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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Computer Modelling Group Ltd | TSX:CMG | Toronto | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.11 | 1.01% | 11.04 | 10.96 | 11.09 | 11.07 | 10.80 | 10.86 | 98,280 | 21:11:01 |
Computer Modelling Group Ltd. (TSX:CMG) ("CMG" or the "Company") is very pleased to report our second quarter results for the three and six months ended September 30, 2012.
SECOND QUARTER HIGHLIGHTS For the three months ended September 30, 2012 2011 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- Annuity/maintenance software licenses 12,012 9,308 2,704 29% Perpetual software licenses 2,671 1,596 1,075 67% Total revenue 16,073 11,982 4,091 34% Operating profit 8,032 5,226 2,806 54% Net income 5,361 4,318 1,043 24% Earnings per share - basic 0.14 0.12 0.02 17% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands, except per share data) ---------------------------------------------------------------------------- Annuity/maintenance software licenses 25,192 18,305 6,887 38% Perpetual software licenses 4,741 6,987 (2,246) -32% Total revenue 32,539 27,921 4,618 17% Operating profit 16,137 14,318 1,819 13% Net income 11,451 10,981 470 4% Earnings per share - basic 0.31 0.30 0.01 3% ----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") for Computer Modelling Group Ltd. ("CMG," the "Company," "we" or "our"), presented as at November 7, 2012, should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of the Company for the three and six months ended September 30, 2012 and the audited consolidated financial statements and MD&A for the years ended March 31, 2012 and 2011 contained in the 2012 Annual Report for CMG. Additional information relating to CMG, including our Annual Information Form, can be found at www.sedar.com. The financial data contained herein have been prepared in accordance with International Financial Reporting Standards ("IFRS") and, unless otherwise indicated, all amounts in this report are expressed in Canadian dollars and rounded to the nearest thousand.
FORWARD-LOOKING INFORMATION
Certain information included in this MD&A is forward-looking. Forward-looking information includes statements that are not statements of historical fact and which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as investment objectives and strategy, the development plans and status of the Company's software development projects, the Company's intentions, results of operations, levels of activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), business prospects and opportunities, research and development timetable, and future growth and performance. When used in this MD&A, statements to the effect that the Company or its management "believes", "expects", "expected", "plans", "may", "will", "projects", "anticipates", "estimates", "would", "could", "should", "endeavours", "seeks", "predicts" or "intends" or similar statements, including "potential", "opportunity", "target" or other variations thereof that are not statements of historical fact should be construed as forward-looking information. These statements reflect management's current beliefs with respect to future events and are based on information currently available to management of the Company. The Company believes that the expectations reflected in such forward-looking information are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking information should not be unduly relied upon.
With respect to forward-looking information contained in this MD&A, we have made assumptions regarding, among other things:
-- Future software license sales -- The continued financing by and participation of the Company's partners in the DRMS project and it being completed in a timely manner -- Ability to enter into additional software license agreements -- Ability to continue current research and new product development -- Ability to recruit and retain qualified staff
Forward-looking information is not a guarantee of future performance and involves a number of risks and uncertainties, only some of which are described herein. Many factors could cause the Company's actual results, performance or achievements, or future events or developments, to differ materially from those expressed or implied by the forward-looking information including, without limitation, the following factors which are described in the MD&A of CMG's 2012 Annual Report under the heading "Business Risks":
-- Economic conditions in the oil and gas industry -- Reliance on key clients -- Foreign exchange -- Economic and political risks in countries where the Company currently does or proposes to do business -- Increased competition -- Reliance on employees with specialized skills or knowledge -- Protection of proprietary rights
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievement may vary materially from those expressed or implied by the forward-looking information contained in this MD&A. These factors should be carefully considered and readers are cautioned not to place undue reliance on forward-looking information, which speaks only as of the date of this MD&A. All subsequent forward-looking information attributable to the Company herein is expressly qualified in its entirety by the cautionary statements contained in or referred to herein. The Company does not undertake any obligation to release publicly any revisions to forward-looking information contained in this MD&A to reflect events or circumstances that occur after the date of this MD&A or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.
NON-IFRS FINANCIAL MEASURES
This MD&A includes certain measures which have not been prepared in accordance with IFRS such as "EBITDA", "direct employee costs" and "other corporate costs." Since these measures do not have a standard meaning prescribed by IFRS, they are unlikely to be comparable to similar measures presented by other issuers. Management believes that these indicators nevertheless provide useful measures in evaluating the Company's performance.
"Direct employee costs" include salaries, bonuses, stock-based compensation, benefits, commission expenses, and professional development. "Other corporate costs" include facility-related expenses, corporate reporting, professional services, marketing and promotion, computer expenses, travel, and other office-related expenses. Direct employee costs and other corporate costs should not be considered an alternative to total operating expenses as determined in accordance with IFRS. People-related costs represent the Company's largest area of expenditure; hence, management considers highlighting separately corporate and people-related costs to be important in evaluating the quantitative impact of cost management of these two major expenditure pools. See "Expenses" heading for a reconciliation of direct employee costs and other corporate costs to total operating expenses.
"EBITDA" refers to net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. EBITDA should not be construed as an alternative to net income as determined by IFRS. The Company believes that EBITDA is useful supplemental information as it provides an indication of the results generated by the Company's main business activities prior to consideration of how those activities are amortized, financed or taxed. See "EBITDA" heading for a reconciliation of EBITDA to net income.
CORPORATE PROFILE
CMG is a computer software technology company serving the oil and gas industry. The Company is a leading supplier of advanced processes reservoir modelling software with a blue chip client base of international oil companies and technology centers in over 50 countries. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities. CMG has sales and technical support services based in Calgary, Houston, London, Caracas and Dubai. CMG's Common Shares are listed on the Toronto Stock Exchange ("TSX") and trade under the symbol "CMG".
QUARTERLY PERFORMANCE Fiscal Fiscal Fiscal 2011(1) 2012(2) 2013(3) ($ thousands, unless otherwise stated) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ---------------------------------------------------------------------------- Annuity/maintenance licenses 7,999 8,531 8,997 9,308 12,056 12,497 13,179 12,012 Perpetual licenses 2,335 3,911 5,391 1,596 2,321 3,416 2,070 2,671 ---------------------------------------------------------------------------- Software licenses 10,333 12,442 14,388 10,904 14,377 15,913 15,249 14,683 Professional services 1,730 1,936 1,551 1,078 1,521 1,302 1,216 1,390 ---------------------------------------------------------------------------- Total revenue 12,063 14,378 15,939 11,982 15,898 17,215 16,465 16,073 Operating profit 5,516 7,532 9,092 5,226 8,093 9,193 8,105 8,032 Operating profit % 46 52 57 44 51 53 49 50 EBITDA(4) 5,789 7,818 9,366 5,508 8,414 9,543 8,423 8,425 Profit before income and other taxes 5,278 7,413 9,240 6,096 8,184 9,104 8,577 7,703 Income and other taxes 1,715 2,605 2,577 1,778 2,394 2,484 2,487 2,342 Net income for the period 3,563 4,808 6,663 4,318 5,790 6,620 6,090 5,361 Cash dividends declared and paid 3,623 3,643 7,519 4,053 4,079 4,848 9,736 6,020 ---------------------------------------------------------------------------- Per share amounts - ($/share) Earnings per share - basic 0.10 0.13 0.18 0.12 0.16 0.18 0.16 0.14 Earnings per share - diluted 0.10 0.13 0.18 0.11 0.15 0.17 0.16 0.14 Cash dividends declared and paid 0.10 0.10 0.205 0.11 0.11 0.13 0.26 0.16 ---------------------------------------------------------------------------- (1) Q3 and Q4 of fiscal 2011 include $0.3 million and $0.1 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters. (2) 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. (3) Q1 and Q2 of fiscal 2013 include $2.1 million and $0.2 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters. (4) EBITDA is defined as net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. See "Non-IFRS Financial Measures".
Highlights
During the six months ended September 30, 2012, as compared to the same period of prior fiscal year, CMG:
-- Increased annuity/maintenance revenue by 38% -- Increased operating profit by 13% -- Increased spending on research and development by 21% -- Increased EBITDA by 13% -- Realized earnings per share of $0.31, representing a 3% increase Revenue For the three months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Software licenses 14,683 10,904 3,779 35% Professional services 1,390 1,078 312 29% ---------------------------------------------------------------------------- Total revenue 16,073 11,982 4,091 34% ---------------------------------------------------------------------------- Software license revenue - % of total revenue 91% 91% Professional services - % of total revenue 9% 9% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Software licenses 29,933 25,292 4,641 18% Professional services 2,606 2,629 (23) -1% ---------------------------------------------------------------------------- Total revenue 32,539 27,921 4,618 17% ---------------------------------------------------------------------------- Software license revenue - % of total revenue 92% 91% Professional services - % of total revenue 8% 9% ----------------------------------------------------------------------------
CMG's revenue is comprised of software license sales, which provide the majority of the Company's revenue, and fees for professional services.
Total revenue increased by 34% for the three months ended September 30, 2012, compared to the same period of the previous fiscal year, due to an increase in software license sales driven by the growth in both annuity/maintenance and perpetual license sales, and a slight increase in fees for professional services earned during the quarter.
Total revenue increased by 17% in the six months ended September 30, 2012, compared to the same period of the previous fiscal year, as a result of the increase in software license sales driven by the increase in annuity/maintenance revenue.
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 September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance licenses 12,012 9,308 2,704 29% Perpetual licenses 2,671 1,596 1,075 67% ---------------------------------------------------------------------------- Total software license revenue 14,683 10,904 3,779 35% ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 82% 85% Perpetual as a % of total software license revenue 18% 15% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance licenses 25,192 18,305 6,887 38% Perpetual licenses 4,741 6,987 (2,246) -32% ---------------------------------------------------------------------------- Total software license revenue 29,933 25,292 4,641 18% ---------------------------------------------------------------------------- Annuity/maintenance as a % of total software license revenue 84% 72% Perpetual as a % of total software license revenue 16% 28% ----------------------------------------------------------------------------
Total software license revenue grew by 35% in the three months ended September 30, 2012, compared to the same period of the previous fiscal year, due to the increases in both annuity/maintenance and perpetual license revenue related to increased sales to new and existing customers. Total software license revenue grew by 18% for the six months ended September 30, 2012, compared to the same period of the previous fiscal year, as a result of an increase in the annuity/maintenance revenue stream offset by a decrease in perpetual license sales.
CMG's annuity/maintenance license revenue increased by 29% and 38% during the three and six months ended September 30, 2012, respectively, compared to the same periods of last year. These increases were driven by sales to new and existing clients as well as an increase in maintenance revenue tied to our strong perpetual sales generated in the current and previous fiscal year. Part of the increase in the six months ended September 30, 2012, compared to the same period of the previous fiscal year, is due to the inclusion of a payment received in the first quarter of the current fiscal year from one of our large customers for whom revenue recognition criteria are fulfilled only at the time of the receipt of funds. The payment was received for the licenses and services provided for two quarters of the previous fiscal year (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). Given our long-standing relationship with this client, and the multi-year nature of the contract, we expect to continue to receive payments under this arrangement; 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. During the current quarter, no payments have been received or recorded for this arrangement. If we were to exclude revenue received from this particular customer from the year-to-date recorded revenue to provide a normalized comparison, we would note that the annuity/maintenance revenue grew by 26% for the six months ended September 30, 2012, compared to the same period of the previous fiscal year.
Despite some variability introduced by the arrangement described above, it should be noted that our annuity/maintenance license sales, representing our recurring revenue stream, have continued to experience consecutive quarterly increases over the past several fiscal years, and this trend continued in the second quarter of fiscal 2013.
We can observe from the table below that the exchange rates between the US and Canadian dollars during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year, had only a slight positive impact on our reported annuity/maintenance revenue.
Software license revenue under perpetual sales increased by 67% for the three months ended September 30, 2012, compared to the same period of the previous fiscal year, driven by increased sales of perpetual licenses in the North America and Eastern Hemisphere. Perpetual license sales for the six months ended September 30, 2012, decreased by 32% compared to the same period of the previous fiscal year. In the first quarter of the previous fiscal year, we reported an amount associated with a multi-million dollar perpetual contract in the Eastern Hemisphere which contributed significantly to the revenue growth in the first six months of the previous fiscal year.
Software licensing under perpetual sales is a significant part of CMG's business, but may fluctuate significantly between periods due to the uncertainty associated with the timing and the location where sales are generated. For this reason, 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. It should be further pointed out that strong perpetual sales in previous quarters contributed to the increase in our recurring maintenance revenue in the current quarter.
Similar to the annuity/maintenance revenue stream, we can observe from the table below that the exchange rates between the US and Canadian dollars during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year, had only a slight positive impact on our reported perpetual license revenue.
The following table summarizes the US dollar denominated revenue and the weighted average exchange rate at which it was converted to Canadian dollars:
For the three months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 6,938 5,902 1,036 18% Weighted average conversion rate 1.005 0.990 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 6,972 5,841 1,131 19% ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 1,905 1,656 249 15% Weighted average conversion rate 1.007 0.964 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 1,918 1,596 322 20% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- US dollar annuity/maintenance license sales US$ 15,576 11,448 4,128 36% Weighted average conversion rate 1.001 0.994 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 15,598 11,377 4,221 37% ---------------------------------------------------------------------------- US dollar perpetual license sales US$ 3,251 7,277 (4,026) -55% Weighted average conversion rate 1.002 0.956 ---------------------------------------------------------------------------- Canadian dollar equivalent CDN$ 3,257 6,955 (3,698) -53% ---------------------------------------------------------------------------- REVENUE BY GEOGRAPHIC SEGMENT For the three months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance revenue Canada 5,473 3,998 1,475 37% United States 2,549 2,061 488 24% South America 1,172 926 246 27% Eastern Hemisphere(1) 2,818 2,323 495 21% ---------------------------------------------------------------------------- 12,012 9,308 2,704 29% ---------------------------------------------------------------------------- Perpetual revenue Canada 753 - 753 - United States 258 141 117 83% South America - 615 (615) -100% Eastern Hemisphere 1,660 840 820 98% ---------------------------------------------------------------------------- 2,671 1,596 1,075 67% ---------------------------------------------------------------------------- Total software license revenue Canada 6,226 3,998 2,228 56% United States 2,807 2,202 605 27% South America 1,172 1,541 (369) -24% Eastern Hemisphere 4,478 3,163 1,315 42% ---------------------------------------------------------------------------- 14,683 10,904 3,779 35% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Annuity/maintenance revenue Canada 10,413 7,732 2,681 35% United States 4,942 4,052 890 22% South America 4,334 1,748 2,586 148% Eastern Hemisphere(1) 5,503 4,773 730 15% ---------------------------------------------------------------------------- 25,192 18,305 6,887 38% ---------------------------------------------------------------------------- Perpetual revenue Canada 1,314 32 1,282 4006% United States 662 603 59 10% South America 483 1,291 (808) -63% Eastern Hemisphere 2,282 5,061 (2,779) -55% ---------------------------------------------------------------------------- 4,741 6,987 (2,246) -32% ---------------------------------------------------------------------------- Total software license revenue Canada 11,727 7,764 3,963 51% United States 5,604 4,655 949 20% South America 4,817 3,039 1,778 59% Eastern Hemisphere 7,785 9,834 (2,049) -21% ---------------------------------------------------------------------------- 29,933 25,292 4,641 18% ---------------------------------------------------------------------------- (1) Includes Europe, Africa, Asia and Australia.
On a geographic basis, total software license sales increased across all regions with the exception of the South American market which experienced an overall decrease during the three months ended September 30, 2012, compared to the same period of the previous fiscal year, and Eastern Hemisphere, which experienced a $2.0 million decrease in the six months ended September 30, 2012, compared to the same period of the previous fiscal year. Total revenues in both of these regions, were impacted by lower perpetual sales. The most significant growth came from our annuity/maintenance license sales, with increases experienced across all regions.
The Canadian market (representing 39% of year-to-date total software revenue) experienced healthy increases in both annuity/maintenance and perpetual license sales during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year. These increases were supported by the sales to both new and existing clients. The Canadian market continues to be the leader in generating total software license revenue and, particularly, in generating the recurring annuity/maintenance revenue as evidenced by the quarterly increases of 51%, 40%, 17% and 32% recorded during Q2 2012, Q3 2012, Q4 2012, and Q1 2013, respectively. This growth trend has continued into the second quarter of the current fiscal year with the recorded increase of 37%.
The US market (representing 19% of year-to-date total software revenue) also grew annuity/maintenance and perpetual license sales during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year. Similar to the Canadian market, we have continued to see successive increases in the annuity/maintenance license sales in the US as evidenced by the increases of 19%, 20%, 26% and 20% recorded during Q2 2012, Q3 2012, Q4 2012, and Q1 2013, respectively. This growth trend has continued into the second quarter of the current fiscal year with the recorded increase of 24%.
South America (representing 16% of year-to-date total software revenue) experienced growth in annuity/maintenance revenue during the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year. Annuity/maintenance revenue grew in the first six months of the current fiscal year mainly due to the inclusion of the significant amount on the long-term contract for which revenue is recognized on a cash basis. If we were to adjust year-to-date annuity/maintenance revenue in the current fiscal year for the described amount, we would notice that South America grew annuity/maintenance revenue by just over 30% as a result of the sales to both new and existing clients. The increase in annuity/maintenance license sales was offset by the decreases in perpetual license sales during both the three and six months ended September 30, 2012.
Eastern Hemisphere (representing 26% of the year-to-date total software revenue) grew annuity/maintenance license sales during both three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year. While perpetual license sales increased in the current quarter, they decreased on a year-to-date basis, as a result of the large perpetual sale made during the first quarter of the previous fiscal year which contributed significantly to revenue growth during the six months ended September 30, 2011.
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 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 Quarterly Software Licence Revenue chart, please visit the following link: http://media3.marketwire.com/docs/1108cmg_chart.jpg
DEFERRED REVENUE 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Deferred revenue at: March 31 21,693 16,755 4,938 29% June 30 18,779 15,326 3,453 23% September 30 18,241 14,600 3,641 25% ----------------------------------------------------------------------------
CMG's deferred revenue consists primarily of amounts for pre-sold licenses. Our annuity/maintenance revenue is deferred and recognized on a straight-line basis over the life of the related license period, which is generally one year or less. Amounts are deferred for licenses that have been provided and revenue recognition reflects the passage of time.
The increase in deferred revenue year-over-year as at September 30, June 30 and March 31 is reflective of the growth in annuity/maintenance license sales. The variation within the year is due to the timing of renewals of annuity and maintenance contracts that are skewed to the beginning of the calendar year which explains the decreases in the deferred revenue balance at the end of the first quarter (June 30) and second quarter (September 30) compared to fiscal year-end (March 31). Deferred revenue at September 30, 2012 increased compared to the same period of prior fiscal year due to both renewal of the existing and signing of the new annuity and maintenance contracts in the quarter.
PROFESSIONAL SERVICES REVENUE
CMG recorded professional services revenue of $1.4 million for the three months ended September 30, 2012, representing growth of $0.3 million compared to the same period of the previous fiscal year, resulting from the increase in project activities by our clients and the associated consulting and training activities in the current quarter. Professional services for the six months ended September 30, 2012 amounted to $2.6 million, remaining consistent with the same period of the previous fiscal year. The year-to-date revenue related to consulting activities actually increased; however, this increase was not evident due to the inclusion of a $0.3 million grant in the professional services revenue during the first quarter of the previous fiscal year, which was received from the CMG Reservoir Simulation Foundation ("Foundation CMG") for the DRMS project. The grant was fulfilled during that same quarter; hence, no additional amounts related to the grant have been subsequently recorded as professional services.
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 September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Sales, marketing and professional services 3,592 3,042 550 18% Research and development 3,028 2,393 635 27% General and administrative 1,421 1,321 100 8% ---------------------------------------------------------------------------- Total operating expenses 8,041 6,756 1,285 19% ---------------------------------------------------------------------------- Direct employee costs(i) 6,491 5,402 1,089 20% Other corporate costs 1,550 1,354 196 14% ---------------------------------------------------------------------------- 8,041 6,756 1,285 19% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Sales, marketing and professional services 7,555 6,167 1,388 23% Research and development 5,925 4,888 1,037 21% General and administrative 2,922 2,548 374 15% ---------------------------------------------------------------------------- Total operating expenses 16,402 13,603 2,799 21% ---------------------------------------------------------------------------- Direct employee costs(i) 13,086 10,965 2,121 19% Other corporate costs 3,316 2,638 678 26% ---------------------------------------------------------------------------- 16,402 13,603 2,799 21% ----------------------------------------------------------------------------
(i)Includes salaries, bonuses, stock-based compensation, benefits and commissions.
CMG's total operating expenses increased by 19% and 21% for the three and six months ended September 30, 2012, 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 six months ended September 30, 2012 related to staff costs, compared to 81% recorded in the comparative period of last year. Staffing levels for the first six months of the current fiscal year grew in comparison to the same period of the previous fiscal year to support our continued growth. At September 30, 2012, CMG's staff complement was 167 employees, up from 143 employees as at September 30, 2011. Direct employee costs increased during the three and six months ended September 30, 2012, 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 14% for the three months ended September 30, 2012, compared to the same period of the previous fiscal year, due to the costs associated with the expansion of our office space, which occurred in the third quarter of the previous fiscal year, and a minor office space addition in the current quarter.
Other corporate costs increased by 26% for the six months ended September 30, 2012, compared to the same period of the previous fiscal year, mainly due to inclusion of the costs associated with CMG's biennial technical symposium which took place during the first quarter of the current fiscal year. The remaining increase is attributable to the costs associated with the expansion of our office space, which are comprised of additional office rent, increased computing resources and increased depreciation associated with capital spending on the new space.
RESEARCH AND DEVELOPMENT For the three months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Research and development (gross) 3,487 2,753 734 27% SR&ED credits (459) (360) (99) 28% ---------------------------------------------------------------------------- Research and development 3,028 2,393 635 27% ---------------------------------------------------------------------------- Research and development as a % of total revenue 19% 20% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Research and development (gross) 6,872 5,552 1,320 24% SR&ED credits (947) (664) (283) 43% ---------------------------------------------------------------------------- Research and development 5,925 4,888 1,037 21% ---------------------------------------------------------------------------- Research and development as a % of total revenue 18% 18% ----------------------------------------------------------------------------
CMG maintains its belief that its strategy of growing long-term value for shareholders can only be achieved through continued investment in research and development. CMG works closely with its customers to provide solutions to complex problems related to proven and new advanced recovery processes.
The above research and development includes CMG's proportionate share of joint research and development costs on the DRMS system development of $0.7 million and $1.5 million for the three and six months ended September 30, 2012, respectively, (2011 - $0.7 million and $1.4 million). See discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties."
The increases of 27% and 24% in our gross spending on research and development for the three and six months ended September 30, 2012, respectively, demonstrate our continued commitment to advancement of our technology which is the focal part of our business strategy. Research and development costs, net of research and experimental development ("SR&ED") credits, increased by 27% and 21% during the three and six months ended September 30, 2012, respectively, compared to the same periods of the previous fiscal year, due to increased employee compensation costs, investment in computing resources and facilities costs associated with the newly leased office space.
At the same time, we had an increase in SR&ED credits driven mainly by the increases in our direct employee costs as well as the increase in the eligibility of our expenses for SR&ED credits.
DEPRECIATION For the three months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Depreciation of property and equipment, allocated to: Sales, marketing and professional services 119 96 23 24% Research and development 226 120 106 88% General and administrative 48 66 (18) -27% ---------------------------------------------------------------------------- Total depreciation 393 282 111 39% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Depreciation of property and equipment, allocated to: Sales, marketing and professional services 217 187 30 16% Research and development 406 238 168 71% General and administrative 88 131 (43) -33% ---------------------------------------------------------------------------- Total depreciation 711 556 155 28% ----------------------------------------------------------------------------
The quarterly and year-to-date increases in depreciation, compared to the same periods of the previous fiscal year, reflect the increase in our asset base, mainly as a result of increased spending on computing resources and expansion of the office space in the third quarter of the previous fiscal year, and a minor office space addition in the current quarter.
Finance Income and Costs For the three months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Interest income 131 111 20 18% Net foreign exchange gain - 759 (759) -100% ---------------------------------------------------------------------------- Total finance income 131 870 (739) -85% ---------------------------------------------------------------------------- Total finance costs (represented by net foreign exchange loss) (460) - (460) - ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Interest income 276 218 58 27% Net foreign exchange gain - 800 (800) -100% ---------------------------------------------------------------------------- Total finance income 276 1,018 (742) -73% ---------------------------------------------------------------------------- Total finance costs (represented by net foreign exchange loss) (133) - (133) - ----------------------------------------------------------------------------
Interest income increased in the three and six months ended September 30, 2012, 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 65% (2011 - 72%) of CMG's revenue for the six months ended September 30, 2012 is denominated in US dollars, whereas only approximately 23% (2011 - 23%) of CMG's total costs are denominated in US dollars.
Six month trailing CDN$ to US$ At June 30 At September 30 average ---------------------------------------------------------------------------- 2010 0.9429 0.9711 0.9614 2011 1.0370 0.9626 1.0252 2012 0.9813 1.0166 0.9977 ----------------------------------------------------------------------------
CMG recorded a foreign exchange loss of $0.5 million and $0.1 million for the three and six months ended September 30, 2012, respectively, compared to a $0.8 million foreign exchange gain recorded in both the three and six months ended September 30, 2011.
The strengthening of the Canadian dollar during the second quarter of the current fiscal year, along with the fluctuation in the exchange rates between the Canadian and the US dollars during the current fiscal year, have contributed negatively to the valuation of our US-denominated working capital, hence, contributing to the foreign exchange losses recorded in the three and six months ended September 30, 2012.
Income and Other Taxes
CMG's effective tax rate for the six months ended September 30, 2012 is reflected as 29.7% (2011 - 28.4%), whereas the prevailing Canadian statutory tax rate is now 25.0%. This is primarily due to a combination of the non-tax deductibility of stock- based compensation expense and the benefit of foreign withholding taxes being realized only as a tax deduction as opposed to a tax credit.
The benefit recorded in CMG's books on the SR&ED investment tax credit program impacts deferred income taxes. The investment tax credit earned in the current fiscal year is utilized by CMG to reduce income taxes otherwise payable for the current fiscal year and the federal portion of this benefit bears an inherent tax liability as the amount of the credit is included in the subsequent year's taxable income for both federal and provincial purposes. The inherent tax liability on these investment tax credits is reflected in the year the credit is earned as a non-current deferred tax liability and then, in the following fiscal year, is transferred to income taxes payable.
Operating Profit and Net Income For the three months ended September 30, 2012 2011 $ change % change ($ thousands, except per share amounts) ---------------------------------------------------------------------------- Total revenue 16,073 11,982 4,091 34% Operating expenses (8,041) (6,756) (1,285) 19% ---------------------------------------------------------------------------- Operating profit 8,032 5,226 2,806 54% Operating profit as a % of total revenue 50% 44% ---------------------------------------------------------------------------- Net income for the period 5,361 4,318 1,043 24% Net income for the period as a % of total revenue 33% 36% ---------------------------------------------------------------------------- Earnings per share ($/share) 0.14 0.12 0.02 17% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands, except per share amounts) ---------------------------------------------------------------------------- Total revenue 32,539 27,921 4,618 17% Operating expenses (16,402) (13,603) (2,799) 21% ---------------------------------------------------------------------------- Operating profit 16,137 14,318 1,819 13% Operating profit as a % of total revenue 50% 51% ---------------------------------------------------------------------------- Net income for the period 11,451 10,981 470 4% Net income for the period as a % of total revenue 35% 39% ---------------------------------------------------------------------------- Earnings per share ($/share) 0.31 0.30 0.01 3% ----------------------------------------------------------------------------
Operating profit as a percentage of total revenue for the three months ended September 30, 2012 was at 50%, compared to 44% recorded in the same period of the previous fiscal year. While our total revenue grew by 34% during this period of time, our operating expenses grew by only 19%. This demonstrates our ability to effectively manage our costs.
Operating profit as a percentage of revenue for the six months ended September 30, 2012 was 50%, which is comparable to 51% recorded in the same period of the previous fiscal year.
Net income as a percentage of revenue decreased to 33% for the three months ended September 30, 2012, compared to 36% recorded in the same period of the previous fiscal year, as a result of recording a net foreign exchange loss of $0.5 million during the three months ended September 30, 2012, compared to recording a net foreign exchange gain of $0.8 million for the same period of the previous fiscal year.
Net income for the period as a percentage of revenue decreased to 35% for the six months ended September 30, 2012, compared to 39% for the same period of the previous fiscal year, mainly as a result of recording a net foreign exchange loss of $0.1 million during the six months ended September 30, 2012, compared to recording a net foreign exchange gain of $0.8 million for the same period of 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 September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Net income for the period 5,361 4,318 1,043 24% Add (deduct): Depreciation 393 282 111 39% Finance income (131) (870) 739 -85% Finance costs 460 - 460 - Income and other taxes 2,342 1,778 564 32% ---------------------------------------------------------------------------- EBITDA 8,425 5,508 2,917 53% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- EBITDA as a % of total revenue 52% 46% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Net income for the period 11,451 10,981 470 4% Add (deduct): Depreciation 711 556 155 28% Finance income (276) (1,018) 742 -73% Finance costs 133 - 133 - Income and other taxes 4,829 4,355 474 11% ---------------------------------------------------------------------------- EBITDA 16,848 14,874 1,974 13% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- EBITDA as a % of total revenue 52% 53% ----------------------------------------------------------------------------
EBITDA increased by 53% and 13% for the three and six months ended September 30, 2012, compared to the same periods of the previous fiscal year. These increases provide further indication of our ability to keep growing our recurring annuity/maintenance license sales while effectively managing costs in relation to this base.
Liquidity and Capital Resources For the three months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Cash, beginning of period 51,535 38,347 13,188 34% Cash flow from (used in): Operating activities 3,537 8,322 (4,785) -57% Financing activities (3,456) (3,259) (197) 6% Investing activities (922) (100) (822) 822% ---------------------------------------------------------------------------- Cash, end of period 50,694 43,310 7,384 17% ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 $ change % change ($ thousands) ---------------------------------------------------------------------------- Cash, beginning of period 55,374 41,753 13,621 33% Cash flow from (used in): Operating activities 10,198 11,162 (964) -9% Financing activities (13,519) (9,341) (4,178) 45% Investing activities (1,359) (264) (1,095) 415% ---------------------------------------------------------------------------- Cash, end of period 50,694 43,310 7,384 17% ----------------------------------------------------------------------------
OPERATING ACTIVITIES
Cash flow generated from operating activities decreased by $4.8 million in the three months ended September 30, 2012, compared to the same period of last year, mainly due to the timing differences of when the sales are made and when the resulting receivables are collected, and the variation in the amount of tax payments made during the quarter.
Cash flow generated from operating activities decreased by $1.0 million in the six months ended September 30, 2012, compared to the same period of last year, mainly as a result of an increase in the deferred revenue balance, and higher tax payments.
FINANCING ACTIVITIES
Cash used in financing activities during the three and six months ended September 30, 2012 increased by $0.2 million and $4.2 million, respectively, compared to the same periods of last year, as a result of paying larger dividends and buying back common shares.
During the six months ended September 30, 2012, CMG employees and directors exercised options to purchase 459,000 Common Shares, which resulted in cash proceeds of $3.8 million.
In the six months ended September 30, 2012, CMG paid $15.8 million in dividends, representing the following quarterly dividends:
($ per share) Q1 Q2 ---------------------------------------------------------------------------- Dividends declared and paid 0.16 0.16 Special dividend declared and paid 0.10 - ---------------------------------------------------------------------------- Total dividends declared and paid 0.26 0.16 ----------------------------------------------------------------------------
On November 7, 2012, CMG announced the payment of a quarterly dividend of $0.16 per share on CMG's Common Shares. The dividend will be paid on December 14, 2012 to shareholders of record at the close of business on December 7, 2012.
On April 6, 2011, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on April 7, 2011 to purchase for cancellation up to 1,636,000 of its Common Shares. During the year ended March 31, 2012, 33,000 Common Shares were purchased at market price for a total cost of $438,000.
On April 16, 2012, the Company announced a NCIB commencing on April 18, 2012 to purchase for cancellation up to 3,416,000 of its Common Shares. During the six months ended September 30, 2012, a total of 91,000 Common Shares were purchased at market price for a total cost of $1,551,000.
INVESTING ACTIVITIES
CMG's current needs for capital asset investment relate to computer equipment and office infrastructure costs, all of which will be funded internally. During the six months ended September 30, 2012, CMG expended $1.4 million on property and equipment additions, primarily composed of computing equipment and leasehold improvements, and currently has a capital budget of $2.1 million for fiscal 2013.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2012, CMG has $50.7 million in cash, no debt, and has access to just over $0.8 million under a line of credit with its principal banker.
During the six months ended September 30, 2012, 3,482,000 shares of CMG's public float were traded on the TSX. As at September 30, 2012, CMG's market capitalization based upon its September 30, 2012 closing price of $19.31 was $727.5 million.
Commitments, Off Balance Sheet Items and Transactions with Related Parties
The Company is the operator of the DRMS research and development project (the "DRMS Project"), a collaborative effort with its partners Shell International Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A. ("Petrobras"), to jointly develop the newest generation of reservoir and production system simulation software. The project has been underway since 2006 and, with the ongoing support of the participants, it is expected to continue until ultimate delivery of the software. The Company's share of costs associated with the project is estimated to be $4.0 million ($1.9 million net of overhead recoveries) for the current fiscal year. CMG plans to continue funding its share of the project costs associated with the development of the newest generation reservoir simulation software system from internally generated cash flows.
CMG has very little in the way of other ongoing material contractual obligations other than for pre-sold licenses which are reflected as deferred revenue on its statement of financial position, and contractual obligations for office leases which are estimated as follows: 2013 - $1.0 million; 2014 to 2016 - $2.0 million per year; and 2017 - $1.0 million.
Business Risks and Critical Accounting Estimates
These remain unchanged from the factors detailed in CMG's 2012 Annual Report.
Accounting Standards and Interpretations Issued But Not Yet Effective
The following standards and interpretations have not been adopted by the Company as they apply to future periods:
Standard/Interpretation Nature of impending Impact on CMG's change in accounting financial statements policy ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- IFRS 9 Financial IFRS 9 (2009) replaces IFRS 9 (2010) supersedes Instruments the guidance in IAS 39 IFRS 9 (2009) and is Financial Instruments: effective for annual In November 2009 the Recognition and periods beginning on or IASB issued IFRS 9 Measurement, on the after January 1, 2015, Financial Instruments classification and with early adoption (IFRS 9 (2009)), and in measurement of financial permitted. For annual October 2010 the IASB assets. The Standard periods beginning before published amendments to eliminates the existing January 1, 2015, either IFRS 9 (IFRS 9 (2010)). IAS 39 categories of IFRS 9 (2009) or IFRS 9 In December 2011, the held to maturity, (2010) may be applied. IASB issued an amendment available-for-sale and to IFRS 9 to defer the loans and receivable. The Company intends to mandatory effective date adopt IFRS 9 (2010) in to annual periods Financial assets will be its financial statements beginning on or after classified into one of for the annual period January 1, 2015. two categories on beginning on April 1, initial recognition: 2015. The Company does not expect IFRS 9 (2010) - financial assets to have a material measured at amortized impact on the financial cost; or statements. The classification and -financial assets measurement of the measured at fair value. Company's financial assets and liabilities Gains and losses on is not expected to remeasurement of change under IFRS 9 financial assets (2010) because of the measured at fair value nature of the Company's will be recognized in operations and the types profit or loss, except of financial assets that that for an investment it holds. 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. IFRS 9 (2010) added guidance to IFRS 9 (2009) on the classification and measurement of financial liabilities, and this guidance is consistent with the guidance in IAS 39 expect as described below. Under IFRS 9 (2010), for financial liabilities measured at fair value under the fair value option, changes in fair value attributable to changes in credit risk will be recognized in OCI, with the remainder of the change recognized in profit or loss. However, if this requirement creates or enlarges an accounting mismatch in profit or loss, the entire change in fair value will be recognized in profit or loss. Amounts presented in OCI will not be reclassified to profit or loss at a later date. IFRS 9 (2010) also requires derivative liabilities that are linked to and must be settled by delivery of an unquoted equity instrument to be measured at fair value, whereas such derivative liabilities are measured at cost under IAS 39. IFRS 9 (2010) also added the requirements of IAS 39 for the derecognition of financial assets and liabilities to IFRS 9 without change. The IASB has deferred the mandatory effective date of the existing chapters of IFRS 9 Financial Instruments (2009) and IFRS 9 (2010) to annual periods beginning on or after January 1, 2015. The early adoption of either standard continues to be permitted. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- IFRS 10 Consolidated IFRS 10 replaces the The Company intends to Financial Statements guidance in IAS 27 adopt IFRS 10 in its Consolidated and financial statements for In May 2011, the IASB Separate Financial the annual period issued IFRS 10 Statements and SIC-12 beginning on April 1, Consolidated Financial Consolidation - Special 2013. The Company does Statements, which is Purpose Entities. IAS not expect IFRS 10 to effective for annual 27 (2008) survives as have a material impact periods beginning on or IAS 27 (2011) Separate on the financial after January 1, 2013, Financial Statements, statements. with early adoption only to carry forward permitted. If an entity the existing accounting applies this Standard requirements for earlier, it shall also separate financial apply IFRS 11, IFRS 12, statements. IAS 27 (2011) and IAS 28 (2011) at the same time. IFRS 10 provides a single model to be applied in the control analysis for all investees, including entities that currently are SPEs in the scope of SIC-12. In addition, the consolidation procedures are carried forward substantially unmodified from IAS 27 (2008). ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- IFRS 11 Joint IFRS 11 replaces the The Company intends to Arrangements guidance in IAS 31 adopt IFRS 11 in its Interests in Joint financial statements for In May 2011, the IASB Ventures. the annual period issued IFRS 11 Joint beginning on April 1, Arrangements, which is Under IFRS 11, joint 2013. The Company does effective for annual arrangements are not expect IFRS 11 to periods beginning on or classified as either have a material impact after January 1, 2013, joint operations or on the financial with early adoption joint ventures. IFRS 11 statements. permitted. If an entity essentially carves out applies this Standard of previous jointly earlier, it shall also controlled entities, apply IFRS 10, IFRS 12, those arrangements which IAS 27 (2011) and IAS 28 although structured (2011) at the same time. through a separate vehicle, such separation is ineffective and the parties to the arrangement have rights to the assets and obligations for the liabilities and are accounted for as joint operations in a fashion consistent with jointly controlled assets/operations under IAS 31. In addition, under IFRS 11 joint ventures are stripped of the free choice of equity accounting or proportionate consolidation; these entities must now use the equity method. Upon application of IFRS 11, entities which had previously accounted for joint ventures using proportionate consolidation shall collapse the proportionately consolidated net asset value (including any allocation of goodwill) into a single investment balance at the beginning of the earliest period presented. The investment's opening balance is tested for impairment in accordance with IAS 28 (2011) and IAS 36 Impairment of Assets. Any impairment losses are recognized as an adjustment to opening retained earnings at the beginning of the earliest period presented. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- IFRS 12 Disclosure of IFRS 12 contains the The Company intends to Interests in Other disclosure requirements adopt IFRS 12 in its Entities for entities that have financial statements for interests in the annual period In May 2011, the IASB subsidiaries, joint beginning on April 1, issued IFRS 12 arrangements (i.e. joint 2013. The Company does Disclosure of Interests operations or joint not expect the in Other Entities, which ventures), associates amendments to have a is effective for annual and/or unconsolidated material impact on the periods beginning on or structured entities. financial statements, after January 1, 2013, Interests are widely because of the nature of with early adoption defined as contractual the Company's interests permitted. If an entity and non-contractual in other entities. applies this Standard involvement that exposes earlier, it needs not to an entity to variability apply IFRS 10, IFRS 11, of returns from the IAS 27 (2011) and IAS 28 performance of the other (2011) at the same time. entity. The required disclosures aim to provide information in order to enable users to evaluate the nature of, and the risks associated with, an entity's interest in other entities, and the effects of those interests on the entity's financial position, financial performance and cash flows. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- IFRS 13 Fair Value IFRS 13 replaces the The Company intends to Measurement fair value measurement adopt IFRS 13 guidance contained in prospectively in its In May 2011, the IASB individual IFRSs with a financial statements for published IFRS 13 Fair single source of fair the annual period Value Measurement, which value measurement beginning on April 1, is effective guidance. It defines 2013. The extent of the prospectively for annual fair value as the price impact of adoption of periods beginning on or that would be received IFRS 13 has not yet been after January 1, 2013. to sell an asset or paid determined. The disclosure to transfer a liability requirements of IFRS 13 in an orderly need not be applied in transaction between comparative information market participants at for periods before the measurement date, initial application. i.e. an exit price. The standard also establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income. IFRS 13 explains 'how' to measure fair value when it is required or permitted by other IFRSs. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Amendments to IAS 1 The amendments require The Company intends to Presentation of that an entity present adopt the amendments in Financial Statements separately the items of its financial statements OCI that may be for the annual period In June 2011, the IASB reclassified to profit beginning on April 1, published amendments to or loss in the future 2013. As the amendments IAS 1 Presentation of from those that would only require changes in Financial Statements: never be reclassified to the presentation of Presentation of Items of profit or loss. items in other Other Comprehensive Consequently an entity comprehensive income, Income, which are that presents items of the Company does not effective for annual OCI before related tax expect the amendments to periods beginning on or effects will also have IAS 1 to have a material after July 1, 2012 and to allocate the impact on the financial are to be applied aggregated tax amount statements. retrospectively. Early between these adoption is permitted. categories. The existing option to present the profit or loss and other comprehensive income in two statements has remained unchanged. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Amendments to IAS 32 and The amendments to IAS 32 The Company intends to IFRS 7, Offsetting clarify that an entity adopt the amendments to Financial Assets and currently has a legally IFRS 7 in its financial Liabilities enforceable right to statements for the set-off if that right annual period beginning In December 2011, the is: on April 1, 2013, and IASB published the amendments to IAS 32 Offsetting Financial - not contingent on a in its financial Assets and Financial future event; and statements for the Liabilities and issued annual period beginning new disclosure - enforceable both in April 1, 2014. The requirements in IFRS 7 the normal course of Company does not expect Financial Instruments: business and in the the amendments to have a Disclosures. event of default, material impact on the insolvency or bankruptcy financial statements. The effective date for of the entity and all the amendments to IAS 32 counterparties. is annual periods beginning on or after The amendments to IAS 32 January 1, 2014. The also clarify when a effective date for the settlement mechanism amendments to IFRS 7 is provides for net annual periods beginning settlement or gross on or after January 1, settlement that is 2013. These amendments equivalent to net are to be applied settlement. retrospectively. The amendments to IFRS 7 contain new disclosure requirements for financial assets and liabilities that are: - offset in the statement of financial position; or - subject to master netting arrangements or similar arrangements. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Annual Improvements to The new cycle of The Company intends to IFRSs 2009-2011 Cycle - improvements contains adopt the amendments to various standards amendments to the the standards in its following four standards financial statements for In May 2012, the IASB (excluding IFRS 1) with the annual period published Annual consequential amendments beginning on April 1, Improvements to IFRSs - to other standards and 2013. The extent of the 2009-2011 Cycle as part interpretations. impact of adoption of of its annual the amendments has not improvements process to - IAS 1 Presentation of yet been determined. make non-urgent but Financial Statements necessary amendments to IFRS. -- Comparative information beyond These amendments are minimum requirements effective for annual periods beginning on or --Presentation of the after Jan 1, 2013 with opening statement of retrospective financial position application. - IAS 16 Property, Plant and Equipment -- Classification of servicing equipment - IAS 32 Financial Instruments: Presentation -- Income tax consequences of distributions - IAS 34 Interim Financial Reporting -- Segment assets and liabilities ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Outstanding Share Data
The following table represents the number of Common Shares and options outstanding:
As at November 7, 2012 (thousands) ---------------------------------------------------------------------------- Common Shares 37,731 Options 3,348 ----------------------------------------------------------------------------
On July 13, 2005, CMG adopted a rolling stock option plan which allows the Company to grant options to its employees and directors to acquire Common Shares of up to 10% of the outstanding Common Shares at the date of grant. Based upon this calculation, at November 7, 2012, CMG could grant up to 3,773,000 stock options.
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Management is responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR") as defined under National Instrument 52-109. These controls and procedures were reviewed and the effectiveness of their design and operation was evaluated in fiscal 2012 in accordance with the COSO control framework. The evaluation confirmed the effectiveness of DC&P and ICFR at March 31, 2012. During our fiscal year 2013, we continue to monitor and review our controls and procedures.
During the six months ended September 30, 2012, there have been no significant changes to the Company's ICFR that have materially affected, or are reasonably likely to materially affect, the company's ICFR.
Outlook
Our second quarter of fiscal 2013 has continued to show growth in our annuity/maintenance revenue stream with increases experienced 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 revenue base. During the second quarter, our EBITDA increased by 53% which demonstrates our 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. While oil prices continue to fluctuate, they remain at levels that should allow our customers to move forward on projects involving various types of unconventional reserves and advanced recovery processes. The greater challenges have been with natural gas prices, which have not fared as well, and petroleum producers are faced with uncertainty related to the fears of another worldwide economic recession, political unrest in several petroleum producing countries and environmental issues that have threatened to increase the costs of development and production.
CMG's joint project to develop the newest generation of dynamic reservoir modelling systems ("DRMS Project") continued to make progress in the second quarter of fiscal 2013. The problems encountered during the stabilization period, prior to the initial beta release, were identified and resolved during the second quarter. It is our expectation that another beta release will be completed later this year. During the first quarter we reported that Rob Eastick had been promoted to the position of Vice President, DRMS and Visualization, taking on the role of Project Manager for the DRMS Project. Since then, Rob has quickly come up to speed on the project, and, with the full support of the entire DRMS team, has begun driving the project toward the anticipated limited commercial release of the software by the end of calendar 2013. CMG and its partners remain committed to funding the ongoing development and to the future success of the project.
We will continue to extend our reach globally and focus our efforts on increasing our license sales to both existing and new clients. The excellent reputation behind our Company and its product suite offering will continue to enable us to grow and sustain a healthy market share while generating solid software license revenue. With our strong working capital position, we are well positioned to continue to invest in all aspects of our business in order to continue to grow and diversify our revenue base and to ultimately return value to our shareholders in the form of regular quarterly dividend payments and growth in share value.
Kenneth M. Dedeluk
President and Chief Executive Officer
November 7, 2012
COMPUTER MODELLING GROUP LTD. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION UNAUDITED (thousands of Canadian $) September 30, 2012 March 31, 2012 ---------------------------------------------------------------------------- Assets Current assets: Cash 50,694 55,374 Trade and other receivables 12,412 15,494 Prepaid expenses 1,186 1,195 Prepaid income taxes 65 - ---------------------------------------------------------------------------- 64,357 72,063 Property and equipment 3,477 2,829 ---------------------------------------------------------------------------- Total assets 67,834 74,892 ---------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Trade payables and accrued liabilities 4,149 5,358 Income taxes payable - 1,404 Deferred revenue 18,241 21,693 ---------------------------------------------------------------------------- 22,390 28,455 Deferred tax liability (note 7) 201 358 ---------------------------------------------------------------------------- Total liabilities 22,591 28,813 ---------------------------------------------------------------------------- Shareholders' equity: Share capital 36,182 31,751 Contributed surplus 4,044 3,535 Retained earnings 5,017 10,793 ---------------------------------------------------------------------------- Total shareholders' equity 45,243 46,079 ---------------------------------------------------------------------------- Total liabilities and shareholders' equity 67,834 74,892 ---------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. COMPUTER MODELLING GROUP LTD. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Three months ended Six months ended September 30 September 30 2012 2011 2012 2011 UNAUDITED (thousands of Canadian $ except per share amounts) ---------------------------------------------------------------------------- Revenue (note 4) 16,073 11,982 32,539 27,921 ---------------------------------------------------------------------------- Operating expenses Sales, marketing and professional services 3,592 3,042 7,555 6,167 Research and development (note 5) 3,028 2,393 5,925 4,888 General and administrative 1,421 1,321 2,922 2,548 ---------------------------------------------------------------------------- 8,041 6,756 16,402 13,603 ---------------------------------------------------------------------------- Operating profit 8,032 5,226 16,137 14,318 Finance income (note 6) 131 870 276 1,018 Finance costs (note 6) (460) - (133) - ---------------------------------------------------------------------------- Profit before income and other taxes 7,703 6,096 16,280 15,336 Income and other taxes (note 7) 2,342 1,778 4,829 4,355 ---------------------------------------------------------------------------- Net and total comprehensive income 5,361 4,318 11,451 10,981 ---------------------------------------------------------------------------- Earnings Per Share Basic (note 8(e)) 0.14 0.12 0.31 0.30 Diluted (note 8(e)) 0.14 0.11 0.30 0.29 ---------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. COMPUTER MODELLING GROUP LTD. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY UNAUDITED (thousands of Common Share Contributed Retained Total Canadian $) Capital Surplus Earnings Equity ---------------------------------------------------------------------------- Balance, April 1, 2011 24,801 2,655 8,314 35,770 Total comprehensive income for the period - - 10,981 10,981 Dividends paid - - (11,572) (11,572) Shares issued for cash on exercise of stock options (note 8(b)) 2,669 - - 2,669 Common shares buy-back (notes 8(b) & (c)) (25) - (413) (438) Stock-based compensation: Current period expense - 867 - 867 Stock options exercised 501 (501) - - ---------------------------------------------------------------------------- Balance, September 30, 2011 27,946 3,021 7,310 38,277 ---------------------------------------------------------------------------- Balance, April 1, 2012 31,751 3,535 10,793 46,079 Total comprehensive income for the period - - 11,451 11,451 Dividends paid - - (15,756) (15,756) Shares issued for cash on exercise of stock options (note 8(b)) 3,788 - - 3,788 Common shares buy-back (notes 8(b) & (c)) (80) (1,471) (1,551) Stock-based compensation: Current period expense - 1,232 - 1,232 Stock options exercised 723 (723) - - ---------------------------------------------------------------------------- Balance, September 30, 2012 36,182 4,044 5,017 45,243 ---------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. COMPUTER MODELLING GROUP LTD. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended Six months ended September 30 September 30 UNAUDITED (thousands of Canadian $) 2012 2011 2012 2011 ---------------------------------------------------------------------------- Cash flows from operating activities Net income 5,361 4,318 11,451 10,981 Adjustments for: Depreciation 393 282 711 556 Income and other taxes (note 7) 2,342 1,778 4,829 4,355 Stock-based compensation (note 8(d)) 664 457 1,232 867 Interest income (note 6) (131) (111) (276) (218) ---------------------------------------------------------------------------- 8,629 6,724 17,947 16,541 Changes in non-cash working capital: Trade and other receivables (1,483) 4,889 3,079 2,745 Trade payables and accrued liabilities (300) 118 (1,209) (1,323) Prepaid expenses (56) (217) 9 (276) Deferred revenue (538) (726) (3,452) (2,155) ---------------------------------------------------------------------------- Cash generated from operating activities 6,252 10,788 16,374 15,532 Interest received 136 106 280 212 Income taxes paid (2,851) (2,572) (6,456) (4,582) ---------------------------------------------------------------------------- Net cash from operating activities 3,537 8,322 10,198 11,162 ---------------------------------------------------------------------------- Cash flows from financing activities Proceeds from issue of common shares 2,564 1,232 3,788 2,669 Dividends paid (6,020) (4,053) (15,756) (11,572) Common shares buy-back (note 8(c)) - (438) (1,551) (438) ---------------------------------------------------------------------------- Net cash used in financing activities (3,456) (3,259) (13,519) (9,341) ---------------------------------------------------------------------------- Cash flows used in investing activities Property and equipment additions (922) (100) (1,359) (264) ---------------------------------------------------------------------------- Increase (decrease) in cash (841) 4,963 (4,680) 1,557 Cash, beginning of period 51,535 38,347 55,374 41,753 ---------------------------------------------------------------------------- Cash, end of period 50,694 43,310 50,694 43,310 ----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended September 30, 2012 and 2011 (unaudited).
1. Reporting Entity:
Computer Modelling Group Ltd. ("CMG") is a company domiciled in Alberta, Canada and is incorporated pursuant to the Alberta Business Corporations Act, with its Common Shares listed on the Toronto Stock Exchange under the symbol "CMG". The address of CMG's registered office is Suite 200, 1824 Crowchild Trail N.W., Calgary, Alberta, Canada, T2M 3Y7. The condensed consolidated financial statements as at and for the three and six months ended September 30, 2012 comprise CMG and its subsidiaries (together referred to as the "Company"). The Company is a computer software technology company engaged in the development and licensing of reservoir simulation software. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities.
2. Basis of Preparation:
(a) STATEMENT OF COMPLIANCE:
These condensed consolidated financial statements have been prepared on a going concern basis in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"), and using the accounting policies disclosed in note 3 of the Company's annual consolidated financial statements as at and for the year ended March 31, 2012. Accordingly, the condensed consolidated financial statements do not include all of the information required for full annual financial statements, and should be read in conjunction with the Company's most recent annual consolidated financial statements as at and for the year ended March 31, 2012, prepared in accordance with International Financial Reporting Standards ("IFRS").
The unaudited condensed consolidated financial statements as at and for the three and six months ended September 30, 2012 were authorized for issuance by the Board of Directors on November 7, 2012.
(b) BASIS OF MEASUREMENT:
The condensed consolidated financial statements have been prepared on the historical cost basis, which is based on the fair value of the consideration at the time of the transaction.
(c) FUNCTIONAL AND PRESENTATION CURRENCY:
The condensed consolidated financial statements are presented in Canadian dollars, which is the functional currency of CMG and its subsidiaries. All financial information presented in Canadian dollars has been rounded to the nearest thousand.
(d) USE OF ESTIMATES, JUDGMENTS AND ASSUMPTIONS:
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses for the period. Estimates and underlying assumptions are based on historical experience and other assumptions that are considered reasonable in the circumstances and are reviewed on an on-going basis. Actual results may differ from such estimates and it is possible that the differences could be material. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. In preparing these condensed consolidated financial statements, the significant judgments made by management in applying the Company's accounting policies and the key sources of estimation uncertainty are the same as those applied in the annual IFRS consolidated financial statements for the year ended March 31, 2012.
3. Significant Accounting Policies:
The condensed consolidated financial statements should be read in conjunction with the Company's annual financial statements for the year ended March 31, 2012 prepared in accordance with IFRS applicable to those annual consolidated financial statements. The same accounting policies, presentation and methods of computation have been followed in these condensed consolidated financial statements as were applied in the Company's first annual IFRS consolidated financial statements for the year ended March 31, 2012.
4. Revenue: For the three months ended September 30, 2012 2011 (thousands of $) ------------------------------------------------------------------------- Software licenses 14,683 10,904 Professional services 1,390 1,078 ------------------------------------------------------------------------- 16,073 11,982 ------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 (thousands of $) ------------------------------------------------------------------------- Software licenses 29,933 25,292 Professional services 2,606 2,629 ------------------------------------------------------------------------- 32,539 27,921 ------------------------------------------------------------------------- 5. Research and Development Costs: For the three months ended September 30, 2012 2011 (thousands of $) ------------------------------------------------------------------------- Research and development 3,487 2,753 Scientific research and experimental development ("SR&ED") investment tax credits (459) (360) ------------------------------------------------------------------------- 3,028 2,393 ------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 (thousands of $) ------------------------------------------------------------------------- Research and development 6,872 5,552 Scientific research and experimental development ("SR&ED") investment tax credits (947) (664) ------------------------------------------------------------------------- 5,925 4,888 ------------------------------------------------------------------------- 6. Finance Income and Finance Costs: For the three months ended September 30, 2012 2011 (thousands of $) ------------------------------------------------------------------------- Interest income 131 111 Net foreign exchange gain - 759 ------------------------------------------------------------------------- Finance income 131 870 ------------------------------------------------------------------------- Net foreign exchange loss (460) - ------------------------------------------------------------------------- Finance costs (460) - ------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 (thousands of $) ------------------------------------------------------------------------- Interest income 276 218 Net foreign exchange gain - 800 ------------------------------------------------------------------------- Finance income 276 1,018 ------------------------------------------------------------------------- Net foreign exchange loss (133) - ------------------------------------------------------------------------- Finance costs (133) - ------------------------------------------------------------------------- 7. Income and Other Taxes: The major components of income tax expense are as follows: For the six months ended September 30, 2012 2011 (thousands of $) ------------------------------------------------------------------------- Current year income taxes 4,416 4,285 Adjustment for prior year 68 - ------------------------------------------------------------------------- Current income taxes 4,484 4,285 Deferred tax recovery (157) (134) Foreign withholding and other taxes 502 204 ------------------------------------------------------------------------- 4,829 4,355 -------------------------------------------------------------------------
The provision for income and other taxes reported differs from the amount computed by applying the combined Canadian Federal and Provincial statutory rate to the profit before income and other taxes.
The reasons for this difference and the related tax effects are as follows:
For the six months ended September 30, 2012 2011 (thousands of $, unless otherwise stated) ---------------------------------------------------------------------------- Combined statutory tax rate 25.00% 26.13% ---------------------------------------------------------------------------- Expected income tax 4,070 4,007 Non-deductible costs 320 237 Withholding taxes 377 143 Adjustment for prior year 68 - Other (6) (32) ---------------------------------------------------------------------------- 4,829 4,355 ---------------------------------------------------------------------------- The components of the Company's deferred tax liability are as follows: September 30, March 31, (thousands of $) 2012 2012 ---------------------------------------------------------------------------- Tax liability on SR&ED investment tax credits (152) (267) Tax liability on property and equipment (49) (91) ---------------------------------------------------------------------------- Deferred tax liability (201) (358) ----------------------------------------------------------------------------
All movement in deferred tax assets and liabilities is recognized through comprehensive income of the respective period.
8. Share Capital:
(a) AUTHORIZED:
An unlimited number of Common Shares, an unlimited number of Non-Voting Shares, and an unlimited number of Preferred Shares, issuable in series.
(b) ISSUED:
(thousands of shares) Common Shares ---------------------------------------------------------------------------- Balance, April 1, 2011 36,427 Issued for cash on exercise of stock options 467 Common shares buy-back (33) ---------------------------------------------------------------------------- Balance, September 30, 2011 36,861 ---------------------------------------------------------------------------- Balance, April 1, 2012 37,307 Issued for cash on exercise of stock options 459 Common shares buy-back (91) ---------------------------------------------------------------------------- Balance, September 30, 2012 37,675 ----------------------------------------------------------------------------
Subsequent to September 30, 2012, 56,000 stock options were exercised for cash proceeds of $487,000.
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 6, 2011, the Company announced a Normal Course Issuer Bid ("NCIB") commencing on April 7, 2011 to purchase for cancellation up to 1,636,000 of its Common Shares. This NCIB ended on April 6, 2012 and a total of 33,000 Common Shares were purchased at market price for a total cost of $438,000 during the year ended March 31, 2012.
On April 16, 2012, the Company announced a NCIB commencing on April 18, 2012 to purchase for cancellation up to 3,416,000 of its Common Shares. During the six months ended September 30, 2012, a total of 91,000 Common Shares were purchased at market price for a total cost of $1,551,000.
(d) STOCK-BASED COMPENSATION PLAN:
The Company adopted a rolling stock option plan as of July 13, 2005, which was reaffirmed by the Company's shareholders on July 7, 2011, which allows it to grant options to acquire Common Shares of up to 10% of the combined outstanding Common and Non-Voting Shares at the date of grant. Based upon this calculation, at September 30, 2012, the Company could grant up to 3,767,000 stock options. Pursuant to the stock option plan, the maximum term of an option granted cannot exceed five years from the date of grant. The outstanding stock options vest as to 50% after the first year anniversary, from date of grant, and then vest as to 25% of the total options granted after each of the second and third year anniversary dates.
The following table outlines changes in stock options:
For the six For the months ended year ended (thousands except per share amounts) September 30, 2012 March 31, 2012 ---------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price Granted ($/share) Granted ($/share) ---------------------------------------------------------------------------- Outstanding at beginning of period 2,903 9.85 2,825 7.41 Granted 1,000 18.18 1,071 13.43 Exercised (459) 8.24 (913) 6.43 Forfeited/cancelled (38) 14.07 (80) 10.57 ---------------------------------------------------------------------------- Outstanding at end of period 3,406 12.46 2,903 9.85 ---------------------------------------------------------------------------- Options exercisable at end of period 1,650 9.25 1,120 7.31 ----------------------------------------------------------------------------
The range of exercise prices of stock options outstanding and exercisable at September 30, 2012 is as follows:
Outstanding Exercisable ---------------------------------------------------------------------------- Weighted Average Weighted Weighted Remaining Average Average Number of Contractual Exercise Number of Exercise Options Life Price Options Price Exercise Price ($/option) (thousands) (years) ($/option) (thousands) ($/option) ---------------------------------------------------------------------------- 4.52 - 5.63 278 0.8 5.40 278 5.40 5.64 - 7.80 444 1.9 7.80 444 7.80 7.81 - 9.07 745 2.9 9.07 493 9.07 9.08 - 13.43 926 3.9 13.40 433 13.40 13.44 - 18.18 1,013 4.8 18.08 2 14.24 ---------------------------------------------------------------------------- 3,406 3.4 12.46 1,650 9.25 ----------------------------------------------------------------------------
The fair value of stock options granted was estimated using the Black-Scholes option pricing model under the following assumptions:
For the six months ended For the year ended September 30, 2012 March 31, 2012 ---------------------------------------------------------------------------- Fair value at grant date ($/option) 2.45 to 3.81 1.23 to 3.42 Share price at grant date ($/share) 17.90 to 18.18 13.00 to 16.35 Risk-free interest rate (%) 1.13 to 1.26 0.99 to 2.06 Estimated hold period prior to exercise (years) 2 to 4 2 to 4 Volatility in the price of common shares (%) 28 to 36 24 to 37 Dividend yield per common share (%) 3.57 to 4.12 3.20 to 4.94 ----------------------------------------------------------------------------
The Company recognized total stock-based compensation expense for the three and six months ended September 30, 2012 of $664,000 and $1,232,000 respectively (three and six months ended September 30, 2011 - $457,000 and $867,000 respectively).
(e) EARNINGS PER SHARE:
The following table summarizes the earnings and weighted average number of Common Shares used in calculating basic and diluted earnings per share:
For the three months ended September 30, 2012 2011 (thousands except per share amounts) ---------------------------------------------------------------------------- Weighted Weighted Average Earnings Average Earnings Earnings Shares Per Share Earnings Shares Per Share ($) Outstanding ($/share) ($) Outstanding ($/share) ---------------------------------------------------------------------------- Basic 5,361 37,504 0.14 4,318 36,759 0.12 Dilutive effect of stock options 1,099 999 ---------------------------------------------------------------------------- Diluted 5,361 38,603 0.14 4,318 37,758 0.11 ---------------------------------------------------------------------------- For the six months ended September 30, 2012 2011 (thousands except per share amounts) ---------------------------------------------------------------------------- Weighted Weighted Average Earnings Average Earnings Earnings Shares Per Share Earnings Shares Per Share ($) Outstanding ($/share) ($) Outstanding ($/share) ---------------------------------------------------------------------------- Basic 11,451 37,429 0.31 10,981 36,646 0.30 Dilutive effect of stock options 1,086 1,074 ---------------------------------------------------------------------------- Diluted 11,451 38,515 0.30 10,981 37,720 0.29 ----------------------------------------------------------------------------
During the three and six months ended September 30, 2012, 147,000 and Nil options respectively (three and six months ended September 30, 2011 - 199,000, and 193,000 respectively) were excluded from the computation of the weighted-average number of diluted shares outstanding because their effect was not dilutive.
9. Commitments:
(a) RESEARCH COMMITMENTS:
The Company is the operator of the DRMS research and development project (the "DRMS project"), a collaborative effort with its partners Shell International Exploration and Production BV ("Shell") and Petroleo Brasileiro S.A. ("Petrobras"), to jointly develop the newest generation of reservoir and production system simulation software. The project has been underway since 2006 and, with the ongoing support of the participants, it is expected to continue until ultimate delivery of the software. The Company's share of costs associated with the project is estimated to be $4.0 million ($1.9 million net of overhead recoveries) for fiscal 2013.
(b) LEASE COMMITMENTS:
The Company has operating lease commitments relating to its office premises with the minimum annual lease payments as follows:
Six months ended September 30, 2012 2011 (thousands of $) ---------------------------------------------------------------------------- Less than one year 995 960 Between one and five years 6,960 5,378 ---------------------------------------------------------------------------- 7,955 6,338 ----------------------------------------------------------------------------
10. Line Of Credit:
The Company has arranged for a $1.0 million line of credit with its principal banker, which can be drawn down by way of a demand operating credit facility or may be used to support letters of credit. As at September 30, 2012, US $165,000 (2011 - US $165,000) had been reserved on this line of credit for the letter of credit supporting a performance bond.
11. Segmented Information:
The Company is organized into one operating segment represented by the development and licensing of reservoir simulation software. The Company provides professional services, consisting of support, training, consulting and contract research activities, to promote the use and development of its software; however, these activities are not evaluated as a separate business segment.
Revenues and property and equipment of the Company arise in the following geographic regions:
(thousands of $) Revenue Property and equipment ---------------------------------------------------------------------------- For the six months ended September 30, As at September 30, 2012 2011 2012 2011 ---------------------------------------------------------------------------- Canada 12,958 9,034 3,332 2,034 United States 5,830 4,800 64 96 South America 5,501 3,878 54 97 Eastern Hemisphere(1) 8,250 10,209 27 35 ---------------------------------------------------------------------------- 32,539 27,921 3,477 2,262 (1) Includes Europe, Africa, Asia and Australia.
In the six months ended September 30, 2012, the Company derived 7.4% (2011 - 13.7%) of its revenue from one customer.
12. Joint Venture:
The Company is the operator of a joint software development project, the DRMS project, which gives the Company exclusive rights to commercialize the jointly developed software while the other partners will have unlimited software access for their internal use. Accordingly, the Company records its proportionate share of costs incurred on the project (37.04%) as research and development costs within the condensed consolidated statements of operations and comprehensive income.
For the three and six months ended September 30, 2012, CMG included $0.9 million and $1.8 million, respectively (2011 - $0.7 million and $1.4 million, respectively) of costs in its condensed consolidated statements of operations and comprehensive income related to this joint project.
Additionally, the Company is entitled to charge the project for various services provided as operator, which were recorded in revenue as professional services and amounted to $0.4 million and $0.9 million during the three and six months ended September 30, 2012 (2011 - $0.4 million and $0.9 million, respectively).
13. Subsequent Events:
On November 7, 2012, the Board of Directors declared a cash dividend of $0.16 per share on its Common Shares, payable on December 14, 2012, to all shareholders of record at the close of business on December 7, 2012.
Contacts: Computer Modelling Group Ltd. Kenneth M. Dedeluk President & CEO (403) 531-1300ken.dedeluk@cmgl.ca Computer Modelling Group Ltd. John Kalman Vice President, Finance & CFO (403) 531-1300john.kalman@cmgl.ca www.cmgl.ca
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