes.
I mean, we can't do that right now we don't traditionally of guidance I can tell you that we were.
And as Caleb mentioned in his comments, we had a nice close that occurred going into Q2. So we're happy with the way of Q2 has started.
And so.
That's a positive sign.
Alright, thank you.
Thank you we'll hear next from Michael Potter from Monarch Capital Group.
Hey, guys.
And good tone to the call.
And <unk>.
And it certainly is.
As you'd laid out killer, we're having.
The backdrop seems and the industry seems to be very positive for for the growth of this company for this year.
Just a quick question the <unk>.
Bookings for the quarter can you can you give us.
And what the bookings number was for Q1.
Yeah, we don't traditionally provide the bookings number I mean, you can back into a rough estimate of that number just by looking at the.
Movement, and pre sold and <unk>.
And revenue.
Provide that number.
Can you start I mean, it would be very helpful to us if we if we understood. The kpis that both you and the board are are using to measure of the progress of this company and certainly for me bookings is wood.
It would be a big contributor to understand how this company is moving forward or what or what is giving you. The confidence that this company is moving forward.
Yeah, I understand and again, we'll take that into consideration and see if we can't try to provide some update at least at this point pre sold kind of where we are we're focused on as it relates to information debt that's out there to.
To give you the best indication.
But we have the back into that.
The prior the.
Prior call of just kind of ask that question and we couldn't get an answer.
But bookings would be helpful. Again, your competitors give out that the.
It's.
And it's it's.
It would be very helpful for us to understand and if the gulfport with the.
We're going to see the bookings number increase certainly as we should.
Prior to seeing the turnaround in the top line.
Understand how you said it will take down the consideration for the next call.
Okay.
Kevin You mentioned that we know of nine direct the resellers is that correct.
No not resellers direct sellers direct sellers, okay, sorry, direct sellers and how does that compare how does that compare to where we were a year ago.
Uh huh.
I don't remember off top my head exactly where and we were a year ago. We had significant departure I mean, when I started back in August of 2019, we didn't have a head of sales and we were at.
Slide four of five sellers, okay, several of which since left and we had the completely retooled the sales team and.
To be completely transparent there too.
We had some turnover of sales during the pandemic as well. So this has been a.
Hi.
Nothing I am proud of but we'll be very transparent there and we've had some work to do there and I feel like we're getting ahead of that.
Okay.
And I know thats been a day.
That's been a big issue.
And unfortunately was.
Was out of your control, but you've.
<unk> rebuilt the sales team over the past year and a half or so.
So we have nine and direct Bill and we've also we've also tried to really bring in.
And this is true across all positions our head of HR and very good at this every time, we have of departure, we really sit back as an executive team and say okay. What.
And the profile, we need to take next to really try to upscale and up level and what I'm really also very pleased with all of our sellers today have a very robust cyber security background. So they can talk the talk and walk the walk.
Okay.
Got it.
Okay.
Maybe we can talk a little bit.
On a.
The labor the point and you've already kind of laid the groundwork between solar wins, the colonial pipeline scripts, which is new and university of Vermont.
There is enough anecdotal evidence out there at this point of.
Of some big headlines.
And the private sector that I would think.
That this has moved up.
The priority list.
For for spend for 2021.
A lot of with a lot of companies and the healthcare system.
And the industry so.
What more is it going to take before we start seeing.
The more contract announcements and again, our bookings really start to increase.
Well I mean, obviously, that's what we're focused on every day right and.
Anytime we get something meaningful that we can talk about a lot of times.
We have clients that won't allow us to talk about their deals even if blinded.
Just because of their security related but we work hard to give you as much guidance as we can on that.
As we said earlier.
Got a high degree of confidence of where we're headed next.
In terms of that rebound and.
Here's the thing you asked kind of about the mindset.
You have to remember, particularly in health care, the biggest issues historically, where data loss and the way you dealt with that risk was to buy cyber insurance right. If you watch the data. It was a bad day, you had to pay fines and it probably came with the reputation of loss, but you could defer that risk of cyber insurance.
The reality now that I think every board is realizing and.
And the further risk of the shutdown of the cyber insurance first of all the insurance carriers and they've gotten very smart.
They're starting to require specific features and functions of the in place if you're even going to be insured.
But also now you've got the cost of downtime of Youre locked up now.
I think everybody on the phone here will understand it takes some time for that to work through boards to realize I.
I got to move money to invest and this and we're really seeing that movement and the dialog and one of the ways I see that early sign to us, we're getting called into more and more board meetings.
We're on presenting the board's, helping them understand their strategy and where they need to go and so it's going to take a little bit of time. Some of this is we're digging out of the hole.
And at the same time I'm very optimistic on where were starting to see the scope.
Okay and.
Let's touch on the CMC of little bit.
You've had some had some wins, which of which has been terrific can you kind of walk us through the process of of where we are in regards to approvals with the with the government and.
I guess when is this going to start to be implemented or when does the government Dod or you're going to start mandating that this is implemented.
Well, so like Paul of government projects.
There are there have been various starts stops and iterations on this as the government stands up the.
The non profit that will be managing this called the <unk>.
They seem to be coming together and coalescing.
Just annoying their first CEO. So they are kind of moving from volunteers to being a real entity.
On.
What we have to do and we're in the same boat as of few others. We're one of the first in Q.
And what we have to do because there's nobody to assess the initial assessors.
We have to go through and assessment, that's being run by the <unk> or the department of defense.
That assessment is underway literally this week.
Pretty much the entire executive team has been on calls all week going through that audit.
What I will tell you is that.
We're learning a lot about this program through being one of the first to go through and it is far more in depth and far more comprehensive than I think anybody understands I mean, just to give you a simple metric.
And what 100 607 person company.
When I print out of our security policies and practices just the bare minimum.
And is three and a half inches thick.
Every single word and their matters every single reference has to be proven and we have to have evidenced the back of it all up.
And that's what we're going through now.
Now.
We have to pass that assessment, and then where we go from there is then we and the initial kind of cadre of assessors.
Approved actually get started with this work.
It appears like the Dod is very anxious to get this work going on.
And they just need now to get the first few companies through this assessment process and like I said, we're right now one of the first in Q <unk>.
Pass it.
And so far so good and we will obviously, let the street know when we get that official nod.
Okay. Thanks.
Thank you we'll take our next question from Timothy and tours with the retail investor.
Hi.
And I appreciate that.
And I hope I, just wanted to piggyback on some of the the <unk>.
Questions that some others of basically called out here and it's in regards to.
The revenue being generated and your sales force and so I had a couple of questions along those lines. The first question is.
Does the company have any type of.
Strategic relationships with other companies that <unk>.
May help to for lack of a bit of term shoe horn business and to you from a cyber security perspective.
We have.
Multiple relationships with technology vendors.
That provide technology that we use and our services. So for example, our patient privacy monitoring compromise assessments incident response.
As examples right the.
Company historically.
Has been a bit shy of kind of traditional.
And all partnership relationships, where we're either getting.
Sure.
We're either getting a cut of that business and or.
Where we might be getting of referral credit and that is because we really wanted to maintain the level of being agnostic.
And I think what we've learned and both been bankers who.
Really runs our operations and delivery as well as myself have had a lot of experience doing this and prior companies and.
And we believe that there is a way to thread that needle right, where you can be agnostic, but you still might have of preferred vendor.
And and a lot of ways that can be beneficial to our clients as well on.
Because oftentimes it allows them to put an entire solution on on <unk>.
One piece of paper one contract obviously, we started some early experiments there.
And I think that is an area, where we want to lean in more and certainly not to the extent of being viewed as a reseller. If you will but I do think there is an opportunity. There you also have to recognize.
We sit on a data set.
That basically articulate everything everybody needs right I mean, and every client we go into that we do and assessment. We know all of the security solutions and they are in place we know what they don't have in place we know what their budgets look like we know what their skills look like so we do sit and an interesting position, where we can not only advice.
But we can do some matchmaking and that's an area, where Ben and I want to lean in a bit more on the future.
Okay.
That's helpful and so.
With that being said.
Like I said of my questions are more of those still around sales and generating the sales because it seems like you've had a lot of really great.
Great opportunities over the last year in terms of cost cutting measures but.
And some other investors of mentioned that the revenue does it seem to be really spiking, given the times and given the situation.
Some of your competitors may have and so I'm just one of the kind of hammered a little bit more of that kind of understand what the differences.
In terms of for example of this most recent situation.
Are you and if so why.
How are you planning on incorporating this and so it kind of your sales process too.
And and generate business.
Well the <unk>.
First thing and recognized especially in the midst of a crisis like the pandemic, where our clients were in some cases going bankrupt or closing down because they needed the only taken COVID-19 patients and you got to survive in order to grow right. So we quickly switched into survival mode.
The important thing there is we made it out the other side and now we've got to flip into the growth mode.
Now if you look at the recent situation.
And the best way for us to <unk>.
Capitalize on that is to really flipping to the educational mode. We're out there on everything from social media and webcast talking about it but we're also advising our clients privately.
One of the things that our Investor community doesn't see is that and all of our managed services, we give our clients the opportunity to open a ticket with us and ask the question at any time and get one of our experts on the phone.
And anytime something like this happens our tickets will shoot through the roof and.
As clients want to understand Hey, why do I need to do to protect myself against this.
What do I need to know about this that may not be and the public realm and how does this change of my strategy. So you can imagine we've been having a lot of those conversations and what ultimately comes out of that is helping clients lay out the budgets to deal with this and as.
Anyone that's worked and any bureaucratic organization like the hospital understand you help them to lay out there, but today youre going to see the return from that three of six months later, when they can actually get that budget approved.
Okay. So.
With that being the case I don't know.
You've talked about not being able to provide numbers, but no. In general are you guys seeing a pretty big uptick in terms of business being generated and now that we're kind of on the back end of of.
Of the pandemic, we will hopefully and then and then finally this will be my last question on top of the one on just asked but.
And I'm curious as to what the sales force and saying the main challenges are in terms of getting business and securing contracts is it.
Securing those initial meetings to be able to kind of give the pits due to the website.
Potentially discouraged and some clients, we're moving forward with the with doing business with you or brand recognition as you mentioned or is it a matter of them getting the business and not being able to necessarily close the sales. What are you hearing from your sales force in terms of that.
Top line marketing and lead generation.
The we if you think about also the way in which all of us by products today right and this.
This is going to be a surprise to anybody, but we were predominantly face to face our marketing traditionally would bring people together face to face of events well not only the things gone, but they're never coming back and the same way so having that digital on boarding that digital presence that top of the line marketing funnel.
Is more critical today than it ever was and we've been busy over the last couple of months building the back and for that and now what we need to do is turn on the front end experience and are our sellers had been very involved and that they're very excited about where we're headed but that's exactly what they need.
Okay.
Thank you.
Thank you and that does conclude today's question and answer session.
And it back over to Mr. Barba for any closing remarks. Please go ahead.
Well look and closing its and great to see our employees getting shots and their arms were starting to travel again, our customers are beginning in the open up and they are even being willing to have face to face conversations, but the first time in the year.
Anticipate that our sales team is going to be back on the road. If you will regularly as we move into Q3 that said, we do plan to capitalize on certain efficiencies that we've learned throughout the pandemic, including largely remote delivery of our services and I just want to take a minute here to say, thank you to our customers our employees and our investors.
For the support.
While this pandemic as we got through it and I think and the and we've all learned of new way to work with that thank you.
Thank you that does conclude today's conference when you. Thank you all for your participation you may now disconnect.
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