Computer Modelling Group Announces First Quarter Results
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CALGARY, ALBERTA -- (Marketwired) -- 08/10/16 -- Computer Modelling Group Ltd. ("CMG" or the "Company") (TSX: CMG) is very pleased to report our first quarter results for the three months ended June 30, 2016.
First Quarter Highlights Three months ended June 30, 2016 2015 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annuity/maintenance software licenses 16,893 16,738 155 1% Perpetual software licenses 579 2,563 (1,984) -77% Total revenue 18,817 21,440 (2,623) -12% Operating profit 8,975 10,494 (1,519) -14% Net income 6,814 6,801 13 0% Earnings per share - basic 0.09 0.09 - 0% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Management's Discussion and Analysis
This Management's Discussion and Analysis ("MD&A") for Computer Modelling Group Ltd. ("CMG," the "Company", "we" or "our"), presented as at August 9, 2016, should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of the Company for the three months ended June 30, 2016 and the audited consolidated financial statements and MD&A for the years ended March 31, 2016 and 2015 contained in the 2016 Financial 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.
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 CoFlow 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 2016 Financial Report under the heading "Business Risks":
-- Economic conditions in the oil and gas industry
-- Reliance on key customers
-- Foreign exchange
-- Economic and political risks in countries where the Company currently
does or proposes to do business
-- Increased competition
-- Reliance on employees with specialized skills or knowledge
-- Protection of proprietary rights
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievement may vary materially from those expressed or implied by the forward-looking information contained in this MD&A. These factors should be carefully considered and readers are cautioned not to place undue reliance on forward-looking information, which speaks only as of the date of this MD&A. All subsequent forward-looking information attributable to the Company herein is expressly qualified in its entirety by the cautionary statements contained in or referred to herein. The Company does not undertake any obligation to release publicly any revisions to forward-looking information contained in this MD&A to reflect events or circumstances that occur after the date of this MD&A or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.
Non-IFRS Financial Measures
This MD&A includes certain measures which have not been prepared in accordance with IFRS such as "EBITDA", "direct employee costs" and "other corporate costs." Since these measures do not have a standard meaning prescribed by IFRS, they are unlikely to be comparable to similar measures presented by other issuers. Management believes that these indicators nevertheless provide useful measures in evaluating the Company's performance.
"Direct employee costs" include salaries, bonuses, stock-based compensation, benefits, commission expenses, and professional development. "Other corporate costs" include facility-related expenses, corporate reporting, professional services, marketing and promotion, computer expenses, travel, and other office-related expenses. Direct employee costs and other corporate costs should not be considered an alternative to total operating expenses as determined in accordance with IFRS. People-related costs represent the Company's largest area of expenditure; hence, management considers highlighting separately corporate and people-related costs to be important in evaluating the quantitative impact of cost management of these two major expenditure pools. See "Expenses" heading for a reconciliation of direct employee costs and other corporate costs to total operating expenses.
"EBITDA" refers to net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. EBITDA should not be construed as an alternative to net income as determined by IFRS. The Company believes that EBITDA is useful supplemental information as it provides an indication of the results generated by the Company's main business activities prior to consideration of how those activities are amortized, financed or taxed. See "EBITDA" heading for a reconciliation of EBITDA to net income.
Corporate Profile
CMG is a computer software technology company serving the oil and gas industry. The Company is a leading supplier of advanced process reservoir modelling software with a blue chip customer base of international oil companies and technology centers in approximately 60 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, Dubai, Bogota and Kuala Lumpur. CMG's Common Shares are listed on the Toronto Stock Exchange ("TSX") and trade under the symbol "CMG".
Quarterly Performance
Fiscal 2015(1)
($ thousands, unless
otherwise stated) Q2 Q3 Q4
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Annuity/maintenance
licenses 15,331 16,071 16,063
Perpetual licenses 2,661 7,150 2,162
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Software licenses 17,992 23,221 18,225
Professional services 1,739 1,985 2,147
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Total revenue 19,731 25,206 20,372
Operating profit 9,560 14,315 8,520
Operating profit (%) 48 57 42
EBITDA(4) 9,949 14,717 8,945
Profit before income and
other taxes 10,411 15,144 11,310
Income and other taxes 2,938 4,162 3,361
Net income for the period 7,473 10,982 7,949
Cash dividends declared
and paid 7,880 7,862 7,848
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Per share amounts -
($/share)
Earnings per share - basic 0.09 0.14 0.10
Earnings per share -
diluted 0.09 0.14 0.10
Cash dividends declared
and paid 0.10 0.10 0.10
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Quarterly Performance
Fiscal
Fiscal 2016(2) 2017(3)
($ thousands, unless
otherwise stated) Q1 Q2 Q3 Q4 Q1
----------------------------------------------------------------------------
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Annuity/maintenance
licenses 16,738 16,790 17,297 16,980 16,893
Perpetual licenses 2,563 1,095 2,729 782 579
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Software licenses 19,301 17,885 20,026 17,762 17,472
Professional services 2,139 1,240 1,191 1,254 1,345
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Total revenue 21,440 19,125 21,217 19,016 18,817
Operating profit 10,494 8,160 10,342 7,040 8,975
Operating profit (%) 49 43 49 37 48
EBITDA(4) 10,824 8,519 10,686 7,389 9,277
Profit before income and
other taxes 9,742 9,365 10,974 5,550 9,212
Income and other taxes 2,941 2,599 3,121 1,668 2,398
Net income for the period 6,801 6,766 7,853 3,882 6,814
Cash dividends declared
and paid 7,876 7,891 7,871 7,876 7,896
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Per share amounts -
($/share)
Earnings per share - basic 0.09 0.09 0.10 0.05 0.09
Earnings per share -
diluted 0.09 0.08 0.10 0.05 0.09
Cash dividends declared
and paid 0.10 0.10 0.10 0.10 0.10
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(1) Q2, Q3 and Q4 of fiscal 2015 include $0.2 million, $0.2 million and $0.3
million, respectively, in revenue that pertains to usage of CMG's
products in prior quarters.
(2) Q1, Q2, Q3 and Q4 of fiscal 2016 include $1.0 million, $0.3 million,
$0.7 million and $0.9 million, respectively, in revenue that pertains to
usage of CMG's products in prior quarters.
(3) Q1 of fiscal 2017 includes $1.8 million in revenue that pertains to
usage of CMG's products in prior quarters.
(4) EBITDA is defined as net income before adjusting for depreciation
expense, finance income, finance costs, and income and other taxes. See
"Non-IFRS Financial Measures".
Highlights
During the three months ended June 30, 2016, as compared to the same period of the previous fiscal year, CMG:
-- Realized a consistent amount of annuity/maintenance revenue; -- Experienced a decrease in total revenue of 12%; -- Maintained spending on research and development at 20% of total revenue.
During the three months ended June 30, 2016, CMG:
-- Realized basic earnings per share of $0.09; -- Declared and paid a regular dividend of $0.10 per share. Revenue Three months ended June 30, 2016 2015 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Software licenses 17,472 19,301 (1,829) -9% Professional services 1,345 2,139 (794) -37% ---------------------------------------------------------------------------- Total revenue 18,817 21,440 (2,623) -12% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Software license revenue - % of total revenue 93% 90% Professional services - % of total revenue 7% 10% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
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 decreased by 12% for the three months ended June 30, 2016, compared to the same period of the previous fiscal year, due to decreases in both software license revenue and professional services.
Software License Revenue
Software license revenue is made up of annuity/maintenance license fees charged for the use of the Company's software products, which is generally for a term of one year or less, and perpetual software license sales, whereby the customer purchases the-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. The majority of CMG's customers who have acquired perpetual software licenses subsequently purchase our maintenance package to ensure ongoing product support and access to current versions of CMG's software.
Three months ended June 30, 2016 2015 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annuity/maintenance licenses 16,893 16,738 155 1% Perpetual licenses 579 2,563 (1,984) -77% ---------------------------------------------------------------------------- Total software license revenue 17,472 19,301 (1,829) -9% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 97% 87% Perpetual as a % of total software license revenue 3% 13% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Total software license revenue decreased by 9% in the three months ended June 30, 2016, compared to the same period of the previous fiscal year, due to a decrease in perpetual license sales.
CMG's annuity/maintenance license revenue remained flat during the three months ended June 30, 2016, compared to the same period of the previous fiscal year, due to increases in South America and the Eastern Hemisphere being offset by decreases in Canada and the United States.
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. 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 (see the Quarterly Software License Revenue graph). If we were to remove annuity/maintenance revenue that pertains to usage of CMG's products in prior quarters from the three months ended June 30, 2016 and 2015, we will notice that the annuity/maintenance revenue decreased by 4%, instead of increasing by 1%.
Perpetual license sales decreased by 77% for the three months ended June 30, 2016, compared to the same period of the previous fiscal year, due to lower perpetual sales in all geographic areas, but more significantly in the United States, as a result of a large perpetual sale realized in that region in the first quarter of the previous fiscal year.
Software licensing under perpetual sales may fluctuate significantly between periods due to the uncertainty associated with the timing and the location where sales are generated. For this reason, even though we expect to achieve a certain level of aggregate perpetual sales on an annual basis, we expect to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year.
We can observe from the tables below that the exchange rates between the US and Canadian dollars during the three months ended June 30, 2016, compared to the same period of the previous fiscal year, had a positive impact on our reported license revenue.
The following table summarizes the US dollar-denominated revenue and the weighted average exchange rate at which it was converted to Canadian dollars:
Three months ended June 30, 2016 2015 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 10,148 10,459 (311) -3% Weighted average conversion rate 1.344 1.211 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 13,635 12,664 971 8% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 446 2,038 (1,592) -78% Weighted average conversion rate 1.299 1.242 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 579 2,531 (1,952) -77% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The following table quantifies the foreign exchange impact on our software license revenue:
Incremental Foreign
Three months ended June 30, 2015 License Exchange 2016
($ thousands) Growth Impact
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Annuity/maintenance license
sales 16,738 (1,193) 1,348 16,893
Perpetual license sales 2,563 (2,009) 25 579
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Total software license revenue 19,301 (3,202) 1,373 17,472
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Software Revenue by Geographic Segment
Three months ended June 30, 2016 2015 $ change % change
($ thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Annuity/maintenance revenue
Canada 4,778 5,994 (1,216) -20%
United States 4,041 4,323 (282) -7%
South America 2,896 1,602 1,294 81%
Eastern Hemisphere(1) 5,178 4,819 359 7%
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16,893 16,738 155 1%
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Perpetual revenue
Canada - 31 (31) -100%
United States 58 1,090 (1,032) -95%
South America 312 460 (148) -32%
Eastern Hemisphere 209 982 (773) -79%
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579 2,563 (1,984) -77%
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Total software license revenue
Canada 4,778 6,025 (1,247) -21%
United States 4,099 5,413 (1,314) -24%
South America 3,208 2,062 1,146 56%
Eastern Hemisphere 5,387 5,801 (414) -7%
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17,472 19,301 (1,829) -9%
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(1) Includes Europe, Africa, Asia and Australia.
During the three months ended June 30, 2016, on a geographic basis, total software license sales declined in all geographic segments, with the exception of South America, as compared to the same period of the previous fiscal year.
The Canadian market (representing 27% of year-to-date total software revenue) experienced a 20% decline in annuity/maintenance license sales during the three months ended June 30, 2016, compared to the same period of the previous fiscal year, due to a reduction in licensing by some customers. There were no perpetual sales realized in Canada during the three months ended June 30, 2016.
The United States market (representing 24% of year-to-date total software revenue) experienced a 7% decline in annuity/maintenance license sales during the three months ended June 30, 2016, compared to the same period of the previous fiscal year, due to decreased spending by existing customers. Perpetual revenue decreased by 95% during the three months ended June 30, 2016, compared to the same period of the previous fiscal year, as a result of a large perpetual sale in the first quarter of the previous fiscal year.
South America (representing 18% of year-to-date total software revenue) experienced an 81% increase in annuity/maintenance license sales during the three months ended June 30, 2016, compared to the same period of the previous fiscal year. The revenue in the South American region can be impacted by the variability of the amounts recorded from a customer for which revenue is recognized only when cash is received (see the discussion about revenue earned in the current period that pertains to usage of products in prior quarters above the Quarterly Software License Revenue graph). The latest payment from this customer was received during the current quarter. To provide a normalized comparison, if we were to remove revenue from this particular customer from the first quarter of the current and previous fiscal years, we will notice that the annuity/maintenance revenue decreased by 24%, instead of increasing by 81%, as compared to the same period of the previous fiscal year. The South American region experienced a small decrease in perpetual license sales during the three months ended June 30, 2016, compared to the same period of the previous fiscal year.
The Eastern Hemisphere (representing 31% of the year-to-date total software revenue) experienced an increase of 7% in annuity/maintenance license sales during the three months ended June 30, 2016, compared to the same period of the previous fiscal year, mainly driven by sales to existing customers. Fewer perpetual license sales were realized in the three months ended June 30, 2016, compared to the same period of the previous fiscal year.
Software license revenue in the United States, South America and the Eastern Hemisphere was positively affected by the strengthening of the US dollar during the three months ended June 30, 2016.
To view a graph of Quarterly Software License Revenue ($thousands), please visit the following link: http://media3.marketwire.com/docs/1065347a.pdf
Deferred Revenue
Fiscal Fiscal Fiscal
2017 2016 2015 $ change % change
($ thousands)
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Deferred revenue at:
Q1 (June 30) 26,154 27,006 (852) -3%
Q2 (September 30) 22,608 22,928 (320) -1%
Q3 (December 31) 17,243 19,180 (1,937) -10%
Q4 (March 31) 33,629 32,663 966 3%
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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 above table illustrates the normal trend in the deferred revenue balance from the beginning of the calendar year (which corresponds with Q4 of our fiscal year), when most renewals occur, to the end of the calendar year (which corresponds with Q3 of our fiscal year). Our fourth quarter corresponds with the beginning of the fiscal year for most oil and gas companies, representing a time when they enter a new budget year and sign/renew their contracts.
Deferred revenue as at Q1 of fiscal 2017 decreased by 3%, compared to Q1 of fiscal 2016, mainly as a result of reduced licensing in the Canadian region, partially offset by increases in the Eastern Hemisphere.
Professional Services Revenue
CMG recorded professional services revenue of $1.3 million for the three months ended June 30, 2016, which represented a decrease of $0.8 million compared to the same period of the previous fiscal year, due to a decline in project activity by our customers.
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 customer companies.
Expenses
Three months ended June 30, 2016 2015 $ change % change
($ thousands)
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Sales, marketing and
professional services 4,578 4,925 (347) -7%
Research and development 3,809 4,407 (598) -14%
General and administrative 1,455 1,614 (159) -10%
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Total operating expenses 9,842 10,946 (1,104) -10%
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Direct employee costs(1) 7,945 8,996 (1,051) -12%
Other corporate costs 1,897 1,950 (53) -3%
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9,842 10,946 (1,104) -10%
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(1) Includes salaries, bonuses, stock-based compensation, benefits,
commissions, and professional development. See "Non-IFRS Financial
Measures".
CMG's total operating expenses decreased by 10% for the three months ended June 30, 2016, compared to the same period of the previous fiscal year, mainly due to a decrease in direct employee costs.
Direct Employee Costs
As a technology company, CMG's largest area of expenditure is its people. Approximately 81% of the total operating expenses in the three months ended June 30, 2016 related to direct employee costs, compared to 82% recorded in the same period of the previous fiscal year. Staffing levels in the current fiscal year remained relatively consistent compared to the previous fiscal year. At June 30, 2016, CMG's full-time equivalent staff complement was 211 employees and consultants, slightly down from 213 full-time equivalent employees and consultants as at June 30, 2015. Direct employee costs decreased during the three months ended June 30, 2016, compared to the same period of the previous fiscal year, due to a lower annual bonus payout, a decrease in stock-based compensation expense, and the closure of the Venezuelan office in May of 2016.
Other Corporate Costs
Other corporate costs stayed relatively flat for the three months ended June 30, 2016, compared to the same period of the previous fiscal year.
Research and Development Three months ended June 30, 2016 2015 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Research and development (gross) 4,284 4,765 (481) -10% SR&ED credits (475) (358) (117) 33% ---------------------------------------------------------------------------- Research and development 3,809 4,407 (598) -14% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Research and development as a % of total revenue 20% 21% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
CMG maintains its belief that its strategy of growing long-term value for shareholders can only be achieved through continued investment in research and development. CMG works closely with its customers to provide solutions to complex problems related to proven and new advanced recovery processes.
The above research and development costs include $1.3 million of costs for CoFlow for the three months ended June 30, 2016 (2015 - $1.6 million). See discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties."
Research and development costs (gross) decreased by 10% during the three months ended June 30, 2016, compared to the same period of the previous fiscal year, mainly as a result of lower annual bonus payout and lower stock-based compensation expense.
SR&ED credits for the three months ended June 30, 2016 increased by 33% for the three months ended June 30, 2016, compared to the same period of the previous fiscal year, mainly due to an increase in hours spent on SR&ED-eligible projects.
Depreciation Three months ended June 30, 2016 2015 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Depreciation of property and equipment, allocated to: Sales, marketing and professional services 121 122 (1) -1% Research and development 151 170 (19) -11% General and administrative 30 38 (8) -21% ---------------------------------------------------------------------------- Total depreciation 302 330 (28) -8% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Depreciation in the three months ended June 30, 2016 decreased slightly, compared to the same period in the previous fiscal year.
Finance Income and Costs Three months ended June 30, 2016 2015 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Interest income 153 164 (11) -7% Net foreign exchange gain 84 - 84 100% ---------------------------------------------------------------------------- Total finance income 237 164 73 45% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net foreign exchange loss - (916) 916 -100% ---------------------------------------------------------------------------- Total finance costs - (916) 916 -100% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Interest income decreased slightly in the three months ended June 30, 2016, compared to the same period of the previous fiscal year, mainly due to lower interest rates.
CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 79% (2015 - 77%) of CMG's revenue for the three months ended June 30, 2016 is denominated in US dollars, whereas only approximately 23% (2015 - 26%) of CMG's total costs are denominated in US dollars.
The following chart shows the exchange rates used to translate CMG's US dollar-denominated working capital at June 30, 2016, 2015 and 2014 and the average exchange rates used to translate income statement items during the three months ended June 30, 2016, 2015 and 2014:
Three month
CDN$ to US$ At June 30 trailing average
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2014 0.9367 0.9231
2015 0.8017 0.8095
2016 0.7687 0.7771
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CMG recorded a net foreign exchange gain of $0.1 million for the three months ended June 30, 2016, compared to a net foreign exchange loss of $0.9 million recorded in the same period of the previous fiscal year. A slight strengthening of the US dollar during the current quarter contributed positively to the valuation of our US dollar-denominated working capital, as opposed to a weakening of the US dollar in the comparative quarter, which resulted in the net foreign exchange loss.
Income and Other Taxes
CMG's effective tax rate for the three months ended June 30, 2016 is reflected as 26.0% (2015 - 30.2%), whereas the prevailing Canadian statutory tax rate is now 27.0%. This difference is primarily due to tax adjustments on the closure of the Venezuelan office, partially offset by the non-tax deductibility of stock-based compensation expense.
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 Three months ended June 30, 2016 2015 $ change % change ($ thousands, except per share amounts) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total revenue 18,817 21,440 (2,623) -12% Operating expenses (9,842) (10,946) 1,104 -10% ---------------------------------------------------------------------------- Operating profit 8,975 10,494 (1,519) -14% Operating profit as a % of total revenue 48% 49% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net income for the period 6,814 6,801 13 0% Net income for the period as a % of total revenue 36% 32% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Basic earnings per share ($/share) 0.09 0.09 - 0% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Operating profit as a percentage of total revenue for the three months ended June 30, 2016 was at 48%, which is consistent with the same period of the previous fiscal year. Both revenue and operating expenses for the three months ended June 30, 2016 decreased by 12% and 10%, respectively, compared to the same period of the previous fiscal year. As a result, operating profit as a percentage of total revenue stayed consistent.
Net income for the period as a percentage of revenue increased to 36% from 32% for the three months ended June 30, 2016, compared to the same period of the previous fiscal year, due to a lower effective tax rate in the current quarter (see "Income and Other Taxes") and also due to a large foreign exchange loss recognized in the comparative quarter (see "Finance Income and Costs").
EBITDA Three months ended June 30, 2016 2015 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net income for the period 6,814 6,801 13 0% Add (deduct): Depreciation 302 330 (28) -8% Finance income (237) (164) (73) 45% Finance costs - 916 (916) -100% Income and other taxes 2,398 2,941 (543) -18% ---------------------------------------------------------------------------- EBITDA 9,277 10,824 (1,547) -14% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- EBITDA as a % of total revenue 49% 50% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
EBITDA decreased by 14% for the three months ended June 30, 2016, compared to the same period of the previous fiscal year. EBITDA as a percentage of total revenue for the three months ended June 30, 2016 remained consistent with the same period of the previous fiscal year.
Liquidity and Capital Resources Three months ended June 30, 2016 2015 $ change % change ($ thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash, beginning of period 72,680 75,342 (2,662) -4% Cash flow from (used in): Operating activities 9,537 9,572 (35) 0% Financing activities (6,797) (5,235) (1,562) 30% Investing activities (609) (313) (296) 95% ---------------------------------------------------------------------------- Cash, end of period 74,811 79,366 (4,555) -6% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Operating Activities
Cash flow generated from operating activities remained consistent in the three months ended June 30, 2016, compared to the same period of the previous fiscal year. Lower income tax installments were offset by the change in the deferred revenue balance.
Financing Activities
Cash used in financing activities during the three months ended June 30, 2016 increased by $1.6 million, compared to the same period of the previous fiscal year, mainly due to receiving lower proceeds from the issuance of Common Shares.
During the three months ended June 30, 2016, CMG employees and directors exercised options to purchase 159,000 Common Shares, which resulted in cash proceeds of $1.1 million (2015 - 418,000 options exercised to purchase Common Shares, which resulted in cash proceeds of $2.6 million).
In the three months ended June 30, 2016, CMG paid $7.9 million in dividends, representing the following quarterly dividends:
($ per share) Q1 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total dividends declared and paid 0.10 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
In the three months ended June 30, 2015, CMG paid $7.9 million in dividends, representing the following quarterly dividends:
($ per share) Q1 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total dividends declared and paid 0.10 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
On August 9, 2016, CMG announced the payment of a quarterly dividend of $0.10 per share on CMG's Common Shares. The dividend will be paid on September 15, 2016 to shareholders of record at the close of business on September 7, 2016. On August 9, 2016, the Board of Directors also approved the issuance of 893,000 options to purchase CMG's Common Shares in accordance with CMG's stock option plan.
Based on our expectation of profitability and cash-generating ability, we are cautiously optimistic that the company is well positioned to continue paying quarterly dividends.
On May 21, 2015, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on May 25, 2015 to purchase for cancellation up to 7,447,000 of its Common Shares. This NCIB ended on May 24, 2016, and during the year ended March 31, 2016, 589,000 Common Shares were purchased at market price for a total cost of $6.9 million (three months ended June 30, 2015 - Nil).
On May 20, 2016, the Company announced a NCIB commencing on May 25, 2016 to purchase for cancellation up to 7,485,000 of its Common Shares. During the three months ended June 30, 2016, no Common Shares were purchased.
Investing Activities
CMG's current needs for capital asset investment relate to computer equipment and office infrastructure costs, all of which will be funded internally. During the three months ended June 30, 2016, CMG spent $0.6 million on property and equipment additions, primarily composed of computing equipment and leasehold improvements. CMG has a capital budget of $18.0 million for fiscal 2017, which includes property and equipment additions for the new Calgary headquarters.
Liquidity and Capital Resources
At June 30, 2016, CMG has $74.8 million in cash, no debt, and has access to approximately $0.8 million under a line of credit with its principal banker. The company's primary non-operating uses of cash are for paying dividends and purchasing shares. Over fiscal 2017, we expect to invest approximately $18.0 million in infrastructure for the new Calgary headquarters.
During the three months ended June 30, 2016, 4,915,000 shares of CMG's public float were traded on the TSX. As at June 30, 2016, CMG's market capitalization based upon its June 30, 2016 closing price of $10.34 was $816.6 million.
Commitments, Off Balance Sheet Items and Transactions with Related Parties
The Company is the operator of CoFlow, a collaborative effort with its partners Shell International Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A. ("Petrobras") to jointly develop the newest generation of reservoir and production system simulation software. The project has been underway since 2006 and is expected to continue until ultimate delivery of the software. Petrobras' financial participation in the joint development project will end in December 2016 and the remaining partners' participation will be sized accordingly. The Company's share of costs associated with the project is estimated to be $6.5 million ($3.7 million net of overhead recoveries) for fiscal 2017. 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 pre-sold licenses, which are reflected as deferred revenue on the statement of financial position, and contractual obligations for office leases, which are estimated for our fiscal years as follows: 2017 - $1.9 million; 2018 - $3.6 million; 2019 - $4.7 million; 2020 - $4.6 million; 2021 - $4.6 million; thereafter - $82.0 million. These amounts include a twenty-year operating lease for the new Calgary headquarters, which will commence in fiscal 2018.
Business Risks and Critical Accounting Estimates
These remain unchanged from the factors detailed in CMG's 2016 Financial Report.
Changes in Accounting Policies
Accounting policies, presentation and methods of computation remain unchanged from those detailed in CMG's 2016 Financial Report.
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:
IFRS 9 Financial Instruments
Replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement on the classification and measurement of financial assets, amends the impairment model and includes a new general hedge accounting standard. The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The Company intends to adopt IFRS 9 in its consolidated financial statements beginning April 1, 2018. The Company does not expect IFRS 9 to have a material impact on the consolidated financial statements because of the nature of the Company's operations and the types of financial assets that it holds.
IFRS 15 Revenue from Contracts with Customers
Replaces the guidance in IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue - Barter Transactions Involving Advertising Services with a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The effective date for IFRS 15 is for annual periods beginning on or after January 1, 2018. IFRS 15 is available for early adoption. The Company intends to adopt IFRS 15 in its consolidated financial statements for the annual period beginning April 1, 2018. The extent of the impact of adoption of the standard has not yet been determined.
IFRS 16 Leases
Replaces the guidance in IAS 17 Leases and requires the recognition of most leases on the balance sheet. IFRS 16 effectively removes the classification of leases as either finance or operating leases and treats all leases as finance leases for lessees with exemptions for short-term leases where the term is twelve months or less and for leases of low value items. IFRS 16 is effective January 1, 2019, with earlier adoption permitted. The Company intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning April 1, 2019. The extent of the impact of adoption of the standard has not yet been determined.
Outstanding Share Data
The following table represents the number of Common Shares and options outstanding:
(thousands) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Common Shares 79,094 Options 6,833 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
On July 13, 2005, CMG adopted a rolling stock option plan which allows the Company to grant options to its employees, officers and directors to acquire Common Shares of up to 10% of the outstanding Common Shares at the date of grant. Based upon this calculation, at August 9, 2016, CMG could grant up to 7,909,000 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 2016 in accordance with the COSO control framework (2013). The evaluation confirmed the effectiveness of DC&P and ICFR at March 31, 2016. During our fiscal year 2017, we continue to monitor and review our controls and procedures.
During the three months ended June 30, 2016, 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
During the first quarter of fiscal 2017, our annuity and maintenance revenue remained consistent with the same period of the previous fiscal year, with increases in South America and the Eastern Hemisphere offset by decreases in Canada and the United States. The increase in South America was caused by timing of revenue recognition on one large contract for which revenue is recognized only when cash is received. Our revenue from foreign regions was positively affected by the strengthening of the US dollar. During the first quarter of fiscal 2017, we realized fewer perpetual sales than in the same period of the previous fiscal year, reflective of the budgetary cuts by our customers, but also due to a large perpetual sale in the United States in the first quarter of the previous fiscal year.
The ongoing reductions in the budgets and activity levels by our customers continue to affect the utilization levels of our software leading to uncertainty of the impact on our future revenue and operating margins. As a result, we have taken prudent measures, such as suspending employee recruitment and reducing discretionary spending, to control costs. In May 2016, as a result of ongoing adverse economic conditions in Venezuela and in the oil and gas industry in general, we made a decision to close our office in Caracas. During the current quarter, our EBITDA represented 49% of our total revenue, consistent with the same period of the previous year.
In a low oil price environment, when companies decrease new drilling programs, it becomes increasingly important to produce economically from existing assets and simulation becomes more valuable in optimizing this production. As producers look for ways to operate efficiently, we believe they will continue to seek reservoir simulation solutions to enhance their existing production and CMG will continue to provide the most advanced reservoir simulation tools to assist companies with their reservoir planning, management and optimization.
CMG's joint project to develop CoFlow, the newest generation of dynamic reservoir modelling systems, continued to progress towards the next release, R11, with a heavy focus on identified performance metrics. It is anticipated that R11 will be released to our partner companies, Shell and Petrobras, in the latter part of calendar 2016, to be used on target assets selected by our partners. While CMG and its partners remain committed to the ongoing development and the future success of the project, Petrobras has indicated its intention to end its financial participation in the project at the end of calendar 2016 and the remaining partners' participation will be sized in accordance with the development plan for R12.
During the first quarter, we maintained our quarterly dividend of $0.10 per share.
Kenneth M. Dedeluk
President and Chief Executive Officer
August 9, 2016
Condensed Consolidated Statements of Financial Position
UNAUDITED (thousands of Canadian $) June 30, 2016 March 31, 2016
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets
Current assets:
Cash 74,811 72,680
Trade and other receivables 9,278 21,093
Prepaid expenses 1,087 1,222
Prepaid income taxes (note 7) 2,764 3,173
----------------------------------------------------------------------------
87,940 98,168
Property and equipment 4,606 3,245
Deferred tax asset (note 7) 22 -
----------------------------------------------------------------------------
Total assets 92,568 101,413
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Trade payables and accrued liabilities 6,297 7,527
Income taxes payable (note 7) 247 800
Deferred revenue 26,154 33,629
----------------------------------------------------------------------------
32,698 41,956
Deferred tax liability (note 7) - 199
----------------------------------------------------------------------------
Total liabilities 32,698 42,155
----------------------------------------------------------------------------
Shareholders' equity:
Share capital 67,329 66,007
Contributed surplus 10,769 10,397
Retained earnings (deficit) (18,228) (17,146)
----------------------------------------------------------------------------
Total shareholders' equity 59,870 59,258
----------------------------------------------------------------------------
Total liabilities and shareholders' equity 92,568 101,413
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent events (notes 8(b) and 14)
See accompanying notes to condensed consolidated interim financial
statements.
Condensed Consolidated Statements of Operations and Comprehensive Income
Three months ended June 30, 2016 2015
UNAUDITED (thousands of Canadian $ except per
share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue (note 4) 18,817 21,440
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating expenses
Sales, marketing and professional services 4,578 4,925
Research and development (note 5) 3,809 4,407
General and administrative 1,455 1,614
----------------------------------------------------------------------------
9,842 10,946
----------------------------------------------------------------------------
Operating profit 8,975 10,494
Finance income (note 6) 237 164
Finance costs (note 6) - (916)
----------------------------------------------------------------------------
Profit before income and other taxes 9,212 9,742
Income and other taxes (note 7) 2,398 2,941
----------------------------------------------------------------------------
Net and total comprehensive income 6,814 6,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings Per Share
Basic (note 8(e)) 0.09 0.09
Diluted (note 8(e)) 0.09 0.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated interim financial
statements.
Condensed Consolidated Statements of Changes in Equity
Common Retained
UNAUDITED (thousands of Share Contributed Earnings Total
Canadian $) Capital Surplus (Deficit) Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, April 1, 2015 59,397 8,561 (4,502) 63,456
Total comprehensive income
for the period - - 6,801 6,801
Dividends paid - - (7,876) (7,876)
Shares issued for cash on
exercise of stock options
(note 8(b)) 2,641 - - 2,641
Stock-based compensation:
Current period expense - 881 - 881
Stock options exercised
(note 8(b)) 455 (455) - -
----------------------------------------------------------------------------
Balance, June 30, 2015 62,493 8,987 (5,577) 65,903
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, April 1, 2016 66,007 10,397 (17,146) 59,258
Total comprehensive income
for the period - - 6,814 6,814
Dividends paid - - (7,896) (7,896)
Shares issued for cash on
exercise of stock options
(note 8(b)) 1,099 - - 1,099
Stock-based compensation:
Current period expense - 595 - 595
Stock options exercised
(note 8(b)) 223 (223) - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, June 30, 2016 67,329 10,769 (18,228) 59,870
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated interim financial
statements.
Condensed Consolidated Statements of Cash Flows
Three months ended June 30, 2016 2015
UNAUDITED (thousands of Canadian $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from operating activities
Net income 6,814 6,801
Adjustments for:
Depreciation 302 330
Income and other taxes (note 7) 2,398 2,941
Stock-based compensation (note 8(d)) 595 881
Interest income (note 6) (153) (164)
----------------------------------------------------------------------------
9,956 10,789
Changes in non-cash working capital:
Trade and other receivables 11,819 12,345
Trade payables and accrued liabilities (2,284) (2,925)
Prepaid expenses 135 74
Deferred revenue (7,475) (5,657)
----------------------------------------------------------------------------
Cash generated from operating activities 12,151 14,626
Interest received 150 163
Income taxes paid (2,764) (5,217)
----------------------------------------------------------------------------
Net cash from operating activities 9,537 9,572
----------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from issue of common shares 1,099 2,641
Dividends paid (7,896) (7,876)
----------------------------------------------------------------------------
Net cash used in financing activities (6,797) (5,235)
----------------------------------------------------------------------------
Cash flows used in investing activities
Property and equipment additions (609) (313)
----------------------------------------------------------------------------
Increase in cash 2,131 4,024
Cash, beginning of period 72,680 75,342
----------------------------------------------------------------------------
Cash, end of period 74,811 79,366
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to condensed consolidated interim financial
statements.
Notes to Condensed Consolidated Financial Statements
For the three months ended June 30, 2016 and 2015 (unaudited).
1. Reporting Entity:
Computer Modelling Group Ltd. ("CMG") is a company domiciled in Alberta, Canada and is incorporated pursuant to the Alberta Business Corporations Act, with its Common Shares listed on the Toronto Stock Exchange under the symbol "CMG". The address of CMG's registered office is Suite 200, 1824 Crowchild Trail N.W., Calgary, Alberta, Canada, T2M 3Y7. The condensed consolidated interim financial statements as at and for the three months ended June 30, 2016 comprise CMG and its subsidiaries (together referred to as the "Company"). The Company is a computer software technology company engaged in the development and licensing of reservoir simulation software. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities.
2. Basis of Preparation:
(a) Statement of Compliance:
These condensed consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting. Accordingly, the condensed consolidated interim financial statements do not include all of the information required for full annual financial statements, and should be read in conjunction with the Company's most recent annual consolidated financial statements as at and for the year ended March 31, 2016 which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), and using the accounting policies disclosed in note 3 of the Company's annual consolidated financial statements as at and for the year ended March 31, 2016.
These unaudited condensed consolidated interim financial statements as at and for the three months ended June 30, 2016 were authorized for issuance by the Board of Directors on August 9, 2016.
(b) Basis of Measurement:
The condensed consolidated financial statements have been prepared on the historical cost basis, which is based on the fair value of the consideration at the time of the transaction.
(c) Functional and Presentation Currency:
The condensed consolidated financial statements are presented in Canadian dollars, which is the functional currency of CMG and its subsidiaries. All financial information presented in Canadian dollars has been rounded to the nearest thousand.
(d) Use of Estimates, Judgments and Assumptions:
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses for the period. Estimates and underlying assumptions are based on historical experience and other assumptions that are considered reasonable in the circumstances and are reviewed on an on-going basis. Actual results may differ from such estimates and it is possible that the differences could be material. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. In preparing these condensed consolidated financial statements, the significant judgments made by management in applying the Company's accounting policies and the key sources of estimation uncertainty are the same as those applied in the annual IFRS consolidated financial statements for the year ended March 31, 2016.
3. Significant Accounting Policies:
The condensed consolidated interim financial statements should be read in conjunction with the Company's annual consolidated financial statements for the year ended March 31, 2016 prepared in accordance with IFRS applicable to those annual consolidated financial statements. The same accounting policies, presentation and methods of computation have been followed in these condensed consolidated interim financial statements as were applied in the Company's consolidated financial statements for the year ended March 31, 2016.
4. Revenue:
Three months ended June 30, 2016 2015
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Software licenses 17,472 19,301
Professional services 1,345 2,139
----------------------------------------------------------------------------
18,817 21,440
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Research and Development:
Three months ended June 30, 2016 2015
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Research and development 4,284 4,765
Scientific research and experimental
development ("SR&ED") investment tax credits (475) (358)
----------------------------------------------------------------------------
3,809 4,407
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Finance Income and Finance Costs:
Three months ended June 30, 2016 2015
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest income 153 164
Net foreign exchange gain 84 -
----------------------------------------------------------------------------
Finance income 237 164
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net foreign exchange loss - (916)
----------------------------------------------------------------------------
Finance costs - (916)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Income and Other Taxes:
The major components of income tax expense are as follows:
Three months ended June 30, 2016 2015
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current year income taxes 2,804 3,022
Deferred tax recovery (222) (186)
Foreign withholding and other taxes (184) 105
----------------------------------------------------------------------------
2,398 2,941
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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:
Three months ended June 30, 2016 2015
(thousands of $, unless otherwise stated)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Combined statutory rate 27.00% 26.50%
----------------------------------------------------------------------------
Expected income tax 2,487 2,582
Non-deductible costs 162 239
Effect of tax rates in foreign jurisdictions 6 32
Withholding taxes (181) 69
Other (76) 19
----------------------------------------------------------------------------
2,398 2,941
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The components of the Company's deferred tax asset (liability) are as follows:
(thousands of $) June 30, 2016 March 31, 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Tax liability on SR&ED investment tax credits (74) (287) Tax asset on property and equipment 96 88 ---------------------------------------------------------------------------- Net deferred tax asset (liability) 22 (199) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
All movement in deferred tax assets and liabilities is recognized through net income of the respective period.
Prepaid income taxes and current income taxes payable have not been offset as the amounts relate to income taxes levied by different tax authorities on different taxable entities.
8. Share Capital:
(a) Authorized:
An unlimited number of Common Shares, an unlimited number of Non-Voting Shares, and an unlimited number of Preferred Shares, issuable in series.
(b) Issued:
(thousands of shares) Common Shares ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance, April 1, 2015 78,487 Issued for cash on exercise of stock options 418 ---------------------------------------------------------------------------- Balance, June 30, 2015 78,905 ---------------------------------------------------------------------------- Balance, April 1, 2016 78,819 Issued for cash on exercise of stock options 159 ---------------------------------------------------------------------------- Balance, June 30, 2016 78,978 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Subsequent to June 30, 2016, 116,000 stock options were exercised for cash proceeds of $779,000.
On May 20, 2015, the Board of Directors considered the merits of renewing the Company's shareholder rights plan on or before the third-year anniversary of shareholder approval of the plan and determined that it was in the best interest of the Company to continue to have a shareholder rights plan in place. Upon careful review, the Board of Directors agreed to approve an amended and restated rights plan (the "Amended and Restated Rights Plan") between the Company and Valiant Trust Company (which has since been succeeded by Computershare Trust Company of Canada as the Company's transfer agent and registrar). The Amended and Restated Rights Plan is similar in all respects to the existing shareholder rights plan, with the exception of certain minor amendments. The Amended and Restated Rights Plan was approved by the Company's shareholders on July 9, 2015.
(c) Common Shares Buy-back:
On May 21, 2015, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on May 25, 2015 to purchase for cancellation up to 7,447,000 of its Common Shares. This NCIB ended on May 24, 2016, and during the year ended March 31, 2016, 589,000 Common Shares were purchased at market price for a total cost of $6,906,000 (three months ended June 30, 2015 - Nil).
On May 20, 2016, the Company announced a NCIB commencing on May 25, 2016 to purchase for cancellation up to 7,485,000 of its Common Shares. During the three months ended June 30, 2016, no Common Shares were purchased.
(d) Stock-based Compensation Plan:
The Company adopted a rolling stock option plan as of July 13, 2005, which was reaffirmed by the Company's shareholders on July 10, 2014, which allows it to grant options to acquire Common Shares of up to 10% of the outstanding Common Shares at the date of grant. Based upon this calculation, at June 30, 2016, the Company could grant up to 7,898,000 stock options. Pursuant to the stock option plan, the maximum term of an option granted cannot exceed five years from the date of grant. The outstanding stock options vest as to 50% after the first year anniversary, from date of grant, and then vest as to 25% of the total options granted after each of the second and third year anniversary dates.
The following table outlines changes in stock options:
Three months ended Year ended
June 30, 2016 March 31, 2016
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
(thousands) ($/share) (thousands) ($/share)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at beginning
of period 7,182 11.54 7,000 10.76
Granted 12 10.16 1,265 12.32
Exercised (159) 6.90 (921) 6.52
Forfeited (85) 12.37 (162) 12.48
----------------------------------------------------------------------------
Outstanding at end of
period 6,950 11.63 7,182 11.54
----------------------------------------------------------------------------
Options exercisable at
end of period 4,189 11.04 4,379 10.89
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The range of exercise prices of stock options outstanding and exercisable at June 30, 2016 is as follows:
Outstanding Exercisable
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Number of Exercise
Exercise Price Options Contractual Price Options Price
($/option) (thousands) Life (years) ($/option) (thousands) ($/option)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6.50 to 9.55 1,589 0.9 8.60 1,589 8.60
9.56 to 12.26 2,119 2.1 12.18 1,570 12.19
12.27 to 12.85 1,233 4.1 12.32 16 12.63
12.86 to 14.97 2,009 3.1 13.04 1,014 13.05
----------------------------------------------------------------------------
6,950 2.5 11.63 4,189 11.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The fair value of stock options granted was estimated using the Black-Scholes option pricing model under the following assumptions:
Three months ended Year ended
June 30, 2016 March 31, 2016
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair value at grant date ($/option) 1.52 to 1.54 1.44 to 2.39
Share price at grant date ($/share) 10.16 11.06 to 13.98
Risk-free interest rate (%) 0.67 to 0.73 0.41 to 0.87
Estimated hold period prior to exercise
(years) 3 to 4 2 to 4
Volatility in the price of common shares
(%) 29 to 30 25 to 28
Dividend yield per common share (%) 4.03 2.92 to 3.69
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company recognized total stock-based compensation expense for the three months ended June 30, 2016 of $595,000 (three months ended June 30, 2015 - $881,000).
(e) Earnings Per Share:
The following table summarizes the earnings and weighted average number of Common Shares used in calculating basic and diluted earnings per share:
Three months ended June 2016 2015
30,
(thousands except per
share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares Per Share Earnings Shares Per Share
($) Outstanding ($/share) ($) Outstanding ($/share)
----------------------------------------------------------------------------
Basic 6,814 78,877 0.09 6,801 78,635 0.09
Dilutive
effect of
stock options 243 1,087
----------------------------------------------------------------------------
Diluted 6,814 79,120 0.09 6,801 79,722 0.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the three months ended June 30, 2016, Nil options (three months ended June 30, 2015 - 138,000 options), were excluded from the computation of the weighted-average number of diluted shares outstanding because their effect was not dilutive.
9. Financial Instruments:
Financial assets include cash and trade and other receivables which are classified as loans and receivables and are measured at amortized cost which approximates their fair values.
Financial liabilities include trade payables and accrued liabilities which are classified as other financial liabilities and are measured at amortized cost which approximates their fair values.
10. Commitments:
(a) Research Commitments:
The Company is the operator of a joint project, a collaborative effort with its partners Shell International Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A. ("Petrobras"), to jointly develop CoFlow, the newest generation of reservoir and production system simulation software (note 13). The Company's share of costs associated with the project is estimated to be $6.5 million ($3.7 million net of overhead recoveries) for fiscal 2017.
(b) Lease Commitments:
The Company has operating lease commitments relating to its office premises with minimum annual lease payments as follows:
As at June 30, 2016 2015
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Less than one year 2,320 2,368
Between one and five years 18,301 15,323
More than five years 80,816 85,395
----------------------------------------------------------------------------
101,437 103,086
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company entered into a twenty year operating lease commitment relating to its new Calgary headquarters commencing in calendar 2017. The minimum annual lease payments have been reflected in the above schedule. In addition to the operating lease commitment, the Company expects to invest approximately $18.0 million in infrastructure for the new headquarters in fiscal 2017. This estimate is based on the Company's assessment of its infrastructure requirements and the contractors' current rates.
11. Line Of Credit:
The Company has arranged for a $1.0 million line of credit with its principal banker, which can be drawn down by way of a demand operating credit facility or may be used to support letters of credit. As at June 30, 2016, US $215,000 (March 31, 2016 - US $215,000) had been reserved on this line of credit for letters of credit supporting a performance bond.
12. Segmented Information:
The Company is organized into one operating segment represented by the development and licensing of reservoir simulation software. The Company provides professional services, consisting of support, training, consulting, and contract research activities, to promote the use and development of its software; however, these activities are not evaluated as a separate business segment.
Revenues and property and equipment of the Company arise in the following geographic regions:
Property and
(thousands of $) Revenue equipment
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended
June 30, As at June 30,
2016 2015 2016 2015
----------------------------------------------------------------------------
Canada 5,333 6,732 4,104 2,071
United States 4,148 5,528 235 288
South America 3,761 3,045 212 286
Eastern Hemisphere(1) 5,575 6,135 55 56
----------------------------------------------------------------------------
18,817 21,440 4,606 2,701
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes Europe, Africa, Asia and Australia.
In the three months ended June 30, 2016 and 2015, no customer represented 10% or more of total revenue.
13. Joint Operation:
The Company is the operator of a joint software development project to develop CoFlow, which gives the Company exclusive rights to commercialize the jointly developed software while the other partners will have unlimited software access for their internal use. Accordingly, the Company records its proportionate share of costs incurred on the project (37.04%) as research and development costs within the condensed consolidated statements of operations and comprehensive income.
For the three months ended June 30, 2016, CMG included $1.3 million (three months ended June 30, 2015 - $1.6 million) of costs in its condensed consolidated statements of operations and comprehensive income related to this joint project.
Additionally, the Company is entitled to charge its partners for various services provided as operator, which were recorded in revenue as professional services and amounted to $0.8 million during the three months ended June 30, 2016 (three months ended June 30, 2015 - $0.8 million).
14. Subsequent Events:
On August 9, 2016, the Board of Directors declared a quarterly cash dividend of $0.10 per share on its Common Shares, payable on September 15, 2016, to all shareholders of record at the close of business on September 7, 2016.
On August 9, 2016, the Board of Directors also approved the issuance of 893,000 options to purchase CMG's Common Shares in accordance with CMG's stock option plan.
Contacts: Computer Modelling Group Ltd. Kenneth M. Dedeluk President & CEO (403) 531-1300 [email protected] Computer Modelling Group Ltd. Sandra Balic Vice President, Finance & CFO (403) 531-1300 [email protected] www.cmgl.ca
Source: Computer Modelling Group Ltd.
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