CALGARY, ALBERTA--(Marketwire - Nov. 6, 2012) - CriticalControl Solutions Corp. (TSX:CCZ) today reported its financial results for the three and nine months ended September 30, 2012.
"The third quarter is historically our weakest quarter of the year," said Alykhan Mamdani, President & CEO of CriticalControl. "Given our continued investment in R&D and expected increased revenue from the strategic selling success associated with all parts of our business, we anticipate returning to our historic levels of profitability in 2013."
Quarter ended September 30, 2012 highlights
- Total revenue of $11.2 million in Q3 2012 ($36.0 million year-to-date) represents a 9% decrease (3% year-to-date) from the same period in 2011.
- Revenue from the Canadian Energy Services business increased by 14%, to $3.0 million in Q3 2012 from $2.7 million in Q3 2011, resulting from the acquisitions of Vertex in Q4 2011 and DGL early in Q1 2012. Year-to-date revenue increased by 14% from $8.4 million in 2011 to $9.6 million in 2012.
- Revenue from the US Energy Services business decreased by 7%, to $4.5 million in Q3 2012 from $4.8 million in Q3 2011. Year-to-date revenue increased by 5% from $12.9 million in 2011 to $13.6 million in 2012, driven by $1.4 million of primarily organic growth in recurring revenue, offset by a $0.7 million decline in fabrication, assembly and equipment revenue.
- Revenue from the Corporation's Service Bureau Operations decreased by 24%, from $4.9 million in Q3 2011 to $3.7 million in Q3 2012. Year-to-date revenue decreased by 19% from $15.9 million in 2011 to $12.9 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 slightly to 36.4% in Q3 2012 from 35.2% in Q3 2011 (year-to-date increased to 36.8% from 36.2%).
- Canadian Energy Services gross margin percentage declined from 66.6% in Q3 2011 (year-to-date 63.3%) to 59.5% in Q3 2012 (year-to-date 56.9%), 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 23.9% in Q3 2011 to 27.0% in Q3 2012 (year-to-date increased from 24.4% to 27.3%). The increase was driven by a focus on recurring revenue, pricing initiatives and cost control.
- Service Bureau Operations gross margin percentage remained relatively flat at 29.0% in Q3 2012 compared to 29.2% in Q3 2011 (year-to-date 31.8% in 2012 compared to 31.5% in 2011).
Selling and administrative expenses
- Selling and administrative expenses for the Corporation decreased by $207,000 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 slightly.
- Selling and administrative expenses for the Canadian Energy Services business increased in Q3 2012 compared to 2011 by $193,000 ($481,000 year-to-date) primarily related to increased sales, marketing and business development activities in Q1 and Q2; facility costs related to acquisitions; and strategic hires.
- Selling and administrative expenses for the US Energy Services business increased in Q3 2012 compared to 2011 by $35,000 ($342,000 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 Q3 2012 compared to 2011 by $188,000 ($434,000 year-to-date) primarily due to continued streamlining and integration of operations, and reduced sales and marketing expenses.
- Selling and administrative expenses for Corporate decreased in Q3 2012 compared to 2011 by $247,000 ($375,000 year-to-date) primarily attributable to non-recurring costs in 2011, reduced staffing, and reduced reliance on consultants.
Other operating expenses
- Other operating expenses increased from $38,000 in Q3 2011 to $246,000 in Q3 2012 due to the loss on disposal of leasehold improvements resulting from moving locations in Winnipeg. The impact on earnings before income tax was offset by an income inclusion related to the reversal of deferred lease inducements associated with the terminated lease. On a year-to-date basis, the increase in other operating expenses was even higher ($432,000) because of favorable estimate changes netted with the 2011 expenses that did not recur in 2012.
- Net earnings for the quarter when compared to Q3 2011 decreased by $407,000 to a net loss of $130,000. Of the decrease, $106,000 (net of income tax) is attributable to foreign exchange losses. Year-to-date net earnings decreased by $778,000 to $240,000.
Cash flow and balance sheet
- Working capital decreased by $0.7 million from $4.4 million at December 31, 2011 to $3.7 million at September 30, 2012.
- For the nine months ended September 30, net cash from operating activities increased by $0.9 million from $1.3 million in 2011 to $2.2 million in 2012.
- Total loans and borrowings, net of cash, decreased by $0.9 million from December 31, 2011 to September 30, 2012 despite an additional $1.0 million of debt incurred related to the DGL acquisition.
Reduced revenue from the Corporation's Service Bureau Operations is attributable to the completion of two major projects that were not replaced in 2012. Subsequent to the end of Q3 2012, the Corporation executed a master services agreement with a Schedule A Bank in Canada for the outsourced handling of certain business processes on an ongoing basis. The original term of the contract is three years. The ongoing revenue from this contract is expected to increase profitability of the Service Bureau Operations by Q2 2013 to the level experienced in 2011 based on a projected volume of documents. There can be no assurance that the volume of documents will meet management's expectations, and the agreement does not guarantee such volumes. In addition, ramp-up and delivery of such a contract is subject to certain risks that may affect overall profitability of the contract.
The Corporation has downsized its Winnipeg operations, which has resulted in reduced rent of approximately $20,000 per month starting in September 2012. Costs of downsizing such operations were recognized in the first three quarters of 2012, offset in part by a one-time benefit from the reversal of deferred lease inducements no longer applicable to the Winnipeg operations.
Gas prices remained weak during 2012, resulting in 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, which remains unpredictable. 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 Services business.
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 2012. The Corporation continues to increase its management costs and research & development costs to rewrite certain applications acquired by the Corporation and build out its suite of products. 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 2013 to offset revenue losses 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 expectation on increasing profitability in the Corporation's Service Bureau Operations business is dependent upon a contract with a Schedule A Bank in Canada. The expected revenue from this contract is based upon certain volumes represented in a request for proposal issued by the bank, but is not guaranteed under the master services agreement. The statement of work with the bank is currently being negotiated and actual revenue may differ from management's current expectations.
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 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.
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.