CynergisTek, Inc.

21 First Quarter 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'd like to remind everyone that some statements made on the call and webcast, including those regarding future financial results and industry prospects, among others, are forward-looking. These forward-looking statements can be identified by the use of forward-looking terminology such as believes, expects, anticipates, would, could, 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 risks and 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 or future events or otherwise. And now at this time, I'd like to turn the call over to Mr. Caleb Barlow. Please go ahead, sir.

Thank you, operator. As a reminder, it was a little over a month ago that we provided an update as part of our year-end call. So today's discussion will really be a continuation of that dialogue. We're continuing to see positive signs of a return to normal in our clients. Budgets are returning, pandemic-related downward pressures on pricing are easing, and pre-sold revenue continues to grow coming out of the momentum that we started in Q4. And it's been great to see clients face-to-face again as many of our staff are now fully vaccinated and we've safely opened up travel. As anticipated, We're also seeing increased consolidation in healthcare providers and an improving awareness of security vulnerabilities across the industries in which we operate, all of which creates new opportunities for growth in existing clients. Now, this was highlighted with our recent announcement of a $1.4 million renewal and expansion, the renewal of which was closed in Q1 and an expansion to additional affiliate locations that closed in Q2. Look, I think consolidation amongst healthcare providers ultimately is a good thing for us. And this is a great example of the add-on business opportunity when our healthcare customers acquire or affiliate with other organizations and leverage our services to raise the maturity of their entire system. As guided in Q4, the first half of this year is expected to be our trough from a revenue perspective. And early signs in Q2 indicate that we're returning to growth for the second half of the year. We're also starting to see synergy between our healthcare business and the work we've been doing to prepare for offering services under the Department of Defense's Cybersecurity Maturity Model Certification, or CMMC, program. You see, several of our existing healthcare clients are recognizing that due to the work they do in support of our active military, reservists, veterans, and dependents, they too will need to be compliant with CMMC. This was noted in our recent announcement concerning Pacific Medical Centers, a primary and integrated multi-specialty healthcare network who chose our Redspin business unit to conduct a CMMC readiness assessment as they prepare for eventual certification. Simply put, our strategy to grow in the government sector is also improving our hand in the healthcare sector while leveraging our existing resources. Now, in related developments, yesterday's announcement that the Biden administration has issued an executive order aimed at helping the U.S. defend itself against sophisticated supply chain attacks, like the recent ones at SolarWinds, the shutdown of the Colonial Pipeline, and the incident with Microsoft Exchange, are all starting to reinforce the federal government's commitment to tighten its security posture while using the federal contracting process to force changes that will likely trickle down to much of the private sector. Now, I also want to mention that earlier this year, we started increasing our investment in marketing by first establishing a VP of marketing role to drive our strategy to position the company for expansion into adjacent verticals and larger enterprise health systems. This is important as we needed to shift our messaging to support the more advanced services we developed over the past year. I'm excited to say that by the end of Q3, the first phase of our marketing strategy will be complete, which includes new brand positioning and websites with an elevated look and better user experience for both the Synergistic and Redspin brands. Initial testing of our messaging is resonating very well with our clients, and more importantly, is leading to pipeline growth of our managed services including our advanced and validation services. Better marketing also opens the door to services being considered in adjacent markets. Our outlook has given us the confidence to expand our efforts with the addition of multiple new sellers who have experience in adjacent markets, bringing our total to nine direct sellers. Bottom line, we used the pandemic to completely retool the company, and that transformation is largely complete. We feel good about where we're headed and the initiative which we have pursued, to be more relevant in a changing healthcare cyber market, expected to grow 16% per annum over the next five years, and to be one of the first companies to capitalize on the emerging multi-billion dollar business opportunity, securing the defense industrial base. All of this is expected to translate into a more profitable business that grows at a double-digit CAGR over the next five years. With that, let me turn it over to Paul.

Thanks, Caleb. The key metric, Caprice, Revenue continues to grow following on the strong Q4, increasing by an additional $200,000 to $17.4 million due to greater demand from our healthcare providers coming out of the pandemic. Additionally, we saw our cost reduction efforts improve earnings year over year by almost $1 million. Our balance sheet ended the quarter with $4.4 million in cash. Q1 traditionally has a higher cash burn due to annual software subscriptions and other beginning-of-the-year cash outlays. but this was offset by the benefits from the employee retention credit provided under the CARES Act that we qualified for for Q1 and expect to have in Q2. Since the end of last year, we have not taken any additional stock issuances under the $5 million ATM under our shelf registration. We still have the $2.8 million in debt that we received under the Paycheck Protection Program and still expect the majority of the loan will be forgiven but are pending word back from the SBA. We are also expecting the tax refund from the carrybacks of available losses from 2020 to the extent possible, which at this point still exceeds over a million. Addressing the Q1 standard financial disclosures, revenue decreased 0.9 million to 4.2 million compared to Q1 2020. The decrease from prior year was due to lower revenue from managed services, which reduced by 0.6 million to 2.4 million compared due to the impact of some customers canceling or delaying renewals and the reduction in net new customers due to the pandemic. Consulting and professional services revenue decreased $0.3 million to $1.7 million due to lower revenue from two customers who completed contract work in the first half of 2020 and less business as a result of the pandemic as our customers had continued to minimize spend with third-party contractors. Gross margin was 50% for Q1 2021 or an adjusted 39% when excluding the benefit from the employee retention credits. This is an improvement when compared to 33% in Q1 2020 and 37% in Q4. The increase in gross margins is due to the staff and expense reductions, the reduced travel, and the delivery efficiencies that we've been talking about on the last couple calls. Sales and marketing expenses decreased to $1.2 million for Q1 2021, compared to $1.5 million for the same period in 2020. This decrease was due to lower marketing and sales support payroll costs from the headcount reductions, less travel costs, as well as the benefit from the employee retention credits. These were partially offset by higher recruiting costs. We do expect sales and marketing to recover to levels similar to 2019, as we increase investment in marketing to support our expanded go-to-market activities. Our G&A expense decreased by $0.4 million to $1.7 million for Q1 2021. This decrease is due to the expense reduction efforts taken last year, lower professional fees due to 2020 being higher from strategic advisory and recruiting costs, and the benefit from the employee retention credits provided under the CARES Act. We do expect G&A expense to increase in the second half of the year as we start to reinstate some employee benefits that were suspended in 2020. We start to travel again, as well as the employee retention credit going away. Non-GAAP adjusted EBITDA loss was $0.6 million for Q1 2021 compared to $1.4 million last year. The full-year financials and reconciliation of GAAP to non-GAAP information can be found in the earnings release that came out today. In summary, taking into consideration the drop in revenue, the aggressive steps we took to respond to the pandemic shows in this quarter's results when compared to last year. With continued improvement in gross margins, a reduction in our net loss, a reduction in our adjusted EBITDA loss, and continued reduction in our cash flow use from operations. All this positions us well going into the rest of 2021 where we are seeing things improving throughout the rest of the year. This concludes the financials and the prepared remarks for Q1. Operator, please open the floor for questions.