Cygnal Technologies Corporation (TSX:CYN) ("Cygnal" or "the Company"), a leading Canadian provider of network communication solutions, today announced its financial results for the three months ended June 30, 2006.
In addition, the Company has filed restated financial results and management's discussion and analysis for the periods ended September 30, 2005, December 31, 2005, and March 31, 2006 in order to comply with technical requirements regarding the classification of certain debt facilities as current rather than long-term liabilities. As such, the restatement affects the balance sheet for such dates but has no impact on Cygnal's previously stated revenues, income or other operating results for such periods.
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Summary of Q2 2006 Results
- Revenues were $29.6 million, down from $31.8 million in the second
quarter of 2005.
- Gross margin was 23.9%, up from 21.8% in the second quarter of the
previous year.
- Selling, general and administrative expenses were $7.4 million, down
from $8.6 million in Q2 2005.
- EBITDA was a loss of $0.8 million, compared to an EBITDA loss of
$1.7 million in the second quarter last year.
- Net loss was $2.3 million, or $0.08 per share, compared to a loss of
$1.7 million or $0.06 per share in the second quarter of 2005.
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"Our cost structure continued to improve in the second quarter, with both SG&A and cost of sales declining in absolute terms and as a percentage of revenue," said Jos Wintermans, President and CEO, Cygnal Technologies Corporation. "Even more importantly, in the key Central Region of our Network Operations division, sales bookings have risen significantly in recent months following an overhaul of the sales organization and the implementation of more disciplined processes for identifying and converting prospects. I believe the revenue impact will be seen in upcoming quarters. We are expecting Cygnal to generate positive EBITDA in the second half of the year."
Mr. Wintermans continued: "Our Communications Services division, known as White Radio, continues to be the strongest performer in the Company. Segment revenues are up 16 percent from the same quarter last year as a result of the management's focus and the growing demand for wireless, telecom and VoIP technology."
Financial Review
Cygnal's revenues for the three months ended June 30, 2006 were $29.6 million, a decrease of $2.1 million or 6.8% from revenues of $31.8 million in the comparable period in 2005. Revenue in Cygnal's Network Operations segment decreased by $4.2 million to $15.2 million, due to the absence this year of certain larger projects which generated revenue in Q2 2005, and to poor bookings and a weak sales funnel at the beginning of the second quarter. At the beginning of the second quarter CEO Jos Wintermans assumed a leadership role in the sales function, made significant personnel changes and revamped internal processes. These actions resulted in significant strengthening of the sales funnel and greatly increased bookings in June and July which should result in increased revenues for the remainder of this year.
Revenue in the Communications Services segment grew by $2.0 million in the quarter to $14.4 million, due to improvements in all categories of the business prompted by new product lines. The Q2 2006 revenue split between Network Operations and Communications Services was 51%/49%, respectively, compared to 61%/39% a year earlier.
Gross profit was $7.1 million in the second quarter, a moderate increase from $6.9 million in Q2 2005 despite lower sales in the quarter. Expressed as a percentage of revenue, gross margin was 23.9%, up from 21.8% a year earlier. Gross profit improved in both operating segments. Network Operations benefited from improved cost controls, changes in the sales mix, and a revamping of the sales process to improve resource utilization and service delivery. Communications Services has grown its sales of higher margin product lines such as wireless, new telecom products and the rollout of VoIP by cable operators.
SG&A expenses prior to severance costs decreased by $1.2 million to $7.4 million in Q2 2006, representing 25% of revenues, compared to $8.6 million or 27% of revenues in the second quarter of 2005. The decrease was driven by headcount reductions, overall expense reductions in Network Operations, and a $0.7 million increase in foreign exchange gain. Severance costs grew from $0.1 million to $0.4 million.
Cygnal recorded an EBITDA loss of $0.8 million in the second quarter of 2006, representing a $1.0 million improvement from a loss of $1.7 million a year earlier. The improvement was attributable to improved margins and a decline in SG&A.
The term "EBITDA" refers to earnings before deducting interest, taxes, depreciation and amortization. The Company believes that EBITDA is a measure of how well the Company's operations are performing. The Company believes that EBITDA is useful supplemental information as it provides an indication of the results generated by the Company's continuing business activities prior to taking into consideration how those activities are financed and taxed, and also prior to taking into consideration asset depreciation. EBITDA is not a recognized measure under GAAP and, accordingly, investors are cautioned that EBITDA should not be construed as an alternative to net earnings or loss determined in accordance with GAAP as an indicator of the financial performance of the Company or as a measure of the Company's liquidity and cash flows. The Company's method of calculating EBITDA may differ from other issuers and, accordingly, EBITDA may not be comparable to similar measures presented by other issuers.
Net loss for the quarter was $2.3 million, or $0.08 per share, compared to a loss of $1.7 million or $0.06 per share in the second quarter of 2005. The increase in net loss was mainly due to the recognition of $0.8 million of future tax assets in Q2 2005, which had the effect of directly reducing net loss for that period. On a pre-tax basis, loss before taxes was $2.3 million in Q2 2006, compared to $2.5 million a year earlier. Pre-tax loss was negatively impacted by a $0.8 million increase in interest expense, which was $1.1 million in the quarter.
Cygnal used $1.1 million of cash for operating activities in the second quarter of 2006, compared to cash generated of $1.4 million in the comparable period of the prior year. Financing activities provided $1.1 million of cash, including new debt financing obtained from Laurus Master Fund, Ltd. ("Laurus"), compared to cash utilized of $0.8 million in Q2 2005.
Further details on Cygnal's results and business outlook can be found in the Company's Consolidated Financial Statements and Interim Management's Discussion and Analysis filed at www.sedar.com.
Restatement of Prior Balance Sheets
Cygnal has two primary lenders, LaSalle Business Credit for its Communications Services segment and Laurus for the Network Operations segment.
Historically, the amounts outstanding under the Laurus arrangement were classified as long-term liabilities. On August 14, 2006, the Board of Directors approved a determination that the Laurus convertible secured note and revolving loan, both covered under the same security agreement, should be classified as a current liability based on the guidance provided in FASB Emerging Issues Task Force issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement, as the agreement requires a lockbox and contains subjective acceleration clauses. Under the lock box arrangement, all cash receipts are swept daily to reduce outstanding borrowings. As a result, the borrowings outstanding under the Laurus agreement are classified as a current liability even though the term of the convertible secured note extends to September 30, 2008 (except with respect to the January 30, 2006 revolving note which is not due until January 30, 2008), and the Company is not in breach of any clauses that would cause acceleration of repayment of the borrowings. These acceleration clauses are typical requirements in commercial credit agreements. This change in classification is retroactive to September 30, 2005 when the agreement was executed. As a result, the Company has restated and re-filed its unaudited interim consolidated financial statements for the three and nine months ended September 30, 2005, the audited consolidated financial statements for the year ended December 31, 2005 and the unaudited consolidated financial statements for the three months ended March 31, 2006. In addition, the Company has restated and refiled its management's discussion and analysis for such periods.
These changes only affect the balance sheets as at such dates. Previously filed consolidated statements of loss and deficit are unchanged. There is no impact on operations, cash flows, loan repayment obligations or borrowing covenants.
Restated financial results for the prior periods have been filed at www.sedar.com.
Notice of Conference Call
Cygnal's senior management team will hold an investor conference call to further discuss the Company's second quarter financial results (August 15, 2006 at 9:00 am) (EDT). To participate, dial 416-644-3428 or 1-800-814-3911. A taped replay will be available until midnight on Tuesday, August 22, 2006 at 416-640-1917 or 1-877-289-8525, reference number 21200003. The call will be webcast live and archived at www.newswire.ca and at www.cygnal.ca.
About Cygnal
Cygnal Technologies Corporation is a leading Canadian provider of network communication solutions including the design, integration, installation, maintenance and management of wired and wireless solutions and networks. The Company offers a full range of technologies and solutions for service providers and enterprise customers. Cygnal has expertise in voice, video and data solutions over traditional and next generation converged technologies.
Cygnal Technologies Corporation is headquartered in Markham, Ontario and supports end-user customers and business partners through 12 offices across Canada, including Vancouver, Edmonton, Calgary, Winnipeg, London, Burlington, Toronto, Ottawa, Montreal, Quebec City and Halifax. Cygnal common shares are listed on the Toronto Stock Exchange under the symbol CYN.
This news release contains forward-looking statements. Often, but not always, forward looking statements can be identified by the use of words such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Cygnal to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Examples of such statements include, but are not limited to: factors relating to trends in the communications equipment and services industry, including (1) Cygnal's ability to maintain and grow its revenues; (2) the opportunity for greater competition to build network infrastructure; (3) the trend toward building next generation core networks; (4) outsourcing by businesses of the design, build and maintenance of their network infrastructure; and (5) an increased demand for private broadband networks. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this news release. Such forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to: Cygnal's ability to meet its obligations under its debt facilities; full implementation of Cygnal's cost reduction plan; Cygnal's ability to compete and to adapt to technological development; the continuation of the Company's relationships with its suppliers; Cygnal's ability to recruit and retain qualified personnel; the continuation of positive economic and market conditions, and the ability of provisions in service agreements to limit exposure to potential claims. While Cygnal anticipates that subsequent events and developments may cause its views to change, Cygnal specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing Cygnal's views as of any date subsequent to the date of this news release.
Although Cygnal has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. These factors are not intended to represent a complete list of the factors that could affect Cygnal.
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CYGNAL TECHNOLOGIES CORPORATION
Consolidated Statements of Loss and Deficit
For the Period Ended June 30, 2006
-------------------------------------------------------------------------
Three months ended Six months ended
---------------------------- ----------------------------
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
(Unaudited) (Unaudited)
$ $ $ $
REVENUE 29,628,587 31,774,904 60,096,184 60,846,967
COST OF SALES 22,539,033 24,838,129 46,334,770 48,070,734
-------------------------------------------------------------------------
7,089,554 6,936,775 13,761,414 12,776,233
SELLING, GENERAL
AND ADMINISTRATIVE
EXPENSES 7,442,798 8,628,114 15,958,628 17,596,541
SEVERANCE COSTS 425,342 55,624 533,974 55,624
-------------------------------------------------------------------------
(778,586) (1,746,963) (2,731,188) (4,875,932)
-------------------------------------------------------------------------
Amortization
of capital and
intangible
assets 438,623 422,312 889,636 922,171
Interest
expense 1,118,572 302,370 1,995,507 559,641
-------------------------------------------------------------------------
1,557,195 724,682 2,885,143 1,481,812
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LOSS BEFORE
INCOME TAXES (2,335,781) (2,471,645) (5,616,331) (6,357,744)
RECOVERY OF
INCOME TAXES - (783,057) - (2,057,475)
-------------------------------------------------------------------------
NET LOSS (2,335,781) (1,688,588) (5,616,331) (4,300,269)
DEFICIT,
BEGINNING OF
PERIOD (49,093,303) (20,860,765) (45,812,753) (18,249,084)
-------------------------------------------------------------------------
DEFICIT, END
OF PERIOD (51,429,084) (22,549,353) (51,429,084) (22,549,353)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
BASIC LOSS PER
SHARE ($0.08) ($0.06) ($0.20) ($0.16)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
DILUTED LOSS
PER SHARE ($0.08) ($0.06) ($0.20) ($0.16)
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CYGNAL TECHNOLOGIES CORPORATION
Consolidated Balance Sheets
-------------------------------------------------------------------------
As at As at
June 30 December 31
2006 2005
------------- -------------
ASSETS (Unaudited) (Audited)
CURRENT
Cash and cash equivalents $ 192,537 $ 728,928
Restricted cash 259,725 575,691
Accounts receivable 23,359,915 23,881,898
Inventory 20,106,656 19,778,272
Prepaid expenses and deposits 1,086,294 875,041
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45,005,127 45,839,830
DEFERRED FINANCING CHARGES 2,053,458 1,356,188
CAPITAL ASSETS 4,358,252 4,996,247
GOODWILL 21,299,990 21,299,990
INTANGIBLE ASSETS 27,795 61,125
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$ 72,744,622 $ 73,553,380
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LIABILITIES
CURRENT
Accounts payable and accrued liabilities 21,356,651 24,457,645
Income taxes payable 120,367 120,367
Current portion of long-term debt 2,837,976 1,331,890
Convertible note 9,561,963 9,574,522
Revolving loan 5,575,000 -
Deferred revenue 4,638,699 5,049,665
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44,090,656 40,534,089
LONG-TERM DEBT 9,441,126 9,247,263
DEFERRED GAIN ON SALE-LEASEBACK TRANSACTION 997,846 1,072,063
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54,529,628 50,853,415
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SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4) 65,301,684 64,545,691
WARRANTS AND CONVERTIBLE NOTE OPTIONS 1,971,924 2,258,788
CONTRIBUTED SURPLUS 2,370,470 1,708,239
DEFICIT (51,429,084) (45,812,753)
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18,214,994 22,699,965
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$ 72,744,622 $ 73,553,380
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CYGNAL TECHNOLOGIES CORPORATION
Consolidated Statement of Cash Flows
For the Period Ended June 30, 2006
-------------------------------------------------------------------------
Three months ended June 30 Six months ended June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
(Unaudited) (Unaudited)
NET (OUTFLOW)
INFLOW OF
CASH RELATED
TO THE
FOLLOWING
ACTIVITIES
OPERATING
Net loss $ (2,335,781) $ (1,688,588) $ (5,616,331) $ (4,300,269)
Adjustments
for non-
cash items
Amortization
of capital
assets and
intangible
assets 438,623 422,312 889,636 922,171
Stock-based
compensation 163,644 191,000 337,231 357,046
Gain on
sale of
assets (5,500) - (5,500) -
Amortization
of cash
paid
deferred
financing
charges 93,641 - 172,281 -
Amortization
of non-cash
deferred
financing
charges 140,305 - 250,472 -
Accretion of
convertible
note
discount 112,574 - 214,070 -
Future
income
taxes - (708,479) - (1,982,897)
Amortization
of deferred
gain on
sale-
leaseback
transaction (37,109) (37,110) (74,217) (74,220)
-------------------------------------------------------------------------
(1,429,603) (1,820,865) (3,832,358) (5,078,169)
Changes in
non-cash
working
capital
items 278,671 3,196,451 (3,529,614) 5,502,602
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Cash (used
for)
provided by
operating
activities (1,150,932) 1,375,586 (7,361,972) 424,433
-------------------------------------------------------------------------
INVESTING
Acquisition
of capital
assets (96,697) (571,388) (218,311) (928,488)
Proceeds on
sale of
assets 5,500 - 5,500 -
-------------------------------------------------------------------------
Cash used for
investing
activities (91,197) (571,388) (212,811) (928,488)
-------------------------------------------------------------------------
FINANCING
Proceeds from
long-term
debt 1,873,039 - 7,606,570 -
Deferred
financing
charges (255,367) - (1,120,023) -
Repayment of
long-term
debt (250,000) (159,366) (500,000) (333,452)
Capital lease
financing,
net 4,327 - (58,250) -
Redemption of
convertible
note options - - (123,931) -
Issuance of
common
shares,
warrants and
convertible
note options 193,560 29,789 918,060 79,510
Increase
(decrease)
in bank
indebtedness (446,859) (674,621) - 757,997
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Cash provided
by (used for)
financing
activities 1,118,700 (804,198) 6,722,426 504,055
-------------------------------------------------------------------------
Net decrease in
cash position (123,429) - (852,357) -
Cash position,
beginning of
period 575,691 - 1,304,619 -
-------------------------------------------------------------------------
Cash position,
end of
period $ 452,262 $ - $ 452,262 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash
equivalents $ 192,537 $ - $ 192,537 $ -
Restricted
cash 259,725 - 259,725 -
-------------------------------------------------------------------------
$ 452,262 $ - $ 452,262 $ -
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-------------------------------------------------------------------------
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%SEDAR: 00000748E
For further information: James Shannon, Chief Financial Officer, Cygnal Technologies Corporation, (905) 944-6572, jshannon@cygnal.ca; Jeff Codispodi, Investor Relations, The Equicom Group Inc., (416) 815-0700 ext. 261, jcodispodi@equicomgroup.com