CriticalControl Solutions Corp.
TSX : CCZ

CriticalControl Solutions Corp.

August 08, 2013 20:20 ET

CriticalControl Announces Second Quarter 2013 Financial Results

CALGARY, ALBERTA--(Marketwired - Aug. 8, 2013) - CriticalControl Solutions Corp. (TSX:CCZ) today reported its financial results for the three and six months ended June 30, 2013.

"The consistent increase in our recurring revenue from Canadian and US Energy Services over the past four quarters demonstrates the success of our strategy," said Alykhan Mamdani, President and CEO of CriticalControl. "During the past two years we have addressed market, industry and economic uncertainty with strategic growth and increased recurring revenue from Canadian and US Energy Services, and substantial pay down of our debt."

Quarter ended June 30, 2013 highlights

Revenue

  • Total revenue of $12.0 million in Q2 2013 represents a 1.0% increase from $11.8 million in Q2 2012. Year-to-date revenue decreased by $2.1 million or 8.5%. An increase of $0.2 million in year-to-date recurring revenue from Canadian and US Energy Services, and the impact of foreign exchange were more than offset by a $0.9 million drop in year-to-date revenue from the Corporation's Service Bureau Operations and a decline of $1.4 million in non-recurring revenue from US and Canadian Energy Services.
  • Revenue from the Canadian Energy Services business increased by 3.4%, to $3.2 million in Q2 2013 from $3.1 million in Q2 2012. Year-to-date revenue decreased by $0.2 million or 3.6%. Year-to-date recurring revenue increased by $0.2 million and non-recurring revenue decreased by $0.4 million. In Q1 2012, the Corporation recognized non-recurring revenue from an implementation of its ProTrend solution, an implementation of its ProStream PA solution, and a large order for hardware devices that were added to NetFlow. The recurring revenue from these large implementations offset a decline in revenue due to shut-ins in Q2 and Q3 2012.
  • Revenue from the US Energy Services business increased by 0.5% from Q2 2012 to $4.4 million in Q2 2013. Year-to-date revenue decreased by $0.9 million or 10.2%. A slight increase in year-to-date recurring revenue and the impact of foreign exchange were offset by decreases in non-recurring revenue of $1.0 million. Q1 2013 sales of gas measurement related equipment and fabricated assemblies were impacted by the lower levels of drilling activity in the last half of 2012.
  • Revenue from the Corporation's Service Bureau Operations was flat in Q2 2013 when compared to Q2 2012. Year-to-date revenue decreased by $0.9 million or 10.4% due to reduced government spending in Q1 2013 on conversion projects and increased competition. A significant project expected to commence in early Q1 2013 did not commence until near the end of Q1 2013.

Gross margin percentage

  • Gross margin percentage for the Corporation increased from 37.9% in Q2 2012 to 38.8% in Q2 2013. Year-to-date gross margin percentage increased from 37.0% to 37.7%.
  • Canadian Energy Services gross margin percentage increased from 56.2% in Q2 2012 to 57.9% in Q2 2013. Year-to-date gross margin percentage increased from 55.6% to 57.1%.
  • US Energy Services gross margin percentage increased from 27.6% in Q2 2012 to 29.2% in Q2 2013. Year-to-date gross margin percentage increased from 27.5% to 29.0%.
  • Service Bureau Operations gross margin percentage decreased from 35.0% in Q2 2012 to 34.4% in Q2 2013 due to an unexpected landlord charge in Q2 2013. Year-to-date gross margin percentage decreased from 33.0% to 31.6%, primarily due to a change in the mix of projects in Q1 2013 compared to Q1 2012.

Selling and administrative expenses

  • Selling and administrative expenses for the Corporation increased by $0.3 million from $3.6 million in Q2 2012 to $3.9 million in Q2 2013. Year-to-date selling and administrative expenses increased by $0.3 million.
  • Selling and administrative expenses for the Canadian Energy Services business increased by $44 thousand compared to Q2 2012. Year-to-date selling and administrative expenses increased by $169 thousand, primarily related to salaries for strategic hires.
  • Selling and administrative expenses for the US Energy Services business increased by $167 thousand compared to Q2 2012. Year-to-date selling and administrative expenses increased by $203 thousand, which is primarily attributable to increased sales and marketing costs.
  • Selling and administrative expenses for the Service Bureau Operations increased by $118 thousand compared to Q2 2012, which is primarily attributable to restructuring of the management group such that more time was spent on marketing, strategy and business development versus production. Year-to-date selling and administrative expenses increased by $27 thousand.
  • Selling and administrative expenses for Corporate remained flat in Q2 2013 when compared to Q2 2012 and decreased by $112 thousand year-to-date. Some of the year-to-date decrease relates to costs absorbed by Corporate in 2012 that were allocated directly to other segments in 2013, but most of the reduction is an accumulation of savings across a variety of expenses.

Other expenses

  • Research and development costs increased by $121 thousand compared to Q2 2012 ($183 thousand year-to-date) due to increased costs associated with the field data capture system development project.
  • Finance costs in Q2 2013 decreased by $116 thousand compared to Q2 2012 ($272 thousand year-to-date) primarily due to a favourable swing in foreign exchange rates, but also due to decreasing debt levels.
  • Other operating expenses in Q2 2013 increased by $41 thousand compared to Q2 2012 (decreased by $218 thousand year-to-date) primarily due to non-recurring items in 2012.

Earnings

  • Earnings before income tax for Q2 2013 compared to Q2 2012 decreased by $0.2 million, primarily due to increased costs in the areas of research and development and sales and marketing. Year-to-date earnings before income tax was also impacted by a reduction in primarily non-recurring revenue for Q1 2013 compared to Q1 2012, resulting in a total decrease in earnings before income tax of $0.6 million.

Cash flow, working capital and debt

  • Working capital increased by $0.3 million from $2.3 million at December 31, 2012 to $2.6 million at June 30, 2013.
  • Year-to-date net cash from operating activities decreased by $1.0 million from $1.8 million for the six months ended June 30, 2012 to $0.8 million for the same period in 2013.
  • Total loans and borrowings, net of cash, decreased by $0.2 million from December 31, 2012 to June 30, 2013.

Outlook and forward looking statements

Investment in gas exploration and production in the Canadian Western Sedimentary basin remains volatile and unpredictable. During 2012, the Corporation replaced a significant amount of recurring revenue from shut-in wells with revenue from product innovation and new products coming to market. Ongoing growth will be dependent upon the Corporation successfully exploiting products it has recently brought to market, innovation of existing solutions, and the introduction of new products in order to replace revenue from depleted or shut-in wells. Current interest in the Corporation's new products and innovations on existing products provides management optimism for modest growth in its Canadian Energy Services business segment.

Continued growth in the Corporation's Canadian Energy Services business segment is dependent upon the success of the Corporation's sales effort, market acceptance of the Company's innovations and new products, and the successful and timely development of other products in 2013, all of which constitute risk factors that may negatively impact growth and create risk of the Corporation being unable to replace recurring revenue from depleted or shut-in wells.

During 2011, exploration activity in the Appalachian basin related primarily to shale gas and the deployment of multi-frac wells. This spur in activity invited greater competition into the region, primarily related to fabrication. The volatility in the price of gas during 2012 reduced exploration, and competition has subsequently declined. The uncertainty caused by the influx and departure of competition has created an opportunity for the Corporation's US Energy Services business segment, which has operated in the region for the past 35 years. The size of the Corporation's field staff, historic operations and track record have resulted in the division becoming the preferred vendor for measurement related services to a number of customers. This has resulted in preliminary interest in the Corporation's software based solutions.

The Corporation is building a sales team and rebuilding its management team in the Appalachian basin to maximize penetration in the region with its products and services. The Corporation is in the process of rolling out its existing technologies in the US and, given the investment in sales, expects growth in the second half of 2013.

Growth from the Corporation's US Energy Services business segment is dependent upon acceptance of the Corporation's technology solutions, the success of its sales capability and the successful hiring and training of staff to manage growth, none of which can be guaranteed. These risk factors, should they arise, will negatively affect management's outlook and reduce the Corporation's profitability.

The current economic environment in Canada and the changing nature of print and document management service businesses has resulted in companies with related ability or capacity entering into the imaging market, resulting in increased competition for the Corporation's Service Bureau Operations. In addition, offshore players are increasing their reach into Canada and are offering discounted data entry services, which erode overall margins. Management expects this trend to continue into 2013 and beyond. During 2012, management attempted to drive efficiencies from its existing operations to become more competitive and to target its solutions away from commoditized imaging and data entry services in order to improve margins. Management was not able to make the transition in 2012 and therefore the weak 2012 results are expected to continue through 2013.

The Corporation has signed a contract with a large financial institution to provide day-forward imaging services and is finalizing the scope of work, which is expected to be negotiated by September 2013. This contract is expected to result in growth commencing in Q4 of 2013, with full contribution from such contract in Q2 2014.

Based on change in operational management for the Service Bureau Operations late in 2012, combined with changes in sales personnel and approach, management is optimistic that it can generate revenue and profit growth in 2014.

Management's longer term outlook for the Service Bureau Operations is subject to the successful change in its sales strategy and the success of its sales capability, which cannot be assured. The failure to mitigate these risks would result in reduced performance from expectations. In addition, the contract signed with a large financial institution for day-forward imaging is dependent upon the completion of the pilot and the financial institution's ability to change its business processes, the timing of which carries uncertainty, which may in turn push revenue expectations to a later date.

About CriticalControl:

In a world of escalating globalization, with an increasingly transient workforce, enterprises have difficulty 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