CALGARY, ALBERTA — (Marketwire) — 08/02/12 — 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
Gross margin percentage
Selling and administrative expenses
Other operating expenses
Earnings
Cash flow and balance sheet
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.
Contacts:
CriticalControl Solutions Corp.
Alykhan Mamdani
President & CEO
(403) 705-7500
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