Computer Modelling Group Announces Second Quarter Results
Tweet
Share
E-mailGet Alerts CMG Hot Sheet
Join SI Premium – FREE
CALGARY, ALBERTA--(Marketwire - Nov. 9, 2011) - Computer Modelling Group Ltd. (TSX: CMG) ("CMG" or the "Company") is very pleased to announce our second quarter results for the three and six months ended September 30, 2011. SECOND QUARTER HIGHLIGHTS For the three months ended September 30, 2011 2010 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- Annuity/maintenance software licenses 9,308 7,855 1,453 18% Perpetual software licenses 1,596 2,975 (1,379) -46% Total revenue 11,982 13,332 (1,350) -10% Operating profit 5,226 6,694 (1,468) -22% Net income 4,318 4,565 (247) -5% Earnings per share - basic 0.12 0.13 (0.01) -8% ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- Annuity/maintenance software licenses 18,305 16,179 2,126 13% Perpetual software licenses 6,987 4,799 2,188 46% Total revenue 27,921 25,386 2,535 10% Operating profit 14,318 12,628 1,690 13% Net income 10,981 8,795 2,186 25% Earnings per share - basic 0.30 0.25 0.05 20% ----------------------------------------------------------------------------
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 8, 2011, 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, 2011 and the audited consolidated financial statements and MD&A for the years ended March 31, 2011 and 2010 contained in the 2011 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.
Effective on the close of business on June 20, 2011, CMG's Common Shares were split on a two-for-one basis. Accordingly, all comparative number of shares and per share amounts have been retroactively adjusted to reflect the two-for-one split.
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 2011 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 contains the terms "direct employee costs" and "other corporate costs" which are not measures defined by IFRS, do not have standardized meaning prescribed by IFRS and should not be considered an alternative to expenses as determined in accordance with IFRS. Direct employee costs and other corporate costs, as computed by CMG, may differ from similar measures as reported by other issuers. These non-IFRS measures are presented in this MD&A because management considers them to be important in highlighting the quantitative impact of cost management as it relates to corporate and people-related costs. The items constituting direct employee costs are outlined in the table under the "Expenses" heading.
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 approximately 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 and Dubai. CMG's Common Shares are listed on the Toronto Stock Exchange ("TSX") and trade under the symbol "CMG".
QUARTERLY PERFORMANCE
Fiscal Fiscal
2010((1)) Fiscal 2011((2)) 2012((3))
($ thousands,
unless
otherwise
stated) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
----------------------------------------------------------------------------
Annuity/maint
enance
licenses 7,406 7,653 8,325 7,855 7,999 8,531 8,997 9,308
Perpetual
licenses 2,903 4,982 1,824 2,975 2,335 3,911 5,391 1,596
----------------------------------------------------------------------------
Software
licenses 10,309 12,635 10,149 10,830 10,333 12,442 14,388 10,904
Professional
services 1,383 1,657 1,905 2,502 1,730 1,936 1,551 1,078
----------------------------------------------------------------------------
Total revenue 11,692 14,292 12,054 13,332 12,063 14,378 15,939 11,982
Operating
profit 5,920 7,844 5,933 6,695 5,517 7,523 9,092 5,226
Operating
profit % 51 55 49 50 46 52 57 44
Profit before
income and
other taxes 5,708 7,710 6,178 6,565 5,278 7,413 9,240 6,096
Income and
other taxes 1,708 2,350 1,949 1,999 1,715 2,605 2,577 1,778
Net income
for the
period 4,000 5,360 4,229 4,565 3,563 4,808 6,663 4,318
Cash
dividends
declared and
paid 3,194 3,209 6,274 3,430 3,623 3,643 7,519 4,053
----------------------------------------------------------------------------
Per share
amounts -
($/share)
Earnings per
share -
basic 0.12 0.15 0.12 0.13 0.10 0.13 0.18 0.12
Earnings per
share -
diluted 0.11 0.15 0.12 0.13 0.10 0.13 0.18 0.11
Cash
dividends
declared and
paid 0.09 0.09 0.175 0.095 0.10 0.10 0.205 0.11
----------------------------------------------------------------------------
1. Q3 and Q4 of fiscal 2010 include $0.3 million and $0.4 million,
respectively, in revenue that pertains to usage of CMG's products in
prior quarters.
2. Q1, Q2, Q3 and Q4 of fiscal 2011 include $1.1 million, $0.2 million,
$0.3 million and $0.1 million, respectively, in revenue that pertains to
usage of CMG's products in prior quarters.
3. Q1 and Q2 of fiscal 2012 include $0.3 million and $0.04 million,
respectively, in revenue that pertains to usage of CMG's products in
prior quarters.
Note: all quarterly data contained in the above table has been prepared in accordance with IFRS.
Highlights
During the six months ended September 30, 2011, as compared to the same period of prior fiscal year, CMG:
-- Increased annuity/maintenance revenue by 13%; -- Increased perpetual sales by 46%; -- Increased net income by 25%; -- Increased gross spending on research and development by 10%; -- Realized earnings per share of $0.30, representing a 20% increase.
Revenue
For the three months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Software licenses 10,904 10,830 74 1% Professional services 1,078 2,502 (1,424) -57% ---------------------------------------------------------------------------- Total revenue 11,982 13,332 (1,350) -10% ---------------------------------------------------------------------------- Software license revenue - % of total revenue 91% 81% Professional services - % of total revenue 9% 19% ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Software licenses 25,292 20,979 4,313 21% Professional services 2,629 4,407 (1,778) -40% ---------------------------------------------------------------------------- Total revenue 27,921 25,386 2,535 10% ---------------------------------------------------------------------------- Software license revenue - % of total revenue 91% 83% Professional services - % of total revenue 9% 17% ----------------------------------------------------------------------------
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 for the three months ended September 30, 2011 decreased by 10% compared to the same period of previous fiscal year. While revenue generated from software licenses remained at a comparable level between the two periods, fees earned from professional services decreased by $1.4M contributing to the overall decrease in revenue.
A 10% increase in total revenue in the six months ended September 30, 2011, compared to the same period of previous fiscal year, is attributable to an increase in software license sales driven by both a growth in annuity/maintenance license revenue and an increase in perpetual sales. This increase was offset by a decrease in fees for professional services earned during the six months ended September 30, 2011.
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-then-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. CMG has found that the majority of its customers who have acquired perpetual software licenses subsequently purchase maintenance licenses to ensure they have access to current versions of CMG's software.
For the three months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance licenses 9,308 7,855 1,453 18% Perpetual licenses 1,596 2,975 (1,379) -46% ---------------------------------------------------------------------------- Total software license revenue 10,904 10,830 74 1% ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 85% 73% Perpetual as a % of total software license revenue 15% 27% ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance licenses 18,305 16,179 2,126 13% Perpetual licenses 6,987 4,799 2,188 46% ---------------------------------------------------------------------------- Total software license revenue 25,292 20,979 4,313 21% ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 72% 77% Perpetual as a % of total software license revenue 28% 23% ----------------------------------------------------------------------------
Total software license revenue remained virtually unchanged between the three months ended September 30, 2011 and the same period of previous fiscal year, as an increase in annuity/maintenance license sales has been offset by a decrease in perpetual license sales. The 21% growth in software license revenue in the six months ended September 30, 2011, compared to the same period of previous fiscal year, is attributable to both the increase in annuity/maintenance license revenue related to increased sales to new and existing customers as well as the increase in perpetual sales driven mainly by a large multi-million dollar perpetual sale made during the first quarter of the current fiscal year. As discussed below, this increase was partially offset by the decrease in both annuity/maintenance and perpetual license revenue as a result of the strengthening of the Canadian dollar relative to the US dollar.
The following table summarizes the US dollar denominated revenue and the weighted average exchange rates at which it was converted to Canadian dollars:
For the three months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 5,902 US$ 5,062 840 17% Weighted average conversion rate 0.990 1.050 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 5,841 CDN$ 5,332 509 10% ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 1,656 US$ 975 681 70% Weighted average conversion rate 0.964 1.060 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 1,596 CDN$ 1,030 566 55% ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 11,448 US$ 10,746 702 7% Weighted average conversion rate 0.994 1.050 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 11,377 CDN$ 11,293 84 1% ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 7,277 US$ 2,735 4,542 166% Weighted average conversion rate 0.956 1.040 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 6,955 CDN$ 2,854 4,101 144% ----------------------------------------------------------------------------
CMG's annuity/maintenance license revenue increased by 18% and 13% during the three and six months ended September 30, 2011, respectively, compared to the same periods of last year. These increases were driven by sales to new and existing clients as well as the increase in maintenance revenue tied to our strong perpetual sales generated in the previous quarters. It is noteworthy that our annuity/maintenance license revenue, representing a recurring revenue stream, is experiencing steady growth quarter over quarter as evidenced by the 18% increase in the current quarter, 8% increase in the previous quarter, 11% increase in Q4 of fiscal 2011 and 8% increases in each of Q3 and Q2 of fiscal 2011, despite the negative effects of foreign exchange as discussed below. It should also be noted that the annuity/maintenance license revenue recorded in the second quarter of prior year included $0.2 million of revenue that pertained to usage of CMG's products in prior quarters compared to only $0.04 million included in the current quarter's annuity/maintenance revenue that pertains to prior quarters (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 increase in annuity/maintenance revenue as measured in Canadian dollars has been negatively affected by the strengthening of the Canadian dollar relative to the US dollar. The table above illustrates revenue generated in US dollars and the rates at which it was converted into Canadian dollars to show the movement in US dollar denominated revenue without the impact of the foreign exchange. Had the exchange rate between the US and Canadian dollars remained constant between the three and six months ended September 30, 2011 and 2010, our second quarter annuity/maintenance revenue would have increased by 23% (instead of 18%) and our year-to-date annuity/maintenance revenue would have increased by 17% (instead of 13%).
Software license revenue under perpetual sales decreased by 46% or $1.4 million for the three months ended September 30, 2011. Perpetual revenue earned in the second quarter of the previous fiscal year was significantly higher on account of a large perpetual deal closed during the quarter. However, perpetual revenue increased by 46% or $2.2 million between the six months ended September 30, 2011 and the same period of previous fiscal year as a result of the multi-million perpetual sale made during the first quarter of the current fiscal year. 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, we expect to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year.
We can observe from the table above that the perpetual sales in US dollars were negatively affected by the foreign exchange movement between the US and Canadian dollars as a result of the strengthening Canadian dollar in the current fiscal year. Had the exchange rate between the US and Canadian dollars remained constant between the three and six months ended September 30, 2011 and 2010, our second quarter perpetual license revenue would have decreased by 41% (instead of 46%) and our year-to-date perpetual license revenue would have increased by 58% (instead of 46%).
REVENUE BY GEOGRAPHIC SEGMENT
For the three months ended
September 30, 2011 2010 $ change % change
($ thousands)
----------------------------------------------------------------------------
Annuity/maintenance revenue
Canada 3,998 2,649 1,349 51%
United States 2,061 1,727 334 19%
Other 3,249 3,479 (230) -7%
----------------------------------------------------------------------------
9,308 7,855 1,453 18%
----------------------------------------------------------------------------
Perpetual revenue
Canada - 1,945 (1,945) -100%
United States 141 24 117 488%
Other 1,455 1,006 449 45%
----------------------------------------------------------------------------
1,596 2,975 (1,379) -46%
----------------------------------------------------------------------------
Total software license revenue
Canada 3,998 4,595 (597) -13%
United States 2,202 1,751 451 26%
Other 4,704 4,485 219 5%
----------------------------------------------------------------------------
10,904 10,830 73 1%
----------------------------------------------------------------------------
For the six months ended September
30, 2011 2010 $ change % change
($ thousands)
----------------------------------------------------------------------------
Annuity/maintenance revenue
Canada 7,732 5,154 2,578 50%
United States 4,052 3,405 647 19%
Other 6,521 7,620 (1,099) -14%
----------------------------------------------------------------------------
18,305 16,179 2,126 13%
----------------------------------------------------------------------------
Perpetual revenue
Canada 32 1,945 (1,913) -98%
United States 603 1,015 (412) -41%
Other 6,352 1,839 4,513 245%
----------------------------------------------------------------------------
6,987 4,799 2,188 46%
----------------------------------------------------------------------------
Total software license revenue
Canada 7,764 7,099 665 9%
United States 4,655 4,420 235 5%
Other 12,873 9,460 3,413 36%
----------------------------------------------------------------------------
25,292 20,979 4,313 21%
----------------------------------------------------------------------------
On a geographic basis, total software license sales increased across all regions with Canada and the United States experiencing increases of 9% and 5%, respectively, for the six months ended September 30, 2011 compared to the same period of previous fiscal year. This growth has been led by the increase in annuity/maintenance revenue stream.
Our other markets grew total software license revenue by 36% in the six months ended September 30, 2011 compared to the same period of previous fiscal year, on account of the increase in perpetual sales.
The Canadian market experienced strong growth in the recurring annuity/maintenance revenue stream as evidenced by the increases of 51% and 50% for the three and six months ended September 30, 2011 compared to the same periods of the previous fiscal year. The increases in the annuity revenue stream were supported by the increase in sales to both existing and new clients. In addition, strong perpetual license sales generated in the past have enabled the Canadian market to maintain increased revenue levels from the maintenance contracts tied to those perpetual licenses. On the other hand, perpetual sales during the current fiscal year did not reach the same levels of the perpetual sales made during the previous fiscal year causing the decrease in our quarterly total software license revenue and offsetting the increase in our year-to-date total software license revenue.
Similar to the Canadian market, the US market also experienced growth in annuity/maintenance revenue with the increases of 19% recorded for both the three and six months ended September 30, 2011 compared to the same periods of previous fiscal year. While perpetual revenue grew by $0.1 in the three months ended September 30, 2011, it decreased by $0.4 million for the six months ended September 30, 2011 offsetting the growth in annuity/maintenance revenue.
The growth in other markets was driven by the increase in perpetual sales with $0.5 million and $4.5 million increases for the three and six months ended September 30, 2011 compared to the same periods of previous fiscal year. The year-to-date growth in perpetual sales was driven solely by the large perpetual sale made during the first quarter of the current fiscal year. The increases in perpetual sales were offset by the decreases in annuity/maintenance revenue of $0.2 million and $1.1 million for the three and six months ended September 30, 2011, respectively, compared to the same periods of previous fiscal year. It should be noted that other markets appear to have experienced a significant decrease in the annuity/maintenance revenue stream for the six months ended September 30, 2011 as a result of the inclusion of a significant contract in the same period of the previous fiscal year that related to usage of CMG's software in prior quarters. For this particular account, revenue recognition criteria were only fulfilled at the time of the receipt of cash in Q1 of fiscal 2011. If we were to adjust Q1 of fiscal 2011 revenue for this amount, the annuity/maintenance revenue derived from other markets in the six months ended September 30, 2011 would have decreased by only 1% (instead of 14%).
The movements in perpetual sales across the 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 be strong and growing across all regions.
The increases in US-dollar generated revenue from the US and other markets have been negatively affected by the strengthening Canadian dollar compared to the US dollar during the three and six months ended September 30, 2011.
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.
DEFERRED REVENUE
2011 2010 $ change % change
($ thousands)
----------------------------------------------------------------------------
Deferred revenue at:
March 31 16,755 13,843 2,912 21%
June 30 15,326 12,496 2,830 23%
September 30 14,600 12,658 1,942 15%
----------------------------------------------------------------------------
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 decreases in deferred revenue balance at the end of the first quarter (June 30) and second quarter (September 30) compared to fiscal year-end (March 31). Deferred revenue at September 30, 2011 increased compared to the same period of prior fiscal year due to both renewal of the existing and signing of the new annuity and maintenance contracts in the quarter. It should be noted that one of our large contracts that was included in deferred revenue at September 30, 2010 has not been included in deferred revenue at September 30, 2011 since it has not been renewed until the beginning of October 2011. Had this amount been included at September 30, 2011, our deferred revenue would have increased by 23% (instead of 15%) which demonstrates that our deferred revenue balance continues to grow at a steady pace.
PROFESSIONAL SERVICES REVENUE
CMG recorded professional services revenue of $1.1 million and $2.6 million for the three and six months ended September 30, 2011, respectively, representing decreases of $1.4 million and $1.8 million from the amounts recorded for the same periods of previous fiscal year. CMG had been engaged in a few large projects in the previous fiscal year, which are either complete or continue on a smaller scale in the current fiscal year, causing the majority of the decrease in the quarterly and year-to-date professional services revenue. Additionally, the funding commitment for the DRMS project received from the CMG Reservoir Simulation Foundation (the "Foundation") was fulfilled in the first quarter of the current fiscal year further contributing to the decrease in the professional services revenue. Refer to the discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties."
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.
At September 30, 2011, approximately $0.07 million (2010 - $0.125 million) is included in deferred revenue relating to professional services.
Expenses
For the three months ended
September 30, 2011 2010 $ change % change
($ thousands)
----------------------------------------------------------------------------
Sales, marketing and professional
services 3,042 3,138 (96) -3%
Research and development 2,393 2,315 78 3%
General and administrative 1,321 1,185 136 11%
----------------------------------------------------------------------------
Total operating expenses 6,756 6,638 118 2%
----------------------------------------------------------------------------
Direct employee costs(i) 5,402 4,905 497 10%
Other corporate costs 1,354 1,733 (379) -22%
----------------------------------------------------------------------------
6,756 6,638 118 2%
----------------------------------------------------------------------------
For the six months ended September
30, 2011 2010 $ change % change
($ thousands)
----------------------------------------------------------------------------
Sales, marketing and professional
services 6,167 5,868 299 5%
Research and development 4,888 4,533 355 8%
General and administrative 2,548 2,357 191 8%
----------------------------------------------------------------------------
Total operating expenses 13,603 12,758 845 7%
----------------------------------------------------------------------------
Direct employee costs(i) 10,965 9,823 1,142 12%
Other corporate costs 2,638 2,935 (297) -10%
----------------------------------------------------------------------------
13,603 12,758 845 7%
----------------------------------------------------------------------------
(i)Includes salaries, bonuses, stock-based compensation, benefits and commissions.
CMG's total expenses increased by 2% and 7% for the three and six months ended September 30, 2011, respectively, compared to the same periods of previous fiscal year as a result of 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 six months ended September 30, 2011 related to staff costs compared to 77% recorded in the comparative period of last year. Staffing levels for the first six months of the current fiscal year grew in comparison to the same period of previous fiscal year to support our continued growth. At September 30, 2011, CMG's staff complement was 143 employees, up from 129 employees as at September 30, 2010. Direct employee costs increased during the three and six months ended September 30, 2011 compared to the same period of previous fiscal year, due to staff additions, increased levels of compensation, commissions and related benefits.
OTHER CORPORATE COSTS
Other corporate costs decreased by 22% and 10% for the three and six months ended September 30, 2011, respectively, compared to the same periods of the previous fiscal year due to a decrease in the use of third party consulting services. In addition, the second quarter of the previous fiscal year included the expenses associated with CMG's biennial technical symposium as well as the expenses associated with the Society of Petroleum Engineer's Annual Technical Conference and Exhibition. The latter event will take place in the third quarter of the current fiscal year.
RESEARCH AND DEVELOPMENT
For the three months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Research and development (gross) 2,753 2,549 204 8% SR&ED credits (360) (234) (126) 54% ---------------------------------------------------------------------------- Research and development 2,393 2,315 78 3% ---------------------------------------------------------------------------- Research and development as a % of total revenue 20% 17% ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Research and development (gross) 5,552 5,051 501 10% SR&ED credits (664) (518) (146) 28% ---------------------------------------------------------------------------- Research and development 4,888 4,533 355 8% ---------------------------------------------------------------------------- Research and development as a % of total revenue 18% 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 proportionate share of joint research and development costs on the DRMS system development of $0.7 million and $1.4 million for the three and six months ended September 30, 2011, respectively, (2010 - $0.7 million and $1.4 million). See discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties."
The increases of 8% and 10% in our gross spending on research and development for the three and six months ended September 30, 2011, respectively, demonstrate our continued commitment to advancement of our technology. Research and development costs, net of research and experimental development ("SR&ED") credits, increased by 3% and 8% during the three and six months ended September 30, 2011, respectively, compared to the same periods of previous fiscal year mainly due to increased employee-related costs. At the same time, we had an increase in SR&ED credits driven by the increases in our direct employee costs as well as the increase in the eligibility of our expenses for SR&ED credits as a direct result of the completion of the grant received from the Foundation which was netted against our research and development expenses for purposes of calculating SR&ED credits. The funding commitment associated with this grant was fulfilled in the first quarter of the current fiscal year. Refer to the discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties."
DEPRECIATION AND AMORTIZATION
For the three months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Depreciation of property and equipment, allocated to: Sales, marketing and professional services 96 72 24 33% Research and development 120 113 7 6% General and administrative 66 64 2 3% ---------------------------------------------------------------------------- Total depreciation and amortization 282 249 33 13% ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Depreciation of property and equipment, allocated to: Sales, marketing and professional services 187 144 43 30% Research and development 238 213 25 12% General and administrative 131 121 10 8% ---------------------------------------------------------------------------- Total depreciation and amortization 556 478 78 16% ----------------------------------------------------------------------------
The quarterly and year-to-date increases in depreciation and amortization reflect the increase in our asset base, mainly as a result of increased spending on computing resources.
FINANCE INCOME AND COSTS
For the three months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Interest income 111 54 57 106% Foreign exchange gain 759 - 759 - ---------------------------------------------------------------------------- Finance income 870 54 816 1511% ---------------------------------------------------------------------------- Finance costs (represented by foreign exchange loss) - (184) 184 -100% ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Interest income 218 89 129 145% Foreign exchange gain 800 26 774 2977% ---------------------------------------------------------------------------- Finance income 1,018 115 903 785% ---------------------------------------------------------------------------- Finance costs (represented by foreign exchange loss) - - - - ----------------------------------------------------------------------------
Interest income increased in the three and six months ended September 30, 2011, compared to the same periods of the prior fiscal year, due to slight improvement in interest rates and investing larger cash balances.
CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 72% (2010 - 66%) of CMG's revenue for the six months ended September 30, 2011 is denominated in US dollars, whereas only approximately 23% (2010 - 25%) of CMG's total costs are denominated in US dollars.
Six month
trailing
CDN$ to US$ At June 30At September 30 average
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009 0.8602 0.9327 0.8955
2010 0.9429 0.9711 0.9614
2011 1.0370 0.9626 1.0252
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CMG recorded a foreign exchange gain of $0.8 million for the three and six months ended September 30, 2011 compared to a $0.2 million foreign exchange loss recorded in the three months ended September 30, 2010 and a $0.03 gain recorded in the six months ended September 30, 2010.
The weakening of the Canadian dollar at the end of the current quarter, along with a significant fluctuation in the exchange rates between the Canadian and the US dollars during the first six months of the current fiscal year, have contributed positively to the valuation of our US-denominated working capital, hence, contributing to the foreign exchange gain in the current fiscal year.
INCOME AND OTHER TAXES
CMG's effective tax rate for the six months ended September 30, 2011 is reflected as 28.4% (2010 - 31.0%), whereas the prevailing Canadian statutory tax rate is now 26.13%. 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 September 30, 2011 2010 $ change % change ($ thousands, except per share amounts) ---------------------------------------------------------------------------- Total revenue 11,982 13,332 (1,350) -10% Operating expenses (6,756) (6,638) (118) 2% ---------------------------------------------------------------------------- Operating profit 5,226 6,694 (1,468) -22% Operating profit as a % of total revenue 44% 50% ---------------------------------------------------------------------------- Net income for the period 4,318 4,565 (247) -5% Net income for the period as a % of total revenue 36% 34% ---------------------------------------------------------------------------- Earnings per share ($/share) 0.12 0.13 (0.01) -8% ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 $ change % change ($ thousands, except per share amounts) ---------------------------------------------------------------------------- Total revenue 27,921 25,386 2,535 10% Operating expenses (13,603) (12,758) (845) 7% ---------------------------------------------------------------------------- Operating profit 14,318 12,628 1,690 13% Operating profit as a % of total revenue 51% 50% ---------------------------------------------------------------------------- Net income for the period 10,981 8,795 2,186 25% Net income for the period as a % of total revenue 39% 35% ---------------------------------------------------------------------------- Earnings per share ($/share) 0.30 0.25 0.05 20% ----------------------------------------------------------------------------
Operating profit as a percentage of total revenue for the three months ended September 30, 2011 was at 44%, compared to 50% recorded in the same period of prior fiscal year. This decrease is a direct result of the decrease in professional services revenue during the current quarter. Despite this decrease, we can observe that our recurring annuity/maintenance revenue base continues to be strong as evidenced by the 18% growth in the current quarter and that our corporate costs continue to be managed effectively as demonstrated by only a 2% increase during the current quarter.
Operating profit as a percentage of revenue for the six months ended September 30, 2011 was at 51% compared to 50% recorded in the same period of prior fiscal year. The year-to-date operating profit margin improved slightly as a result of the increase in revenue and the effective management of corporate costs.
Net income for the period as a percentage of revenue was comparable between the three months ended September 30, 2011 and the same period of previous fiscal year, with only a slight increase experienced in the current quarter.
Net income for the period as a percentage of revenue increased to 39% for the six months ended September 30, 2011, compared to 35% for the same period of previous fiscal year, mainly as a result of the positive effect of recording foreign exchange gain in the six months ended September 30, 2011.
Liquidity and Capital Resources
For the three months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Cash, beginning of period 38,347 32,622 5,725 18% Cash flow from (used in) Operating activities 8,322 2,357 5,965 253% Financing activities (3,259) (2,147) (1,112) 52% Investing activities (100) (267) 167 -63% ---------------------------------------------------------------------------- Cash, end of period 43,310 32,565 10,745 33% ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 $ change % change ($ thousands) ---------------------------------------------------------------------------- Cash, beginning of period 41,753 28,826 12,927 45% Cash flow from (used in) Operating activities 11,162 12,087 (925) -8% Financing activities (9,341) (7,675) (1,666) 22% Investing activities (264) (673) 409 -61% ---------------------------------------------------------------------------- Cash, end of period 43,310 32,565 10,745 33% ----------------------------------------------------------------------------
OPERATING ACTIVITIES
Cash flow generated from operating activities increased by $6.0 million in the three months ended September 30, 2011 compared to the same period of last year, as a result of collecting significant trade receivables balances that were outstanding at June 30, 2011.
Cash flow generated from operating activities decreased by $0.9 million in the six months ended September 30, 2011 compared to the same period of last year, due to the timing differences when the sales are made and when the resulting receivables are collected, net impact of changes in income taxes payable balance, higher prepaid expenses balance and lower deferred revenue balance.
FINANCING ACTIVITIES
Cash used in financing activities during the three and six months ended September 30, 2011 increased by $1.1 million and $1.7 million respectively, compared to the same periods of last year, as a result of issuing larger dividends and buying back common shares during the current quarter.
During the six months ended September 30, 2011, CMG employees and directors exercised options to purchase 467,000 Common Shares, which resulted in cash proceeds of $2.7 million.
In the six months ended September 30, 2011, CMG paid $11.6 million in dividends, representing a quarterly dividend of $0.105 per share, a quarterly dividend of $0.11 per share and a special dividend of $0.10 per share. On November 8, 2011, CMG announced the payment of a quarterly dividend of $0.11 per share on CMG's Common Shares. The dividend will be paid on December 15, 2011 to shareholders of record at the close of business on December 6, 2011.
On April 6, 2011, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on April 7, 2011 to purchase for cancellation up to 1,636,000 of its Common Shares. During the six months ended September 30, 2011, 33,000 Common Shares were purchased at market price for a total cost of $438,000.
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, 2011, CMG expended $0.3 million on property and equipment additions, primarily composed of computing equipment, and currently has a capital budget of $2.4 million for fiscal 2012.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2011, CMG has $43.3 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, 2011, 3,244,000 shares of CMG's public float were traded on the TSX. As at September 30, 2011, CMG's market capitalization based upon its September 30, 2011 closing price of $13.31 was $490.6 million.
Commitments, Off Balance Sheet Items and Transactions with Related Parties
In May, 2006, CMG announced that it had committed approximately $10.6 million to the five-year DRMS research and development project with its industry partners Shell International Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A. ("Petrobras") to develop the newest generation of dynamic reservoir modelling system. While the original funding commitment has been fulfilled during the first quarter of the current fiscal year, CMG and its partners are committed to continue funding the project beyond the initially estimated five-year period with CMG's share of the project costs estimated at $3.0 million per year. We expect to release a beta version of the new reservoir modelling system to our partners by the end of calendar 2011, with the first commercial release expected to take place by the end of calendar 2012.
In conjunction with entering into this project, the Foundation agreed, subject to certain termination rights, to provide up to a maximum of $5.2 million in research grant funding to cover 50% of the Company's estimated share of project costs over the initial five years of the project. For the six months ended September 30, 2011, the Company has reflected $366,000 (2010 - $709,000) in research grants from the Foundation in professional services revenue with respect to this project. The Foundation's $5.2 million funding commitment was completed in the first quarter of the current fiscal year.
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: 2012 - $1.0 million; 2013 and 2014 - $1.7 million per year; 2015 - $1.3 million; and 2016 - $0.6 million.
Business Risks and Critical Accounting Estimates
These remain unchanged from the factors detailed in CMG's 2011 Annual Report.
Changes in Accounting Policies
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The CICA Accounting Standards Board requires all Canadian publicly listed entities to adopt IFRS for interim and annual financial reporting purposes for fiscal years beginning on or after January 1, 2011. Accordingly, this is the second quarter in which we have provided unaudited condensed consolidated financial statements which are in compliance with the interim reporting requirements found in IAS 34, Interim Financial Reporting, as well as IFRS 1, First-time Adoption of IFRS. In accordance with IFRS 1, we have applied IFRS retrospectively as of April 1, 2010, our transition date, as if IFRS had always been in effect, subject to certain mandatory exceptions and optional exemptions. Our consolidated financial statements for the year ended April 1, 2012, will be our first annual financial statements that comply with IFRS.
An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided in note 16 to the Condensed Consolidated Financial Statements for the three and six months ended September 30, 2011.
The transition to IFRS did not have a material impact on retained earnings, net income or cash flows. The only adjustments were reclassifications on the Statement of Financial Position, Statement of Operations and Comprehensive Income, and the Statement of Cash Flows as follows:
Statement of Financial Position
-- Deferred taxes are classified as non-current under IFRS. Under previous
Canadian GAAP, deferred taxes were classified as current and non-current
based on the classification of the underlying assets or liabilities to
which they relate or based on the expected reversal of the temporary
differences.
-- Transition rules resulted in reclassification of deferred tax liability
associated with SR&ED credits from current to non-current. In addition,
the deferred tax asset associated with property and equipment was offset
against deferred tax liability as both relate to income taxes levied by
the same taxation authority for the same taxable entity.
Statement of Operations and Comprehensive Income
-- Expense classification - the Company has elected to present its expenses
in the consolidated statements of operations and comprehensive income
prepared under IFRS according to their function. As a result,
depreciation and amortization, which was reported as a separate line
item under previous Canadian GAAP, was allocated to its respective
functions.
-- Finance income and costs - under Canadian GAAP, interest income and
foreign exchange gains and losses were classified as separate line items
in the consolidated statement of earnings. Under IFRS, interest income
and foreign exchange gains are presented as finance income, and foreign
exchange losses are presented as finance costs. Finance income and costs
are presented on a gross basis as required by IFRS.
Statement of Cash Flows
-- Interest received and income taxes paid have been moved into the body of
the statement of cash flows under operating activities, whereas they
were previously disclosed as supplemental information.
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 Instruments IFRS 9 (2009) IFRS 9 (2010)
In November 2009 the IASB issued replaces the supersedes IFRS 9
IFRS 9 Financial Instruments guidance in IAS 39 (2009) and is
(IFRS 9 (2009)), and in October Financial effective for annual
2010 the IASB published Instruments: periods beginning on
amendments to IFRS 9 (IFRS 9 Recognition and or after January 1,
(2010)). Measurement, on the 2013, with early
classification and adoption permitted.
measurement of For annual periods
financial assets. beginning before
The Standard January 1, 2013,
eliminates the either IFRS 9 (2009)
existing IAS 39 or IFRS 9 (2010) may
categories of held be applied. The
to maturity, Company intends to
available-for-sale adopt IFRS 9 (2010)
and loans and in its financial
receivable. statements for the
Financial assets annual period
will be classified beginning on April
into one of two 1, 2013. The Company
categories on does not expect IFRS
initial recognition: 9 (2010) to have a
financial assets material impact on
measured at the financial
amortized cost; or statements. The
financial assets classification and
measured at fair measurement of the
value. Company's financial
Gains and losses on assets and
remeasurement of liabilities is not
financial assets expected to change
measured at fair under IFRS 9 (2010)
value will be because of the
recognized in profit nature of the
or loss, except that Company's operations
for an investment in and the types of
an equity instrument financial assets
which is not held- that it holds.
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 IFRS 7 Disclosures - The amendments to The Company does not
Transfers of Financial Assets IFRS 7 require expect the
In October 2010 the IASB issued disclosure of amendments to have a
Amendments to IFRS 7 Disclosures information that material impact on
- Transfers of Financial Assets, enables users of the financial
which is effective for annual financial statements, because
periods beginning on or after statements: of the nature of the
January 1, 2012. to understand the Company's operations
relationship between and the types of
transferred financial assets
financial assets that it holds.
that are not
derecognized in
their entirety and
the associated
liabilities; and
to evaluate the
nature of, and risks
associated with, the
entity's continuing
involvement in
derecognized
financial assets.
The amendments
define "continuing
involvement" for the
purposes of applying
the disclosure
requirements.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS 10 Consolidated Financial IFRS 10 replaces the The Company intends
Statements guidance in IAS 27 to adopt IFRS 10 in
In May 2011, the IASB issued IFRS Consolidated and its financial
10 Consolidated Financial Separate Financial statements for the
Statements, which is effective Statements and SIC- annual period
for annual periods beginning on 12 Consolidation - beginning on April
or after January 1, 2013, with Special Purpose 1, 2013. The Company
early adoption permitted. If an Entities. IAS 27 does not expect IFRS
entity applies this Standard (2008) survives as 10 to have a
earlier, it shall also apply IFRS IAS 27 (2011) material impact on
11, IFRS 12, IAS 27 (2011) and Separate Financial the financial
IAS 28 (2011) at the same time. Statements, only to statements.
carry forward the
existing accounting
requirements for
separate financial
statements.
IFRS 10 provides a
single model to be
applied in the
control analysis for
all investees,
including entities
that currently are
SPEs in the scope of
SIC-12. In addition,
the consolidation
procedures are
carried forward
substantially
unmodified from IAS
27 (2008).
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS 11 Joint Arrangements IFRS 11 replaces the The Company intends
In May 2011, the IASB issued IFRS guidance in IAS 31 to adopt IFRS 11 in
11 Joint Arrangements, which is Interests in Joint its financial
effective for annual periods Ventures. statements for the
beginning on or after January 1, Under IFRS 11, joint annual period
2013, with early adoption arrangements are beginning on April
permitted. If an entity applies classified as either 1, 2013. The Company
this Standard earlier, it shall joint operations or does not expect IFRS
also apply IFRS 10, IFRS 12, IAS joint ventures. IFRS 11 to have a
27 (2011) and IAS 28 (2011) at 11 essentially material impact on
the same time. carves out of the financial
previous jointly statements.
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
are stripped of the
free choice of
equity accounting or
proportionate
consolidation; these
entities must now
use the equity
method.
Upon application of
IFRS 11, entities
which had previously
accounted for joint
ventures using
proportionate
consolidation shall
collapse the
proportionately
consolidated net
asset value
(including any
allocation of
goodwill) into a
single investment
balance at the
beginning of the
earliest period
presented. The
investment's opening
balance is tested
for impairment in
accordance with IAS
28 (2011) and IAS 36
Impairment of
Assets. Any
impairment losses
are recognized as an
adjustment to
opening retained
earnings at the
beginning of the
earliest period
presented.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS 12 Disclosure of Interests in IFRS 12 contains the The Company intends
Other Entities disclosure to adopt IFRS 12 in
In May 2011, the IASB issued IFRS requirements for its financial
12 Disclosure of Interests in entities that have statements for the
Other Entities, which is interests in annual period
effective for annual periods subsidiaries, joint beginning on April
beginning on or after January 1, arrangements (i.e. 1, 2013. The Company
2013, with early adoption joint operations or does not expect the
permitted. If an entity applies joint ventures), amendments to have a
this Standard earlier, it needs associates and/or material impact on
not to apply IFRS 10, IFRS 11, unconsolidated the financial
IAS 27 (2011) and IAS 28 (2011) structured entities. statements, because
at the same time. Interests are widely of the nature of the
defined as Company's interests
contractual and non- in other entities.
contractual
involvement that
exposes an entity to
variability of
returns from the
performance of the
other entity. The
required disclosures
aim to provide
information in order
to enable users to
evaluate the nature
of, and the risks
associated with, an
entity's interest in
other entities, and
the effects of those
interests on the
entity's financial
position, financial
performance and cash
flows.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS 13 Fair Value Measurement IFRS 13 replaces the The Company intends
In May 2011, the IASB published fair value to adopt IFRS 13
IFRS 13 Fair Value Measurement, measurement guidance prospectively in its
which is effective prospectively contained in financial statements
for annual periods beginning on individual IFRSs for the annual
or after January 1, 2013. The with a single source period beginning on
disclosure requirements of IFRS of fair value April 1, 2013. The
13 need not be applied in measurement extent of the impact
comparative information for guidance. It defines of adoption of IFRS
periods before initial fair value as the 13 has not yet been
application. price that would be determined.
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
measurements 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 comprehensive
income.
IFRS 13 explains
'how' to measure
fair value when it
is required or
permitted by other
IFRSs. IFRS 13 does
not introduce new
requirements to
measure assets or
liabilities at fair
value, nor does it
eliminate the
practicability
exceptions to fair
value measurements
that currently exist
in certain
standards.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amendments to IAS 1 Presentation The amendments The Company intends
of Financial Statements require that an to adopt the
In June 2011, the IASB published entity present amendments in its
amendments to IAS 1 Presentation separately the items financial statements
of Financial Statements: of OCI that may be for the annual
Presentation of Items of Other reclassified to period beginning on
Comprehensive Income, which are profit or loss in April 1, 2013. The
effective for annual periods the future from Company does not
beginning on or after July 1, those that would expect the
2012 and are to be applied never be amendments to IAS 1
retrospectively. Early adoption reclassified to to have a material
is permitted. profit or loss. impact on the
Consequently an financial
entity that presents statements.
items of OCI before
related tax effects
will also have to
allocate the
aggregated tax
amount between these
categories.
The existing option
to present the
profit or loss and
other comprehensive
income in two
statements has
remained unchanged.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding Share Data
The following table represents the number of Common Shares and options outstanding:
As at November 8, 2011 (thousands) ------------------------------------------------------------------ Common Shares 36,913 Options 3,335 ------------------------------------------------------------------
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 8, 2011, CMG could grant up to 3,691,000 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 2011 in accordance with the COSO control framework. The evaluation confirmed the effectiveness of DC&P and ICFR at March 31, 2011. During our fiscal year 2012, we continue to monitor and review our controls and procedures.
During the six months ended September 30, 2011, 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
As in the past several years, CMG remains committed to focusing all its resources on the development, enhancement and deployment of simulation software tools relevant to the challenges and opportunities facing its diverse customer base. 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. The greater challenges have been with natural gas prices, which have not fared as well, and petroleum producers are faced with uncertainty related to the fears of another worldwide economic recession, political unrest in several petroleum producing countries and environmental issues that have threatened to increase the costs of development and production.
With diversification of our geographic profile, we plan to strengthen our position in the global marketplace which should also help to mitigate the effects of economic recession and instability experienced in any particular geographic region.
Over 70% of our annual software license revenue is derived from our annuity and maintenance contracts which generally represent a recurring source of revenue. We have continued to see successive increases in this revenue base over the past several years and with a strong renewal rate, we expect this trend to continue.
CMG's joint project to develop the newest generation of dynamic reservoir modelling systems ("DRMS Project") continues to make progress in fiscal 2012. We expect to release a beta version to our partners by the end of calendar 2011 with the first commercial release by the end of calendar 2012. CMG and its partners remain committed to funding the ongoing development and to the future success of the project.
The Company remains confident that the value that CMG technology provides to its customers is greater than ever and accordingly we continue to be optimistic that our software license revenue will remain solid. With our strong working capital position, we are well positioned to continue to invest in all aspects of our business 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
November 8, 2011
COMPUTER MODELLING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
UNAUDITED (thousands of September 30,
Canadian $) 2011 March 31, 2011 April 1, 2010
----------------------------------------------------------------------------
Assets
Current assets:
Cash 43,310 41,753 28,826
Trade and other receivables 10,579 13,318 16,072
Prepaid expenses 1,340 1,064 1,141
Prepaid income taxes - - 1,433
----------------------------------------------------------------------------
55,229 56,135 47,472
Property and equipment 2,262 2,554 2,401
----------------------------------------------------------------------------
Total assets 57,491 58,689 49,873
----------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities:
Trade payables and accrued
liabilities 3,220 4,543 5,398
Income taxes payable 1,144 1,237 -
Deferred revenue 14,600 16,755 13,843
----------------------------------------------------------------------------
18,964 22,535 19,241
Deferred tax liability (note 6) 250 384 189
----------------------------------------------------------------------------
Total liabilities 19,214 22,919 19,430
----------------------------------------------------------------------------
Shareholders' equity:
Share capital 27,946 24,801 20,390
Contributed surplus 3,021 2,655 1,816
Retained earnings 7,310 8,314 8,237
----------------------------------------------------------------------------
Total shareholders' equity 38,277 35,770 30,443
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity 57,491 58,689 49,873
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three months ended Six months ended
September 30 September 30
UNAUDITED (thousands of Canadian $
except per share amounts) 2011 2010 2011 2010
----------------------------------------------------------------------------
Revenue (note 8) 11,982 13,332 27,921 25,386
----------------------------------------------------------------------------
Operating expenses
Sales, marketing and professional
services 3,042 3,138 6,167 5,868
Research and development (note 4) 2,393 2,315 4,888 4,533
General and administrative 1,321 1,185 2,548 2,357
----------------------------------------------------------------------------
6,756 6,638 13,603 12,758
----------------------------------------------------------------------------
Operating profit 5,226 6,694 14,318 12,628
Finance income (note 5) 870 54 1,018 115
Finance costs (note 5) - (184) - -
----------------------------------------------------------------------------
Profit before income and other
taxes 6,096 6,564 15,336 12,743
Income and other taxes (note 6) 1,778 1,999 4,355 3,948
----------------------------------------------------------------------------
Net and comprehensive income 4,318 4,565 10,981 8,795
----------------------------------------------------------------------------
Earnings Per Share
Basic (note 7(e)) 0.12 0.13 0.30 0.25
Diluted (note 7(e)) 0.11 0.12 0.29 0.24
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Share Capital Contributed Retained Total
------------------
UNAUDITED (thousands of Non-
Canadian $) Common voting Surplus Earnings Equity
----------------------------------------------------------------------------
Balance, April 1, 2010 20,244 146 1,816 8,237 30,443
Total comprehensive income
for the period - - - 8,795 8,795
Dividends paid - - - (9,705) (9,705)
Shares issued for cash on
exercise of stock options
(note 7(b)) 2,030 - - - 2,030
Converted into common shares
(note 7(b)) 146 (146) - - -
Stock-based compensation:
Current period expense - - 706 - 706
Stock options exercised 392 - (392) - -
----------------------------------------------------------------------------
Balance, September 30, 2010 22,812 - 2,130 7,327 32,269
----------------------------------------------------------------------------
Balance, April 1, 2011 24,801 - 2,655 8,314 35,770
Total comprehensive income
for the period - - - 10,981 10,981
Dividends paid - - - (11,572) (11,572)
Shares issued for cash on
exercise of stock options
(note 7(b)) 2,669 - - - 2,669
Common shares buy-back (note
7(b)) (25) (413) (438)
Stock-based compensation:
Current period expense - - 867 - 867
Stock options exercised 501 - (501) - -
----------------------------------------------------------------------------
Balance, September 30, 2011 27,946 - 3,021 7,310 38,277
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Six months ended
September 30 September 30
UNAUDITED (thousands of Canadian
$) 2011 2010 2011 2010
----------------------------------------------------------------------------
Cash flows from operating
activities
Net income 4,318 4,565 10,981 8,795
Adjustments for:
Depreciation and amortization 282 249 556 478
Income and other taxes (note 6) 1,778 1,999 4,355 3,948
Stock-based compensation (note
7(d)) 457 386 867 706
Interest income (note 5) (111) (54) (218) (89)
----------------------------------------------------------------------------
6,724 7,145 16,541 13,838
Changes in non-cash working
capital:
Trade and other receivables 4,889 (3,212) 2,745 4,282
Trade payables and accrued
liabilities 118 (214) (1,323) (1,770)
Prepaid expenses (217) 164 (276) 63
Deferred revenue (726) 162 (2,155) (1,185)
----------------------------------------------------------------------------
Cash generated from operating
activities 10,788 4,045 15,532 15,228
Interest received 106 50 212 81
Income taxes paid (2,572) (1,738) (4,582) (3,222)
----------------------------------------------------------------------------
Net cash from operating
activities 8,322 2,357 11,162 12,087
----------------------------------------------------------------------------
Cash flows from financing
activities
Proceeds from issue of common
shares 1,232 1,284 2,669 2,030
Dividends paid (4,053) (3,431) (11,572) (9,705)
Common shares buy-back (438) - (438) -
----------------------------------------------------------------------------
Net cash used in financing
activities (3,259) (2,147) (9,341) (7,675)
----------------------------------------------------------------------------
Cash flows used in investing
activities
Property and equipment additions (100) (267) (264) (673)
----------------------------------------------------------------------------
Increase (decrease) in cash 4,963 (57) 1,557 3,739
Cash, beginning of period 38,347 32,622 41,753 28,826
----------------------------------------------------------------------------
Cash, end of period 43,310 32,565 43,310 32,565
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended September 30, 2011 and 2010 (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 #150, 3553 - 31 Street N.W., Calgary, Alberta, Canada, T2L 2K7. The condensed consolidated financial statements as at and for the three and six months ended September 30, 2011 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 on a going concern basis in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting as issued by the International Accounting Standards Board ("IASB"), and using the accounting policies the Company expects to adopt in its consolidated financial statements as at and for the year ending March 31, 2012. These accounting policies are disclosed in note 3 of the Company's condensed consolidated financial statements for the three months ended June 30, 2011.
The preparation of these condensed consolidated financial statements resulted in changes to accounting policies as compared with the most recent annual consolidated financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The Company's accounting policies have been applied consistently to all periods presented in these condensed consolidated financial statements with the exception of certain IFRS 1, First-time Adoption of IFRS, exemptions the Company applied in its transition from previous GAAP to International Financial Reporting Standards ("IFRS") at April 1, 2010, the Company's transition date.
The condensed consolidated financial statements do not include all of the information required for full annual financial statements, therefore, these condensed consolidated financial statements should be read in conjunction with the Company's annual audited consolidated financial statements for the year ended March 31, 2011, the Company's condensed consolidated financial statements for the three months ended June 30, 2011, and in consideration of the IFRS transition disclosures presented in note 16 to these financial statements.
The unaudited condensed consolidated financial statements as at and for the three and six months ended September 30, 2011 were authorized for issuance by the Board of Directors on November 8, 2011.
(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 expected to be the same as those applied in the first annual IFRS financial statements.
The key judgments made in applying accounting policies that have the most significant effect on the amounts recognized in these condensed consolidated financial statements are as follows:
Research and development - assumptions are made in respect to the eligibility of certain research and development projects in the calculation of scientific research and experimental development ("SR&ED") investment tax credits which are netted against the research and development costs in the statement of operations. SR&ED claims are subject to audits by relevant taxation authorities and the actual amount may change depending on the outcome of such audits (note 4).
Revenue recognition - certain software license agreements contain multiple-element arrangements as they may also include maintenance fees. Judgment is used in determining a fair value of each element of a contract. Professional services revenue earned from certain consulting contracts is recognized by the stage of completion of the transaction determined using the percentage-of-completion method. Judgment is used in determining progress of each contract at period end. In assessing revenue recognition, judgment is also used in determining the ability to collect the corresponding account receivable (note 8).
Property and equipment - estimates are used in determining useful economic lives of property and equipment for the purposes of calculating depreciation.
Stock-based compensation - assumptions and estimates are used in determining the inputs used in the Black-Scholes option pricing model, including assumptions regarding volatility, dividend yield, risk-free interest rates, forfeiture estimates and expected option lives (note 7(d)).
Deferred income taxes - assumptions and estimates are made regarding the amount and timing of realization and/or settlement of the temporary differences between the accounting carrying value of the Company's assets versus the tax basis of those assets, and the tax rates at which the differences will be recovered or settled in the future (note 6).
3. Significant Accounting Policies:
The significant accounting policies used in preparing these Condensed Consolidated Financial Statements are unchanged from those disclosed in the Company's Condensed Consolidated Financial Statements for the three months ended June 30, 2011.
4. Research and Development Costs:
For the three months ended September 30, 2011 2010
(thousands of $)
----------------------------------------------------------------------------
Research and development 2,753 2,549
SR&ED investment tax credits (360) (234)
----------------------------------------------------------------------------
2,393 2,315
----------------------------------------------------------------------------
For the six months ended September 30, 2011 2010
(thousands of $)
----------------------------------------------------------------------------
Research and development 5,552 5,051
SR&ED investment tax credits (664) (518)
----------------------------------------------------------------------------
4,888 4,533
----------------------------------------------------------------------------
5. Finance Income and Costs:
For the three months ended September 30, 2011 2010 (thousands of $) ---------------------------------------------------------------------------- Interest income 111 54 Foreign exchange gain 759 - ---------------------------------------------------------------------------- Finance income 870 54 ---------------------------------------------------------------------------- Foreign exchange loss - (184) ---------------------------------------------------------------------------- Finance costs - (184) ---------------------------------------------------------------------------- For the six months ended September 30, 2011 2010 (thousands of $) ---------------------------------------------------------------------------- Interest income 218 89 Foreign exchange gain 800 26 ---------------------------------------------------------------------------- Finance income 1,018 115 ---------------------------------------------------------------------------- Foreign exchange loss - - ---------------------------------------------------------------------------- Finance costs - - ----------------------------------------------------------------------------
6. Income and Other Taxes:
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 six months ended September 30, 2011 2010
(thousands of $, unless otherwise stated)
----------------------------------------------------------------------------
Statutory tax rate 26.13% 27.63%
----------------------------------------------------------------------------
Expected income tax 4,007 3,521
Non-deductible costs 237 209
Change in unrecognized temporary differences - (78)
Withholding taxes 143 369
Other (32) (73)
----------------------------------------------------------------------------
4,355 3,948
----------------------------------------------------------------------------
Represented by:
Current income taxes 4,285 3,390
Deferred tax expense (134) 40
Foreign withholding and other taxes 204 518
----------------------------------------------------------------------------
4,355 3,948
----------------------------------------------------------------------------
The components of the Company's net deferred income tax liability are as follows:
(thousands of $) September 30, 2011 March 31, 2011 April 1, 2010 ---------------------------------------------------------------------------- Tax liability on investment tax credits (107) (181) (222) Tax (liability) asset on property and equipment (143) (203) 33 ---------------------------------------------------------------------------- Deferred tax liability, net (250) (384) (189) ---------------------------------------------------------------------------- 7. 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.
Effective June 20, 2011, the Common Shares were split on a two-for-one basis. Accordingly, the comparative number of shares and per share amounts have been retroactively adjusted to reflect the two-for-one adjustment.
(B) ISSUED:
Non-Voting
(thousands of shares) Common Shares Shares
----------------------------------------------------------------------------
Balance, April 1, 2010 31,117 4,543
Issued for cash on exercise of stock options 455 -
Converted into common shares 4,543 (4,543)
----------------------------------------------------------------------------
Balance, September 30, 2010 36,115 -
----------------------------------------------------------------------------
Balance, April 1, 2011 36,427 -
Issued for cash on exercise of stock options 467 -
Common shares buy-back (33)
----------------------------------------------------------------------------
Balance, September 30, 2011 36,861 -
----------------------------------------------------------------------------
The Non-Voting Shares were convertible into an equivalent number of Common Shares at any time at the option of the holder.
Subsequent to September 30, 2011, 53,000 stock options were exercised for cash proceeds of $364,000.
On May 18, 2006, the Board of Directors adopted a shareholder rights plan (the "Original Rights Plan"), whereby the Company issued one right in respect of each share outstanding at the close of business on May 18, 2006 and for each additional share issued by the Company thereafter. The issuance of the rights was not dilutive and will not affect reported earnings per share until the rights separate from the underlying shares and become exercisable or until the exercise of the rights. The Original Rights Plan was approved by the Company's shareholders on July 13, 2006.
On May 21, 2009, the Board of Directors reviewed the Original Rights Plan and determined that it was in the best interest of the Company to continue to have a shareholder rights plan in place. The Company, therefore, adopted a new shareholder rights plan (the "Rights Plan") which is identical in all respects to the Original Rights Plan, with the exception of certain minor amendments which have been made to provide for renewal or approval of the Rights Plan every three years (rather than only one three-year period as was set out in the Original Rights Plan) and to update references to statutory provisions now out of date. The Rights Plan was approved by the Company's shareholders on July 9, 2009.
(C) COMMON SHARES BUY-BACK:
On March 22, 2010, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on March 23, 2010 to purchase for cancellation up to 1,315,000 of its Common Shares. This NCIB ended on March 22, 2011 and a total of 10,000 shares were purchased at market price for a total cost of $126,000.
On April 6, 2011, the Company announced a NCIB commencing on April 7, 2011 to purchase for cancellation up to 1,636,000 of its Common Shares. During the six months ended September 30, 2011, 33,000 Common Shares were purchased at market price for a total cost of $438,000.
(D) STOCK-BASED COMPENSATION PLAN:
The Company adopted a rolling stock option plan as of July 13, 2005, which was reaffirmed by the Company's shareholders on July 10, 2008, which allows it to grant options to acquire Common Shares of up to 10% of the combined outstanding Common and Non-Voting Shares at the date of grant. Based upon this calculation, at September 30, 2011, the Company could grant up to 3,686,000 stock options. Pursuant to the stock option plan, the maximum term of an option granted cannot exceed five years from the date of grant. The outstanding stock options vest as to 50% after the first year anniversary, from date of grant, and then vest as to 25% of the total options granted after each of the second and third year anniversary dates.
The following table outlines changes in options:
(thousands except per For the six months ended For the year ended
share amounts) September 30, 2011 March 31, 2011
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Granted ($/share) Granted ($/share)
----------------------------------------------------------------------------
Outstanding at beginning of
period 2,825 7.41 2,572 5.90
Granted 1,050 13.41 1,094 9.07
Exercised (467) 5.71 (777) 4.76
Forfeited/cancelled (12) 8.75 (64) 7.08
----------------------------------------------------------------------------
Outstanding at end of period 3,396 9.49 2,825 7.41
----------------------------------------------------------------------------
Options exercisable at end of
period 1,557 7.29 969 5.91
----------------------------------------------------------------------------
The range of exercise prices of options outstanding and exercisable at September 30, 2011 is as follows:
Outstanding Exercisable
----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Number of Exercise
Exercise Price Options Contractual Price Options Price
($/option) (thousands) Life (years) ($/option) (thousands) ($/option)
----------------------------------------------------------------------------
3.45 - 3.70 79 1.0 3.68 75 3.70
3.71 - 5.63 491 1.9 5.49 486 5.50
5.64 - 7.80 740 2.9 7.80 498 7.80
7.81 - 9.07 1,036 3.9 9.07 498 9.07
9.08 - 14.24 1,050 4.9 13.41 - -
----------------------------------------------------------------------------
3,396 3.6 9.49 1,557 7.29
----------------------------------------------------------------------------
The fair value of stock options granted was estimated using the Black-Scholes option pricing model under the following assumptions:
For the six months ended For the year ended
September 30, 2011 March 31, 2011
----------------------------------------------------------------------------
Fair value at grant date
($/option) 1.23 to 2.99 1.56 to 1.78
Share price at grant date
($/share) 13.00 to 14.24 9.07
Risk-free interest rate (%) 0.99 to 2.06 1.37 to 2.17
Estimated hold period prior to
exercise (years) 2 to 4 2 to 5
Volatility in the price of
common shares (%) 24 to 37 35 to 39
Dividend yield per common share
(%) 3.42 to 4.94 5.12
----------------------------------------------------------------------------
The Company recognized total stock-based compensation expense for the three and six months ended September 30, 2011 of $457,000 and $867,000 respectively (three and six months ended September 30, 2010 - $386,000 and $706,000 respectively).
(E) EARNINGS PER SHARE:
The following table summarizes the earnings and weighted average number of Common and Non-Voting Shares used in calculating basic and diluted earnings per share:
For the three months ended
September 30, (thousands
except per share amounts) 2011 2010
----------------------------------------------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares Per Share Earnings Shares Per Share
($) Outstanding ($/share) ($) Outstanding ($/share)
----------------------------------------------------------------------------
Basic 4,318 36,759 0.12 4,565 35,974 0.13
Dilutive
effect
of
stock
options 999 653
----------------------------------------------------------------------------
Diluted 4,318 37,758 0.11 4,565 36,627 0.12
----------------------------------------------------------------------------
For the six months ended
September 30, (thousands
except per share amounts) 2011 2010
----------------------------------------------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares Per Share Earnings Shares Per Share
($) Outstanding ($/share) ($) Outstanding ($/share)
----------------------------------------------------------------------------
Basic 10,981 36,646 0.30 8,795 35,860 0.25
Dilutive
effect
of
stock
options 1,074 700
----------------------------------------------------------------------------
Diluted 10,981 37,720 0.29 8,795 36,560 0.24
----------------------------------------------------------------------------
During the three and six months ended September 30, 2011, 199,000 and 193,000 (three and six months ended September 30, 2010 - 203,000 and 200,000 respectively) options were excluded from the computation of the weighted-average number of diluted shares outstanding because their effect was not dilutive.
8. Revenue:
For the three months ended September 30,
(thousands of $) 2011 2010
----------------------------------------------------------------------------
Software licenses 10,904 10,830
Professional services 1,078 2,502
----------------------------------------------------------------------------
11,982 13,332
----------------------------------------------------------------------------
For the six months ended September 30,
(thousands of $) 2011 2010
----------------------------------------------------------------------------
Software licenses 25,292 20,979
Professional services 2,629 4,407
----------------------------------------------------------------------------
27,921 25,386
----------------------------------------------------------------------------
9. Capital Management:
The Company's objectives in managing capital are to ensure sufficient liquidity to pursue its strategy of organic growth combined with strategic acquisitions and to maximize the return to its shareholders. The capital structure of the Company consists of cash, credit facilities and shareholders' equity. The Company does not have any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital.
The Company's policy is to pay quarterly dividends based on the Company's overall financial performance and cash flow generation. In addition, since May 2005, the Company has declared a special dividend after review of the completion of the immediately prior fiscal year results. Decisions on dividend payments are made on a quarterly basis by the Board of Directors. There can be no assurance as to the amount or payment of such dividends in the future.
Since November 2002, the Company embarked on a series of normal course issuer bids to buy back its shares. The latest normal course issuer bid is effective from April 7, 2011 to April 6, 2012. Reference is made to note 7(c).
The Company makes adjustments to its capital structure in light of general economic conditions and the Company's working capital requirements. In order to maintain or adjust its capital structure, the Company, upon approval from its Board of Directors, may pay dividends, buy back shares or undertake other activities as deemed appropriate under the specific circumstances. The Board of Directors reviews and approves any material transactions not in the ordinary course of business.
There were no changes in the Company's approach to capital management during the period.
10. Financial Instruments and Risk Management:
(i) Classification of financial instruments
Classification Measurement
----------------------------------------------------------------------------
Cash Held for trading Fair value
Trade and other receivables Loans and receivables Amortized cost
Trade payables and accrued
liabilities Other financial liabilities Amortized cost
----------------------------------------------------------------------------
(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.
OVERVIEW:
The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth. The main objectives of the Company's risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to those risks. The principal financial risks to which the Company is exposed are described below:
(A) CREDIT RISK:
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligation and arises principally from the Company's cash and trade and other receivables. The amounts reported in the statements of financial position for trade receivables are net of allowances for bad debts, estimated by the Company's management based on prior experience and their assessment of the current economic environment.
The Company's trade receivables consist primarily of balances from customers operating in the oil and gas industry, both domestically and internationally, as the Company sells its products and services in over 50 countries worldwide. Some of these countries have greater economic and political risk than experienced in North America and as a result there may be greater risk associated with sales in those jurisdictions. The Company manages this risk by invoicing for the full license term in advance for the majority of software license sales and by invoicing as frequently as the contract allows for consulting and contract research services on a percentage-of-completion basis. In cases where collectability is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been met. Historically, the Company has not experienced any significant losses related to individual customers or groups of customers in any particular geographic area; therefore, no allowance for doubtful accounts has been established at September 30, 2011.
As at September 30, 2011, the Company has a concentration of credit risk with 9 domestic and international customers who represent 71% of trade receivables. In addition, $2.1 million of trade receivables are over 90 days. The Company assesses the creditworthiness of its customers on an ongoing basis and it regularly monitors the amount and age of balances outstanding. Payment terms with customers are 30 days from invoice date; however, industry practice can extend these terms. Accordingly, the Company views the credit risks on these amounts as normal for the industry.
The Company minimizes the credit risk of cash by depositing only with a reputable financial institution in highly liquid interest-bearing cash accounts.
(B) MARKET RISK:
Market risk is the risk that changes in market prices of the Company's foreign exchange rates and interest rates will affect the Company's income or the value of its financial instruments.
(i) Foreign Exchange Risk
The Company operates internationally and primarily prices its products in either the Canadian or US dollar. This gives rise to exposure to market risks from changes in the foreign exchange rates between the Canadian and US dollar. Approximately 72% of the Company's revenues for the six months ended September 30, 2011 were denominated in US dollars and at September 30, 2011, the Company had approximately $7.8 million of its working capital denominated in US dollars. The Company currently does not use derivative instruments to hedge its exposure to those risks but as approximately 23% of the Company's total costs are also denominated in US dollars they provide a partial economic hedge against the fluctuation in this currency exchange. In addition, the Company manages levels of foreign currency held by converting excess US dollars into Canadian dollars at spot rates.
Canadian operations are exposed to currency risk on US denominated financial assets and liabilities with fluctuations in the rate recognized as foreign exchange gains or losses in the Consolidated Statements of Operations and Comprehensive Income. It is estimated that a one cent change in the US dollar would result in a net change of approximately $56,000 on net income for the six months ended September 30, 2011. A weaker US dollar with respect to the Canadian dollar will result in a negative impact while the reverse would result from a stronger US dollar.
(ii) Interest Rate Risk
The Company has significant cash balances and no interest-bearing debt. The Company's current policy is to invest excess cash in interest-bearing deposits and/or guaranteed investment certificates issued by its principal banker. The Company is exposed to interest cash flow risk from changes in interest rates on its cash balances. Based on the September 30, 2011 cash balance, each 1% change in the interest rate on the Company's cash balance would change net income for the six months ended September 30, 2011 by approximately $320,000.
(C) LIQUIDITY RISK:
Liquidity risk is the risk that the Company is not able to meet its financial obligations as they fall due or can do so only at excessive cost. The Company manages liquidity risk through the management of its capital structure as outlined in note 9. The Company's growth is financed through a combination of the cash flows from operations and its cash balances on hand. Given the Company's available liquid resources as compared to the timing of the payments of its liabilities, management assesses the Company's liquidity risk to be low. The Company monitors its expenditures by preparing annual budgets which are updated periodically. At September 30, 2011, the Company has significant cash balances in excess of its obligations and over $800,000 of the line of credit (note 12) available for its use.
11. Commitments: (A) RESEARCH COMMITMENTS:
The DRMS research and development project, a collaborative effort with our partners Shell International Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A. ("Petrobras") to jointly develop the newest generation of reservoir simulation software, which commenced in 2006 and was originally estimated to take five years to complete, is now anticipated to continue beyond the initial five-year time frame; however, the Company and its partners are committed to continue funding the project with the Company's share of the project costs estimated at $3.0 million per year.
In conjunction with entering into this project, CMG Reservoir Simulation Foundation (the "Foundation") agreed, subject to certain termination rights, to provide up to a maximum of $5.2 million in research grant funding to cover 50% of the Company's estimated share of costs over the initial five years of the project. For the six months ended September 30, 2011, the Company has reflected $366,000 (2010 - $709,000) in research grants from the Foundation in revenue with respect to this project. The Foundation's $5.2 million funding commitment was completed in the first quarter of the current fiscal year.
(B) LEASE COMMITMENTS:
The Company has operating lease commitments relating to its office premises with the minimum annual lease payments as follows:
(thousands of $) ---------------------------------------------------------------------------- 2012 960 2013 1,715 2014 1,729 2015 1,319 2016 615 ----------------------------------------------------------------------------
12. 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, 2011, US $165,000 (2010 - US $165,000) had been reserved on this line of credit for the letter of credit supporting a performance bond.
13. 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:
(thousands of $) Revenue Property and equipment
----------------------------------------------------------------------------
For the six months ended
September 30, As at September 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Canada 9,034 8,891 2,034 2,377
United States 4,800 4,606 96 124
Other Foreign 14,087 11,889 132 95
----------------------------------------------------------------------------
27,921 25,386 2,262 2,596
----------------------------------------------------------------------------
In the six months ended September 30, 2011, the Company derived 13.7% (2010 - 9.5%) of its revenue from one customer.
14. Subsidiaries:
CMG is the beneficial owner of the entire issued share capital and controls all the votes of its subsidiaries. The principal activities of all the subsidiaries are the sale and support for the use of CMG's software licenses. Transactions between subsidiaries are eliminated on consolidation. The following is the list of CMG's subsidiaries:
Subsidiary Country of Incorporation ---------------------------------------------------------------------------- Computer Modelling Group Inc. United States CMG Venezuela Venezuela CMG Middle East FZ LLC Dubai, UAE ----------------------------------------------------------------------------
15. Subsequent Events:
On November 8, 2011, the Board of Directors declared a cash dividend of $0.11 per share on its Common Shares, payable on December 15, 2011, to all shareholders of record at the close of business on December 6, 2011.
16. Transition to IFRS:
As stated in note 2(a), these condensed consolidated financial statements have been prepared in accordance with IAS 34. The accounting policies described in note 3 to the condensed consolidated financial statements for the three months ended June 30, 2011 have been applied in preparing the condensed consolidated financial statements for the three and six months ended September 30, 2011, the comparative information for the three and six months ended September 30, 2010, and in preparation of an opening IFRS statement of financial position at April 1, 2010, the Company's date of transition to IFRS, and statements of financial position as at September 30, 2011 and March 31, 2011.
This transition note explains the effect of the transition from previous Canadian GAAP to IFRS on the Company's financial position, financial performance and cash flows.
16.1 ELECTED EXEMPTIONS FROM FULL RETROSPECTIVE APPLICATION:
In preparing these condensed consolidated financial statements in accordance with IFRS 1, we applied the following optional exemptions from full retrospective application of IFRS:
-- IFRS 3 - Business Combinations
IFRS 1 allows the Company to apply IFRS 3, Business Combinations,
retrospectively or prospectively from the date of transition. The
retrospective application would require restatement of all business
combinations that occurred prior to the transition date, April 1, 2010.
The Company elected not to retrospectively apply IFRS 3 to business
combinations that occurred prior to its transition date and such
business combinations have not been restated.
-- IFRS 2 - Share-based Payments
IFRS 1 provides the exemption from retrospective application of IFRS 2,
Share-based Payments, to options granted on or before November 7, 2002
and options granted after November 7, 2002 that vested before April 1,
2010. The Company adopted the exemption in IFRS 1 and applied IFRS 2 to
employee options granted after November 7, 2002 that had not vested by
April 1, 2010. While minor differences occurred on the transition from
Canadian GAAP to IFRS, these differences were not material, and hence,
no adjustments have been made to the consolidated financial statements.
16.2 MANDATORY EXCEPTIONS TO RETROSPECTIVE APPLICATION:
In preparing these condensed consolidated financial statements in accordance with IFRS 1, the Company applied the following mandatory exception:
-- Estimates
IFRS 1 disallows hindsight to be used in creating or revising estimates. Estimates made in accordance with IFRSs at the date of transition are consistent with estimates made under Canadian GAAP except where the revision was necessary to reflect any difference in accounting policies. In making estimates under IFRSs not required under Canadian GAAP, the estimates reflect conditions that existed at the relevant reporting date and/or transition date.
16.3 RECONCILIATION OF FINANCIAL POSITION AND SHAREHOLDERS' EQUITY:
(thousands of $) March 31, 2011 September 30, 2010
----------------------------------------------------------------------------
Canadian IFRS Canadian IFRS
GAAP Adj. IFRS GAAP Adj. IFRS
----------------------------------------------------------------------------
Assets
Current assets:
Cash 41,753 41,753 32,565 32,565
Trade and other
receivables 13,318 13,318 11,796 11,796
Prepaid expenses 1,064 1,064 1,079 1,079
Prepaid income taxes - - 747 747
----------------------------------------------------------------------------
56,135 56,135 46,187 46,187
Property and equipment 2,554 2,554 2,596 2,596
Deferred tax asset
(note 16.5(A)) - - - -
----------------------------------------------------------------------------
Total assets 58,689 58,689 48,783 48,783
----------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Current liabilities:
Trade payables and
accrued
liabilities 4,543 4,543 3,627 3,627
Income taxes payable 1,237 1,237 - -
Deferred revenue 16,755 16,755 12,658 12,658
Deferred tax liability
(note
16.5(A)) 181 (181) - 87 (87) -
----------------------------------------------------------------------------
22,716 (181) 22,535 16,372 (87) 16,285
Deferred tax liability
(note 16.5(A)) 203 181 384 142 87 229
----------------------------------------------------------------------------
Total liabilities 22,919 - 22,919 16,514 - 16,514
----------------------------------------------------------------------------
Shareholders' equity:
Share capital 24,801 24,801 22,812 22,812
Contributed surplus 2,655 2,655 2,130 2,130
Retained earnings 8,314 8,314 7,327 7,327
----------------------------------------------------------------------------
Total shareholders'
equity 35,770 35,770 32,269 32,269
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity 58,689 58,689 48,783 48,783
----------------------------------------------------------------------------
(thousands of $) April 1, 2010
----------------------------------------------------------------------------
IFRS
Canadian GAAP Adj. IFRS
----------------------------------------------------------------------------
Assets
Current assets:
Cash 28,826 28,826
Trade and other
receivables 16,072 16,072
Prepaid expenses 1,141 1,141
Prepaid income taxes 1,433 1,433
----------------------------------------------------------------------------
47,472 47,472
Property and equipment 2,401 2,401
Deferred tax asset
(note 16.5(A)) 33 (33) -
----------------------------------------------------------------------------
Total assets 49,906 (33) 49,873
----------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Current liabilities:
Trade payables and
accrued
liabilities 5,398 5,398
Income taxes payable - -
Deferred revenue 13,843 13,843
Deferred tax liability
(note
16.5(A)) 222 (222) -
----------------------------------------------------------------------------
19,463 (222) 19,241
Deferred tax liability
(note 16.5(A)) - 189 189
----------------------------------------------------------------------------
Total liabilities 19,463 (33) 19,430
----------------------------------------------------------------------------
Shareholders' equity:
Share capital 20,390 20,390
Contributed surplus 1,816 1,816
Retained earnings 8,237 8,237
----------------------------------------------------------------------------
Total shareholders'
equity 30,443 30,443
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity 49,906 (33) 49,873
----------------------------------------------------------------------------
16.4. RECONCILIATION OF NET AND COMPREHENSIVE INCOME:
For the three months ended
September 30, 2010 IFRS
(thousands of $) Canadian GAAP Adjustments IFRS
----------------------------------------------------------------------------
Revenue 13,332 - 13,332
----------------------------------------------------------------------------
Operating expenses
Sales, marketing and
professional services (note
16.5(B)) 3,066 72 3,138
Research and development 2,315 - 2,315
General and administrative
(note 16.5(B)) 1,121 64 1,185
Depreciation and amortization
(note 16.5(B)) 136 (136) -
Foreign exchange gain (note
16.5(C)) 184 (184) -
Interest and other income
(note 16.5(C)) (54) 54 -
----------------------------------------------------------------------------
6,768 (130) 6,638
----------------------------------------------------------------------------
Operating profit 6,564 130 6,694
Finance income (note 16.5(C)) - 54 54
Finance costs (note 16.5(C)) - (184) (184)
----------------------------------------------------------------------------
Profit before income and other
taxes 6,564 - 6,564
Income and other taxes 1,999 - 1,999
----------------------------------------------------------------------------
Net and comprehensive income 4,565 - 4,565
----------------------------------------------------------------------------
For the six months ended
September 30, 2010 IFRS
(thousands of $) Canadian GAAP Adjustments IFRS
----------------------------------------------------------------------------
Revenue 25,386 - 25,386
----------------------------------------------------------------------------
Operating expenses
Sales, marketing and
professional services (note
16.5(B)) 5,724 144 5,868
Research and development 4,533 - 4,533
General and administrative
(note 16.5(B)) 2,236 121 2,357
Depreciation and amortization
(note 16.5(B)) 265 (265) -
Foreign exchange loss (note
16.5(C)) (26) 26 -
Interest and other income
(note 16.5(C)) (89) 89 -
----------------------------------------------------------------------------
12,643 115 12,758
----------------------------------------------------------------------------
Operating profit 12,743 (115) 12,628
Finance income (note 16.5(C)) - 115 115
Finance costs (note 16.5(C)) - - -
----------------------------------------------------------------------------
Profit before income and other
taxes 12,743 - 12,743
Income and other taxes 3,948 - 3,948
----------------------------------------------------------------------------
Net and comprehensive income 8,795 - 8,795
----------------------------------------------------------------------------
16.5 EXPLANATION OF PRESENTATION RECLASSIFICATIONS:
(A) Deferred taxes - deferred taxes are classified as non-current under IFRS. Under previous Canadian GAAP, deferred taxes were classified as current and non-current based on the classification of the underlying assets or liabilities to which they relate or based on the expected reversal of the temporary differences.
Transition rules resulted in reclassification of deferred tax liability associated with SR&ED credits from current to non-current. In addition, deferred tax asset associated with property and equipment was offset against deferred tax liability as both relate to income taxes levied by the same taxation authority for the same taxable entity.
(B) Expense classification - the Company has elected to present its expenses in the consolidated statements of operations and comprehensive income prepared under IFRS according to their function. As a result, depreciation and amortization, which was reported as a separate line item under previous Canadian GAAP, was allocated to its respective functions.
(C) Finance income and costs - under Canadian GAAP, interest income and foreign exchange gains and losses were classified as separate line items in the consolidated statement of earnings. Under IFRS, interest income and foreign exchange gains are presented as finance income, and foreign exchange losses are presented as finance costs. Finance income and costs are presented on a gross basis as required by IFRS.
16.6 ADJUSTMENTS TO THE STATEMENTS OF CASH FLOWS:
Interest received and income taxes paid have been moved into the body of the statement of cash flows under operating activities, whereas they were previously disclosed as supplemental information. There are no other material differences between the statement of cash flows presented under IFRS and the statement of cash flows previously presented under Canadian GAAP.
FOR FURTHER INFORMATION PLEASE CONTACT:
Computer Modelling Group Ltd.
Kenneth M. Dedeluk
President & CEO
(403) 531-1300
[email protected]
Computer Modelling Group Ltd.
John Kalman
Vice President, Finance & CFO
(403) 531-1300
[email protected]
www.cmgl.ca
Source: Computer Modelling Group Ltd.
Are you missing key trading opportunities? Upgrade to StreetInsider Premium and get a step ahead of the market - FREE TRIAL!
Create E-mail Alert Related Categories
Press ReleasesRelated Entities
Dividend, EarningsSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
