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Edited Transcript of CTEK.A earnings conference call or presentation 11-Nov-19 4:00pm GMT

Q3 2019 CynergisTek Inc Earnings Call

MISSION VIEJO Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of CynergisTek Inc earnings conference call or presentation Monday, November 11, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan Flynn

CynergisTek, Inc. - Head of IR

* Paul T. Anthony

CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer

* William Caleb Barlow

CynergisTek, Inc. - CEO & President

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Conference Call Participants

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* Lucas Grant Baranowski

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* William Tennent Gibson

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Avram Fisher; Long Cast Advisers;Principal Portfolio Manager

* Ross Taylor;ARS Investment Partners;Portfolio Manager

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Presentation

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Operator [1]

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Good day. And welcome to the CynergisTek Third Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bryan Flynn, CynergisTek Investor Relations. Please go ahead, sir.

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Bryan Flynn, CynergisTek, Inc. - Head of IR [2]

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Thank you, operator. I want to welcome everyone to CynergisTek's Third Quarter 2019 Earnings Call. Joining us today from the company includes Mr. Caleb Barlow, 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 and may be 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. CynergisTek 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'd like to turn the call over to our CEO, Caleb Barlow.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [3]

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Good morning, everyone. Before I start my remarks today, I wanted to point out that last week we held a CEO strategy webcast, where I laid out my observations and go-forward strategy after the first 100 days on the job.

I discussed the state of the security and privacy market in health care, along with a series of 5 strategic imperatives that will get us back on the growth curve.

Turning to the third quarter. We continued to grow our customers by adding 32 new clients. We saw 15% revenue growth in our managed service offerings year-to-date; this is slightly down compared to previous years.

Professional and consulting revenue was also down year-over-year, which, as we've discussed before, was due to lower revenue from our largest professional services client as we're getting close to the completion of a large remediation project which started in 2018.

As we stated on the 100-day webcast last week, there are a few challenges that need to be addressed that impacted this quarter and will in turn impact revenue for the year. We have a sales and marketing challenge. Multiple departures, including the sales leader, combined with distractions during the divestiture, have resulted in a go-to-market organization that is operating at about half speed. This is a fixable problem, but it takes time to rebuild the pipeline. The first step is the addition of an experienced sales leader.

One of the first things I did was start a thorough search for a sales leader, and we're narrowing in on a top-notch industry player. We're looking for a leader that has experience in the security industry but also has the context, the network reputation, and most importantly, speaks the language of health care. Stay tuned on this. We hope to have an announcement on this before the end of the year.

We have a cost challenge, and a series of targeted cost reduction efforts are already underway to rightsize the organization and position us for growth. Paul is going to go into more detail on potential savings later on the call.

We need to strengthen and upskill our team. We're investing in professional development for our people. We have focused recruiting on skills that will enable us to scale, and we are also looking at how we improve the capabilities of our Board.

One of the ways we will grow is by acquisition, and we are interested in acquisitions that expand our capabilities and are accretive. This quarter, we were able to close on the acquisition of Backbone Consultants. They are a health care security, privacy and compliance company based out of Minneapolis, Minnesota. Backbone brings multiyear contracts with a diverse and growing customer base both in health care and non-health care, including 2 Fortune 1000 EHR vendors and one of the largest medical device manufacturers in the market.

Backbone extends our capabilities in compliance with IT auditing for Sarbanes-Oxley. It extends our privacy practice in the GDPR radius, which, although a European regulation, is critical for even U.S. companies doing business in Europe.

Backbone is a provider of the DEA-mandated electronic prescription for controlled substances certification audits. They have a team of certified information system auditors that are qualified to conduct EPCS audits.

One of the most compelling features of this certification is it generates reoccurring revenue for the business. Because you see this auditor certification has to be done any time a functionality related to the controlled substance prescription requirements is altered or every 2 years, whichever is first.

Historically, they have shown solid revenue growth with a compound annual growth rate of about 24% from 2016 to 2018. They have incredible relationships with their 50-plus customers, having a renewal rate greater than 90%. So with the addition of Backbone, we bring our total customer count to approximately 350 nationwide, which brings additional opportunities for cross-selling and expanding out our sales platform.

Finally, the acquisition allowed us to immediately onboard 17 billable, talented and skilled information security and privacy experts. These skilled employees will bring a wealth of knowledge, allowing us to expand our capabilities as well as cross train our employees on delivering new services.

Most important, Backbone came with almost no overhead; all but one of their people are billable.

Now I also want to mention a couple of words around an announcement last week with our new partner, LogicGate. According to CynergisTek's 2019 annual report, third-party vendors represent a growing security risk to health care organizations, and 23% of the vendors we evaluated fell into the high- and medium-risk category for our clients. Remember how Target was breached by the HVAC vendor?

Now just imagine a hospital, hundreds of vendors. Many of which have access to medical records across the networks. Vendor risk management is a big deal for our clients, and we approach it with a comprehensive managed service.

But now imagine the challenge we have. Interviewing and chasing down vendors, identifying their security risks and then developing remediation plans that are mutually agreed upon between the client and their suppliers.

Carrie Whysall, one of our more recent hires and the former Senior Director of Security for Ascension Information Services, has been leading an effort to improve the productivity of this offering.

Now she and her team identified new capabilities and efficiencies that we could garner with LogicGate, and we moved quickly to closing the partnership.

With LogicGate, we can make it easier for clients to identify and remediate third-party risks. Their solution offers unique capabilities, such as enhanced automation of vendor risk assessments and easy tracking of risk remediation and mitigation activities.

Combined with our comprehensive managed service, we can help our clients to close that gap between finding the risks and remediating the risks. This partnership will also allow CynergisTek to [optimize] our own operations, by retiring in-house developed risk management solution. So simply put, we improve the outcome for our clients, increase our own team's productivity, and we no longer need to maintain developers for our own software product. Now once again, if you haven't had the opportunity to listen to the 100-day CEO webcast, I highly recommend you do. The details on the webcast about the market direction should give you some insights into why we are in the health care market and the demand for our services.

The strategic imperatives will give you insight into how we're going to get there: the team we need to build and the impediments we need to address.

Finally, it'll give you the what: the new revenue opportunities we can capture, both the ones that are close to what we do today and those adjacencies that aren't (inaudible) our reach. Addressing the 5 strategic imperatives I laid out in the webcast is a top priority. I think we have a strategy here that can work, and now we start the hard work of getting it done.

I also want to share some new news you might not have seen. Released just last week, an independent and unbiased survey from Black Book market research of over 2,800 security professionals from 733 provider organizations in the health care industry identified CynergisTek as the top cybersecurity advisers and consultants servicing the health care industry.

Now this beat out some much larger organizations like Deloitte, KPMG, HCI Group, E&Y, Secure Digital Solutions, NOL, even my old stomping grounds at IBM Security.

With that, I'd like to hand the call over to Paul to give a summary to Q3 financials. Paul, go ahead.

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [4]

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Thanks, Caleb. The financial information I'm about to provide is for the continuing security business only, unless I specifically mention that it includes discontinued operations. Security revenue for the third quarter decreased by $0.9 million to $4.8 million. Breaking down this revenue for Q3 2019 versus '18, managed services revenue was $3 million, an increase of 14%. Professional and consulting services decreased 43% to $1.7 million.

As Caleb previously stated, this drop was a result of the largest -- of our largest professional services client completing a large portion of their remediation efforts they initiated back in Q2 of 2018 that drove our 2017 versus '18 growth rate above 200%. We saw the biggest benefit from this contract in Q3 and Q4 of '18, where it peaked at $2.2 million in Q4 of 2018.

This quarter, the revenue from this client was down to about $600,000, and we expect the work to finish early next year. We expect the lumpiness that comes with this side of the business to also continue.

Heading into Q4, we expect revenue from the core CynergisTek offerings to come in flat this quarter, and we anticipate Backbone to add 10-plus percent of growth over Q3. Although we expect to see a slow start with core offerings going into 2020 as we make changes to the sales and marketing organizations, but taking into consideration the addition of Backbone, we are looking for double-digit revenue growth for 2020.

Gross margins were 34% for the quarter -- for the third quarter of 2019 compared to 49% in 2018.

As we mentioned last quarter, the declines in gross margin are reflective of our investment in attracting cybersecurity professionals, the implementation of new systems to support the business, costs associated with ramping up the new managed services, which had an approximate 4% margin impact. Additionally, the drop in revenue from the professional services and consulting business had the biggest impact of approximately 10% to our gross margin this quarter.

We do expect margins to improve over the next few quarters as we grow revenue, the addition of Backbone and some targeted cost reductions. Sales and marketing expense decreased $100,000 due to less in salaries and related costs from turnover in our sales team. We do expect sales and marketing to increase in Q4 and into 2020 as we rebuild the sales and marketing team and look to maintain them at full strength, and we redeploy some resources to better support this side of the business.

G&A expense increased $0.3 million due to the nonrecurring expenses related to the on-boarding of our new CEO and those transition activities.

Q4 will continue to see the impact of this transition, along with some additional severance related costs we'll cover shortly. We expect general and administrative expenses to decrease next year as we complete this transition and the removal of the dual CEO expense and we see the impact from these targeted cost reductions we initiated in Q4, partially offset by some costs associated with the addition of Backbone.

To give a little more information about the cost reduction initiatives, with the divestiture of the Managed Print Services business earlier this year we reduced operating expenses, but we did maintain some support roles as we completed the transition to a pure-play information security company.

We are now able to complete this effort and have identified additional areas to rightsize the support organization. We estimate the impact to be approximately $1.5 million in savings for 2020 with 70% of this coming from operating expenses. We do expect to see some added severance costs in Q4 of this year, which would total approximately $250,000.

Non-GAAP adjusted EBITDA loss was $0.4 million or negative 8% of revenues for the third quarter of '19 compared to income of $0.4 million or 7% of revenues for '18. Non-GAAP adjusted loss was $0.4 million or $0.04 per basic and diluted share for the third quarter '19 compared to breakeven for 2018.

The company had $10.2 million of cash and cash equivalents before taking into consideration the Backbone acquisition, receipt of escrow funds from the sale of the MPS business, and our approximate $2.4 million tax liability driven by the gain on the sale of the MPS business.

We expect our cash balance to be around $4 million at the end of the year. The full financials and reconciliation of GAAP to non-GAAP information can be found in the earnings release that came out earlier today. It will take a couple of months to complete the conversion of Backbone's financials to GAAP. But initial indication is that from a financial perspective, Backbone generated approximately $3.6 million in trailing 12-month revenue. The full earn-out targets are for double-digit revenue growth year-over-year for the next 3 years. And looking at the earnings impact, we're looking for 15% to 20% EBITDA margin from this business.

The initial consideration paid to Backbone totaled $7 million and includes $5.5 million in cash and $1.5 million in CynergisTek common stock. The additional earn-outs over the 3-year period total a maximum of $4 million.

Given our current results, the reduction in overhead costs and the investments we plan to make in sales and marketing and potential acquisitions, we are constantly monitoring our cash position to ensure we can execute on our long-term strategy,

and along with the Board, we will continue to keep you updated on our progress in this area. This concludes the financials and the prepared remarks for Q3. Operator, please open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Matt Hewitt from Craig-Hallum Capital Group.

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Lucas Grant Baranowski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [2]

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Yes. This is Lucas Baranowski on for Matt Hewitt here at Craig-Hallum. Thanks for all of the color on the cost savings, that was pretty helpful. Just one question there, though. The $1.5 million figure that you gave, I mean, is that kind of the total amount of the cost savings? Or is there maybe some other savings on top of that from some other initiatives that you have going?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [3]

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That's the total that's been identified, that's going to get reflected in the Q4 severance related costs. There is some additional savings that we're still focused on as we move into the year, so...

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Lucas Grant Baranowski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [4]

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Okay. And then, I guess, turning to the Backbone Consultants acquisition, $3.6 million in trailing 12-month revenue. Is there anything you could tell us about how fast that was growing, preferably on a trailing 12-month basis?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [5]

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I don't have that number at this point. We're still working through some of the specifics on the timing and cutoff. And so -- but we do know, at least over the last 3 years, they were looking at 20-plus percent year-over-year growth.

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Lucas Grant Baranowski, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [6]

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Okay. Great. And then finally, the recently announced partnership with LogicGate. Is there any potential for that to maybe expand beyond just that one service offering?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [7]

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That's a very good question. And actually, that is one of the things we're evaluating. We are looking at it. I think there's actually a very good chance that we may be able to use that solution in a couple of different areas.

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Operator [8]

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We'll now take our next question from William Gibson from Roth Capital Partners.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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In regards to LogicGate, how does that work from a revenue perspective? Is the -- is it an added cost to you when you book the revenue of the deal? Or do you book your share? Or how does that work?

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [10]

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Yes. In the case of [Logic Image], a couple of different ways, the primary way that we're looking for is, this is just going to be a cost of using the tool for us. So we'll sell it as a managed services, and this will be just one of our cost of goods sold that runs through the business. There may be situations where we may support our customers or their customers, and where there may be some referral fees or other types of arrangements. But the core service is going to be wrapped into the managed service and the cost will show up as a cost of goods sold.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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Yes. And in regards to remediation and the completion of one large customer, was there nothing else on backlog, or how's the backlog look in that area?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [12]

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Well, the thing to keep in mind anytime we're dealing with remediation work, is that we go in and identify all the challenges that a company might have. Oftentimes, that can involve the purchase of products, solutions, implementation services, staffing, any or all of the above. And that's where you ultimately enter the challenge of that client's own budgeting process and their own prioritization. As more and more breaches occur in this space, and, in my opinion, more importantly, as those breaches move away from just people stealing data, which is what we've seen historically, to institutions actually being forced to shut down or not being able to see patients, you can imagine that changes the dynamic of that budgeting conversation significantly. I mentioned this on the strategy call last week. But we saw last month, 3 hospitals in Alabama be forced to stop seeing patients because they were locked up with ransomware and a clinic in California actually had to shut their doors.

They couldn't pay the ransom, they couldn't access schedules, they couldn't access patient records, and it sounds like the liability of continuing to see patients without having the history was too great that they just closed their doors. So in my opinion, I think we're going to start to see a real shift here if we see more and more of these destructive attacks in terms of how people budget.

But at the end of the day, that's why this business is lumpy, is nobody has the money to fix it all. So it's really about prioritizing what are they going to fix, and that may or may not involve services from us.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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And just one last question. In regard to 2020, any sense of where we end up on a non-GAAP adjusted basis? Are you aiming for a cash flow breakeven?

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [14]

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We're still working through some of those projections, Bill. We still got a lot of things that we're looking at from the sales and marketing side. So we're not ready to really provide that yet.

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Operator [15]

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We'll now take our next question from Ross Taylor from ARS Investment Partners.

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Ross Taylor;ARS Investment Partners;Portfolio Manager, [16]

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Gentlemen, I was looking for a little bit more color still on the sales and marketing ramp up and the ability to bring new people on and how quickly they can hit the ground and run with the opportunities. Additionally, what kind of skill sets are we looking for? And do you think we're 2 salespeople short or are we 10 or more salespeople short?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [17]

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Ross, great question. Let me just parse what I can say here. As you can imagine, good salespeople have jobs and then good salespeople typically work those scenarios close to the end of the year because that's when they get paid, right? So put another way, we've got a lot going on in the background, but not a lot I can talk about publicly yet in terms of how we're going to rebuild that team. As you can imagine here as well, the -- we need skills that not only have expertise in health care and speak that language but understand this evolving security market. So the good news here is, I started looking for the right people, and we really put out a big initiative across the team, really, as soon as I came in the door.

I think we've got a good slate of people we're looking at. We've just got to close those opportunities, bring them over the fence and get them moving. Now in terms of the ramp-up period, it's going to vary a lot by the skill level we're going to bring in. You'll obviously see a mix there of some highly skilled people that come with networks that can get started right away as well as maybe some younger pups to round that out.

In terms of the number, what we're looking to do is get back up to the realm of 8 to 10 salespeople, and we're running at about half that right now.

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Ross Taylor;ARS Investment Partners;Portfolio Manager, [18]

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Okay. Cool. And I'd like to say, Caleb, there's a lot of excitement around what you're bringing to this company like -- but as a long-term shareholder, I have to say that I'm exceptionally frustrated by the missteps that the Board made that basically allowed the sales situation to get to where it is, while the company was focused on kind of saving and writing the business that you guys sold earlier this year. And as a result, I think that it would be helpful for -- as an investor, I'd love to see you surrounded by a more competent, more value-added Board that helps you grow in this position, because I think it sounds like you've got a lot of great ideas and a lot of energy, and you're going to be able to make it work if we put the right people around you. So I hope that we're able to do that, and I'm excited to see what you can do when we do.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [19]

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Thank you, Ross. Understood. And as you know from our conversations, I'm focused on the go-forward.

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Ross Taylor;ARS Investment Partners;Portfolio Manager, [20]

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Yes. And you're doing it, I think -- and I appreciate the effort you guys made with the call last week, and I appreciate the amount of information, quite honestly, the honesty that you're putting out to shareholders. I think that should build a strong base with us. And hopefully, somewhere in there, we'll start to reward you for your efforts.

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Operator [21]

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We'll now take our next question from [Jeff Bash] from [Fintech].

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Unidentified Analyst, [22]

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Caleb, I see a major risk to the company as some kind of a national health insurance scheme where customers would be more concerned about survival than cybersecurity, and I'd be curious if you see it that way. And if so, how much of a priority is expanding the company's horizons beyond health care?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [23]

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Well, that's a very good question, Jeff. And I think if we look at health care and reimbursement in general, there has been pressure in this environment for years. And there's no sign that that's going to slow down anytime soon. Now what's also interesting about this is, I think the key here is looking at adjacencies where we can continue to grow. The good news about this company, and one of the things that really attracted me to it is, let's face it, it's operating in one of the most difficult markets out there, right? Health care not only has one of the largest threat landscapes, the cost of the data breach in health care is more than double the cost of a breach in any other industry. And it is a market where, generally speaking, the security posture is immature relative to, let's say, financial services or energy and much of the [other] part of the industry. But what's also fascinating about it is that because of the regulatory pressure on this market, health care actually looks a lot more like where other markets are headed. If you've been following GDPR in Europe -- which, again, most people have been ignoring because it's a European regulation -- the California Consumer Privacy Act mirrors GDPR, and we're going to start to see both fines go up, we're going to start to see more regulatory pressure here. And the type of work we do, the assessments we do upfront, not only is that going to relay into all the adjacencies around health care, but you're going to start to see it appear in other markets. So from my perspective, yes, this is something we're always watching. I mean I think the good news there is if we start to see major pivots in health care, we're all going to have plenty of warning of when that's going to occur. But there's a lot of opportunities in the adjacencies. And I think we walked through a bunch of that on the call.

But there's at least a half a dozen other areas in the market that are going to start to look more and more like this.

So look, what I want to do -- and this is a big part of acquiring Backbone -- let's shore up our stronghold in health care. And by adding in things like EPCS audits, the ability to go in and do a Sarbanes-Oxley audit, I mean those were big gaps, if you will, in our offerings that we've now really shored up. That also gives us the ability to not only continue to grow in health care but to really start to stretch our arms into some of those adjacencies.

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Unidentified Analyst, [24]

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Okay. Now on Backbone, I went and took a look at the website. And if you read through the website, there's no evidence, particularly, that there's a focus on health care, which the 3 large customers certainly suggest in terms of how revenues have turned out. I mean you see financial companies mentioned, so forth and so on. Is that sort of coincidental where the opportunity lay, or is Backbone really well-positioned to help diversification outside of the health care area if you choose to make that a focus?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [25]

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So how do I put this without completely offending my friends at Backbone. Their website -- I mean these guys operated off their reputation, right? They are 3 highly regarded consultants. Their website, honestly, is just a bit of an afterthought. There's a kind of laundry list of different things they do out there. I wouldn't put any real credence in the website relative to where they build their businesses. Their -- do you know what the percentage of health care versus non-health care is for them, Paul?

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [26]

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I don't know the specific.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [27]

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Yes. I mean there definitely have -- most of their business is health care and health care related, but this is also part of what I liked about it relative to your earlier question. Some of what they're doing, in fact a lot of what they're doing, are in the adjacencies, right? One of their biggest clients is a medical device manufacturer, where they go in and provide all kinds of security consulting, auditing and assessment work.

They're doing work directly for 2 large EHR vendors. So still health care, but slightly adjacent to what we do today. There are some areas where they're totally outside of health care. But again, this kind of goes back to my point about experimenting a little bit in markets that are very similar. And I don't want to scare anybody that we're walking away from health care. But they're also doing some work with state and local government. You'll also see some things on their website that you're probably scratching your head going what in the world does this mean, like they're doing auditing around body-worn cameras. Well, it turns out that the data collection and storage of the video captured from a body-worn camera in certain states, just like we would treat a privacy -- the private information and medical record, you have to audit, what are you doing with that? How are you storing it? Who's got access to it? What kind of security provisions do you have around it? So although it sounds like something totally disconnected from health care, it's actually very analogous to what we do today, once you get underneath what the actual work is.

So again, mostly in health care or the related adjacencies. I like that a lot because it shores things up a bit, gives us a little bit of an opportunity to stretch our legs and arms but doesn't move us too far away from our base.

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Unidentified Analyst, [28]

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Good. Next question. I'm a little surprised at all the sales departures, if you could add any color there, it'd be nice. But I'm more interested in whether you see part of the sales issues being perhaps some elements of slowing industry growth, more competitive pricing, our service offerings aren't exactly what the market is demanding. In other words, larger problems than just hiring good sales people.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [29]

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I think there's -- so let me go through and parse through that because I think there's the -- let me kind of unpack that. So first of all, in terms of the actual sales departures, some of them are people that voluntarily left. We had hired some people that are a little more product-focused than services-focused and this wasn't a fit. In addition to that, there were some that, frankly, we let go.

So there's -- just understand, there's a bit of a mix there. The second piece of this, if I look at the market direction, pricing pressure. Pricing pressure, I haven't seen it, per se, but it is an area that I want to dig underneath. And I'll just tell you 100 days in, it hasn't been a place that I've had the time to really go in and focus. My bigger question isn't so much is there pressure -- downward pressure. I'm questioning what will the market bear? I mean you have to remember, many of these hospitals that are located in regional areas, they can't hire the people even if they're willing to pay them what they're worth. They just can't get them to work for them. So we see an opportunity there, and I want to really look at our pricing in depth. So I think it's a really good question. Ask it to me again next quarter and the quarter after it, and I think I'll have a lot more of a precise answer for you.

In terms of overall market pressure, I don't see it yet. I mean, yes, there are certainly -- there certainly may be issues where reimbursements at health care institutions may become more challenging. I don't think we're seeing that yet, at least not at a serious scale. But it's absolutely something we're going to watch. On the other hand, as -- remember, we are right at the point where these institutions are moving from seeing the attacks being data exfiltration to seeing them having a kinetic impact. That changes the dialogue completely in a health care institution.

And, God forbid, we ever see someone actually manipulating data, where you start to break trust, and then things will change even more significantly. So this is part of what's kind of interesting about a market like this, it's 3 dimensional, right? It's not just the pressures in the market and the offerings you bring to bear. But it's also bad guys and what they do, right? If they put more pressure on this market, then budgets are going to increase in this space, and we continue to see that.

Now lastly, in terms of our offerings. There are absolutely some offering changes that we want to make. I don't think we have a scenario today where our offerings are falling behind other than penetration testing. And we outlined on the strategy call, our penetration testing business is a total reboot. The good news there is we brought in Ben Denkers. He has a lot of expertise in this area. And we think we can actually reboot that into more of what's called Red Teaming, where you go in and literally act as an adversary in a full-scale multifaceted attack pattern. People are willing to pay a lot more for that, it's a lot more demand, and that's what we're going to do.

We are looking at other areas of our offerings, just to make sure we've got them shored up. So one of the other things I talked about on the strategy call, for example, is the need to bring some level of threat awareness into our assessments. So those are examples of what we're doing.

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Unidentified Analyst, [30]

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Okay. Great. And that answer leads into my last question. I share ARS Investment Partners' disappointment in where the company has got itself, and from a different perspective, which I'd like to hear your comment on. You have an acquisition background at IBM. You just made a great acquisition, it looks like, in Backbone, and you may come across others or may have them on the radar already. And with the stock price at this level, it's extremely horrible to be in a position of issuing stock under $3 for acquisitions. So I'm wondering what's your general comment on that. And where do you stand in terms of being able to use debt financing? Because if you'll recall, CynergisTek itself was acquired by Auxilio for almost entirely debt at the beginning of 2017.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [31]

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I think you're hitting a key, both opportunity and challenge. On the opportunity side, there are a variety of companies out there like Backbone. And what I love about this segment of the market, even though it's small, is that there are companies out there that you can pick up that basically have no overhead. And not only do they feed in -- fit in, but they fit in quickly, you can integrate them quickly and they're accretive. Also remember, when we buy something, we're not a product company, we're a services company. So I mean I think of all the integration checklists and time frames and plans I would have to build in my former job, they're so much easier here because I'm not integrating products and developers and development methodology, we're -- we've just got consultants. Now the question then comes as those opportunities arise, how do you pay for it. You hit exactly the problem. I'm keenly focused on it. Paul and I are working together with the Board as well as having lots of conversations with folks like all of you on the phone to figure out how to best navigate those tricky waters and come up with solutions that allow us to continue to grow.

So look, I realize that's a nonanswer other than saying, yes, I'm keenly aware of the problem, and we're looking at all of the different options that will benefit our shareholders.

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Operator [32]

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(Operator Instructions) We'll now take our next question from Avi Fisher from Long Cast Advisers.

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Avram Fisher; Long Cast Advisers;Principal Portfolio Manager, [33]

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Paul, you mentioned that core revenues would be flat for the remainder of the year. Can you break it down, please, between managed services and professional services?

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [34]

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We're not going to -- we don't usually give that level of guidance, Avi. But I would assume in general, though, it's going to be probably similar to what we experienced last quarter, so...

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Avram Fisher; Long Cast Advisers;Principal Portfolio Manager, [35]

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So managed services should continue to grow in the 10% to 15% range?

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [36]

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Yes.

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Avram Fisher; Long Cast Advisers;Principal Portfolio Manager, [37]

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Okay. Jeff asked my question about the risks and the issues around the $4 million in cash balance, so I won't dig into that. I am curious -- I'm wondering, if you see competition, do you see it mostly from other companies pursuing the same clients or from customers deciding to in-source or some other form of competition? I'm curious where you see that?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [38]

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It's interesting, Avi. I don't want to over- rotate on this, but there's not -- on one hand, there's not a ton of traditional competition in this segment of the market, which is part of what makes it interesting, right? I kind of drew a bit of a picture out on the strategy call of where the bulk of the market sits and where it's just really frothy with competition. We're kind of on the edges of that. Now don't get me wrong, we still have competition, both from kind of the big 4 consulting firms as well as just small mom-and-pop regional players. The challenge you have to keep in mind in -- when you walk into one of these hospitals, unlike almost every other industry, is that cybersecurity incident is not the worst thing that can happen in one of these institutions. So they are constantly balancing what they want to spend on information security relative to what they want to spend on all of the other initiatives they have to save people's lives. So that's the first dynamic. So there's a little bit of a dynamic of -- it's really more about competition in the budget than it is competition with other players, right? And I think the better job we do in messaging and awareness and education, things like the CAPP program where they can ask us questions any time they want, those things are really important to help them drive that. I also think one of the things Backbone brings to the table, where they operate at that trusted adviser level, can really be helpful because you want to get out in front of their issues at the budgeting process, when they've got the opportunity to actually make some changes. So that's kind of the big piece of this. Now I do think that we are starting to see a shift, and I just came back from a conference last week where we're meeting with a lot of the top CIOs in health care institutions, and you could definitely see an emerging trend between the sophisticated and the less sophisticated. And I don't mean sophisticated in terms of the people. I mean in terms of their budget, their program, the size of investments they would make. The more sophisticated clients are becoming threat -- aware of the threat, aware of who is the actor? What's the campaign? What's the motivation coming at them? And the minute you start to understand that, and you start to understand what are they trying to get, versus just, oh, I need to buy certain products and certain solutions, it changes the whole dialogue. So part of what we've got to do is make sure we're front and center in that new conversation as it's emerging with these more sophisticated clients, because those are the folks that are ready to make a bigger spend.

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Avram Fisher; Long Cast Advisers;Principal Portfolio Manager, [39]

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Okay. In terms of getting in front of the right people, is Mac going to continue to sell? Is he going to at all be involved in marketing and selling at all going forward?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [40]

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I think Mac is looking to legitimately retire. But let me tell you, I am -- I'm going to probably cajole him every now and then to make a call on a customer. And look, a lot of folks have asked Mac and I, hey, how do you guys get along, what happens when you disagree? I will tell you, I think one of the great things about this job is a great friendship has emerged out of this. Mac and I have been traveling on the road together now for 1.5 months or so. He literally has me eating breakfast at Chick-fil-A, which I've turned out is a delicious thing, and there's a great dialogue there. And it's really -- if you think about most CEO transitions, usually the first thing the new CEO does is blame everything on the guy you're -- the guy that's leaving and runs in and takes over with all their new ideas. This has really given me the opportunity, client by client, to have that face-to-face introduction, but also given me the opportunity to have a private sounding board for new ideas -- "What do you think of this?" And Mac is not only incredibly supportive in that but he's also really helping to step back where he needs to step back. So Avi, I think it will be a bit of a mix, but I'm sure he's hoping to get out there and do some new things. At the same time, I think I've always got a lifeline there when I need it.

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Avram Fisher; Long Cast Advisers;Principal Portfolio Manager, [41]

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I think -- you talked about blaming the prior CEO. I think based on -- I think a lot of shareholders actually blame the Board. And you've mentioned the need for improvements in the Board. What steps are going to be done and other people asked about it, short of hari-kari, what steps are being done to improve the Board?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [42]

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So I don't want to go into a whole lot of detail on that, just because we have a Board meeting in the next couple of days. But look, we have received suggestions from many of you, we have received nominations from some of you, we take all of that very seriously, and it will be a part of a big discussion at this week's Board meeting.

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Operator [43]

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There are no further questions at this time. I'd like to now turn the conference back to Caleb Barlow for any additional or closing remarks.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [44]

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All right. Thank you, operator. I want to thank you all for joining the call today and your feedback over the first 100 days as my time as a CEO and a special thank you to all of the veterans out there, Happy Veterans Day, and thank you for your service. I look forward to talking with all of you over the coming months.

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Operator [45]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.