Computer Modelling Group Ltd. (TSX:CMG) ("CMG" or the "Company") is very pleased
to report our first quarter results for the three months ended June 30, 2013.
FIRST QUARTER HIGHLIGHTS
For the three months ended June 30, 2013 2012 $ change % change
($ thousands, except per share data)
----------------------------------------------------------------------------
Annuity/maintenance software
licenses 13,958 13,179 779 6%
Perpetual software licenses 2,331 2,070 261 13%
Total revenue 18,116 16,465 1,651 10%
Operating profit 9,350 8,105 1,245 15%
Net income 7,081 6,090 991 16%
Earnings per share - basic 0.19 0.16 0.03 19%
----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") for Computer Modelling Group
Ltd. ("CMG," the "Company," "we" or "our"), presented as at August 12, 2013,
should be read in conjunction with the unaudited condensed consolidated
financial statements and related notes of the Company for the three months ended
June 30, 2013 and the audited consolidated financial statements and MD&A for the
years ended March 31, 2013 and 2012 contained in the 2013 Annual Report for CMG.
Additional information relating to CMG, including our Annual Information Form,
can be found at www.sedar.com. The financial data contained herein have been
prepared in accordance with International Financial Reporting Standards ("IFRS")
and, unless otherwise indicated, all amounts in this report are expressed in
Canadian dollars and rounded to the nearest thousand.
FORWARD-LOOKING INFORMATION
Certain information included in this MD&A is forward-looking. Forward-looking
information includes statements that are not statements of historical fact and
which address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including such things as investment
objectives and strategy, the development plans and status of the Company's
software development projects, the Company's intentions, results of operations,
levels of activity, future capital and other expenditures (including the amount,
nature and sources of funding thereof), business prospects and opportunities,
research and development timetable, and future growth and performance. When used
in this MD&A, statements to the effect that the Company or its management
"believes", "expects", "expected", "plans", "may", "will", "projects",
"anticipates", "estimates", "would", "could", "should", "endeavours", "seeks",
"predicts" or "intends" or similar statements, including "potential",
"opportunity", "target" or other variations thereof that are not statements of
historical fact should be construed as forward-looking information. These
statements reflect management's current beliefs with respect to future events
and are based on information currently available to management of the Company.
The Company believes that the expectations reflected in such forward-looking
information are reasonable, but no assurance can be given that these
expectations will prove to be correct and such forward-looking information
should not be unduly relied upon.
With respect to forward-looking information contained in this MD&A, we have made
assumptions regarding, among other things:
-- Future software license sales
-- The continued financing by and participation of the Company's partners
in the DRMS project and it being completed in a timely manner
-- Ability to enter into additional software license agreements
-- Ability to continue current research and new product development
-- Ability to recruit and retain qualified staff
Forward-looking information is not a guarantee of future performance and
involves a number of risks and uncertainties, only some of which are described
herein. Many factors could cause the Company's actual results, performance or
achievements, or future events or developments, to differ materially from those
expressed or implied by the forward-looking information including, without
limitation, the following factors which are described in the MD&A of CMG's 2013
Annual Report under the heading "Business Risks":
-- Economic conditions in the oil and gas industry
-- Reliance on key clients
-- Foreign exchange
-- Economic and political risks in countries where the Company currently
does or proposes to do business
-- Increased competition
-- Reliance on employees with specialized skills or knowledge
-- Protection of proprietary rights
Should one or more of these risks or uncertainties materialize, or should
assumptions underlying the forward-looking statements prove incorrect, actual
results, performance or achievement may vary materially from those expressed or
implied by the forward-looking information contained in this MD&A. These factors
should be carefully considered and readers are cautioned not to place undue
reliance on forward-looking information, which speaks only as of the date of
this MD&A. All subsequent forward-looking information attributable to the
Company herein is expressly qualified in its entirety by the cautionary
statements contained in or referred to herein. The Company does not undertake
any obligation to release publicly any revisions to forward-looking information
contained in this MD&A to reflect events or circumstances that occur after the
date of this MD&A or to reflect the occurrence of unanticipated events, except
as may be required under applicable securities laws.
NON-IFRS FINANCIAL MEASURES
This MD&A includes certain measures which have not been prepared in accordance
with IFRS such as "EBITDA", "direct employee costs" and "other corporate costs."
Since these measures do not have a standard meaning prescribed by IFRS, they are
unlikely to be comparable to similar measures presented by other issuers.
Management believes that these indicators nevertheless provide useful measures
in evaluating the Company's performance.
"Direct employee costs" include salaries, bonuses, stock-based compensation,
benefits, commission expenses, and professional development. "Other corporate
costs" include facility-related expenses, corporate reporting, professional
services, marketing and promotion, computer expenses, travel, and other
office-related expenses. Direct employee costs and other corporate costs should
not be considered an alternative to total operating expenses as determined in
accordance with IFRS. People-related costs represent the Company's largest area
of expenditure; hence, management considers highlighting separately corporate
and people-related costs to be important in evaluating the quantitative impact
of cost management of these two major expenditure pools. See "Expenses" heading
for a reconciliation of direct employee costs and other corporate costs to total
operating expenses.
"EBITDA" refers to net income before adjusting for depreciation expense, finance
income, finance costs, and income and other taxes. EBITDA should not be
construed as an alternative to net income as determined by IFRS. The Company
believes that EBITDA is useful supplemental information as it provides an
indication of the results generated by the Company's main business activities
prior to consideration of how those activities are amortized, financed or taxed.
See "EBITDA" heading for a reconciliation of EBITDA to net income.
CORPORATE PROFILE
CMG is a computer software technology company serving the oil and gas industry.
The Company is a leading supplier of advanced processes reservoir modelling
software with a blue chip client base of international oil companies and
technology centers in over 50 countries. The Company also provides professional
services consisting of highly specialized support, consulting, training, and
contract research activities. CMG has sales and technical support services based
in Calgary, Houston, London, Caracas, Dubai, Bogota and Kuala Lumpur. CMG's
Common Shares are listed on the Toronto Stock Exchange ("TSX") and trade under
the symbol "CMG".
QUARTERLY PERFORMANCE
Fiscal 2012(1)
($ thousands, unless
otherwise stated) Q2 Q3 Q4
--------------------------------------------------------
Annuity/maintenance
licenses 9,308 12,056 12,497
Perpetual licenses 1,596 2,321 3,416
--------------------------------------------------------
Software licenses 10,904 14,377 15,913
Professional services 1,078 1,521 1,302
--------------------------------------------------------
Total revenue 11,982 15,898 17,215
Operating profit 5,226 8,093 9,193
Operating profit (%) 44 51 53
EBITDA(4) 5,508 8,414 9,543
Profit before income and
other taxes 6,096 8,184 9,104
Income and other taxes 1,778 2,394 2,484
Net income for the period 4,318 5,790 6,620
Cash dividends declared
and paid 4,053 4,079 4,848
--------------------------------------------------------
Per share amounts -
($/share)
Earnings per share - basic 0.12 0.16 0.18
Earnings per share -
diluted 0.11 0.15 0.17
Cash dividends declared
and paid 0.11 0.11 0.13
--------------------------------------------------------
Fiscal
Fiscal 2013(2) 2014(3)
($ thousands, unless
otherwise stated) Q1 Q2 Q3 Q4 Q1
----------------------------------------------------------------------------
Annuity/maintenance
licenses 13,179 12,012 14,004 15,359 13,958
Perpetual licenses 2,070 2,671 1,365 2,300 2,331
----------------------------------------------------------------------------
Software licenses 15,249 14,683 15,369 17,659 16,289
Professional services 1,216 1,390 1,433 1,620 1,827
----------------------------------------------------------------------------
Total revenue 16,465 16,073 16,802 19,279 18,116
Operating profit 8,105 8,032 8,276 9,877 9,350
Operating profit (%) 49 50 49 51 52
EBITDA(4) 8,423 8,425 8,687 10,294 9,725
Profit before income and
other taxes 8,577 7,703 8,556 10,314 9,999
Income and other taxes 2,487 2,342 2,437 3,061 2,918
Net income for the period 6,090 5,361 6,119 7,253 7,081
Cash dividends declared
and paid 9,736 6,020 6,050 6,099 8,841
----------------------------------------------------------------------------
Per share amounts -
($/share)
Earnings per share - basic 0.16 0.14 0.16 0.19 0.19
Earnings per share -
diluted 0.16 0.14 0.16 0.19 0.18
Cash dividends declared
and paid 0.26 0.16 0.16 0.16 0.23
----------------------------------------------------------------------------
(1) Q2, Q3 and Q4 of fiscal 2012 include $0.04 million, $2.6 million and
$2.7 million, respectively, in revenue that pertains to usage of CMG's
products in prior quarters.
(2) Q1, Q2, Q3 and Q4 of fiscal 2013 include $2.1 million, $0.2 million,
$1.8 million and $2.6 million, respectively, in revenue that pertains to
usage of CMG's products in prior quarters.
(3) Q1 of fiscal 2014 includes $1.2 million in revenue that pertains to
usage of CMG's products in prior quarters.
(4) EBITDA is defined as net income before adjusting for depreciation
expense, finance income, finance costs, and income and other taxes. See
"Non-IFRS Financial Measures".
Highlights
During the three months ended June 30, 2013, as compared to the same period of
the prior fiscal year, CMG:
-- Increased annuity/maintenance revenue by 6%
-- Increased operating profit by 15%
-- Increased spending on research and development by 20%
-- Increased EBITDA by 15%
-- Realized basic earnings per share of $0.19, representing a 19% increase
Revenue
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Software licenses 16,289 15,249 1,040 7%
Professional services 1,827 1,216 611 50%
----------------------------------------------------------------------------
Total revenue 18,116 16,465 1,651 10%
----------------------------------------------------------------------------
Software license revenue - % of
total revenue 90% 93%
Professional services - % of total
revenue 10% 7%
----------------------------------------------------------------------------
CMG's revenue is comprised of software license sales, which provide the majority
of the Company's revenue, and fees for professional services.
Total revenue increased by 10% for the three months ended June 30, 2013,
compared to the same period of the previous fiscal year due to the increases in
both software license revenue and professional services.
SOFTWARE LICENSE REVENUE
Software license revenue is made up of annuity/maintenance license fees charged
for the use of the Company's software products which is generally for a term of
one year or less and perpetual software license sales, whereby the customer
purchases the current version of the software and has the right to use that
version in perpetuity. Annuity/maintenance license fees have historically had a
high renewal rate and, accordingly, provide a reliable revenue stream while
perpetual license sales are more variable and unpredictable in nature as the
purchase decision and its timing fluctuate with the customers' needs and
budgets. The majority of CMG's customers who have acquired perpetual software
licenses subsequently purchase our maintenance package to ensure ongoing product
support and access to current versions of CMG's software.
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Annuity/maintenance licenses 13,958 13,179 779 6%
Perpetual licenses 2,331 2,070 261 13%
----------------------------------------------------------------------------
Total software license revenue 16,289 15,249 1,040 7%
----------------------------------------------------------------------------
Annuity/maintenance as a % of total
software license revenue 86% 86%
Perpetual as a % of total software
license revenue 14% 14%
----------------------------------------------------------------------------
Total software license revenue grew by 7% in the three months ended June 30,
2013, compared to the same period of the previous fiscal year, due to the
increases in both annuity/maintenance and perpetual license sales.
CMG's annuity/maintenance license revenue increased by 6% during the three
months ended June 30, 2013, compared to the same period of last year. This
increase was driven by sales to new and existing customers as well as an
increase in maintenance revenue tied to perpetual sales generated in the
previous fiscal year.
All of our regions, except South America, experienced growth in
annuity/maintenance revenue during the three months ended June 30, 2013, for the
reasons described above, but the most significant growth came from the US
market.
Our annuity/maintenance revenue is impacted by the revenue recognition from a
long-standing customer for which revenue recognition criteria are fulfilled only
at the time of the receipt of funds (see the discussion about revenue earned in
the current period that pertains to usage of products in prior quarters above
the "Quarterly Software License Revenue" graph). The variability of the amounts
of the payments received and the timing of such payments may skew the comparison
of the recorded annuity/maintenance revenue amounts between periods. To provide
a normalized comparison, if we were to remove revenue from this one customer
from the first quarter of the current and the previous year, we will notice that
the annuity/maintenance revenue increased by 14%, instead of 6%. Given our
long-term relationship with this customer, and their on-going use of our
licenses, we expect to continue to receive payments from them; however, the
amount and timing are uncertain and will continue to be recorded on a cash
basis, which may introduce some variability in our reported quarterly
annuity/maintenance revenue results.
We can observe from the table below that the exchange rates between the US and
Canadian dollars during the three months ended June 30, 2013, compared to the
same period of the previous fiscal year, had only a slight positive impact on
our reported annuity/maintenance revenue.
Perpetual license sales increased by 13% for the three months ended June 30,
2013, compared to the same period of the previous fiscal year, due to increased
perpetual sales in the Eastern Hemisphere. The growth in perpetual sales
generated by the Eastern Hemisphere was partially offset by decreases in both
Canada and South America.
Software licensing under perpetual sales is a significant part of CMG's
business, but may fluctuate significantly between periods due to the uncertainty
associated with the timing and the location where sales are generated. For this
reason, even though we expect to achieve a certain level of aggregate perpetual
sales on an annual basis, we expect to observe fluctuations in the quarterly
perpetual revenue amounts throughout the fiscal year.
We can observe from the table below that the exchange rates between the US and
Canadian dollars during the three months ended June 30, 2013, compared to the
same period of the previous fiscal year, had only a slight positive impact on
our reported perpetual license revenue.
The following table summarizes the US dollar denominated revenue and the
weighted average exchange rate at which it was converted to Canadian dollars:
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
US dollar annuity/maintenance
license sales US$ 9,341 8,638 703 8%
Weighted average conversion rate 1.009 0.999
----------------------------------------------------------------------------
Canadian dollar equivalent CDN$ 9,421 8,626 795 9%
----------------------------------------------------------------------------
US dollar perpetual license sales US$ 2,011 1,346 665 49%
Weighted average conversion rate 1.014 0.995
----------------------------------------------------------------------------
Canadian dollar equivalent CDN$ 2,040 1,339 701 52%
----------------------------------------------------------------------------
The following table quantifies the foreign exchange impact on our software
license revenue:
Incremental Foreign
Q1 2013 License Exchange Q1 2014
($ thousands) Balance Growth Impact Balance
----------------------------------------------------------------------------
Annuity/Maintenance license
sales 13,179 687 92 13,958
Perpetual license sales 2,070 222 39 2,331
----------------------------------------------------------------------------
Total software license
revenue 15,249 909 131 16,289
----------------------------------------------------------------------------
REVENUE BY GEOGRAPHIC SEGMENT
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Annuity/maintenance revenue
Canada 5,430 4,939 491 10%
United States 3,164 2,392 772 32%
South America 2,332 3,162 (830) -26%
Eastern Hemisphere(1) 3,032 2,686 346 13%
----------------------------------------------------------------------------
13,958 13,179 779 6%
----------------------------------------------------------------------------
Perpetual revenue
Canada 291 561 (270) -48%
United States 427 404 23 6%
South America 76 483 (407) -84%
Eastern Hemisphere 1,537 622 915 147%
----------------------------------------------------------------------------
2,331 2,070 261 13%
----------------------------------------------------------------------------
Total software license revenue
Canada 5,721 5,500 221 4%
United States 3,591 2,796 795 28%
South America 2,408 3,645 (1,237) -34%
Eastern Hemisphere 4,569 3,308 1,261 38%
----------------------------------------------------------------------------
16,289 15,249 1,040 7%
----------------------------------------------------------------------------
(1)
Includes Europe, Africa, Asia and Australia.
On a geographic basis, total software license sales increased across all regions
with the exception of the South American market which experienced an overall
decrease of 34% during the three months ended June 30, 2013, compared to the
same period of the previous fiscal year.
The Canadian market (representing 35% of year-to-date total software revenue)
experienced an increase in annuity/maintenance license sales during the three
months June 30, 2013, compared to the same period of the previous fiscal year.
This increase was supported by the sales to both new and existing customers.
Perpetual sales were lower during the first quarter of the current year compared
to the same period of the previous year. The Canadian market continues to be the
leader in generating total software license revenue and, particularly, in
generating the recurring annuity/maintenance revenue as evidenced by the
quarterly year-over-year increases of 32%, 37%, 37%, and 38% recorded during Q1
2013, Q2 2013, Q3 2013, and Q4 2013 respectively. During the first quarter of
the current fiscal year, we recorded an increase of 10%.
The US market (representing 22% of year-to-date total software revenue)
experienced the most significant growth in annuity/maintenance license sales, in
comparison to other regions, during the three months ended June 30, 2013,
compared to the same period of the previous fiscal year, driven by sales to new
and existing customers. Perpetual license sales remained flat between the first
quarters of the current and the previous year. Similar to the Canadian market,
we have continued to see successive increases in the annuity/maintenance license
sales in the US as evidenced by the quarterly year-over-year increases of 20%,
24%, 32%, and 20% recorded during Q1 2013, Q2 2013, Q3 2013, and Q4 2013
respectively. This growth trend has continued into the first quarter of the
current fiscal year with the recorded increase of 32%.
South America (representing 15% of year-to-date total software revenue)
experienced a decrease of 26% in annuity/maintenance revenue during the three
months ended June 30, 2013, compared to the same period of the previous fiscal
year. This decrease was caused by the variability of the amount recorded from a
customer for which revenue is recognized only when cash is received (see the
discussion about revenue earned in the current period that pertains to usage of
products in prior quarters above the "Quarterly Software License Revenue"
graph). To provide a normalized comparison, if we were to exclude the amounts
received from this customer from the annuity/maintenance revenue in the first
quarter of the current and the previous fiscal years, we would notice that the
annuity/maintenance revenue remained flat between the two periods. South
American region also experienced a decrease in perpetual sales during the first
quarter of the current year compared to the first quarter of the previous year.
Eastern Hemisphere (representing 28% of the year-to-date total software revenue)
grew annuity/maintenance license sales by 13% during the three months ended June
30, 2013, compared to the same period of the previous fiscal year, due to
increased license usage by two of our significant customers in the region.
Compared to other regions, Eastern Hemisphere achieved the highest growth in
perpetual license revenue during the first quarter of the current year compared
to the same period of the previous year.
Movements in perpetual sales across regions are indicative of the unpredictable
nature of the timing and location of perpetual license sales. Overall, our
recurring annuity/maintenance revenue base continues to experience growth. We
will continue to focus our efforts on increasing our license sales to both
existing and new customers, and we will endeavor to continue expanding our
market share globally.
As footnoted in the Quarterly Performance table, in the normal course of
business, CMG may complete the negotiation of certain annuity/maintenance
contracts and/or fulfill revenue recognition requirements within a current
quarter that includes usage of CMG's products in prior quarters. This situation
particularly affects contracts negotiated with countries that face increased
economic and political risks leading to revenue recognition criteria being
satisfied only at the time of the receipt of cash. The dollar magnitude of such
contracts may be significant to the quarterly comparatives of our
annuity/maintenance revenue stream and, to provide a normalized comparison, we
specifically identify the revenue component where revenue recognition is
satisfied in the current period for products provided in previous quarters.
QUARTERLY SOFTWARE LICENSE REVENUE ($THOUSANDS)
To view accompanying graph, visit the following link:
http://media3.marketwire.com/docs/QuarterlySoftwareLicenseRevenue.jpg
DEFERRED REVENUE
2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Deferred revenue at:
March 31 25,289 21,693 3,596 17%
June 30 22,014 18,779 3,235 17%
----------------------------------------------------------------------------
CMG's deferred revenue consists primarily of amounts for pre-sold licenses. Our
annuity/maintenance revenue is deferred and recognized on a straight-line basis
over the life of the related license period, which is generally one year or
less. Amounts are deferred for licenses that have been provided and revenue
recognition reflects the passage of time.
The increase in deferred revenue year-over-year as at June 30 and March 31 is
reflective of the growth in annuity/maintenance license sales. The variation
within the year is due to the timing of renewals of annuity and maintenance
contracts that are skewed to the beginning of the calendar year which explains
the decrease in deferred revenue balance at the end of the first quarter (June
30) compared to the fiscal year-end (March 31). Deferred revenue at June 30,
2013 increased compared to the same period of the prior fiscal year due to both
renewal of the existing and signing of the new annuity and maintenance contracts
in the quarter.
PROFESSIONAL SERVICES REVENUE
CMG recorded professional services revenue of $1.8 million for the three months
ended June 30, 2013, representing an increase of $0.6 million, compared to the
same period of the previous fiscal year, due to both an increase in project
activities by our clients and due to entering into a large consulting agreement
with one of our clients which, we expect, will contribute to the professional
services revenue during the current fiscal year.
Professional services revenue consists of specialized consulting, training, and
contract research activities. CMG performs consulting and contract research
activities on an ongoing basis, but such activities are not considered to be a
core part of our business and are primarily undertaken to increase our knowledge
base and hence expand the technological abilities of our simulators in a funded
manner, combined with servicing our customers' needs. In addition, these
activities are undertaken to market the capabilities of our suite of software
products with the ultimate objective to increase software license sales. Our
experience is that consulting activities are variable in nature as both the
timing and dollar magnitude of work are dependent on activities and budgets
within client companies.
Expenses
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Sales, marketing and professional
services 3,649 3,962 (313) -8%
Research and development 3,472 2,897 575 20%
General and administrative 1,645 1,501 144 10%
----------------------------------------------------------------------------
Total operating expenses 8,766 8,360 406 5%
----------------------------------------------------------------------------
Direct employee costs(1) 7,120 6,595 525 8%
Other corporate costs 1,646 1,765 (119) -7%
----------------------------------------------------------------------------
8,766 8,360 406 5%
----------------------------------------------------------------------------
(1) Includes salaries, bonuses, stock-based compensation, benefits,
commissions, and professional development.
CMG's total operating expenses increased by 5% for the three months ended June
30, 2013, compared to the same period of the previous fiscal year, due to an
increase in direct employee costs, offset by a decrease in other corporate
costs.
DIRECT EMPLOYEE COSTS
As a technology company, CMG's largest area of expenditure is for its people.
Approximately 81% of the total operating expenses in the three months ended June
30, 2013 related to staff costs, compared to 79% recorded in the comparative
period of last year. Staffing levels for the current fiscal year grew in
comparison to the previous fiscal year to support our continued growth. At June
30, 2013, CMG's staff complement was 186 employees and consultants, up from 164
employees as at June 30, 2012. Direct employee costs increased during the three
months ended June 30, 2013, compared to the same periods of the previous fiscal
year, due to staff additions, increased levels of compensation, and related
benefits.
OTHER CORPORATE COSTS
Other corporate costs decreased by 7% for the three months ended June 30, 2013,
compared to the same period of the previous fiscal year, mainly due to including
the costs associated with CMG's biennial Technical Symposium in other corporate
costs for the three months ended June 30, 2012.
RESEARCH AND DEVELOPMENT
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Research and development (gross) 4,020 3,385 635 19%
SR&ED credits (548) (488) (60) 12%
----------------------------------------------------------------------------
Research and development 3,472 2,897 575 20%
----------------------------------------------------------------------------
Research and development as a % of
total revenue 19% 18%
----------------------------------------------------------------------------
CMG maintains its belief that its strategy of growing long-term value for
shareholders can only be achieved through continued investment in research and
development. CMG works closely with its customers to provide solutions to
complex problems related to proven and new advanced recovery processes.
The above research and development includes CMG's share of joint research and
development costs associated with the DRMS project of $1.1 million for the three
months ended June 30, 2013 (2012 - $0.8 million). See discussion under
"Commitments, Off Balance Sheet Items and Transactions with Related Parties."
The increase of 19% in our gross spending on research and development for the
three months ended June 30, 2013, demonstrates our continued commitment to
advancement of our technology which is the focal part of our business strategy.
Research and development costs, net of research and experimental development
("SR&ED") credits, increased by 20% during the three months ended June 30, 2013,
compared to the same period of the previous fiscal year, due to increased
employee compensation costs, and costs associated with computing resources.
We also had an increase in SR&ED credits driven mainly by the increases in our
direct employee costs as well as the increase in hours spent on projects
eligible for SR&ED credits.
DEPRECIATION
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Depreciation of property and
equipment, allocated to:
Sales, marketing and professional
services 100 98 2 2%
Research and development 226 180 46 26%
General and administrative 49 40 9 23%
----------------------------------------------------------------------------
Total depreciation 375 318 57 18%
----------------------------------------------------------------------------
The quarterly increase in depreciation, compared to the same period of the
previous fiscal year, reflects the increase in our asset base, mainly as a
result of increased spending on computing resources.
Finance Income
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Interest income 157 145 12 8%
Net foreign exchange gain 492 327 165 50%
----------------------------------------------------------------------------
Total finance income 649 472 177 38%
----------------------------------------------------------------------------
Interest income increased slightly in the three months ended June 30, 2013,
compared to the same period of the prior fiscal year, mainly due to investing
larger cash balances.
CMG is impacted by the movement of the US dollar against the Canadian dollar as
approximately 70% (2012 - 68%) of CMG's revenue for the three months ended June
30, 2013 is denominated in US dollars, whereas only approximately 25% (2012 -
23%) of CMG's total costs are denominated in US dollars.
Three month trailing
CDN$ to US$ At June 30 average
----------------------------------------------------------------------------
2011 1.0370 1.0411
2012 0.9813 0.9861
2013 0.9513 0.9702
----------------------------------------------------------------------------
CMG recorded a net foreign exchange gain of $0.5 million for the three months
ended June 30, 2013, compared to a $0.3 million net foreign exchange gain
recorded in the three months ended June 30, 2012.
The weakening of the Canadian dollar during the first quarter of the current
fiscal year, contributed positively to the valuation of our US-denominated
working capital for the three months ended June 30, 2013 compared to the same
period of the previous fiscal year.
Income and Other Taxes
CMG's effective tax rate for the three months ended June 30, 2013 is reflected
as 29.2% (2012 - 29.0%), whereas the prevailing Canadian statutory tax rate is
now 25.0%. This is primarily due to a combination of the non-tax deductibility
of stock-based compensation expense and the benefit of foreign withholding taxes
being realized only as a tax deduction as opposed to a tax credit.
The benefit recorded in CMG's books on the SR&ED investment tax credit program
impacts deferred income taxes. The investment tax credit earned in the current
fiscal year is utilized by CMG to reduce income taxes otherwise payable for the
current fiscal year and the federal portion of this benefit bears an inherent
tax liability as the amount of the credit is included in the subsequent year's
taxable income for both federal and provincial purposes. The inherent tax
liability on these investment tax credits is reflected in the year the credit is
earned as a non-current deferred tax liability and then, in the following fiscal
year, is transferred to income taxes payable.
Operating Profit and Net Income
For the three months ended June 30, 2013 2012 $ change % change
($ thousands, except per share
amounts)
----------------------------------------------------------------------------
Total revenue 18,116 16,465 1,651 10%
Operating expenses (8,766) (8,360) (406) 5%
----------------------------------------------------------------------------
Operating profit 9,350 8,105 1,245 15%
Operating profit as a % of total
revenue 52% 49%
----------------------------------------------------------------------------
Net income for the period 7,081 6,090 991 16%
Net income for the period as a % of
total revenue 39% 37%
----------------------------------------------------------------------------
Basic earnings per share ($/share) 0.19 0.16 0.03 19%
----------------------------------------------------------------------------
Operating profit as a percentage of total revenue for the three months ended
June 30, 2013 was at 52% compared to 49% recorded in the same period of the
previous fiscal year. While our total revenue grew by 10%, our operating
expenses grew by 5%, having a positive impact on our operating profit. Our high
levels of operating profit as a percentage of revenue demonstrate our commitment
to continue to effectively manage our costs.
Net income for the period as a percentage of revenue increased to 39% for the
three months ended June 30, 2013, compared to 37% recorded in the same period of
the previous fiscal year.
We have continued to maintain our profitability by focusing our efforts on
increasing license sales while, at the same time, effectively controlling our
operating costs. Managing these variables will continue to be imperative to our
future success.
EBITDA
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Net income for the period 7,081 6,090 991 16%
Add (deduct):
Depreciation 375 318 57 18%
Finance income (649) (472) (177) 38%
Finance costs - - - -
Income and other taxes 2,918 2,487 431 17%
----------------------------------------------------------------------------
EBITDA 9,725 8,423 1,302 15%
----------------------------------------------------------------------------
EBITDA as a % of total revenue 54% 51%
----------------------------------------------------------------------------
EBITDA increased by 15% for the three months ended June 30, 2013, compared to
the same period of the previous fiscal year. This increase provides further
indication of our ability to keep growing our recurring annuity/maintenance
license sales while effectively managing costs in relation to this base.
EBITDA as a percent of total revenue for the three months ended June 30, 2013
was at 54% compared to 51% recorded in the same period of the previous fiscal
year.
Liquidity and Capital Resources
For the three months ended June 30, 2013 2012 $ change % change
($ thousands)
----------------------------------------------------------------------------
Cash, beginning of period 59,419 55,374 4,045 7%
Cash flow from (used in):
Operating activities 9,837 6,661 3,176 48%
Financing activities (5,919) (10,063) 4,144 -41%
Investing activities (225) (437) 212 -49%
----------------------------------------------------------------------------
Cash, end of period 63,112 51,535 11,577 22%
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Cash flow generated from operating activities increased by $3.2 million in the
three months ended June 30, 2013, compared to the same period of last year,
mainly due to the timing differences of when the sales are made and when the
resulting receivables are collected, positive effect on the timing difference of
when income taxes are recorded and paid, offset by the change in trade payables
and accrued liabilities balance.
FINANCING ACTIVITIES
Cash used in financing activities during the three months ended June 30, 2013
decreased by $4.1 million, compared to the same period of last year, due to
receiving higher proceeds from the issuance of Common Shares in the current
quarter, and paying less in dividends. In the previous fiscal year, we
re-shifted our focus from paying a large special dividend at year end to paying
higher quarterly dividends. Consequently, the special dividend paid in the first
quarter of the previous year was higher than the special dividend paid in the
first quarter of the current year, but this is expected to normalize, on a
year-to-date basis due to paying higher quarterly dividends. In addition, in the
first quarter of the previous fiscal year, CMG spent $1.6 million on buying back
Common Shares.
During the three months ended June 30, 2013, CMG employees and directors
exercised options to purchase 355,000 Common Shares, which resulted in cash
proceeds of $2.9 million.
In the three months ended June 30, 2013, CMG paid $8.8 million in dividends,
representing the following quarterly dividends:
($ per share) Q1
----------------------------------------------------------------------------
Dividends declared and paid 0.18
Special dividend declared and paid 0.05
----------------------------------------------------------------------------
Total dividends declared and paid 0.23
----------------------------------------------------------------------------
In the three months June 30, 2012, CMG paid $9.7 million in dividends,
representing the following quarterly dividends:
($ per share) Q1
----------------------------------------------------------------------------
Dividends declared and paid 0.16
Special dividend declared and paid 0.10
----------------------------------------------------------------------------
Total dividends declared and paid 0.26
----------------------------------------------------------------------------
On August 12, 2013, CMG announced the payment of a quarterly dividend of $0.18
per share on CMG's Common Shares. The dividend will be paid on September 13,
2013 to shareholders of record at the close of business on September 6, 2013. On
August 12, 2013, the Board of Directors also approved the issuance of 1,150,000
options to purchase CMG's Common Shares in accordance with CMG's stock option
plan.
Over the past 10 years, we have consistently raised our total annual dividend
and paid out a special dividend at the end of each fiscal year as determined by
our corporate performance. In recognition of the importance of a more regular
income stream to our shareholders, as reported in fiscal 2012 Management's
Discussion and Analysis, we decided to increase the relative proportion of
dividends paid quarterly and lower the amount paid as a special annual dividend
beginning in fiscal 2013. The above table demonstrates this increase in the
regular quarterly dividend which amounted to $0.18 per share in Q1 of fiscal
2014 compared to $0.16 per share in Q1 of fiscal 2013.
Based on our expectation of solid profitability and cash-generating ability
driven by the predictability of our software revenue base and effective
management of costs, we are cautiously optimistic that the company is well
positioned for future growth which will enable us to continue to pay quarterly
dividends.
On April 16, 2012, the Company announced a Normal Course Issuer Bid ("NCIB")
commencing on April 18, 2012 to purchase for cancellation up to 3,416,000 of its
Common Shares. During the year ended March 31, 2013, a total of 91,000 Common
Shares were purchased at market price for a total cost of $1,551,000.
On April 29, 2013, the Company announced a NCIB commencing on May 1, 2013 to
purchase for cancellation up to 3,538,000 of its Common Shares. During the three
months ended June 30, 2013, no Common Shares were purchased.
INVESTING ACTIVITIES
CMG's current needs for capital asset investment relate to computer equipment
and office infrastructure costs, all of which will be funded internally. During
the three months ended June 30, 2013, CMG expended $0.2 million on property and
equipment additions, primarily composed of computing equipment, and has a
capital budget of $1.8 million for fiscal 2014.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2013, CMG has $63.1 million in cash, no debt, and has access to just
over $0.8 million under a line of credit with its principal banker.
During the three months ended June 30, 2013, 3,192,000 shares of CMG's public
float were traded on the TSX. As at June 30, 2013, CMG's market capitalization
based upon its June 30, 2013 closing price of $23.19 was $892.4 million.
Commitments, Off Balance Sheet Items and Transactions with Related Parties
The Company is the operator of the DRMS research and development project (the
"DRMS Project"), a collaborative effort with its partners Shell International
Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A.
("Petrobras"), to jointly develop the newest generation of reservoir and
production system simulation software. The project has been underway since 2006
and, with the ongoing support of the participants, it is expected to continue
until ultimate delivery of the software. The Company's share of costs associated
with the project is estimated to be $5.5 million ($2.6 million net of overhead
recoveries) for fiscal 2014. CMG plans to continue funding its share of the
project costs associated with the development of the newest generation reservoir
simulation software system from internally generated cash flows.
CMG has very little in the way of other ongoing material contractual obligations
other than for pre-sold licenses which are reflected as deferred revenue on its
statement of financial position, and contractual obligations for office leases
which are estimated as follows: 2014 - $1.5 million; 2015 to 2016 - $2.0 million
per year; and 2017 - $1.0 million.
Business Risks and Critical Accounting Estimates
These remain unchanged from the factors detailed in CMG's 2013 Annual Report.
Changes in Accounting Policies
Except as disclosed below, the accounting policies, presentation and methods of
computation remain unchanged from those detailed in CMG's 2013 Annual Report.
The following new standards and interpretations have been adopted as detailed
below:
-- IFRS 10 Consolidated Financial Statements
Replaces the guidance in IAS 27 Consolidated and Separate Financial
Statements and SIC-12 Consolidation - Special Purpose Entities, and
provides a single model to be applied in the control analysis for all
investees, including entities that currently are special purpose
entities in the scope of SIC-12. The Company adopted IFRS 10 for the
annual period beginning on April 1, 2013. The adoption of IFRS 10 did
not have a material impact on the condensed consolidated interim
financial statements.
-- IFRS 11 Joint Arrangements
Under IFRS 11, joint arrangements are classified as either joint
operations or joint ventures. IFRS 11 replaces the guidance in IAS 31
Interest in Joint Ventures, and essentially carves out of previous
jointly controlled entities, those arrangements which although
structured through a separate vehicle, such separation is ineffective
and the parties to the arrangement have rights to the assets and
obligations for the liabilities and are accounted for as joint
operations in a fashion consistent with jointly controlled
assets/operations under IAS 31. In addition, under IFRS 11, joint
ventures must now use the equity method of accounting. The Company
adopted IFRS 11 for the annual period beginning on April 1, 2013. The
adoption of IFRS 11 did not have a material impact on the condensed
consolidated interim financial statements.
-- IFRS 12 Disclosure of Interests in Other Entities
Contains the disclosure requirements for entities that have interests in
subsidiaries, joint arrangements, associates and/or unconsolidated
structured entities. The Company adopted IFRS 12 for the annual period
beginning on April 1, 2013. The adoption of IFRS 12 did not have a
material impact on the condensed consolidated interim financial
statements.
-- IFRS 13 Fair Value Measurement
Replaces the fair value measurement guidance contained in individual
IFRSs with a single source of fair value measurement guidance. It
defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, i.e. an exit price. The standard
also establishes a framework for measuring fair value and sets out
disclosure requirements for fair value measurement to provide
information that enables financial statement users to assess the methods
and inputs used to develop fair value measurements and, for recurring
fair value measurements that use significant unobservable inputs (Level
3), the effect of the measurements on profit or loss or other. The
Company adopted IFRS 13 prospectively for the interim and annual periods
beginning on April 1, 2013. The adoption of IFRS 13 did not have a
material impact on the condensed consolidated interim financial
statements other than the inclusion of certain fair value disclosures
which were previously applicable to annual financial statements only.
-- Amendments to IAS 1 Presentation of Financial Statements
Require an entity present separately the items of other comprehensive
income that may be reclassified to profit or loss in the future from
those that would never be reclassified to profit or loss. The Company
adopted the amendments for the annual period beginning on April 1, 2013.
As the amendments only required changes in the presentation of items in
other comprehensive income, the new standard did not have a material
impact on the condensed consolidated interim financial statements
-- Amendments to IFRS 7 Offsetting Financial Assets and Liabilities
Contains new disclosure requirements for offset financial assets and
liabilities and netting arrangements. The Company adopted the amendments
for the interim and annual periods beginning on April 1, 2013. The
amendments to IFRS 7 did not have a material impact on the condensed
consolidated interim financial statements.
Accounting Standards and Interpretations Issued But Not Yet Effective
The following standards and interpretations have not been adopted by the Company
as they apply to future periods:
Standard/Interpretation Nature of impending Impact on CMG's
change in accounting financial statements
policy
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS 9 Financial IFRS 9 (2009) replaces IFRS 9 (2010) supersedes
Instruments the guidance in IAS 39 IFRS 9 (2009) and is
In November 2009 the Financial Instruments: effective for annual
IASB issued IFRS 9 Recognition and periods beginning on or
Financial Instruments Measurement, on the after January 1, 2015,
(IFRS 9 (2009)), and in classification and with early adoption
October 2010 the IASB measurement of financial permitted. For annual
published amendments to assets. The Standard periods beginning before
IFRS 9 (IFRS 9 (2010)). eliminates the existing January 1, 2015, either
On July 24, 2013 the IAS 39 categories of IFRS 9 (2009) or IFRS 9
IASB tentatively decided held to maturity, (2010) may be applied.
to defer the mandatory available-for-sale and
effective date of IFRS loans and receivable. The Company does not
9. The mandatory expect IFRS 9 (2010) to
effective date will be Financial assets will be have a material impact
left open pending the classified into one of on the financial
finalisation of the two categories on statements. The
impairment and initial recognition: classification and
classification and measurement of the
measurement financial assets Company's financial
requirements. measured at amortized assets and liabilities
cost; or is not expected to
financial assets change under IFRS 9
measured at fair value. (2010) because of the
nature of the Company's
Gains and losses on operations and the types
remeasurement of of financial assets that
financial assets it holds.
measured at fair value
will be recognized in
profit or loss, except
that for an investment
in an equity instrument
which is not held-for-
trading, IFRS 9
provides, on initial
recognition, an
irrevocable election to
present all fair value
changes from the
investment in other
comprehensive income
(OCI). The election is
available on an
individual share-by-
share basis. Amounts
presented in OCI will
not be reclassified to
profit or loss at a
later date.
IFRS 9 (2010) added
guidance to IFRS 9
(2009) on the
classification and
measurement of financial
liabilities, and this
guidance is consistent
with the guidance in IAS
39 expect as described
below.
Under IFRS 9 (2010), for
financial liabilities
measured at fair value
under the fair value
option, changes in fair
value attributable to
changes in credit risk
will be recognized in
OCI, with the remainder
of the change recognized
in profit or loss.
However, if this
requirement creates or
enlarges an accounting
mismatch in profit or
loss, the entire change
in fair value will be
recognized in profit or
loss. Amounts presented
in OCI will not be
reclassified to profit
or loss at a later date.
IFRS 9 (2010) also
requires derivative
liabilities that are
linked to and must be
settled by delivery of
an unquoted equity
instrument to be
measured at fair value,
whereas such derivative
liabilities are measured
at cost under IAS 39.
IFRS 9 (2010) also added
the requirements of IAS
39 for the derecognition
of financial assets and
liabilities to IFRS 9
without change.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amendments to IAS 32, The amendments to IAS 32 The Company intends to
Offsetting Financial clarify that an entity adopt the amendments to
Assets and Liabilities currently has a legally IAS 32 in its financial
enforceable right to statements for the
In December 2011, the set-off if that right annual period beginning
IASB published is: April 1, 2014. The
Offsetting Financial Company does not expect
Assets and Financial not contingent on a the amendments to have a
Liabilities and issued future event; and material impact on the
new presentation enforceable both in the financial statements.
requirements in IAS 32 normal course of
Financial Instruments: business and in the
Presentation. event of default,
insolvency or bankruptcy
The effective date for of the entity and all
the amendments to IAS 32 counterparties.
is annual periods
beginning on or after The amendments to IAS 32
January 1, 2014. These also clarify when a
amendments are to be settlement mechanism
applied retrospectively. provides for net
settlement or gross
settlement that is
equivalent to net
settlement.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding Share Data
The following table represents the number of Common Shares and options outstanding:
As at August 12, 2013
(thousands)
----------------------------------------------------------------------------
Common Shares 38,511
Options 2,492
----------------------------------------------------------------------------
On July 13, 2005, CMG adopted a rolling stock option plan which allows the
Company to grant options to its employees and directors to acquire Common Shares
of up to 10% of the outstanding Common Shares at the date of grant. Based upon
this calculation, at August 12, 2013, CMG could grant up to 3,851,000 stock
options.
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Management is responsible for establishing and maintaining disclosure controls
and procedures ("DC&P") and internal control over financial reporting ("ICFR")
as defined under National Instrument 52-109. These controls and procedures were
reviewed and the effectiveness of their design and operation was evaluated in
fiscal 2013 in accordance with the COSO control framework. The evaluation
confirmed the effectiveness of DC&P and ICFR at March 31, 2013. During our
fiscal year 2014, we continue to monitor and review our controls and procedures.
During the three months ended June 30, 2013, there have been no significant
changes to the Company's ICFR that have materially affected, or are reasonably
likely to materially affect, the company's ICFR.
Outlook
Our annuity/maintenance revenue stream continued to grow during the first
quarter of fiscal 2014 with a recorded increase of 6%, compared to the first
quarter of the previous fiscal year. Over 80% of our software license revenue is
derived from our annuity and maintenance contracts, and with a strong renewal
rate, we expect to see continued growth in this revenue base. We will continue
to extend our reach globally and focus our efforts on increasing our license
sales to both existing and new customers.
Our profit margin continued to hold strong, demonstrating our continuous
commitment to effectively manage our corporate costs. For the three months ended
June 30, 2013, our EBITDA represented 54% of our total revenue, compared to 51%
recorded in the same period of the previous fiscal year.
CMG continues to focus its resources on the development, enhancement and
deployment of simulation software tools relevant to the challenges and
opportunities facing its diverse customer base. With the growth in
unconventional hydrocarbon and enhanced oil recovery ("EOR") projects around the
globe, we are seeing an increase in the use of reservoir simulation software by
reservoir engineers. This growth in simulation use has been reflected in the
number and types of projects being simulated and the amount of simulation done
on each project, hence, increasing the demand for our software. While oil prices
continue to fluctuate, they remain at levels that should allow our customers to
move forward on projects involving various types of unconventional reserves and
advanced recovery processes.
One of the instrumental parts of our success includes training programs which we
offer to our customers to enable them to become more efficient and effective
users of our software. We continue to see strong class attendance across all the
regions.
CMG's joint project to develop the newest generation of dynamic reservoir
modelling systems ("DRMS Project") continued to make progress during the first
quarter of the current fiscal year. The most recent beta version of the software
was released at the beginning of calendar 2013, and our DRMS team continues to
make progress toward the anticipated limited commercial release of the software
by the end of calendar 2013. CMG and its partners remain committed to funding
the ongoing development and to the future success of the project.
The excellent reputation behind our Company and its product suite offering will
continue to enable us to grow and sustain a healthy market share while
generating solid software license revenue. With our strong working capital
position, we are well positioned to continue to invest in all aspects of our
business in order to continue to grow and diversify our revenue base and to
ultimately return value to our shareholders in the form of regular quarterly
dividend payments and growth in share value.
Kenneth M. Dedeluk
President and Chief Executive Officer
August 12, 2013
COMPUTER MODELLING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
UNAUDITED (thousands of Canadian $) June 30, 2013 March 31, 2013
----------------------------------------------------------------------------
Assets
Current assets:
Cash 63,112 59,419
Trade and other receivables 12,017 19,141
Prepaid expenses 1,063 1,216
Prepaid income taxes (note 7) 20 341
----------------------------------------------------------------------------
76,212 80,117
Property and equipment 3,154 3,304
----------------------------------------------------------------------------
Total assets 79,366 83,421
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Trade payables and accrued liabilities 3,632 6,047
Income taxes payable (note 7) 492 296
Deferred revenue 22,014 25,289
----------------------------------------------------------------------------
26,138 31,632
Deferred tax liability (note 7) 111 379
----------------------------------------------------------------------------
Total liabilities 26,249 32,011
----------------------------------------------------------------------------
Shareholders' equity:
Share capital 43,936 40,498
Contributed surplus 4,702 4,673
Retained earnings 4,479 6,239
----------------------------------------------------------------------------
Total shareholders' equity 53,117 51,410
----------------------------------------------------------------------------
Total liabilities and shareholders' equity 79,366 83,421
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended June 30,
UNAUDITED (thousands of Canadian $ except per
share amounts) 2013 2012
----------------------------------------------------------------------------
Revenue (note 4) 18,116 16,465
----------------------------------------------------------------------------
Operating expenses
Sales, marketing and professional services 3,649 3,962
Research and development (note 5) 3,472 2,897
General and administrative 1,645 1,501
----------------------------------------------------------------------------
8,766 8,360
----------------------------------------------------------------------------
Operating profit 9,350 8,105
Finance income (note 6) 649 472
----------------------------------------------------------------------------
Profit before income and other taxes 9,999 8,577
Income and other taxes (note 7) 2,918 2,487
----------------------------------------------------------------------------
Net and total comprehensive income 7,081 6,090
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings Per Share
Basic (note 8(e)) 0.19 0.16
Diluted (note 8(e)) 0.18 0.16
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Common
UNAUDITED (thousands of Share Contributed Retained Total
Canadian $) Capital Surplus Earnings Equity
----------------------------------------------------------------------------
Balance, April 1, 2012 31,751 3,535 10,793 46,079
Total comprehensive income
for the period - - 6,090 6,090
Dividends paid - - (9,736) (9,736)
Shares issued for cash on
exercise of stock options
(note 8(b)) 1,224 - - 1,224
Common shares buy-back
(notes 8(b) & (c)) (80) - (1,471) (1,551)
Stock-based compensation:
Current period expense - 568 - 568
Stock options exercised
(note 8(b)) 231 (231) - -
----------------------------------------------------------------------------
Balance, June 30, 2012 33,126 3,872 5,676 42,674
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, April 1, 2013 40,498 4,673 6,239 51,410
Total comprehensive income
for the period - - 7,081 7,081
Dividends paid - - (8,841) (8,841)
Shares issued for cash on
exercise of stock options
(note 8(b)) 2,922 - - 2,922
Common shares buy-back
(notes 8(b) & (c)) - - -
Stock-based compensation:
Current period expense - 545 - 545
Stock options exercised
(note 8(b)) 516 (516) - -
----------------------------------------------------------------------------
Balance, June 30, 2013 43,936 4,702 4,479 53,117
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30,
UNAUDITED (thousands of Canadian $) 2013 2012
----------------------------------------------------------------------------
Cash flows from operating activities
Net income 7,081 6,090
Adjustments for:
Depreciation 375 318
Income and other taxes (note 7) 2,918 2,487
Stock-based compensation (note 8(d)) 545 568
Interest income (note 6) (157) (145)
----------------------------------------------------------------------------
10,762 9,318
Changes in non-cash working capital:
Trade and other receivables 7,126 4,562
Trade payables and accrued liabilities (2,415) (909)
Prepaid expenses 153 65
Deferred revenue (3,275) (2,914)
----------------------------------------------------------------------------
Cash generated from operating activities 12,351 10,122
Interest received 155 144
Income taxes paid (2,669) (3,605)
----------------------------------------------------------------------------
Net cash from operating activities 9,837 6,661
----------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from issue of common shares 2,922 1,224
Dividends paid (8,841) (9,736)
Common shares buy-back (note 8(c)) - (1,551)
----------------------------------------------------------------------------
Net cash used in financing activities (5,919) (10,063)
----------------------------------------------------------------------------
Cash flows used in investing activities
Property and equipment additions (225) (437)
----------------------------------------------------------------------------
Increase (decrease) in cash 3,693 (3,839)
Cash, beginning of period 59,419 55,374
----------------------------------------------------------------------------
Cash, end of period 63,112 51,535
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended June 30, 2013 and 2012 (unaudited).
1. Reporting Entity:
Computer Modelling Group Ltd. ("CMG") is a company domiciled in Alberta, Canada
and is incorporated pursuant to the Alberta Business Corporations Act, with its
Common Shares listed on the Toronto Stock Exchange under the symbol "CMG". The
address of CMG's registered office is Suite 200, 1824 Crowchild Trail N.W.,
Calgary, Alberta, Canada, T2M 3Y7. The condensed consolidated financial
statements as at and for the three months ended June 30, 2013 comprise CMG and
its subsidiaries (together referred to as the "Company"). The Company is a
computer software technology company engaged in the development and licensing of
reservoir simulation software. The Company also provides professional services
consisting of highly specialized support, consulting, training, and contract
research activities.
2. Basis of Preparation:
(a) STATEMENT OF COMPLIANCE:
These condensed consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards ("IFRS") as issued
by the International Accounting Standards Board ("IASB"), and using the
accounting policies disclosed in note 3 of the Company's annual consolidated
financial statements as at and for the year ended March 31, 2013.
These condensed consolidated financial statements have been prepared in
accordance with International Accounting Standard ("IAS") 34, Interim Financial
Reporting. Accordingly, the condensed consolidated financial statements do not
include all of the information required for full annual financial statements,
and should be read in conjunction with the Company's most recent annual
consolidated financial statements as at and for the year ended March 31, 2013.
These unaudited condensed consolidated financial statements as at and for the
three months ended June 30, 2013 were authorized for issuance by the Board of
Directors on August 12, 2013.
(b) BASIS OF MEASUREMENT:
The condensed consolidated financial statements have been prepared on the
historical cost basis, which is based on the fair value of the consideration at
the time of the transaction.
(c) FUNCTIONAL AND PRESENTATION CURRENCY:
The condensed consolidated financial statements are presented in Canadian
dollars, which is the functional currency of CMG and its subsidiaries. All
financial information presented in Canadian dollars has been rounded to the
nearest thousand.
(d) USE OF ESTIMATES, JUDGMENTS AND ASSUMPTIONS:
The preparation of financial statements in conformity with IFRS requires
management to make judgments, estimates and assumptions that affect the
application of accounting policies, the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue, costs and
expenses for the period. Estimates and underlying assumptions are based on
historical experience and other assumptions that are considered reasonable in
the circumstances and are reviewed on an on-going basis. Actual results may
differ from such estimates and it is possible that the differences could be
material. Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods affected. In preparing
these condensed consolidated financial statements, the significant judgments
made by management in applying the Company's accounting policies and the key
sources of estimation uncertainty are the same as those applied in the annual
IFRS consolidated financial statements for the year ended March 31, 2013.
3. Significant Accounting Policies:
The condensed consolidated financial statements should be read in conjunction
with the Company's annual financial statements for the year ended March 31, 2013
prepared in accordance with IFRS applicable to those annual consolidated
financial statements. Except as disclosed below, the same accounting policies,
presentation and methods of computation have been followed in these condensed
consolidated financial statements as were applied in the Company's consolidated
financial statements for the year ended March 31, 2013.
NEW STANDARDS AND INTERPRETATIONS ADOPTED:
The Company has adopted the following new standards and amendments to standards,
with a date of initial application of April 1, 2013:
-- IFRS 10 Consolidated Financial Statements
Replaces the guidance in IAS 27 Consolidated and Separate Financial
Statements and SIC-12 Consolidation - Special Purpose Entities, and
provides a single model to be applied in the control analysis for all
investees, including entities that currently are special purpose
entities in the scope of SIC-12. The adoption of IFRS 10 did not have a
material impact on the condensed consolidated interim financial
statements.
-- IFRS 11 Joint Arrangements
Under IFRS 11, joint arrangements are classified as either joint
operations or joint ventures. IFRS 11 replaces the guidance in IAS 31
Interest in Joint Ventures, and essentially carves out of previous
jointly controlled entities, those arrangements which although
structured through a separate vehicle, such separation is ineffective
and the parties to the arrangement have rights to the assets and
obligations for the liabilities and are accounted for as joint
operations in a fashion consistent with jointly controlled
assets/operations under IAS 31. In addition, under IFRS 11, joint
ventures must now use the equity method of accounting. The adoption of
IFRS 11 did not have a material impact on the condensed consolidated
interim financial statements.
-- IFRS 12 Disclosure of Interests in Other Entities
Contains the disclosure requirements for entities that have interests in
subsidiaries, joint arrangements, associates and/or unconsolidated
structured entities. The adoption of IFRS 12 did not have a material
impact on the condensed consolidated interim financial statements.
-- IFRS 13 Fair Value Measurement
Replaces the fair value measurement guidance contained in individual
IFRSs with a single source of fair value measurement guidance. It
defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, i.e. an exit price. The standard
also establishes a framework for measuring fair value and sets out
disclosure requirements for fair value measurement to provide
information that enables financial statement users to assess the methods
and inputs used to develop fair value measurements and, for recurring
fair value measurements that use significant unobservable inputs (Level
3), the effect of the measurements on profit or loss or other. Due to
the nature of the Company's financial assets and liabilities, the
adoption of IFRS 13 did not have a material impact on the condensed
consolidated interim financial statements. It only resulted in the
inclusion of certain fair value disclosures which were previously
applicable to annual financial statements only (refer to note 9).
-- Amendments to IAS 1 Presentation of Financial Statements
Requires an entity to present separately the items of other
comprehensive income that may be reclassified to profit or loss in the
future from those that would never be reclassified to profit or loss. As
the amendments only required changes in the presentation of items in
other comprehensive income, the new standard did not have a material
impact on the condensed consolidated interim financial statements.
-- Amendments to IFRS 7 Offsetting Financial Assets and Liabilities
Contains new disclosure requirements for offset financial assets and
liabilities and netting arrangements. The amendments to IFRS 7 did not
have a material impact on the condensed consolidated interim financial
statements.
4. Revenue:
For the three months ended June 30, 2013 2012
(thousands of $)
----------------------------------------------------------------------------
Software licenses 16,289 15,249
Professional services 1,827 1,216
----------------------------------------------------------------------------
18,116 16,465
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Research and Development Costs:
For the three months ended June 30, 2013 2012
(thousands of $)
----------------------------------------------------------------------------
Research and development 4,020 3,385
Scientific research and experimental
development ("SR&ED") investment tax credits (548) (488)
----------------------------------------------------------------------------
3,472 2,897
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Finance Income:
For the three months ended June 30, 2013 2012
(thousands of $)
----------------------------------------------------------------------------
Interest income 157 145
Net foreign exchange gain 492 327
----------------------------------------------------------------------------
Finance income 649 472
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Income and Other Taxes:
The major components of income tax expense are as follows:
For the three months ended June 30, 2013 2012
(thousands of $)
----------------------------------------------------------------------------
Current year income taxes 2,901 2,412
Deferred tax expense (recovery) (268) (213)
Foreign withholding and other taxes 285 288
----------------------------------------------------------------------------
2,918 2,487
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The provision for income and other taxes reported differs from the amount
computed by applying the combined Canadian Federal and Provincial statutory rate
to the profit before income and other taxes.
The reasons for this difference and the related tax effects are as follows:
For the three months ended June 30, 2013 2012
(thousands of $, unless otherwise stated)
----------------------------------------------------------------------------
Combined statutory tax rate 25.00% 25.00%
----------------------------------------------------------------------------
Expected income tax 2,500 2,144
Non-deductible costs 143 150
Effect of tax rates in foreign jurisdictions 56 5
Withholding taxes 213 216
Other 6 (28)
----------------------------------------------------------------------------
2,918 2,487
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The components of the Company's deferred tax liability are as follows:
(thousands of $) June 30, 2013 March 31, 2013
----------------------------------------------------------------------------
Tax liability on SR&ED investment tax credits (104) (362)
Tax liability on property and equipment (7) (17)
----------------------------------------------------------------------------
Deferred tax liability (111) (379)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All movement in deferred tax assets and liabilities is recognized through net
income of the respective period.
Prepaid income taxes and current income taxes payable have not been offset as
the amounts relate to income taxes levied by different tax authorities to
different taxable entities.
8. Share Capital:
(a) AUTHORIZED:
An unlimited number of Common Shares, an unlimited number of Non-Voting Shares,
and an unlimited number of Preferred Shares, issuable in series.
(b) ISSUED:
(thousands of shares) Common Shares
----------------------------------------------------------------------------
Balance, April 1, 2012 37,307
Issued for cash on exercise of stock options 175
Common shares buy-back (91)
----------------------------------------------------------------------------
Balance, June 30, 2012 37,391
----------------------------------------------------------------------------
Balance, April 1, 2013 38,129
Issued for cash on exercise of stock options 355
Common shares buy-back -
----------------------------------------------------------------------------
Balance, June 30, 2013 38,484
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent to June 30, 2013, 27,000 stock options were exercised for cash
proceeds of $227,000.
On May 23, 2012, the Board of Directors considered the merits of renewing the
Company's shareholder rights plan on or before the third-year anniversary of
shareholder approval of the plan and determined that it was in the best interest
of the Company to continue to have a shareholder rights plan in place. Upon
careful review, the Board of Directors agreed to approve an amended and restated
rights plan (the "Amended and Restated Rights Plan") between the Company and
Valiant Trust Company, which is similar in all respects to the existing
shareholder rights plan, with the exception of certain minor amendments. The
Amended and Restated Rights Plan was approved by the Company's shareholders on
July 12, 2012.
(c) COMMON SHARES BUY-BACK:
On April 16, 2012, the Company announced a NCIB commencing on April 18, 2012 to
purchase for cancellation up to 3,416,000 of its Common Shares. During the year
ended March 31, 2013, a total of 91,000 Common Shares were purchased at market
price for a total cost of $1,551,000.
On April 29, 2013, the Company announced a NCIB commencing on May 1, 2013 to
purchase for cancellation up to 3,538,000 of its Common Shares. During the three
months ended June 30, 2013, no Common Shares were purchased.
(d) STOCK-BASED COMPENSATION PLAN:
The Company adopted a rolling stock option plan as of July 13, 2005, which was
reaffirmed by the Company's shareholders on July 7, 2011, which allows it to
grant options to acquire Common Shares of up to 10% of the outstanding Common
Shares at the date of grant. Based upon this calculation, at June 30, 2013, the
Company could grant up to 3,848,000 stock options. Pursuant to the stock option
plan, the maximum term of an option granted cannot exceed five years from the
date of grant. The outstanding stock options vest as to 50% after the first year
anniversary, from date of grant, and then vest as to 25% of the total options
granted after each of the second and third year anniversary dates.
The following table outlines changes in stock options:
For the three months
ended For the year ended
(thousands except per share amounts) June 30, 2013 March 31, 2013
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Granted ($/share) Granted ($/share)
----------------------------------------------------------------------------
Outstanding at beginning of period 2,938 13.13 2,903 9.85
Granted - - 1,006 18.19
Exercised (355) 8.23 (913) 8.15
Forfeited/cancelled (64) 15.30 (58) 15.09
----------------------------------------------------------------------------
Outstanding at end of period 2,519 13.77 2,938 13.13
----------------------------------------------------------------------------
Options exercisable at end of period 855 10.41 1,207 9.75
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The range of exercise prices of stock options outstanding and exercisable at
June 30, 2013 is as follows:
Outstanding Exercisable
----------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Exercise Price Options Life Price Options Price
($/option) (thousands) (years) ($/option) (thousands) ($/option)
----------------------------------------------------------------------------
4.52 - 5.63 31 0.2 5.54 31 5.54
5.64 - 7.80 168 1.1 7.80 168 7.80
7.81 - 9.07 559 2.1 9.07 320 9.07
9.08 - 13.43 799 3.1 13.40 326 13.40
13.44 - 21.75 962 4.1 18.12 10 14.92
----------------------------------------------------------------------------
2,519 3.1 13.77 855 10.41
----------------------------------------------------------------------------
----------------------------------------------------------------------------
There were no options granted during the three months ended June 30, 2013. The
fair value of stock options granted during the year ended March 31, 2013 was
estimated using the Black-Scholes option pricing model under the following
assumptions:
For the year
ended
March 31, 2013
----------------------------------------------------------------------------
Fair value at grant date ($/option) 2.45 to 3.83
Share price at grant date ($/share) 17.90 to 21.75
Risk-free interest rate (%) 1.13 to 1.33
Estimated hold period prior to exercise (years) 2 to 4
Volatility in the price of common shares (%) 27 to 36
Dividend yield per common share (%) 3.39 to 4.12
----------------------------------------------------------------------------
The Company recognized total stock-based compensation expense for the three
months ended June 30, 2013 of $545,000 (2012 - $568,000).
(e) EARNINGS PER SHARE:
The following table summarizes the earnings and weighted average number of
Common Shares used in calculating basic and diluted earnings per share:
For the three months
ended June 30,
(thousands except per
share amounts) 2013 2012
----------------------------------------------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares Per Share Earnings Shares Per Share
($) Outstanding ($/share) ($) Outstanding ($/share)
----------------------------------------------------------------------------
Basic 7,081 38,254 0.19 6,090 37,353 0.16
Dilutive
effect of
stock
options - 1,015 - - 1,078 -
----------------------------------------------------------------------------
Diluted 7,081 39,269 0.18 6,090 38,431 0.16
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Financial Instruments:
(i) Classification of financial instruments
Classification Measurement
----------------------------------------------------------------------------
Cash Held for trading Fair value
Trade and other Loans and receivables Amortized cost
receivables
Trade payables and accrued Other financial Amortized cost
liabilities liabilities
----------------------------------------------------------------------------
(ii) Fair values of financial instruments
The carrying values of cash, trade and other receivables, trade payables and
accrued liabilities approximate their fair values due to the short-term nature
of these instruments.
10. Commitments:
(a) RESEARCH COMMITMENTS:
The Company is the operator of the DRMS research and development project (the
"DRMS project"), a collaborative effort with its partners Shell International
Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A.
("Petrobras"), to jointly develop the newest generation of reservoir and
production system simulation software. The project has been underway since 2006
and, with the ongoing support of the participants, it is expected to continue
until ultimate delivery of the software. The Company's share of costs associated
with the project is estimated to be $5.5 million ($2.6 million net of overhead
recoveries) for fiscal 2014.
(b) LEASE COMMITMENTS:
The Company has operating lease commitments relating to its office premises with
minimum annual lease payments as follows:
Three months ended June 30, 2013 2012
(thousands of $)
----------------------------------------------------------------------------
Less than one year 1,547 1,504
Between one and five years 5,084 6,965
----------------------------------------------------------------------------
6,631 8,469
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Line Of Credit:
The Company has arranged for a $1.0 million line of credit with its principal
banker, which can be drawn down by way of a demand operating credit facility or
may be used to support letters of credit. As at June 30, 2013, US $165,000
(March 31, 2013 - US $165,000) had been reserved on this line of credit for the
letter of credit supporting a performance bond.
12. Segmented Information:
The Company is organized into one operating segment represented by the
development and licensing of reservoir simulation software. The Company provides
professional services, consisting of support, training, consulting and contract
research activities, to promote the use and development of its software;
however, these activities are not evaluated as a separate business segment.
Revenues and property and equipment of the Company arise in the following
geographic regions:
Property and
(thousands of $) Revenue equipment
----------------------------------------------------------------------------
For the three months
ended June 30, As at June 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
Canada 6,490 6,118 2,972 2,801
United States 3,859 2,887 44 67
South America 3,114 3,951 73 58
Eastern Hemisphere(1) 4,653 3,509 65 22
----------------------------------------------------------------------------
18,116 16,465 3,154 2,948
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes Europe, Africa, Asia and Australia.
In the three months ended June 30, 2013, no customer represented 10% of total
revenue, while in the three months ended June 30, 2012, the Company derived
12.4% of its revenue from one customer.
13. Joint Operation:
The Company is the operator of a joint software development project, the DRMS
project, which gives the Company exclusive rights to commercialize the jointly
developed software while the other partners will have unlimited software access
for their internal use. Accordingly, the Company records its proportionate share
of costs incurred on the project (37.04%) as research and development costs
within the condensed consolidated statements of operations and comprehensive
income.
For the three months ended June 30, 2013, CMG included $1.1 million (2012 - $0.8
million) of costs in its condensed consolidated statements of operations and
comprehensive income related to this joint project.
Additionally, the Company is entitled to charge the project for various services
provided as operator, which were recorded in revenue as professional services
and amounted to $0.6 million during the three months ended June 30, 2013 (2012 -
$0.5 million).
14. Subsequent Events:
On August 12, 2013, the Board of Directors declared a quarterly cash dividend of
$0.18 per share on its Common Shares, payable on September 13, 2013, to all
shareholders of record at the close of business on September 6, 2013.
On August 12, 2013, the Board of Directors also approved the issuance of
1,150,000 options to purchase CMG's Common Shares in accordance with CMG's stock
option plan.
FOR FURTHER INFORMATION PLEASE CONTACT:
Computer Modelling Group Ltd.
Kenneth M. Dedeluk
President & CEO
(403) 531-1300
ken.dedeluk@cmgl.ca
Computer Modelling Group Ltd.
John Kalman
Vice President, Finance & CFO
(403) 531-1300
john.kalman@cmgl.ca
www.cmgl.ca
Computer Modelling (TSX:CMG)
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