05
Threat Defiance Report

Cybersecurity company moves its headquarters to Colorado Springs

Root9B LLC is sinking deeper roots in Colorado Springs as part of a corporate strategy of its parent company to narrow the company's focus to cybersecurity by selling off subsidiaries in other industries.

The Springs-based company employs 40 locally and 40 more at three other offices to provide cybersecurity services that include advanced vulnerability analysis, network penetration testing, digital forensics, incident response, industrial control system security and adversary pursuit on computer networks to government and commercial clients worldwide. Root9B also operates its Adversary Pursuit Center, a $2 million operations center it opened in Colorado Springs in 2015 to provide clients remote computer network defense, training and other services.

The company is a unit of root9B Holdings, which moved its headquarters to Colorado Springs from Charlotte, N.C., in early December as part of an "evolution into a pure-play cybersecurity company, and a reflection of our commitment to this endeavor," according to a Dec. 20 letter to shareholders from CEO Joseph Grano Jr. The move also included a consolidation of the parent company's corporate support operations to improve efficiency and cut costs as it tries to raise money to fund growth of root9B LLC and its cybersecurity operations, he said.

No company personnel were relocated as part of the headquarters move, said Eric Hipkins, founder and CEO of root9B LLC. Hipkins expects the company to double the size of its local workforce this year to serve a growing list of clients in the financial, retail and "critical infrastructure" industries and is doubling its space in the Wells Fargo Tower downtown to accommodate the additional staff. The company also plans to expand its operations in Maryland and Texas and open offices this year in Canada and England.

Anti-hacking strategy

The company sells subscription and fee-based cybersecurity services that include a software suite called ORKOS and a hardware and software platform called ORION, both of which it plans to update this year to add capabilities and enhance the "user experience," Hipkins said. Customers include Fortune 500 corporations and companies that are "highly visible in their sectors," but he said root9B keeps their identities confidential so "we don't provide a playbook to (potential) adversaries," the term he uses for computer hackers.

"We are focused on the human aspect of the adversary's tactics, techniques and procedures, especially the stand operating procedures used to bypass traditional automated defensive measures," Hipkins said. "We bring a unique approach to manned information security combined with remote HUNT (automated) operations."

As part of its restructuring, root9B Holdings plans to sell off two subsidiaries of its predecessor company, Premier Alliance Group Inc., which focus on helping customers assess, design and install processes and automation to 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. The company agreed Dec. 20 to sell the energy unit, called Control Engineering Inc., to one of its managers for $60,000. Grano also said he will step down May 14 as CEO when his contract expires.

The parent company also completed 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, making root9B Holdings the fifth local company with stock that is listed on a major national exchange. The others are defense contractor Vectrus Inc., medical device manufacturer Spectranetics Corp., gold mine operator Gold Resource Corp. and casino and horse track operator Century Casinos Inc., which all have a total market value that is many times the $59.1 million value of root9B Holdings.

"Many of the leading cybersecurity companies trade on Nasdaq, so the Nasdaq listing is an important milestone for the company," Hipkins said. "As the organization grows on a global scale, our trajectory and this (listing) will help elevate our profile and attract a broader range of institutional investors to the company."

Financing

Low on cash as it ramped up its cybersecurity operations and its other operations were losing money, root9B Holdings launched a convertible promissory note offering to private investors in September to raise $10 million. The company raised $6.76 million through Dec. 22. The notes carry a 10 percent annual interest rate and can be converted into the company's stock within three years at 15 percent discount to the market price. The company is reviewing raising additional funding from "a large strategic investor," Hipkins said.

During the first nine months of last year, root9B Holdings lost $13.2 million, or 16 cents a share, more than double its loss during the same period in 2015, on revenue of $25.9 million. Nearly two-thirds of the loss comes from root9B cybersecurity operations, which generated less than 12 percent of the company's revenue but was growing the fastest at more than 60 percent from a year earlier. While the company cut its losses for its energy and anti-money laundering operations by nearly $700,000, revenue grew just 2.4 percent in those businesses.

Grano told stockholders in August that root9B Holdings' financial results for the first half of the year were "disappointing despite new client engagements, which while resulting in increased revenues did not scale to levels sufficient to offset the ramp up of our new cybersecurity footings." He remained optimistic, however, that "cybersecurity and risk mitigation services remain high areas of demand for companies, government entities and regulators worldwide."

As a result of the disappointing first-half results, the company cut its revenue forecast for all of 2016 to $34.7 million from $48 million and boosted its projected losses to $11.9 million from $7 million. Much of the cut came from its cybersecurity operations, from more than $14 million to $7.9 million. In mid-October, root9B Holdings said it had won $12 million in contracts so far in 2016 with government and commercial customers, which Hipkins said had grown to $18 million by year's end.

The company also formed a partnership with Science Applications International Corp. to offer advanced cybersecurity simulation and training to U.S. government agencies. A partnership was also formed with Head Italia to provide Italian government and defense customers with cybersecurity solutions to protect critical data and infrastructure.

The cybersecurity unit, root9B LLC, continues to top industry rankings of the top 500 cybersecurity providers from New York-based online publication Cybersecurity Ventures, securing the top spot in all four of the quarterly lists published last year.

Hipkins founded root9B in 2011 with four other employees, all with military or intelligence backgrounds and who are still with the company, with a small-business loan from Chase Bank and initially focused on cybersecurity training. He said the fledgling company quickly built a reputation as a top provider of training services, which generated enough revenue to build its cybersecurity software tools and operational capabilities. The company's rapid growth attracted the attention of Premier Global, which acquired root9B for $1.75 million in cash and stock and later adopted the root9B name.

Hipkins selected the root9B name to reflect root access, which gives users control of a computer operating system, and 9B as programming shorthand for 9/11 because "as an organization, we believe that cyber represents the No. 1 threat to the U.S. and global industry abroad."

-

Contact Wayne Heilman: 636-0234

Twitter @wayneheilman

Facebook Wayne Heilman