CALGARY, ALBERTA — (Marketwired) — 11/13/13 — Computer Modelling Group Ltd. (“CMG” or the “Company”) (TSX: CMG) is very pleased to report our second quarter results for the three and six months ended September 30, 2013.
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 November 12, 2013, should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of the Company for the three and six months ended September 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 . 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:
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”:
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”.
Highlights
During the six months ended September 30, 2013, as compared to the same period of the prior fiscal year, CMG:
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 7% for the three months ended September 30, 2013, compared to the same period of the previous fiscal year, primarily due to an increase in professional services.
Total revenue increased by 8% for the six months ended September 30, 2013, compared to the same period of the previous fiscal years, as a result of 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.
Total software license revenue grew by 2% and 4% in the three and six months ended September 30, 2013, respectively, compared to the same periods of the previous fiscal year due to increases in the annuity/maintenance revenue offset by decreases in perpetual license sales.
CMG-s annuity/maintenance license revenue increased by 9% and 8% during the three and six months ended September 30, 2013, respectively, compared to the same periods of the previous year. This increase was driven by annuity sales to new and existing customers as well as an increase in maintenance revenue tied to perpetual sales generated in the previous fiscal year.
During the three months ended September 30, 2013, all of our regions experienced growth in annuity/maintenance revenue with the exception of Canada which remained flat. All of our regions, except South America, experienced growth in annuity/maintenance revenue during the six months ended September 30, 2013, but the most significant growth during this period came from the US region.
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. During the current quarter no payments have been received or recorded for this arrangement which is consistent with the same quarter of the previous year. To provide a normalized comparison, if we were to remove revenue from this one customer from the year-to-date recorded revenue, we will notice that the annuity/maintenance revenue increased by 12%, instead of 8% as compared to the same period of the previous year. 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 and six months ended September 30, 2013, compared to the same periods of the previous fiscal year, had only a slight positive impact on our reported annuity/maintenance revenue.
Perpetual license sales decreased by 32% for the three months ended September 30, 2013, compared to the same period of the previous fiscal year, due to decreases in Canada, the US and the Eastern Hemisphere offset by growth in perpetual sales generated by South America.
Perpetual license sales decreased by 12% for the six months ended September 30, 2013, compared to the same period of the previous fiscal year, due to decreases in Canada and the US offset by growth in perpetual sales generated by the Eastern Hemisphere.
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 and six months ended September 30, 2013, compared to the same periods 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:
During the three months ended September 30, 2013, on a geographic basis, total software license sales increased across all regions with the exception of the Canadian market which experienced an overall decrease of 12%, compared to the same period of the previous fiscal year.
During the six months ended September 30, 2013, on a geographic basis, total software license sales increased by 17% and 18% in the US and South America, respectively, while Canada and South America experienced decreases of 5% and 9%, respectively.
The Canadian market (representing 36% of year-to-date total software revenue) remained flat in annuity/maintenance revenue during the three months ended September 30, 2013. Even though we have experienced revenue growth during the quarter due to increased license usage by our existing large clients, and due to the addition of several new accounts, these increases have been offset due to a few clients cancelling their projects or experiencing financial difficulties which has reduced or eliminated their need for licenses. However, our diversified geographic profile enables us to take advantage of opportunities internationally which offsets the impact of market softening in any particular region. On a year-to-date basis, annuity/maintenance revenue in Canada experienced a 5% growth, compared to the same period of the previous year, and our expectation is that our existing and, in particular, our large clients will continue renewing and increasing their usage of our products. Perpetual sales were lower during the three and six months ended September 30, 2013, compared to the same period of the previous year, due to the fluctuations inherent in the perpetual revenue stream. Historically, the Canadian market has been strong in generating recurring annuity/maintenance revenue as evidenced by the quarterly year-over-year increases of 37%, 37%, 38% and 10% recorded during Q2 2013, Q3 2013, Q4 2013, and Q1 2014, respectively. During the second quarter of the current fiscal year, we recorded comparable revenue to the second quarter of the previous fiscal year due to the reasons described above.
The US market (representing 21% of year-to-date total software revenue) experienced significant growth in annuity/maintenance license sales, in comparison to other regions, during the three and six months ended September 30, 2013, compared to the same periods of the previous fiscal year, driven by sales to new and existing customers. Perpetual license sales were lower during the three and six months ended September 30, 2013, compared to the same period of the previous year. We continue to experience successive increases in the annuity/maintenance license sales in the US as evidenced by the quarterly year-over-year increases of 24%, 32%, 20% and 32% recorded during Q2 2013, Q3 2013, Q4 2013, and Q1 2014 respectively. This double-digit growth trend has continued into the second quarter of the current fiscal year with the recorded increase of 16%.
South America (representing 14% of year-to-date total software revenue) experienced an increase of 34% in annuity/maintenance license sales during the three months ended September 30, 2013, compared to the same period of the previous fiscal year, mainly due to increased sales to existing clients. South America experienced a decrease of 10% in annuity/maintenance license sales during the six months ended September 30, 2013, compared to the same period of the previous fiscal year; however, the decrease was caused by the variability of the amounts 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 year-to-date annuity/maintenance revenue of the current and the previous fiscal years, we would notice that the annuity/maintenance revenue grew by 17% in the six months ended September 30, 2013. The South American region also experienced an increase in perpetual sales during the second quarter of the current year compared to the second quarter of the previous year while perpetual license sales remained relatively flat for the six months ended September 30, 2013, as compared to the same period of the previous fiscal year.
Eastern Hemisphere (representing 29% of the year-to-date total software revenue) grew annuity/maintenance license sales by 13% during both the three and six months ended September 30, 2013, compared to the same periods of the previous fiscal year, due to increased license usage by our significant customers in the region. Compared to other regions, Eastern Hemisphere achieved the highest growth in perpetual license revenue during the six months ended September 30, 2013, 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: .
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 September 30, 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 and second quarter (June 30 and September 30, respectively) compared to the fiscal year-end (March 31).
Deferred revenue at September 30, 2013 increased by 6% compared to the same period of the prior fiscal year. This increase is lower than the increases of 17% recorded in the previous two quarters due to the timing of the renewal of one significant contract. In the previous fiscal year, this contract was renewed and included in our second quarter-s deferred revenue balance, whereas in the current fiscal year, the renewal is expected to be completed during the third quarter. To provide a normalized comparison, if we were to include this renewal in the current quarter-s deferred revenue balance, we would notice that the deferred revenue would have increased by 12% at September 30, 2013 compared to the same period of the previous fiscal year.
PROFESSIONAL SERVICES REVENUE
CMG recorded professional services revenue of $2.2 million for the three months ended September 30, 2013, representing an increase of $0.8 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 for the six months ended September 30, 2013 amounted to $4.0 million, representing an increase of $1.4 million, compared to the same period of the previous fiscal year, which again resulted from entering into a large consulting agreement with one of our clients in 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.
CMG-s total operating expenses increased by 11% and 8% for the three and six months ended September 30, 2013, respectively, compared to the same periods of the previous fiscal year, due to increases in both direct employee costs and 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 six months ended September 30, 2013 related to staff costs, compared to 80% 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 September 30, 2013, CMG-s staff complement was 185 employees and consultants, up from 167 employees as at September 30, 2012. Direct employee costs increased during the three and six months ended September 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 increased by 10% for the three months ended September 30, 2013, compared to the same period of the previous fiscal year, mainly due to increased computing costs.
Other corporate costs increased by 1% for the six months ended September 30, 2013, compared with the same period of the previous fiscal year, mainly due to increased computing costs in the six months ended September 30, 2013 offset by the inclusion of the costs associated with CMG-s biennial technical symposium in the six months ended September 30, 2012.
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 costs include CMG-s share of joint research and development costs associated with the DRMS project of $1.0 million and $2.1 million for the three and six months ended September 30, 2013, respectively (2012 – $0.7 million and $1.5 million). See discussion under “Commitments, Off Balance Sheet Items and Transactions with Related Parties.”
The increases of 13% and 16% in our gross spending on research and development for the three and six months ended September 30, 2013, respectively, demonstrate 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 13% and 16% during the three and six months ended September 30, 2013, respectively, compared to the same periods 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 in the three and six months ended September 30, 2013 was relatively flat as compared to the same periods in the previous fiscal year.
Interest income increased in the three and six months ended September 30, 2013, compared to the same periods 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 71% (2012 – 65%) of CMG-s revenue for the six months ended September 30, 2013 is denominated in US dollars, whereas only approximately 25% (2012 – 23%) of CMG-s total costs are denominated in US dollars.
CMG recorded a net foreign exchange loss of $0.3 million for the three months ended September 30, 2013, compared to a $0.5 million foreign exchange loss recorded in the same period of the previous fiscal year, due to a strengthening of the Canadian dollar during the quarter which contributed negatively to the valuation of our US-denominated working capital.
CMG recorded a net foreign exchange gain of $0.2 million for the six months ended September 30, 2013, compared to a $0.1 million foreign exchange loss recorded in the same period of the previous fiscal year, as the net foreign exchange loss recorded in the three months ended September 30, 2013 was offset by the $0.5 million foreign exchange gain recorded in the three months ended June 30, 2013.
Income and Other Taxes
CMG-s effective tax rate for the six months ended September 30, 2013 is reflected as 30.0% (2012 – 29.7%), whereas the prevailing Canadian statutory tax rate is now 25.0%. This difference 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 as a percentage of total revenue for the three months ended September 30, 2013 was at 48% compared to 50% recorded in the same period of the previous fiscal year. While our total revenue grew by 7% during this period of time, our operating expenses grew by 11%, having a negative impact on our operating profit. The slight decrease in operating profit as a percentage of total revenue is due to the fluctuations inherent in our perpetual revenue stream given that more perpetual license revenue was recorded during the second quarter of the previous year, compared to the same quarter of the current year.
Operating profit as a percentage of revenue for the six months ended September 30, 2013 remained flat at 50% as compared to the same period of the previous fiscal year.
Net income for the period as a percentage of revenue was consistent at 33% for the three months ended September 30, 2013, compared to the same period of the previous fiscal year.
Net income for the period as a percentage of revenue increased to 36% for the six months ended September 30, 2013, compared to 35% for the same period of the previous fiscal year.
We have continued to maintain our profitability by focusing our efforts on increasing effectively controlling our operating costs. Managing these variables will continue to license sales while, at the same time, be imperative to our future success.
EBITDA increased by 3% and 9% for the three and six months ended September 30, 2013, compared to the same periods of the previous fiscal year. This increase provides further indication of our ability to keep growing our license sales while effectively managing costs in relation to this base.
EBITDA as a percent of total revenue for the three months ended September 30, 2013 decreased to 50% as compared to 52% recorded in the same period of the previous fiscal year. This slight decrease is due to the fluctuations inherent in our perpetual revenue stream.
EBITDA as a percent of total revenue for the six months ended September 30, 2013 remained consistent with the same period of the previous fiscal year at 52%.
OPERATING ACTIVITIES
Cash flow generated from operating activities decreased by $0.6 million in the three months ended September 30, 2013, compared to the same period of last year, mainly as a result of an increase in the deferred revenue balance offset by the positive effect on the timing difference of when trade payables and accrued liabilities are recorded and paid.
Cash flow generated from operating activities increased by $2.5 million in the six months ended September 30, 2013, compared to the same period of last year, mainly due to the increase in net income for the period, the timing difference of when the sales are made and when the resulting receivables are collected, the positive effect on the timing difference of when income taxes are recorded and paid offset by the change in trade payables and accrued liabilities and deferred revenue balances.
FINANCING ACTIVITIES
Cash used in financing activities during the three and six months ended September 30, 2013 decreased by $1.2 million and $5.4 million, respectively, compared to the same period of last year, due to receiving higher proceeds from the issuance of Common Shares. In addition, in the first quarter of the previous fiscal year, CMG spent $1.6 million on buying back Common Shares.
During the six months ended September 30, 2013, CMG employees and directors exercised options to purchase 755,000 Common Shares, which resulted in cash proceeds of $7.7 million (2012 – 459,000 options exercised to purchase Common Shares which resulted in cash proceeds of $3.8 million).
In the six months ended September 30, 2013, CMG paid $15.8 million in dividends, representing the following quarterly dividends:
In the six months September 30, 2012, CMG paid $15.8 million in dividends, representing the following quarterly dividends:
On November 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 December 13, 2013 to shareholders of record at the close of business on December 6, 2013.
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 and Q2 of fiscal 2014 compared to $0.16 per share in Q1 and Q2 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 six months ended September 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 six months ended September 30, 2013, CMG expended $0.3 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 September 30, 2013, CMG has $63.7 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 six months ended September 30, 2013, 4,838,000 shares of CMG-s public float were traded on the TSX. As at September 30, 2013, CMG-s market capitalization based upon its September 30, 2013 closing price of $24.10 was $937.1 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 – $1.0 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:
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:
Outstanding Share Data
The following table represents the number of Common Shares and options outstanding:
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 November 12, 2013, CMG could grant up to 3,890,000 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 six months ended September 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 six months of fiscal 2014 with a recorded increase of 8%, compared to the same period 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 have experienced increased usage by our existing large clients as well as added new accounts during the quarter. Year-to-date, the most notable growth was experienced in the US and the Eastern Hemisphere.
Our geographical diversification allows us to take advantage of opportunities internationally, and we will continue to extend our reach globally and focus our efforts on sustaining high renewal rates as well as increasing the number of licenses sold to both existing and new customers.
Although professional services are not the primary source of our revenue, we were able to grow this business by $1.4 million in the first six months of fiscal 2014 as compared to the same period of the prior fiscal year.
Our profit margin continued to hold strong, demonstrating our continuous commitment to effectively manage our corporate costs. For the six months ended September 30, 2013, our EBITDA represented 52% of our total revenue, remaining consistent with 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. We strive to invest 20% of our top line towards continuous improvement of our product features as well as development of new capabilities in order to maintain our technological distinction and take advantage of new opportunities. We will continue fostering value-based, long-term relationships with our clients while helping them solve problems associated with hydrocarbon recovery, with an emphasis on the advanced recovery processes, which are increasing in complexity and where our products continue to gain increasing importance. 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. More recently, the North American market is seeing an increased opportunity in shale gas and liquids which use complex recovery processes that necessitate the use of simulation.
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 second 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 scheduled for the end of calendar 2013. The new release will be distributed only to our partner companies for the purpose of testing it on selected assets. 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended September 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 and six months ended September 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 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 which 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 unaudited condensed consolidated financial statements as at and for the three and six months ended September 30, 2013 were authorized for issuance by the Board of Directors on November 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:
4. Revenue:
5. Research and Development Costs:
6. Finance Income and Finance Costs:
7. Income and Other Taxes:
The major components of income tax expense are as follows:
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:
The components of the Company-s deferred tax liability are as follows:
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:
Subsequent to September 30, 2013, 17,000 stock options were exercised for cash proceeds of $252,000.
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.
© COMMON SHARES BUY-BACK:
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 six months ended September 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 September 30, 2013, the Company could grant up to 3,888,000 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:
The range of exercise prices of stock options outstanding and exercisable at September 30, 2013 is as follows:
The fair value of stock options granted was estimated using the Black-Scholes option pricing model under the following assumptions:
The Company recognized total stock-based compensation expense for the three and six months ended September 30, 2013 of $758,000 and $1,303,000 respectively (three and six months ended September 30, 2012 – $664,000 and $1,232,000 respectively).
(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:
During the three and six months ended September 30, 2013, 150,000 and Nil options respectively (three and six months ended September 30, 2012 – 147,000, and Nil respectively) were excluded from the computation of the weighted-average number of diluted shares outstanding because their effect was not dilutive.
9. Financial Instruments:
(i) Classification of financial instruments
(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:
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 September 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:
In the six months ended September 30, 2013 and 2012, no customer represented 10% of total revenue.
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 and six months ended September 30, 2013, CMG included $1.1 million and $2.2 million, respectively (2012 – $0.9 million and $1.8 million, respectively) 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 and $1.2 million during the three and six months ended September 30, 2013 (2012 – $0.4 million and $0.9 million, respectively).
14. Subsequent Events:
On November 12, 2013, the Board of Directors declared a quarterly cash dividend of $0.18 per share on its Common Shares, payable on December 13, 2013, to all shareholders of record at the close of business on December 6, 2013.
Contacts:
Computer Modelling Group Ltd.
Kenneth M. Dedeluk
President & CEO
(403) 531-1300
Computer Modelling Group Ltd.
Sandra Balic
Vice President, Finance & CFO
(403) 531-1300
(403) 289-8502 (FAX)
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