CynergisTek, Inc.

Welcome to Synergistic's 2024th quarter and year-end earnings conference call. Today's conference is being recorded. Joining us today from the company are Mr. Caleb Barlow, President and Chief Executive Officer, and Mr. Paul Anthony, Chief Financial Officer. Before we begin the formal presentation, I would like to remind everyone that some statements made on the call and webcast, including those regarding future financial results and industry prospects, among others, are forward-looking. These forward-looking statements can be identified by the use of forward-looking terminology such as believes, expects, anticipates, would, could, intends, may, will, or similar expressions, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the conference call. Certain of these risks and uncertainties are or will be described in greater detail in the company's SEC filings. Given the risk of uncertainties, listeners should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results which may not occur as anticipated. Synergistic is under no obligation and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise. At this time, I would like to turn the call over to Caleb Barlow.

2020 is behind us, and it's great to be talking with all of you now. As a company that is heavily penetrated in the healthcare provider market, our clients have been and continue to be on the front lines of this pandemic. And our business saw the impact almost immediately as hospitals made room for COVID-19 patients, put elective procedures on hold, and stopped doing anything that was not directly tied to patient care. Last year, about this time when our business slowed down abruptly, we did not stop working. Instead, we started asking, what changes? What does this new normal look like? And how do we refine our strategy? Telemedicine is accelerated by five to ten years. Working from home, outside the protection of the corporate network, is now the norm versus the exception. And the concept of a healthcare breach is no longer just about losing data. It likely means your entire institution is locked up with ransomware and it becomes difficult to treat patients. As customers pulled back, we started to innovate and developed entirely new post-COVID relevant offerings that would be in demand by our clients, compromise assessments, privileged access management services, and security validation, just to name a few. We also focused on expanding our addressable market and our relevancy in close adjacencies to healthcare. while at the same time we open the door to new regulated markets that can leverage our skills, processes, technologies, and our existing resources. In Q4, we saw the start of a rebound of our professional services, which we highlighted in an announcement in January of a $700,000 deal with a large health system. We saw a new logo, a sign that our services continue to be in demand, including deals with Valley Health and Fairview Health, We started to see the benefits of our diversification strategy into close adjacencies in healthcare that are collecting world volumes of protected data during the pandemic. We've been signing of a deal with a large state department of public health and our announcement of a contract with Ball State University. And we saw expansion in existing clients across our base, including a large academic medical center system and an expanded deal with Logitech. Now, late in Q4, budgets began to free up, and we saw the first increase in our bookings for the quarter in over a year, which manifested itself in a 10% increase in our pre-sold revenue and a more diversified pipeline positioning us well for growth in 2021. And as vaccines become available, healthcare workers have been the first to get shots in their arms. And while that makes us opportunistic and optimistic that this will also accelerate a return to pre-pandemic business conditions, So that's the story in healthcare, but it's by no means all we've been up to. In my first investor call just over a year ago, I talked about the opportunity we saw to expand the company beyond healthcare. That diversification has been core to my strategy, and today I want to talk with you about the opportunity we see to be a big part of securing the defense industrial base. Unfortunately, cyber attacks on America's defense industrial base are, well, not unusual, as evidenced by the most recent SolarWinds breach and the Microsoft Exchange vulnerabilities making headlines this month. It's estimated that the United States is losing $600 billion a year to foreign adversaries through exfiltration, data theft, and the loss of intellectual property. To address this threat, U.S. military defense acquisition is moving from a self-assessment model to a rigorous framework that requires third-party assessment for all 300,000 vendors in the defense industrial base that handle controlled, unclassified information. This new initiative, known as the Cybersecurity Maturity Model Certification, or CMMC. CMMC is unlike other cybersecurity regulations, as it requires a comprehensive security maturity that has both breadth and depth, but it also has real teeth. Simply put, if you do not meet the requisite security requirements, you will not win your government contract. To prepare, secure, and assess 300,000 defense contractors over the next few years will require a small army of consultants and assessors, likely several thousand strong. We believe the emerging market opportunity for both assessment and the remediation services which we expect to be three times the opportunity of assessments alone, to be in the tens of billions over the next five years. We recognize the opportunity more than a year ago, and we believe we are uniquely positioned to capitalize on it. We are not a government supplier to that. We are completely independent, and that's an advantage. All of our current employees are U.S. citizens, and approximately 17% of them are U.S. military veterans. The CMMC leverages nearly identical frameworks to what we use in healthcare, where we already have intellectual property in place, including automation, training, and quality control. Most importantly, we have 60 assessors already in position that we believe can meet the required qualifications once the certification process fully opens up, allowing us to enter this market with existing resources and capabilities. Now, becoming a CM&C assessor is not a trivial process. The required training, credentialing, and background checks with people, along with new controls, procedures, and an enhanced security posture of our organization is significant. We are one of the first companies to be approved as a third-party assessment organization. We have a provisional certified assessor in our ranks that represents one of the first 100 in the program. And we are a registered provider organization, authorizing us to do consulting work now. And I want to announce today that we have already begun closing consulting deals, helping government suppliers prepare for the CMMC initiative. The next critical step for us in this process which is already underway and will continue over the next few months, is to have the Department of Defense conduct a review of our security posture. Our strategy is twofold. We remain focused in health care, and we are seeing the signs of recovery. But we also believe that the CMMC effort, along with customer diversification efforts and investment in our go-to-market in these new industries, can get us growing at a much higher rate than our baseline growth strategy. With that, let me turn the call over to Paul.

Thank you, Caleb. This year was all about constantly reacting to what the market threw at us during the pandemic. This reaction included numerous efforts to reduce costs, improve efficiencies, and respond to customer pullback due to budgetary constraints. As a result of the impacts from the pandemic last year, we expect Q1 2021 to be our revenue low point, down approximately 10% from Q4 of 2020. But as Caleb said, we are seeing strong signs of a rebound with an increase in our pre-sold revenue and our Q4 bookings were the highest we experienced in over two years. Given that our revenue in some cases can lag bookings by several quarters and our emphasis on closing long-term recurring revenue contracts, it will take some time to show in our numbers. From a balance sheet and financial resourcing perspective, we ended the year with $5.6 million in cash, that included a net issuance of $1.8 million of the $5 million eligible takedown of the ATM under our shelf registration. This was done at an average price of $1.54 and a total share issuance of 1.3 million shares. We still have the $2.8 million in debt that we received under the Paycheck Protection Program, and we expect the majority of the loan will be forgiven. We are also expecting tax relief as a result of the CARES Act, where we expect to carry back available losses from this year to the extent possible, which at this point exceeds $1 million. Outlining our Q4 standard financial disclosures, revenue decreased $1.1 million to $4.7 million, but it was up 4% over Q3. The decrease from prior year was due to lower revenue from managed services, which reduced by $0.3 million to $2.8 million due to the impact of some customers canceling or delaying renewals, and a reduction in net new customers due to the pandemic. Professional consulting services decreased to $0.8 million to $1.9 million due to lower revenue from synergistic business as a result of the pandemic, offset by an increase of $0.2 million of revenues from backbone. Again, this backbone increase was lower than we had projected due to a pullback by our customers' use of third-party services, again, directly related to the pandemic. Gross margin was 37% for Q4 2020 compared to 40% in 2019, and it improved from 35% at Q3. As I mentioned in my highlights, the improvement in gross margin is due to the staff and expense reductions we made over the last couple quarters, along with reduced travel in reaction to the lower revenue and the COVID-related travel restrictions. Sales and marketing expenses decreased to $1.1 million for Q4 2020, compared to $1.4 million for the same period in 2019. This decrease was due to lower headcount as we looked to rebuild part of the sales team and lower stock-based comp. We do expect this to increase as we get back to full headcount levels in our investment in marketing to support our increased go-to-market activities. DNA expense decreased by $1 million to $1.1 million for Q4 2020 compared to the same period in 2019. The decrease is due to $1.1 million in temporary and permanent expense reduction efforts taken to improve operating margins for 2020, offset $5.1 million in additional costs for backbone. We do expect expenses to increase going into 2021 as we start to reinstate some employee benefits that were suspended in 2020 in reaction to the pandemic, but we will react as we see how 2021 shapes up. During the quarter, we did record a non-cash impairment to Goodwill and Intangibles, amounting to $16.5 million. Our non-GAAP adjusted EBITDA loss was $0.3 million for Q4 2020 compared to $0.4 million for Q4 2019 and $0.8 million in Q3 of this year. Full-year financials and reconciliation of GAAP to non-GAAP information can be found in the earnings release that came out today. Caleb highlighted our growth strategy during his discussion earlier. Funding through the ATM was a step in supporting these initiatives with a small infusion of capital. We're bullish on the long-term prospects for the company, and any subsequent capital raises would be with a mind to accelerating growth and creating incremental value for shareholders beyond the current plan. This concludes the financials and prepared remarks for Q4 2020. Operator, please open the floor for questions.