Computer Modelling Group Ltd. (TSX:CMG) ("CMG" or the "Company") is very pleased
to report our financial results for the fiscal year ended March 31, 2014.
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 May 21, 2014, should
be read in conjunction with the audited consolidated financial statements and
related notes of the Company for the years ended March 31, 2014 and 2013.
Additional information relating to CMG, including our Annual Information Form,
can be found at www.sedar.com. The financial data contained herein have been
prepared in accordance with International Financial Reporting Standards ("IFRS")
and, unless otherwise indicated, all amounts in this report are expressed in
Canadian dollars and rounded to the nearest thousand.
CORPORATE PROFILE
CMG is a computer software technology company serving the oil and gas industry.
The Company is a leading supplier of advanced processes reservoir modelling
software with a blue chip client base of international oil companies and
technology centers in more than 50 countries. The Company also provides
professional services consisting of highly specialized support, consulting,
training, and contract research activities. CMG has sales and technical support
services based in Calgary, Houston, London, Caracas, Dubai, Bogota and Kuala
Lumpur. CMG's Common Shares are listed on the Toronto Stock Exchange ("TSX") and
trade under the symbol "CMG".
ANNUAL PERFORMANCE
March 31, March 31, March 31,
($ thousands, unless otherwise stated) 2014 2013 2012
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Annuity/maintenance licenses 57,139 54,555 42,858
Perpetual licenses 9,074 8,406 12,724
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Software licenses 66,213 62,961 55,582
Professional services 8,290 5,659 5,452
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Total revenue 74,503 68,620 61,034
Operating profit 36,782 34,290 31,604
Operating profit (%) 49% 50% 52%
EBITDA(1) 38,373 35,829 32,831
Net income for the year 27,630 24,822 23,391
Cash dividends declared and paid 30,304 27,905 20,499
Total assets 100,268 83,421 74,892
Total shares outstanding 39,210 38,129 37,307
Trading price per share at March 31 29.16 21.09 15.90
Market capitalization at March 31 1,143,351 804,130 593,170
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Per share amounts - ($/share)
Earnings per share - basic 0.71 0.66 0.63
Earnings per share - diluted 0.70 0.64 0.62
Cash dividends declared and paid 0.78 0.74 0.555
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(1) EBITDA is defined as net income before adjusting for depreciation
expense, finance income, finance costs, and income and other taxes. See
"Non-IFRS Financial Measures".
QUARTERLY
PERFORMANCE
Fiscal 2013(1) Fiscal 2014(2)
($ thousands, unless
otherwise stated) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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Annuity/maintenance
licenses 13,179 12,012 14,004 15,359 13,958 13,153 14,278 15,750
Perpetual licenses 2,070 2,671 1,365 2,300 2,331 1,829 2,942 1,972
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Software licenses 15,249 14,683 15,369 17,659 16,289 14,982 17,220 17,722
Professional
services 1,216 1,390 1,433 1,620 1,827 2,202 2,007 2,254
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Total revenue 16,465 16,073 16,802 19,279 18,116 17,184 19,227 19,976
Operating profit 8,105 8,032 8,276 9,877 9,350 8,296 9,575 9,561
Operating profit (%) 49 50 49 51 52 48 50 48
EBITDA 8,423 8,425 8,687 10,294 9,725 8,675 9,972 10,001
Profit before income
and other taxes 8,577 7,703 8,556 10,314 9,999 8,133 10,249 10,761
Income and other
taxes 2,487 2,342 2,437 3,061 2,918 2,525 3,044 3,025
Net income for the
period 6,090 5,361 6,119 7,253 7,081 5,608 7,205 7,736
Cash dividends
declared and paid 9,736 6,020 6,050 6,099 8,841 6,994 7,020 7,449
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Per share amounts -
($/share)
Earnings per share -
basic 0.16 0.14 0.16 0.19 0.19 0.15 0.19 0.20
Earnings per share -
diluted 0.16 0.14 0.16 0.19 0.18 0.14 0.18 0.19
Cash dividends
declared and paid 0.26 0.16 0.16 0.16 0.23 0.18 0.18 0.19
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(1) Q1, Q2, Q3 and Q4 of fiscal 2013 include $2.1 million, $0.2 million,
$1.8 million and $2.6 million, respectively, in revenue that pertains to
usage of CMG's products in prior quarters.
(2) Q1, Q2, Q3 and Q4 of fiscal 2014 include $1.2 million, $0.2 million,
$0.9 million and $1.8 million, respectively, in revenue that pertains to
usage of CMG's products in prior quarters.
HIGHLIGHTS
During the year ended March 31, 2014, as compared to the prior fiscal year, CMG:
-- Increased annuity/maintenance revenue by 5%
-- Increased total revenue by 9%
-- Increased operating profit by 7%
-- Increased spending on research and development by 17%
-- Increased EBITDA by 7%
-- Increased total dividends declared and paid by 5%
-- Realized earnings per share of $0.71, representing an 8% increase
REVENUE
For the three months ended March 31, 2014 2013 $ change % change
($ thousands)
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Software licenses 17,722 17,659 63 0%
Professional services 2,254 1,620 634 39%
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Total revenue 19,976 19,279 697 4%
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Software license revenue - % of total
revenue 89% 92%
Professional services - % of total
revenue 11% 8%
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For the year ended March 31, 2014 2013 $ change % change
($ thousands)
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Software licenses 66,213 62,961 3,252 5%
Professional services 8,290 5,659 2,631 46%
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Total revenue 74,503 68,620 5,883 9%
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Software license revenue - % of total
revenue 89% 92%
Professional services - % of total
revenue 11% 8%
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CMG's revenue is comprised of software license sales, which provide the majority
of professional services.
Total revenue increased by 4% for the three months ended March 31, 2014,
compared to the same period of the previous fiscal year, mainly due to an
increase in professional services.
Total revenue increased by 9% in the year ended March 31, 2014, compared to the
previous fiscal year, due to increases in both software license revenue and
professional services.
SOFTWARE LICENSE REVENUE
Software license revenue is made up of annuity/maintenance license fees charged
for the use of the Company's software products which is generally for a term of
one year or less and perpetual software license sales, whereby the customer
purchases the-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.
For the three months ended March 31, 2014 2013 $ change % change
($ thousands)
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Annuity/maintenance licenses 15,750 15,359 391 3%
Perpetual licenses 1,972 2,300 (328) -14%
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Total software license revenue 17,722 17,659 63 0%
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Annuity/maintenance as a % of total
software license revenue 89% 87%
Perpetual as a % of total software
license revenue 11% 13%
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For the year ended March 31, 2014 2013 $ change % change
($ thousands)
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Annuity/maintenance licenses 57,139 54,555 2,584 5%
Perpetual licenses 9,074 8,406 668 8%
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Total software license revenue 66,213 62,961 3,252 5%
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Annuity/maintenance as a % of total
software license revenue 86% 87%
Perpetual as a % of total software
license revenue 14% 13%
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Total software license revenue remained flat in the three months ended March 31,
2014, compared to the same period of the previous fiscal year. However, total
software license revenue grew by 5% for the year ended March 31, 2014, compared
to the previous fiscal year, as a result of increases in both the
annuity/maintenance and perpetual revenue streams.
CMG's annuity/maintenance license revenue increased by 3% and 5% during the
three months and year ended March 31, 2014, respectively, compared to the same
periods of the previous fiscal year. These increases were driven by sales to new
and existing clients as well as an increase in maintenance revenue tied to
perpetual sales. In addition, annuity/maintenance license revenue for the three
months and year ended March 31, 2014, compared to the same periods of the
previous year, was positively affected by the weakening of the Canadian dollar.
All of our regions, except South America, experienced solid growth in
annuity/maintenance revenue during both the three months and year ended March
31, 2014, for the reasons described above, but the most significant growth came
from our US market.
Our annuity/maintenance revenue is impacted by the revenue recognition on a
multi-year contract for which revenue recognition criteria are fulfilled only at
the time of the receipt of funds (see the discussion about revenue earned in the
current period that pertains to usage of products in prior quarters above the
"Quarterly Software License Revenue" graph.) The variability of the amounts and
timing of the payments received may skew the comparison of the recorded
annuity/maintenance revenue amounts between periods. To provide a normalized
comparison, if we were to remove revenue from this particular customer from the
fourth quarter of the current and previous fiscal years, we will notice that the
annuity/maintenance revenue increased by 11%, instead of 3%, as compared to the
same period of the previous year. Similarly, if we were to remove revenue from
this particular customer from the years ended March 31, 2014 and 2013, we will
notice that the annuity/maintenance revenue increased by 12%, instead of 5%, as
compared to the previous year. We are pleased to report that subsequent to the
year ended March 31, 2014 we received an additional quarterly payment from this
particular customer which will be reflected in Q1 of fiscal 2015 results. Given
our long-term relationship with this customer, and their on-going use of our
licenses, we expect to continue to receive payments from them; however, the
amount and timing are uncertain and will continue to be recorded on a cash
basis, which may introduce some variability in our reported quarterly
annuity/maintenance revenue results.
Perpetual license sales decreased by 14% for the three months ended March 31,
2014, compared to the same period of the previous fiscal year, due to a decrease
in Canada and South America partially offset by growth in perpetual sales
generated by the US and Eastern Hemisphere.
Perpetual license sales for the year ended March 31, 2014 increased by 8%,
compared to the previous fiscal year, due to growth in perpetual sales generated
by the US, South America and Eastern Hemisphere partially offset by a decrease
in Canada.
Software licensing under perpetual sales is a significant part of CMG's
business, but may fluctuate significantly between periods due to the uncertainty
associated with the timing and the location where sales are generated. For this
reason, even though we expect to achieve a certain level of aggregate perpetual
sales on an annual basis, we expect to observe fluctuations in the quarterly
perpetual revenue amounts throughout the fiscal year.
We can observe from the table below that the exchange rates between the US and
Canadian dollars during the three months and year ended March 31, 2014, compared
to the same periods 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:
For the three months ended
March 31, 2014 2013 $ change % change
($ thousands)
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US dollar annuity/maintenance
license sales US$ 10,462 10,777 (315) -3%
Weighted average conversion
rate 1.072 1.006
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Canadian dollar equivalent CDN$ 11,212 10,838 374 3%
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US dollar perpetual license
sales US$ 1,808 1,475 333 23%
Weighted average conversion
rate 1.091 1.015
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Canadian dollar equivalent CDN$ 1,972 1,497 475 32%
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For the year ended March 31, 2014 2013 $ change % change
($ thousands)
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US dollar annuity/maintenance US$
license sales 38,030 35,138 2,892 8%
Weighted average conversion
rate 1.030 1.003
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Canadian dollar equivalent CDN$ 39,178 35,231 3,947 11%
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US dollar perpetual license US$
sales 8,234 5,634 2,600 46%
Weighted average conversion
rate 1.048 1.004
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Canadian dollar equivalent CDN$ 8,627 5,657 2,970 53%
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The following table quantifies the foreign exchange impact on our software
license revenue:
For the three months ended Incremental Foreign
March 31, 2014 Q4 2013 License Exchange Q4 2014
($ thousands) Balance Growth Impact Balance
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Annuity/maintenance license
sales 15,359 (300) 691 15,750
Perpetual license sales 2,300 (466) 138 1,972
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Total software license revenue 17,659 (766) 829 17,722
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For the year ended March 31, Incremental Foreign
2014 2013 License Exchange 2014
($ thousands) Balance Growth Impact Balance
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Annuity/maintenance license
sales 54,555 1,537 1,047 57,139
Perpetual license sales 8,406 308 360 9,074
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Total software license revenue 62,961 1,845 1,407 66,213
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REVENUE BY GEOGRAPHIC SEGMENT
For the three months ended March 31, 2014 2013 $ change % change
($ thousands)
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Annuity/maintenance revenue
Canada 6,225 5,805 420 7%
United States 3,236 2,799 437 16%
South America 2,616 3,399 (783) -23%
Eastern Hemisphere(1) 3,673 3,356 317 9%
15,750 15,359 391 3%
Perpetual revenue
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Canada 67 803 (736) -92%
United States 787 331 456 138%
South America 33 232 (199) -86%
Eastern Hemisphere 1,085 934 151 16%
1,972 2,300 (328) -14%
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Total software license revenue
Canada 6,292 6,608 (316) -5%
United States 4,023 3,130 893 29%
South America 2,649 3,631 (982) -27%
Eastern Hemisphere 4,758 4,290 468 11%
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17,722 17,659 63 0%
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For the year ended March 31, 2014 2013 $ change % change
($ thousands)
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Annuity/maintenance revenue
Canada 23,120 21,708 1,412 7%
United States 12,778 10,558 2,220 21%
South America 8,027 10,169 (2,142) -21%
Eastern Hemisphere(1) 13,214 12,120 1,094 9%
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57,139 54,555 2,584 5%
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Perpetual revenue
Canada 514 2,344 (1,830) -78%
United States 1,641 993 648 65%
South America 1,385 741 644 87%
Eastern Hemisphere 5,534 4,328 1,206 28%
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9,074 8,406 668 8%
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Total software license revenue
Canada 23,634 24,052 (418) -2%
United States 14,419 11,551 2,868 25%
South America 9,412 10,910 (1,498) -14%
Eastern Hemisphere 18,748 16,448 2,300 14%
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66,213 62,961 3,252 5%
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(1) Includes Europe, Africa, Asia and Australia.
On a geographic basis, total software license sales increased in the US and
Eastern Hemisphere markets and decreased in the Canadian and South American
markets during the three months and year ended March 31, 2014, as compared to
the same periods of the previous fiscal year. The most significant growth came
from our annuity/maintenance license sales, with increases experienced across
all regions, with the exception of South America, for the three months and year
ended March 31, 2014, compared to the same periods of the previous fiscal year.
The Canadian market (representing 36% of year-to-date total software revenue)
experienced increases in annuity/maintenance license sales during the three
months and year ended March 31, 2014, compared to the same periods of the
previous fiscal year. These increases were supported by the sales to both new
and existing clients. Perpetual sales experienced decreases during the three
months and year ended March 31, 2014, compared to the same periods of the
previous fiscal year, due to the fluctuations inherent in the perpetual revenue
stream. The Canadian market continues to be the leader in generating total
software license revenue and, particularly, in generating recurring
annuity/maintenance revenue as evidenced by the quarterly year-over-year
increases of 38%, 10% and 10% recorded during Q4 2013, Q1 2014 and Q3 2014,
respectively (annuity/maintenance was relatively flat in Q2 2014, compared to
the same period in the previous fiscal year). The growth trend has continued
into the fourth quarter of the current fiscal year with the recorded increase of
7%.
The US market (representing 22% of year-to-date total software revenue) had the
most significant growth in annuity/maintenance license sales during the three
months and year ended March 31, 2014, compared to the same periods of the
previous fiscal year, driven by sales to new and existing clients. Perpetual
license sales also grew during the three months and year ended March 31, 2014,
compared to the same periods of the previous fiscal year. We have continued to
see successive increases in the annuity/maintenance license sales in the US as
evidenced by the quarterly year-over-year increases of 20%, 32%, 16% and 21%
recorded during Q4 2013, Q1 2014, Q2 2014, and Q3 2014, respectively. This
double digit growth trend has continued into the fourth quarter of the current
fiscal year with the recorded increase of 16%.
South America (representing 14% of year-to-date total software revenue)
experienced decreases of 23% and 21% in annuity/maintenance revenue during the
three months and year ended March 31, 2014, respectively, compared to the same
periods of the previous fiscal year. The revenue recognition in our South
American region is affected by the revenue recorded on the long-term contract
for which revenue is recognized on a cash basis (see the discussion about
revenue earned in the current period that pertains to usage of products in prior
quarters above the "Quarterly Software License Revenue" graph). To provide a
normalized comparison, if we were to remove revenue from this particular
customer from the fourth quarter of the current and previous fiscal years, we
will notice that the South America annuity/maintenance revenue increased by 29%,
instead of decreasing by 23%, as compared to the same period of the previous
year. Similarly, if we were to remove revenue from this particular customer from
the years ended March 31, 2014 and 2013, we will notice that the
annuity/maintenance revenue increased by 20%, instead of decreasing by 21%, as
compared to the previous year which demonstrates the continued growth in the
South American market. The South American region experienced a decrease in
perpetual license sales during the three months ended March 31, 2014, compared
to the same period of the previous fiscal year, while there was an increase in
perpetual license sales during the year ended March 31, 2014, compared to the
previous fiscal year.
Eastern Hemisphere (representing 28% of the year-to-date total software revenue)
grew annuity/maintenance license sales during both the three months and year
ended March 31, 2014, compared to the same periods of the previous fiscal year,
due to sales to both new and existing customers. Perpetual license sales also
increased in both the three months and year ended March 31, 2014, compared to
the same periods of the previous fiscal year.
Movements in perpetual sales across regions are indicative of the unpredictable
nature of the timing and location of perpetual license sales. Overall, our
recurring annuity/maintenance revenue base continues to be strong and growing
across all regions. We will continue to focus our efforts on increasing our
license sales to both existing and new clients and, supported by our product
suite offering and our customer-oriented approach, we will endeavor to continue
expanding our market share globally.
As footnoted in the Quarterly Performance table, in the normal course of
business, CMG may complete the negotiation of certain annuity/maintenance
contracts and/or fulfill revenue recognition requirements within a current
quarter that includes usage of CMG's products in prior quarters. This situation
particularly affects contracts negotiated with countries that face increased
economic and political risks leading to 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 revenue recognition is
satisfied in the current period for products provided in previous quarters.
QUARTERLY SOFTWARE LICENSE REVENUE ($THOUSANDS)
To view the figure associated with this release, please visit the following
link: http://media3.marketwire.com/docs/CMGL_QSLR.pdf.
1. Q1, Q2, Q3 and Q4 of fiscal 2010 include $0.4 million, $0.4 million,
$0.3 million and $0.4 million, respectively, in revenue that pertains to
usage of CMG's products in prior quarters.
2. Q1, Q2, Q3 and Q4 of fiscal 2011 include $1.1 million, $0.2 million,
$0.3 million and $0.1 million, respectively, in revenue that pertains to
usage of CMG's products in prior quarters.
3. Q1, Q2, Q3 and Q4 of fiscal 2012 include $0.3 million, $0.04 million,
$2.6 million, and $2.7 million, respectively, in revenue that pertains
to usage of CMG's products in prior quarters.
4. Q1, Q2, Q3 and Q4 of fiscal 2013 include $2.1 million, $0.2 million,
$1.8 million, and $2.6 million, respectively, in revenue that pertains
to usage of CMG's products in prior quarters.
5. Q1, Q2, Q3 and Q4 of fiscal 2014 include $1.2 million, $0.2 million,
$0.9 million, and $1.8 million, respectively, in revenue that pertains
to usage of CMG's products in prior quarters.
DEFERRED REVENUE
Fiscal Fiscal
2014 2013 $ change % change
($ thousands)
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Deferred revenue at:
Q1 22,014 18,779 3,235 17%
Q2 19,346 18,241 1,105 6%
Q3 18,069 15,510 2,559 16%
Q4 29,531 25,289 4,242 17%
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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 increase in deferred revenue year-over-year as at the end of Q1, Q2, Q3 and
Q4 is reflective of the growth in annuity/maintenance license sales. The
variation within the year is due to the timing of renewals of annuity and
maintenance contracts that are skewed to the beginning of the calendar year
which explains the increase in deferred revenue balance at Q4 compared to the
balances at Q1, Q2 and Q3. Our fourth quarter corresponds to 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 at March 31, 2014 increased by 17% compared to the prior fiscal
year due to both the renewal of existing and signing of new software licenses
and maintenance contracts in the quarter.
PROFESSIONAL SERVICES REVENUE
CMG recorded professional services revenue of $2.3 million for the three months
ended March 31, 2014, representing an increase of $0.6 million compared to the
same period of the previous fiscal year, due to both an increase in project
activities by our clients and due to entering into a large consulting agreement
with one of our clients. Professional services for the year ended March 31, 2014
amounted to $8.3 million, representing a $2.6 million increase compared to the
previous fiscal year, which again resulted from both an increase in project
activities by our clients and entering into a large consulting agreement with
one of our clients in the current fiscal year.
Professional services revenue consists of specialized consulting, training, and
contract research activities. CMG performs consulting and contract research
activities on an ongoing basis, but such activities are not considered to be a
core part of our business and are primarily undertaken to increase our knowledge
base and hence expand the technological abilities of our simulators in a funded
manner, combined with servicing our customers' needs. In addition, these
activities are undertaken to market the capabilities of our suite of software
products with the ultimate objective to increase software license sales. Our
experience is that consulting activities are variable in nature as both the
timing and dollar magnitude of work are dependent on activities and budgets
within client companies.
EXPENSES
For the three months ended March 31, 2014 2013 $ change % change
($ thousands)
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Sales, marketing and professional
services 4,539 4,140 399 10%
Research and development 3,917 3,456 461 13%
General and administrative 1,959 1,806 153 8%
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Total operating expenses 10,415 9,402 1,013 11%
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Direct employee costs(i) 8,385 7,507 878 12%
Other corporate costs 2,030 1,895 135 7%
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10,415 9,402 1,013 11%
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For the year ended March 31, 2014 2013 $ change % change
($ thousands)
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Sales, marketing and professional
services 16,144 15,473 671 4%
Research and development 14,623 12,517 2,106 17%
General and administrative 6,954 6,340 614 10%
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Total operating expenses 37,721 34,330 3,391 10%
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Direct employee costs(i) 30,292 27,309 2,983 11%
Other corporate costs 7,429 7,021 408 6%
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37,721 34,330 3,391 10%
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(i)Includes salaries, bonuses, stock-based compensation, benefits,
commissions, and professional development.
CMG's total operating expenses increased by 11% and 10% for the three months and
year ended March 31, 2014, respectively, compared to the same periods of the
previous fiscal year, due to increases in both direct employee and other
corporate costs.
DIRECT EMPLOYEE COSTS
As a technology company, CMG's largest area of expenditure is for its people.
Approximately 80% of the total operating expenses in the year ended March 31,
2014 related to staff costs, which is consistent with 80% recorded in the
comparative period of the previous fiscal year. Staffing levels for the current
fiscal year grew in comparison to the previous fiscal year to support our
continued growth. At March 31, 2014, CMG's staff complement was 195 employees
and consultants, up from 173 employees as at March 31, 2013. Direct employee
costs increased during the three months and year ended March 31, 2014, compared
to the same periods of the previous fiscal year, due to staff additions,
increased levels of compensation, commissions and related benefits.
OTHER CORPORATE COSTS
Other corporate costs increased by 7% for the three months ended March 31, 2014,
compared to the same period of the previous fiscal year, mainly due to
computer-related purchases and the increase in other office costs.
Other corporate costs increased by 6% for the year ended March 31, 2014,
compared to the previous fiscal year, mainly due to computer-related purchases
and the increase in other office costs partially offset by the inclusion of the
costs associated with CMG's biennial technical symposium which took place during
the first quarter of the previous fiscal year.
RESEARCH AND DEVELOPMENT
For the three months ended March 31, 2014 2013 $ change % change
($ thousands)
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Research and development (gross) 4,359 3,906 453 12%
SR&ED credits (442) (450) 8 -2%
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Research and development 3,917 3,456 461 13%
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Research and development as a % of
total revenue 20% 18%
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For the year ended March 31, 2014 2013 $ change % change
($ thousands)
----------------------------------------------------------------------------
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Research and development (gross) 16,439 14,364 2,075 14%
SR&ED credits (1,816) (1,847) 31 -2%
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Research and development 14,623 12,517 2,106 17%
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Research and development as a % of
total revenue 20% 18%
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CMG maintains its belief that its strategy of growing long-term value for
shareholders can only be achieved through continued investment in research and
development. CMG works closely with its customers to provide solutions to
complex problems related to proven and new advanced recovery processes.
The above research and development includes CMG's share of joint research and
development costs associated with the DRMS project of $1.0 million and $4.0
million for the three months and year ended March 31, 2014, respectively (2013 -
$0.9 million and $3.1 million). See discussion under "Commitments, Off Balance
Sheet Items and Transactions with Related Parties."
The increases of 12% and 14% in our gross spending on research and development
for the three months and year ended March 31, 2014, respectively, compared to
the same periods of the previous fiscal year, demonstrate our continued
commitment to advancement of our technology which is the focal part of our
business strategy.
Research and development costs, net of research and experimental development
("SR&ED") credits, increased by 13% and 17% during the three months and year
ended March 31, 2014, respectively, compared to the same periods of the previous
fiscal year, due to increased employee compensation costs and costs associated
with computing resources.
SR&ED credits remained relatively flat for the three months and year ended March
31, 2014, compared to the same periods of the previous fiscal year, due to the
increase in SR&ED eligible expenditures offset by the decrease in the Federal
SR&ED input tax credit rate from 20% to 15% effective January 1, 2014 lowering
our average rate for fiscal 2014.
DEPRECIATION
For the three months ended March 31, 2014 2013 $ change % change
($ thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation of property and
equipment, allocated to:
Sales, marketing and professional
services 118 126 (8) -6%
Research and development 247 239 8 3%
General and administrative 75 52 23 44%
----------------------------------------------------------------------------
Total depreciation 440 417 23 6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the year ended March 31, 2014 2013 $ change % change
($ thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation of property and
equipment, allocated to:
Sales, marketing and professional
services 423 467 (44) -9%
Research and development 939 880 59 7%
General and administrative 229 192 37 19%
----------------------------------------------------------------------------
Total depreciation 1,591 1,539 52 3%
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----------------------------------------------------------------------------
Depreciation in the three months and year ended March 31, 2014 was relatively
flat as compared to the same periods of the previous fiscal year.
FINANCE INCOME
For the three months ended March 31, 2014 2013 $ change % change
($ thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest income 165 139 26 19%
Net foreign exchange gain 1,035 298 737 247%
----------------------------------------------------------------------------
Total finance income 1,200 437 763 175%
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----------------------------------------------------------------------------
For the year ended March 31, 2014 2013 $ change % change
($ thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest income 644 548 96 18%
Net foreign exchange gain 1,716 311 1,405 452%
----------------------------------------------------------------------------
Total finance income 2,360 859 1,501 175%
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----------------------------------------------------------------------------
Interest income increased in the three months and year ended March 31, 2014,
compared to the same periods of the prior fiscal year, mainly due to investing
larger cash balances.
CMG is impacted by the movement of the US dollar against the Canadian dollar as
approximately 72% (2013 - 67%) of CMG's revenue for the year ended March 31,
2014 is denominated in US dollars, whereas only approximately 24% (2013 - 23%)
of CMG's total costs are denominated in US dollars.
CDN$ to US$ At March 31 Yearly average
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2012 1.0009 1.0106
2013 0.9846 0.9963
2014 0.9047 0.9452
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CMG recorded a net foreign exchange gain of $1.0 million and $1.7 million for
the three months and year ended March 31, 2014, respectively, compared to a net
foreign exchange gain of $0.3 million for both the three months and year ended
March 31, 2013. These gains were a result of a weakening in the Canadian dollar
which contributed positively to the valuation of our US-denominated working
capital.
INCOME AND OTHER TAXES
CMG's effective tax rate for the year ended March 31, 2014 is reflected as
29.41% (2013 - 28.30%), whereas the prevailing Canadian statutory tax rate is
now 25.0%. This difference is primarily due to a combination of the non-tax
deductibility of stock-based compensation expense and the benefit of foreign
withholding taxes being realized only as a tax deduction as opposed to a tax
credit.
The benefit recorded in CMG's books on the SR&ED investment tax credit program
impacts deferred income taxes. The investment tax credit earned in the current
fiscal year is utilized by CMG to reduce income taxes otherwise payable for the
current fiscal year and the federal portion of this benefit bears an inherent
tax liability as the amount of the credit is included in the subsequent year's
taxable income for both federal and provincial purposes. The inherent tax
liability on these investment tax credits is reflected in the year the credit is
earned as a non-current deferred tax liability and then, in the following fiscal
year, is transferred to income taxes payable.
OPERATING PROFIT AND NET INCOME
For the three months ended March 31, 2014 2013 $ change % change
($ thousands, except per share
amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total revenue 19,976 19,279 697 4%
Operating expenses (10,415) (9,402) (1,013) 11%
----------------------------------------------------------------------------
Operating profit 9,561 9,877 (316) -3%
Operating profit as a % of total
revenue 48% 51%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income for the period 7,736 7,253 483 7%
Net income for the period as a % of
total revenue 39% 38%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per share ($/share) 0.20 0.19 0.01 5%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the year ended March 31, 2014 2013 $ change % change
($ thousands, except per share
amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total revenue 74,503 68,620 5,883 9%
Operating expenses (37,721) (34,330) (3,391) 10%
----------------------------------------------------------------------------
Operating profit 36,782 34,290 2,492 7%
Operating profit as a % of total
revenue 49% 50%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income for the period 27,630 24,822 2,808 11%
Net income for the period as a % of
total revenue 37% 36%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per share ($/share) 0.71 0.66 0.05 8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating profit as a percentage of total revenue for the three months and year
ended March 31, 2014 was at 48% and 49%, respectively, compared to 51% and 50%
recorded in the same periods of the previous fiscal year. While our total
revenue for the year ended March 31, 2014 grew by 9%, as compared to the same
period of the previous fiscal year, our operating expenses grew by 10%, having a
slight negative impact on our operating profit. Our high levels of operating
profit as a percentage of revenue demonstrate our ability to continue to
effectively manage our costs.
Net income for the period as a percentage of revenue increased to 39% for the
three months ended March 31, 2014, compared to 38% for the same period of the
previous fiscal year.
Net income for the period as a percentage of revenue increased to 37% for the
year ended March 31, 2014, compared to 36% for the previous fiscal year.
We have continued to maintain our profitability by focusing our efforts on
increasing license sales while, at the same time, effectively controlling our
operating costs. Managing these variables will continue to be imperative to our
future success.
EBITDA
For the three months ended March 31, 2014 2013 $ change % change
($ thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income for the period 7,736 7,253 483 7%
Add (deduct):
Depreciation 440 417 23 6%
Finance income (1,200) (437) (763) 175%
Income and other taxes 3,025 3,061 (36) -1%
----------------------------------------------------------------------------
EBITDA 10,001 10,294 (293) -3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EBITDA as a % of total revenue 50% 53%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the year ended March 31, 2014 2013 $ change % change
($ thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income for the period 27,630 24,822 2,808 11%
Add (deduct):
Depreciation 1,591 1,539 52 3%
Finance income (2,360) (859) (1,501) 175%
Income and other taxes 11,512 10,327 1,185 11%
----------------------------------------------------------------------------
EBITDA 38,373 35,829 2,544 7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EBITDA as a % of total revenue 52% 52%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EBITDA decreased by 3% for the three months ended March 31, 2014 and increased
by 7% for the year ended March 31, 2014, compared to the same periods of the
previous fiscal year.
EBITDA as a percent of total revenue for the three months ended March 31, 2014
was at 50%, compared to 53% recorded in the same period of the previous fiscal
year, while it remained consistent at 52% for the year ended March 31, 2014,
compared to the previous fiscal year.
Our high EBITDA as a percent of total revenue provides indication of our ability
to keep growing our revenue while effectively managing costs.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2014 2013 $ change % change
($ thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash, beginning of period 64,708 52,236 12,472 24%
Cash flow from (used in):
Operating activities 13,396 11,155 2,241 20%
Financing activities (5,324) (3,718) (1,606) 43%
Investing activities (370) (254) (116) 46%
----------------------------------------------------------------------------
Cash, end of period 72,410 59,419 12,991 22%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the year ended March 31, 2014 2013 $ change % change
($ thousands)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash, beginning of period 59,419 55,374 4,045 7%
Cash flow from (used in):
Operating activities 32,860 28,073 4,787 17%
Financing activities (19,030) (22,014) 2,984 -14%
Investing activities (839) (2,014) 1,175 -58%
----------------------------------------------------------------------------
Cash, end of period 72,410 59,419 12,991 22%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Cash flow generated from operating activities increased by $2.2 million in the
three months ended March 31, 2014, compared to the same period of the previous
fiscal year, mainly due to the increase in net income, and the changes in the
deferred revenue and prepaid expense balances, partially offset by the change in
the trade accounts payable balance.
Cash flow generated from operating activities increased by $4.8 million in the
year ended March 31, 2014, compared to the previous fiscal year, mainly due to
the increase in net income, the change in deferred revenue balance and the net
impact of changes in income taxes payable partially offset by both the increase
in trade receivables, caused by the timing differences of when the sales are
made and when the resulting receivables are collected and the change in the
trade accounts payable balance.
FINANCING ACTIVITIES
Cash used in financing activities during the three months ended March 31, 2014
increased by $1.6 million, compared to the same period of the previous fiscal
year, as a result of paying larger dividends.
Cash used in financing activities during the year ended March 31, 2014 decreased
by $3.0 million, compared to the previous fiscal year, due to receiving higher
proceeds from the issuance of Common Shares partially offset by paying larger
dividends. In addition, in the first quarter of the previous fiscal year, CMG
spent $1.6 million on buying back Common Shares.
During the year ended March 31, 2014, CMG employees and directors exercised
options to purchase 1,081,000 Common Shares, which resulted in cash proceeds of
$11.3 million.
In the year ended March 31, 2014, CMG paid $30.3 million in dividends,
representing the following quarterly dividends:
2014
($ per share) Q1 Q2 Q3 Q4 Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Dividends declared and paid 0.18 0.18 0.18 0.19 0.73
Special dividend declared and
paid 0.05 - - - 0.05
----------------------------------------------------------------------------
Total dividends declared and
paid 0.23 0.18 0.18 0.19 0.78
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the year ended March 31, 2013, CMG paid $27.9 million in dividends,
representing the following quarterly dividends:
2013
($ per share) Q1 Q2 Q3 Q4 Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Dividends declared and paid 0.16 0.16 0.16 0.16 0.64
Special dividend declared and
paid 0.10 - - - 0.10
----------------------------------------------------------------------------
Total dividends declared and
paid 0.26 0.16 0.16 0.16 0.74
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On May 21, 2014, CMG announced the payment of a quarterly dividend of $0.20 per
share on CMG's Common Shares. The dividend will be paid on June 13, 2014 to
shareholders of record at the close of business on June 6, 2014.
In the fiscal 2012 Management's Discussion and Analysis, we reported that,
beginning in fiscal 2013, we would increase the relative proportion of dividends
paid quarterly and lower the amount paid as a special dividend at the end of the
fiscal year, in order to provide a more regular income stream to our
shareholders throughout the year. The above tables demonstrate an increase in
the regular quarterly dividend from $0.64 per share in fiscal 2013 to $0.73 per
share in fiscal 2014 and the lowering of the special dividend paid between the
two years. Our total dividend paid also increased from $0.74 per share in fiscal
2013 to $0.78 per share paid in fiscal 2014, representing a 5% increase. The
special dividend, if any, will continue to be determined annually based on the
Company's, performance, however, our focus will remain on a sustainable dividend
paid quarterly.
Based on our expectation of solid profitability and cash-generating ability
driven by the predictability of our software revenue base and effective
management of costs, we are cautiously optimistic that the company is well
positioned for future growth which will enable us to continue to pay quarterly
dividends.
On April 16, 2012, the Company announced a Normal Course Issuer Bid ("NCIB")
commencing on April 18, 2012 to purchase for cancellation up to 3,416,000 of its
Common Shares. During the year ended March 31, 2013, a total of 91,000 Common
Shares were purchased at market price for a total cost of $1,551,000.
On April 29, 2013, the Company announced a NCIB commencing on May 1, 2013 to
purchase for cancellation up to 3,538,000 of its Common Shares. During the year
ended March 31, 2014, no common shares were purchased.
On May 5, 2014, the Company announced a NCIB commencing on May 5, 2014 to
purchase for cancellation up to 3,720,000 of its Common Shares.
INVESTING ACTIVITIES
CMG's current needs for capital asset investment relate to computer equipment
and will be funded internally. During the year ended March 31, 2014, CMG
expended $0.8 million on property and equipment additions, primarily composed of
computing equipment, and has a capital budget of $2.3 million for fiscal 2015.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2014, CMG has $72.4 million in cash, no debt, and has access to
just over $0.8 million under a line of credit with its principal banker.
During the year ended March 31, 2014, 9,377,000 shares of CMG's public float
were traded on the TSX. As at March 31, 2014 CMG's market capitalization based
upon its March 31, 2014 closing price of $29.16 was $1.1 billion.
COMMITMENTS, OFF BALANCE SHEET ITEMS AND TRANSACTIONS WITH RELATED PARTIES
The Company is the operator of the DRMS research and development project (the
"DRMS Project"), a collaborative effort with its partners Shell and Petrobras,
to jointly develop the newest generation of reservoir and production system
simulation software. The project has been underway since 2006 and, with the
ongoing support of the participants, it is expected to continue until ultimate
delivery of the software. The Company's share of costs associated with the
project is estimated to be $5.9 million ($3.1 million net of overhead
recoveries) for fiscal 2015. CMG plans to continue funding its share of the
project costs associated with the development of the newest generation reservoir
simulation software system from internally generated cash flows.
CMG has very little in the way of other ongoing material contractual obligations
other than for pre-sold licenses which are reflected as deferred revenue on its
statement of financial position, and contractual obligations for office leases
which are estimated as follows: 2015 - $2.2 million per year; 2016 - $2.3
million; 2017 - $1.2 million; 2018 and 2019 - $0.2 million per year.
The leases for our Calgary offices expire in fiscal 2017 and we are currently in
the process of negotiating the lease of new premises.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements 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 dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. By their nature, these estimates are subject to
estimation uncertainty. The effect on the financial statements of changes in
such estimates in future periods could be material and would be accounted for in
the period in which the estimates are revised and in any future periods
affected.
Revenue recognition
Revenue consists primarily of software license fees with some fees for
professional services. We recognize revenue in accordance with the current rules
of IFRS. We follow specific and detailed guidelines in measuring revenue;
however, certain judgments affect the application of our revenue recognition
policies.
Software license revenue is comprised of annuity/maintenance license fees
charged for the use of our 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. We recognize software license revenue 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.
Certain software license agreements contain multiple-element arrangements as
they may also include maintenance fees. Judgment is used in determining a fair
value of each element of a contract.
Professional services revenue earned from certain consulting contracts is
recognized by the stage of completion of the transaction determined using the
percentage-of-completion method. Judgment is used in determining progress of
each contract at period end. In assessing revenue recognition, judgment is also
used in determining the ability to collect the corresponding account receivable.
Functional currency
The determination of the functional currency is a matter of determining the
primary economic environment in which an entity operates. IAS 21, The Effects of
Changes in Foreign Exchange Rates, sets out a number of factors to apply in
making the determination of the functional currency. However, applying the
factors in IAS 21 does not always result in a clear indication of functional
currency. Where IAS 21 factors indicate differing functional currencies within a
subsidiary, the Company uses judgment in the ultimate determination of that
subsidiary's functional currency, including an assessment of the nature of the
relationship between the Company and the subsidiary. Judgment was applied in the
determination of the functional currency of certain of the Company's operating
entities.
Research and development
Assumptions are made in respect to the eligibility of certain research and
development projects in the calculation of SR&ED investment tax credits which
are netted against the research and development costs in the statement of
operations. SR&ED claims are subject to audits by relevant taxation authorities
and the actual amount may change depending on the outcome of such audits.
Stock-based compensation
Assumptions and estimates are used in determining the inputs used in the
Black-Scholes option pricing model, including assumptions regarding volatility,
dividend yield, risk-free interest rates, forfeiture estimates and expected
option lives.
Property and equipment
Estimates are used in determining useful economic lives of property and
equipment for the purposes of calculating depreciation.
Deferred income taxes
Assumptions and estimates are made regarding the amount and timing of
realization and/or settlement of the temporary differences between the
accounting carrying value of the Company's assets versus the tax basis of those
assets, and the tax rates at which the differences will be recovered or settled
in the future.
NEW ACCOUNTING STANDARDS AND INTERPRETATIONS ADOPTED:
The Company adopted the following new standards and interpretations effective as
of April 1, 2013:
IFRS 10 - Consolidated Financial Statements
Replaces the guidance in IAS 27 Consolidated and Separate Financial Statements
and SIC-12 Consolidation - Special Purpose Entities, and provides a single model
to be applied in the control analysis for all investees, including entities that
currently are special purpose entities in the scope of SIC-12. The Company
adopted IFRS 10 in its consolidated financial statements for the annual period
beginning on April 1, 2013. IFRS 10 did not have a material impact on the
consolidated financial statements.
IFRS 11 - Joint Arrangements
Replaces the guidance in IAS 31 Interest in Joint Ventures, and essentially
carves out of previous jointly controlled entities, those arrangements which
although structured through a separate vehicle, such separation is ineffective
and the parties to the arrangement have rights to the assets and obligations for
the liabilities and are accounted for as joint operations in a fashion
consistent with jointly controlled assets/operations under IAS 31. In addition,
under IFRS 11 joint ventures must now use the equity method of accounting. The
Company adopted IFRS 11 in its consolidated financial statements for the annual
period beginning on April 1, 2013. IFRS 11 did not have a material impact on the
consolidated financial statements.
IFRS 12 - Disclosure of Interests in Other Entities
Contains the disclosure requirements for entities that have interest in
subsidiaries, joint arrangements, associates and/or unconsolidated structured
entities. The Company adopted IFRS 12 in its consolidated financial statements
for the annual period beginning April 1, 2013. The amendments did not have a
material impact on the consolidated financial statements, because of the nature
of the Company's interests in other entities.
IFRS 13 - Fair Value Measurement
Replaces the fair value measurement guidance contained in individual IFRSs with
a single source of fair value measurement guidance. The Company adopted IFRS 13
prospectively in its consolidated financial statements for the annual period
beginning on April 1, 2013. IFRS 13 did not have a material impact on the
consolidated financial statements.
Amendments to IAS 1 - Presentation of Financial Statements
Require an entity present separately the items of other comprehensive income
that may be reclassified to profit or loss in the future from those that would
never be reclassified to profit or loss. The Company adopted the amendments in
its consolidated financial statements for the annual period beginning on April
1, 2013. As the amendments only require changes in the presentation of items in
other comprehensive income, the amendments to IAS 1 did not have a material
impact on the consolidated financial statements.
Amendments IFRS 7 - Offsetting Financial Assets and Liabilities
Contain new disclosure requirements for offsetting financial assets and
liabilities and netting arrangements. The Company adopted the amendments to IFRS
7 in its consolidated financial statements for the annual period beginning on
April 1, 2013. The amendments did not have a material impact on the consolidated
financial statements.
ACCOUNTING STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE
The following standards and interpretations have not been adopted by the Company
as they apply to future periods:
Standard/Interpretation Nature of impending change Impact on CMG's
in accounting policy financial statements
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS 9, Financial
Instruments IFRS 9 replaces the The mandatory effective
guidance in IAS 39 date of IFRS 9 has been
In November 2009 the Financial Instruments: left open by the IASB.
IASB issued IFRS 9 Recognition and Early application of
Financial Instruments, Measurement on the IFRS is permitted. The
in October 2010 the IASB classification and Company does not intend
published amendments to measurement of financial to adopt IFRS 9 in its
IFRS 9 and in November assets. The Standard consolidated financial
2013 the IASB published eliminates the existing statements for the
further amendments to IAS 39 categories of held annual period beginning
IFRS 9. to maturity, available- April 1, 2014. The
for-sale and loans and Company does not expect
The mandatory effective receivable. IFRS 9 to have a
date of IFRS 9 has been material impact on the
left open by the IASB. Financial assets will be consolidated financial
Earlier application of classified into one of two statements because of
IFRS 9 is permitted. categories on initial the nature of the
recognition: Company's operations an
of financial assets that
- financial assets it holds.
measured at amortized
cost; or
- financial assets
measured at fair value.
Gains and losses on
remeasurement of financial
assets measured at fair
value will be recognized
in profit or loss, except
that for an investment in
an equity instrument which
is not held-for-trading,
IFRS 9 provides, on
initial recognition, an
irrevocable election to
present all fair value
changes from the
investment in other
comprehensive income
(OCI). The election is
available on an individual
share-by-share basis.
Amounts presented in OCI
will not be reclassified
to profit or loss at a
later date.
Under IFRS 9, for
financial liabilities
measured at fair value
under the fair value
option, changes in fair
value attributable to
changes in credit risk
will be recognized in OCI,
with the remainder of the
change recognized in
profit or loss.
IFRS 9 incorporates a new
hedge accounting standard,
aligning hedge accounting
more closely with risk
management.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amendments to IAS 32, The amendments to IAS 32 The Company intends to
Offsetting Financial clarify that an entity adopt the amendments to
Assets and Liabilities currently has a legally IAS 32 in its
enforceable right to set- consolidated financial
In December 2011, the off if that right is: statements for the
IASB published annual period beginning
Offsetting Financial - not contingent on a April 1, 2014. The
Assets and Financial future event; and Company does not expect
Liabilities and issued - enforceable both in the the amendments to have a
new presentation normal course of business material impact on the
requirements in IAS 32 and in the event of consolidated financial
Financial Instruments: default, insolvency or statements.
Presentation. bankruptcy of the entity
and all counterparties.
The effective date for
the amendments to IAS 32 The amendments to IAS 32
is annual periods also clarify when a
beginning on or after settlement mechanism
January 1, 2014. The provides for net
amendments are to be settlement or gross
applied retrospectively. settlement that is
equivalent to net
settlement.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Standard/Interpretation Nature of impending change Impact on CMG's
in accounting policy financial statements
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amendments to IAS These amendments to IAS 36 The Company intends to
36,Impairment of Assets clarify IASB's original adopt the amendments to
intention to require: IAS 36 in its
In May 2013, the IASB consolidated financial
published Recoverable - the disclosure of the statements for the
Amount Disclosures for recoverable amount of annual period beginning
Non-Financial Assets impaired assets; and April 1, 2014. The
detailing narrow scope - additional disclosures Company does not expect
amendments to IAS 36 about the measurement of the amendments to have a
Impairment of Assets. the recoverable amount of material impact on the
impaired assets when the consolidated financial
The effective date for recoverable amount is statements.
the amendments to IAS 36 based on fair value less
is annual period costs of disposal,
beginning on or after including the discount
January 1, 2014. These rate when a present value
amendments are to be technique is used to
applied retrospectively measure the recoverable
and earlier adoption is amount.
permitted for periods
when IFRS 13 is applied.
----------------------------------------------------------------------------
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OUTSTANDING SHARE DATA
The following table represents the number of Common Shares and options
outstanding:
As at May 21, 2014
(thousands)
----------------------------------------------------------------------------
Common Shares 39,278
Options 2,861
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On July 13, 2005, CMG adopted a rolling stock option plan which allows the
Company to grant options to its employees and directors to acquire Common Shares
of up to 10% of the outstanding Common Shares at the date of grant. Based upon
this calculation, at May 21, 2014, CMG could grant up to 3,927,000 stock
options.
On May 21, 2014, the Company's Board of Directors approved a two-for-one stock
split of the Company's issued and outstanding Common Shares. Shareholders of
record at the close of business on June 25, 2014, will receive one additional
Common Share for every Common Share owned. The Company's Common Shares are
expected to commence trading on the Toronto Stock Exchange on a post-split basis
on June 23, 2014. All share data contained in this MD&A are presented on a
pre-split basis.
BUSINESS RISKS
The Company has the following business risks:
COMMODITY PRICE RISK
CMG's customers are oil and gas companies and it might, therefore, be assumed
that its financial results are significantly impacted by commodity prices. CMG's
actual experience of growth in software license revenues during depressed oil
price markets makes us believe that software license sales are influenced more
by the utility of the software as opposed to the prevailing commodity price but
different circumstances could prevail in the future. Low commodity prices and
resulting lower cash flow in the industry could impact how customers license CMG
software; one could expect sales of perpetual licenses to decrease in favour of
leasing software on a term basis.
Volatility in commodity prices could have an impact on CMG's consulting
business; however, this business segment generates less than 10% of total
revenues and CMG has no current plans to significantly expand this area of
business.
CREDIT AND LIQUIDITY RISKS
Our product demand is dependent on the customers' overall spending plans, which
are driven by commodity prices and the availability of capital. This risk is
mitigated by having a diversified customer base with the majority of revenue
being derived from larger entities which are not as affected by the market
volatility or cyclical downturns in commodity prices. In addition, our
diversified geographic profile helps to mitigate the effects of economic
recessions and instability experienced in any particular geographic region.
The Company mitigates the collection risk by closely monitoring its accounts
receivable and assessing creditworthiness of its customers. The Company has not
had any significant losses to date.
In terms of liquidity, the Company held $72.4 million of cash at March 31, 2014,
which more than covers its obligations and it has over $0.8 million of the
credit facility available for its use. The Company's cash is held with a
reputable banking institution. For the described reasons, we believe that our
liquidity risk is low.
SALES VARIABILITY RISK
CMG's software license revenue consists of annuity/maintenance software
licensing, 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
licensing under perpetual sales is a significant part of CMG's business but is
more variable in nature as the purchase decision, and its timing, fluctuate with
clients' needs and budgets. CMG has found that a number of clients prefer to
acquire perpetual software licenses rather than leasing the software on an
annual basis. The experience over the last few years is that a number of these
clients are purchasing additional licenses to allow more users to access CMG
technology in their operations. CMG has found that a large percentage of its
customers who have acquired perpetual software licenses are subsequently
purchasing maintenance licenses to ensure they have access to current CMG
technology.
The variability in sales of perpetual licenses may cause significant
fluctuations in the Company's quarterly and annual financial results, and these
results may not meet the expectations of analysts or investors. Accordingly, the
Company's past results may not be a good indication of its future performance.
CMG's customers are both domestic and international oil and gas companies and
for the years ended March 31, 2014 and March 31, 2013, no customer represented
revenue in excess of 10% of total revenue.
FOREIGN EXCHANGE RISK
CMG's reported results are affected by the exchange rate between the Canadian
dollar and the US dollar as approximately 72% (2013 - 67%) of product revenues
in fiscal 2014 were denominated in US dollars. Approximately 24% of CMG's total
costs in fiscal 2014 (2013 - 23%) were denominated in US dollars and provided a
partial economic hedge against the fluctuation in currency exchange between the
US and the Canadian dollar on revenues. CMG's residual revenues and costs are
primarily denominated in Canadian dollars and its policy is to convert excess US
dollar cash into Canadian dollars when received.
GEOPOLITICAL RISKS
CMG sells its products and services in over 50 countries worldwide, and has
operations in a number of different countries. Some of these countries have
greater economic, political and social risks than experienced in North America
which may adversely affect the Company's sales, costs and operations in those
jurisdictions. Some of those risks include:
-- Currency restrictions and exchange rate fluctuations
-- Civil unrest and political instability
-- Changes in laws governing existing operations and contracts
-- Changes to taxation policies dramatically increasing tax costs to the
Company
-- Economic and legal sanctions
-- Non-compliance with applicable anti-corruption and bribery laws
Any disruption in our ability to complete a sale cycle, including disruption of
travel to customers' locations to provide training and support, and the cost of
reorganizing daily activities of foreign operations, could have an adverse
effect on our financial condition. CMG mitigates the potential adverse effect on
sales by invoicing for the full license term in advance for the majority of
software license sales and by invoicing as frequently as the contract allows for
consulting and contract research services. CMG closely monitors the business
and regulatory environments of the countries in which it conducts operations to
minimize the potential impact on costs and operations.
Non-compliance with applicable anti-corruption and bribery laws could subject
the Company to onerous penalties and the costs of prosecution. CMG has
established business practices and internal controls to minimize the potential
occurrence of any irregular payments. In addition, the Company has established
well-defined anti-corruption and bribery policies and procedures that each
employee and contractor is required to sign indicating their compliance.
COMPETITION RISK
Competition is a risk for CMG as it is for almost every company in every sector.
The reservoir simulation software industry currently consists of four major
suppliers (including CMG) and a number of small suppliers. Some of the other
suppliers, including two major suppliers, offer products or oil field services
outside the scope of reservoir simulation. Some potential customers may prefer
to deal with such multi-service suppliers, while others prefer an independent
supplier, such as CMG.
Although competition is very active, CMG believes that its proven technology and
the comprehensive scope of its products, combined with its international
presence and recognition as a major independent supplier, provide distinct
competitive advantages.
Sustaining competitive advantage is another issue, which CMG addresses by making
a significant ongoing commitment to research and development spending. CMG
expended $14.6 million (2013 - $12.5 million) in product research and
development in its most recently completed fiscal year.
The introduction by competitors of products embodying new technology and the
emergence of new industry standards and practices could render CMG's products
obsolete and unmarketable and could exert price pressures on existing products,
which could have negative effects on the Company's business, operating results
and financial condition.
There is a significant barrier for new entrants into the reservoir simulation
software industry. The cost of entry is substantial as a significant investment
in research and development is required. In addition, to become a major
supplier, a significant time investment is required to build up quality
relationships with potential clients.
LABOUR RISK
The Company's continued success is substantially dependent on the performance of
its key employees and officers. The loss of the services of these personnel as
well as failure to attract additional key personnel could have a negative impact
upon the Company's business, operating results and financial condition. Due to
high levels of competition for qualified personnel, there can be no assurance
that the Company will be successful in retaining and attracting such personnel.
The Company attempts to overcome this by offering an attractive compensation
package and providing an environment that provides the intellectual and
professional stimulation sought by our employee group.
INTELLECTUAL PROPERTY RISK
CMG regards its software as proprietary and attempts to protect it with
copyrights, trademarks and trade secret measures, including restrictions on
disclosure and technical measures. Despite these precautions, it may be possible
for third parties to copy CMG's programs or aspects of its trade secrets. CMG
has no patents, and existing legal and technical precautions afford only limited
practical protection. CMG could incur substantial costs in protecting and
enforcing its intellectual property rights. Moreover, from time to time third
parties may assert patent, trademark, copyright and other intellectual property
rights to technologies that are important to CMG. In such an event, CMG may be
required to incur significant costs in litigating a resolution to the asserted
claim. There can be no assurance that such a resolution would not require that
CMG pay damages or obtain a license of a third party's proprietary rights in
order to continue licensing its products as currently offered, or, if such a
license is required, that it will be available on terms acceptable to CMG.
CMG does not know of any infringement of any third party's patent rights,
copyrights, trade secrecy rights or other intellectual property disputes in the
development or support of its products.
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.
At March 31, 2014, the Chief Executive Officer ("CEO") and the Chief Financial
Officer ("CFO") concluded that the design and operation of the Company's DC&P
were effective and that material information relating to the Company, including
its subsidiaries, was made known to them and was recorded, processed, summarized
and reported within the time periods specified under applicable securities
legislation. Further, the CEO and the CFO concluded that the design and
operation of the Company's ICFR were effective at March 31, 2014 in order to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with IFRS. It should be noted that while the Company's CEO and CFO believe that
the Company's disclosure controls and procedures and internal controls over
financial reporting provide a reasonable level of assurance that they are
effective, they do not expect that such controls and procedures will prevent all
errors and fraud. A control system, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met.
During the year ended March 31, 2014, 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.
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.
FORWARD-LOOKING INFORMATION
Certain information included in this MD&A is forward-looking. Forward-looking
information includes statements that are not statements of historical fact and
which address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including such things as investment
objectives and strategy, the development plans and status of the Company's
software development projects, the Company's intentions, results of operations,
levels of activity, future capital and other expenditures (including the amount,
nature and sources of funding thereof), business prospects and opportunities,
research and development timetable, and future growth and performance. When used
in this MD&A, statements to the effect that the Company or its management
"believes", "expects", "expected", "plans", "may", "will", "projects",
"anticipates", "estimates", "would", "could", "should", "endeavours", "seeks",
"predicts" or "intends" or similar statements, including "potential",
"opportunity", "target" or other variations thereof that are not statements of
historical fact should be construed as forward-looking information. These
statements reflect management's current beliefs with respect to future events
and are based on information currently available to management of the Company.
The Company believes that the expectations reflected in such forward-looking
information are reasonable, but no assurance can be given that these
expectations will prove to be correct and such forward-looking information
should not be unduly relied upon.
With respect to forward-looking information contained in this MD&A, we have made
assumptions regarding, among other things:
-- Future software license sales
-- The continued financing by and participation of the Company's partners
in the DRMS project and it being completed in a timely manner
-- Ability to enter into additional software license agreements
-- Ability to continue current research and new product development
-- Ability to recruit and retain qualified staff
Forward-looking information is not a guarantee of future performance and
involves a number of risks and uncertainties, only some of which are described
herein. Many factors could cause the Company's actual results, performance or
achievements, or future events or developments, to differ materially from those
expressed or implied by the forward-looking information including, without
limitation, the following factors which are discussed in greater detail in the
"Business Risks" section of this MD&A:
-- 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.
This Management's Discussion and Analysis was reviewed and approved by the Audit
Committee and Board of Directors and is effective as of May 21, 2014.
OUTLOOK
During fiscal 2014, our annuity and maintenance revenue grew by 5%, compared to
the previous fiscal year, with the most significant growth coming from the US at
21%. If we were to adjust revenue that we received for a large contract, for
which payments are recognized on a cash basis and introduce skewing of the
results, we would have noticed that annuity and maintenance revenue actually
grew by 12% during fiscal 2014, compared to the previous fiscal year. Despite
this variability of results, we have experienced growth in annuity and
maintenance revenue across all geographic regions. Over 80% of our software
license revenue is derived from our annuity and maintenance contracts, and with
a strong renewal rate, we expect to see continued growth in this recurring
revenue base.
Although professional services are not the primary source of our revenue, we
were able to grow this business by $2.6 million in fiscal 2014 as compared to
fiscal 2013.
For the year ended March 31, 2014, our EBITDA represented 52% of our total
revenue which demonstrates our continuous ability to effectively manage our
corporate costs.
CMG continues to focus its resources on the development, enhancement and
deployment of simulation software tools relevant to the challenges and
opportunities facing its diverse customer base. We strive to invest 20% of our
top line towards continuous improvement of our product features as well as
development of new capabilities in order to maintain our technological
distinction and take advantage of new opportunities. We will continue fostering
value-based, long-term relationships with our customers while helping them solve
problems associated with hydrocarbon recovery, with an emphasis on the advanced
recovery processes, which are increasing in complexity and where our products
continue to gain increasing importance. With the growth in unconventional
hydrocarbon and enhanced oil recovery ("EOR") projects around the globe, we are
seeing an increase in the use of reservoir simulation software by reservoir
engineers. This growth in simulation use has been reflected in the number and
types of projects being simulated and the amount of simulation done on each
project. More recently, the North American market is seeing an increased
opportunity in shale gas and liquids which use complex recovery processes that
necessitate the use of simulation. In the Middle East region we are seeing a
shift in focus towards development of unconventional oil and gas resources,
which presents new opportunities for the use of our software.
One of the instrumental parts of our success includes training programs which we
offer to our customers to enable them to become more efficient and effective
users of our software. We continue to see strong class attendance across all the
regions.
CMG's joint project to develop the newest generation of dynamic reservoir
modelling systems ("DRMS Project") continued to progress during the current
fiscal year. The most recent version of the software was released to our
partners during the fourth quarter of fiscal 2014, for the purposes of testing
it on selected assets. This release achieved its target of successfully
simulating a complex integrated asset model. CMG and its partners remain
committed to funding the ongoing development and to the future success of the
project.
The excellent reputation behind our Company and its product suite offering will
continue to enable us to grow and sustain a healthy market share while
generating solid software license revenue. With our strong working capital
position, we are well positioned to continue to invest in all aspects of our
business in order to continue to grow and to ultimately return value to our
shareholders in the form of regular quarterly dividend payments and growth in
share value. During fiscal 2014, our total dividends declared and paid increased
by 5%.
Kenneth M. Dedeluk
President and Chief Executive Officer
May 21, 2014
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(thousands of Canadian $) March 31, 2014 March 31, 2013
----------------------------------------------------------------------------
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Assets
Current assets:
Cash 72,410 59,419
Trade and other receivables (note 13(a)) 24,025 19,141
Prepaid expenses 1,153 1,216
Prepaid income taxes (note 10) 128 341
----------------------------------------------------------------------------
----------------------------------------------------------------------------
97,716 80,117
Property and equipment (note 4) 2,552 3,304
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Total assets 100,268 83,421
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----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Trade payables and accrued liabilities
(note 5) 5,947 6,047
Income taxes payable (note 10) 1,287 296
Deferred revenue 29,531 25,289
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36,765 31,632
Deferred tax liability (note 10) 335 379
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----------------------------------------------------------------------------
Total liabilities 37,100 32,011
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Shareholders' equity:
Share capital 53,750 40,498
Contributed surplus 5,853 4,673
Retained earnings 3,565 6,239
----------------------------------------------------------------------------
Total shareholders' equity 63,168 51,410
----------------------------------------------------------------------------
Total liabilities and shareholders' equity 100,268 83,421
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent events (notes 11(b) and 20)
See accompanying notes to consolidated financial statements.
Approved by the Board
Frank L. Meyer Robert F. M. Smith
Director Director
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Years Ended March 31, 2014 2013
(thousands of Canadian $ except per share amounts)
----------------------------------------------------------------------------
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Revenue (note 6) 74,503 68,620
----------------------------------------------------------------------------
Operating expenses
Sales, marketing and professional services 16,144 15,473
Research and development (note 7) 14,623 12,517
General and administrative 6,954 6,340
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37,721 34,330
----------------------------------------------------------------------------
Operating profit 36,782 34,290
Finance income (note 9) 2,360 859
----------------------------------------------------------------------------
Profit before income and other taxes 39,142 35,149
Income and other taxes (note 10) 11,512 10,327
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Net and total comprehensive income 27,630 24,822
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings Per Share
Basic (note 11(e)) 0.71 0.66
Diluted (note 11(e)) 0.70 0.64
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----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Common Contributed Retained Total
(thousands of Canadian $) Share Capital Surplus Earnings Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, April 1, 2012 31,751 3,535 10,793 46,079
Total comprehensive income
for the year - - 24,822 24,822
Dividends paid - - (27,905) (27,905)
Shares issued for cash on
exercise of stock options
(note 11(b)) 7,442 - - 7,442
Common shares buy-back
(notes 11(b) & (c)) (80) - (1,471) (1,551)
Stock-based compensation:
Current period expense - 2,523 - 2,523
Stock options exercised 1,385 (1,385) - -
----------------------------------------------------------------------------
Balance, March 31, 2013 40,498 4,673 6,239 51,410
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, April 1, 2013 40,498 4,673 6,239 51,410
Total comprehensive income
for the year - - 27,630 27,630
Dividends paid - - (30,304) (30,304)
Shares issued for cash on
exercise of stock options
(note 11(b)) 11,274 - - 11,274
Stock-based compensation:
Current period expense - 3,158 - 3,158
Stock options exercised 1,978 (1,978) - -
----------------------------------------------------------------------------
Balance, March 31, 2014 53,750 5,853 3,565 63,168
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 2014 2013
(thousands of Canadian $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from operating activities
Net income 27,630 24,822
Adjustments for:
Depreciation (note 4) 1,591 1,539
Income and other taxes (note 10) 11,512 10,327
Stock-based compensation (note 11(d)) 3,158 2,523
Interest income (note 9) (644) (548)
----------------------------------------------------------------------------
43,247 38,663
Changes in non-cash working capital:
Trade and other receivables (4,876) (3,643)
Trade payables and accrued liabilities (100) 689
Prepaid expenses 63 (21)
Deferred revenue 4,242 3,596
----------------------------------------------------------------------------
Cash generated from operating activities 42,576 39,284
Interest received 635 544
Income taxes paid (10,351) (11,755)
----------------------------------------------------------------------------
Net cash from operating activities 32,860 28,073
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from issue of common shares 11,274 7,442
Dividends paid (30,304) (27,905)
Common shares buy-back (note 11(c)) - (1,551)
----------------------------------------------------------------------------
Net cash used in financing activities (19,030) (22,014)
----------------------------------------------------------------------------
Cash flows used in investing activities
Property and equipment additions (note 4) (839) (2,014)
----------------------------------------------------------------------------
Increase in cash 12,991 4,045
Cash, beginning of year 59,419 55,374
----------------------------------------------------------------------------
Cash, end of year 72,410 59,419
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 2014 and 2013.
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 consolidated financial statements as at
and for the year ended March 31, 2014 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 consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board ("IASB").
These consolidated financial statements as at and for the year ended March 31,
2014 were authorized for issuance by the Board of Directors on May 21, 2014.
(b) BASIS OF MEASUREMENT:
The 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 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.
(i) Key judgments in applying accounting policies
The key judgments made in applying accounting policies, apart from those
involving estimations (note 2(d)(ii) below), that have the most significant
effect on the amounts recognized in these consolidated financial statements are
as follows:
Functional currency - the determination of the functional currency is a matter
of determining the primary economic environment in which an entity operates. IAS
21 - The Effects of Changes in Foreign Exchange Rates, sets out a number of
factors to apply in making the determination of the functional currency.
However, applying the factors in IAS 21 does not always result in a clear
indication of functional currency. Where IAS 21 factors indicate differing
functional currencies within a subsidiary, the Company uses judgment in the
ultimate determination of that subsidiary's functional currency, including an
assessment of the nature of the relationship between the Company and the
subsidiary. Judgment was applied in the determination of the functional currency
of certain of the Company's operating entities.
Research and development - assumptions are made in respect to the eligibility of
certain research and development projects in the calculation of scientific
research and experimental development ("SR&ED") investment tax credits which are
netted against the research and development costs in the statement of
comprehensive income. SR&ED claims are subject to audits by relevant taxation
authorities and the actual amount may change depending on the outcome of such
audits (note 7).
Revenue recognition - certain software license agreements contain
multiple-element arrangements as they may also include maintenance fees.
Judgment is used in determining a fair value of each element of a contract.
Professional services revenue earned from certain consulting contracts is
recognized by the stage of completion of the transaction determined using the
percentage-of-completion method. Judgment is used in determining the progress of
each contract at period end. In assessing revenue recognition, judgment is also
used in determining the ability to collect the corresponding account receivable
(note 6).
(ii) Estimation uncertainty
The following are the key sources of estimation uncertainty and key assumptions
concerning the future, that have a significant risk of causing material
adjustments to the carrying amount of assets and liabilities within the next
financial year:
Stock-based compensation - assumptions and estimates are used in determining the
inputs used in the Black-Scholes option pricing model, including assumptions
regarding volatility, dividend yield, risk-free interest rates, forfeiture
estimates and expected option lives (note 11(d)).
Property and equipment - estimates are used in determining useful economic lives
of property and equipment for the purposes of calculating depreciation (note 4).
Deferred income taxes - assumptions and estimates are made regarding the amount
and timing of realization and/or settlement of the temporary differences between
the accounting carrying value of the Company's assets versus the tax basis of
those assets, and the tax rates at which the differences will be recovered or
settled in the future (note 10).
3. SIGNIFICANT ACCOUNTING POLICIES:
(a) BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of CMG and its
subsidiaries, all 100% owned. All inter-company transactions and balances have
been eliminated on consolidation. The financial statements of the subsidiaries
are prepared for the same reporting period as the parent company, using
consistent accounting policies.
(b) REVENUE RECOGNITION:
Revenue consists of software license fees and professional service fees.
Software License Revenue
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 fees, 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 recognized on a straight-line basis over the life
of the related license period, which is generally one year or less. Revenue for
licenses billed in advance is deferred and recognized in revenue over the
relevant license period.
License fees for perpetual licenses are recognized fully in revenue when all
recognition conditions are satisfied. Software license agreements with
multiple-element arrangements, such as those including license fees and
maintenance fees, are recognized as separate units of accounting and are
recognized as each element is earned based on the relative fair value of each
element. A delivered element is considered a separate unit of accounting if it
has value to the customer on a standalone basis, and delivery or performance of
the undelivered elements is considered probable and substantially under the
Company's control. If these criteria are not met, revenue for the arrangement as
a whole is accounted for as a single unit of accounting.
Professional Services Revenue
Revenue from professional services, consisting of consulting, training and
contract research activities, is recorded on a percentage-of-completion basis or
as such services are performed as appropriate in the circumstances.
Percentage-of-completion is used when the outcome of the contract can be
estimated reliably and is assessed based on work completed as determined by the
hours incurred. When the outcome of the contract cannot be estimated reliably,
the amount of revenue recognized is limited to the cost incurred in the period.
(c) CASH:
Cash is comprised of interest-earning bank accounts.
(d) PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost less accumulated depreciation. Cost
includes expenditures that are directly attributable to the acquisition of the
asset.
Depreciation is based on the cost of an asset and is recognized from the date
the item is ready for use in the statement of comprehensive income 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
Any gain or loss on disposal of an item of property and equipment (calculated as
the difference between the net proceeds from disposal and the carrying amount of
the item) is recognized in the statement of comprehensive income.
The estimated useful lives and depreciation methods are reviewed at each fiscal
year-end and adjusted if appropriate.
(e) 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. Research and
development costs are recorded net of related SR&ED investment tax credits.
(f) 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
research and development costs within the statement of comprehensive income.
(g) FINANCE INCOME AND FINANCE COSTS:
Finance income comprises interest income earned on the bank balances and is
recognized as it accrues through the statement of comprehensive income, using
the effective interest method.
Foreign currency gains and losses are reported on a net basis as either finance
income or finance cost depending on whether foreign currency movements are in a
net gain or net loss position. Foreign currency gains and losses are recognized
in the period in which they occur.
(h) FOREIGN CURRENCY TRANSLATION:
Transactions in foreign currencies are translated to Canadian dollars, the
functional currency of the Company, at exchange rates at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies
are translated into Canadian dollars at the rate of exchange prevailing at the
reporting date while non-monetary assets and liabilities that are measured in
terms of historical cost are translated using the exchange rates at the dates of
the transactions.
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 the statement of comprehensive income in the period in which they
occur.
(i) INCOME TAXES:
Income taxes comprise current and deferred tax.
Current tax is the expected tax payable or receivable based on taxable profit
for the period calculated using tax rates that have been enacted or
substantively enacted at the reporting date, and includes any adjustments to tax
payable in respect of previous years. Taxable profit differs from profit as
reported in the Consolidated Statement of Operations and Comprehensive Income
because of items that are taxable or deductible in other years and items that
are never taxable and deductible. Prepaid income taxes and current income taxes
payable are offset only when a legally enforceable right of offset exists and
the prepaid income tax and tax payable arise in the same tax jurisdiction and
relate to the same taxable entity.
Deferred 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 to the extent that it is
probable that future taxable profits will be available against which the losses
can be utilized. Deferred tax assets and liabilities are measured using the
enacted or 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 deferred tax assets and liabilities is included in operations in the
period it occurs. Deferred tax assets and liabilities are offset only when a
legally enforceable right of offset exists and the deferred tax assets and
liabilities arise in the same tax jurisdiction and relate to the same taxable
entity.
In determining the amount of current and deferred tax, the Company takes into
account the impact of uncertain tax positions and whether additional taxes and
interest may be due. The Company believes that its accruals for tax liabilities
are adequate for all open tax years based on its assessment of many factors,
including interpretations of tax law and prior experience. This assessment
relies on estimates and assumptions and may involve a series of judgements about
future events. New information may become available that causes the Company to
change its judgement regarding the adequacy of existing tax liabilities; such
changes to tax liabilities will impact tax expense in the period that such a
determination is made.
(j) INVESTMENT TAX CREDITS:
The Company receives federal and provincial investment tax credits in Canada on
qualified scientific research and experimental development expenditures incurred
in each taxation year. Investment tax credits are recorded as a deduction
against related expenses or capital items provided that reasonable assurance
over collection of the tax credits exists.
(k) EARNINGS PER SHARE:
Basic earnings per share is computed by dividing the net income by the weighted
average number of Common 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.
In calculating the dilutive effect of stock options, it is assumed 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.
(l) STOCK-BASED COMPENSATION PLAN:
The Company has a stock-based compensation plan that is described in note 11(d).
The fair value of stock options is determined using the Black-Scholes valuation
model as of the grant date and is expensed over the vesting period, with a
corresponding increase in equity, based on the Company's estimate of the number
of options that will actually vest. Measurement inputs include the share price
on the measurement date, the exercise price of the instrument, expected
volatility (based on an evaluation of the Company's historic volatility,
particularly over the historic period commensurate with the expected term),
expected term of the instruments (based on historical experience and general
option holder behaviour), expected dividends, and the risk-free interest rate
(based on government bonds). Service and non-market performance conditions
attached to the transactions are not taken into account in determining fair
value. At the end of each reporting period, the Company revises its estimates of
the number of options that are expected to vest and recognizes the impact of any
revision in the statement of comprehensive income. When stock options are
exercised, the Company records consideration received, together with amounts
previously recognized in contributed surplus, as an increase in share capital.
(m) SHORT-TERM EMPLOYEE BENEFITS:
Short-term employee benefit obligations are measured on an undiscounted basis
and are expensed as the related service is provided. A liability is recognized
for the amount expected to be paid under short-term cash bonus or profit-sharing
plans if the Company has a present legal or constructive obligation to pay this
amount as a result of past service provided by the employee, and the obligation
can be estimated reliably.
(n) FINANCIAL INSTRUMENTS:
(i) Non-derivative financial assets
The Company initially recognizes loans and receivables on the date that they are
originated. All other financial assets are recognized initially on the trade
date at which the Company becomes a party to the contractual provisions of the
instruments. The Company derecognizes a financial asset when the contractual
rights to the cash flows from the asset expire or it transfers the rights to
receive the contractual cash flows on the financial asset in a transaction in
which substantially all the risks and rewards of ownership of the financial
asset are transferred. The Company classifies non-derivative financial assets
into the following categories:
Financial assets at fair value through profit or loss ("FVTPL"):
A financial asset is classified in this category if it is either held for
trading or designated as such upon initial recognition.
It is held for trading if:
-- It has been acquired principally for the purpose of selling it in the
near term;
-- It is part of the Company's portfolio of financial instruments that are
managed together and have a pattern of short-term profit taking;
-- It is a derivative not designated and effective as a hedging instrument.
It is classified as FVTPL if:
-- It forms part of a contract containing one or more embedded derivatives;
-- It forms part of a group of financial instruments which is managed and
its performance is evaluated on a fair value basis.
FVTPL are measured initially and subsequently at fair value, and changes therein
are recognized in the statement of comprehensive income. Transaction costs are
recognized in the statement of comprehensive income as incurred. The Company's
only financial asset belonging to this category is cash.
Loans and receivables:
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. The Company's
trade and other receivables are classified as loans and receivables. Trade
receivables are recognized initially at fair value plus any directly
attributable transaction costs, and subsequently measured at amortized cost
using the effective interest rate method less any provision for impairment. The
Company's trade and other receivables are classified as current assets. The fair
value of trade and other receivables is estimated at the present value of future
cash flows, discounted at the market rate of interest at the reporting date.
(ii) Non-derivative financial liabilities
Financial liabilities at amortized cost include trade payables and accrued
liabilities. Such liabilities are initially recognized at fair value on the
trade date at which the Company becomes a party to the contractual provisions of
the instrument, represented by the amount required to be paid plus any directly
attributable transaction costs, and subsequently measured at amortized cost
using the effective interest method. Financial liabilities are classified as
current liabilities if payment is due within a year; otherwise, they are
classified as non-current liabilities. The Company derecognizes a financial
liability when its contractual obligations are discharged, cancelled or expire.
The fair value of non-derivative financial liabilities, which is determined for
disclosure purposes, is calculated based on the present value of future
principal and interest cash flows, discounted at the market rate of interest at
the reporting date.
(iii) Share Capital
Common Shares are classified as equity. Incremental costs directly attributable
to the issue of Common Shares are recognized as a deduction from equity, net of
any tax effects.
(o) IMPAIRMENT:
(i) Receivables
Trade and other receivables are assessed for impairment at each reporting date
at both a specific and collective level. All individually significant
receivables are assessed for specific impairment. All individually significant
receivables found not to be specifically impaired, together with receivables
that are not individually significant, are collectively assessed for impairment
by grouping together receivables with similar risk characteristics. In assessing
collective impairment, the Company uses historical trends of the probability of
default, the timing of recoveries and the amount of loss incurred, adjusted for
management's judgment as to whether current economic and credit conditions are
such that the actual losses are likely to be greater or less than suggested by
historical trends. An impairment loss in respect of a financial asset measured
at amortized cost is calculated as the difference between its carrying amount
and the present value of the estimated future cash flows discounted at the
asset's original effective interest rate. Losses are recognized in the statement
of comprehensive income and reflected in an allowance account against trade and
other receivables. When a subsequent event (such as the repayment by a debtor)
causes the amount of impairment loss to decrease, the decrease is reversed
through the statement of comprehensive income.
(ii) Non-financial assets
The carrying amounts of the Company's non-financial assets, other than deferred
tax assets, are reviewed at each reporting date to determine whether there is
any indication of impairment. If any such indication exists, then the asset's
recoverable amount is estimated, and any impairment loss required is recognized
in the statement of comprehensive income. An impairment loss is reversed only to
the extent that the asset's carrying amount does not exceed the carrying amount
that would have been determined, net of depreciation, if no impairment loss had
been recognized.
(p) LEASES:
The Company's only lease commitments relate to its office premises which are
classified as operating leases since they do not transfer the risks and rewards
of ownership to the Company. Payments made under operating leases are recognized
in the statement of comprehensive income on a straight-line basis over the term
of the lease.
(q) NEW ACCOUNTING STANDARDS AND INTERPRETATIONS ADOPTED:
(i) IFRS 10 - Consolidated Financial Statements
Replaces the guidance in IAS 27 Consolidated and Separate Financial Statements
and SIC-12 Consolidation - Special Purpose Entities, and provides a single model
to be applied in the control analysis for all investees, including entities that
currently are special purpose entities in the scope of SIC-12. The Company
adopted IFRS 10 in its consolidated financial statements for the annual period
beginning on April 1, 2013. IFRS 10 did not have a material impact on the
consolidated financial statements.
(ii) IFRS 11 - Joint Arrangements
Replaces the guidance in IAS 31 Interest in Joint Ventures, and essentially
carves out of previous jointly controlled entities, those arrangements which
although structured through a separate vehicle, such separation is ineffective
and the parties to the arrangement have rights to the assets and obligations for
the liabilities and are accounted for as joint operations in a fashion
consistent with jointly controlled assets/operations under IAS 31. In addition,
under IFRS 11 joint ventures must now use the equity method of accounting. The
Company adopted IFRS 11 in its consolidated financial statements for the annual
period beginning on April 1, 2013. IFRS 11 did not have a material impact on the
consolidated financial statements.
(iii) IFRS 12 - Disclosure of Interests in Other Entities
Contains the disclosure requirements for entities that have interest in
subsidiaries, joint arrangements, associates and/or unconsolidated structured
entities. The Company adopted IFRS 12 in its consolidated financial statements
for the annual period beginning April 1, 2013. The amendments did not have a
material impact on the consolidated financial statements, because of the nature
of the Company's interests in other entities.
(iv) IFRS 13 - Fair Value Measurement
Replaces the fair value measurement guidance contained in individual IFRSs with
a single source of fair value measurement guidance. The Company adopted IFRS 13
prospectively in its consolidated financial statements for the annual period
beginning on April 1, 2013. IFRS 13 did not have a material impact on the
consolidated financial statements.
(v) Amendments to IAS 1 - Presentation of Financial Statements
Require an entity present separately the items of other comprehensive income
that may be reclassified to profit or loss in the future from those that would
never be reclassified to profit or loss. The Company adopted the amendments in
its consolidated financial statements for the annual period beginning on April
1, 2013. As the amendments only require changes in the presentation of items in
other comprehensive income, the amendments to IAS 1 did not have a material
impact on the consolidated financial statements.
(vi) Amendments IFRS 7 - Offsetting Financial Assets and Liabilities
Contain new disclosure requirements for offsetting financial assets and
liabilities and netting arrangements. The Company adopted the amendments to IFRS
7 in its consolidated financial statements for the annual period beginning on
April 1, 2013. The amendments did not have a material impact on the consolidated
financial statements.
(r) ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTED:
The following is a summary of new standards, amendments to standards and
interpretations not yet effective for the year ended March 31, 2014, and have
not been applied in preparing these consolidated financial statements:
(i) IFRS 9 - Financial Instruments
Replaces the guidance in IAS 39 Financial Instruments: Recognition and
Measurement, on the classification and measurement of financial assets and
liabilities. The mandatory effective date of IFRS 9, which supersedes previous
versions, has been left open by the IASB. Early application of IFRS 9 is
permitted. The Company does not intend to adopt IFRS 9 in its consolidated
financial statements for the annual period beginning April 1, 2014. 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.
(ii) Amendments to IAS 32 - Offsetting Financial Assets and Liabilities
Clarify when an entity has a legally enforceable right to set-off and net versus
gross settlement mechanisms. The Company intends to adopt the amendments to IAS
32 in its consolidated financial statements for the annual period beginning
April 1, 2014. The Company does not expect the amendments to have a material
impact on the consolidated financial statements.
(iii) Amendments to IAS 36 - Impairment of Assets
Clarify IASB's original intention to require the disclosure of the recoverable
amount of impaired assets as well as additional disclosures about the
measurement of the recoverable amount of impaired assets. The Company intends to
adopt the amendments to IAS 36 in its consolidated financial statements for the
annual period beginning April 1, 2014. The Company does not expect the
amendments to have a material impact on the consolidated financial statements.
4. PROPERTY AND EQUIPMENT:
Cost Computer Furniture and Leasehold
(thousands of $) Equipment Equipment Improvements Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at April 1, 2012 4,249 1,561 2,246 8,056
Additions 1,419 126 469 2,014
Disposals (269) - - (269)
----------------------------------------------------------------------------
Balance at March 31, 2013 5,399 1,687 2,715 9,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at April 1, 2013 5,399 1,687 2,715 9,801
Additions 810 29 - 839
Disposals (505) (4) - (509)
----------------------------------------------------------------------------
Balance at March 31, 2014 5,704 1,712 2,715 10,131
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Depreciation
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at April 1, 2012 (3,252) (770) (1,205) (5,227)
Depreciation charge for
the year (851) (262) (426) (1,539)
Disposals 269 - - 269
----------------------------------------------------------------------------
Balance at March 31, 2013 (3,834) (1,032) (1,631) (6,497)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at April 1, 2013 (3,834) (1,032) (1,631) (6,497)
Depreciation charge for
the year (908) (268) (415) (1,591)
Disposals 505 4 - 509
----------------------------------------------------------------------------
Balance at March 31, 2014 (4,237) (1,296) (2,046) (7,579)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying Amounts
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At March 31, 2013 1,565 655 1,084 3,304
----------------------------------------------------------------------------
At March 31, 2014 1,467 416 669 2,552
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. TRADE PAYABLES AND ACCRUED LIABILITIES:
(thousands of $) March 31, 2014 March 31, 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trade payables 344 518
Employee salaries, commissions and benefits
payable 3,503 3,574
Accrued liabilities and other payables 2,100 1,955
----------------------------------------------------------------------------
5,947 6,047
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. REVENUE:
Years ended March 31, 2014 2013
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Software licenses 66,213 62,961
Professional services 8,290 5,659
----------------------------------------------------------------------------
74,503 68,620
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. RESEARCH AND DEVELOPMENT COSTS:
Years ended March 31, 2014 2013
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Research and development 16,439 14,364
SR&ED investment tax credits (1,816) (1,847)
----------------------------------------------------------------------------
14,623 12,517
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. PERSONNEL EXPENSES:
Years ended March 31, 2014 2013
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Salaries, commissions and short-term
employee benefits 26,994 24,570
Stock-based compensation (note 11(d)) 3,158 2,523
----------------------------------------------------------------------------
30,152 27,093
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. FINANCE INCOME:
Years ended March 31, 2014 2013
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest income 644 548
Net foreign exchange gain 1,716 311
----------------------------------------------------------------------------
Finance income 2,360 859
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. INCOME AND OTHER TAXES:
The major components of income tax expense are as follows:
Years ended March 31, 2014 2013
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current year income taxes 10,537 9,436
Adjustment for prior year 7 144
----------------------------------------------------------------------------
Current income taxes 10,544 9,580
Deferred tax expense (recovery) (44) 21
Foreign withholding and other taxes 1,012 726
----------------------------------------------------------------------------
11,512 10,327
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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:
Years ended March 31, 2014 2013
(thousands of $, unless otherwise stated)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Combined statutory tax rate 25.00% 25.00%
----------------------------------------------------------------------------
Expected income tax 9,786 8,788
Non-deductible costs 814 658
Effect of tax rates in foreign jurisdictions 101 168
Withholding taxes 757 544
Adjustment for prior year 7 144
Other 47 25
----------------------------------------------------------------------------
11,512 10,327
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The components of the Company's deferred tax liability are as follows:
(thousands of $) March 31, 2014 March 31, 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Tax liability on SR&ED investment tax
credits (354) (362)
Tax asset (liability) on property and
equipment 19 (17)
----------------------------------------------------------------------------
Net deferred tax liability (335) (379)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All movement in deferred tax assets and liabilities is recognized through net
income of the respective period.
Prepaid income taxes and current income taxes payable have not been offset as
the amounts relate to income taxes levied by different tax authorities to
different taxable entities.
11. SHARE CAPITAL:
(a) AUTHORIZED:
An unlimited number of Common Shares, an unlimited number of Non-Voting Shares,
and an unlimited number of Preferred Shares, issuable in series.
(b) ISSUED:
(thousands of shares) Common Shares
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, April 1, 2012 37,307
Issued for cash on exercise of stock options 913
Common shares buy-back (91)
----------------------------------------------------------------------------
Balance, March 31, 2013 38,129
----------------------------------------------------------------------------
Balance, April 1, 2013 38,129
Issued for cash on exercise of stock options 1,081
----------------------------------------------------------------------------
Balance, March 31, 2014 39,210
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent to March 31, 2014, 69,000 stock options were exercised for cash
proceeds of $652,000.
On May 23, 2012, the Board of Directors considered the merits of renewing the
Company's shareholder rights plan on or before the third-year anniversary of
shareholder approval of the plan and determined that it was in the best interest
of the Company to continue to have a shareholder rights plan in place. Upon
careful review, the Board of Directors agreed to approve an amended and restated
rights plan (the "Amended and Restated Rights Plan") between the Company and
Valiant Trust Company, which is similar in all respects to the existing
shareholder rights plan, with the exception of certain minor amendments. The
Amended and Restated Rights Plan was approved by the Company's shareholders on
July 12, 2012.
(c) COMMON SHARES BUY-BACK:
On April 16, 2012, the Company announced a Normal Course Issuer Bid ("NCIB")
commencing on April 18, 2012 to purchase for cancellation up to 3,416,000 of its
Common Shares. During the year ended March 31, 2013, a total of 91,000 Common
Shares were purchased at market price for a total cost of $1,551,000.
On April 29, 2013, the Company announced a NCIB commencing on May 1, 2013 to
purchase for cancellation up to 3,538,000 of its Common Shares. During the year
ended March 31, 2014, no Common Shares were purchased.
On May 5, 2014, the Company announced a NCIB commencing on May 5, 2014 to
purchase for cancellation up to 3,720,000 of its Common Shares.
(d) STOCK-BASED COMPENSATION PLAN:
The Company adopted a rolling stock option plan as of July 13, 2005, which was
reaffirmed by the Company's shareholders on July 7, 2011, which allows it to
grant options to acquire Common Shares of up to 10% of the outstanding Common
Shares at the date of grant. Based upon this calculation, at March 31, 2014, the
Company could grant up to 3,921,000 stock options. Pursuant to the stock option
plan, the maximum term of an option granted cannot exceed five years from the
date of grant. The outstanding stock options vest as to 50% after the first year
anniversary, from date of grant, and then vest as to 25% of the total options
granted after each of the second and third year anniversary dates.
The following table outlines changes in stock options:
Years ended March 31, 2014 2013
(thousands except per share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
Granted ($/share) Granted ($/share)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at
beginning of year 2,938 13.13 2,903 9.85
Granted 1,164 24.45 1,006 18.19
Exercised (1,081) 10.41 (913) 8.15
Forfeited (92) 16.98 (58) 15.09
----------------------------------------------------------------------------
Outstanding at end of
year 2,929 18.50 2,938 13.13
----------------------------------------------------------------------------
Options exercisable
at end of year 1,083 13.44 1,207 9.75
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The range of exercise prices of stock options outstanding and exercisable at
March 31, 2014 is as follows:
Outstanding Exercisable
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Exercise Price Options Life Price Options Price
($/option) (thousands) (years) ($/option) (thousands) ($/option)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7.80 - 9.07 355 1.1 8.79 355 8.79
9.08 - 13.43 606 2.4 13.34 372 13.38
13.44 - 18.18 814 3.4 18.13 355 18.12
18.19 - 29.15 1,154 4.4 24.44 1 21.75
----------------------------------------------------------------------------
2,929 3.3 18.50 1,083 13.44
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The fair value of stock options granted was estimated using the Black-Scholes
option pricing model under the following assumptions:
Years ended March 31, 2014 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair value at grant date ($/option) 3.06 to 4.94 2.45 to 3.83
Share price at grant date ($/share) 24.40 to 29.15 17.90 to 21.75
Risk-free interest rate (%) 1.21 to 1.64 1.13 to 1.33
Estimated hold period prior to exercise
(years) 2 to 4 2 to 4
Volatility in the price of common shares (%) 26 to 28 27 to 36
Dividend yield per common share (%) 2.78 to 3.21 3.39 to 4.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company recognized total stock-based compensation expense for the year ended
March 31, 2014 of $3,158,000 (2013 - $2,523,000).
(e) EARNINGS PER SHARE:
The following table summarizes the earnings and weighted average number of
Common Shares used in calculating basic and diluted earnings per share:
Years ended
March 31, 2014 2013
(thousands except per
share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares Per Share Earnings Shares Per Share
($) Outstanding ($/share) ($) Outstanding ($/share)
----------------------------------------------------------------------------
Basic 27,630 38,733 0.71 24,822 37,643 0.66
Dilutive
effect of
stock options 966 1,143
----------------------------------------------------------------------------
Diluted 27,630 39,699 0.70 24,822 38,786 0.64
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the year ended March 31, 2014, 108,000 options (2013 - 65,000) were
excluded from the computation of the weighted-average number of diluted shares
outstanding because their effect was not dilutive.
12. CAPITAL MANAGEMENT:
The Company's objectives in managing capital are to ensure sufficient liquidity
to pursue its strategy of organic growth combined with strategic acquisitions
and to maximize the return to its shareholders. The capital structure of the
Company consists of cash, credit facilities and shareholders' equity. The
Company does not have any externally imposed capital requirements and does not
presently utilize any quantitative measures to monitor its capital.
The Company's policy is to pay quarterly dividends based on the Company's
overall financial performance and cash flow generation. Decisions on dividend
payments are made on a quarterly basis by the Board of Directors. There can be
no assurance as to the amount or payment of such dividends in the future.
Since November 2002, the Company embarked on a series of normal course issuer
bids to buy back its shares. Reference is made to note 11(c).
The Company makes adjustments to its capital structure in light of general
economic conditions and the Company's working capital requirements. In order to
maintain or adjust its capital structure, the Company, upon approval from its
Board of Directors, may pay dividends, buy back shares or undertake other
activities as deemed appropriate under the specific circumstances. The Board of
Directors reviews and approves any material transactions not in the ordinary
course of business.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
(i) Classification of financial instruments
Classification Measurement
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash Held for trading Fair value
Trade and other receivables Loans and receivables Amortized cost
Trade payables and accrued Other financial Amortized cost
liabilities liabilities
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(ii) Fair values of financial instruments
The carrying values of cash, trade and other receivables, trade payables and
accrued liabilities approximate their fair values due to the short-term nature
of these instruments.
OVERVIEW:
The Company is exposed to risks of varying degrees of significance and
likelihood which could affect its ability to achieve its strategic objectives
for growth. The main objectives of the Company's risk management process are to
ensure that risks are properly identified and that the capital base is adequate
in relation to those risks. The principal financial risks to which the Company
is exposed are described below:
(a) CREDIT RISK:
Credit risk is the risk of an unexpected loss if a customer or third party to a
financial instrument fails to meet its contractual obligation and arises
principally from the Company's trade and other receivables. The amounts reported
in the statements of financial position for trade receivables are net of
allowances for bad debts, estimated by the Company's management based on prior
experience and their assessment of the current economic environment
The Company's trade receivables consist primarily of balances from customers
operating in the oil and gas industry, both domestically and internationally, as
the Company sells its products and services in over 50 countries worldwide. Some
of these countries have greater economic and political risk than experienced in
North America and as a result there may be greater risk associated with sales in
those jurisdictions. The Company manages this risk by invoicing for the full
license term in advance for the majority of software license sales and by
invoicing as frequently as the contract allows for consulting and contract
research services. In cases where collectability is not deemed probable, revenue
is recognized upon receipt of cash, assuming all other criteria have been met.
Historically, the Company has not experienced any significant losses related to
individual customers or groups of customers in any particular geographic area;
therefore, no allowance for doubtful accounts has been established at March 31,
2014 and 2013.
As at March 31, 2014, the Company has a concentration of credit risk with 13
domestic and international customers who represent 73% of trade receivables
(2013 - 12 customers; 72%).
The carrying amount of trade and other receivables represents the maximum credit
exposure. The maximum exposure to credit risk at March 31, 2014 was $24.0
million (2013 - $19.1 million). The aging of trade and other receivables at the
reporting date was:
(thousands of $) March 31, 2014 March 31, 2013
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current 11,204 10,621
31-60 days 8,445 4,798
61-90 days 2,801 2,493
Over 90 days 1,575 1,229
----------------------------------------------------------------------------
Balance, end of year 24,025 19,141
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company assesses the creditworthiness of its customers on an ongoing basis
and it regularly monitors the amount and age of balances outstanding. Payment
terms with customers are 30 days from invoice date; however, industry practice
can extend these terms. Accordingly, the Company views the credit risks on these
amounts as normal for the industry.
The Company minimizes the credit risk of cash by depositing only with a
reputable financial institution in highly liquid interest-bearing cash accounts.
(b) MARKET RISK:
Market risk is the risk that changes in market prices of the foreign exchange
rates and interest rates will affect the Company's income or the value of its
financial instruments.
(i) Foreign Exchange Risk
The Company operates internationally and primarily prices its products in either
the Canadian or US dollar. This gives rise to exposure to market risks from
changes in the foreign exchange rates between the Canadian and US dollar.
Approximately 72% (2013 - 67%) of the Company's revenues for the year ended
March 31, 2014 were denominated in US dollars and at March 31, 2014, the Company
had approximately $16.7 million (2013 - $16.8 million) of its working capital
denominated in US dollars. The Company currently does not use derivative
instruments to hedge its exposure to those risks but as approximately 24% (2013
- 23%) of the Company's total costs are also denominated in US dollars they
provide a partial economic hedge against the fluctuation in this currency
exchange. In addition, the Company manages levels of foreign currency held by
converting excess US dollars into Canadian dollars at spot rates.
The Company's operations are exposed to currency risk on US denominated
financial assets and liabilities with fluctuations in the rate recognized as
foreign exchange gains or losses in the Consolidated Statements of Operations
and Comprehensive Income. It is estimated that a one cent change in the US
dollar would result in a net change of approximately $125,000 to equity and net
income for the year ended March 31, 2014. A weaker US dollar with respect to the
Canadian dollar will result in a negative impact while the reverse would result
from a stronger US dollar.
(ii) Interest Rate Risk
The Company has significant cash balances and no interest-bearing debt. The
Company's current policy is to invest excess cash in interest-bearing deposits
and/or guaranteed investment certificates issued by its principal banker. The
Company is exposed to interest cash flow risk from changes in interest rates on
its cash balances. Based on the March 31, 2014 cash balance, each 1% change in
the interest rate on the Company's cash balance would change equity and net
income for the year ended March 31, 2014 by approximately $543,000.
(c) LIQUIDITY RISK:
Liquidity risk is the risk that the Company is not able to meet its financial
obligations as they fall due or can do so only at excessive cost. The Company
manages liquidity risk through the management of its capital structure as
outlined in note 12. The Company's growth is financed through a combination of
the cash flows from operations and its cash balances on hand. Given the
Company's available liquid resources as compared to the timing of the payments
of its liabilities, management assesses the Company's liquidity risk to be low.
The Company monitors its expenditures by preparing annual budgets which are
updated periodically. At March 31, 2014, the Company has significant cash
balances in excess of its obligations and over $800,000 of the line of credit
(note 15) available for its use.
14. COMMITMENTS:
(a) RESEARCH COMMITMENTS:
The Company is the operator of the DRMS research and development project (the
"DRMS project"), a collaborative effort with its partners Shell International
Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A.
("Petrobras"), to jointly develop the newest generation of reservoir and
production system simulations software. The project has been underway since 2006
and, with the ongoing support of the participants, it is expected to continue
until ultimate delivery of the software. The Company's share of costs associated
with the project is estimated to be $5.9 million ($3.1 million net of overhead
recoveries) for fiscal 2015.
(b) LEASE COMMITMENTS:
The Company has operating lease commitments relating to its office premises with
the minimum annual lease payments as follows:
Years ended March 31, 2014 2013
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Less than one year 2,189 2,059
Between one and five years 3,817 5,083
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6,006 7,142
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----------------------------------------------------------------------------
The Company leases a number of properties under operating leases. During the
year ended March 31, 2014, $2.3 million (2013 - $2.1 million) was recognized as
an expense in the statement of comprehensive income in respect of operating
leases related to office premises.
15. 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 March 31, 2014, US $165,000
(2013 - US $165,000) had been reserved on this line of credit for the letter of
credit supporting a performance bond.
16. SEGMENTED INFORMATION:
The Company is organized into one operating segment represented by the
development and licensing of reservoir simulation software. The Company provides
professional services, consisting of support, training, consulting and contract
research activities, to promote the use and development of its software;
however, these activities are not evaluated as a separate business segment.
Revenues and property and equipment of the Company arise in the following
geographic regions:
(thousands of $) Revenue Property and equipment
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Years ended March 31, As at March 31,
2014 2013 2014 2013
----------------------------------------------------------------------------
Canada 26,690 26,573 2,364 3,132
United States 15,276 12,105 53 53
South America 12,763 12,262 76 62
Eastern
Hemisphere(1) 19,774 17,680 59 57
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74,503 68,620 2,552 3,304
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----------------------------------------------------------------------------
(1) Includes Europe, Africa, Asia and Australia.
No customer represented 10% or more of total revenue in the years ended March
31, 2014 and 2013.
17. SUBSIDIARIES:
CMG is the beneficial owner of the entire issued share capital and controls all
the votes of its subsidiaries. The principal activities of all the subsidiaries
are the sale and support for the use of CMG's software licenses. Transactions
between subsidiaries are eliminated on consolidation. The following is the list
of CMG's subsidiaries:
Subsidiary Country of Incorporation
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Computer Modelling Group Inc. United States
CMG Venezuela Venezuela
CMG Middle East FZ LLC Dubai, United Arab Emirates
CMG (Europe) Limited United Kingdom
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18. JOINT OPERATION:
The Company is the operator of a joint software development project, the DRMS
project, which gives the Company exclusive rights to commercialize the jointly
developed software while the other partners will have unlimited software access
for their internal use. Accordingly, the Company records its proportionate share
of costs incurred on the project (37.04%) as research and development costs
within the consolidated statements of operations and comprehensive income.
For the year ended March 31, 2014, CMG included $4.8 million (2013 - $3.9
million) of costs in its consolidated statements of operations and comprehensive
income related to this joint project.
Additionally, the Company is entitled to charge the project for various services
provided as operator, which were recorded in revenue as professional services
and amounted to $2.4 million during the year ended March 31, 2014 (2013 - $1.9
million).
19. RELATED PARTIES:
(a) INTERCOMPANY TRANSACTIONS:
The Company has four wholly owned subsidiaries (note 17) which have intercompany
transactions under the normal course of operations and are eliminated upon
consolidation.
(b) KEY MANAGEMENT PERSONNEL COMPENSATION:
The key management personnel of the Company are the members of the Company's
executive management team and Board of Directors, and control approximately 5.3%
of the outstanding shares of CMG at March 31, 2014.
In addition to their salaries and director fees, as applicable, directors and
executive officers also participate in the Company's stock option plan (note
11(d)), which is available to almost all employees of the Company.
Key management personnel compensation comprised the following:
Years ended March 31, 2014 2013
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Salaries, bonus and employee benefits 3,707 3,694
Stock-based compensation 870 724
----------------------------------------------------------------------------
4,577 4,418
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20. SUBSEQUENT EVENTS:
On May 21, 2014, the Board of Directors declared a quarterly cash dividend of
$0.20 per share on its Common Shares, payable on June 13, 2014, to all
shareholders of record at the close of business on June 6, 2014.
On May 21, 2014, the Company's Board of Directors approved a two-for-one stock
split of the Company's issued and outstanding Common Shares. Shareholders of
record at the close of business on June 25, 2014 will receive one additional
Common Share for every Common Share owned. The Company's Common Shares are
expected to commence trading on the Toronto Stock Exchange on a post-split basis
on June 23, 2014. All share data contained in these consolidated financial
statements and notes are presented on a pre-split basis.
FOR FURTHER INFORMATION PLEASE CONTACT:
Computer Modelling Group Ltd.
Kenneth M. Dedeluk
President & CEO
(403) 531-1300
ken.dedeluk@cmgl.ca
Computer Modelling Group Ltd.
Sandra Balic
Vice President, Finance & CFO
(403) 531-1300
sandra.balic@cmgl.ca
www.cmgl.ca
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