root9B Holdings Announces 2016 Financial Results

COLORADO SPRINGS, Colo., April 18, 2017 /PRNewswire/ -- root9B Holdings, Inc. (Nasdaq: RTNB) ("RTNB") today announced financial results for the full year ended December 31, 2016.

As previously announced, in connection with its shift to a pure-play cybersecurity company, RTNB sold its Control Engineering, Inc. ("CEI") subsidiary on December 31, 2016 and is in the final stages of completing the sale of its IPSA International ("IPSA") subsidiary.   Accordingly, the financial results of CEI and IPSA have been presented as discontinued operations for all periods presented. The following highlights our financial results from continuing operations for 2016, except where noted.

Financial Overview

• Cybersecurity revenue for 2016 increased 71% to $5.1 million from $3.0 million in 2015.  
• 2016 net revenue declined to $10.2 million from $11.2 million in FY 2015. 
• Revenue at Business Advisory Solutions, which focuses on regulatory risk mitigation, declined to $5.1 million in 2016 from $8.2 million in 2015. 
• RTNB recorded a non-cash goodwill impairment charge of $2.0 million at Business Advisory Solutions in 2016, as well as significantly higher SG&A expenses related to its ongoing investments in root9B.       
• 2016 loss from continuing operations increased to $18.3 million from $8.0 million in 2015.  

Business Overview

• Contracted services at root9B, which will be serviced over the next several years, rose to $17 million from $8 million spanning engagements across Fortune 500 companies, government agencies and blanket purchase agreements.  
• root9B has been approved to participate in various U.S. Government indefinite-delivery/indefinite-quantity (IDIQ) multi-year contracts.   
• In January 2017, root9B was ranked #1 on the Cybersecurity 500 for the fifth consecutive quarter.
• In March 2017, RTNB closed a private placement financing which began in September 2016 consisting of secured convertible promissory notes and common stock purchase warrants that generated net proceeds of $8.8 million. 
• In April 2017, Eric Hipkins was named Chief Executive Officer of RTNB, effective May 25, 2017, succeeding Joseph J. Grano, who will continue as Non-Executive Chairman.

"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 J. Grano, Chairman and CEO.  "Although cybersecurity revenue rose by 70% 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.   For 2017, we expect a significant improvement in our operating results driven by the performance at root9B.     

"We are pleased with the progress we are making to complete the initiatives we disclosed at the end of 2016, all of which support our ongoing transition to a pure-play cybersecurity company.  We are encouraged by our improving performance at cyber. While acknowledging the significant challenges that lie before us, the pace of our business development activities has accelerated and we are seeing an increasing level of government- and commercial-client attention being directed towards root9B's pioneering approach of manned information security.  Eric Hipkins, CEO of root9B LLC who will follow me as CEO of RTNB in May, and his team have developed a HUNT and cybersecurity-as-a-service model that we believe is being viewed as a future industry standard." 

"During 2016, we expanded root9B's cybersecurity operations, sold CEI, and secured capital to help fund our growth and support our operations," said Dan Wachtler, RTNB's President and COO.  "We have taken several steps to improve efficiencies and reduce costs, especially at the corporate level, and are continuing to explore ways to rationalize our operating infrastructure.  We are also pursuing the sale of IPSA as part of our efforts to strengthen our capital base and advance our long-term business objectives.  We expect to close the sale of IPSA during Q2 2017."      

"We are making tangible, measured progress in creating a sustainable platform for growth," said Mr. Grano.  "For 2017, we are dedicated to further elevating our industry profile, expanding our base of clients, and improving our operating results.  This process will take time, but I believe we have the right team in place to effect the change necessary to drive long-term shareholder value."

FY 2016 Results Overview

Net revenue for 2016 declined to $10.2 million from $11.2 million in 2015.  Cybersecurity revenue increased 71% to $5.1 million, while revenue at Business Advisory Solutions declined by 37% to $5.1 million.  

SG&A expenses rose to $17.2 million from $12.3 million in 2015.  SG&A at RTNB's cybersecurity business rose to $8.7 million from $3.4 million last year, reflecting higher labor costs, software R&D, rent, advertising, and travel as this segment prepares for future growth.   SG&A at Business Advisory Solutions declined to $0.7 million from $1.4 million in 2015.   Corporate overhead SG&A costs rose by 2.7% to $7.7 million from $7.5 million in 2015, due primarily to a $2.2 million increase in stock compensation expense (a non-cash charge); however, expenses in virtually every other corporate category declined by $2.0 million, including professional services, wages and benefits, and Director fees and expenses.  

The loss from operations was $17.5 million as compared to $11.4 million in 2015.

Non-cash derivative income declined by $1.7 million to $1.9 million in 2016 from non-cash derivative income of $3.6 million last year.   This income is associated with certain financing transactions completed between May 2010 and December 2016 when RTNB issued certain warrants and other financial instruments which are required to be classified as derivative liabilities.

RTNB recorded a $2.0 million non-cash goodwill impairment charge for Business Advisory Solutions in 2016; there was no such charge in 2015.   

Loss from continuing operations for 2016 was $18.3 million, or $3.31 per diluted share, compared to a loss from continuing operations of $8.0 million, or $1.79 per diluted share, in 2015.   Loss from discontinued operations was $11.9 million, or $2.21 per diluted share, compared to a loss from discontinued operations of $0.3 million, or $0.07 per diluted share, in 2015.   Net loss for 2016 was $30.5 million, or $5.52 per diluted share, compared to a net loss of $8.7 million, or $1.86 per diluted share, in 2015.   

Form 10-K

RTNB filed its Annual Report on Form 10-K with the Securities and Exchange Commission on April 17, 2017.  Investors are encouraged to read this document, including the Risk Factors section which details various risks and uncertainties related to our business and industry, operations, and financial condition and outlook, including that the Company continues to have a "going concern" designation.

Availability of Chairman's Letter to Stockholders

RTNB also announced the availability of a Letter to Stockholders from Joseph J. Grano, Jr., Chairman and CEO of root9B Holdings, which may be accessed at the "Investor Relations" section of the Company's website, www.root9bholdings.com.

About root9B

Ranked as the #1 Cybersecurity company for five consecutive quarters by Cybersecurity Ventures, root9B stands in defiance of the unwanted human presence within our clients' networks by attacking the root of the problem—the adversary's ability to gain entry and remain undetected. root9B's application of advanced technology developed through cutting-edge R&D and engineering and refined through relevant, hands-on training is revolutionary. root9B combines next generation technology, tactics development, specialty tools, and deep mission experience. root9B personnel leverage their extensive backgrounds in the U.S. Intelligence Community to conduct advanced vulnerability analysis, penetration testing, digital forensics, incident response, Industrial Control System (ICS) security, and Active Adversary Pursuit (HUNT) engagements on networks worldwide. For more information, visit www.root9B.com. 

About root9B Holdings, Inc.

root9B Holdings is a leading provider of Cybersecurity and Regulatory Risk Mitigation Services. Through its wholly owned subsidiaries root9B, Business Advisory Services and IPSA International, the Company delivers results that improve productivity, mitigate risk and maximize profits. Its clients range in size from Fortune 100 companies to mid-sized and owner-managed businesses across a broad range of industries including local, state and government agencies. For more information, visit www.root9bholdings.com

Forward Looking Statements

Certain information contained in this press release may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future financial performance, future growth, the anticipated sale of IPSA and reorganization efforts. These statements are based on RTNB's current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive and/or regulatory factors, and other risks and uncertainties affecting the operation of RTNB's business and the inability to negotiate acceptable terms for the sale of IPSA or complete the transaction on the anticipated timeline. These risks, uncertainties and contingencies are indicated from time to time in root9B Holdings filings with the Securities and Exchange Commission. The information set forth herein should be read in light of such risks. Further, investors should keep in mind that RTNB's financial results in any particular period may not be indicative of future results. RTNB is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.

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SOURCE root9B Holdings, Inc.