CriticalControl Solutions Corp.
TSX : CCZ

CriticalControl Solutions Corp.

November 07, 2013 20:17 ET

CriticalControl Announces Third Quarter 2013 Financial Results

CALGARY, ALBERTA--(Marketwired - Nov. 7, 2013) - CriticalControl Solutions Corp. (TSX:CCZ) today reported its financial results for the three and nine months ended September 30, 2013.

"We executed on our objectives for Q3, which generated improved performance in each of our business segments," said Alykhan Mamdani, President and CEO of CriticalControl. "Continued increases in our recurring revenue and improved operational performance will support the execution of our strategic vision in 2014."

Quarter ended September 30, 2013 highlights

Revenue

  • Total revenue of $11.9 million in Q3 2013 represents a 6.0% increase from $11.2 million in Q3 2012. Year-to-date revenue decreased by $1.4 million or 4.0%. An increase of $0.4 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 $1.2 million in non-recurring revenue from US and Canadian Energy Services.

  • Revenue from the Canadian Energy Services business increased by 6.0%, to $3.2 million in Q3 2013 from $3.0 million in Q3 2012. Year-to-date revenue decreased by $0.1 million or 0.5%. Year-to-date recurring revenue increased by $0.3 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 10.3% from $4.5 million in Q3 2012 to $4.9 million in Q3 2013. Year-to-date revenue decreased by $0.5 million or 3.4%. A $0.1 million increase in year-to-date recurring revenue and the impact of foreign exchange were offset by decreases in non-recurring revenue of $0.8 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 relatively flat in Q3 2013 when compared to Q3 2012. Year-to-date revenue decreased by $0.9 million or 7.1% 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 (1) percentage

  • Gross margin percentage for the Corporation increased from 36.4% in Q3 2012 to 36.9% in Q3 2013. Year-to-date gross margin percentage increased from 36.8% to 37.5%.

  • Canadian Energy Services gross margin percentage decreased from 59.5% in Q3 2012 to 53.6% in Q3 2013. Year-to-date gross margin percentage decreased from 56.8% to 55.9%. Lower margins in the implementation stage of recurring revenue contracts had a more significant impact on margins in Q3 2013 than it has in previous quarters.

  • US Energy Services gross margin percentage increased from 27.0% in Q3 2012 to 32.1% in Q3 2013. Year-to-date gross margin percentage increased from 27.3% to 30.1%.

  • Service Bureau Operations gross margin percentage for Q3 2013 was consistent with Q3 2012 at 29.0%. Year-to-date gross margin percentage decreased from 31.8% to 30.8%, 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 $3.4 million in Q3 2012 to $3.7 million in Q2 2013. Year-to-date selling and administrative expenses increased by $0.6 million.

  • Selling and administrative expenses for the Canadian Energy Services business decreased by $0.1 million compared to Q3 2012, partially attributable to costs absorbed by Corporate in Q3 2013. Year-to-date selling and administrative expenses increased by $0.1 million, primarily related to salaries for strategic hires

  • Selling and administrative expenses for the US Energy Services business increased by $0.1 million compared to Q3 2012. Year-to-date selling and administrative expenses increased by $0.3 million. The increases are primarily attributable to increased sales and marketing costs.

  • Selling and administrative expenses for the Service Bureau Operations increased by $18 thousand compared to Q3 2012. Year-to-date selling and administrative expenses increased by $45 thousand.

  • Selling and administrative expenses for Corporate increased by $0.2 million compared to Q3 2012 and increased by $0.1 million year-to-date. The increase in Q3 2013 relates to infrastructure costs that were charged to Canadian Energy Services in 2012, reversal of bonus accruals in 2012 and increased salary costs. The year-to-date impact was offset by other cost savings throughout the year.

Other expenses

  • Research and development costs decreased by $0.2 million compared to Q3 2012 ($0.2 million year-to-date). The Corporation was required under IFRS to capitalize certain development costs starting in 2013. The impact of this was to normalize research and development expenses in relation to 2012. The decline in Q3 and year-to-date is primarily attributable to Scientific Research and Experimental Development (SR&ED) tax credits recognized in Q3 2013.

  • Finance costs in Q3 2013 were relatively flat when compared to Q3 2012 but decreased by $0.3 million year-to-date. Interest savings in Q3 2013 were offset by other costs. The year-to-date decrease was primarily attributable to a favorable swing in foreign exchange rates, but decreasing debt levels also had a significant impact.

  • Other operating expenses in Q3 2013 decreased by $0.2 million compared to Q3 2012 ($0.5 million year-to-date) due to non-recurring items in 2012.

Earnings and net earnings

  • Earnings before income tax for Q3 2013 compared to Q3 2012 increased by $0.5 million to $0.3 million. Year-to-date earnings before income tax increased by $0.1 million to $0.5 million.

  • Net earnings for Q3 2013 compared to Q3 2012 increased by $0.3 million to $0.2 million. Year-to-date net earnings increased by $0.1 million to $0.3 million.

Cash flow, working capital and debt

  • Working capital increased by $0.6 million from $2.3 million at December 31, 2012 to $2.9 million at September 30, 2013.

  • Year-to-date net cash from operating activities decreased by $0.2 million from $2.4 million for the nine months ended September 30, 2012 to $2.2 million for the same period in 2013.

  • Total loans and borrowings, net of cash, decreased by $0.9 million from December 31, 2012 to September 30, 2013.

Outlook and forward looking statements

Investment in gas exploration and production in the Canadian Western Sedimentary basin remains volatile and unpredictable. 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 growth in its Canadian Energy Services business segment.

Continued growth in the Corporation's Canadian Energy Services business segment is dependent upon the continued success of the Corporation's sales effort, market acceptance of the Company's innovations and new products, the successful deployment of the Corporation's ProMonitor solution launched in February 2013 and the successful and timely development of its field data capture solution, all of which constitute risk factors that may negatively impact growth.

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 growing interest in the Corporation's software based solutions.

The Corporation is building a sales team and reinforcing 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 development, sales and potential channel partnerships, expects evidence of success to become material in 2014.

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, if they arise, will have a negative impact on management's outlook and 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 2014. During 2012 and 2013, management has 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.

Based on change in operational management for the Service Bureau Operations and recent success in establishing new customer revenue, which is expected to ramp up over 2014, 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. Failure to mitigate these risks would result in reduced performance from expectations. In addition, expected growth from a contract signed with a large financial institution for day-forward imaging is dependent upon the successful ramp up of volume resulting from a change in the client's current process, 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
    Tel (403) 705-7500