Q4 2016 Earnings Call Transcript

Published: 27 Mar 2017

[Operator:]

Good day, and welcome to the Auxilio Inc. Fourth Quarter and Full Year 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mike Cole, MZ Auxilio's Investor Relations Firm North America. Please go ahead, sir.

[Mike Cole:]

Thank you, Operator. Good afternoon, and welcome everyone to Auxilio's fourth quarter and full year 2016 earnings call. The associated press release has been submitted and should be on the wire shortly. Joining us from the call today are Mr. JD Abouchar, Chairman; Mr. Joe Flynn, 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 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. Hello, and thank you all for joining the call today. This period has been one of the most transformational times in the company's history, and it was great to end 2016 on such a strong note. Less than a year ago, we shared ambitious goals to list our shares on a major exchange to significantly expand our healthcare IT security business to obtain self-side analyst coverage along with a host of operational objectives we identified, all with the goal of maximizing shareholder value. We had a great plan and our team delivered above and beyond expectation, and it is great to see the stock price starting to reflect that hard work. We will continue the trend of investing in our future in 2017 as we seek new ways to leverage our existing presence within major healthcare systems, offering customers secure, cutting-edge document and data management services. A security threat that healthcare institution space continue to evolve, and we are increasingly seeing demand from customers for what we refer to as, "Data in the Right Form," meaning the way patient health information is obtained, transferred and stored is all done efficiently and in an optimal manner from a security perspective. These protective measures are no longer being layered on after the fact we are being intertwined at the offset, and this is obviously a trend that we are excited about. There are number of large document solutions contracts in our sites, and I cannot emphasize enough how much the expansion of our security services capabilities via the acquisition of CynergisTek has improved our ability to compete for this new business. Being able to bundle best-of-breed security services on top of our expertise and driving cost and efficiencies out of the document and patient information, logistical chain has proven invaluable. This is the key factor in the recently announced multimillion dollar contract win, and there are other prospects entering the pipeline with similar needs. Most of our competition traditionally comes from major device manufacturers and they simply do not view themselves as a complete end-to-end service provider, inclusive of a security component. It is just not the nature of their business. As it stands today, we are the only name in the space that can wrap security services around all the places Patient Health Information or PHI resides, including printed, storage, and digital documents, that is increasingly becoming a significant competitive advantage. One operational objective laid out early last year was to identity and invest in ways that could reduce the volatility of margin during the implementation phase with new document management customer. As many long-term shareholders know, taking on a large new client could historically cause as much as a 5% to 6% decline in the overall gross margin for the first quarter or two. As we began exploring potential options to mitigate this impact, we were able to identify new ways in which we could utilize technology to reduce labor costs, while also improving the caliber of services provided to our customers, while we still experience a certain degree of margin pressure during this phase, that should be far or less pronounced going forward. Over the last several years, our resources were dedicated to establishing market share and developing entrench relationships with our customer. While we are still operating in that regard, we now also have the bandwidth to go back and invest in driving costs out of our process, and that will remain an ongoing objective through the balance of the year. The early initiatives associated with the acquisition of CynergisTek remain on track. The greatest potential advantage of this combination is a cross-selling opportunity, which we are extremely excited about, especially given the demand we are seeing from new customers for bundled services. This will continue to be a major priority, now that we have worked through the integration of our sales and marketing teams. These things do not happen overnight, we have to be realistic about the timeline to success, but it is undoubtedly a major opportunity. The recent class award naming CynergisTek best-in-class for cybersecurity advisory services is also helping drive new business into the pipeline of further strengthening the brand. We will be investing heavily in building out additional bandwidth at CynergisTek and see continued strong demand for security on both the standalone and a bundle basis. All things equal, we continue to expect great things ahead, and in 2017, we will see further investment in our future, as is typical in the healthcare industry, both document solution and cybersecurity offerings experience seasonality, with the first quarter on the lower end, then the business ramps throughout the year with the fourth quarter typically being the strongest. This has traditionally been the case and we expect 2017 to be the same. Some of the new contract wins in the document solutions business will be partially offset by the loss of customers up for renewal, a normal part of business, as we mature and grow our footprint in the market. In addition, while we have taken steps to improve profitability with new customers in the document solutions business, margin pressure for that segment in general continues. The impact of this on the financials will be countered to a degree by the strong profitability in IT services, and this is exactly why we have been leveraging our brand and adding these types of higher margin and revenue streams. That being said, there is no doubt that we remain very excited about the document solution business as a whole, and as I mentioned before, the ability to wrap security services around these offerings only enhances the opportunity for growth over time. I will now go ahead and hand it over to Paul to review the financials for both the fourth quarter and the full year. Please go ahead, Paul.

[Paul Anthony:]

Thanks, Joe. Before getting started, I want to remind everybody that I will be reviewing 2016 financials, which will not reflect any impact from our acquisition of CynergisTek in January 2017. For the three months ended December 31, 2016, the company reported revenues of $16.2 million, an increase of 1% when compared to $16.1 million reported in the prior year. The company services revenue decreased approximately $0.2 in the fourth quarter of 2016, due to reductions in the cybersecurity professional services at Redspin. Equipment sales were $2 million in the fourth quarter of 2016, compared to $1.6 million for the fourth quarter of 2015. Cost of revenue for the three months ended December 31, 2016 and 2015 were $12.5 million, compared to $12.6 million, a decrease of approximately 1%. Operating expenses for the fourth quarter of 2016 were $2.4 million, flat from the same period a year ago. Sales and marketing expenses increased by 185 in the fourth quarter to $0.6 million due to expanded marketing activities, and general and administrative expenses decreased 9% to $1.7 million. The decrease in G&A was primarily attributable to a higher expense in the fourth quarter of 2015 due to severance-related cost from a reorganization and integration of the security businesses that were purchased. The company also incurred a $2.6 million impairment charge in the fourth quarter of 2016 related to its intangible assets and goodwill acquired with the Delphiis and Redspin acquisitions. The company reported an operating loss of $1.3 million for the three months ended December 31, 2016, compared to operating income of $1 million in the prior year with this decline largely being attributable to the $2.6 million impairment charge. The company also recorded a $5.1 million tax benefit related to the removal of a previously recorded valuation allowance against our deferred tax assets from NOL carry-forwards given the increased likelihood they will be utilized, compared to $0.2 million income tax expense in the fourth quarter of 2015. Inclusive of these impairment charges and tax benefits, net income for the three months ended December 31, 2016, will be $3.8 million or $0.47 per basic and $0.46 per diluted share, compared to net income of $1.5 million or $0.18 per basic and diluted share in the same period of 2015. Excluding $0.1 million in charges related to stock-based comp and $2.8 million in amortization and impairment of intangibles, we achieved adjusted income from operations of $1.5 million in the fourth quarter of 2016, or $0.18 per basic and diluted share, compared to an adjusted income from operations, after excluding charges of $0.1 million in stock-based comp and amortization of intangibles of $1.2 million or $0.14 per basic and diluted share for the same period last year. For the year ended December 31, 2016, the company reported revenues of $60.2 million, a decrease of 2% compared to $61.3 million reported in 2015. The company added approximately $3.2 million of services revenue with net new recurring service revenue contracts being partially offset by reductions from existing customers related to pricing, sales volumes, and non-renewing contracts. In addition, the company experienced a decrease of $4.2 million in equipment revenue, compared to the same period in 2015. Cost of revenue for the 12 months ended December 31, 2016 was $47.9 million compared to $50.7 million for the same period in '15. In 2016, we incurred approximately 200,000 less in staffing costs, which includes contract labor, and approximately $1.3 million of additional service and supply costs. Equipment costs decreased by approximately $3.9 million in '16, primarily as a result of decrease in equipment revenues from copy or fleet refresh activities. Gross profit for fiscal 2016 was $12.3 million, or 20% of revenues, compared to $10.6 million, or 17% of revenues for the same period in 2015. And this improvement is a result of maturing of our customer base and the fact that margins typically improves as contracts age. Operating expenses for fiscal 2016 were $12.3 million, an increase of 28% compared to '15. When excluding the $2.6 million impairment charge, operating expenses were flat year over year. Sales and marketing expenses decreased by 3% in '16, and general and administrative expenses increased 2% to $6.9 million. Company reported operating income of $27,000 in fiscal 2016, compared to operating income of $1 million in fiscal 2015; the decrease again being attributable to the $2.6 million impairment charge. Net income for the 12 months ended December 31, 2016 was $5.0 million, or $0.61 per basic and $0.60 per diluted share, compared to net income of $1.3 million, or $0.16 per basic and diluted share in the same period of '15. This increase again is largely attributable to the $5.1 million tax benefit associated with the NOL carry-forwards being partially offset by the $2.6 million impairment charge. Excluding $0.2 million in charges related to stock-based compensation and $3.2 million in amortization and impairment of intangibles, we achieved adjusted income from operations of $3.4 million in fiscal 2016, or $0.42 and $0.41 per basic and diluted share respectively, compared to adjusted income from operations, after excluding charges of $0.4 million related to stock-based comp and $0.5 million in amortization of intangibles of $1.8 million or $0.23 and $0.22 per basic and diluted share in 2015. At December 31, 2016, the company had $6.1 million of cash and cash equivalents, and working capital of $5.8 million. Cash provided by operating activities for the 12 months ended December 31, 2016 was $0.4 million compared to $2.4 during the same period in 2015, with the decline being attributable to the timing of AR collection. The company maintained a line of credit with a commercial bank for up to $2 million that is since then amended an increase of $5 million as part of the recent acquisition of CynergisTek, credit line currently has no outstanding balance. That concludes my financial overview of the fourth quarter and full year results and while as a subsequent event to the company's fiscal year ended December 31, 2016, I want to provide a brief recap on the acquisition of CynergisTek and we have a number of new investors on the call today. Austin, Texas based CynergisTek was acquired in January, 2017 is a leading provider of cyber security and regulatory compliance consultant services for the healthcare industry. The company was acquired for an initial consideration of approximately $26 million which included $14.2 million in cash, approximately 1.17 million shares of common stock and a seller's note of $9 million. Additional earn-out totaling $7.5 million maybe paid over the next five years, based on certain financial criteria being met, CynergisTek generate approximately $15 million and $4 million in EBIDTA for 2016 and will expand our ability to meet growing demand from our healthcare customers' for comprehensive IT security solutions. As we continue to finalize CynergisTek 2016 financials and convert them to GAAP accounting these numbers may continue to be adjusted, additional details and the transaction can be found in our regulatory filings which I encourage you to review. This concludes the financial portion, at this point, I will hand it back to you Joe.

[Joe Flynn:]

Thanks, Paul. We grew up more excited by the day about this transformative acquisition of CynergisTek and I am certainly pleased with how quickly we were able to integrate the sales and marketing team in order to immediately pursue cross-selling opportunities, we accomplished a great deal in the last year, but we view that as only the first chapter of our corporate evolution with the great deal of work ahead. Thank you all for your continued support, and we will now open it up for Q&A, operator?

[Operator:]

Thank you [Operator Instructions] And our first question today will come from Andrew D'Silva with B. Riley and Company.

[Andrew D'Silva:]

Good afternoon, everyone. Thanks for taking my questions. I got a few here; first off, as it relates to document side of the business, maybe you can give me some inferential data on how large the pipeline looks like right now? And then maybe you could potentially compare it to how it looked around this time last year, and if you are seeing any benefits to the document side of the business, its pipeline through the CynergisTek acquisition?

[Joe Flynn:]

Well, I definitely -- I will answer the last part of your question first, Andrew. We definitely see a much larger pipeline if you add -- excuse me, if you add the opportunities available to us through the acquisition of CynergisTek, those, you know, they have roughly 100 or 120 or so long-term accounts. Each one of them is an opportunity for us, and some of them we have begun discussions with already. So, from that perspective it's much, much larger than we had this time last year. But sales pipeline activity generated from our normal sales channels prior assuming the acquisition wasn't there the still I think pretty robust. We are working on a number of deals now, and I would say it's more or less where it was this time last year, but the addition of the CynergisTek pipeline just gives us a lot more visibility. And in fact we view that as the lowest-hanging fruit opportunity that we have in front of us.

[Andrew D'Silva:]

Okay, that's great to hear. I mean, is it reciprocated the other way, when we start thinking about CynergisTek, are their customers, or your customers that you had interested in that product offering equally to the same extent as their customers are interested in your offering?

[Joe Flynn:]

I would say that they are definitely interested, because our customers are pursuing those services in a variety of forms now. Just to differentiate, our customer base tends to be on the document management side right now, tends to be large, very, very large health system, many of whom have their own security departments. However, they do a lot of outsourced services and around specific functions, and we have begun some dialog with some of those customers about our capabilities around CynergisTek, but those are going to be longer sales cycle and so forth. Most definitely, one of the things that helped CynergisTek situation with the big health systems has been this class award. I would say that before the class award, I would say CynergisTek was well-known, but now this award they have won far and above their competitors in the space, which are typically the large consulting firms like PwC and Deloitte & Touche, who you see a lot in these big health systems. So that award is definitely getting them to the table, getting us to the table much faster to these large places.

[Andrew D'Silva:]

Great, thanks. That was great color on that. Maybe just moving over a little bit to the cost structure side of the business; in your prepared remarks, you mentioned some of the technology that will be implemented on the document side of the business that would hopefully release some of the pressure that you see when your health systems are onboard. Could you maybe in a little bit detail discuss what that is? And then also previously you mentioned that there was maybe a change in the way you are bidding out to health systems, so that you can maybe stagger some of the impact, and maybe an update in the fast-growing [indiscernible] as well.

[Joe Flynn:]

Yes. So, up to this point, really recently in the last 12 to 18 months, there really wasn't technology available to help automate some of the processes that are done by actual people in our document management program. For example, getting meter reads and getting just in time inventory on toner and things like that, that technology was available for network devices, which really only was about 60%, 70% of the total devices we manage. Now it's available through other means, Bluetooth and otherwise to really be able to get that across the entire fleet. And what that does is it allows us to bid these new deals with less labor, maybe 10, sometimes 10% to 20% less labor than we normally would do. And that takes a big chunk out of our spent, I mean, the two major components of our expense are labor and equipment costs. And so, we can control those and bring those down early on, then, we can implement these deals much faster. So that's really what we are seeing, and it's like that's happening in a lot of industry; automation is replacing the need for a human body, and we are not immune to that. And we are certainly taking advantage of it, so that we can drive margin in our accounts You asked me another question, Andrew, and I forgot, so hit me again with that other one.

[Andrew D'Silva:]

You were previously on -- on previously call you have discussed that you were changing the way you were bidding to health systems on the document side of business to maybe stagger some of the pressure that you would receive on the cost side and I was just wondering how that was coming along?

[Joe Flynn:]

Yes, I mean, the first thing we are doing is out of the gate, we are implementing these automation tools to make sure we can stand up these accounts with less labor right out of the gate, but it's a very large deal, maybe like the one we just closed, a fairly large deal. We are probably staggering it out where we rollout, we don't guarantee its set-up within a three months period, it's more of a six or an eight month period which spreads out our cost. And so, we see our revenues ramping, and also we are able to control costs because we are not forced into standing up; excuse me, a 1,500 bed hospital in a three or four month period, something like that happens it forces costs upon us that we would rather stagger out.

[Andrew D'Silva:]

Got it, great, I understand that now. And these are maybe for Paul, sorry I haven't had a chance to review the press release in detail here, but could you repeat what your gross margin was for the period? And then after that I was just going to ask question about your tax rate. What should we expect the effective tax rate to be going forward and then the cash tax rate level as well?

[Paul Anthony:]

Yes. As it relates to gross margin, we did 23 for Q4 of this year versus 21 last year -- 22 last year and this year for the full year we did 20% versus 17% last year for the full year. And we are still working through the specifics on the tax issues given the timing of the acquisition as well as some of the tax selections that we will need to take as part of that. We are not in a position yet to comment on that. We are still working through all those details as it relates to both statutory and cash. So, we will have that number ready by ideally Q1.

[Andrew D'Silva:]

Got it, great. Just a little bit color on the gross margin; is that fairly essentially where we should expect it to be going forward around 23% on a quarterly basis? And then, is CynergisTek's gross margin around 50% is that a fair assumption?

[Paul Anthony:]

We would definitely expect margins to come down in the front-end of the year as we do traditionally see for seasonality purposes and so Q4 was definitely a little bit higher than what we would expect for full year number. So we expect that the number would be closer to what we experienced for the full year of 20% and we are not giving specific guidance as it relates to where we think CynergisTek margins are going to go, but we are definitely traditionally higher than Auxilio's and in the past they have experienced margins in the 50% range.

[Andrew D'Silva:]

Awesome, thank you very much, and good luck going forward, guys.

[Paul Anthony:]

Thank you, Andrew.

[Operator:]

[Operator Instructions] next question today will come from Jeff Bash with General Pacific Partners.

[Jeff Bash:]

Hi, Joe, Paul.

[Joe Flynn:]

Hi Jeff, how are you?

[Jeff Bash:]

Good, thank you. The recently announced $12 million medical sensors you had saving upto 50% over five years of the university medical center, is there something unique about that, that savings are so much larger than what I recall your advertised savings within the half as much range, or is this reflect really an improved competitive position by getting your costs down?

[Joe Flynn:]

This is a fairly unique situation, this particular client has a very large abundance of equipment that they overspent for, and we -- our assumption is we are going to be able to take out a significant number of those devices over the course of this engagement and the number will be driven further and a lot of that is driven by the fact it's an academic institution, so the academic institution tied with the health system, they have a tendency to have a lot more equipment than normal, so that's really where the big opportunity of savings is for this particular client, Jeff.

[Jeff Bash:]

Okay. Paul, how much of professional fees were there in Q4 related to the acquisitions of CynergisTek?

[Paul Anthony:]

So, as it relates to Auxilio in Q4 it was probably about 100,000 in this year and then we will experience some more next year. So, probably in the 50,000 to 70,000 range next year.

[Jeff Bash:]

Because those non-recurring…

[Paul Anthony:]

That's right.

[Jeff Bash:]

Joe, Seeking Alpha published the ROTH presentation slide deck in your recent presentation, and it shows a five-year revenue goal of $150 million, which is approximately double the current level, do you expect the economies of scale and SG&A to emerge as you grow larger?

[Joe Flynn:]

Yes, I do. We believe we can grow this business without significantly increasing management overhead, but obviously, Jeff, as you know we take on large managed print contract that typically comes with more people, but we think, we are going to be able to drive a lot of costs out of the general labor, this year in particular that we will be making some investments in a couple of areas, sales and marketing being one, we have merged sales organization and we are going to be very aggressive in our sales effort and especially the cross selling effort that we sort of used this year as investment year to do that, we are also looking at putting some dollars to work towards a possible development of the Delphiis tool which we now are going to be calling Risk Sonar, under the CynergisTek brand and roll that out to the CynergisTek customer base, so that's going to require some development dollars in the short-term but over the long-term we think, we can get some scale out of that SG&A in order to get the $150 million.

[Jeff Bash:]

Great, and then I now have a question about the $2.6 impairment charge, obviously if you hadn't gotten into the business with Delphiis and Redspin, we are going to be looking at the great CynergisTek acquisition but it is a little on the shocking side to see a write-off which is a significant percentage what you would pay for those two acquisitions. So I have two questions, could you give me a little more color around that and then how comfortable should we feel that this won't recur with the large acquisition we just made in the same space.

[Paul Anthony:]

Yes, Jeff, this is Paul. As it relates specifically to the impairment, we definitely, when we looked at our original five year goals and in some cases even longer when looking out at our projected cash flows and such, we had some over pretty aggressive target, we obviously had to scale those back now, as evidenced through this impairment, in addition we have made some changes as part of the integration and now with the addition of CynergisTek its kind of changed the model as well a little bit. So, both of those items, put us a position, where we had to go back and reevaluate the value of both the identified intangibles as well as goodwill and so it was really a combination of those events that triggered this impairment, we were obviously disappointed in some of the short-term results that we have seen from the two entities but we believe that the bringing them together with the CynergisTek financial model where they sell very into customer base very similar to Auxilio with long-term contract and the ability to sell both the Delphiis and Redspin services individually as well as potentially bundle those into a more valuable and ideally higher priced in and more higher margin product in their recurrent service contract is kind of some of the -- is definitely one of the attractions that we saw and so short-term we saw an impact, so we took the - we need to take the impairment charge, but long-term we think that the value of the combined security businesses is much better now.

[Joe Flynn:]

Jeff, just to add to that; if I had a crystal ball four years ago I would have bought and I knew CynergisTek was there, I would have taken CynergisTek first and then bought Delphiis and Redspin with CynergisTek we buy a very healthy company with an excellent reputation and a large customer base and the sales force to sell it, when we bought Delphiis and Redspin as I said it before we are dipping our toe in the water. Both of those companies would have needed significant investments in order to remain competitive in the marketplace and instead of throwing money into that, we went after the very best player in the marketplace. Now, by combining the Delphiss tool, which I mentioned before, we are not re-branding as Risk Sonar as well as the pen testing capabilities of Redspin, we see significant upside opportunity and merging two companies into CynergisTek as sort of mother ship for our security business, so you never know you don't have a crystal ball, you never know how things are going to work out. But we are a lot more optimistic about the growth opportunities that two companies bring to CynergisTek than I would have been standalone, so that makes sense.

[Jeff Bash:]

No it does and I have two more questions for Paul, I am correct is that you will be re-boarding now in the future on a fully tax basis since the first valuation line is spread?

[Paul Anthony:]

That's right, yes.

[Jeff Bash:]

And the last one is that, what quarter do you think is one needs to look at, to be that they fairly representative of the earnings power of the combined company, I presume the first quarter is because you are seasonally slower and you have integration issues, would you say as early as second quarter or the third quarter or…

[Paul Anthony:]

I mean, I would day at this point, I think ideally we are targeting the third quarter obviously things are -- we are still working through integration effort and still identifying things that we would be doing to drive this business. So ideally we would like to see that being in the third quarter but again we are still working through some of those plans.

[Jeff Bash:]

I just needed that thank you very much, good luck with the integration.

[Paul Anthony:]

Thanks, Jeff.

[Operator:]

And the next question comes from Avi Fisher with Long Cast Advisers.

[Avi Fisher:]

Hi, good afternoon. Jeff asked the question that I wanted on the goodwill and intangible write-down, but I just want to dig in a little more closely in terms of what, what could you tell us that you learned from Redspin and Delphiis that you won't repeat the mistake you made back then with this new acquisition because this is a significant write-down of a fairly recent acquisition. And I'm trying to understand what comfort you can give investors that you won't have this happen again in two years from now? Thank you.

[Joe Flynn:]

Yes, I think the main lesson we learned is when you make an acquisition you are much better of making an acquisition that's got immediate -- a larger customer base and immediate scaling opportunities versus making acquisition that of very small companies that don't have a lot of management and experience to scale upward. So, like it said to Jeff, in a perfect world I would have done it in the reverse, we would have taken on CynergisTek first and then the other two as add-ons, because they are very complementary. So that's what we learned, and looking forward I don't think we would probably ever invest unless it was a nice piece of technology that we could easily rollout for customers. We probably won't be acquiring companies unless they are significantly accretive and have a growth trajectory without a significant investment to get there, if that makes sense.

[Avi Fisher:]

Is Mac McMillan going to be running the IT Security segment?

[Joe Flynn:]

Mac McMillan continues to be the President and CEO of CynergisTek, and absolutely is running it.

[Avi Fisher:]

And did he do it -- I am curious, I know he is not on the call, but I would be curious what due diligence he did to Redspin and Delphiis, and how he would incorporate them into the CynergisTek business?

[Joe Flynn:]

Well, him and his partner, Dr. Mike Mathews were one of the -- we have been having conversations with them for couple of years leading up to this acquisition, both of them were very excited as we got closer to you know, coming up from the idea of working together and acquiring them to have those two capabilities. And I will tell you why. If you look at CynergisTek business, well, they were very, very strong on the compliance and consulting side. There are two things that they felt they were missing; number one was high-end technical capabilities around penetration testing and vulnerability assessments, which Redspin brings to the table, and they were relatively light on that in that particular area, and they had told me extra few years back that they were actually looking at Redspin themselves to acquire Redspin. And secondly, as it relates to the Delphiis, which is essentially what we bought with Delphiis was this tool that helps to automate risk assessments, they have been looking in the marketplace for a risk assessment tool that they could rollout to their customer base that they sold strongly, and more importantly that they owned, and this immediately gives them that opportunity. So, over those acquisitions, both of those tool sets that we brought to the table are significantly complementary to CynergisTek, and in fact we are going to be rolling out fairly aggressive marketing plans to CynergisTek's customer base highlighting those two new capabilities that they now have.

[Avi Fisher:]

All right, thank you, I look forward to following this.

[Joe Flynn:]

Thank you.

[Operator:]

And next will be Bill Sutherland with the Benchmark Company.

[Bill Sutherland:]

Thanks. Joe, Paul, good afternoon.

[Joe Flynn:]

Good afternoon.

[Paul Anthony:]

How are you, Bill?

[Bill Sutherland:]

Good. Just trying to get a sense of -- I know you are going to be counting up sales and marketing in a couple of different ways, can you help us understand kind of how that's probably going to scale the order of magnitude?

[Joe Flynn:]

Yes. So, there is a couple of things we got, inside sales, and that's people that are on phone making appointments for our sales force and what we call our Accounting Executives, so we have a group of inside sales potential that are based in Austin that are managing these events that we do. We do about 40 to 50 events around the country throughout the year, where our experts from the CynergisTek side and from the document management side go out and make presentations, and we invite, we do it in -- so, for example, in Phoenix, we will invite people come in and talk about our expertise and then those are opportunities to generate leads. So, those inside sales people do that. Inside sales people also are making appointments. They are looking for RFPs. They are on the telephone doing that work. We have an outside sales force, which we call our Accounting Executives, and those are people based regionally that are really hunters. They are out there going into big health systems and small health systems in their region, and pitching the services that CynergisTek and Auxilio provide. This is by the way that sales force is something we didn't really have with Auxilio. So, right now I think we have four people, we are going to be looking to have a total sales force on the Accounting Executive side, and we have about six people that are out there hunting. And then lastly, we are going to have a cadre regionally split three ways throughout the country of Accounting Executives, and those Accounting Executives are actually going into our existing customer base and driving the cross-selling efforts. Right now we have one person. We intend to hire two more within the next quarter or so. So that's a fairly large sales force that we hope to have in place and running by the end of this year. And it will give us strong geographical coverage. It will give us excellent opportunity for cross-selling through the Accounting Executives. And then you know, we are making sure that inside sales force is getting the name out there, and getting us in front of RFP before they even go out. In addition to that, we have got a group of [technical difficulty].

[Bill Sutherland:]

Yes, that's the group out of CynergisTek that does the…

[Joe Flynn:]

Right.

[Bill Sutherland:]

Yes. So, just want to be clear, is this called a group of different sales people equally sell or trained to equally sell the cybersecurity…

[Joe Flynn:]

They will be; they are not there. I will say, Bill, like I mentioned before, that's going to be the hard work we are going to have here over the next couple of quarters. We just literally integrated the sales and marketing organizations about two weeks ago. So, everybody knows who they report to and what they are supposed to do. We are in the process of training cross-selling to the entire sales force. So, I would say, right now they are not quite ready, but the goal here is by the end of -- certainly by the end of this year, everyone is going to know how to sell everything and know how to pitch everything. And the marketing message, the message to the market is going to be clear and comprehensive as to what we do, but that's still in the works, and again, that's a little bit of the investment we got to do as we merge these two companies together.

[Bill Sutherland:]

Great. And then, I'm curious to know the wake of the American Healthcare Act, getting anywhere; in the one day you had a chance to talk to clients since then, do you sense any -- I mean, do you have a feel for whether you're going to be able to have a better reduced the sales…

[Joe Flynn:]

Well, no. I mean I would say that the reality is certainly there was a lot of confusion, maybe hesitation, not knowing kind of what was going to happen if there was going to be a vote of replacement or repeal of Obamacare. I think that has definitely settled down, but there's some question that the -- I mean, the American Hospital Association and other large entities involved in the hospital market were very nervous about what was going to happen under the -- what they call in the American Healthcare Plan, I think the Trump administration was calling. So, there is definitely still some uncertainty, and we are seeing that uncertainty, and I think that's going to continue to have a little bit of a headwind as it relates to sales cycles as these health systems kind of look to see what's going to happen here in the future. I mean, hospitals are still running, hospitals are still generating cash, and they are moving forward, business there is definitely some hesitation and we are definitely seeing sales cycles be impacted by that. It's a reality of the situation.

[Bill Sutherland:]

Yes. So, your segment, even though it's been dates fixed at the moment, there is a lingering -- it's like, well, it's still be around the corner down the road…

[Joe Flynn:]

Oh, yes. I mean, this is just my personal opinion; I was listening to the report on my driving to work this morning. And I guess the Freedom Caucus guys run -- one of those spokesperson was talking to a reported, and he was saying, "Look, this isn't completely dead yet, we are stilling negotiating internally about some type of repeal of the Affordable Care Act," so I wouldn't be surprised if they go back to the table and negotiate another deal and try to pull something out. So I don't think this is dead yet at all, and I keep hearing it's going to -- I keep asking the question what does it actually mean Obamacare will blow up? I don't know exactly what that means other than premiums get more expensive and the voters are getting really angry about it, right?

[Bill Sutherland:]

Yes, well, we can talk offline. I don't see a blowing speed, but it's staggering at the moment. Okay, thanks guys. I appreciate it.

[Joe Flynn:]

Thank you.

[Operator:]

And at this time, there are no further questions.

[Joe Flynn:]

Okay. All right, well, thank you very much everybody for attending, and we look forward to you joining us on our next conference call coming up soon. Thank you.

[Operator:]

Well, thank you. That does conclude today's conference call. We do thank you for your participation today.