Increased bad debt allowances.
Charges for layoffs.
Another big quarterly loss.
Violation of its covenants buried all the way at the bottom.
Wall - Writing. Writing - Wall.
Critical Control Announces Third Quarter 2015 Financial Results
23:04 EST Monday, November 16, 2015
CALGARY, ALBERTA--(Marketwired - Nov. 16, 2015) - Critical Control Energy Services Corp. (TSX:CCZ) today reported its financial results for the three and nine months ended September 30, 2015.
Revenue increased 15.5% to $30.5 million in the nine months ended September 30, 2015 compared to the same period in 2014 driven by growth in the Corporation's software solutions and geographic expansion in the United States. For the quarter, revenue remained steady at $10.3 million compared to $10.4 million in 2014, with the Corporation's recurring revenue growth from software and services replacing a $2.4 million decline in fabrication related non-recurring revenue in Q3 2014.
During 2015, the Corporation is transitioning to a focused digital oilfield solutions company with integrated software and services. As part of this transition and in light of the prevailing industry the Corporation is recognizing the following one-time charges for the nine month period ended September 30, 2015:
- $2.1 million in restructuring charges related to terminations ($1.4 million in Q3 2015);
- $1.2 million as an additional allowance for doubtful accounts ($1.2 million in Q3 2015);
- $0.4 million as an additional allowance for inventory obsolescence ($0.4 million in Q3 2015).
These one-time charges increase the Corporation's net loss before tax from $1.2 million for the nine months ended September 30, 2015 to $4.9 million compared to a loss before tax of $0.4 million for the period in 2014 (Q3 2015 loss increased from $0.6 million to $3.6 million compared to net income before tax of $0.5 million in 2014).
Driven by these one-time non-recurring charges, net loss for the nine months ended September 30, 2015 dropped to $2.8 million from $0.1 million in 2014. On a quarterly basis, net loss increased to $2.4 million in Q3 2015 from net income of $0.2 million in Q3 2014.
"Our top line numbers are indicative of our continued success to penetrate the market with our solutions despite turbulent industry conditions," said Alykhan Mamdani. "Notwithstanding our success during this quarter, we have taken charges for our plan to increase our resilience, improve our competitiveness and streamline our overhead; all with a view to deliver strong future profitability."
Quarter ended September 30, 2015 highlights
In 2015, Critical Control embarked on a restructuring of the Corporation to reposition itself as a digital oil field company focused on the penetration of its software partnered with its field and lab services into the US market. Phase 1 of this plan was completed in the first half of 2015 whereby all of the Corporation's non-energy business units, comprising of approximately 35% of the Corporation's revenue in 2014 were divested.
Phase 2 commenced in the second quarter of 2015, resulting in the Corporation acquiring the measurement services business of a larger company, giving the Corporation a presence in a number of new geographic areas in the United States.
Late in the second quarter of 2015, the Corporation commenced the integration of its Canadian and US business units into a single organization, reducing overhead, centralizing accounting, creating a sales and marketing team to span North America and reengineered its business processes to integrate its solutions with the objective of leveraging its size and centralization capability to obtain economies of scale. This third phase continued in the third quarter. The business process reengineering negatively impacted margins in the third quarter of 2015 with duplicate costs while certain business processes were relocated. Additionally, the reorganization resulted in the Corporation incurring one-time restructuring costs of $2.1 million in 2015, $1.4 million of which was in the third quarter.
Given the current price of oil and gas, the lack of investment in exploration and the impact to investment in the industry, oil and gas producers are facing significant financial obstacles. Management has observed that the impact of these obstacles has resulted in a number of bankruptcies in the third quarter of 2015. Although the Corporation's key customers have comparatively strong financial positions, a number of the Corporation's smaller and mid-sized customers may be at risk. Accordingly, upon review of the increased risk of insolvency in the industry and amounts due from the Corporation's specific clients, management has increased its provision for doubtful accounts by $1.2 million.
In addition, given the downturn in exploration and the resulting rapid decline in the Corporation's non-recurring fabrication business, management has reevaluated the value of its inventory and has conservatively increased its allowance for obsolescence by $0.4 million.
The additional charges taken by the Corporation in the third quarter of 2015, combined with the business process reengineering being implemented by management has resulted in the Corporation being in violation of its banking covenants. Although the lender has provided a waiver for the breach of covenants to the Corporation subsequent to September 30, 2015, the $2.5 million which would otherwise have been considered long-term, has been classified as current. Total indebtedness to the lender as at September 30, 2015 is $10.3 million. The Corporation is in discussions with the lender to either extend the waiver for a longer period of time or amend the financial covenants to reflect the charges taken by the Corporation and its longer term impact to profitability and to avoid future breaches.