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Edited Transcript of CTEK.A earnings conference call or presentation 14-Aug-19 6:00pm GMT

Q2 2019 CynergisTek Inc Earnings Call

MISSION VIEJO Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of CynergisTek Inc earnings conference call or presentation Wednesday, August 14, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan Flynn

CynergisTek, Inc. - Head of IR

* John D. Abouchar

CynergisTek, Inc. - Non-Executive Chairman of the Board

* Michael H. McMillan

CynergisTek, Inc. - CEO Emeritus, Founder & Director

* 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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* Andrew Jacob D'Silva

B. Riley FBR, Inc., Research Division - Senior Analyst

* Matthew Gregory Hewitt

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

* Timothy Clarkson

Van Clemens & Co., Inc. - Stockbroker

* William Tennent Gibson

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

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Presentation

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Operator [1]

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

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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 Second Quarter 2019 Earnings Call. Joining us today from the company include Mr. JD Abouchar, Chairman; Mr. Mac McMillan, Chief Executive Officer, Americas; Mr. Caleb Barlow, President and Chief Executive Officer; and Mr. Paul Anthony, Chief Financial Officer.

Before we begin with 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 obligations 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 our Chairman, JD.

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John D. Abouchar, CynergisTek, Inc. - Non-Executive Chairman of the Board [3]

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Thank you, Bryan, and thanks, everyone, for joining the call today. Mac's vision, thought leadership and focused commitment to the health care industry grew CynergisTek into the leading health care-focused cybersecurity, privacy and compliance services company in the U.S. I want to thank Mac for his dynamic leadership and look forward to his continued support throughout the remainder of the year and into the future as a member of our Board.

One of the most important jobs of a Chairman is to always ensure that a strong leadership succession plan is in place. After significant and thoughtful due diligence, Mac and the Board found in Caleb Barlow the perfect candidate to lead CynergisTek through the next stages of our growth. I want to welcome Caleb to the CynergisTek team, and we'll give you an opportunity to ask him questions during the Q&A.

With that, I'll hand it over to Mac.

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Michael H. McMillan, CynergisTek, Inc. - CEO Emeritus, Founder & Director [4]

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Good afternoon, everyone. Before I start my remarks, let me first say thank you to JD and to our Board for all of their support that they provide to our company. I also want to say thank you to Bryan Flynn, who many of you have come to know, who works tirelessly to make sure these meetings are a success and in keeping you informed. Congratulations to Bryan and his wife who had their second son yesterday. Welcome [Henry James Humphrey], and thank you for letting us have your dad for a little while today.

I'll start with a few highlights of the second quarter before I provide more details on the real story today, the arrival of Caleb Barlow. The company continues to execute on its business plan, seeing a 17% year-over-year security growth -- revenue growth and slight improvement in margin quarter-over-quarter for Q2. Looking forward to Q3, we expect to be down year-over-year as a result of both fluctuations in delivery caused by client delays and budget constraints and in comparison to Q3 of 2018 where we also experienced a significant amount of remediation work from a very large professional services contract. That said, we continue to see positive indicators overall.

This marked the 10th consecutive quarter of revenue growth and the ninth of double-digit growth for the company. Continued, consistent growth in managed services is our primary focus. And this quarter, we achieved the highest managed services customer penetration to date with approximately 40% of our total clients now in one or more managed services.

We also took important steps to position CynergisTek for the future -- for success with the addition of a seasoned director of managed security and implementing the leadership transition plan with the selection and appointment of my successor, Caleb Barlow. While changes like these are never easy, this succession represents a critical next step in the company's strategic plan and its evolution, which I will expand on later.

We've seen increased demand for medical device security services and success in our first several projects. The medical device security assessments offerings have driven growth in consulting revenue and is building a great pipeline for both assessments and managed services. The recent signings of 2 of our current CAPP clients into their second managed service, medical device security management, after completing an assessment is a good sign that our strategy of expanding our offerings will translate to increased recurring revenue from our current installed base. We believe we will continue to see growth in this area as clients complete these assessments, giving them a better understanding of their medical device risks.

We saw both early renewals within our CAPP programs -- or Managed Security Service to support cybersecurity program development as well as requests for expanded services within those agreements at multiple existing managed service clients. A recent press release, which you may have seen, spoke about one of our current clients expanding into its third managed service. This client who now has a CAPP patient privacy monitoring and vendor security management services is also in discussions around adding medical device security, which would be its fourth managed service. This client is an example of one of our long-term relationships, having been with us for more than 13 years, expanding its program, which is a testament to the quality of our managed service.

Continued adoption of our expanding offerings highlights our clients' recognition of the value and importance of having a strategic partner to aid in identifying, addressing and managing cybersecurity threats and risks.

As I said earlier, we have taken important steps to ensure the success and the future growth of the business. This first -- the first was the appointment of Carrie Whysall as the Director of Managed Security Services. Ms. Whysall will be responsible for executing strategic business initiatives and driving the company's growth strategies for vendor security management, managed security service and medical device security. A health care veteran with over 20 years of experience in IT leadership, her most recent position was with Ascension Health, the largest not-for-profit health system in the United States with more than 150 hospitals. Whysall was part of the leadership team that implemented Ascension's security operations center, or SOC, as well as the company's eForensics, security training and awareness, medical device security management and incident response programs. Her knowledge and expertise will be invaluable to aid in the growth of our recently launched medical device security management, managed security service offerings or SOC as well as other managed services.

The next big step in our strategic plan was the execution of our leadership succession plan, which culminated in the appointment of Caleb Barlow as President and Chief Executive Officer beginning August 1. Two years ago, we implemented our strategic plan recognizing that leadership succession, and a strategy to do that thoughtfully and deliberately was a top priority. With the disposition of the MPS business determined and the launch of our new managed services, I felt the business was headed in the right direction and position for growth. I knew it was time to make sure we have the right person at the helm who would be -- who would secure and prepare the business for the next stage of growth. After a 10-month executive search with interviews by myself, our Chairman, members of the Board and the executive leadership team, we landed on our candidate. We all unanimously picked Caleb as the #1 choice to lead CynergisTek.

There are plenty of things that attracted us to Caleb, but 4 stand out in my mind. First, he is held in high regards and is a credible presence in the industry. He has testified in front of Congress, has been a keynote speaker at many conferences around the country and is consistently in the news discussing cybersecurity. He is positioned well to become the new face of CynergisTek.

Second, his knowledge of cybersecurity is at the forefront of the industry. He has the ability to do a deep dive into the technical aspects of the business while also being able to translate that to the Board level. Additionally, Caleb has led teams in product development, product management, strategy, marketing, service delivery and acquisition integration, giving him a broad range of experiences across the industry. He will be credible in front of customers, investors and our employees who all know -- who all want to know that he knows his stuff.

Next, he is focused on the current relationships with customers and employees. He wanted to make sure he completely understood what our customers and employees needed to be successful. You heard me speak many times of the long and close relationships we have built with our customers and others in this industry and how important that is to our success. Caleb shares that appreciation.

Finally, he has an extensive background in partnerships and M&A activity, which is giving him experience in leading both small and large organizations. As CynergisTek rose as a business, M&A will become increasingly more important. Having someone with the knowledge to integrate acquisitions successfully into the company will be critical to our success. This is the experience that Caleb possesses and we will need moving forward.

I know that many did not expect this day to come for me so soon, but we develop and execute strategic plans to accomplish organizational goals, and succession has always been an important part of that plan. Fortunately, we were able to attract the leader who has the necessary background and experience that will position us well to execute on our growth strategies that we put in place 2.5 years ago. As I hand it off to Paul for the last time to give a summary of the Q2 financials, I would first like to publicly thank him for all of his support for me and his dedication to what we are building here at CynergisTek.

Paul, go ahead.

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [5]

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Thanks, Mac. The financial information I'm about to provide is for the continuing security business only, unless I specifically mention that it includes the discontinued operations.

Security revenue for the second quarter increased $0.7 million to $5.1 million. Breaking down the revenue for Q2 2019 versus '18, managed services revenue was $2.8 million, an increase of 13%; and professional and consulting services increased 23% to $2.2 million.

Gross margins were 41% for the second quarter of 2019 compared to 43% in 2018. As we've mentioned over the last couple of quarters, the slight decline in gross margin is reflective of our investment in attracting and retaining talented cybersecurity employees, costs associated with ramping up new services and the implementation of advanced systems to support the business.

Non-GAAP adjusted EBITDA loss was $0.4 million or 8% of revenues for the second quarter of '19 compared to a loss of $0.8 million or 18% of revenues for 2018. Non-GAAP adjusted loss was $0.5 million or $0.05 per basic and diluted share for the second quarter of '19 compared to a loss of $1.1 million or $0.11 per basic and diluted share for 2018.

The company had $10.8 million of cash and cash equivalents before taking into consideration our approximate $4.3 million tax liability driven primarily by the gain on the sale of the MPS business. We saw an increase in deferred revenues of about $0.4 million. The full financials and reconciliation of GAAP to non-GAAP information can be found in the earnings release that came out yesterday.

I'd like to provide an update on a few additional financial items. First is in regard to the sale of the MPS business in Q1. The $1.5 million subject to future sales activity did not materialize, reducing the consideration paid to $28.5 million before working capital adjustments.

Additionally, now that we are solely focused on cybersecurity, privacy and compliance, I'd like to breakdown the 2018 revenue and gross margin for the security business to give investors a complete financial picture for Q3 and Q4. For security revenue in Q3 of '18, managed services was $2.7 million, professional and consulting was $2.9 million, equipment and software was $0.1 million. Gross margin for the same period was 49%.

For security revenue in Q4 of 2018, managed services was $3 million, professional and consulting was $3.8 million and equipment and software was $0.2 million. Gross margin for the same period of '18 was 51%.

Lastly, we will see additional general and administrative fees of approximately $0.2 million in Q3 for the executive recruiter fees associated with the hiring of our new CEO. As a result, going into next year, we expect our G&A expenses to decrease.

This concludes the financials for Q2. I'd now like to hand the call over to our new CEO, Caleb Barlow. Caleb?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [6]

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Thank you, Paul, and good afternoon. I'll start by saying that I'm excited to be part of this incredible company. Over the last 3 years, I've spent the bulk of my time working with and leading intelligence services and incident response teams all over the globe on both the breaches that you've heard of and the ones that never make the news. What I noticed from that experience is a real trend away from the attacks of the past where bad actors exfiltrated personal data for financial gain to an increase in destructive attacks led by organized crime, requesting ransom payment or, in other cases, a political desire to destroy and cripple a company. In these cases, you come into the office an idle Tuesday, and it's all gone, all of it, including the backups. These destructive attacks require an all business response and an understanding of how to get the business back to resiliency.

A proper response not only requires multiple security experts, but more importantly, requires individuals who understand the business domain and the growing regulatory environment who can help prioritize and execute remediation actions.

Just to give you an example, here in the U.S. alone, there are 52 different breach disclosure laws, and you do not want to go sideways with any of them.

As I look at this problem and approach the opportunity with CynergisTek, I saw a company that had all of the components in place to address these coming challenges, responding to these more destructive attacks. CynergisTek was operating and succeeding in one of the most complex regulatory environments out there: health care. They became the trusted adviser for their clients not just by the security team, but in many cases, the CEO and the Board of Directors, all of which are required to respond in an incident of magnitude. As vulnerabilities grow well beyond your server and workstation to IoT and other devices, CynergisTek is leading the way not only to identify but monitor the complete picture. CynergisTek not only has the capabilities to look at the company's security vulnerabilities, but also the ability to understand the likelihood of an incident and the impact it will have on the business. They have everything necessary to help a company plan for their worst day.

Knowing how to respond to a large-scale security incident is not a skill you're going to learn from reading a book. It's much more analogous to learning how to swim. To be successful, you're going to need to jump in a pool with an instructor, a coach. If you're just reading a book on swimming, you're likely going to drown. Responding to the coming attacks is not any different. CEOs, Boards and security executives are going to need a different type of trusted partner by their side, one that has a thorough understanding of their security posture, the risk to the organization and the regulatory environment in which they operate; a partner that knows how to help them build plans for their worst day and make decisions in a crisis if it occurs.

I came here to take what I've learned and to build a company that can solve this problem, and I believe CynergisTek has the right DNA to do it.

Now I may be coming from a very large company, but even with a very large company, big ideas start small. My focus over the years has been on driving teams that innovate quickly and turning small businesses into large organizations. I see a tremendous opportunity to expand on what CynergisTek has built by adding another layer to the assessments and managed services that help clients be more resilient in a cybersecurity incident.

Now I've only been here for 2 weeks, and my initial plan is to visit our clients around the country, engage our teams throughout the company and work with the leadership team and Mac to solidify a smooth transition. One thing I've noticed in my short time is that CynergisTek has built a fantastic team, full of leading cybersecurity and privacy experts. I look forward to working with them all in the future.

In closing, I want to extend my congratulations to Mac on his career, his leadership, both here at CynergisTek and in the industry as a whole. This concludes the prepared remarks. 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) And we'll take our first question from Matt Hewitt with Craig-Hallum.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Mac, it's been a pleasure working with you this last couple of years and best wishes in future endeavors. And then Caleb, welcome to the team.

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Michael H. McMillan, CynergisTek, Inc. - CEO Emeritus, Founder & Director [3]

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Thank you, Matt.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [4]

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Thank you.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [5]

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A couple of questions. First, consulting. Professional consulting came up a little bit short of our expectations. I'm just wondering if that was a function of timing or what you're seeing from a demand perspective for that piece of the business.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [6]

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Well, it's certainly an area that we're paying a lot of attention to. And the advantage of professional services obviously is it's revenue that we can recognize in the short term. So it is a continued area of focus. And one of the things we need to do there is continue to bolster sales to get those numbers up.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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Got it. And then gross margin, nice sequential improvement. And I'm sure there's some mix component to that, but how should we be thinking about that metric trending, say, over the next couple of years?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [8]

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Paul, let me defer that to you.

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [9]

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Yes. I mean I think at least in the short term, as we're at these revenue levels in that $5 million, $6 million a quarter range, I think we're going to be sitting in that low 40 range. That's probably pretty consistent. But as we start to see the ramp-up in the revenue and we start getting in that high 6, into the $6-plus million, into in the $7 million range, we're going to -- it's our expectation we'll see those margins start to uptick back to the middle of the high 40s is what we're expecting, Matt.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Understood. And then maybe one last big kind of more of an open-ended question for you, Caleb. In the press release and even in your prepared remarks today, you commented on other areas for -- or other areas where you're seeing opportunity to expand the current service offerings. Are you looking more from people in consulting? Or are you thinking that there's opportunities to maybe attach hardware, software, bring that into the mix? And maybe just kind of a high-level overview of where you see opportunities for the company going forward.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [11]

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So Matt, I think that the biggest areas of focus will certainly be professional services and our associated managed services, which are predominantly people based. There's a couple of things here that are very intriguing, and this goes, frankly, to the core of why I came here. The first thing you have to realize is that when you run into these more pervasive, more destructive attacks, it's no longer just the security team that's responding. It's in all of business response. And what that ultimately means is that if you're just a tool vendor, you don't understand the business environment in which you're operating, you can't provide that guidance and be that trusted adviser. And the thing that CynergisTek has done is very unique. Because of their heritage in providing these assessments at a very deep level, they understand the business in which they're operating in. And I believe that is part of the secret sauce that's going to help many companies, not just in health care, better be prepared and better respond to an incident.

So if you look at the opportunities and the potential areas of expansion, it all centers around doing 2 key things: the first, continuing to focus on our growth in the health care segment and the good base we've built there; but the second is in bringing forward services that are cross-industry and move us beyond just health care.

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Operator [12]

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And we'll take our next question from Andrew D'Silva with B. Riley FBR.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [13]

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And I'd like to echo previous comments. Mac, this might be the last time with you on a conference call. It's been a pleasure. And Caleb, great to finally get a chance to talk to you as well.

So first question, just related to customer retention rates. Can you maybe break it down a little bit? Historically, it's been very good customer retention. Has that maintained throughout 2019 thus far? And then maybe a little bit of a breakout between how that works between managed services and consulting and professional.

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Michael H. McMillan, CynergisTek, Inc. - CEO Emeritus, Founder & Director [14]

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So Andy, the good news is, is that retention rate has remained strong across the board. And what you heard me talk about in my opening remarks was that we're now tracking that in many different ways. And one of the ways we're tracking it is just if you look across all of our customers, how many of all of our customers have at least a managed service, and that for the first time ticked up over 40% for the total number of customers we have. And then secondarily, we look at, as you've heard me talk about in the past, how many of our managed service customers actually have 2 or more managed services, and that number is ticking up as well. You heard me talk about the one customer that added their third and is already talking to us about adding their fourth. And it's absolutely our goal to have as many of our customers have as many of our managed services as we can possibly sell to them. So that is still a very strong focus, and the good news is that all of those statistics are trending in the right direction and remaining strong.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [15]

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Okay. Great. And just moving over to gross margins. I know you talked a little bit about this in previous caller's questions. But in the back half of the year for '18, you're about 50%. Obviously, the labor market has been getting tighter in your segment. How much of the kind of gross margin compression related to that? And how much would you say is just related to the economies of scale due to the back half of the year being stronger in '18 than you expected to be in '19?

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [16]

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Yes. We estimate around 1%, maybe on a worse case, 2%, is going to be tied to some of the -- in the head count, some of those new -- the new tools that we've implemented as well as the additional managed services is what we're looking at is the impact primarily from that side of it. So the balance is associated with the revenue levels.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [17]

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Okay. Perfect. And then, Caleb, maybe run me -- or just a little understanding upon the question you already answered. But run me through what first brought you to the company. What was the initial attraction? Obviously, a big shift from the size of the company you were previously at and your position roles changing dramatically as well. And then I'm also just curious on how you view M&A as it can be very accretive done correctly, but can obviously be a huge headwind if not done correctly. So just your actual fundamental thought process would be useful versus particular avenues might go down.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [18]

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Okay. So the first thing you have to understand is that in my past role, I was literally sitting at the epicenter of most major breaches as they would occur. And the thing I tell people often, and this obviously isn't a scientific statement but I really believe it, if you look at most major breaches that hit the headlines, the response to the breach actually causes more damage than the breach, executives not knowing what to do.

And if you think about it, it's the first time -- I mean many of us went to business school, right? And at no point along the way do you learn how to take on a human adversary, right? I mean it's the kind of metaphor equivalent to getting punched in the face, and you're going to keep getting punched in the face until you punch back. That is a very foreign concept for your average corporate executive that you're up against a human that can see what you're doing, can pivot and then come at you in different ways.

And as I started to see this and worked with CEOs and Boards during these breaches, I really started to realize that 2 things are required. One, you've got to plan for these things way in advance. So one of the things I did at IBM, and if you're interested in this, you can Google it, is that I built up the world's first immersive cyber range. We built one in an environment, in a building and we even built one at a back of a truck. And these things were incredibly successful because you could exercise what was going to happen. But the missing link that I still couldn't get to was actually getting in front of it and not -- to not only understand the security weaknesses, which every company has, but also understanding how those weaknesses impact the business. So that connection between the risk that you are taking on with your cybersecurity vulnerabilities and how the business was going to operate if those risks were exploited. So that was, first of all, where I got interested in this.

But then the second part of your question is kind of around M&A. And one of the other great opportunities I had was to work many different acquisitions. IBM Security is actually a combination of our 20 acquisitions. And one of the more interesting roles there is what they call an integration executive where you actually are the lead executive on an acquisition. You work it all the way through the process and then working either hand in hand with the CEO or, in many cases, the CEO leads actually running the company.

And exactly to your point, there are many acquisitions that meet your business case and many acquisitions that you struggle and you have to try to figure it out and have to try to figure out how it scales. So it's interesting, I used a lot of that same discipline in evaluating CynergisTek. And of course, the great thing about CynergisTek is it's public, so you can see a lot of this information. A lot of it isn't hidden away in ego and other things.

But I think to your point, M&A is something that very well may be part of our future, along with organic growth. But we have to be very careful about taking the plays that are going to give us the synergy we need to grow not just driving towards revenue, but actually helping us get that 1 plus 1 equals 4 advantage off of the work that we're already doing.

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Operator [19]

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And we'll take our next question from William Gibson with Roth Capital Partners.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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A question for Caleb, and it relates to -- you talked about moving into new areas beyond health care. And I think I know what Mac thinks about it. But what's your sense of the medical device security and how big that could be?

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [21]

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Well, I think if you look at the IoT space in general, we have to all realize that if you look at a typical company maybe with 1,000 employees, that might mean you've got 2,000 workstations. But you might have 10,000 devices connected to that network. And the challenge with any type of IoT device is the opportunity for kinetic action to actually impact more than just the data in a database, but actually impact the building or a pump or a valve. And of course, then you add in medical devices on top of this, and you're going to have a real kinetic impact on people. Now combine that with the fact that these things often last 15-, 20-plus years, they may be running an older operating system, they may not be well protected.

So what is intriguing about this space is that if we focus on medical devices, it not only has a large threat landscape, it has a significant impact, it has a large regulatory framework. But think about it this way, if we can figure that out and harness that opportunity, it also opens the door for us to address the larger space of IoT in general, which is a bit less complex, a bit less regulated but totally the Wild West.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [22]

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And then second question, follow-up, is in the early statements, Mac, I think you went over breaking this streak potentially of a 10 consecutive up quarters in the third quarter of '19. Could you go over that again?

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Michael H. McMillan, CynergisTek, Inc. - CEO Emeritus, Founder & Director [23]

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Paul?

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Paul T. Anthony, CynergisTek, Inc. - CFO, Corporate Secretary & Treasurer [24]

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Yes, I can take it. Yes. I mean last year, if you remember, we had a large customer who had a large remediation effort and in which Q3 and Q4 saw significant professional services revenue. And so this year, at least this third quarter, we don't have the same level of remediation efforts that are going on right now, and so we will see a drop in that Q3 number. We're still looking at Q4. We've still got a lot in the pipeline, so we've still got our fingers crossed. But at least at this point, we are looking at a drop. It's entirety a function of the professional services, though, in comparison to the large deal we had last year. So...

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [25]

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So that's a drop from $5.7 million, correct?

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

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Yes. Exactly right. Yes.

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Operator [27]

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(Operator Instructions) And we'll take our next question from Tim Clarkson with Van Clemens Capital.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [28]

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I'm kind of new to this call, so I'm just going to ask a more basic question. How would you define the difference between managed services and professional consulting services, specifically in terms of which ones are repeatable and which ones more onetime and are they both involved with cybersecurity?

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

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So professional services, of course, is exactly what it sounds like, right? However, the managed services model here at CynergisTek is very unique in that very analogous to a Software-as-a-Service model, what you're doing is having a company sign up for a subscription. Now remember, in the health care field, these assessments that are done are required. So every year, you've got to go in and assess your cybersecurity business, potentially even more often than once a year, which certainly would be healthy. So what CynergisTek has done is package these up as a repeating service.

So a couple of things come as benefit of that. One, you don't have to go take it out to RFP and find a vendor and we don't have to go sell it every year. The second, and you also get some consistency year-over-year because you've got the same vendor doing this. And of course, what you're hopefully doing is the vulnerabilities you find in the year 1 assessment, you're looking to go fix those in your next assessment and do even better the assessment after that.

So we're packaging that as a managed service, but where it also gets interesting is in monitoring the posture that we found. So for example, the patient privacy monitoring service, we're also going in now operating in an environment where hopefully all those controls are in place and helping a company to validate those controls in place by effectively continuous monitoring on top of that environment to see what the posture is.

So I think from a -- if you look at this from a financial perspective, think of this as very analogous to a SaaS-based service in that you contract with us, we take care of all of the aspects that you need and we're coming back to constantly continue monitor and reassess that environment.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [30]

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Sure. So would you say that on both the managed services and also the professional consulting services in terms of what you're doing, you're still involved with cybersecurity?

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

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Yes. So now that this is a pure-play cybersecurity company -- and of course, this is a big part of our transition, right? And frankly, a big part of what interested me in coming here is that as all of those other businesses have moved out, it allows us to be a pure-play cybersecurity company to start to take that on from a brand messaging perspective as well as not having any distractions with any other parts of the business.

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Michael H. McMillan, CynergisTek, Inc. - CEO Emeritus, Founder & Director [32]

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I'll add to that. As it relates to managed services, that's what we would consider our recurring consulting, what we would consider repeatable. So your consulting services in many cases are the same types of services that are done on a one-off basis but they're traditionally services that are still contracted for annually. And so it's people still coming back, repeating those services with us. So consulting has that aspect to it.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [33]

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So the managed services would be even more predicable and professional consulting...

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Michael H. McMillan, CynergisTek, Inc. - CEO Emeritus, Founder & Director [34]

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Yes. It's a 3-year contract.

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William Caleb Barlow, CynergisTek, Inc. - CEO & President [35]

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And obviously, the revenue recognition is very different on those versus professional services contract as well.

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Michael H. McMillan, CynergisTek, Inc. - CEO Emeritus, Founder & Director [36]

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Exactly.

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Operator [37]

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(Operator Instructions) And with no other questions at this time, I'd like to hand the call back over to Mac McMillan. Please go ahead.

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Michael H. McMillan, CynergisTek, Inc. - CEO Emeritus, Founder & Director [38]

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Thank you, operator. Today is my last time to present our company to you, which represents a bittersweet moment for me as I'm extremely proud of this company and humbled by the success that it has become. No outfit is successful on its own, and there are generally many stakeholders to thank. But today belongs to our shareholders, past, present and future. I want to thank you for your support, for your genuine interest in our success and for the many of you who were thoughtful enough to engage and share your thoughts with me along the way. I did not know what to expect when I transition from the private company world to the public one, but I can honestly say now looking back that our shareholders, like our clients and our employees, are a valuable component of our business and a tremendous source of experience, wisdom and advice.

As I mentioned on several occasions, I rose every day focused on growing the value of this company, and I am confident that the team I leave behind will do the same. Caleb, Paul and I look forward to speaking with you all in the future. Thank you and have a great day. Thank you. Operator?

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Operator [39]

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And this concludes today's call. Thank you for your participation. You may now disconnect.