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CriticalControl Announces Second Quarter 2014 Financial Results

CALGARY, ALBERTA -- (Marketwired) -- 08/07/14 -- CriticalControl Solutions Corp. (TSX: CCZ) today reported its financial results for the three months ended June, 2014.

"We are on track to bring to market in the second half of 2014 the initiatives we have invested materially in over the past two years," said Alykhan Mamdani, President and CEO of CriticalControl. "The financing we completed in the second quarter provides us with additional flexibility for marketing and launching these initiatives as well as continued expansion in the US market."

Quarter ended June 30, 2014 highlights

Revenue

--  Total revenue was $12.7 million in Q2 2014 compared to $11.9 million in
    Q2 2013, representing an increase of $0.8 or 6.6%. Year-to-date revenue
    increased by $1.8 million or 7.7%.
--  Revenue from Canadian Energy Services was $3.3 million in Q2 2014
    compared to $3.2 million in Q2 2013, representing an increase of $0.1 or
    2.7%. Year-to-date revenue increased by $0.2 million or 3.2%.
--  Revenue from the US Energy Services business increased by $0.8 million
    or 18.4%, from $4.4 million in Q2 2013 to $5.2 million in Q2 2014. Year-
    to-date revenue increased by $1.4 million or 16.7%.
--  Revenue from the Corporation's Service Bureau Operations decreased by
    $0.1 million or 2.1%, from $4.3 million in Q2 2013 to $4.2 million in Q2
    2014. Year-to-date revenue increased by $0.2 million or 2.7%.

Gross margin percentage

--  Gross margin percentage for the Corporation was 35.3% in Q2 2014
    compared to 38.8% in Q2 2013. Year-to-date gross margin decreased from
    37.7% to 33.5%.
--  Canadian Energy Services gross margin percentage decreased from 57.9% in
    Q2 2013 to 48.4% in Q2 2014. Year-to-date gross margin decreased from
    57.1% to 45.8%. The decrease is primarily attributable to negative
    margins associated with the rapid expansion and training related to
    ProMonitor in order to implement a large strategic ProMonitor project.
--  US Energy Services gross margin percentage decreased slightly from 29.2%
    in Q2 2013 to 28.7% in Q2 2014. Year-to-date gross margin decreased from
    29.0% to 27.5%.
--  Service Bureau Operations gross margin percentage decreased from 34.4%
    in Q2 2013 to 33.0% in Q2 2014. Year-to-date gross margin decreased from
    31.6% to 30.5%.

Selling and administrative expenses

--  Quarterly selling and administrative expenses for the Corporation were
    flat at $3.9 million in Q2 2014 and Q2 2013. Year-to-date selling and
    administrative expenses increased by $0.1 million. The year-to-date
    increase 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 $39 thousand in Q2 2014
    compared to Q2 2013, and $103 thousand year-to-date, but when the impact
    of amounts capitalized and SR&ED tax credits is considered, expenditures
    increased by $39 thousand for the quarter and $83 thousand year-to-date.
--  Finance costs in Q2 2014 increased by $268 thousand compared to Q2 2013
    and $147 thousand year-to-date. The increases were attributable to an
    unfavorable swing in unrealized foreign exchange, offset somewhat by
    lower interest associated with decreased debt levels and lower bad debt
    expense in relation to 2013.
--  Other operating expenses in Q2 2014 increased by $97 thousand compared
    to Q2 2013 and decreased $38 thousand year-to-date. A favourable
    adjustment to the Edmonton onerous lease provision in Q1 2014 was offset
    by a non-recurring expense in Q1 2014 and increased termination costs in
    Q2 2014.

Earnings and net earnings

--  The results for Q2 2014 and year-to-date were impacted by certain non-
    recurring or non-cash items, including unfavorable swings in unrealized
    foreign exchange, a loss on a large strategic ProMonitor project, a
    reduced onerous lease provision and other smaller or offsetting amounts.
    When the impact of these items is excluded from the results, the 2014
    adjusted earnings (loss) before income tax is comparable to 2013.
--  Loss before income tax for Q2 2014 was $114 thousand compared to
    earnings of $370 thousand for Q2 2013. The year-to-date loss in 2014 was
    $352 thousand compared to earnings of $150 thousand in 2013.
--  Net loss for Q2 2014 was $110 thousand compared to net earnings of $270
    thousand for Q2 2013. The year-to-date net loss in 2014 was $280
    thousand compared to net earnings of $90 thousand in 2013.

Cash flow and working capital

--  Working capital increased by $2.0 million from $2.3 million at December
    31, 2013 to $4.3 million at June 30, 2014. The main driver of this was
    private placement net proceeds of $2.7 million.
--  Year-to-date net cash from operating activities decreased by $1.7
    million from $1.0 million in 2013 to negative $0.7 million in 2014. The
    impact of income tax refunds in 2013 and income tax payments in 2014
    accounted for $0.7 million of the year-to-date decrease, investment in
    working capital for growth accounted for $0.7 million, and the remaining
    decrease is primarily attributable to expenses incurred in relation to
    the loss on a significant ProMonitor project.

Outlook and forward looking statements

CriticalControl has invested significant resources in the past two years on initiatives within its Canadian and US Energy business. Management believes that the Corporation is on track with these initiatives, and they are anticipated to bear fruit in the next five calendar quarters. Modest revenue growth in the first half of the year 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, 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 year-to-date negative margin is attributable to the loss recognized on the large producer implementation project estimated at $576, which includes a provision of $200 for future losses. Management expects these further losses on the contract until the software can be adapted to materially offset current manual processes. Progress has been made in this regard and productivity has increased since Q1 2014, and further benefits are expected to be realized from the software development initiatives by the end of 2014. 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, reduces 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. 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 has implemented its ProTrend software in its fluid analysis labs in the US and is delivering fluid analysis results to its clients through this version of ProTrend, which has increased ProTrend's potential exposure to the US market. The US version of ProTrend to enable an oil and gas producer to validate and manage its fluid analysis from all third parties is expected to become available by Q4 2014. This expectation is based on development and testing time, which cannot be predicted with complete certainty. A delay in completion of development will result in the product being delayed to potential clients in the US.

The Corporation has launched its combined electronic fluid measurement meter and NetFlow software solution on a single price rental model in Canada in July 2014 and is expecting to launch a similar service in the US later in Q3 2014. Management is optimistic that this combined software and hardware solution will resonate with the needs of oil and gas producers in this uncertain market. Although early response to the solution has been positive, it is too early in the sales process to predict the impact of this solution to the Corporation's future growth.

In addition to the investment made on these strategic initiatives, the Corporation increased inventory during Q2 2014 in relation to the contracted fabrication of measurement related equipment. Management expects to complete, deliver and invoice these assemblies in Q3 2014. A delay in completion and shipping of these assemblies would delay the related revenue recognition.

The Corporation was expecting increased revenue in 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
www.criticalcontrol.com

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