Cortex Business Solutions Inc.
TSX VENTURE : CBX

Cortex Business Solutions Inc.

June 29, 2011 09:01 ET

Cortex Announces Q3 2011 Financial Results

CALGARY, ALBERTA--(Marketwire - June 29, 2011) -Cortex Business solutions inc. ("Cortex" or the "Company") (TSX VENTURE:CBX)

Third Quarter 2011 Financial and Operational Highlights

The Company continued to see rapid growth in all its key metrics.

During the quarter we signed agreements with two more buying organizations ("Hubs") and four progressed from the pilot phase to the on-boarding phase where suppliers are being enabled to send documents to the new hub. In addition, Cortex formed 2 new partnerships with Verian Technologies and American Express. Our Partnership with American Express will introduce a new payment service to our current and future customers.

There has been a 20% increase in the number contracted suppliers, due in large part to the rapid uptake in the United States of America ("USA" or "United States"), where we have signed up more than 500 suppliers to the three operational Hubs.

Q3 Financial Highlights

  • Total revenue for the quarter ended April 30, 2011 was $776k, staying consistent with the quarter ended January 31, 2011. There was no project management revenue in Q3 2011 and there was $60K in Q2 2011. The Company was able to replace 100% of that project management revenue with access and usage fee revenue growth in the quarter. At the end of April the Company had deferred revenue of $1.6M of which $684k is estimated to be recognized in the next 12 months.
  • Notable is the change in composition of our revenue streams, with a continuing shift from project management fees to set-up and access and usage fees.
  • In the current quarter access and usage fee revenue grew 12% over the quarter ended January 31, 2011 ("Q2-2011"). Cortex continued to see the Network effect on access and usage fees as our existing customers started transacting with multiple buying organizations. This resulted in an increase in recurring revenue for those customers transacting with multiple buyers as well as net new suppliers joining the Network from the four hubs completed in the quarter.
  • Loss for the quarter ended April 30, 2011 totaled $2,525K compared to $2,644K for the previous quarter. This is as a result of increased expenditure on expanding into the USA and upgrading our core technologies. During the quarter the Company incurred $1,006K in project related expenses, of which $566K has been capitalized as software development and $12K in property plant and equipment. These levels of expenditure are expected to continue over the next five quarters.
  • Cash used in operations (excluding changes in working capital) remaining relatively unchanged at $2.0M from $2.1M in the previous quarter. This cash outflow is the result of investments in USA expansion and productivity improvements. Cash on hand decreased by $2.1M to $4.5M at April 30, 2011.

The following table illustrates the growth in some key metrics:

Operational Highlights

2011
%%
IncreaseIncrease
QuarterQuarter
overover
Q3QuarterQ2QuarterQ1
Number of Buyer integrations
Completed1064
In progress464
Number of Contracted Suppliers3,96422%3,25217%2,775
Total documents exchanged1,202,92810%1,095,76218%931,603
Supplier initiated documents374,67113%331,99614%291,881

The daily volume of documents sent through the Cortex Trading Partner Network (the "Network") continues to grow consistently. The volume of transactions in the Oil & Gas industry in Canada is seasonal and tied to drilling activity. April and May saw lower activity with the Canadian customers due to "Spring Breakup", a time when heavy equipment cannot be moved while the roads defrost and dry out. This phenomenon does not occur in the USA and we expect the seasonality in our revenue to diminish as we continue to expand into the USA.

Notwithstanding the impact of Spring Breakup, the number of transactions over our Network during the quarter increased by 13% as both the number of suppliers and Hubs increased. Since April 30, 2011, the Company has added over 500 contracted suppliers to the Network bringing the total number on the Network to approximately 4500 as of June 24, 2011. This is in line with expectations as the Network effect starts to materialize as more suppliers transact with multiple Hubs.

The Company continues to see the productivity improvements as a result of the project initiatives currently underway. The expensed portion of the project initiatives are a line item on the income statement entitled marketing expansion and product development. One of the key metrics the management team uses to determine how effective the organization is becoming is measuring the average cost per supplier. Since the beginning of fiscal 2011 the Company has seen a 42% reduction in the cost per supplier and expects this trend to continue moving downwards with the efficiency gains being implemented operationally throughout the organization. Another trend the Company is seeing is a significant reduction in support calls. This has been accomplished through continuous improvement initiatives with the Hubs and their suppliers (our customers). The average support call per supplier has been reduced to under one per month.

Revenue

The increase in number of Hubs active on our Network and the rapid on-boarding of their suppliers translated into an increase in recurring revenue.

In the previous fiscal year the Company also earned a significant amount of project management fees. This type of revenue is not considered part of our base business and our challenge is to replace this with revenue of a recurring nature.

The graph below shows the make-up of our base revenue stream. Access and usage fee revenue provides the foundation for our base revenue averaging 10% growth quarter over quarter since Q1 2010 for a 36% annual growth.

To view the graph, please visit the following link: http://media3.marketwire.com/docs/629cbx1.jpg.

Expenses

To accelerate growth, the Company initiated a program to expand into the United States. This program has been successful with four Hubs signed and a strong pipeline of potential sales. To date Cortex has invested in setting up a USA subsidiary and has contracted a senior sales executive in Denver to set up a satellite sales office. Revenues from USA customers started in the third quarter and we expect it to become a major portion of the Company's growth strategy, understanding that the lead time for expenses will remain ahead of the revenue rewards.

The graph below depicts an analysis of the Company's spend profile. Project spending begins in Q1 2011 and remains consistent quarter over quarter, averaging 13% of total expenses. This level of expenditure is expected through fiscal 2012. The Company has accrued the employee bonus, as part of our EPM program, in 2011 over each quarter in order to minimize the impact in Q4. In 2010 the Company did not accrue the bonus each quarter and the entire expense was recognized in Q4 making the treatment between years inconsistent and skewing the comparatives. The level of bonus remains consistent between 16% and 19% of salaries.

The line shows the trend of our baseline expenditures which have leveled out quarter over quarter since Q1 2010.

To view the graph, please visit the following link: http://media3.marketwire.com/docs/629cbx2.jpg.

During this fiscal year, the Company embarked on a project to upgrade our core system and convert it into a Cloud based system. This is essential in order to handle increased volumes and to increase efficiencies. A Cloud based system will also allow the Company to expand internationally without additional system expenses. This project is on time and on budget and will be completed during the next fiscal year.

Management intends to continue investing in system enhancements that will allow us to automate labour intensive processes, further improving our productivity, as witnessed in a reduced average cost per supplier.

Cash position

On May 31, 2011 the Company raised gross proceeds of $7.5 million in a bought deal offering for net proceeds to the Company of approximately $6.8 million. The major portion of this offering was taken up by institutional investors. The funds will be used to finance the aforementioned programs as well as working capital.

With this additional capital the Company has strengthened its balance sheet and has more than $10 million in cash at June 24, 2011. This will enable the Company to take advantage of organic growth opportunities and market expansion and product development initiatives.

Outlook

Cortex will continue to expand the Network by adding buying organizations (Hubs) and their supplier groups through current and new partnerships. Cortex will explore new revenue, industry and partnership opportunities in Canada and the USA.

Building on a strong relationship with Husky Energy, Cortex will continue to see revenue growth from increasing transaction volumes between Apache Corporation, Bonavista, Murphy, Petro-Hunt, Energen and other Hubs and their suppliers.

Organic Network growth, both in the number of suppliers connected and the number of transactions they do, has provided a solid revenue foundation for the company.

Strategic partnerships with Full Circle, Basware, Verian Technologies, Amex and Powervision are providing numerous opportunities to add buying organizations in both Canada and the USA.

Management is investing in marking expansion and product development to incorporate new technology in our core service, expanding sales efforts in both Canada and the USA and into new industries. These marking expansion and product development are important for accelerating growth of the Network and will provide significant opportunities for the Company in the future.

The validation of Cortex Solutions in the marketplace together with a strong balance sheet at April 30, 2011, has increased the credibility and acceptance of the Cortex Solutions resulting in numerous opportunities to expand.

With the addition of multiple buying organizations to the Cortex Network, management expects the growth of access and usage fee revenue stream to accelerate. Our USA expansion is contributing to significant increases in suppliers connected to the Network with over 2000 expected to be signed through our Apache USA project by December 2011.

Cortex is also starting to experience the "network effect", with significant increases in monthly revenue per supplier from customers transacting with multiple buying organizations on the Network.

Management expects to complete more partnerships, announce more buying organizations joining the Network in both Canada and the USA and continue increasing recurring revenue towards break even.

About Cortex Business Solutions

Cortex Business Solutions Inc. is a leading eCommerce service company that improves efficiencies, reduces costs and streamlines procurement and supply chain processes for its customers. Accessing the Cortex Network enhances the exchange of business critical documents, such as purchase orders, receipts and invoices resulting in improved cash flow management and business controls, while reducing day's outstanding and administrative costs. Cortex is a low cost, low risk solution that can be implemented quickly by leveraging its customers existing business environment - evolving business. For more information please visit our website at www.cortex.net.

Forward-Looking Statements

Statements in this release that are forward-looking statements are subject to various risks and uncertainties concerning the specific factors disclosed under the heading "Risk Factors" and elsewhere in the Company's periodic filings with Canadian securities regulators. Such information contained herein represents management's best judgment as of the date hereof based on information currently available. The Company does not assume the obligation to update any forward-looking statement.

The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of the content of this news release.

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