Computer Modelling Group Announces Second Quarter Results
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CALGARY, ALBERTA--(Marketwire - Nov. 10, 2009) - Computer Modelling Group Ltd. ("CMG" or the "Company") (TSX: CMG) is very pleased to announce our second quarter results for the three and six months ended September 30, 2009.
---------------------------------------------------------------------------- $ thousands, except per share data For the three months ended September 30, 2009 2008 Change ---------------------------------------------------------------------------- Annuity/Maintenance Software Licenses 7,240 5,350 35% Perpetual Software Licenses 582 2,882 (80)% Total Revenue 9,084 9,585 (5)% Gross Profit 6,785 7,157 (5)% Earnings 2,414 2,968 (19)% Earnings per share - basic 0.14 0.17 (18)% ---------------------------------------------------------------------------- $ thousands, except per share data For the six months ended September 30, 2009 2008 Change ---------------------------------------------------------------------------- Annuity/Maintenance Software Licenses 14,448 10,967 32% Perpetual Software Licenses 2,558 4,053 (37)% Total Revenue 19,319 17,852 8% Gross Profit 14,667 13,471 9% Earnings 5,103 5,595 (9)% Earnings per share - basic 0.29 0.33 (12)% ----------------------------------------------------------------------------
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 9, 2009, should be read in conjunction with the unaudited consolidated financial statements and related notes of the Company for the six months ended September 30, 2009 and the audited consolidated financial statements and MD&A for the years ended March 31, 2009 and 2008 contained in the 2009 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 Canadian Generally Accepted Accounting Principles ("GAAP") and, unless otherwise indicated, all amounts in this report are expressed in Canadian dollars.
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 the 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 2009 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.
CORPORATE PROFILE
CMG is a computer software technology and consulting company serving the oil and gas industry. The Company is a leading supplier of advanced processes reservoir modelling software in the world with a blue chip client base of international oil companies and technology centres in approximately 50 countries. 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 2008 Fiscal 2009 Fiscal 2010
----------------------------------------------------------------------------
$ thousands,
unless
otherwise
stated Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
----------------------------------------------------------------------------
Annuity/
maintenance
licenses 4,450 5,587(1) 5,618(2) 5,350 6,937(3) 8,042(4) 7,208(5) 7,240(6)
Perpetual
licenses 1,449 2,230 1,171 2,882 3,383 5,023 1,976 582
----------------------------------------------------------------------------
Software
licenses 5,899 7,817 6,789 8,232 10,320 13,065 9,184 7,822
Consulting
and
contract
research 1,441 1,181 1,479 1,353 1,340 1,364 1,051 1,262
----------------------------------------------------------------------------
Revenues 7,340 8,998 8,268 9,585 11,660 14,429 10,235 9,084
Gross
Profit 5,640 7,192 6,314 7,157 9,525 11,789 7,882 6,785
Gross
Profit (%) 77 80 76 75 82 82 77 75
Earnings
before
income and
other
taxes 3,291 4,665 3,814 4,414 7,254 8,765 3,991 3,437
Income and
other
taxes 1,180 1,657 1,187 1,446 2,350 2,648 1,302 1,023
Earnings for
the
quarter 2,111 3,008 2,627 2,968 4,904 6,117 2,689 2,414
Cash
dividends
declared and
paid 1,260 1,684 3,843 2,073 2,422 2,588 6,975 3,179
----------------------------------------------------------------------------
Per share
amounts -
($/share)
Earnings per
share -
basic 0.13 0.18 0.15 0.17 0.28 0.35 0.16 0.14
Earnings per
share -
diluted 0.13 0.18 0.15 0.17 0.28 0.35 0.15 0.13
Cash
dividends
declared per
share 0.075 0.10 0.225 0.12 0.14 0.15 0.40 0.18
----------------------------------------------------------------------------
(1) Includes $0.8 million in revenue that pertains to usage of CMG's
products in prior quarters
(2) Includes $0.7 million in revenue that pertains to usage of CMG's
products in prior quarters
(3) Includes $0.7 million in revenue that pertains to usage of CMG's
products in prior quarters
(4) Includes $1.1 million in revenue that pertains to usage of CMG's
products in prior quarters
(5) Includes $0.4 million in revenue that pertains to usage of CMG's
products in prior quarters
(6) Includes $0.4 million in revenue that pertains to usage of CMG's
products in prior quarters
REVENUES
CMG's revenues are comprised of software license sales, which provide the majority of the Company's revenues, and consulting and contract research fees.
CMG's total revenues of $9.1 million for the second quarter of fiscal 2010 decreased by 5.2 percent or $0.5 million from the $9.6 million reported for the second quarter of fiscal 2009. The reduction was driven by lower perpetual software license sales that were for a large part offset by the increase in quarterly annuity/maintenance software license revenues.
CMG's total revenues of $19.3 million for the first six months of fiscal 2010 increased by 8.2 percent or $1.5 million over the $17.9 million reported for the comparative period in fiscal 2009. The rise was due to the growth in annuity/maintenance revenues offset by lower perpetual software license revenues and the reduction in consulting and contract research fees.
Software License Revenues
Software license revenue is comprised 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 clients' needs and budgets.
Software license revenues were $7.8 million in the second quarter of fiscal 2010, down 5.0 percent or $0.4 million from the $8.2 million recorded in the same period last year. The reduction was the result of lower perpetual software license sales that were for the most part offset by the increase in quarterly annuity/maintenance software license revenues.
Software license revenues were $17.0 million in the six months ended September 30, 2009, up 13.2 percent or $2.0 million from the $15.0 million recorded in the same period last year. The increase was due to the growth in annuity/maintenance revenues dampened by lower perpetual software license sales.
The annuity/maintenance software license fees for the second quarter of fiscal 2010 rose by 35.3 percent to $7.2 million as compared to $5.4 million recorded in the second quarter of fiscal 2009. The growth in this component of software revenue was due to high renewal rates, additional maintenance related to the large number of perpetual sales in fiscal 2009 and new annuity licenses taken up in the quarter.
The annuity/maintenance component to our software license stream in the six months ended September 30, 2009 grew by 31.7 percent to $14.4 million from the $11.0 million in the comparative period of the prior year. This increase was due to the same reasons noted above for the quarterly results.
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 the 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 the revenue recognition is satisfied in the current period for the products provided in previous quarters.
Perpetual license sales for the second quarter of fiscal 2010 were $0.6 million, down from $2.9 million recorded in the second quarter of fiscal 2009. Perpetual sales for the six months ended September 30, 2009 were $2.6 million, down from the $4.1 million recorded in the same period last year. This variability in the timing and magnitude of perpetual software license sales is a reflection of some of the uncertainty and budget constraints our customers have faced in the current year compared to greater availability of funds in the prior year driven by higher commodity prices.
At September 30, 2009, CMG has pre-sold $9.9 million (2008 - $8.5 million) of software license revenue, $7.8 million of which relates to its current fiscal year ending March 31, 2010.
Consulting and Contract Research Revenues
CMG recorded consulting and contract research revenues of $1.3 million in the second quarter of fiscal 2010 which is comparable to $1.4 million recorded in the second quarter of fiscal 2009. For the six months ended September 30, 2009, CMG recorded consulting and contract research revenues of $2.3 million, down $0.5 million from the $2.8 million recorded for the same period last year.
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, 2009, CMG has recorded approximately $0.3 million (2008 - $0.2 million) of pre-sold revenue relating to consulting and contract research revenues.
EXPENSES
CMG realized a gross profit of $6.8 million (74.7 percent) in the second quarter of fiscal 2010, down $0.4 million from the $7.2 million (74.9 percent) recorded in the same period of fiscal 2009. The lower gross profit was due primarily to the impact of lower perpetual software sales for the quarter.
CMG realized a gross profit of $14.7 million (75.9 percent) in the six months ended September 30, 2009, up $1.2 million from the $13.5 million (75.5 percent) recorded in the first six months of fiscal 2009. The improvement in gross profit was due mainly to increased annuity/maintenance license fee revenues.
CMG's total expenses, excluding depreciation and income and other taxes, amounted to $5.2 million for the second quarter of fiscal 2010, which was comparable to the $5.2 million recorded in the second quarter of fiscal 2009. Higher employee related costs in the quarter were partially offset by the increased benefits recorded in respect of the scientific research and experimental development ("SR&ED") investment tax credit program and total expenses in the second quarter of fiscal 2009 included the costs associated with CMG's biennial technical symposium.
CMG's total expenses amounted to $10.8 million for the six months ended September 30, 2009, up $1.2 million from the $9.6 million recorded in the comparable period last year. This increase in total expenses between the reporting periods is primarily due to growth in CMG's staff base and consulting services from third party companies involved in new research initiatives. SR&ED credits of $0.55 million recorded for the six months ended September 30, 2009 were comparable to $0.55 million recorded in the six months ended September 30, 2008 as increases in current year's credits due to the new provincial SR&ED program were similar in magnitude to the additional SR&ED claims made in fiscal 2009 that related to prior years.
As a technology company, CMG's largest area of expenditure is for its people. Approximately $8.6 million or 80 percent of the total expenses in the six months ended September 30, 2009 related to staff costs. This compares to $7.5 million or 78 percent of the total expenses in the comparative period last year. Staffing levels for the first six months of fiscal 2010 grew throughout the Company to support our continued growth. At September 30, 2009, CMG's staff complement was 126 employees, up from 105 employees as at September 30, 2008.
Research and Development
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.
During the six months ended September 30, 2009, CMG incurred research and development expenditures of $4.2 million (2008 - $3.6 million), which includes its proportionate share of joint research and development costs on the DRMS project of $1.2 million (2008 - $1.0 million), all of which is expensed to earnings. The increase in research and development costs is a result of the increase in people cost and consulting services from third party companies involved in new research initiatives. These costs represented 22 percent (2008 - 20 percent) of total revenues. Research and development expenses during the second quarter of fiscal 2010 amounted to $2.0 million which is comparable to the amount recorded for the same period of fiscal 2009 as higher employee costs were offset by higher SR&ED benefits recorded in the most recent quarter.
INTEREST INCOME AND FOREIGN EXCHANGE
Interest income decreased to $0.07 million in the six months ended September 30, 2009 from the $0.35 million recorded last year due to lower prevailing interest rates. On a quarterly basis, interest income decreased from $0.17 million in the second quarter of fiscal 2009 to $0.05 million in the second quarter of fiscal 2010 for the same reason.
CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 71 percent (2008 - 63 percent) of CMG's revenues for the six months ended September 30, 2009 are denominated in US dollars, whereas only approximately 20 percent (2008 - 18 to 20 percent) of CMG's total costs are denominated in US dollars.
----------------------------------------------------------------------------
Six month
CDN$ to US$ At March 31 At September 30 trailing average
----------------------------------------------------------------------------
2007 0.8674 1.0037 0.9210
2008 0.9729 0.9435 0.9724
2009 0.7935 0.9327 0.8955
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Given that the significant portion of our business is conducted in US dollars, the strengthening of the Canadian dollar against the US dollar in the first six months of fiscal 2010 has negatively impacted our financial results in both the valuation of our US dollar net working capital position and current period sales.
CMG recorded a foreign exchange loss of $0.32 million and $0.77 million for the three and six months ended September 30, 2009 compared to $0.01 million and $0.07 million loss recorded in the same periods of fiscal 2009.
INCOME AND OTHER TAXES
CMG's effective tax rate for the six months ended September 30, 2009 is reflected as 31.3 percent (2008 - 32.0 percent), whereas the prevailing Canadian statutory tax rate is now 28.75 percent. This is primarily due to a combination of the non-tax deductibility of stock-based compensation expense and the benefit of losses in a foreign subsidiary not being recognized.
The benefit recorded in CMG's books on the federal scientific research and experimental development investment tax credit program impacts future income taxes. The investment tax credit earned in the current fiscal year is utilized by CMG to reduce federal income taxes otherwise payable for the current fiscal year and 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 current future income tax liability and then, in the following fiscal year is transferred to income taxes payable.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
CMG generated $0.8 million from operating activities in the six months ended September 30, 2009, a decrease of $5.7 million from the $6.5 million generated in the comparative period of last year. The decrease is driven by the changes in non-cash working capital which are reflective of the timing of customer purchases, cash receipts of revenues and the timing of CMG's payments of income taxes payable. The tax instalments paid during six months ended September 30, 2009 are higher than the tax instalments made in the comparative period of last fiscal year.
Financing Activities
During the six months ended September 30, 2009, CMG employees and directors exercised options to purchase 402,100 Common Shares, which resulted in cash proceeds of $2.5 million.
Effective on the close of business on August 1, 2008, CMG's Common and Non-Voting 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.
In the six months ended September 30, 2009, CMG paid $10.2 million in dividends, representing two quarterly dividends of $0.18 per share and a special dividend of $0.22 per share. On November 9, 2009, CMG announced the payment of a quarterly dividend of $0.18 per share on CMG's Common and Non-Voting Shares. The dividend will be paid on December 15, 2009 to shareholders of record at the close of business on December 4, 2009.
On February 27, 2009, the Company announced a Normal Course Issuer Bid ("NCIB") commencing March 3, 2009 to purchase for cancellation up to 1,114,791 of its Common Shares. No shares have been purchased pursuant to this NCIB through September 30, 2009.
On February 26, 2008, the Company announced a NCIB commencing February 28, 2008 to purchase for cancellation up to 970,000 of its Common Shares. This NCIB ended on February 27, 2009 and a total of 75,120 shares were repurchased at market price for a total cost of $598,564.
Investing Activities
CMG's current needs for capital asset investment relate equally to computer equipment and office infrastructure costs. During the six months ended September 30, 2009, CMG expended $0.6 million on property and equipment additions and has a capital budget of $2.2 million for fiscal 2010, all of which will be funded internally.
Liquidity and Capital Resources
At September 30, 2009, CMG has $27.2 million in cash, no debt and has access to a $1.0 million line of credit with its principal banker.
During the six months ended September 30, 2009, 4,075,828 shares of CMG's public float were traded on the TSX. As at September 30, 2009, CMG's market capitalization based upon its September 30, 2009 closing price of $15.64 was $276.2 million.
COMMITMENTS, OFF BALANCE SHEET ITEMS AND TRANSACTIONS WITH RELATED PARTIES
CMG committed approximately $10.6 million to the five year DRMS research and development project with its industry partners Shell International Exploration and Production BV and Petroleo Brasileiro S.A., of which $6.0 million has been incurred from inception to September 30, 2009.
In conjunction with entering into this project, CMG Reservoir Simulation Foundation ("the Foundation"), the sole holder of CMG's Non-Voting Shares, agreed, subject to certain termination rights, to provide up to a maximum of $5.2 million in research grant funding to cover 50 percent of the Company's estimated share of project costs over the duration of the project. During the six months ended September 30, 2009, CMG has reflected $0.6 million (2008 - $0.5 million) in research grants from the Foundation in revenue with respect to this project. From commencement of the project to September 30, 2009, these research grants aggregate to $3.0 million.
CMG plans to fund its share of the project costs associated with the development of the newest generation reservoir simulation software system from internal cash and funding from the Foundation.
CMG has very little in the way of other ongoing material contractual obligations other than for pre-sold revenues which are reflected as deferred revenue on its balance sheet. Contractual obligations for office leases are estimated as follows: 2010 - $0.5 million; 2011 through 2014 - $1.0 million; and, 2015 - $0.6 million.
BUSINESS RISKS AND CRITICAL ACCOUNTING ESTIMATES
These remain unchanged from the factors detailed in CMG's 2009 Annual Report.
CHANGES IN ACCOUNTING POLICIES
Capital Disclosures
Effective April 1, 2008, CMG adopted the recommendations included in the Canadian Institute of Chartered Accountants ("CICA") Handbook, Section 1535, Capital Disclosures. The new standard requires disclosure of qualitative and quantitative information that enables users of financial statements to evaluate the Company's objectives, policies and processes for managing capital. The adoption of this standard did not have a material impact on the Company's financial statements.
Financial Instruments
On April 1, 2008, CMG adopted CICA Handbook Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation. Section 3862 requires disclosure about the significance of financial instruments for an entity's financial position, the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. The standards on the presentation of financial instruments carries forward previous guidance unchanged. Section 3863 enhances financial statement users' understanding of the significance of financial instruments to an entity's financial position, performance and cash flows. Sections 3862 and 3863 replace Section 3861, Financial Instruments - Disclosure and Presentation. The adoption of these standards did not have a material impact on the Company's financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
International Financial Reporting Standards
In February 2008, the Accounting Standards Board ("AcSB") confirmed that all Canadian publicly accountable enterprises will be required to adopt International Financial Reporting Standards ("IFRS") for interim and annual financial reporting purposes for fiscal years beginning on or after January 1, 2011 with comparatives for the prior year. The Company will be required to report financial statements prepared in accordance with IFRS for the fiscal year ending March 31, 2012 with comparatives for fiscal year ending March 31, 2011.
A project team has been set up to manage this transition and ensure successful implementation. The team includes senior management personnel with the required experience and knowledge to manage the transition. All project members have attended training and education sessions and will continue to do so throughout the conversion project. The project team will develop recommendations on accounting policies and will periodically report to the audit committee about the status of the changeover plan.
The Company expects its changeover plan to be carried out in the following phases which may be modified and updated as we proceed through the transition period:
Diagnostic Analysis Preliminary Assessment
- Initial project plan considering resources, timelines and overall project approach
- Identify key areas of differences between GAAP and IFRS
Detailed Assessment
- Identify and evaluate IFRS 1 elective and mandatory exemptions
- Provide detailed assessment of the available accounting policy alternatives
- Provide recommendations on the adoption of accounting policies
Plan and Design
- Evaluate business processes and information requirements
- Develop detailed project plan for the implementation for each specific item
- Develop timelines, resource requirements, status reporting and training programs
- Assess effects on computer systems and internal controls over financial reporting
Implement and Monitor
- Implement processes for required information gathering
- Prepare IFRS compliant financial statements and notes
- Implement and test internal controls over financial reporting and any changes to computer systems
- Provide ongoing training and education
- Monitor reporting requirements on an on-going basis
As part of the changeover plan, the Company will assess the effects of the adoption of the new standards on its information and computer systems, business activities and internal controls over financial reporting.
The Company commenced its IFRS transition project in 2009 and has completed the preliminary assessment including:
- assessment and allocation of resource and training needs,
- a high level comparison of differences between Canadian GAAP and IFRS and ranking of the identified key areas according to complexity and significance,
- identification of the options under IFRS 1, First-time Adoption of International Reporting Standards which will be further analyzed, and
- development of key milestones and timelines in accordance with priorities assigned.
The next step in the conversion process involves developing an in-depth analysis of the key areas identified during the preliminary assessment phase including the evaluation and selection of available accounting policies.
As the Company is in the preliminary stages of the conversion, the impact of the adoption of IFRS on the consolidated financial statements of the Company cannot be reasonably determined. Each quarter, the plan's status and progress are reviewed with the Audit Committee.
The Company will continue to monitor any changes to IFRS as issued by the International Accounting Standards Board and the AcSB and will update its quarterly MD&A disclosures to report on the progress of its IFRS changeover plan.
OUTSTANDING SHARE DATA AS AT NOVEMBER 9, 2009
CMG's authorized share capital has remained unchanged from September 30, 2009 to November 9, 2009 and subsequent to September 30, 2009 the only share capital transactions were for the exercise of 6,800 stock options to acquire Common Shares of the Company. CMG's issued and outstanding shares at November 9, 2009 are 15,396,989 Common Shares and 2,271,429 Non-Voting Shares.
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 percent of the combined outstanding Common and Non-Voting Shares at the date of grant. Based upon this calculation, at November 9, 2009, CMG could grant up to 1,766,841 stock options, of which 1,458,674 are currently issued and outstanding.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal controls over financial reporting ("ICFR") as defined under Multilateral Instrument 52-109 of the Canadian Securities Administrators, Certification of Disclosure in Issuers' Annual and Interim Filings. These controls and procedures were reviewed and the effectiveness of their design and operation was evaluated in fiscal 2009 in accordance with the COSO control framework. The evaluation confirmed the effectiveness of the design and operation of DC&P and ICFR at March 31, 2009. During our fiscal year 2010, we continue to monitor and review our controls and procedures.
During the six months ended September 30, 2009, 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
CMG is committed to focusing its resources on the development and enhancement of simulation tools relevant to the challenges facing its diverse customer base. While oil prices have rebounded from their lows earlier this year and natural gas prices have shown some recent improvement, petroleum producers continue to be faced with the economic uncertainty related to the world wide recession.
The Company remains confident that the value that CMG technology provides to its customers is greater than ever and accordingly we continue to be cautiously optimistic that our software license revenue will remain solid.
On behalf of the Board of Directors
Kenneth M. Dedeluk, President and Chief Executive Officer
November 9, 2009
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------
(unaudited) September 30, 2009 March 31, 2009
----------------------------------------------------------------------------
Assets
Current assets:
Cash $ 27,154,052 $ 34,701,292
Accounts receivable 8,300,164 11,352,448
Prepaid expenses 958,921 825,892
Prepaid income taxes 1,157,797 -
----------------------------------------------------------------------------
37,570,934 46,879,632
Property and equipment (note 3) 1,392,528 1,112,103
Future income taxes (note 5) 51,182 52,340
----------------------------------------------------------------------------
$ 39,014,644 $ 48,044,075
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities $ 3,099,461 $ 4,951,571
Income taxes payable - 3,438,733
Deferred revenue 10,191,930 11,796,342
Future income taxes (note 5) 98,374 197,272
----------------------------------------------------------------------------
13,389,765 20,383,918
Shareholders' equity:
Share capital (note 6) 19,027,139 16,083,799
Contributed surplus (note 6) 1,317,543 1,245,485
Retained earnings 5,280,197 10,330,873
----------------------------------------------------------------------------
25,624,879 27,660,157
----------------------------------------------------------------------------
$ 39,014,644 $ 48,044,075
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments (note 9)
See accompanying notes to consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
----------------------------------------------------------------------------
Three months ended Six months ended
September 30 September 30
(unaudited) 2009 2008 2009 2008
----------------------------------------------------------------------------
Revenue
Software licenses $ 7,822,428 $ 8,231,888 $ 17,006,788 $ 15,020,735
Consulting and
contract research 1,261,655 1,352,642 2,311,907 2,831,491
----------------------------------------------------------------------------
9,084,083 9,584,530 19,318,695 17,852,226
----------------------------------------------------------------------------
Cost of Sales
Marketing expenses 1,827,667 1,919,197 3,665,678 3,437,476
Direct consulting
expenses 482,477 485,551 987,288 919,562
Third-party contract
costs (10,597) 22,696 (1,289) 24,303
----------------------------------------------------------------------------
2,299,547 2,427,444 4,651,677 4,381,341
----------------------------------------------------------------------------
Gross Profit 6,784,536 7,157,086 14,667,018 13,470,885
General and
administrative
expenses 1,024,562 848,934 2,133,515 1,742,134
Depreciation
and amortization 86,718 77,014 170,619 147,982
Product research and
development costs
(note 4) 1,967,567 1,975,657 4,234,094 3,626,013
Foreign exchange loss 319,619 11,377 774,681 72,578
Interest and other
income (51,079) (170,101) (73,689) (345,927)
----------------------------------------------------------------------------
Earnings before
income and other taxes 3,437,149 4,414,205 7,427,798 8,228,105
Income and other taxes
(note 5) 1,023,019 1,446,247 2,324,598 2,633,376
----------------------------------------------------------------------------
Earnings for the Period 2,414,130 2,967,958 5,103,200 5,594,729
Retained earnings,
beginning of period 6,044,816 3,938,017 10,330,873 5,155,818
Dividends paid (3,178,749) (2,073,299) (10,153,876) (5,917,871)
Common shares
buy-back (note 6(c)) - (122,745) - (122,745)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained earnings,
end of period $ 5,280,197 $ 4,709,931 $ 5,280,197 $ 4,709,931
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings Per Share
Basic (note 6(e)) $ 0.14 $ 0.17 $ 0.29 $ 0.33
Diluted (note 6(e)) $ 0.13 $ 0.17 $ 0.29 $ 0.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------
Three months ended Six months ended
September 30 September 30
(unaudited) 2009 2008 2009 2008
----------------------------------------------------------------------------
Cash provided by (used for)
Operating
Earnings for the
period $ 2,414,130 $ 2,967,958 $ 5,103,200 $ 5,594,729
Items not involving
cash:
Depreciation and
amortization 195,027 177,213 365,598 340,046
Future income taxes
(note 5) 55,049 42,754 (97,740) (4,646)
Stock-based
compensation 285,019 203,016 528,008 357,648
----------------------------------------------------------------------------
2,949,225 3,390,941 5,899,066 6,287,777
Changes in non-cash
working capital:
Accounts receivable (315,593) (408,680) 3,052,284 295,101
Accounts payable and
accrued liabilities (684,100) 577,612 (1,852,110) 420,235
Income taxes
payable/prepaid (1,250,579) 205,931 (4,596,530) (386,370)
Prepaid expenses (90,452) (80,153) (133,029) (2,347)
Deferred revenue (727,281) (325,576) (1,604,412) (110,930)
----------------------------------------------------------------------------
(118,780) 3,360,075 765,269 6,503,466
----------------------------------------------------------------------------
Financing
Issue of common shares 1,534,726 914,107 2,487,390 1,598,022
Dividends paid (3,178,749) (2,073,299) (10,153,876) (5,917,871)
Common shares buy-back
(note 6 (c)) - (137,364) - (137,364)
----------------------------------------------------------------------------
(1,644,023) (1,296,556) (7,666,486) (4,457,213)
----------------------------------------------------------------------------
Investing
Property and equipment
additions (357,495) (171,240) (646,023) (327,201)
----------------------------------------------------------------------------
Increase (decrease)
in cash (2,120,298) 1,892,279 (7,547,240) (1,719,052)
Cash, beginning of
period 29,274,350 23,306,203 34,701,292 23,479,430
----------------------------------------------------------------------------
Cash, end of period $ 27,154,052 $ 25,198,482 $ 27,154,052 $ 25,198,482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental disclosure of cash flow information (note 11)
See accompanying notes to consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended September 30, 2009 and 2008 and as at March 31, 2009 (unaudited).
Computer Modelling Group Ltd. (the "Company") is a computer software technology and consulting firm engaged in the development and licensing of reservoir simulation software.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of Consolidation:
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and include the accounts of the Company and its subsidiaries, all 100 percent owned. All intercompany transactions have been eliminated.
(b) Revenue Recognition:
Revenue consists primarily of software license fees and consulting and contract research fees.
Software license revenue is comprised 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 licensing, whereby the customer purchases the then current version of the software and has the right to use that version in perpetuity. Software license revenue is recognized when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is probable. In cases where collectability is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been met.
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. License fees for perpetual licenses are recognized fully in revenue when all recognition conditions are satisfied.
Consulting and contract research revenues are recorded on a percentage-of-completion basis whereby revenues and costs are recorded in operations based on work completed.
(c) Property and Equipment:
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided using the following annual rates and methods that are expected to amortize the cost of the property and equipment over their estimated useful lives:
Computer equipment 33 1/3% straight-line Furniture and equipment 20% straight-line Leasehold improvements Straight-line over the lease term
(d) Product Research and Development Costs:
All costs of product research and development are expensed to operations as incurred as the impact of both technological changes and competition require the Company to continually enhance its products on an annual basis. Product research and development costs are recorded net of the related investment tax credits.
(e) Joint Research and Development Costs:
The Company participates in a joint project engaged in product research and development and accordingly records its proportionate share of costs incurred as product research and development costs.
(f) Foreign Currency:
The Company's subsidiaries are considered to be integrated operations. Accordingly, monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange prevailing at the balance sheet date while other consolidated balance sheet items are translated at historic rates.
Revenues and expenses are translated at the rate of exchange in effect on the transaction dates. Realized and unrealized foreign exchange gains and losses are included in operations in the period in which they occur.
(g) Income Taxes:
The Company provides for income taxes using the asset and liability method. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year and future income taxes are recognized for temporary differences between the tax and accounting bases of assets and liabilities and for the benefit of losses available to be carried forward for tax purposes that are more likely than not to be realized. Future income tax assets and liabilities are measured using the substantively enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. Any change to the net future income tax assets and liabilities is included in operations in the period it occurs.
(h) Investment Tax Credits:
The Company receives federal and provincial investment tax credits in Canada on qualified scientific research and development expenditures ("SR&ED"). Investment tax credits are recorded as a deduction against related expenses or capital items provided that the reasonable assurance over collection of the tax credits exists.
(i) Earnings Per Share:
Basic earnings per share is computed by dividing earnings by the weighted average number of Common and Non-Voting Shares outstanding for the period. Diluted per share amounts reflect the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted to Common Shares. The treasury stock method is used to determine the dilutive effect of stock options. This method assumes that proceeds received from the exercise of in-the-money stock options are used to repurchase Common Shares at the average market price during the period.
(j) Stock-based Compensation Plan:
The Company has a stock-based compensation plan that is described in note 6(d). The fair value of stock options is expensed over the vesting period along with a credit to contributed surplus. When the stock options are exercised for stock, the recorded amount is transferred from contributed surplus to common share capital.
(k) Financial Instruments:
Financial assets and financial liabilities "held-for-trading" are measured at fair value with changes in those fair values recognized in net earnings. Financial assets "available-for-sale" are measured at fair value, with changes in those fair values recognized in other comprehensive income. Financial assets "held-to-maturity," "loans and receivables" and "other financial liabilities" are measured at amortized cost.
(l) Use of Estimates and Assumptions:
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect 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. Actual results may differ from such estimates and the differences could be material.
2. CHANGES IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:
(a) Changes in accounting policies:
On April 1, 2008, the Company adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook Sections:
- "Capital Disclosures," Section 1535. The new standard requires the Company to disclose its objectives, policies and processes for managing its capital structure. Reference is made to note 7.
- "Financial Instruments - Presentation," Section 3863 and "Financial Instruments - Disclosures," Section 3862. These accounting standards replaced "Financial Instruments - Disclosure and Presentation", Section 3861. The disclosures required by Section 3862 provide additional information on the risks associated with our financial instruments and how we manage those risks. The standards on the presentation of financial instruments carries forward previous guidance unchanged. Section 3863 enhances financial statement users' understanding of the significance of financial instruments to an entity's financial position, performance and cash flows. Reference is made to note 8.
(b) Recent accounting pronouncements:
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, the AcSB confirmed in February 2008 that International Financial Reporting Standards ("IFRS") will replace Canadian GAAP for fiscal years beginning on or after January 1, 2011 for profit-oriented Canadian publicly accountable enterprises. As the Company will be required to report its results in accordance with IFRS for the fiscal year ending March 31, 2012 with comparatives for fiscal year ending March 31, 2011, the Company is assessing the potential impacts of this changeover and developing its plan accordingly.
3. PROPERTY AND EQUIPMENT:
----------------------------------------------------------------------------
Accumulated
September 30, 2009 Cost Depreciation Net Book Value
----------------------------------------------------------------------------
Computer equipment $ 2,954,298 $ 1,988,603 $ 965,695
Furniture and equipment 687,234 534,152 153,082
Leasehold improvements 1,211,650 937,899 273,751
----------------------------------------------------------------------------
$ 4,853,182 $ 3,460,654 $ 1,392,528
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
March 31, 2009 Cost Depreciation Net Book Value
----------------------------------------------------------------------------
Computer equipment $ 2,487,946 $ 1,807,704 $ 680,242
Furniture and equipment 690,742 532,059 158,683
Leasehold improvements 1,122,177 848,999 273,178
----------------------------------------------------------------------------
$ 4,300,865 $ 3,188,762 $ 1,112,103
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. PRODUCT RESEARCH AND DEVELOPMENT COSTS:
----------------------------------------------------------------------------
For the three months ended September 30, 2009 2008
----------------------------------------------------------------------------
Product research and development costs $ 2,152,766 $ 2,045,519
Depreciation 108,309 100,199
Scientific research and experimental development
investment tax credits (293,508) (170,061)
----------------------------------------------------------------------------
$ 1,967,567 $ 1,975,657
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months ended September 30, 2009 2008
----------------------------------------------------------------------------
Product research and development costs $ 4,592,957 $ 3,980,918
Depreciation 194,979 192,064
Scientific research and experimental development
investment tax credits (553,842) (546,969)
----------------------------------------------------------------------------
$ 4,234,094 $ 3,626,013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. 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 earnings 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, 2009 2008
----------------------------------------------------------------------------
Statutory tax rate 28.75% 29.38%
----------------------------------------------------------------------------
Expected income tax $ 2,135,492 $ 2,417,417
Non-deductible costs 160,267 116,741
Change in valuation allowance 24,820 41,305
Withholding taxes 34,169 46,784
Other (30,150) 11,129
----------------------------------------------------------------------------
$ 2,324,598 $ 2,633,376
----------------------------------------------------------------------------
Represented by:
Current income taxes $ 2,353,286 $ 2,569,818
Future income taxes (97,740) (4,646)
Foreign withholding and other taxes 69,052 68,204
----------------------------------------------------------------------------
$ 2,324,598 $ 2,633,376
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The components of the Company's net future income tax liability are as
follows:
----------------------------------------------------------------------------
September 30, 2009 March 31, 2009
----------------------------------------------------------------------------
Net tax asset (liability) on investment
tax credits $ (98,374) $ 290,465
Property and equipment 51,182 52,340
Benefit of operating losses in a foreign
subsidiary 220,218 195,398
----------------------------------------------------------------------------
$ 173,026 $ 538,203
Valuation allowance (220,218) (683,135)
----------------------------------------------------------------------------
Future income tax asset (liability), net $ (47,192) $ (144,932)
Represented by:
Future income tax liability, current $ (98,374) $ (197,272)
Future income tax asset, long-term 51,182 52,340
----------------------------------------------------------------------------
Future income tax asset (liability), net $ (47,192) $ (144,932)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The operating losses in the foreign subsidiary expire over the next three
fiscal years.
6. 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 August 1, 2008, the Common and Non-Voting 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 split.
(b) Issued:
----------------------------------------------------------------------------
Common Shares Non-Voting Shares
------------------------------------------------- Contributed
Number Consideration Number Consideration Surplus
----------------------------------------------------------------------------
Balance,
March 31,
2008 12,916,878 $13,833,303 3,949,034 $253,876 $ 744,405
Issued for
cash on
exercise of
stock options 468,726 1,739,197
Common Shares
buy-back (75,120) (83,228)
Converted into
Common Shares 1,053,088 67,701 (1,053,088) (67,701)
Stock-based
compensation:
Current period
expense 841,731
Stock options
exercised 340,651 (340,651)
----------------------------------------------------------------------------
Balance,
March 31,
2009 14,363,572 $15,897,624 2,895,946 $186,175 $1,245,485
Issued for
cash on
exercise of
stock options 402,100 2,487,390
Converted into
Common Shares 624,517 40,149 (624,517) (40,149)
Stock-based
compensation:
Current period
expense 528,008
Stock options
exercised 455,950 (455,950)
----------------------------------------------------------------------------
Balance,
September 30,
2009 15,390,189 $18,881,113 2,271,429 $146,026 $1,317,543
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Non-Voting Shares are convertible into an equivalent number of Common Shares at any time at the option of the holder.
Subsequent to September 30, 2009, 6,800 stock options were exercised for cash proceeds of $28,814.
On May 18, 2006, the Board of Directors adopted a shareholder rights plan (the "Original Rights Plan"), whereby the Company will issue 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 is 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 February 26, 2008, the Company announced a NCIB commencing February 28, 2008 to purchase for cancellation up to 970,000 of its Common Shares. This NCIB ended on February 27, 2009 and a total of 75,120 shares have been repurchased at market price for a total cost of $598,564.
On February 27, 2009, the Company announced a NCIB commencing March 3, 2009 to purchase for cancellation up to 1,114,791 of its Common Shares. No shares have been purchased pursuant to t
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