Q2 2021 CynergisTek Inc Earnings Call
Yeah.
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Welcome to the <unk> 2021 second quarter earnings Conference call Today's conference is being recorded joining.
Joining us today from the company are Mr. Mac, Mcmillan, President and Chief Executive Officer, and Mr. Paul Anthony Chief Financial Officer.
Before we begin the formal presentation I'd 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 intense mi.
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 SEC filings.
Given the risks and uncertainties listeners should not place undue reliance on any forward looking statement and should recognized that the statements are predictions of future results, which may not occur as anticipated.
<unk> is 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 Mac Mcmillan.
Thank you and answer and good afternoon, everybody I never expected to be back in the seat, but I am and I'm already at work.
Gordon remember when I was encouraged by what I saw as good progress in rebuilding our business after the impacts from Covid.
All we could and should be doing more you're seeing quicker progress towards a return to growth and as I told our employees a couple of weeks ago. My decision to return was made easier by the fact that this company continues to have a tremendous pedigree and reputation in the industry, particularly with our customers, but also with our competitors which is <unk>.
<unk> related to their professionalism talent and commitment to what we do for our clients.
And we have a phenomenal clients some of whom has been with us for almost two decades now since 2004.
That type of longevity does not happen without building client loyalty by upholding the highest standards in our services and are pursuing success in everything we do.
It happens by solving the challenges that customers face in delivering positive outcomes for them consistently engagement after engagement.
It's been encouraging to have so many of our clients as well as others in the industry. Even some of you reach out to me in welcoming me back but more importantly, the offers of support had been greatly appreciate it.
I know that some might be concerned that we will return to what was perceived as a single health care focus, but I can assure you that never was and will not be the case going forward.
There had been some great improvements and additions made to our services in the past 18 months.
<unk> real benefit to our customers and we're not going to abandon those because they can be applied more broadly to many industries as well.
Health care is our core business and the primary source of our revenue we need to be aware of that and we will allocate the appropriate amount of attention and effort in promoting our business in it but in a balanced way are.
Our sales organization for the first time in a long time is near full strength with solid sales leadership.
<unk> New board members since I was CEO last who are more engaged than ever since my return we have improved the strength of our board membership with the addition of John flood shareholder himself, who brings 35 years of capital markets and Investor Relations experience to the board.
We recognize that investors support capitalization are important to our future shareholders have been asking us to add this type of expertise on our board and now we have it to say that the company hasn't faced some tough times. This past 18 months would be naive and say my predecessor did not manage during one of the most difficult time.
In corporate history would be unfair, but despite that the company did make strides in its efficiencies. It did develop new service offerings and it did position itself as the market leader in readiness for CMC, even though unfortunately, our performance as a company overall is not where any of us would like it to be.
That as I say is water under the bridge and where are we must focus now and where I plan to focus is on the future.
With the leadership changes the.
The changing environment post COVID-19, which is still challenging and the long term market opportunity <unk>, increasing one of our first priorities is to do a deep dive and revisit and update our strategic plans to be well positioned to capitalize. This will include an emphasis on investing and accelerating growth over near term profit.
We have a solid foundation with a leadership position and our strong relationships in health care and the addition of C of the CMC initiative greatly increasing our addressable market creates the opportunity to become a much larger company over the next 12 months to 24 months.
One of the first responsibilities of leadership is to create a shared vision for the organization to focus on and I understand how important that is but a close second priority will be concentrated on immediate short term execution and results, which has already begun.
This company was recently paid what I consider one of the highest compliment as a services business can't receive a recent independent industry analysts report listed synergistic as one of the top cyber security companies that healthcare Cio's consider as a true partner.
This is the goal that has always been a core value of this company and as guided what we do what we create and how we serve as a result. This company has a great legacy we have a great reputation and we can be so much more than we are today.
Our commitment is to build a more successful company for our employees our customers and our shareholders. We will do that by creating that shared vision a solid plan and then executing.
Successful organizations successful businesses successful teams all share two things in common focus and the will to win meaning.
Meaning winning is paramount and everything we do and winning as part of our culture and we intend to build on that as I've mentioned already we now have a strong capable sales leader and Steve Rivera, who wants to win and lead in winning sales team. While we have a fairly new sales team that are synergistic they are a seasoned and experienced set of <unk>.
Sellers and they have already put some wins on the board and are anxious to do more.
These past few weeks, we have landed several new clients and multiple wins that you have seen in the press releases recently sent out also the credit of that sales team and a delivery organization that are working more closely together now than I've ever experienced in the past.
We want to capitalize on that collaboration in those wins and increase their frequency to that end, we have already taken steps to restructure and strengthened sales to provide better nationwide coverage to enhance our ability to more effectively cross sell all of our services and created very focused service overlays for areas like health care.
And C M C diff.
To further support our client alignment and sales we have restructured our delivery organization to provide dedicated consultant directors. These physicians better provides support to our customers and serve as the dedicated conduit of support to our sales team to.
To get more specific on progress the sales team has been active in identifying and pursuing new opportunities and we are seeing things rebound and we are on track to see pipeline creation at a 33% higher rate than last year. In fact through the first six months of 2021, we have seen nearly $6 million at new pipeline.
Generated each month.
Give you more information to track our progress we have decided to start disclosing our bookings again something that many of you have asked for more color on.
We saw a significant increase in our quarterly bookings from Q2, when compared to last year's Q2, and again when compared to Q1 of this year.
More importantly, this resulted in an increase in our pre sold revenues.
Good news is we are seeing things begin to head in the right direction.
Gross requires net new business in addition to renewals and up selling and our team is focused on adding new clients, while continuing to expand our relationship with the ones. We already have the sales team has closed a number of new logos that included several new large health systems and tier one universities are Red Spin Division has also added some.
New non health care logos, and we were able to leverage our first mover position with CMC to grow that pipeline as well, adding numerous fortune 500 companies, which should position us well to take advantage of consulting and assessment opportunities.
Despite delays by the D. O D. We have already closed several C. M C deals spin.
Specifically as it relates to C. M C. Let me give you some updates on our pursuit of that business.
First we announced in Q2 that we were the first organization to successfully pass the CMC level three certification as an authorized C. M. M. C. Third party assessor organization and we are and we are ready to conduct CMC assessments as soon as D. O D has everything in place and says go.
We anticipate assessments beginning in the fourth quarter.
Secondly, we are one of the first organizations approved to provide CMC training, which we also expect to begin in Q4 and recently, we announced we will be allowing organizations and individuals to register ahead of time for training and already in just the first few days since that announcement has gone out we've had multiple <unk>.
Individuals' Express interest.
Even though that's still early it's still another good sign.
And lastly, and most importantly, we can provide consulting services.
To those needing help with C. M. C readiness now to summarize we are certified and prepared to offer services under all three categories consulting assessor and training.
We are currently building out a more detailed business approach to executing our C. M C opportunity based on the services. We can provide now and the D. O D schedule going forward. The volume is behind as we deal with delays from the government, but we still see the tremendous opportunity in front of us and we are extremely excited and prepare.
To take this on our.
Our target was to achieve certification and to start generating CMC related revenue by Q4 of this year.
Which we have accomplished we began booking deals last quarter and have seen close to 100 leads since then.
Fueling the funnel is important sales as we all know as a matter of numbers from leads to prospects to opportunities to deals.
We are beginning to see recent investment in our digital marketing efforts start to pay off we recently debuted our new synergistic and web red spin websites.
Haven't seen those I encourage you to go take a look and our initial data shows that a 25% increase in web visitors with people engaging more directly and more frequently with our content and uptick of some 33%.
Additionally deployment of more focused account based marketing strategy and tools have contributed to new to net new logo opportunities nearly $3 million in just the last couple of weeks.
Many of our leads still come from our educational efforts and interactions with customers that events are synergistic summer series that includes seven virtual many events connecting leaders within health care industry and others to discuss topics around cyber security and privacy is now in full swing we had folks attend.
Both black hat and HIMSS annual conferences recently, where we provided two presentations covering cyber security challenges and medical device security.
And we also attended several other smaller events around the country as well we continue our virtual marketing efforts, but lately, we have been able to meet with some customers in person and have taken advantage of that that said, we have still seen some health care institutions pull back and cancel travel.
Lately due to the surge. We're currently experiencing this is especially true of children's hospitals right now.
We are hopeful that this new resurgence of COVID-19 will not cause more delays like we saw last year.
We are addressing in the future integration further integration of the services offered by our backbone group to provide better sales and marketing support to those efforts as well in addition to their existing IP audit and <unk> offerings. We are looking to add sock too and PCI audit credentials and service offerings to their mix are on.
Group can provide service in three forms as augmentation to our clients' audit organization or staff as consulting opportunities or as formal audits. In addition members of this group will be cross trained and available to fulfill CMC requirements as well.
Another trend we are tracking as a significant changes occurring in the cyber insurance marketplace cyber security insurance premiums are increasing dramatically and and and and.
And in many cases carriers are dropping coverage altogether.
When organizations do get coverage they can expect a much more detailed application and increased requirements from the carriers before binding coverage.
Those requirements can include independent third party validation of their programs as well as their controls and higher standards for compliance.
Speaking with healthcare C. I OS at Hims last week, we learned this is an ongoing concern.
Add to that the recent scripts experience, where they estimated the cost of their breach to be somewhere around $113 million with only and only expect cyber insurance to cover $21 million of that cost and you have it not so positive formula of high premiums demanding underwriting requirements.
And less than optimal payouts.
This all translates to potentially higher demand for cyber security and privacy services as organizations realize that they have to prepare for breaches and meet higher expectations were.
We are actively pursuing opportunities with cyber insurance providers to be able to offer services to their clients as well as to them.
And lastly, we just released our annual report titled maturity Paradox, New World New threats new focus.
This report is the work product from just under 100 assessments, we completed of health care organizations across the continuum.
<unk> hospitals physician practices accountable care organizations and business associates in 2020, it's the fourth annual report of its time showcasing lessons learned from analyzing those annual assessment results, providing a benchmark for the industry.
We have seen in previous years healthcare still has a tremendous need for cyber security privacy and audit services.
One of the highlights of this year's report that I'd like to call out was the fact that it reinforced what we've been seeing that most hospitals still critically lack the ability to secure their supply chains.
Secondly, 76% of health care organizations failed to secure their supply chain and over 64% of organizations are below a passing grade when measured against the NIST cybersecurity framework requirements for protecting information.
Supply chain security is a significant risk.
All businesses in America, and frankly around the world as we have seen this past year with the volume of ransomware attacks targeting critical supply chain partners.
One of the most prominent examples of this was the colonial pipeline breach they got everyone's attention this past summer and highlighted the vulnerability in our energy sector.
Apply chain breaches have caused problems for health care from hospital operations to data protection, and even patients safety and health.
Third party vendors host critical systems and data have system level network access provide critical services have physical access to health care organizations and are an integral component of service delivery for most institutions, there disruption because of the hospitals disruption.
Ah report highlights the continuing challenges that health care and for the most part all industries face the problem of protecting data in a hyperconnected ever expanding information ecosystem with a relentless threat is daunting.
Recent data indicates that the department of health and Human services has opened 308 investigation since January alone into data breaches of retail pharmacies hospitals clinics and other healthcare businesses.
Their work our work is never done.
I want to thank you for all your support and ask for your patience as I jump in and start to build out a more detailed business plan that we expect to share with all of you as soon as we can and with that I'd like to turn it over to Paul.
Thanks Mac.
As Mac mentioned, we wanted to start disclosing bookings. So we'll start with the Q2 bookings, which increased to $4.7 million.
Compared to $2.8 million last year bookings year to date totaled $8.5 million compared to $6.6 million last year.
As a result, our pre sold revenue continued to grow increasing by an additional half a million to $17.9 million and brings our total increase in pre sold to $2.3 million from its pandemic low in Q3.2020.
Additionally, we saw our cost reduction efforts improve earnings year over year by just under a million.
Our balance sheet ended the quarter with $4 million in cash and continues to benefit from reducing debt levels. We continue to qualify for the employee retention tax credits.
Provided that they are provided under the cares Act and that's included Q1 Q2 and Q3 of this year.
Since the end of last year, we haven't taken any additional stock issuances from the $5 million ATM under the shelf registration.
We received notice from the SBA late last week that the full $2.8 million in debt that was received under the Paycheck protection program was forgiven.
And we filed for and expecting a tax refund here shortly on the carry backs are available losses from 2020, approximately $1.4 million.
Addressing the Q2 standard financial disclosures revenue was $3.9 million compared to $4.6 million in Q2.2020 <unk>.
Decrease from prior year was due to lower revenue from managed services, which reduced by <unk> 7 million to $2.2 million due to the impact of some customers canceling delay.
Delay in renewals and a reduction in net new customers from the pandemic.
Consulting and professional services revenue increased <unk> 1 million to $1.7 million when compared to Q2 'twenty as we started to see things rebound from their pandemic lows.
Gross margin was 46% for Q2.2021, or an adjusted 33% when excluding the benefit from the employee retention tax credits.
This is an improvement when compared to 27% in Q2.2020.
The increase in gross margins is due to the staff and expense reductions reduced travel and the delivery efficiencies that we've talked about over the last few quarters.
SG&A expenses decreased to $2.7 million for Q2, 2021 compared to $3.5 million for the same period in 2020.
This decrease was due to a drop in payroll and benefit costs from head count reductions decreases in travel because of COVID-19, and the benefit from the employee retention tax credits.
Non-GAAP adjusted EBITDA loss was <unk> 6 million for Q2, 2021 compared to $1.3 million last year.
Full year financials, and reconciliation of GAAP to non-GAAP information can be found in the earnings release that came out today.
In summary, we're starting to see the return of the health care market as evidenced by the growth in bookings and pre sold revenue.
We still have work to do but we've made great progress and will continue to benefit from a clean balance sheet and a simplified cap capital structure.
This concludes the financials and the prepared remarks for Q2, operator, please open the floor for questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad and if you're on speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question and we will pause for a moment to allow everyone an opportunity to signal for questions.
Yeah.
Yeah.
And well go first to Matt Hewitt of Craig Hallum Capital Group.
Good afternoon, and thank you for taking our questions and welcome back Mark.
Thank you Sir.
Maybe first up obviously that I think over the last two weeks you've had several new wins and Allison I am curious, if we could get a little bit more color on what's driving the decision making behind those contracts.
Think back over the past year hospitals were locked down so there wasn't a lot being done on the cyber security side. So was it just a function of you know coming out of Covid. If you will or is it have to do more with what was going on this spring with the you mentioned the colonial pipeline and scripts and there was roughly a dozen other major.
Your hospital security breaches, what is that driving it or is that a confluence of both.
I think Matt, it's probably a confluence of both.
Most of the folks that I've talked to in the industry.
Have wanted to spend more.
On security and a lot of other areas and they've just been held back.
Because of the losses that most health systems are sustained during the pandemic and so there's there was there was a there was a time there were basically if it wasn't offer an operational necessity.
Basically it didn't get signed.
That has gotten better and for a while there it looked like we were well on our way to reopening and we had folks like I said like you heard me say, we're actually even talking about getting together in person.
Some of that has slowed down a bit now because of the delta Varian in the surge that we're currently experiencing which is really impacting our children's hospitals, even more so than our acute care centers, but but even so folks are still very keenly aware that they have.
<unk> got to do something about security.
Really not an option for them and so there they're really just being more prescriptive about what theyre doing and what they're focusing on and the things that they're most interested in right now is obviously maintaining their baseline.
Because why most most organizations have have we.
We've seen an uptick in the renewals and actually increases in those renewals in terms of the size of those those contracts.
But also they're they're focusing on the things that are adding to their resilience from a from a incident response perspective.
And you heard me talk about the insurance thing I can't tell you how many.
The CIO as I talked to at HIMSS. This past week, who said you know Mac, we don't know what we're gonna do because.
They're telling us the premiums are going up where they are or they are not or they're not going to cover us altogether.
Even when they do cover us the amount that they're paying out as is.
Incredibly small compared to the cost that we're seeing with these incidents and so I think that's kind of all come coming full circle to a realization that the.
That theyre going to have to do a better job for themselves.
Protecting their environment and being ready to to respond to these things because they're not going to be able to count on insurance and it's not going to go away.
Yeah.
You mentioned operational necessity I guess.
If you saw you know seeing what happened with Scripps and their inability to treat patients for several weeks I guess that would qualify as an operational necessity, but.
We will see what happens here in the press release, you mentioned the Fortune 500 is that entirely tied to the C. M. M C opportunity or are you starting to see interest even.
Even beyond the the government mandate are you seeing companies reach out maybe not tied to that program, but just recognizing what's going on around them and maybe the need to have a heightened level of security.
Well I think it's both us the cause we if you remember we we put the non health care business in either one of them either the risks under the Red spin brand division or the or the.
The CMC umbrella and so that's where we're seeing those logos if you will show up.
But yes, I think it's a it's a little bit of everything but certainly.
You know the good news is that we are beginning to start to see some traction with CMC, where it's we're still lagging as a result of D. O D. A lagging because there are certain parts of the program that still has not been approved by the government yet.
And so there are certain things you can't do until that until that occurs.
But what we're finding is that people do want to get ready and they are willing to spend the dollars on the consulting side, which is good because we can support them there as well.
And generally there's there's interest across the board. So we're hoping that what will end up happening is it by the time.
They get ready to kind of open the gate. So to speak we will have everything teed up to include a healthy pipeline and as well as the.
Mechanisms to support that <unk> be able to exploit it.
Okay, Great and then.
Periodically over the past year or so.
There has been discussion about medical device cyber security I'm. Just curious how are those discussions progressing are you seeing interest from some of the device manufacturers and players in that market.
Any color there would be helpful.
So there is there's still a tremendous amount of discussion around medical devices and it has been frankly, it's not just medical devices devices in general.
Because when you look at AR and AR.
Hospitals environment, or just a business environment.
We have literally hundreds of thousands of devices connected to our networks today medical devices, just being one.
Type of device, that's connected and having a little bit different kind of import or impact because at some cases connected to a human or a part of our or part of care delivery.
But devices in general are just like third parties are becoming a real concern for just about everybody because they're recognizing that many of the many of the attacks that they're seeing.
Our occurring through devices or relationships that are not necessarily under their control or that or that they don't have as good a control of as they should.
And they're realizing all of a sudden as I said in my remarks that any disruption to the them as a disruption to the hospital as well or to the us, particularly to the business as well.
And so they're having to kind of broaden.
Their perspective as it relates to what is my my threat footprint and what is my responsibility.
For maintaining the my business.
When I'm, taking advantage of using all of these different capabilities that are now.
Causing me to have critical systems critical data critical processes, either hosted or performed by other people or a device on my network that I may or may not have as much control over is I thought I did.
Got it alright, that's very helpful well come back again, and thank you for taking the questions.
Thank you Matt.
And as a reminder, you May press star one on your telephone keypad. If you have a question that is star one for our questions.
And.
With no other questions in the queue that does conclude the question and answer session I will now hand, it over to Mac Mcmillan for any closing remarks, Matt. Please go ahead.
Thank you again, operator again I want to first thank everyone, who has reached out and expressed their support for this team and our company I want to also thank you for your support you show through your continued investment I want to reiterate that we have a great company. It has great bones as they say with an incredibly talented staff.
We live in we live and work in a time when what we do is critically important to the people. We serve there arent enough of us to meet all of that need we have reset our sights on execution and growth and are pursuing emerging opportunities that are in the market.
We want to build and deliver services that help our clients solve the problems in cyber security privacy and compliance.
They face and we want to maintain our first among peers reputation as a trusted partner.
Our board is active in helping to shape the direction of the company and we are and will be engaging at all level of staff management Board and investor to redefine that path. Our near term goal simply stated is to return this company to double digit growth.
You for attending today.
Yeah.
Thank you. This concludes today's call. Thank you for your participation you may now disconnect.
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