CynergisTek Reports Second Quarter 2019 Financial Results

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Retrieved on: 
Tuesday, August 13, 2019 - 9:00pm
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CynergisTek, Inc. (NYSE AMERICAN: CTEK), a leader in healthcare cybersecurity, privacy, and compliance, today announced financial results for the second quarter ended June 30, 2019.

Financial Highlights for the Second Quarter 2019 Include:

Financials represent business from continuing operations. Discontinued operations have been isolated.

  • Revenues from continuing operations for the second quarter were $5.1 million, an increase of 17%, compared to $4.3 million for the same period of 2018.

    • Managed services revenue, from continuing operations, was $2.8 million an increase of 13%, compared to $2.5 million for the same period of 2018.
    • Professional and Consulting services revenues, from continuing operations, were $2.2 million an increase of 23%, compared to $1.8 million for the same period of 2018.
  • Non-GAAP adjusted EBITDA loss from continuing operations, after adding back stock-based compensation, was $(0.4) million in the second quarter of 2019, compared to $(0.8) million after adding back stock-based compensation for the same period in 2018.
  • Non-GAAP adjusted loss from continuing operations per share for the second quarter 2019 was ($0.05) per basic and diluted share, compared to ($0.11) per basic and diluted share for the same period of 2018.

Recent Operational Highlights Include:

“CynergisTek has just marked its tenth consecutive quarter of year-over-year revenue growth in security,” said Mac McMillan, CEO Emeritus of CynergisTek. “The evolving security threat landscape and several new privacy regulations at the state level have been key factors contributing to the increased demand for our managed services. Like this quarter, we will continue to focus on expanding our newer managed services into our growing client base.”

“CynergisTek has seen continued success in the highly regulated healthcare industry,” said Caleb Barlow, President and CEO of CynergisTek. “CynergisTek has all the components in place to take advantage of the evolving threat landscape and I see tremendous opportunity to expand on what they have built by adding another layer to the assessments and managed services that help clients be more resilient in a cybersecurity incident.”

For the Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018

Financial results are from the Company’s continuing operations related to Security Services unless specifically noted that it includes discontinued operations related to the sale of the managed print services (MPS) business. Revenue increased by approximately $0.7 million to $5.1 million for the three months ended June 30, 2019, as compared to the same period in 2018.

Cost of revenue was $3.0 million for the three months ended June 30, 2019, as compared to $2.5 million for the same period in 2018. This increase was due to increased headcount in order to provide services to a larger customer base, support new services, and efforts to augment the employee salary and benefit offerings to attract and retain talent.

Gross margin was 41% of revenue for the three months ended June 30, 2019 and 43% for the same period in 2018. The slight decline in gross margin is reflective of investment in attracting and retaining talented cyber security employees and costs associated with ramping up new services.

Sales and marketing expenses were $1.3 million for the three months ended June 30, 2019, as compared to $1.3 million for the same period in 2018. General and administrative (G&A) expenses increased to $1.5 million for the three months ended June 30, 2019, as compared to $1.4 million for the same period in 2018. The increase in G&A is due to an increase in salaries and related costs primarily as a result of the issuance of restricted stock units to key employees and board members and software subscriptions for business tracking.

On March 20, 2019, CynergisTek sold the MPS business. The adjustments to the gain on the sale of this business together with the charges from these discontinued operations totaled $0.2 million for the three months ended June 30, 2019. Earnings from these discontinued operations in the second quarter of 2018 totaled $1.8 million.

GAAP net loss from continuing operations for the second quarter was $(0.9) million, or $(0.10) per basic and diluted share compared to a net loss of $(1.7) million, or $(0.17) per basic and diluted share for the same period of 2018. GAAP net loss for the second quarter, after adjustment from income from discontinued operations, including gain on sale, net of tax, was $(1.1) million, or $(0.11) per basic and diluted share compared to net income after adjustment from income from discontinued operations, net of tax of $0.1 million, or $0.1 per basic and diluted share for the same period of 2018.

For the Six Months Ended June 30, 2019, Compared to the Six Months Ended June 30, 2018

Revenue increased by approximately $2.1 million to $10.8 million for the six months ended June 30, 2019, as compared to the same period in 2018 due to increased sales efforts, expansion of service offerings and benefitted from current customers’ need for additional managed services. This increase is a result of an approximately $0.8 million increase in multi-year managed service revenues and approximately $1.3 million in additional revenues from consulting and professional services provided to new and existing customers.

Cost of revenue was $6.4 million for the six months ended June 30, 2019, as compared to $4.9 million for the same period in 2018. CynergisTek incurred approximately $1.1 million more in salaries and related costs, approximately $0.2 million more in stock compensation, and approximately $0.3 million more in contract labor. These increases were due to increased headcount in order to provide services to a larger customer base to support new services and the efforts to augment the employee salary and benefit offerings to attract and retain talent.

Gross margin was 40% of revenue for the six months ended June 30, 2019, and 44% for the same period in 2018. The decline in gross margin is reflective of the Company’s investment in attracting and retaining talented cybersecurity employees and costs associated with ramping up new services. Over the next few quarters, it is expected for gross margins to improve as the Company looks to grow cybersecurity consulting services.

Sales and marketing expenses were $2.8 million for the six months ended June 30, 2019, as compared to $2.7 for the same period in 2018. The increase is primarily a result of a broad array of additional marketing expenses incurred in an effort to increase sales. General and administrative expenses decreased by $0.4 million to $3.1 million for the six months ended June 30, 2019, as compared to $3.5 million for the same period in 2018 which includes $0.6 million of severance expense related to a departed executive.

GAAP net loss from continuing operations for the six months ended June 30, 2019 was $(2.4) million, or $(0.25) per basic and diluted share compared to a net loss of $(3.5) million, or $(0.37) per basic and diluted share for the same period of 2018. GAAP net income for the six months ended June 30, 2019, after adjustment from income from discontinued operations, including gain on sale, net of tax, was $16.5 million, or $1.69 per basic and $1.66 per diluted share compared to a net loss after adjustment from income from discontinued operations, net of tax of $(0.6) million, or $(0.06) per basic and diluted share for the same period of 2018.

The reconciliation of GAAP to non-GAAP information can be found in the tables at the end of this release and provide the details of the Company’s non-GAAP disclosures and the reconciliation of non-GAAP information.

 

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

June 30, 2019

(unaudited)

December 31, 2018

ASSETS

 

 

Current assets:

 

 

Cash and cash equivalents

$

10,845,464

$

6,571,381

 

Accounts receivable, net

 

4,810,332

 

5,572,467

 

Prepaid and other current assets

 

3,511,465

 

1,425,858

 

Refundable income taxes

 

-

 

472,059

 

Current assets held for sale

 

201,965

 

8,427,408

 

Total current assets

 

19,369,226

 

22,469,173

 

 

 

 

Property and equipment, net

 

818,842

 

887,874

 

Deposits

 

79,710

 

87,778

 

Deferred income taxes

 

1,615,173

 

2,146,020

 

Intangible assets, net

 

8,184,521

 

9,089,989

 

Goodwill

 

17,008,189

 

17,008,189

 

Noncurrent assets held for sale

 

-

 

1,844,349

 

Total assets

$

47,075,661

$

53,533,372

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

Current liabilities:

 

 

Accounts payable and accrued expenses

$

432,679

$

1,370,336

 

Accrued compensation and benefits

 

1,022,593

 

1,592,765

 

Deferred revenue

 

1,649,026

 

918,165

 

Income taxes payable

 

4,253,173

 

-

 

Note payable

 

-

 

343,750

 

Current portion of long-term liabilities

 

866,995

 

3,271,052

 

Current liabilities held for sale

 

70,000

 

7,299,561

 

Total current liabilities

 

8,294,467

 

14,795,629

 

 

 

 

Long-term liabilities:

 

 

Term loan, less current portion

 

-

 

12,851,617

 

Promissory notes to related parties, less current portion

 

984,375

 

5,015,625

 

Capital lease obligations, less current portion

 

-

 

1,570

 

Operating lease liability, less current portion

 

268,343

 

436,805

 

Noncurrent liabilities held for sale

 

-

 

58,967

 

Total long-term liabilities

 

1,252,718

 

18,364,584

 

Commitments and contingencies

 

 

Stockholders’ equity:

 

 

Common stock, par value at $0.001, 33,333,333 shares authorized, 9,795,147 shares issued and outstanding at June 30, 2019, and 9,630,050 shares issued and outstanding at December 31, 2018

 

9,795

 

9,630

 

Additional paid-in capital

 

32,610,001

 

31,910,831

 

Accumulated earnings (deficit)

 

4,908,681

 

(11,547,302

)

Total stockholders’ equity

 

37,528,477

 

20,373,159

 

Total liabilities and stockholders’ equity

$

47,075,661

$

53,533,372

 

 

CYNERGISTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2019

 

 

 

2018

 

 

 

2019

 

 

 

2018

 

Net revenues

$

5,057,460

 

$

4,308,015

 

$

10,831,117

 

$

8,682,584

 

Cost of revenues

 

2,963,636

 

 

2,476,264

 

 

6,448,275

 

 

4,885,044

 

Gross profit

 

2,093,824

 

 

1,831,751

 

 

4,382,842

 

 

3,797,540

 

 

Operating expenses:

 

 

 

 

Sales and marketing

 

1,335,732

 

 

1,324,198

 

 

2,817,115

 

 

2,692,069

 

General and administrative

 

1,465,144

 

 

1,368,233

 

 

3,118,777

 

 

3,537,524

 

Depreciation

 

49,115

 

 

35,915

 

 

88,100

 

 

70,979

 

Amortization of acquisition-related intangibles

 

452,734

 

 

452,734

 

 

905,468

 

 

905,468

 

Total operating expenses

 

3,302,725

 

 

3,181,080

 

 

6,929,459

 

 

7,206,040

 

Loss from operations

 

(1,208,901

)

 

(1,349,329

)

 

(2,546,618

)

 

(3,408,500

)

 

Other income (expense):

 

 

 

 

Other income

 

17

 

 

9

 

 

26

 

 

29

 

Interest income

 

16,638

 

 

-

 

 

16,638

 

 

-

 

Interest expense

 

(113,545

)

 

(341,579

)

 

(409,450

)

 

(741,312

)

Total other income (expense)

 

(96,890

)

 

(341,570

)

 

(392,786

)

 

(741,283

)

 

 

 

 

 

(Loss) before provision for income taxes

 

(1,305,791

)

 

(1,690,899

)

 

(2,939,404

)

 

(4,149,783

)

Income tax benefit

 

366,524

 

 

16,532

 

 

510,738

 

 

619,004

 

Net loss from continuing operations

 

(939,267

)

 

(1,674,367

)

 

(2,428,666

)

 

(3,530,779

)

Income (loss) from discontinued operations, including gain on sale, net of tax

(152,181

)

1,795,500

18,884,649

2,944,569

Net income (loss)

$

(1,091,448

)

$

121,133

 

$

16,455,983

 

$

(586,210

)

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

From continuing operations:

 

 

 

 

Basic

$

(0.10

)

$

(0.17

)

$

(0.25

)

$

(0.37

)

Diluted

$

(0.10

)

$

(0.17

)

$

(0.24

)

$

(0.37

)

 

 

 

 

 

From discontinued operations:

 

 

 

 

Basic

$

(0.02

)

$

0.19

 

$

1.94

 

$

0.31

 

Diluted

$

(0.02

)

$

0.18

 

$

1.90

 

$

0.31

 

 

 

 

 

 

Net income:

 

 

 

 

Basic

$

(0.11

)

$

0.01

 

$

1.69

 

$

(0.06

)

Diluted

$

(0.11

)

$

0.01

 

$

1.66

 

$

(0.06

)

 

 

 

 

 

Number of weighted average shares outstanding:

 

 

 

 

Basic

 

9,791,744

 

 

9,613,566

 

 

9,732,991

 

 

9,600,120

 

Diluted

 

9,791,744

 

 

9,827,686

 

 

9,931,281

 

 

9,600,120

 

 

CYNERGISTEK, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP LOSS FROM CONTINUING OPERATIONS TO NON-GAAP ADJUSTED EBITDA FROM CONTINUING OPERATIONS (UNAUDITED)

 

Three Months, Ended June 30,

Six Months, Ended June 30,

2019

2018

2019

2018

GAAP loss from continuing operations

$

(1,208,901

)

$

(1,349,329

)

$

(2,546,618

)

$

(3,408,500

)

Adjustments:

 

 

 

 

Depreciation

 

49,115

 

 

35,915

 

 

88,100

 

 

70,979

 

Amortization of acquisition-related intangibles

 

452,734

 

 

452,734

 

 

905,468

 

 

905,468

 

One-time restructuring and legal fees

 

-

 

 

-

 

 

-

 

 

735,183

 

Stock-based compensation

 

281,162

 

 

105,211

 

 

563,506

 

 

283,658

 

Non-GAAP adjusted EBITDA

$

(425,890

)

$

(755,469

)

$

(989,543

)

$

(1,413,212

)

Non-GAAP adjusted EBITDA per share

 

 

 

 

Basic

$

(0.04

)

$

(0.08

)

$

(0.10

)

$

(0.15

)

Diluted

$

(0.04

)

$

(0.08

)

$

(0.10

)

$

(0.15

)

 

 

 

 

 

 

 

 

 

RECONCILIATION OF GAAP NET LOSS FROM CONTINUING OPERATIONS TO NON-GAAP ADJUSTED EARNINGS FROM CONTINUING OPERATIONS (UNAUDITED)

 

Three Months, Ended June 30,

Six Months, Ended June 30,

2019

2018

2019

2018

GAAP net loss from continuing operations

$

(939,267

)

$

(1,674,367

)

$

(2,428,666

)

$

(3,530,779

)

Adjustments:

 

 

 

 

Non-Cash Income Tax Adjustment

 

(366,524

)

 

(16,532

)

 

(510,738

)

 

(619,004

)

Other Expense

 

-

 

 

(9

)

 

(26

)

 

(29

)

Depreciation

 

49,115

 

 

35,915

 

 

88,100

 

 

70,979

 

Amortization of acquisition-related intangibles

 

452,734

 

 

452,734

 

 

905,468

 

 

905,468

 

One-time restructuring and legal fees

 

-

 

 

-

 

 

-

 

 

735,183

 

Stock-based compensation

 

281,162

 

 

105,211

 

 

563,506

 

 

283,658

 

Non-GAAP adjusted earnings

$

(522,780

)

$

(1,097,048

)

$

(1,382,355

)

$

(2,154,524

)

Non-GAAP adjusted earnings per share

 

 

 

 

Basic

$

(0.05

)

$

(0.11

)

$

(0.14

)

$

(0.22

)

Diluted

$

(0.05

)

$

(0.11

)

$

(0.14

)

$

(0.22

)

 

Conference Call Information

Date: Wednesday, August 14, 2019

Time: 2:00 pm Eastern Time / 11:00 am Pacific Time

U.S.: 1-800-458-4148

International: 1-323-794-2597

Conference ID: 1876799

Webcast: http://public.viavid.com/player/index.php?id=135679

A replay of the call will be available from 5:00 pm ET on August 14, 2019 to 11:59 pm ET on August 21, 2019. To access the replay, please dial 1-844-512-2921 from the U.S. and 1-412-317-6671 from outside the U.S. The PIN is 1876799.

About CynergisTek, Inc.

CynergisTek is a top-ranked cybersecurity and information management consulting firm dedicated to serving the healthcare industry. CynergisTek offers specialized services and solutions to help organizations achieve privacy, security, and compliance goals. Since 2004, the company has served as a partner to hundreds of healthcare organizations and is dedicated to supporting and educating the industry by contributing to relevant industry associations. The company has been named in numerous research reports as one of the top firms that provider organizations turn to for privacy and security, and won the 2017 Best in KLAS award for Cyber Security Advisory Services.

Forward Looking Statements

This release contains certain forward-looking statements relating to the business of CynergisTek that can be identified by the use of forward-looking terminology such as “believes,” “expects,” “anticipates,” “may” or similar expressions. Such forward-looking statements involve known and unknown risks and uncertainties, including uncertainties relating to product/services development, long and uncertain sales cycles, the ability to obtain or maintain proprietary intellectual property protection, market acceptance, future capital requirements, competition from other providers, the ability of our vendors to continue supplying the company with equipment, parts, supplies and services at comparable terms and prices and other factors that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected. Certain of these risks and uncertainties are or will be described in greater detail in our Form 10-K and Form 10-Q filings with the Securities and Exchange Commission, which are available at http://www.sec.gov. 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.