Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Good day everyone and welcome to the Auxilio Second Quarter 2017 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Mike Cole, MZ North America. Please go ahead.

[Mike Cole:]

Thank you, Operator. I want to welcome everyone to Auxilio's second quarter 2017 earnings call. Joining us today from the Company are Mr. Joe Flynn, Chief Executive Officer; Mac McMillan, President and Chief Strategy Officer, Mr. Paul Anthony, Chief Financial Officer; and JD Abouchar, Chairman of the Board. 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 on the Company's SEC filings. Auxilio 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 now turn the call over to Mr. Joe Flynn. Joe, the floor is yours.

[Joe Flynn:]

Thank you, Mike, and thank you everybody for joining today's call. We had a great first half and during the second quarter we made considerable progress on several strategic initiatives we laid out earlier in the year. Our core objective was to combine Auxilio and CynergisTek to leverage one another strength, enabling us to provide customers with a complete end-to-end security and document service offering of the highest quality and that is exactly what we've done. There's no doubt that healthcare executive are finding it increasingly difficult to secure the resources necessary to both identify and remediate potential security threat to patient health information as it travels across the enterprise. Strong demand for great security can be evidenced by the fact that we closed several new multiyear contracts during the quarter with several others in the latter stages of negotiation. On the other hand continued uncertainty around the Affordable Care Act and future healthcare legislation efforts in Washington are causing some hesitation and extending sales cycle across the industry. We have mostly seen this affecting our equipment revenues where customers delayed some scheduled purchases during the quarter. Fortunately, many of the services we provide are in urgent demand and are viewed as an absolute necessity regardless of the end result in Washington. When we made the acquisition of CynergisTek earlier in the year, one major growth opportunity our teams collectively identify was the potential to expand in security remediation services. After performing a security audit for customers, we had persistent demand to provide expertise and manpower necessary to implement our recommended plan of action. We have been investing heavily in the build out of this line and it is great to see that investment beginning to bear fruit. A couple of weeks ago, the Company announced our first major win for this service offering, a multimillion dollar contract with a nationally recognized health system. While it is still early, expectations are high that this could be a significant growth driver for years to come. While those outside industry may not fully realize the benefit the fact that CynergisTek recently won a prestigious award from the peer review organization known as KLAS is of great significance. We're undoubtedly seeing an increased level of interest in our security services as a result, especially from the larger health systems where that recognition has helped us get our foot in the door. Healthcare security is a business built on trust more than any other and speaks volumes about the CynergisTek brand when we're ranked above competing Fortune 100 Companies by our healthcare customers. As mentioned on previous call, 2017 is an investment year. We're expanding and enhancing our sales and delivery organizations to take advantage of the demand for our services. As a result, the front end of the pipeline continues to strengthen for both our security services and document services offerings. Some of those prospects on the managed document services side continue to move more slowly due to legislative issues in Washington, but we're undoubtedly seeing tangible benefits from the investment to bolster our sales capabilities. We're also seeing material traction in our cross selling initiatives as those prospects are now maturing through the sales channel. On that note, our managed document services team will be onsite in the next few weeks of a major CynergisTek customer performing an assessment. We expect cross selling initiatives to increasingly translate into new business opportunities in the back half of the year and into 2018. To recap the quarter, there is certainly a great deal to be excited about, but like any business there will be occasionally challenges. We've done an excellent job putting the right team in place and build the right operational infrastructure around them. I can honestly say, my view of our combined potential continues to grow with time and I am excited to see a number of the initiatives we put in place earlier this year gaining traction. And at this time I'll go ahead and hand it over to Paul who will cover the financial portion and then we will open it up for Q&A after that.

[Paul Anthony:]

Thank s, Joe. For the three months ended June 30, 2017, the Company reported revenues of $16.8 million, an increase of 10% when compared to $15.2 million reported in the prior year period. Equipment sales were $0.5 million in the second quarter of 2017 compared to $0.9 million in the second quarter of 2016. While equipment sales are ancillary to our core business not a material profit center, we have seen customer refresh plans to lay with customer citing legislative uncertainty in Washington. Cost of revenue for the three months ended June 30, 2017 was $12.4 million compared to $12.1 million. The increase is attributable to the increase in revenues. Gross profit for the second quarter of 2017 was $4.4 million or 26% of revenues compared to $3.1 million or 20% of revenues for the same period in 2016. The increase is due to higher gross margins on the professional services delivered by CynergisTek. As we have discussed previously in the managed document services business, we expect to see a decrease in gross margin over the balance of the year due to the customer turnover. Operating expenses for the second quarter of 2017 were $3.8 million, an increase of $2.4 million in the same period a year ago. Sales and marketing expenses increased by 88% in the second quarter to $1.4 million due to the addition of the CynergisTek sales and marketing teams. G&A expenses increased 50% to $2.5 million. Increase in G&A was also attributed to the CynergisTek acquisition and the absorption of this business. Operating expenses for the quarter included approximately $150,000 of non-recurring expenses relating to severance integration and acquisition expenses. The Company reported income from operations of $0.5 million for the three months ended June 30, 2017 compared to $0.7 million in the same period of prior year. Net income was $0.1 million for the three months for the three months ended June 30, 2017 or $0.01 per basic and diluted share compared to net income of $0.6 million or $0.08 per basic and diluted share in the same period of 2016. Non-GAAP adjusted earnings per share for the second quarter was $0.08 per basic and diluted share after adjusting for the amortization of intangibles, stock based comp and depreciation of $1.3 million compared to $0.12 per basic and diluted share after adjusting for amortization of intangibles stock based comp and depreciation of $0.5 million for the same period 2016. Adjusted EBITDA when adding back stock based comp was $1.2 million in the second quarter of 2017 compared to $1 million for the same period of 2016. At June 30, 2017 deferred revenue was $1.7 million up from $0.6 million at December 31, 2016. The Company had $2.8 million of cash and cash equivalents at the end of the quarter cash used for operating activities for the six months ended June 30, 2017 were $1.3 million compared to $1.6 million during the same period of 2016. The decline being attributable to the timing of AR collections and approved expenses associated with the CynergisTek acquisition. The Company maintained a line of credit with a commercial bank of $5 million subject to borrowing base limitations, credit line currently has no outstanding balance. This concludes the financial portion. Operator, please open the floor for questions.

[Joe Flynn:]

Operator, before we go to questions, I just want to make a comment with regards to the Friday morning call. We don’t usually do Friday morning call. We usually do them at the closing market during the work week, but given travel schedule this week, we were forced into this timeframe. So, we will get back to normal schedules as we do our further calls going forward. So, with that, operator I’ll handed it over to your for Q&A.

[Operator:]

[Operator Instructions] We'll take our first question of day from Matt Hewitt with Craig-Hallum Capital.

[Matthew Hewitt:]

First question, regarding the remediation of offering obviously congratulations on the first -- the first big one there, I’m wondering if you could give us a little bit color on the pipeline and the opportunities there. And then maybe help us understand to how from a deal size perspective, if there is a range or something we should be thinking about as you move further into that market?

[Joe Flynn:]

Yes, the remediation business is in significant demand across the board, really driven by the lack of resources in the marketplace for especially the medium size health business where they really can’t find that talent. But if you were look at our existing customer base, we see a significant opportunity to sell those services as they're in search of that talent. Mac, maybe you can add a little more color as to where do you see this going from the standpoint of demand in the marketplace?

[Mac McMillan:]

Sure. And then actually, Joe, we’ve seen demand across the spectrum.

[Joe Flynn:]

Okay.

[Mac McMillan:]

So, with the smaller and the midsized hospitals out there that they have trouble filling positions, sometimes they're in locations that it’s hard to recruit somebody to those locations or they just are not willing to pay the cost of getting a qualified piece of in a role. And so, they’re looking for more of a virtual role that they don’t end having to incur all of the cost and it’s much more acceptable to them. But we’re also seeing in a lot of our very large customer as well, but it’s a little bit different scenario. And in our large customers, lot of the times they have restriction on growth at their FTEs. And so, they can’t go out and hire more people but they’ve got plenty of consulting dollars, operational dollars as they can throw towards consultants. So, they fill those gaps and they fill those voids in their staff, staffing or with consultants as they can hire from us or from others. And we’re also seeing more prescriptive staffing requirement or remediation requirements, if you will from those larger customers, so they’re asking the people with a particular expertise to do a particular project for some period of time whether it’s a six months or year. So, if the requirement changes, we’re actually seeing the need for people with skill across the spectrum of customers.

[Joe Flynn:]

Yes, Matt with that we put some resources towards that. We hired somebody to specifically run that business for us. We’re looking at nearly adding some more another recruiter or two to help us really go after those opportunities as our sales teams that brings them to us from our existing customers as well as from new customers in the marketplace.

[Matt Hewitt:]

And then as far as normalized deal size or a range that we should be thinking about?

[Mac McMillan:]

So, it really depends on the length of the duration of the, the time that they want to resource, but right now we’re seeing those deals range from around a quarter of million in up depending on the number of months that they want that person.

[Joe Flynn:]

On an average basis.

[Mac McMillan:]

And the nice thing is what we’re seeing right now at least is the margins on that business are much better than it’s been expected. And primarily because there is such a need for the resources and the skill set and they are so very difficult to find that we’re not having to place individuals at the normal IT staffing rates that a lot of the outfits out there are doing. They are actually looking at these as more specialized resources to perform something that's very difficult for them to get their hands on.

[Matt Hewitt:]

Following up on your comments regarding the delays or the uncertainty regarding the ACA and the delays that you saw for the equipment, how -- I'm struggling in this and I am trying to figure out how the delays or uncertainty with ACA affects the hospitals decision whether or not you renew or refresh printers? Or what have you maybe a little bit of color there would be helpful?

[Joe Flynn:]

Yes, what we're seeing in the marketplace is some hesitation around capital outlay, and especially with some of our larger clients when you're talking about large fleets of equipment and the hospitals are sort of taking a step back and looking at their expenses right now and they're trying to figure out what their budget is going to look like next year specifically around revenue coming to them. If the reimbursements in Medicare and Medicaid change again then that's going to impact. And so there's some hesitation and some difficultly from our client side in creating budgets going into next year and I think that's impacting capital outlays like equipment. Mac, do you want to add some color to that?

[Mac McMillan:]

Yes, I think that's really what it comes down to. It's a combination of watching what's going on with respect to ACA and how that's going to really impact their reimbursement. A lot of these hospitals in some of these states are very reliant on Medicaid, Medicare reimbursement as part of their deal mixes in terms of their revenue. If something happens with ACA gets to repeal -- if the insurance plans go away and all of a sudden we've a large influx of individuals who no longer have insurance who start showing back up at emergency rooms were the hospitals are forced to take care of them and without being paid for that service, this is the real concern that a lot of these hospitals have. So a lot of the CIO's have expressed that -- it's not that they've less money but they're actually saving some of their money. They're creating war chests, waiting to see what Washington is going to do. And I think what this is going to do in some respects or could do, it's going to be a very interesting fourth quarter perhaps because all of a sudden they're going to get to the end of the fourth quarter, if something doesn't change with ACA, now they're going to have money in their budget that they're going to need to spend. But that's the real concern of most of these folks is that ACA is somehow going to be affected, Medicaid is going to affected, it's going to affect their reimbursements and that means they're going to have more cash on hand to satisfy the needs of those patients who are going to show up without insurance.

[Joe Flynn:]

And so it relates to management document solutions in this copier or printer equipment, if it's not a revenue producing asset, it's not -- the dollars just not getting allocated to those type of capital items.

[Matt Hewitt:]

Maybe one more from me just want to make sure I heard this correctly. As far as gross margins are concerned obviously a great second quarter aided by the CynergisTek acquisition, sounds like some of the investment and a couple of other things will impact gross margins in the second half of the year. How much are you anticipating those falling back and then obviously is it fair to assume strong lift as we get into next year? Thank you.

[Joe Flynn:]

We're definitely going to feel the impact of some of the turnovers on the MDS side, and we'll start to work to try to mitigate whether that's on the support side as well as on the direct margin side. So we're expecting probably two to three quarters minimum of impact, as we go, we're not giving guidance necessarily on how much that impact is and we're still early in understanding how we're going to be able to perfect the support network part of the organization. So -- but we do anticipate it extending for a few quarters.

[Operator:]

Next is Andrew D'Silva with B. Riley.

[Andrew D'Silva:]

Good morning, guys. Thanks for taking my call. Just a few quick questions. Can you like just help me understand the year a little better? I suppose now that you have CynergisTek and at least you got a little bit of time to understand their seasonality. Is it looking like it's going to mar MDS historically as far as fourth quarter being the strongest period in the year and then third quarter being flat to up from the second quarter?

[Joe Flynn:]

I would say at least from my perspective, we're still trying to get our head around that as to how the two businesses compare. I do know that in the past CynergisTek has seen some stronger Q4s as people are may be deploying some dollars towards the consulting or other areas as well as some product resale type activities in the security space. So, we do anticipate that there is going to be some seasonality, but again I'd say we're still learning kind of what -- how that's going to look and how it directly compares to the MDS business. Remember, MDS is really more of a volume base seasonality associated with paper, which really a lot of that drives around budget seasons when they are doing work on, on creating budgets and such and so.

[JD Abouchar:]

Yes, I am going to add a little color. With the investment that we've made in expanding our sales force which is really just sort of got finished here in the last 50 days or so where we have full team in place. We're starting to see the pipeline in both of the businesses increase significantly, as to when they actually close, those deals actually closed given some of the lengthening in sales cycle. It's hard to determine, but I mean we're very optimistic with the investment we made in integrating the sales and marketing organizations to really go after those cross selling opportunities as well as building that pipeline. And that's really where we're focused is, build the pipeline, so we can build growth on this business over the next year -- over the next couple of years. So that's really where we're focused right now.

[Joe Flynn:]

And we did have a short term impact with a large customer from CynergisTek that kind of pivoted with their service offering. I'll let Mac kind of highlight that.

[Mac McMillan:]

Yes, so one of our largest customers actually at the end of reviewing the results of their -- of our initial baseline assessment of their system which was little over 50 hospital in a region basically came back and said wow, we have so much remediation work that we need to do. We think we need to basically change the focus of this -- of our partnership with you and go more towards your remediation services line as opposed to staying in right now focusing on the program. As a result, that actually gave a boost to our remediation services as we were kicking it off, and it actually ended up in being a much larger revenue driver from that particular customer than have we just been in the normal cap mode as we have a lot of our customers in. Now, we expect next year that that customer is going to come back to us and resume that business as well. So, actually at the end of the day, it will turn out to be a real plus all the way round because it would have generated more revenue in a shorter period of time, number one, with pivot towards remediation. But number two, it will long term provide and even larger footprint as they return back to their program focus as well.

[Andrew D'Silva:]

Okay that’s great to hear. That seems like an opportunity you guys can capitalize on with multiple distinct customers. Is there a typical contract length for the remediation business and then maybe you help me think about how that’s going to change your gross margin structure on the CTek side of being -- I believe we were thinking 50% previously. Is that still the range right now we should consider as the remediation business continues to grow in there?

[Joe Flynn:]

Maybe I’ll take the first part and then I’ll hand it to Mac for the -- I mean the second part and then Mac take the first part. But I don’t think the remediation business necessarily is going to change the margin profile. It is going to come in at strong margins. The thing now with this remediation services business, it’s a direct revenue to resource relationship where our traditional cap business or managed service business, we can leverage the staff across multiple clients, and so, that’s what ultimately drive some of the higher margin. So if anything what we are seeing is that the remediation or strategic sources is allowing us to maintain those margins if the pricing is able to maintain what we've seen at this point.

[Mac McMillan:]

So the typical -- I’d say the median if you will in terms of remediation projects or support is around six months, so think of it 6.5 of an FTE is easily around six months. But one other things that we have experienced now with these remediation and strategic services by offerings is that once they get in there especially with the larger systems, they tend to get extended and expended. So we have had multiple projects where we put a consultant onsite for six months to do something and they didn’t come back for another 18 months. So that’s one of the things that we’re hoping that as this grows and we get more and more resources placed in these hospitals around the country that that’s exactly what they will do. They will follow the level and then the next thing you know those projects will just be continuous and we grow larger than even the initial projects.

[Andrew D'Silva:]

Okay, got it. Last kind of grouping a question I suppose. As far as this expense line goes for the second quarter, any one-time expenses? And then relative to what we should be thinking about on go forward basis, should it be fairly stable now that you have added the needed overhead for some of these new initiatives or should we expect that to increase? And then tying into that, how are you finding some of these remediation employees that just seems like it's maybe -- that’s probably the secret sauce or the challenging aspect of what you are trying to do right now, maybe more so than anything out?

[Joe Flynn:]

Okay, I can split with Mac again. The first part at least as we mentioned, we look at about a $150,000 in the current quarter and I think it was approximately $400,000 for the year-to-date. The expense is specifically related to severance and acquisition and integration related expenses. I do believe we still have more of those expenses coming throughout the quarter. I would expect each quarter for them to come down a little bit. And then from a run rate perspective, we are not expecting necessarily any major increases. I think we’re probably going to level out at about where we are, but as we start to see the business grow on the security side, we would and the MDS side, we would expect to add sales resources as the business grows. So, one of the areas that -- one of the questions that you have with regard to resources and I’m sure Mac will add some more, but we are looking at a number of things. Number one being, adding some more recruiting talent in-house, we have a couple of people, one person in particular now focused on the security. We may add another resource who has specific expertise and grow with access around people in the industry that they know, people they work with around security as well as recruiting heavily from veterans organizations. Mac and I actually had in a case and to meet last night with the university here in Southern California, tie to veteran organization who are getting people out of the military who are processing out, finishing their degrees that have significant amount of cyber security expertise and then helping place them. So that's one area. And I know Mac has seen many other opportunities in the market.

[Mac McMillan:]

Yes. So it a combination of our own internal recruiting efforts, and as Joe said, there are multiple universities around the country that are -- other that are interstate centers of excellence or have contracts with or grant money from the government to create cyber programs and unfortunately we get to and speak at lot of those universities to their students in those graduate programs, which creates an opportunity for us to recruit some of those. In fact, I think two of the last folks that we hired actually came out of those programs. So, it’s a good source of individuals who are transitioning in their career either from IT to cyber security or from military to cyber security and giving us access to those folks. We also support the program called Cyber Warriors which is a program that actually begin teaching youngsters, cyber security skills as early as great school all the way through high school and then into college. And that two gives us the ability to tap into people who are moving into this career profession. And then the last but not least, because of our presence in the market, fortunately we still have lot of folks who are coming to us, who are looking for an opportunity to work with the Company that has a good reputation in the industry with respect to cyber security. And so, knock on wood at least for the moment, we have had really great success at finding good people and being able to find them what we need them.

[Operator:]

And we’ll take our next question Jeff Bash with General Pacific Partners. Please go ahead.

[Jeff Bash:]

In 2016, the Company had over $3 million of EBITDA on its management services business and in connection with the acquisition you said they had $5 million of EBITDA in 2016. That makes for an $8 million total of historical reference for 2016 versus $2 million for the first six months of this year. At least the two questions, is the acquisition meeting your performance expectations? That’s the first one. The second, correct that your regard this apparent decline and EBITDA profitable is more temporary or permanent for your comment that quote the benefits to these investments will becoming increasingly apparent through the balance of the year and growth and your comment today about the two to three quarters for gross margin effect?

[Paul Anthony:]

Jeff, I'll start I guess with the first part of it and let Joe add some color, if he'd like. We definitely from the integration aspect as well as some of the discussion we had about one of our larger customer on the security side, pivoting to an alternative model, we definitely saw some shortfall in the first couple of quarters on the security side which was a direct hit to the gross margin since there were lot of labor changes to that. So we're definitely looking for an improvement as we move into the rest of the year into next year. We have seen as we've mentioned a reduction in EBITDA associated with the MDS business as a result of the turnover that we saw and have indicated in the past. So those were the primary drivers. We definitely are looking for as part of a quicker integration than had been originally planned, especially in the sales and marketing side of the business, we're looking for those efforts to start to materialize into additional revenue and additional MDS deals and cross selling opportunities. So, we're definitely looking to try to uptick as we head out of the year and into 2018.

[Joe Flynn:]

Yes, I would just add to that to Paul. There were some delays in the early part of the year from the transition of net large security customer. But I will tell you that, we know and one of the reasons why we integrated sales and marketing as quickly as we've as we see a tremendous opportunity for cross selling and an opportunity to grab more market share especially on the MDS side. Now that's going to take long -- that's going to take a little longer as we know the sales cycles there are long. We do see some benefits coming right now as I mentioned in my opening remarks about one of the CTek's largest and longstanding customers already very interested in our MDS services. We've a number of meetings and opportunities that we're rolling out to their CTek customer base to drive revenues on the MDS side, and we're going to be very aggressive about that going forward. So, like I said we're very focused on how to build, how to integrate these two organizations together quickly as quickly as we can and then build that revenue base as fast as we can and that's where really where we're focused right now.

[Jeff Bash:]

In piece sensation earlier in the year you had added a slight of -- not a forecast a goal of 150 million revenue in five years. Do you think that that's slipped at this point or you still think that the market opportunity offers that kind of possibility?

[Joe Flynn:]

There's no question that the market opportunity provides that opportunity. In other words, the market opportunity is out there. We still have very low market share even in the security side. CTek probably has only about 10% of the overall market. On the MDS side, it's less than 5%. So, it's a matter of execution, it's a matter of presenting to the market the needs of -- meeting the needs of the market, understanding those needs. So I'm still optimistic about getting to $150 million in revenue by ramping up the sales and marketing organization and that takes investment on the front end. But by ramping it up and going after it aggressively, we feel it still out there for us, whether it's five years, who knows, but I think it's reasonable to think that we can get there in five years.

[Jeff Bash:]

And lastly you had mentioned the delay in business equipment -- copier equipment sales but from my perspective that's no big deal since your margins and those are insignificant. What I am more interested in is why would the ACA have an impact on getting new managed print service deals? Isn't saving money always a priority and…

[Paul Anthony:]

Yes, you would think so. We've always said this and it hasn't changed unfortunately since we started the business many, many years ago. The MDS contracts are large contracts where multiple stakeholders are involved in the decision making inside of a health system. Our customers are not for profit organizations much of their decision making is a political decision or it's sort of all over the place from the standpoint who actually makes the decision. So, these -- it's much longer sales cycle and given sort of the uncertainty in the marketplace even though there is savings opportunities because of these capital outlays and commitments to long term contracts that's where we're seeing some of the delays. And Mac, you know, you've experienced this as well.

[Mac McMillan:]

Yes, and I think to help explain a little bit better and it's not just affecting the printer hardware, it's affecting all of those kinds of purchases across the hospital. We're seeing hospitals delay refreshing their hardware in terms of servers, workstations et cetera. We're seeing them delay upgrading or refreshing medical devices and other kinds of devices in their environment. And unfortunately, all of this creates a greater cyber risk for all of these facilities. And in fact, we've seen incidence occur as a result of unequated hardware, unequated software -- software or hardware that's no longer supported by the vendor because the hospital is trying to get just one more mile out of it or one more year out of it. They try to delay some of these costs and refreshing this equipment again trying to figure out what's going to go on and are they going to need that money for something else. So, it's I think there is a -- I talked to CIOs all time and a lot of them are expressing that the boards and leaderships of these hospitals are just a little bit nervous about outlaying cash and for things like quite frankly, they can perhaps get a little bit more trade out of. So, I think that's really what effects the equipment.

[Paul Anthony:]

Yes, exactly right. The document management is right in that sweet spot for them in terms of equipment or decisions that they can delay versus doing something new.

[Mac McMillan:]

But your point is well taken, they are very interested in saving money and the client that Joe referenced a minute ago, we have as you know CynergisTek -- on the CynergisTek, we have many client relationships that go over 15 years. And some of those clients and the one he was talking about is one that we've had for over 15 years, and that's exactly even though they pretty much thought that their printer fleet was being managed pretty efficiently. They were still very interested in having us come in and take a look and finding ways that they could be even more efficient with it. So, I don't think that they have totally abandoned the desire to obviously look for those savings, but they are just going to be little bit more cautious I think as they approach that.

[Mac McMillan:]

And Jeff we're going to be much more aggressive ramping up this cross selling effort and getting everybody on the sales side, which we had a big meeting about last week, very focused on that effort, going to be a major initiative for the sales organization to drive that cross selling efforts, so we can grab to that market share and that opportunity.

[Jeff Bash:]

Good. And my last question is for Mac. I scratch my head about whether this is a good business to be an as an owner of the Company and I am still not a 100% sure, but I am wondering have you pursued or thought much about the possibilities of bringing of expertise to other markets besides the hospital market or a healthcare generally? I mean, is there any application that you can think of have you thought about it much?

[Mac McMillan:]

We have thought about it and in fact we actually do entertain other clients and other verticals. We don’t typically advertise or market so to speak actively to other verticals because healthcare has been such a wide open market for us and still have an incredible amount of runway out there I think for those of us in this field. It certainly the one that has the most motivation right now because of the threat posture of the industry and by virtual how far behind it is compared to others. But we do business with financial institutions, we do business with tech companies, we do business with the entertainment industry, we do business with the leisure industry, we do business with lot of other verticals out there.

[Jeff Bash:]

How about government?

[Mac McMillan:]

We have not done business with the government. And primarily we -- those are the decision that I made early on, we founded CynergisTek that is not something that we couldn’t reconsider. But the challenges in doing business with the government it's a very prescribed business model, it's the totally different financial structure in terms of how those contracts have to be managed from an accounting perspective et cetera. The margins on it are much lower as well, but obviously the contract values can be much larger. But there is a tremendous runway for a company that hasn’t been in the government space to actually to get in that space and become attractive, because as lot of things that in terms of the model that would be very different than the model we have in the private sector. So as you may know the work in the government side is very much relational based and so there is just a lot that would have to change to do that.

[Operator:]

[Operator Instructions] And we will now go to Bill Sutherland with the Benchmark Company. Please go ahead.

[Bill Sutherland:]

I just want to square a couple of things between the couple of comments on the press release that what you guys have been talking about. So I understand the reference to strategic remediation deal in the press release a multi-year, multi-million dollar deal of the system. Is that going to ramp gradually across your system because I am trying to commentary about the average size of these deals being a quarter of millions in six months? I wasn’t sure kind of how to square that that information?

[Joe Flynn:]

Mac take that.

[Mac McMillan:]

Yes, so let me explain that. So, when I say the median size of -- it could be what happens when we get requested for a remediation asset, the most often model that we get requested for is somebody for six months. I mean they typically don't -- it's very few of those deals are 90 days or a year and they're typically most of six months. And then what happens is like I said the resource gets in there, they get comfortable with the person, they're doing good work and next think they've got another project form, and another project form and that six months continues to ramp up. The customer in the press release that was referenced and that we talked about earlier was a customer that we had a large system that we had gone out and done an enterprise level base line risk assessment for across all of their hospitals and had identified a very large number of remediation projects that they needed to perform in order to get their program up to the level that it needed it to be. And they had initially entered into our cap program and then plan was at the time by the CIO and the key privacy officer was to over a period of years get to that level. But the Board had a different idea, the Board basically said you've got 18 months to knockout all these items, which threw them kind of sort in a tailspin for a couple of minutes and they basically responded and said okay, well, if we have to get all this work done that quickly then we're going to have to ramp up our remediation efforts, so we need to change our focus from gradual improvement in the program for now and really attack this remediation. So they came back to us and they said, can we change the nature of our contract with you that we have right now and shift more to remediation. And we literally went from zero to -- what I say zero to 60 with that client because we literally went from zero to eight almost full time resources at that client. So that particular remediation project which like I said involves eight different resources that are onsite with that client as we speak, quickly ramped over $2 million in revenue.

[Bill Sutherland:]

Can you give us some sense of when you say double-digit new client wins? Kind of curious kind of the relationship that is to the base you have, just to get a feel for it, how much growth that represents?

[Mac McMillan:]

So, typically our ratio say over the last several years has been somewhere between 30% and 40% of our net bookings for the year being net new client. And just one other things that we track and we watch very carefully, we try to -- we always want to be somewhere in that 30% or higher net new clients, so that the business continues to grow while we're growing the existing accounts. So the other 60% comes from growing our existing relationships with the client. So this year I think we're -- if I remember correctly, I think we are really right on track with where we need to be. And in the last quarter, we actually saw more new clients than we saw in the first quarter.

[Bill Sutherland:]

And then finally, Joe on MDS, you had a couple of non-renewals at the end of last year that you have commented on and you have some significant claims in the pipeline. And I just -- and maybe you did at the opening because I got on few minutes late, but what’s the status of kind of coming back from the whole credit by the non-renewals on that side?

[Joe Flynn:]

Yes. We are -- we are -- like I mentioned earlier, there is a couple of avenues that we’re taking. Number one, we’ve got a few significant deals in the pipeline that we’re hoping to close out here over the next say 90 days or so, 90 days to 120 days. In addition to that, we are aggressively going after the cross selling opportunity, is that really is where the immediate pipeline opportunity for growth for MDS business is and the initial conversation and the initial meetings we’ve had with the synergistic customer base have yielded some decent size opportunity. And so, our goal here in the next six months is to make for that revenue -- those revenue losses and get back on track to where we want to be in terms of that 10% annual growth on the MDS business. That’s where we're going to come from an aggressive cross selling effort as an immediate opportunity that we’ve got right now.

[Bill Sutherland:]

So you think you could actually see some results in the fourth quarter?

[Joe Flynn:]

Yes, I would say fourth quarter, but really into the first quarters and second quarters of next year given the length of the sales cycle and that we’re seeing.

[Bill Sutherland:]

And Paul, one number I miss when you were talking of revenue, the equipment revenue number in the quarter?

[Paul Anthony:]

About $0.5 million.

[Bill Sutherland:]

$05 million, okay. Thanks everybody.

[Operator:]

And there are no other questions. So I’d like to turn it back to Joe Flynn for any additional or closing remarks.

[Joe Flynn:]

I just want to thank everybody for joining the call. And appreciate all your continued following and sponsorship of the Company. And wish you all happy safe week again. Thank you.

[Operator:]

And thank you very much, that does conclude our conference for today.