CriticalControl Solutions Corp.
TSX : CCZ

CriticalControl Solutions Corp.

August 02, 2012 19:48 ET

CriticalControl Announces Second Quarter 2012 Financial Results

CALGARY, ALBERTA--(Marketwire - Aug. 2, 2012) - CriticalControl Solutions Corp. (TSX:CCZ) today reported its financial results for the three and six months ended June 30, 2012.

"Increased profitability in Q2 2012 is the outcome of key strategic investments and initiatives currently being executed," said Alykhan Mamdani, President and CEO of CriticalControl. "Prevailing global market conditions increase the necessity to expand our products and services in order to succeed for the long term."

Quarter ended June 30, 2012 highlights

Revenue

  • Total revenue of $11.8 million in Q2 2012 ($24.8 million year-to-date) represents a 6% decrease (0% increase year-to-date) from the same period in 2011. Significant revenue increases in the Canadian and US Energy Services businesses were offset by decreases in the Service Bureau Operations.
  • Revenue from the Canadian Energy Services business increased by 12%, to $3.1 million in Q2 2012 from $2.8 million in Q2 2011, resulting from the acquisitions of Vertex in Q4 2011 and DGL early in Q1 2012. Year-to-date revenue increased by 13% from $5.8 million in 2011 to $6.5 million in 2012.
  • Revenue from the US Energy Services business remained relatively consistent at $4.4 million in Q2 2012 and Q2 2011. Year-to-date revenue increased by 13% from $8.0 million in 2011 to $9.1 million in 2012, driven by organic growth of recurring revenue from the Corporation's sales efforts.
  • Revenue from the Corporation's Service Bureau Operations decreased by 19%, from $5.3 million in Q2 2011 to $4.4 million in Q2 2012. Year-to-date revenue decreased by 17% from $11.0 million in 2011 to $9.1 million in 2012. The revenue decrease is primarily attributable to the completion of two large imaging projects in Q3 2011.

Gross margin percentage

  • Gross margin percentage for the Corporation increased to 37.9% in Q2 2012 from 35.7% in Q2 2011 (year-to-date increased to 37.0% from 36.8%).
  • Canadian Energy Services gross margin percentage declined from 61.5% in Q2 2011 (year-to-date 61.7%) to 56.3% in Q2 2012 (year-to-date 55.7%), primarily attributable to lower margins associated with the DGL and Vertex acquisitions, economic factors putting pressure on gas producers, and increasing labour costs.
  • US Energy Services gross margin percentage increased from 21.7% in Q2 2011 to 27.6% in Q2 2012 (year-to-date increased from 24.7% to 27.5%). The increase was driven by a focus on recurring revenue, pricing initiatives and cost control.
  • Service Bureau Operations gross margin percentage increased by 1.2% from 33.8% in Q2 2011 to 35.0% in Q2 2012 (year-to-date increased 0.4% from 32.6% to 33.0%).

Selling and administrative expenses

  • Selling and administrative expenses for the Corporation decreased by $101,000 for the quarter in comparison to 2011 despite the additional expenses associated with the acquisitions of DGL and Vertex. On a year-to-date basis, selling and administrative expenses increased by 3.1%.
  • Selling and administrative expenses for the Canadian Energy Services business increased in Q2 2012 compared to 2011 by $131,000 ($291,000 year-to-date) primarily related to increased sales, marketing and business development activities; facility costs related to acquisitions; and strategic hires.
  • Selling and administrative expenses for the US Energy Services business increased in Q2 2012 compared to 2011 by $171,000 ($371,000 year-to-date) primarily due to increased staffing to position the business for growth, increased infrastructure costs, and increased sales and marketing activities.
  • Selling and administrative expenses for the Service Bureau Operations decreased in Q2 2012 compared to 2011 by $335,000 ($247,000 year-to-date) primarily due to continued streamlining and integration of operations.
  • Selling and administrative expenses for Corporate decreased in Q2 2012 compared to 2011 by $68,000 ($195,000 year-to-date) primarily attributable to non-recurring costs in 2011 and reduced reliance on consultants.

Other operating expenses

  • Other operating expenses were insignificant on a net basis in Q2 2011 and Q2 2012, but increased by $224,000 year-to-date primarily in relation to favorable estimate changes that were netted with the 2011 expenses and did not recur in 2012.

Earnings

  • Net earnings for the quarter increased by $91,000 when compared to Q2 2011 to $318,000. Year-to-date net earnings decreased by $372,000 to $369,000.

Cash flow and balance sheet

  • Working capital increased by $0.2 million from $3.6 million at June 30, 2011 to $3.8 million at June 30, 2012. From December 31, 2011 to June 30, 2012, working capital decreased by $0.6 million from $4.4 million.
  • For the six months ended June 30, net cash from operating activities increased by $1.4 million from $0.3 million in 2011 to $1.7 million in 2012.
  • Total loans and borrowings decreased by $0.9 million from June 30, 2011 to June 30, 2012 (and $0.1 million from December 31, 2011) despite an additional $1.0 million of debt incurred related to the DGL acquisition.

Outlook

Reduced revenue from the cyclic completion of two major projects in the Corporation's Service Bureau Operations that were active in Q2 2011 was mitigated by management's cost saving measures, resulting in slightly stronger Q2 2012 profitability. Management expects to terminate its lease in Winnipeg in Q3 2012, which will result in cost reductions of $60,000 in Q4 2012, further increasing profitability.

Gas prices did not stabilize at the lows seen at the end of 2011 as generally expected, but instead declined further during the first half of 2012. Management has seen an escalation in the shut-in of low production gas wells during this period, putting additional downward pressure on the Corporation's historic revenue streams. Management undertook an ambitious expansion of its technologies in its Canadian Energy Services business in late 2011 in order to offset the decreased revenue caused by the shut-ins. This effort is based on transforming the Corporation's core volumetric business (consisting of managing gas measurement and composition production data) into a full scale system to manage oil and gas production data from the well-head to the financial accounting system. The expansion includes management of oil related production data, and the management of production data in business processes within producers that use the data currently provided by the Corporation's solutions. This includes the acquisition of Vertex, which manages volumetric data through midstream operations, including the functions of daily allocations, production accounting and financial accounting. Additionally, the acquisition of assets from DGL early in 2012 resulted in the Corporation gaining the ability to manage the production accounting and financial accounting business processes of producers on an outsourced basis.

Management continues to focus on increasing recurring revenue from its measurement focused solutions in its US Energy Services business. Management expects to retain its increased levels of recurring revenue in its US Energy Services business, which combined with anticipated increased margins from fabrication will offset reduced revenue from its US fabrication business. Notwithstanding the measures taken by management and the success experienced, continued weak commodity prices into 2013 will impact new exploration and, subsequently, the Corporation's revenue stream from its US Energy operations.

The necessity of executing management's plan to offset declining revenue from its historic revenue base is even more essential given the reduced gas prices seen in the first half of 2012. In addition to its existing research & development budget, the Corporation expects to spend up to $0.5 million in 2012 to rewrite certain applications acquired by the Corporation. Unless the Corporation is successful in its current strategy, revenue from the Corporation's historic revenue streams will diminish significantly, which will impact profitability.

Notwithstanding these additional costs, the increased associated sales and marketing costs already being incurred, and the price of natural gas being significantly lower than previously predicted, management is optimistic that its efforts will bear fruit by increasing revenue in the second half of 2012 to offset revenue loss from the shut-in of less productive wells and to pay for the Corporation's increased costs. Management's plan, if successful, will result in revenue and profit growth in 2013.

Forward looking statements

Management's outlook in increasing its US based fabrication, assembly and equipment revenue in 2012 to the levels achieved in the second half of 2011 cannot be assured as such revenue is not recurring. Additionally, the Corporation's fabrication, assembly and equipment business is now geared towards larger equipment used in shale gas production, the continued development of which is dependent upon the financial viability of gas production in the Marcellus shale play. The financial viability of gas production in the Marcellus shale play is not yet predictable and can only be proven with the passage of time.

Expected profitability in the Corporation's US operations will be dependent upon the acceptance of the Corporation's clients in the US of the Corporation's technologies, and general economic conditions including the price of natural gas, neither of which can be assured or predicted.

The Corporation has undertaken a strategic direction to penetrate further into the Corporation's client base in Canada with integrated technologies. There can be no assurance of client acceptance of this strategy, nor can there be assurance that the Corporation will be successful in the integration of its current technologies with those that have been recently acquired.

The continued decline in gas prices during the first half of 2012 has had a negative impact on the Corporation's recurring revenue. Representations have been made that the current growth in the Corporation's business is offsetting the decline. The pace of shut-in of non-profitable wells is not predictable in the current economic climate. Should the number of wells being shut-in increase, management's guidance will be negatively impacted.

About CriticalControl:

In a world of escalating globalization, with an increasingly transient workforce, enterprises are constrained from maintaining their knowledge and are forced to focus on their key market advantages to remain competitive. CriticalControl provides these enterprises with secure and cost effective solutions for the completion of document and information intensive business processes through an integrated offering of software, outsourced services and optimized business processes.

Contact Information

  • CriticalControl Solutions Corp.
    Alykhan Mamdani
    President & CEO
    (403) 705-7500