CriticalControl – a plan that came together

One of the most enjoyable elements of the venture capital business is the chance to watch companies grow and thrive. As much as the recession forces us all to worry about “the problems”, there are still many good stories and management teams to applaud.

One such situation is Wellington Financial Fund II portfolio co. CriticalControl Solutions (CCZ:TSX). We financed CCZ on two occasions in Fund II, back in 2004 and 2005. At the time, it had a combination of software and imaging businesses, primarily serving the energy and government sectors.

Listed on the TSXV, Calgary-based CriticalControl finished the 2004 fiscal year with about $13 million of revenue, EBITDA loss of $1.1, net income loss of $2.55 million and no following on Bay Street. Through a variety of acquisitions and divestitures, CriticalControl management grew their energy business, while pruning sidelines that proved to be a distraction. Selling a division or an application often goes against the genetic code of entrepreneurs — but this team was always clinical when sizing up where the company should focus its time and resources. If something wasn’t performing, it was either sold or closed.

Although some equity was raised along the way, our $6.95 million of capital was the primary growth fuel.

Through the wonders of free cash flow and a modest bank re-fi, we were paid out a couple of years ago, although we remain shareholders to this day. This is what CriticalControl’s most recent fiscal picture looks like for the 2008 fiscal year:

Revenue has doubled to $26 milliom
EBITDA exceeded $5 million
Net income of $3.4 million

Naturally, the TSX asked them to graduate to the main exchange. In light of the weak markets and low EPS multiple, CEO Alykhan Mamdani is buying back shares! How many execs have that kind of confidence in their businesses during a recession?

And, with great performance comes research coverage. Toll Cross forecasts CCZ to become a veritable cash machine this year, trading about 5x current year EPS.

CriticalControl’s success is proof that entrepreneurs can i) grow via acquisition and reap the forecast synergies, ii) raise capital without a large following on Bay Street, and iii) when they come, keep the earnings for the benefit of existing shareholders. Management didn’t complain about a lack of capital, they created opportunities where raising it was viable.

And, in the space of half a decade, they have all of the choices in the world. I love it when a plan comes together.

MRM