Colorado Springs-based cybersecurity company root9B Holdings Inc. told stockholders Monday that its losses more than tripled to $30.5 million after an 8.2 percent decline in revenue.
Much of the loss results from root9B's aggressive expansion in the Springs, which the company said more than doubled its contract backlog of services during the next several years to $17 million from $8 million and includes agreements with Fortune 500 companies and government agencies.
The company said the much of its spending went its cybersecurity unit to hire personnel, marketing, building its $2 million operations center in downtown Colorado Springs, legal fees for trademarks and patents as well as research and development to enhance its software platforms.
Nearly 40 percent of the company's losses came from operations the company is selling, including units that focused on helping customers reduce energy usage and cost, and to provide anti-money laundering advisory and consulting services and investigative and advisory services on risk, data and other areas.
"Our overall performance in 2016 was disappointing, the result of write-downs associated with the divestiture of certain non-core assets and the impact of increased costs associated with our ongoing investments within our root9B LLC cybersecurity business," said Joseph Grano Jr., root9B Holdings CEO. "Although cybersecurity revenue rose by 70 percent during 2016 to just over $5 million, they have not yet scaled to a level sufficient to offset our significant investments in technology and talent. Specifically, the cyber division saw its first full year impact in 2016 of the ramp-up of new hires in 2015."
Grano said he expects "significant improvement" in the company's operating results this year, driven by the performance of the cybersecurity unit. He noted that the pace of business development has accelerated and the company is seeing an increasing level of government, and commercial client attention directed to root9B's strategy of "manned information security."
The company ended the year with $1.45 million in cash, more than double the amount it had a year earlier, mostly from selling $8.78 million in convertible promissory notes in the final quarter of last year. However, root9B Holdings told stockholders will need to raise more money in the current quarter to continue expanding its cybersecurity business, pay operating expenses and make payments on its debt, including $1.6 million that is due May 21. The company said it expects to generate $6 million to $10 million during the next three years by selling the anti-money laundering unit.
Root 9B Holdings also disclosed in its annual report that Grano and Chief Financial Officer Bill Hoke determined that the company's "internal controls were not effective" as of the end of last year as a result of "a material weakness in our internal control over financial reporting." The weakness stemmed from lacking adequate personnel to properly account for complex transactions and financial instruments involved in its financing, not reporting financial results on a timely basis, not consolidating financial statements adequately and not having adequate staff or procedures needed for financial reporting.
The company's stock has lost 40 percent of its value since a 15-for-1 reverse stock split in December to boost the price of the company's publicly traded stock and qualify it for listing on the Nasdaq Stock Market.
Cybersecurity remains a hot area for investors, though few such firms have publicly traded stock. The MoneyTree Report found that venture capital funds last year invested $2.43 billion in 200 cybersecurity deals though financing slowed in the fourth quarter before recovering again in the first quarter. Three Denver area cybersecurity companies have raised nearly $50 million, including CyberGRX, ProtectWise and SecureSet as companies look for helping in making sure that their vendors, suppliers and partners meet security requirements.
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