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CriticalControl Announces First Quarter 2014 Financial Results

CALGARY, ALBERTA -- (Marketwired) -- 05/09/14 -- CriticalControl Solutions Corp. (TSX:CCZ) today reported its financial results for the three months ended March 31, 2014.

"Significant progress in bringing our key strategic longer term investments to market is the highlight of our quarter," said Alykhan Mamdani, President and CEO of CriticalControl. "The two material sales of ProMonitor announced in the quarter combined with preparations for going to market in the US with our core software solutions positions us for growth in 2014."

Quarter ended March 31, 2014 highlights

Revenue


--  Total revenue was $11.6 million in Q1 2014 compared to $10.7 million in
    Q1 2013, representing an increase of $0.9 or 9.0%.  
--  Revenue from the Canadian Energy Services was $3.2 million in Q1 2014
    compared to $3.1 in Q1 2013, representing an increase of $0.1 million or
    3.7%. 
--  Revenue from the US Energy Services business increased by $0.5 million
    or 14.7%, from $3.8 million in Q1 2013 to $4.3 million in Q1 2014.  
--  Revenue from the Corporation's Service Bureau Operations increased by
    $0.3 million or 8.2%, from $3.8 million in Q1 2013 to $4.1 million in Q1
    2014. 

Gross margin percentage


--  Gross margin percentage for the Corporation was 31.5% in Q1 2014
    compared to 36.5% in Q1 2013. 
--  Canadian Energy Services gross margin percentage decreased from 56.2% in
    Q1 2013 to 43.1% in Q1 2014. The decrease is attributable to negative
    margins on the implementation of a large strategic ProMonitor project. 
--  US Energy Services gross margin percentage decreased from 28.7% in Q1
    2013 to 26.2% in Q1 2014. The decrease is driven by the costs associated
    with ProChart implementation. 
--  Service Bureau Operations gross margin percentage decreased from 28.5%
    in Q1 2013 to 27.9% in Q1 2014. 

Selling and administrative expenses


--  Selling and administrative expenses for the Corporation increased by
    $0.1 million from $3.7 million in Q1 2013 to $3.8 million in Q1 2014. Of
    the increase, $76 thousand can be attributed to the impact of the weaker
    Canadian dollar in relation to the US dollar. Other changes in selling
    and administrative expenses were primarily offsetting.

Other expenses


--  Research and development expense decreased by $65 thousand in Q1 2014
    compared to Q1 2013, but when the impact of amounts capitalized is
    considered, expenditures increased by $44 thousand. 
--  Finance costs in Q1 2014 decreased by $0.1 million compared to Q1 2013.
    The decrease was primarily attributable to a favorable swing in foreign
    exchange rates, and decreased debt levels in relation to Q1 2013. 
--  Other operating expenses in Q1 2014 decreased by $0.1 million compared
    to Q1 2013, due to a favorable adjustment to the onerous lease provision
    for Edmonton. 

Earnings and net earnings


--  Loss before income tax for Q1 2014 remained consistent at $0.2 million
    compared to Q1 2013.  
--  Net loss for Q1 2014 remained consistent at $0.2 million compared to Q1
    2013.

Cash flow, working capital and debt


--  Working capital decreased by $0.8 million from $2.3 million at December
    31, 2013 to $1.5 million at March 31, 2014. The main drivers of this
    were increased borrowings on the Corporation's secured bank facility and
    the accrual of a loss on a large strategic ProMonitor project. 
--  Net cash from operating activities decreased by $0.4 million from $0.5
    million in Q1 2013 to $0.1 million in Q1 2014. The impact of income tax
    refunds in Q1 2013 and income tax payments in Q1 2014 accounted for the
    decrease.

Outlook and forward looking statements

The Corporation has invested significant resources in the past two years on initiatives within its Canadian and US Energy business which are anticipated to bear fruit in the next six calendar quarters. Revenue growth prior to the benefits of these initiatives being realized provides management optimism for the remainder of the year.

Specifically, the Corporation continued development of two material software initiatives related to its Canadian Energy Services business, ProMonitor and ProFDC. ProMonitor currently has two separate modules consisting of a schematics management application and a pipeline corrosion risk application offered through a common map-based interface. CriticalControl launched the schematics module commercially in 2013, with certain small to medium sized producers adopting the platform. One of Canada's largest producers adopted the schematics module, as announced by the Corporation during Q1 2014. In order to implement the module, data driven schematics need to be produced from public and proprietary databases to form the first draft schematic, which is then refined and stored as data in the system. Given the size of the producer, the number of assets in the field and the complexity of their gathering systems that integrate assets from the well to the plant, the scope of the implementation is material and significantly more complex than the Corporation's other clients.

The scope of the implementation required CriticalControl to triple the size of its team and accelerate training. The complexity of the project, combined with the fact that the schematics module is new and currently lacks the automated processes required for the scope of the producer's field assets, has resulted in an inefficient implementation. Development of the ProMonitor tool will continue and is expected to improve productivity later in 2014. However, time constraints have necessitated the use of manual efforts to complete the initial phases of the implementation, resulting in a negative margin for ProMonitor. The negative margin is attributable to the loss on the large producer implementation project of $0.4 million in Q1 2014, including a provision for $0.2 million. Management expects further losses on the contract in 2014 until the software can be adapted to materially offset current manual processes, and accordingly has taken the additional $0.2 million provision this quarter. Inability to complete necessary software changes in a timely manner would result in an investment greater than the provision taken.

The pipeline corrosion risk module was adopted by a prominent Canadian producer in Q1 2014, prior to its commercial launch in Q2 2014. Both modules of ProMonitor require significant development in the next six months, and business processes need to be built to handle the scope of growth. Notwithstanding the forgoing, the market acceptance of ProMonitor as indicated by these material engagements, reduce a critical risk factor in the commercialization of the product.

The Corporation's other large development initiative, ProFDC, a field data capture system, continues to be in development, with initial modules expected to become commercial later in 2014. The ability to successfully complete development, the ability to attract and retain implementation staff, the ability to build viable business processes and broader market acceptance of the products are risk factors that could materially, adversely affect the Corporation's profitability in 2014 and 2015.

The Corporation is in the process of finalizing its core Canadian applications, ProChart, ProTrend and NetFlow, for the US market. Management views leveraging its strong presence in the Appalachians to penetrate the US market with its core products as a strong vehicle for growth in the next year. This process is near completion, and the Corporation has been focused on building its US management and sales teams to leverage its software in the US market. These costs will increase in 2014 as the Corporation intends to add a senior gas measurement resource to its US management team. In order to benefit from these expenditures, the Corporation needs to be successful in implementing its core applications in the US. Although management is optimistic of the viability of its plan, market acceptance of these applications cannot be certain and could negatively affect profitability in 2014.

The Corporation was expecting increased revenue in Q1 2014 from its Service Bureau Operations related to a contract from a large Canadian bank. The expansion of the project has been delayed by the customer due to internal issues, and expansion into Quebec has been delayed to Q4 2014 from the original Q2 2014 expectation. Growth in the scope of this project is at the discretion of the customer, and further delays are outside of management's control.

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.

Contacts:
CriticalControl Solutions Corp.
Alykhan Mamdani
President & CEO
(403) 705-7500

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