CALGARY, ALBERTA–(Marketwire – May 24, 2012) – Computer Modelling Group Ltd. (“CMG” or the “Company”) (CMG.TO – News) is very pleased to report our financial results for the fiscal year ended March 31, 2012.
MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (“MDA”) for Computer Modelling Group Ltd. (“CMG,” the “Company,” “we” or “our”), presented as at May 23, 2012, should be read in conjunction with the audited consolidated financial statements and related notes of the Company for the years ended March 31, 2012 and 2011. Additional information relating to CMG, including our Annual Information Form, can be found at www.sedar.com. The financial data contained herein have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and, unless otherwise indicated, all amounts in this report are expressed in Canadian dollars and rounded to the nearest thousand.
Effective on the close of business on June 20, 2011, CMG’s Common Shares were split on a two-for-one basis. Accordingly, all comparative number of shares and per share amounts have been retroactively adjusted to reflect the two-for-one split.
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”.
ANNUAL PERFORMANCE
March 31, March 31, March 31,
($ thousands, unless otherwise stated) 2012 2011 2010
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Annuity/maintenance licenses 42,858 32,709 29,507
Perpetual licenses 12,724 11,045 10,443
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Software licenses 55,582 43,754 39,950
Professional services 5,452 8,073 5,353
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Total revenue 61,034 51,827 45,303
Operating profit 31,604 25,677 21,893
Operating profit (%) 52% 50% 48%
EBITDA(1) 32,831 26,714 22,780
Net income for the year 23,391 17,166 14,463
Cash dividends declared and paid 20,499 16,971 16,557
Total assets 74,892 58,689 49,906
Total shares outstanding 37,307 36,427 35,660
Trading price per share at March 31 15.90 12.98 8.63
Market capitalization at March 31 593,170 472,820 307,568
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Per share amounts - ($/share)
Earnings per share - basic 0.63 0.48 0.41
Earnings per share - diluted 0.62 0.47 0.40
Cash dividends declared and paid 0.555 0.47 0.47
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(1) EBITDA is defined as net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. See “Non-IFRS Financial Measures”.
QUARTERLY PERFORMANCE
Fiscal 2011(1)
($ thousands, unless otherwise stated) Q1 Q2 Q3 Q4
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Annuity/maintenance licenses 8,325 7,855 7,999 8,531
Perpetual licenses 1,824 2,975 2,335 3,911
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Software licenses 10,149 10,830 10,333 12,442
Professional services 1,905 2,502 1,730 1,936
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Total revenue 12,054 13,332 12,063 14,378
Operating profit 5,933 6,695 5,516 7,532
Operating profit % 49 50 46 52
EBITDA 6,162 6,944 5,789 7,818
Profit before income and other taxes 6,178 6,565 5,278 7,413
Income and other taxes 1,949 1,999 1,715 2,605
Net income for the period 4,229 4,565 3,563 4,808
Cash dividends declared and paid 6,274 3,430 3,623 3,643
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Per share amounts - ($/share)
Earnings per share - basic 0.12 0.13 0.10 0.13
Earnings per share - diluted 0.12 0.13 0.10 0.13
Cash dividends declared and paid 0.175 0.095 0.10 0.10
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Fiscal 2012(2)
($ thousands, unless otherwise stated) Q1 Q2 Q3 Q4
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Annuity/maintenance licenses 8,997 9,308 12,056 12,497
Perpetual licenses 5,391 1,596 2,321 3,416
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Software licenses 14,388 10,904 14,377 15,913
Professional services 1,551 1,078 1,521 1,302
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Total revenue 15,939 11,982 15,898 17,215
Operating profit 9,092 5,226 8,093 9,193
Operating profit % 57 44 51 53
EBITDA 9,366 5,508 8,414 9,543
Profit before income and other taxes 9,240 6,096 8,184 9,104
Income and other taxes 2,577 1,778 2,394 2,484
Net income for the period 6,663 4,318 5,790 6,620
Cash dividends declared and paid 7,519 4,053 4,079 4,848
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Per share amounts - ($/share)
Earnings per share - basic 0.18 0.12 0.16 0.18
Earnings per share - diluted 0.18 0.11 0.15 0.17
Cash dividends declared and paid 0.205 0.11 0.11 0.13
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(1) Q1, Q2, Q3 and Q4 of fiscal 2011 include $1.1 million, $0.2 million, $0.3 million and $0.1 million, respectively, in revenue that pertains to usage of CMG’s products in prior quarters.
(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.
Note: all quarterly data contained in the above table has been prepared in accordance with IFRS.
Highlights
During the year ended March 31, 2012, as compared to the prior fiscal year, CMG:
-- Increased annuity/maintenance revenue by 31%;
-- Increased perpetual sales by 15%;
-- Increased net income by 36%;
-- Increased spending on research and development by 14%;
-- Realized earnings per share of $0.63, representing a 31% increase.
Revenue
For the three months ended March 31, 2012 2011 $ change % change
($ thousands)
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Software licenses 15,913 12,442 3,471 28%
Professional services 1,302 1,936 (634) -33%
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Total revenue 17,215 14,378 2,837 20%
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Software license revenue - % of total
revenue 92% 87%
Professional services - % of total
revenue 8% 13%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands)
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Software licenses 55,582 43,754 11,828 27%
Professional services 5,452 8,073 (2,621) -32%
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Total revenue 61,034 51,827 9,207 18%
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Software license revenue - % of total
revenue 91% 84%
Professional services - % of total
revenue 9% 16%
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CMG’s revenue is comprised of software license fees, which provide the majority of the Company’s revenue, and fees for professional services.
Total revenue increased by 20% and 18% for the three months and year ended March 31, 2012, respectively, driven primarily by our strong annuity/maintenance sales experienced during both the quarter and year-to-date. The increases in software license revenue were partially offset by the decreases in fees earned from professional services.
SOFTWARE LICENSE REVENUE
Software license revenue is made up of annuity/maintenance license fees charged for the use of the Company’s software products which is generally for a term of one year or less and perpetual software license fees, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity. Annuity/maintenance license fees have historically had a high renewal rate and, accordingly, provide a reliable revenue stream while perpetual license sales are more variable and unpredictable in nature as the purchase decision and its timing fluctuate with the customers’ needs and budgets. The majority of CMG’s customers who have acquired perpetual software licenses subsequently purchase our maintenance package to ensure ongoing product support and access to current versions of CMG’s software.
For the three months ended March 31, 2012 2011 $ change % change
($ thousands)
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Annuity/maintenance licenses 12,497 8,531 3,966 46%
Perpetual licenses 3,416 3,911 (495) -13%
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Total software license revenue 15,913 12,442 3,471 28%
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Annuity/maintenance as a % of total
software license revenue 79% 69%
Perpetual as a % of total software
license revenue 21% 31%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands)
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Annuity/maintenance licenses 42,858 32,709 10,149 31%
Perpetual licenses 12,724 11,045 1,679 15%
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Total software license revenue 55,582 43,754 11,828 27%
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Annuity/maintenance as a % of total
software license revenue 77% 75%
Perpetual as a % of total software
license revenue 23% 25%
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Total software license revenue increased by 28% and 27% during the three months and year ended March 31, 2012, respectively, compared to the same periods of the previous fiscal year. The increase in our quarterly total software license revenue was driven by the increase in annuity/maintenance license sales while our year-to-date increase was supported by growth in both annuity/maintenance and perpetual license sales.
CMG’s annuity/maintenance license revenue increased by 46% and 31% during the three months and year ended March 31, 2012, respectively, compared to the same periods of the previous fiscal year. Part of the growth during both the quarter and year-to-date was driven by strong sales to new and existing clients as well as the increase in maintenance revenue tied to our strong perpetual sales generated in the previous quarters of the current and past fiscal years. Another reason for the increase in both the quarterly and year-to-date annuity/maintenance revenue is the accounting treatment of the payments received from one of our large customers for whom revenue recognition criteria are fulfilled only at the time of the receipt of funds. Payments have been received during the current quarter and fiscal year for the licenses provided in past periods (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 receiving payments under this arrangement, however, the amount and timing is uncertain and will continue to be recorded on a cash basis which may introduce some variability in our reported quarterly revenue results. If we were to remove revenue from this particular customer from the quarterly and year-to-date annuity/maintenance revenue amounts in order to provide normalized comparison, we would note that that the annuity/maintenance license sales have grown by 19% and 20% in the three months and year ended March 31, 2012, respectively, compared to the same periods of the previous fiscal year. Our annuity/maintenance license revenue, representing a recurring revenue stream, continues experiencing steady growth quarter-over-quarter as evidenced by consecutive quarterly increases over the past several fiscal years. We expect this trend to continue in the future supported by the market’s demand for our highly specialized software, which is further demonstrated by the strong growth in our deferred revenue balance (see discussion under “Deferred Revenue”).
The increase in annuity/maintenance revenue as measured in Canadian dollars has been negatively affected by the strengthening of the Canadian dollar relative to the US dollar in the current fiscal year. The table below illustrates revenue generated in US dollars and the rates at which it was converted into Canadian dollars to show the movement in US dollar denominated revenue without the impact of the foreign exchange. Had the exchange rate between the US and Canadian dollars remained constant between the three months and year ended March 31, 2012 and 2011, our fourth quarter annuity/maintenance revenue would have increased by 48% (instead of 46%) and our year-to-date annuity/maintenance revenue would have increased by 35% (instead of 31%).
Perpetual license sales decreased by 13% for the three months ended March 31, 2012 whereas they increased by 15% for the year ended March 31, 2012, compared to the same periods 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 anticipate achieving a certain level of aggregate perpetual sales on an annual basis, we expect to observe fluctuations in the reported quarterly amounts across different markets. Quarterly perpetual license revenue decreased due to selling fewer licenses, particularly in the North American market, in the last part of the fourth quarter of the current fiscal year compared to the same period of the previous fiscal year.The year-to-date increase was driven by strong perpetual sales achieved in our Eastern Hemisphere, supported in particular by a multi-million perpetual contract closed in the first quarter of the current fiscal year.
We can observe from the table below that our year-to-date perpetual sales in US dollars were negatively affected by the foreign exchange movement between the US and Canadian dollars as a result of the strengthening Canadian dollar in the current fiscal year. Had the exchange rate between the US and Canadian dollars remained constant between the year ended March 31, 2012 and 2011, our year-to-date perpetual license revenue would have increased by 19% (instead of 15%). The foreign exchange rates had a minimum impact on our quarterly perpetual sales.
The following table summarizes the US dollar denominated revenue and the weighted average exchange rates at which it was converted to Canadian dollars:
For the three months ended
March 31, 2012 2011 $ change % change
($ thousands)
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US dollar annuity/maintenance
license sales US$ 8,986 US$ 5,368 3,618 67%
Weighted average conversion
rate 0.994 1.012
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Canadian dollar equivalent CDN$ 8,934 CDN$ 5,433 3,501 64%
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US dollar perpetual license
sales US$ 3,281 US$ 3,502 (221) -6%
Weighted average conversion
rate 1.001 0.980
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Canadian dollar equivalent CDN$ 3,285 CDN$ 3,432 (147) -4%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands)
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US dollar annuity/maintenance
license sales US$ 29,146 US$ 21,275 7,871 37%
Weighted average conversion
rate 0.993 1.040
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Canadian dollar equivalent CDN$ 28,954 CDN$ 22,116 6,838 31%
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US dollar perpetual license
sales US$ 12,425 US$ 8,120 4,305 53%
Weighted average conversion
rate 0.977 1.012
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Canadian dollar equivalent CDN$ 12,142 CDN$ 8,216 3,926 48%
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REVENUE BY GEOGRAPHIC SEGMENT
For the three months ended March 31, 2012 2011 $ change % change
($ thousands)
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Annuity/maintenance revenue
Canada 4,213 3,608 605 17%
United States 2,337 1,857 480 26%
South America 3,307 674 2,633 391%
Eastern Hemisphere(1) 2,640 2,392 248 10%
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12,497 8,531 3,966 46%
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Perpetual revenue
Canada 204 480 (276) -58%
United States 753 879 (126) -14%
South America 177 830 (653) -79%
Eastern Hemisphere 2,282 1,722 560 33%
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3,416 3,911 (495) -13%
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Total software license revenue
Canada 4,417 4,088 329 8%
United States 3,090 2,736 354 13%
South America 3,484 1,504 1,980 132%
Eastern Hemisphere 4,922 4,114 808 20%
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15,913 12,442 3,471 28%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands)
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Annuity/maintenance revenue
Canada 15,946 11,620 4,326 37%
United States 8,528 7,041 1,487 21%
South America 8,536 5,147 3,389 66%
Eastern Hemisphere 9,848 8,901 947 11%
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42,858 32,709 10,149 31%
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Perpetual revenue
Canada 655 2,829 (2,174) -77%
United States 1,746 2,141 (395) -18%
South America 1,468 1,919 (451) -24%
Eastern Hemisphere 8,855 4,156 4,699 113%
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12,724 11,045 1,679 15%
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Total software license revenue
Canada 16,601 14,449 2,152 15%
United States 10,274 9,182 1,092 12%
South America 10,004 7,066 2,938 42%
Eastern Hemisphere 18,703 13,057 5,646 43%
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55,582 43,754 11,828 27%
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(1) Includes Europe, Africa, Asia and Australia.
On a geographic basis, total software license sales increased across all regions during both the three months and the year ended March 31, 2012. The most significant growth came from our annuity/maintenance license sales, with increases experienced across all regions. While the South American market experienced the highest increase, Canada continues to be the leader in annuity/maintenance revenue generation. While perpetual license sales decreased during the fourth quarter, they increased by 15% on a year-to-date basis. This increase was driven solely by the sales made in the Eastern Hemisphere.
The Canadian market (representing 30% of fiscal 2012 total software revenue) continues to experience consistent growth in the recurring annuity/maintenance revenue stream as evidenced by the increases of 17% and 37% for the three months and year ended March 31, 2012, respectively, compared to the same periods of the previous fiscal year. The increases in the annuity revenue stream were supported by the increase in sales to both existing and new clients. In addition, strong perpetual license sales generated in the past have enabled the Canadian market to maintain increased revenue levels from the maintenance contracts tied to those perpetual licenses. On the other hand, perpetual sales during the current fiscal year did not reach the same level of the perpetual sales made during the previous fiscal year.
The US market (representing 18% of fiscal 2012 total software revenue) also experienced growth in annuity/maintenance revenue with the increases of 26% and 21% recorded for the three months and year ended March 31, 2012, respectively, compared to the same periods of the previous fiscal year, due to increased sales to both existing and new clients. Perpetual sales experienced decreased activity in the current fiscal year compared to the previous fiscal year with the overall year-to-date decrease of 18%.
South America (representing 18% of fiscal 2012 total software revenue) experienced strong growth in annuity/maintenance revenue due to the inclusion of a significant amount on a long-term contract for which revenue is recognized on a cash basis. Similar to the North American market, South America experienced lower perpetual sales, with the overall year-to-date decrease of 24%.
Eastern Hemisphere (representing 34% of fiscal 2012 total software revenue) experienced growth in both annuity/maintenance and perpetual revenue streams. Annuity/maintenance license sales increased by 10% and 11% for the three months and year ended March 31, 2012, respectively, compared to the same periods of the previous fiscal year, driven by increased sales to both new and existing clients. Perpetual license sales increased by 33% and 113% for the three months and year ended March 31, 2012 compared to the same periods of the previous fiscal year. The year-to-date increase was driven by the large perpetual sale made during the first quarter of the current fiscal year. In addition to closing one significant contract, we have seen a general increase in the number of perpetual license sales made to the Eastern Hemisphere market. A significant increase in year-to-date perpetual license sales in the Eastern Hemisphere offset the effects of decreased perpetual sales experienced in all other regions. The movements in perpetual sales across the regions are indicative of the unpredictable nature of the timing and location of perpetual license sales.
Overall, our recurring annuity/maintenance revenue base continues to be strong and growing across all regions with the Canadian market being the leader in this revenue stream. We will continue to extend our reach globally and focus our efforts on increasing our license sales to both existing and new clients. We are confident that the excellent reputation behind our company and its product suite offering along with our customer-oriented approach will enable us to grow and sustain a healthy market share across all regions.
The increases in US-dollar generated revenue from the US and other markets have been negatively affected by the strengthening Canadian dollar compared to the US dollar during the year ended March 31, 2012.
As footnoted in the Quarterly Performance table, in the normal course of business CMG may complete the negotiation of certain annuity/maintenance contracts and/or fulfill revenue recognition requirements within a current quarter that includes usage of CMG’s products in prior quarters. This situation particularly affects contracts negotiated with countries that face increased economic and political risks leading to revenue recognition criteria being satisfied only at the time of the receipt of cash. The dollar magnitude of such contracts may be significant to the quarterly comparatives of our annuity/maintenance revenue stream and, to provide a normalized comparison, we specifically identify the revenue component where revenue recognition is satisfied in the current period for products provided in previous quarters.
DEFERRED REVENUE
2012 2011 2010 $ change % change
($ thousands)
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Deferred revenue at:
June 30 15,326 12,496 2,830 23%
September 30 14,600 12,658 1,942 15%
December 31 14,746 11,892 2,854 24%
March 31 21,693 16,755 - 4,938 29%
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CMG’s deferred revenue consists primarily of amounts for pre-sold licenses. Our annuity/maintenance revenue is deferred and recognized on a straight-line basis over the life of the related license period, which is generally one year or less. Amounts are deferred for licenses that have been provided and revenue recognition reflects the passage of time.
The increase in deferred revenue year over year as at June 30, September 30, December 31 and March 31 is reflective of the growth in annuity/maintenance license sales. The variation within a year is due to the timing of renewals of annuity and maintenance contracts that are skewed to the beginning of the calendar year which explains the increase in deferred revenue balance at fiscal year-end. Our fourth quarter corresponds to the beginning of the fiscal year for most oil and gas companies, representing a time when they enter a new budget year and sign/renew their contracts. Deferred revenue at March 31, 2012 increased compared to the same period of prior fiscal year due to both renewal of the existing and signing of the new software licenses and maintenance contracts in the quarter. Our deferred revenue balance continues to grow at a steady pace as demonstrated in the table above by the consecutive quarterly double-digit growth experienced during the current fiscal year. Significant deferred revenue balance will contribute to our future revenue growth.
PROFESSIONAL SERVICES REVENUE
CMG recorded professional services revenue of $1.3 million and $5.5 million for the three months and year ended March 31, 2012, respectively, representing decreases of $0.6 million and $2.6 million from the amounts recorded for the same periods of previous fiscal year. CMG had been engaged in a few large projects in the previous fiscal year, which are either complete or continue on a smaller scale in the current fiscal year, causing the majority of the decrease in the quarterly and year-to-date professional services revenue. Additionally, the funding commitment for the DRMS project received from the CMG Reservoir Simulation Foundation (“Foundation CMG”) was fulfilled in the first quarter of the current fiscal year further contributing to the decrease in the professional services revenue for the year. For the year ended March 31, 2012, the Company has reflected $0.3 million (2011 – $1.3 million) in professional services revenue related to this grant. Refer to the discussion under “Commitments, Off Balance Sheet Items and Transactions with Related Parties.”
Professional services revenue consists of specialized consulting, training, and contract research activities. CMG performs consulting and contract research activities on an ongoing basis but such activities are not considered to be a core part of our business and are primarily undertaken to increase our knowledge base and hence expand the technological abilities of our simulators in a funded manner, combined with servicing our customers’ needs. In addition, these activities are undertaken to market the capabilities of our suite of software products with the ultimate objective to increase software license sales. Our experience is that consulting activities are variable in nature as both the timing and dollar magnitude of work are dependent on activities and budgets within client companies.
At March 31, 2012, approximately $0.04 million (2011 – $0.1 million) is included in deferred revenue relating to professional services.
Expenses
For the three months ended March 31, 2012 2011 $ change % change
($ thousands)
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Sales, marketing and professional services 3,333 3,000 333 11%
Research and development 2,994 2,397 597 25%
General and administrative 1,695 1,449 246 17%
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Total operating expenses 8,022 6,846 1,176 17%
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Direct employee costs(i) 6,349 5,484 865 16%
Other corporate costs 1,673 1,362 311 23%
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8,022 6,846 1,176 17%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands)
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Sales, marketing and professional
services 13,036 11,704 1,332 11%
Research and development 10,629 9,338 1,291 14%
General and administrative 5,765 5,108 657 13%
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Total operating expenses 29,430 26,150 3,280 13%
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Direct employee costs(i) 23,376 20,329 3,047 15%
Other corporate costs 6,054 5,821 233 4%
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29,430 26,150 3,280 13%
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(i)Includes salaries, bonuses, stock-based compensation, benefits, commissions, and professional development.
CMG’s total operating expenses increased by 17% and 13% for the three months and year ended March 31, 2012, respectively, compared to the same periods in 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 79% of the total operating expenses in the year ended March 31, 2012 related to staff costs compared to 78% recorded in the comparative period of last year. Staffing levels for the current fiscal year grew in comparison to the previous fiscal year to support our continued growth. At March 31, 2012, CMG’s staff complement was 149 employees, up from 136 employees as at March 31, 2011. Direct employee costs increased during the three months and year ended March 31, 2012 compared to the same period 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 23% for the three months ended March 31, 2012 compared to the same period of previous fiscal year, mainly due to inclusion of the costs associated with the expansion of our office space at the end of calendar 2011. These costs comprise additional office rent, relocation costs, increased computing resources and increased depreciation associated with capital spending on the new space.
Other corporate costs increased by 4% for the year ended March 31, 2012, compared to the same period of the previous fiscal year due to the increase in costs associated with the expanded office space. The previous fiscal year included expenses associated with CMG’s biennial technical symposium, hence, offsetting the impact of the increased office space costs in the current fiscal year.
RESEARCH AND DEVELOPMENT
For the three months ended March 31, 2012 2011 $ change % change
($ thousands)
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Research and development (gross) 3,444 2,707 737 27%
SRED credits (450) (310) (140) 45%
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Research and development 2,994 2,397 597 25%
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Research and development as a % of total
revenue 17% 17%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands)
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Research and development (gross) 12,100 10,416 1,684 16%
SRED credits (1,471) (1,078) (393) 36%
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Research and development 10,629 9,338 1,291 14%
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Research and development as a % of
total revenue 17% 18%
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CMG maintains its belief that its strategy of growing long-term value for shareholders can only be achieved through continued investment in research and development. CMG works closely with its customers to provide solutions to complex problems related to proven and new advanced recovery processes.
The above research and development includes CMG’s proportionate share of joint research and development costs on the DRMS system development of $0.7 million and $2.7 million for the three months and year ended March 31, 2012, respectively (2011 – $0.7 million and $2.7 million). See discussion under “Commitments, Off Balance Sheet Items and Transactions with Related Parties.”
The increases of 27% and 16% in our gross spending on research and development for the three months and year ended March 31, 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 scientific research and experimental development (“SRED”) credits, increased by 25% and 14% during the three months and year ended March 31, 2012, respectively, compared to the same periods of the previous fiscal year mainly due to increased employee compensation costs, investment in computing resources and facilities costs associated with a newly leased office space.
At the same time, we had an increase in SRED credits driven by the increases in our direct employee costs as well as the increase in the eligibility of our expenses for SRED credits. Part of the increased eligibility is a direct result of the completion of the grant received from Foundation CMG which had been netted against our research and development expenses for the purposes of calculating SRED credits. The funding commitment associated with this grant was fulfilled in the first quarter of the current fiscal year.
DEPRECIATION
For the three months ended March 31, 2012 2011 $ change % change
($ thousands)
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Depreciation of property and equipment,
allocated to:
Sales, marketing and professional services 105 91 14 15%
Research and development 200 132 68 52%
General and administrative 45 63 (18) -29%
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Total depreciation 350 286 64 22%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands)
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Depreciation of property and equipment,
allocated to:
Sales, marketing and professional
services 410 311 99 32%
Research and development 583 476 107 22%
General and administrative 234 250 (16) -6%
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Total depreciation 1,227 1,037 190 18%
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The quarterly and year-to-date increases in depreciation reflect the increase in our asset base, mainly as a result of increased spending on computing resources and expansion of the office space at the end of Q3 2012.
FINANCE INCOME AND FINANCE COSTS
For the three months ended March 31, 2012 2011 $ change % change
($ thousands)
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Interest income 131 101 30 30%
Net foreign exchange gain - - - -
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Finance income 131 101 30 30%
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Finance costs (represented by net foreign
exchange loss) (220) (220) - 0%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands)
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Interest income 472 280 192 69%
Net foreign exchange gain 548 - 548 -
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Finance income 1,020 280 740 264%
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Finance costs (represented by net foreign
exchange loss) - (523) 523 -
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Interest income increased in the three months and year ended March 31, 2012, compared to the same periods of the prior fiscal year, due to an improvement in interest rates and investing larger cash balances.
CMG is impacted by the movement of the US dollar against the Canadian dollar as approximately 73% (2011 – 68%) of CMG’s revenue for the year ended March 31, 2012 is denominated in US dollars, whereas only approximately 24% (2011 – 25%) of CMG’s total costs are denominated in US dollars.
CDN$ to US$ At March 31 Yearly average
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2010 0.9846 0.8966
2011 1.0290 0.9220
2012 1.0009 1.0106
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The impact of foreign exchange movement was unchanged between the three months ended March 31, 2012 and the same period of the previous year with a $0.2 million net foreign exchange loss recorded during both periods.
CMG recorded a net foreign exchange gain of $0.5 million during the year ended March 31, 2012 compared to a net foreign exchange loss of $0.5 million recorded for the same period of the previous fiscal year.
The weakening of the Canadian dollar during the third 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 positively to the valuation of our US-denominated working capital, hence, contributing to the year-to-date foreign exchange gain.
INCOME AND OTHER TAXES
CMG’s effective tax rate for the year ended March 31, 2012 is reflected as 28.30% (2011 – 32.5%), whereas the prevailing Canadian statutory tax rate is now 26.13%. This is primarily due to a combination of the non-tax deductibility of stock-based compensation expense and the benefit of foreign withholding taxes being realized only as a tax deduction as opposed to a tax credit. In addition, during the fiscal year ended March 31, 2012, we recognized an amount related to previously unclaimed SRED investment tax credits.
The benefit recorded in CMG’s books on the SRED investment tax credit program impacts deferred income taxes. The investment tax credit earned in the current fiscal year is utilized by CMG to reduce income taxes otherwise payable for the current fiscal year and the federal portion of this benefit bears an inherent tax liability as the amount of the credit is included in the subsequent year’s taxable income for both federal and provincial purposes. The inherent tax liability on these investment tax credits is reflected in the year the credit is earned as a non-current deferred tax liability and then, in the following fiscal year, is transferred to income taxes payable.
Operating Profit and Net Income
For the three months ended March 31, 2012 2011 $ change % change
($ thousands, except per share
amounts)
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Total revenue 17,215 14,378 2,837 20%
Operating expenses (8,022) (6,846) (1,176) 17%
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Operating profit 9,193 7,532 1,661 22%
Operating profit as a % of total
revenue 53% 52%
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Net income for the period 6,620 4,808 1,812 38%
Net income for the period as a % of
total revenue 38% 33%
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Earnings per share ($/share) 0.18 0.13 0.05 38%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands, except per share
amounts)
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Total revenue 61,034 51,827 9,207 18%
Operating expenses (29,430) (26,150) (3,280) 13%
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Operating profit 31,604 25,677 5,927 23%
Operating profit as a % of total
revenue 52% 50%
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Net income for the period 23,391 17,166 6,225 36%
Net income for the period as a % of
total revenue 38% 33%
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Earnings per share ($/share) 0.63 0.48 0.15 31%
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Operating profit as a percentage of total revenue increased to 53% and 52% for the three months and year ended March 31, 2012, respectively, compared to 52% and 50% recorded in the same periods of the previous fiscal year. The increases are a result of the increase in our total revenue driven by the growth in our software license sales, and effective management of our corporate costs.
Net income for the period as a percentage of revenue increased to 38% for the three months and year ended March 31, 2012, compared to 33% recorded in the same periods of previous fiscal year mainly as a result of the positive effect of the changes in foreign exchange rates recorded in the current fiscal year compared to the previous fiscal year and incurring less tax expenses as a result of lower withholding taxes, recovery of previously unclaimed SRED investment tax credits and a lower statutory tax rate.
The above results demonstrate that 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. These variables will continue to be imperative to our future success.
EBITDA
For the three months ended March 31, 2012 2011 $ change % change
($ thousands, except per share amounts)
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Net income for the period 6,620 4,808 1,812 38%
Add (deduct):
Depreciation 350 286 64 22%
Finance income (131) (101) (30) 30%
Finance costs 220 220 - 0%
Income and other taxes 2,484 2,605 (121) -5%
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EBITDA 9,543 7,818 1,725 22%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands, except per share
amounts)
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Net income for the period 23,391 17,166 6,225 36%
Add (deduct):
Depreciation 1,227 1,037 190 18%
Finance income (1,020) (280) (740) 264%
Finance costs - 523 (523) -100%
Income and other taxes 9,233 8,268 965 12%
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EBITDA 32,831 26,714 6,117 23%
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EBITDA increased by 22% and 23% for the three months and year ended March 31, 2012, respectively, compared to the same periods of the previous fiscal year. Both quarterly and annual increases in EBITDA are driven by strong sales and solid control over corporate expenses, and are consistent with the increases in operating profit.
Liquidity and Capital Resources
For the three months ended March 31, 2012 2011 $ change % change
($ thousands)
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Cash, beginning of period 47,615 38,012 9,603 25%
Cash flow from (used in)
Operating activities 11,512 7,051 4,461 63%
Financing activities (3,318) (3,055) (263) 9%
Investing activities (435) (255) (180) 71%
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Cash, end of period 55,374 41,753 13,621 33%
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For the year ended March 31, 2012 2011 $ change % change
($ thousands)
----------------------------------------------------------------------------
Cash, beginning of period 41,753 28,826 12,927 45%
Cash flow from (used in)
Operating activities 30,185 27,516 2,669 10%
Financing activities (15,063) (13,399) (1,664) 12%
Investing activities (1,501) (1,190) (311) 26%
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Cash, end of period 55,374 41,753 13,621 33%
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OPERATING ACTIVITIES
Cash flow generated from operating activities increased by $4.5 million and $2.7 million in the three months and year ended March 31, 2012, respectively, compared to the same periods of last year, due to the increase in net income, the increase in deferred revenue balance, offset by decreases due to the timing differences when the sales are made and when the resulting receivables are collected, and net impact of changes in income taxes payable.
FINANCING ACTIVITIES
Cash used in financing activities increased by $0.3 million and $1.7 million in the three months and year ended March 31, 2012, respectively, compared to the same periods of last year, mainly as a result of paying larger dividends and buying back common shares, offset by the impact of recording more cash proceeds from options being exercised.
During the year ended March 31, 2012, CMG employees and directors exercised options to purchase 913,000 Common Shares, which resulted in cash proceeds of $5.9 million.
In the year ended March 31, 2012, CMG paid $20.5 million in dividends, representing the following quarterly dividends:
($ per share) Q1 Q2 Q3 Q4
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Dividends declared and paid 0.105 0.110 0.110 0.130
Special dividend declared and paid 0.100 - - -
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Total dividends declared and paid 0.205 0.110 0.110 0.130
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On May 23, 2012, CMG announced the payment of a quarterly dividend of $0.16 per share and a special dividend of $0.10 per share on CMG’s Common Shares. The dividend will be paid on June 15, 2012 to shareholders of record at the close of business on June 8, 2012.
Over the past 9 years, we have consistently raised our total annual dividend and paid out a special dividend at the end of each fiscal year as determined by our corporate performance. In recognition of the importance of a more regular income stream to our shareholders, we have decided to increase the relative proportion of dividends paid quarterly and lower the amount paid as a special annual dividend beginning in fiscal 2013. The special dividend, if any, will continue to be determined annually based on the Company’s performance.
Based on our expectation of solid profitability and cash-generating ability driven by the predictability of our software revenue base and effective management of costs, we are cautiously optimistic that the company is well positioned for future growth which will enable us to sustain increased levels of quarterly dividends.
Continued increases in our dividend further demonstrate the exceptional performance and stability of our business model as well as our commitment to return value to our shareholders as we continue to invest in research and development initiatives.
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.
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 year ended March 31, 2012, CMG expended $1.5 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 March 31, 2012, CMG has $55.4 million in cash, no debt and has access to just over $0.8 million under a line of credit with its principal banker.
During the year ended March 31, 2012, 8,899,000 shares of CMG’s public float were traded on the TSX. As at March 31, 2012, CMG’s market capitalization based upon its March 31, 2012 closing price of $15.90 was $593.2 million.
Commitments, Off Balance Sheet Items and Transactions with Related Parties
The Company is the operator of the DRMS project, a collaborative effort with its partners Shell and Petrobras, to jointly develop the newest generation of reservoir and production system simulation software. The project has been underway since 2006 and, with the ongoing support of the participants, it is expected to continue until ultimate delivery of the software. The Company’s share of costs associated with the project is estimated to be $4.0 million ($1.9 million net of overhead recoveries) for the upcoming 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 to 2015 – $1.9 million per year; 2016 – $2.0 million; and 2017 – $0.9 million.
Critical Accounting Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. By their nature, these estimates are subject to estimation uncertainty. The effect on the financial statements of changes in such estimates in future periods could be material and would be accounted for in the period in which the estimates are revised and in any future periods affected.
Revenue recognition
Revenue consists primarily of software license fees with some fees for professional services. We recognize revenue in accordance with the current rules of IFRS. We follow specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue recognition policies.
Software license revenue is comprised of annuity/maintenance license fees charged for the use of our software products which is generally for a term of one year or less, and perpetual software licensing, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity. We recognize software license revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is probable. In cases where collectability is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been met.
Annuity/maintenance revenue is deferred and recognized on a straight-line basis over the life of the related license period, which is generally one year or less. License fees for perpetual licenses are recognized fully in revenue when all recognition conditions are satisfied.
Certain software license agreements contain multiple-element arrangements as they may also include maintenance fees. Judgment is used in determining a fair value of each element of a contract.
Professional services revenue earned from certain consulting contracts is recognized by the stage of completion of the transaction determined using the percentage-of-completion method. Judgment is used in determining progress of each contract at period end. In assessing revenue recognition, judgment is also used in determining the ability to collect the corresponding account receivable.
Functional currency
The determination of the functional currency is a matter of determining the primary economic environment in which an entity operates. IAS 21, The Effects of Changes in Foreign Exchange Rates, sets out a number of factors to apply in making the determination of the functional currency. However, applying the factors in IAS 21 does not always result in a clear indication of functional currency. Where IAS 21 factors indicate differing functional currencies within a subsidiary, the Company uses judgment in the ultimate determination of that subsidiary’s functional currency, including an assessment of the nature of the relationship between the Company and the subsidiary. Judgment was applied in the determination of the functional currency of certain of the Company’s operating entities.
Research and development
Assumptions are made in respect to the eligibility of certain research and development projects in the calculation of SRED investment tax credits which are netted against the research and development costs in the statement of operations. SRED claims are subject to audits by relevant taxation authorities and the actual amount may change depending on the outcome of such audits.
Stock-based compensation
Assumptions and estimates are used in determining the inputs used in the Black-Scholes option pricing model, including assumptions regarding volatility, dividend yield, risk-free interest rates, forfeiture estimates and expected option lives.
Property and equipment
Estimates are used in determining useful economic lives of property and equipment for the purposes of calculating depreciation.
Deferred income taxes
Assumptions and estimates are made regarding the amount and timing of realization and/or settlement of the temporary differences between the accounting carrying value of the Company’s assets versus the tax basis of those assets, and the tax rates at which the differences will be recovered or settled in the future.
Changes in Accounting Policies
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The CICA Accounting Standards Board requires all Canadian publicly listed entities to adopt IFRS for interim and annual financial reporting purposes for fiscal years beginning on or after January 1, 2011. Accordingly, this is the first annual period in which we have provided audited consolidated financial statements which are in compliance with IFRS. In accordance with IFRS 1, First-time Adoption of IFRS, we have applied IFRS retrospectively as of April 1, 2010, our transition date, as if IFRS had always been in effect, subject to certain mandatory exceptions and optional exemptions.
An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided in note 22 to the Consolidated Financial Statements for the year ended March 31, 2012.
The transition to IFRS did not have a material impact on retained earnings, net income or cash flows. The only adjustments were reclassifications on the Statement of Financial Position, Statement of Operations and Comprehensive Income, and the Statement of Cash Flows as follows:
Statement of Financial Position
- Deferred taxes are classified as non-current under IFRS. Under previous Canadian GAAP, deferred taxes were classified as current and non-current based on the classification of the underlying assets or liabilities to which they relate or based on the expected reversal of the temporary differences.
Transition rules resulted in the reclassification of the deferred tax liability associated with SRED credits from current to non-current. In addition, the deferred tax asset associated with property and equipment was offset against the deferred tax liability as both relate to income taxes levied by the same taxation authority for the same taxable entity.
Statement of Operations and Comprehensive Income
- Expense classification – the Company has elected to present its expenses in the consolidated statements of operations and comprehensive income prepared under IFRS according to their function. As a result, depreciation, which was reported as a separate line item under previous Canadian GAAP, was allocated to its respective functions.
- Finance income and costs – under Canadian GAAP, interest income and foreign exchange gains and losses were classified as separate line items in the consolidated statement of earnings. Under IFRS, interest income and net foreign exchange gains are presented as finance income, and net foreign exchange losses are presented as finance costs. Finance income and costs are presented on a gross basis as required by IFRS.
Statement of Cash Flows
- Interest received and income taxes paid have been moved into the body of the statement of cash flows under operating activities, whereas they were previously disclosed as supplemental information.
Accounting Standards and Interpretations Issued But Not Yet Effective
The following standards and interpretations have not been adopted by the Company as they apply to future periods:
Standard/ Nature of impending change in Impact on CMG's
Interpretation accounting policy financial statements
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IFRS 9 Financial IFRS 9 (2009) replaces the IFRS 9 (2010)
Instruments guidance in IAS 39 Financial supersedes IFRS 9
In November 2009 the Instruments: Recognition and (2009) and is
IASB issued IFRS 9 Measurement, on the effective for annual
Financial Instruments classification and measurement periods beginning on
(IFRS 9 (2009)), and of financial assets. The or after January 1,
in October 2010 the Standard eliminates the 2015, with early
IASB published existing IAS 39 categories of adoption permitted.
amendments to IFRS 9 held to maturity, available- For annual periods
(IFRS 9 (2010)). In for-sale and loans and beginning before
December 2011, the receivable. January 1, 2015,
IASB issued an either IFRS 9 (2009)
amendment to IFRS 9 Financial assets will be or IFRS 9 (2010) may
to defer the classified into one of two be applied.
mandatory effective categories on initial
date to annual recognition: The Company intends
periods beginning on to adopt IFRS 9
or after January 1, - financial assets measured at (2010) in its
2015. amortized cost; or financial statements
- financial assets measured at for the annual period
fair value. beginning on April 1,
2015. The Company
Gains and losses on does not expect IFRS
remeasurement of financial 9 (2010) to have a
assets measured at fair value material impact on
will be recognized in profit the financial
or loss, except that for an statements. The
investment in an equity classification and
instrument which is not held- measurement of the
for-trading, IFRS 9 provides, Company's financial
on initial recognition, an assets and
irrevocable election to liabilities is not
present all fair value changes expected to change
from the investment in other under IFRS 9 (2010)
comprehensive income (OCI). because of the nature
The election is available on of the Company's
an individual share-by-share operations and the
basis. Amounts presented in types of financial
OCI will not be reclassified assets that it holds.
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.
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IFRS 10 Consolidated IFRS 10 replaces the guidance The Company intends
Financial Statements in IAS 27 Consolidated and to adopt IFRS 10 in
Separate Financial Statements its financial
In May 2011, the IASB and SIC-12 Consolidation - statements for the
issued IFRS 10 Special Purpose Entities. IAS annual period
Consolidated 27 (2008) survives as IAS 27 beginning on April 1,
Financial Statements, (2011) Separate Financial 2013. The Company
which is effective Statements, only to carry does not expect IFRS
for annual periods forward the existing 10 to have a material
beginning on or after accounting requirements for impact on the
January 1, 2013, with separate financial statements. financial statements.
early adoption
permitted. If an IFRS 10 provides a single
entity applies this model to be applied in the
Standard earlier, it control analysis for all
shall also apply IFRS investees, including entities
11, IFRS 12, IAS 27 that currently are SPEs in the
(2011) and IAS 28 scope of SIC-12. In addition,
(2011) at the same the consolidation procedures
time. are carried forward
substantially unmodified from
IAS 27 (2008).
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IFRS 11 Joint IFRS 11 replaces the guidance The Company intends
Arrangements in IAS 31 Interests in Joint to adopt IFRS 11 in
Ventures. its financial
In May 2011, the IASB statements for the
issued IFRS 11 Joint Under IFRS 11, joint annual period
Arrangements, which arrangements are classified as beginning on April 1,
is effective for either joint operations or 2013. The Company
annual periods joint ventures. IFRS 11 does not expect IFRS
beginning on or after essentially carves out of 11 to have a material
January 1, 2013, with previous jointly controlled impact on the
early adoption entities, those arrangements financial statements.
permitted. If an which although structured
entity applies this through a separate vehicle,
Standard earlier, it such separation is ineffective
shall also apply IFRS and the parties to the
10, IFRS 12, IAS 27 arrangement have rights to the
(2011) and IAS 28 assets and obligations for the
(2011) at the same liabilities and are accounted
time. 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.
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IFRS 12 Disclosure of IFRS 12 contains the The Company intends
Interests in Other disclosure requirements for to adopt IFRS 12 in
Entities entities that have interests its financial
in subsidiaries, joint statements for the
In May 2011, the IASB arrangements (i.e. joint annual period
issued IFRS 12 operations or joint ventures), beginning on April 1,
Disclosure of associates and/or 2013. The Company
Interests in Other unconsolidated structured does not expect the
Entities, which is entities. Interests are widely amendments to have a
effective for annual defined as contractual and material impact on
periods beginning on non-contractual involvement the financial
or after January 1, that exposes an entity to statements, because
2013, with early variability of returns from of the nature of the
adoption permitted. the performance of the other Company's interests
If an entity applies entity. The required in other entities.
this Standard disclosures aim to provide
earlier, it needs not information in order to enable
to apply IFRS 10, users to evaluate the nature
IFRS 11, IAS 27 of, and the risks associated
(2011) and IAS 28 with, an entity's interest in
(2011) at the same other entities, and the
time. effects of those interests on
the entity's financial
position, financial
performance and cash flows.
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IFRS 13 Fair Value IFRS 13 replaces the fair The Company intends
Measurement value measurement guidance to adopt IFRS 13
contained in individual IFRSs prospectively in its
In May 2011, the IASB with a single source of fair financial statements
published IFRS 13 value measurement guidance. It for the annual period
Fair Value defines fair value as the beginning on April 1,
Measurement, which is price that would be received 2013. The extent of
effective to sell an asset or paid to the impact of
prospectively for transfer a liability in an adoption of IFRS 13
annual periods orderly transaction between has not yet been
beginning on or after market participants at the determined.
January 1, 2013. The measurement date, i.e. an exit
disclosure price. The standard also
requirements of IFRS establishes a framework for
13 need not be measuring fair value and sets
applied in out disclosure requirements
comparative for fair value measurements to
information for provide information that
periods before enables financial statement
initial application. 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.
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Amendments to IAS 1 The amendments require that an The Company intends
Presentation of entity present separately the to adopt the
Financial Statements items of OCI that may be amendments in its
reclassified to profit or loss financial statements
In June 2011, the in the future from those that for the annual period
IASB published would never be reclassified to beginning on April 1,
amendments to IAS 1 profit or loss. Consequently 2013. As the
Presentation of an entity that presents items amendments only
Financial Statements: of OCI before related tax require changes in
Presentation of Items effects will also have to the presentation of
of Other allocate the aggregated tax items in other
Comprehensive Income, amount between these comprehensive income,
which are effective categories. the Company does not
for annual periods expect the amendments
beginning on or after The existing option to present to IAS 1 to have a
July 1, 2012 and are the profit or loss and other material impact on
to be applied comprehensive income in two the financial
retrospectively. statements has remained statements.
Early adoption is unchanged.
permitted.
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Amendments to IAS 32 The amendments to IAS 32 The Company intends
and IFRS 7, clarify that an entity to adopt the
Offsetting Financial currently has a legally amendments to IFRS 7
Assets and enforceable right to set-off in its financial
Liabilities if that right is: statements for the
annual period
In December 2011, the - not contingent on a future beginning on April 1,
IASB published event; and 2013, and the
Offsetting Financial - enforceable both in the amendments to IAS 32
Assets and Financial normal course of business and in its financial
Liabilities and in the event of default, statements for the
issued new disclosure insolvency or bankruptcy of annual period
requirements in IFRS the entity and all beginning April 1,
7 Financial counterparties. 2014. The Company
Instruments: does not expect the
Disclosures. The amendments to IAS 32 also amendments to have a
clarify when a settlement material impact on
The effective date mechanism provides for net the financial
for the amendments to settlement or gross settlement statements.
IAS 32 is annual that is equivalent to net
periods beginning on settlement.
or after January 1,
2014. The effective The amendments to IFRS 7
date for the contain new disclosure
amendments to IFRS 7 requirements for financial
is annual periods assets and liabilities that
beginning on or after are:
January 1, 2013.
These amendments are - offset in the statement of
to be applied financial position; or
retrospectively. - subject to master netting
arrangements or similar
arrangements.
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Outstanding Share Data
The following table represents the number of Common Shares and options outstanding:
----------------------------------------------------------------------------
As at May 23, 2012
(thousands)
----------------------------------------------------------------------------
Common Shares 37,320
Options 2,889
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On July 13, 2005, CMG adopted a rolling stock option plan which allows the Company to grant options to its employees and directors to acquire Common Shares of up to 10% of the outstanding Common Shares at the date of grant. Based upon this calculation, at May 23, 2012, CMG could grant up to 3,732,000 stock options.
Business Risks
The Company has the following business risks:
COMMODITY PRICE RISK
CMG’s customers are oil and gas companies and it might, therefore, be assumed that its financial results are significantly impacted by commodity prices. CMG’s actual experience of growth in software license revenues during depressed oil price markets makes us believe that software license sales are influenced more by the utility of the software as opposed to the prevailing commodity price but different circumstances could prevail in the future. Low commodity prices and resulting lower cash flow in the industry could impact how customers license CMG software; one could expect sales of perpetual licenses to decrease in favour of leasing software on a term basis.
Volatility in commodity prices could have an impact on CMG’s consulting business; however, this business segment generates less than 10% of total revenues and CMG has no current plans to significantly expand this area of business.
CREDIT AND LIQUIDITY RISKS
Our product demand is dependent on the customers’ overall spending plans, which are driven by commodity prices and the availability of capital. This risk is mitigated by having a diversified customer base with the majority of revenue being derived from larger entities which are not as affected by the market volatility or cyclical downturns in commodity prices. In addition, our diversified geographic profile helps to mitigate the effects of economic recessions and instability experienced in any particular geographic region.
The Company mitigates the collection risk by closely monitoring its accounts receivable and assessing creditworthiness of its customers. The Company has not had any significant losses to date.
In terms of liquidity, the Company held $55.4 million of cash at March 31, 2012, which more than covers its obligations and it has over $0.8 million of the credit facility available for its use. The Company’s cash is held with a reputable banking institution. For the described reasons, we believe that our liquidity risk is low.
SALES VARIABILITY RISK
CMG’s software license revenue consists of annuity/maintenance software licensing, which is generally for a term of one year or less, and perpetual software licensing, whereby the customer purchases the-then-current version of the software(s) and has the right to use that version in perpetuity. Software licensing under perpetual sales is a significant part of CMG’s business but is more variable in nature as the purchase decision, and its timing, fluctuate with clients’ needs and budgets. CMG has found that a number of clients prefer to acquire perpetual software licenses rather than leasing the software on an annual basis. The experience over the last few years is that a number of these clients are purchasing additional licenses to allow more users to access CMG technology in their operations. CMG has found that a large percentage of its customers who have acquired perpetual software licenses are subsequently purchasing maintenance licenses to ensure they have access to current CMG technology.
The variability in sales of perpetual licenses may cause significant fluctuations in the Company’s quarterly and annual financial results, and these results may not meet the expectations of analysts or investors. Accordingly, the Company’s past results may not be a good indication of its future performance.
CMG’s customers are both domestic and international oil and gas companies and for the years ended March 31, 2012 and March 31, 2011, no customer represented revenue in excess of 10% of total revenue.
FOREIGN EXCHANGE RISK
CMG’s reported results are affected by the exchange rate between the Canadian dollar and the US dollar as approximately 73% (2011 – 68%) of product revenues in fiscal 2012 were denominated in US dollars. Approximately 24% of CMG’s total costs in fiscal 2012 (2011 – 25%) were denominated in US dollars and provided a partial economic hedge against the fluctuation in currency exchange between the US and the Canadian dollar on revenues. CMG’s residual revenues and costs are primarily denominated in Canadian dollars and its policy is to convert excess US dollar cash into Canadian dollars when received.
ECONOMIC AND POLITICAL RISKS
CMG sells its products and services in over 50 countries worldwide. Some of these countries have greater economic and political risk than experienced in North America and as a result there may be greater risk associated with sales in those jurisdictions. CMG manages this risk by invoicing for the full license term in advance for the majority of software license sales and by invoicing as frequently as the contract allows for consulting and contract research services on a percentage-of-completion basis. In addition, CMG assesses if specific insurance should be acquired depending upon the size of the sale and its view of the country risk at the time of sale.
COMPETITION RISK
Competition is a risk for CMG as it is for almost every company in every sector. The reservoir simulation software industry currently consists of four major suppliers (including CMG) and a number of small suppliers. Some of the other suppliers, including three major suppliers, offer products or oil field services outside the scope of reservoir simulation. Some potential customers may prefer to deal with such multi-service suppliers, while others prefer an independent supplier, such as CMG.
Although competition is very active, CMG believes that its proven technology and the comprehensive scope of its products, combined with its international presence and recognition as a major independent supplier, provide distinct competitive advantages.
Sustaining competitive advantage is another issue, which CMG addresses by making a significant ongoing commitment to research and development spending. CMG expended $10.6 million (2011 – $9.3 million) in product research and development in its most recently completed fiscal year.
The introduction by competitors of products embodying new technology and the emergence of new industry standards and practices could render CMG’s products obsolete and unmarketable and could exert price pressures on existing products, which could have negative effects on the Company’s business, operating results and financial condition.
There is a significant barrier for new entrants into the reservoir simulation software industry. The cost of entry is substantial as a significant investment in research and development is required. In addition, to become a major supplier, a significant time investment is required to build up quality relationships with potential clients.
LABOUR RISK
The Company’s continued success is substantially dependent on the performance of its key employees and officers. The loss of the services of these personnel as well as failure to attract additional key personnel could have a negative impact upon the Company’s business, operating results and financial condition. Due to high levels of competition for qualified personnel, there can be no assurance that the Company will be successful in retaining and attracting such personnel. The Company attempts to overcome this by offering an attractive compensation package and providing an environment that provides the intellectual and professional stimulation sought by our employee group.
INTELLECTUAL PROPERTY RISK
CMG regards its software as proprietary and attempts to protect it with copyrights, trademarks and trade secret measures, including restrictions on disclosure and technical measures. Despite these precautions, it may be possible for third parties to copy CMG’s programs or aspects of its trade secrets. CMG has no patents, and existing legal and technical precautions afford only limited practical protection. CMG could incur substantial costs in protecting and enforcing its intellectual property rights. Moreover, from time to time third parties may assert patent, trademark, copyright and other intellectual property rights to technologies that are important to CMG. In such an event, CMG may be required to incur significant costs in litigating a resolution to the asserted claim. There can be no assurance that such a resolution would not require that CMG pay damages or obtain a license of a third party’s proprietary rights in order to continue licensing its products as currently offered, or, if such a license is required, that it will be available on terms acceptable to CMG.
CMG does not know of any infringement of any third party’s patent rights, copyrights, trade secrecy rights or other intellectual property disputes in the development or support of its products.
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Management is responsible for establishing and maintaining disclosure controls and procedures (“DCP”) and internal control over financial reporting (“ICFR”) as defined under National Instrument 52-109.
At March 31, 2012, the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) concluded that the design and operation of the Company’s DCP were effective and that material information relating to the Company, including its subsidiaries, was made known to them and was recorded, processed, summarized and reported within the time periods specified under applicable securities legislation. Further, the CEO and the CFO concluded that the design and operation of the Company’s ICFR were effective at March 31, 2012 in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. It should be noted that while the Company’s CEO and CFO believe that the Company’s disclosure controls and procedures and internal controls over financial reporting provide a reasonable level of assurance that they are effective, they do not expect that such controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
During the year ended March 31, 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.
NON-IFRS FINANCIAL MEASURES
This MDA includes certain measures which have not been prepared in accordance with IFRS such as “EBITDA”, “direct employee costs” and “other corporate costs.” Since these measures do not have a standard meaning prescribed by IFRS, they are unlikely to be comparable to similar measures presented by other issuers. Management believes that these indicators nevertheless provide useful measures in evaluating the Company’s performance.
“Direct employee costs” include salaries, bonuses, stock-based compensation, benefits, commission expenses, and professional development. “Other corporate costs” include facility-related expenses, corporate reporting, professional services, marketing and promotion, computer expenses, travel, and other office-related expenses. Direct employee costs and other corporate costs should not be considered an alternative to total operating expenses as determined in accordance with IFRS. People-related costs represent the Company’s largest area of expenditure; hence, management considers highlighting separately corporate and people-related costs to be important in evaluating the quantitative impact of cost management of these two major expenditure pools. See “Expenses” heading for a reconciliation of direct employee costs and other corporate costs to total operating expenses.
“EBITDA” refers to net income before adjusting for depreciation expense, finance income, finance costs, and income and other taxes. EBITDA should not be construed as an alternative to net income as determined by IFRS. The Company believes that EBITDA is useful supplemental information as it provides an indication of the results generated by the Company’s main business activities prior to consideration of how those activities are amortized, financed or taxed. See “EBITDA” heading for a reconciliation of EBITDA to net income.
FORWARD-LOOKING INFORMATION
Certain information included in this MDA 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 MDA, 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 MDA, we have made assumptions regarding, among other things:
-- Future software license sales
-- The continued financing by and participation of the Company's partners
in the DRMS project and it being completed in a timely manner
-- Ability to enter into additional software license agreements
-- Ability to continue current research and new product development
-- Ability to recruit and retain qualified staff
Forward-looking information is not a guarantee of future performance and involves a number of risks and uncertainties, only some of which are described herein. Many factors could cause the Company’s actual results, performance or achievements, or future events or developments, to differ materially from those expressed or implied by the forward-looking information including, without limitation, the following factors which are discussed in greater detail in the “Business Risks” section of this MDA:
-- 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 MDA. 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 MDA. 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 MDA to reflect events or circumstances that occur after the date of this MDA or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.
This Management’s Discussion and Analysis was reviewed and approved by the Audit Committee and Board of Directors and is effective as of May 23, 2012.
Outlook
As in the past several years, CMG remains committed to focusing all its resources on the development, enhancement and deployment of simulation software tools relevant to the challenges and opportunities facing its diverse customer base. While oil prices continue to fluctuate, they remain at levels that should allow our customers to move forward on projects involving various types of unconventional reserves and advanced recovery processes. The greater challenges have been with natural gas prices, which have not fared as well, and petroleum producers are faced with uncertainty related to the fears of another worldwide economic recession, political unrest in several petroleum producing countries and environmental issues that have threatened to increase the costs of development and production.
With diversification of our geographic profile, we plan to strengthen our position in the global marketplace which should also help to mitigate the effects of economic recession and instability experienced in any particular geographic region.
Over 70% of our annual software license revenue is derived from our annuity and maintenance contracts which generally represent a recurring source of revenue. We have continued to see successive increases in this revenue base over the past several years and with a strong renewal rate, we expect this trend to continue.
CMG’s joint project to develop the newest generation of dynamic reservoir modelling systems (“DRMS Project”) continues to make progress in fiscal 2012. Our goal for 2012 was to move beyond the initial “demonstration” version of the product towards a beta release to our partners. During the stabilization period, prior to the beta release, we encountered instances of instability in the code that have led us to delay the beta release until later this year. Additionally, Allan Hiebert, the Vice President, DRMS Development, has tendered his resignation effective July 17, 2012. With these developments, we anticipate a commercial release of the software by the end of calendar 2013. While this news is disappointing, we are very excited about the progress we have made and have a greater appreciation of the size of the task we undertook six years ago. CMG and its partners remain committed to funding the ongoing development and to the future success of the project.
The Company remains confident that the value that CMG technology provides to its customers is greater than ever and accordingly we continue to be optimistic that our software license revenue will remain solid. With our strong working capital position, we are well positioned to continue to invest in all aspects of our business to continue to grow and diversify our revenue base and to ultimately return value to our shareholders in the form of regular quarterly dividend payments and growth in share value.
Kenneth M. Dedeluk, President and Chief Executive Officer
May 23, 2012
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
----------------------------------------------------------------------------
(thousands of Canadian $) March 31, 2012 March 31, 2011 April 1, 2010
----------------------------------------------------------------------------
Assets
Current assets:
Cash 55,374 41,753 28,826
Trade and other
receivables (note
14(a)) 15,494 13,318 16,072
Prepaid expenses 1,195 1,064 1,141
Prepaid income taxes - - 1,433
----------------------------------------------------------------------------
72,063 56,135 47,472
Property and equipment
(note 5) 2,829 2,554 2,401
----------------------------------------------------------------------------
Total assets 74,892 58,689 49,873
----------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Current liabilities:
Trade payables and
accrued liabilities
(note 6) 5,358 4,543 5,398
Income taxes payable 1,404 1,237 -
Deferred revenue 21,693 16,755 13,843
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28,455 22,535 19,241
Deferred tax liability
(note 11) 358 384 189
----------------------------------------------------------------------------
Total liabilities 28,813 22,919 19,430
----------------------------------------------------------------------------
Shareholders' equity:
Share capital 31,751 24,801 20,390
Contributed surplus 3,535 2,655 1,816
Retained earnings 10,793 8,314 8,237
----------------------------------------------------------------------------
Total shareholders'
equity 46,079 35,770 30,443
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity 74,892 58,689 49,873
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Approved by the Board
Frank L. Meyer, Director
Robert F. M. Smith, Director
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
----------------------------------------------------------------------------
Years Ended March 31, 2012 2011
(thousands of Canadian $ except per share
amounts)
----------------------------------------------------------------------------
Revenue (note 7) 61,034 51,827
----------------------------------------------------------------------------
Operating expenses
Sales, marketing and professional
services 13,036 11,704
Research and development (note 8) 10,629 9,338
General and administrative 5,765 5,108
----------------------------------------------------------------------------
29,430 26,150
----------------------------------------------------------------------------
Operating profit 31,604 25,677
Finance income (note 10) 1,020 280
Finance costs (note 10) - (523)
----------------------------------------------------------------------------
Profit before income and other taxes 32,624 25,434
Income and other taxes (note 11) 9,233 8,268
----------------------------------------------------------------------------
Net and total comprehensive income 23,391 17,166
----------------------------------------------------------------------------
Earnings Per Share
Basic (note 12(e)) 0.63 0.48
Diluted (note 12(e)) 0.62 0.47
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
----------------------------------------------------------------------------
Share Capital
--------------------
(thousands of Non- Contributed Retained Total
Canadian $) Common voting Surplus Earnings Equity
----------------------------------------------------------------------------
Balance, April 1,
2010 20,244 146 1,816 8,237 30,443
Total comprehensive
income for the
year - - - 17,166 17,166
Dividends paid - - - (16,971) (16,971)
Shares issued for
cash on exercise
of stock options
(note 12(b)) 3,697 - - - 3,697
Common shares buy-
back (notes 12(b)
(c)) (7) - - (118) (125)
Converted into
common shares
(note 12(b)) 146 (146) - - -
Stock-based
compensation:
Current period
expense - - 1,560 - 1,560
Stock options
exercised 721 - (721) - -
----------------------------------------------------------------------------
Balance, March 31,
2011 24,801 - 2,655 8,314 35,770
----------------------------------------------------------------------------
Balance, April 1,
2011 24,801 - 2,655 8,314 35,770
Total comprehensive
income for the
year - - - 23,391 23,391
Dividends paid - - - (20,499) (20,499)
Shares issued for
cash on exercise
of stock options
(note 12(b)) 5,874 - - - 5,874
Common shares buy-
back (notes 12(b)
(c)) (25) - - (413) (438)
Stock-based
compensation:
Current period
expense - - 1,981 - 1,981
Stock options
exercised 1,101 - (1,101) - -
----------------------------------------------------------------------------
Balance, March 31,
2012 31,751 - 3,535 10,793 46,079
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
COMPUTER MODELLING GROUP LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------
Years ended March 31, 2012 2011
(thousands of Canadian $)
----------------------------------------------------------------------------
Cash flows from operating activities
Net income 23,391 17,166
Adjustments for:
Depreciation (note 5) 1,227 1,037
Income and other taxes (note 11) 9,233 8,268
Stock-based compensation (note 12(d)) 1,981 1,560
Interest income (note 10) (472) (280)
----------------------------------------------------------------------------
35,360 27,751
Changes in non-cash working capital:
Trade and other receivables (2,164) 2,775
Trade payables and accrued liabilities 815 (854)
Prepaid expenses (131) 77
Deferred revenue 4,938 2,912
----------------------------------------------------------------------------
Cash generated from operating activities 38,818 32,661
Interest received 458 259
Income taxes paid (9,091) (5,404)
----------------------------------------------------------------------------
Net cash from operating activities 30,185 27,516
----------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from issue of common shares 5,874 3,697
Dividends paid (20,499) (16,971)
Common shares buy-back (438) (125)
----------------------------------------------------------------------------
Net cash used in financing activities (15,063) (13,399)
----------------------------------------------------------------------------
Cash flows used in investing activities
Property and equipment additions (note 5) (1,501) (1,190)
----------------------------------------------------------------------------
Increase (decrease) in cash 13,621 12,927
Cash, beginning of year 41,753 28,826
----------------------------------------------------------------------------
Cash, end of year 55,374 41,753
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 2012 and 2011.
1. Reporting Entity:
Computer Modelling Group Ltd. (“CMG”) is a company domiciled in Alberta, Canada and is incorporated pursuant to the Alberta Business Corporations Act, with its Common Shares listed on the Toronto Stock Exchange under the symbol “CMG”. The address of CMG’s registered office is Suite 200, 1824 Crowchild Trail N.W., Calgary, Alberta, Canada, T2M 3Y7. The consolidated financial statements as at and for the year ended March 31, 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 consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These are the Company’s first annual consolidated financial statements prepared in accordance with IFRS and IFRS 1 – First-Time Adoption of International Financial Reporting Standards has been applied.
The preparation of these consolidated financial statements resulted in changes to accounting policies as compared with the most recent annual consolidated financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”). The Company’s accounting policies have been applied consistently to all periods presented in these consolidated financial statements with the exception of certain IFRS 1 exemptions the Company applied in its transition from previous GAAP to IFRS at April 1, 2010, the Company’s transition date. An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided in note 22. This note includes reconciliations of financial position and equity and of net and comprehensive income of the comparative year and of financial position and equity at the date of transition reported under Canadian GAAP to IFRS.
These consolidated financial statements as at and for the year ended March 31, 2012 were authorized for issuance by the Board of Directors on May 23, 2012.
(b) BASIS OF MEASUREMENT:
The consolidated financial statements have been prepared on the historical cost basis, which is based on the fair value of the consideration at the time of the transaction.
(c) FUNCTIONAL AND PRESENTATION CURRENCY:
The consolidated financial statements are presented in Canadian dollars, which is the functional currency of CMG and its subsidiaries. All financial information presented in Canadian dollars has been rounded to the nearest thousand.
(d) USE OF ESTIMATES, JUDGMENTS AND ASSUMPTIONS:
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, costs and expenses for the period. Estimates and underlying assumptions are based on historical experience and other assumptions that are considered reasonable in the circumstances and are reviewed on an on-going basis. Actual results may differ from such estimates and it is possible that the differences could be material. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
(i) Key judgments in applying accounting policies
The key judgments made in applying accounting policies, apart from those involving estimations (note 2(d)(ii) below), that have the most significant effect on the amounts recognized in these consolidated financial statements are as follows:
Functional currency – the determination of the functional currency is a matter of determining the primary economic environment in which an entity operates. IAS 21 – The Effects of Changes in Foreign Exchange Rates, sets out a number of factors to apply in making the determination of the functional currency. However, applying the factors in IAS 21 does not always result in a clear indication of functional currency. Where IAS 21 factors indicate differing functional currencies within a subsidiary, the Company uses judgment in the ultimate determination of that subsidiary’s functional currency, including an assessment of the nature of the relationship between the Company and the subsidiary. Judgment was applied in the determination of the functional currency of certain of the Company’s operating entities.
Research and development- assumptions are made in respect to the eligibility of certain research and development projects in the calculation of scientific research and experimental development (“SRED”) investment tax credits which are netted against the research and development costs in the statement of comprehensive income. SRED claims are subject to audits by relevant taxation authorities and the actual amount may change depending on the outcome of such audits (note 8).
Revenue recognition – certain software license agreements contain multiple-element arrangements as they may also include maintenance fees. Judgment is used in determining a fair value of each element of a contract. Professional services revenue earned from certain consulting contracts is recognized by the stage of completion of the transaction determined using the percentage-of-completion method. Judgment is used in determining progress of each contract at period end. In assessing revenue recognition, judgment is also used in determining the ability to collect the corresponding account receivable (note 7).
(ii) Estimation uncertainty
The following are the key sources of estimation uncertainty and key assumptions concerning the future, that have a significant risk of causing material adjustments to the carrying amount of assets and liabilities within the next financial year:
Property and equipment – estimates are used in determining useful economic lives of property and equipment for the purposes of calculating depreciation (note 5).
Stock-based compensation – assumptions and estimates are used in determining the inputs used in the Black-Scholes option pricing model, including assumptions regarding volatility, dividend yield, risk-free interest rates, forfeiture estimates and expected option lives (note 12(d)).
Deferred income taxes – assumptions and estimates are made regarding the amount and timing of realization and/or settlement of the temporary differences between the accounting carrying value of the Company’s assets versus the tax basis of those assets, and the tax rates at which the differences will be recovered or settled in the future (note 11).
3. Significant Accounting Policies:
(a) BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of CMG and its subsidiaries, all 100% owned. All inter-company transactions and balances have been eliminated on consolidation. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.
(b) REVENUE RECOGNITION:
Revenue consists of software license fees and professional service fees.
Software License Revenue
Software license revenue is comprised of annuity/maintenance license fees charged for the use of the Company’s software products which is generally for a term of one year or less, and perpetual software licensing fees, whereby the customer purchases the-then-current version of the software and has the right to use that version in perpetuity.
Software license revenue is recognized when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is probable. In cases where collectability is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been met.
Annuity/maintenance revenue is recognized on a straight-line basis over the life of the related license period, which is generally one year or less. Revenue for licenses billed in advance is deferred and recognized in revenue over the relevant license period.
License fees for perpetual licenses are recognized fully in revenue when all recognition conditions are satisfied.
Software license agreements with multiple-element arrangements, such as those including license fees and maintenance fees, are recognized as separate units of accounting and are recognized as each element is earned based on the relative fair value of each element. A delivered element is considered a separate unit of accounting if it has value to the customer on a standalone basis, and delivery or performance of the undelivered elements is considered probable and substantially under the Company’s control. If these criteria are not met, revenue for the arrangement as a whole is accounted for as a single unit of accounting.
Professional Services Revenue
Revenue from professional services, consisting of consulting, training and contract research activities, is recorded on a percentage-of-completion basis or as such services are performed as appropriate in the circumstances. Percentage-of-completion is used when the outcome of the contract can be estimated reliably and is assessed based on work completed as determined by the hours incurred. When the outcome of the contract cannot be estimated reliably, the amount of revenue recognized is limited to the cost incurred in the period.
(c) CASH:
Cash is comprised of interest-earning bank accounts.
(d) PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost less accumulated depreciation. Cost includes expenditures that are directly attributable to the acquisition of the asset.
Depreciation is based on the cost of an asset and is recognized from the date the item is ready for use in the statement of comprehensive income using the following annual rates and methods that are expected to amortize the cost of the property and equipment over their estimated useful lives:
Computer equipment 33 1/3% straight-line
Furniture and equipment 20% straight-line
Leasehold improvements Straight-line over the lease term
Any gain or loss on disposal of an item of property and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognized in the statement of comprehensive income.
The estimated useful lives and depreciation methods are reviewed at each fiscal year-end and adjusted if appropriate.
(e) RESEARCH AND DEVELOPMENT COSTS:
All costs of product research and development are expensed to operations as incurred as the impact of both technological changes and competition require the Company to continually enhance its products on an annual basis. Research and development costs are recorded net of related SRED investment tax credits.
(f) JOINT RESEARCH AND DEVELOPMENT COSTS:
The Company participates in a joint project engaged in product research and development and accordingly records its proportionate share of costs incurred as research and development costs within the statement of comprehensive income.
(g) FINANCE INCOME AND FINANCE COSTS:
Finance income comprises interest income earned on the bank balances and is recognized as it accrues through the statement of comprehensive income, using the effective interest method.
Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position. Foreign currency gains and losses are recognized in the period in which they occur.
(h) FOREIGN CURRENCY TRANSLATION:
Transactions in foreign currencies are translated to Canadian dollars, the functional currency of the Company, at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange prevailing at the reporting date while non-monetary assets and liabilities that are measured in terms of historical cost are translated using the exchange rates at the dates of the transactions.
Revenues and expenses are translated at the rate of exchange in effect on the transaction dates. Realized and unrealized foreign exchange gains and losses are included in the statement of comprehensive income in the period in which they occur.
(i) INCOME TAXES:
Income taxes comprise current and deferred tax.
Current tax is the expected tax payable or receivable based on taxable profit for the period calculated using tax rates that have been enacted or substantively enacted at the reporting date, and includes any adjustments to tax payable in respect of previous years. Taxable profit differs from profit as reported in the Consolidated Statement of Operations and Comprehensive Income because of items that are taxable or deductible in other years and items that are never taxable and deductible.
Deferred taxes are recognized for temporary differences between the tax and accounting bases of assets and liabilities and for the benefit of losses available to be carried forward for tax purposes to the extent that it is probable that future taxable profits will be available against which the losses can be utilized. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. Any change to the net deferred tax assets and liabilities is included in operations in the period it occurs. Deferred tax assets and liabilities are offset only when a legally enforceable right of offset exists and the deferred tax assets and liabilities arise in the same tax jurisdiction and relate to the same taxable entity.
In determining the amount of current and deferred tax, the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Company believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Company to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.
(j) INVESTMENT TAX CREDITS:
The Company receives federal and provincial investment tax credits in Canada on qualified scientific research and experimental development expenditures incurred in each taxation year. Investment tax credits are recorded as a deduction against related expenses or capital items provided that reasonable assurance over collection of the tax credits exists.
(k) EARNINGS PER SHARE:
Basic earnings per share is computed by dividing the net income by the weighted average number of Common and Non-Voting Shares outstanding for the period. Diluted per share amounts reflect the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted to Common Shares. In calculating the dilutive effect of stock options, it is assumed that proceeds received from the exercise of in-the-money stock options are used to repurchase Common Shares at the average market price during the period.
(l) STOCK-BASED COMPENSATION PLAN:
The Company has a stock-based compensation plan that is described in note 12(d). The fair value of stock options is determined using the Black-Scholes valuation model as of the grant date and is expensed over the vesting period, with a corresponding increase in equity, based on the Company’s estimate of the number of options that will actually vest. Measurement inputs include the share price on the measurement date, the exercise price of the instrument, expected volatility (based on an evaluation of the Company’s historic volatility, particularly over the historic period commensurate with the expected term), expected term of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds).
Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. At the end of each reporting period, the Company revises its estimates of the number of options that are expected to vest and recognizes the impact of any revision in the statement of comprehensive income. When stock options are exercised, the Company records consideration received, together with amounts previously recognized in contributed surplus, as an increase in share capital.
(m) SHORT-TERM EMPLOYEE BENEFITS:
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
(n) FINANCIAL INSTRUMENTS:
(i) Non-derivative financial assets
The Company initially recognizes loans and receivables on the date that they are originated. All other financial assets are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instruments. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. The Company classifies non-derivative financial assets into the following categories:
Financial assets at fair value through profit or loss (“FVTPL”):
A financial asset is classified in this category if it is either held for trading or designated as such upon initial recognition.
It is held for trading if:
-- It has been acquired principally for the purpose of selling it in the
near term;
-- It is part of the Company's portfolio of financial instruments that are
managed together and have a pattern of short-term profit taking;
-- It is a derivative not designated and effective as a hedging instrument.
It is classified as FVTPL if:
-- It forms part of a contract containing one or more embedded derivatives;
-- It forms part of a group of financial instruments which is managed and
its performance is evaluated on a fair value basis.
FVTPL are measured initially and subsequently at fair value, and changes therein are recognized in the statement of comprehensive income. Transaction costs are recognized in the statement of comprehensive income as incurred. The Company’s only financial asset belonging to this category is cash.
Loans and receivables:
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company’s trade and other receivables are classified as loans and receivables. Trade receivables are recognized initially at fair value plus any directly attributable transaction costs, and subsequently measured at amortized cost using the effective interest rate method less any provision for impairment. The Company’s trade and other receivables are classified as current assets. The fair value of trade and other receivables is estimated at the present value of future cash flows, discounted at the market rate of interest at the reporting date.
(ii) Non-derivative financial liabilities
Financial liabilities at amortized cost include trade payables and accrued liabilities. Such liabilities are initially recognized at fair value on the trade date at which the Company becomes a party to the contractual provisions of the instrument, represented by the amount required to be paid plus any directly attributable transaction costs, and subsequently measured at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within a year; otherwise, they are classified as non-current liabilities. The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire. The fair value of non-derivative financial liabilities, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.
(iii) Share Capital
Common Shares are classified as equity. Incremental costs directly attributable to the issue of Common Shares are recognized as a deduction from equity, net of any tax effects.
(o) IMPAIRMENT:
(i) Receivables
Trade and other receivables are assessed for impairment at each reporting date at both a specific and collective level. All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired, together with receivables that are not individually significant, are collectively assessed for impairment by grouping together receivables with similar risk characteristics. In assessing collective impairment, the Company uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in the statement of comprehensive income and reflected in an allowance account against trade and other receivables. When a subsequent event (such as the repayment by a debtor) causes the amount of impairment loss to decrease, the decrease is reversed through the statement of comprehensive income.
(ii) Non-financial assets
The carrying amounts of the Company’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated, and any impairment loss required is recognized in the statement of comprehensive income. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.
(p) LEASES:
The Company’s only lease commitments relate to its office premises which are classified as operating leases since they do not transfer the risks and rewards of ownership to the Company. Payments made under operating leases are recognized in the statement of comprehensive income on a straight-line basis over the term of the lease.
4. Accounting Standards and Interpretations Not Yet Adopted:
The following is a summary of new standards, amendments to standards and interpretations not yet effective for the year ended March 31, 2012, and have not been applied in preparing these consolidated financial statements:
- IFRS 9 Financial Instruments
Replaces the guidance in IAS 39 Financial Instruments: Recognition and
Measurement, on the classification and measurement of financial assets
and liabilities. The Company intends to adopt IFRS 9 (2010) in its
financial statements for the annual period beginning on April 1, 2015.
The Company does not expect IFRS 9 (2010) to have a material impact on
the financial statements because of the nature of the Company's
operations and the types of financial assets that it holds.
- IFRS 10 Consolidated Financial Statements
Replaces the guidance in IAS 27 Consolidated and Separate Financial
Statements and SIC-12 Consolidation - Special Purpose Entities, and
provides a single model to be applied in the control analysis for all
investees, including entities that currently are special purpose
entities in the scope of SIC-12. The Company intends to adopt IFRS 10 in
its financial statements for the annual period beginning on April 1,
2013, and does not expect IFRS 10 to have a material impact on the
financial statements.
- IFRS 11 Joint Arrangements
Replaces the guidance in IAS 31 Interest in Joint Ventures, and
essentially carves out of previous jointly controlled entities, those
arrangements which although structured through a separate vehicle, such
separation is ineffective and the parties to the arrangement have rights
to the assets and obligations for the liabilities and are accounted for
as joint operations in a fashion consistent with jointly controlled
assets/operations under IAS 31. In addition, under IFRS 11 joint
ventures must now use the equity method of accounting. The Company
intends to adopt IFRS 11 in its financial statements for the annual
period beginning on April 1, 2013. The Company does not expect IFRS 11
to have a material impact on the financial statements.
- IFRS 12 Disclosure of Interests in Other Entities
Contains the disclosure requirements for entities that have interest in
subsidiaries, joint arrangements, associates and/or unconsolidated
structured entities. The Company intends to adopt IFRS 12 in its
financial statements for the annual period beginning April 1, 2013. The
Company does not expect the amendments to have a material impact on the
financial statements, because of the nature of the Company's interests
in other entities.
- IFRS 13 Fair Value Measurement
Replaces the fair value measurement guidance contained in individual
IFRSs with a single source of fair value measurement guidance. The
Company intends to adopt IFRS 13 prospectively in its financial
statements for the annual period beginning on April 1, 2013. The extent
of the impact of adoption of IFRS 13 has not yet been determined.
- Amendments to IAS 1 Presentation of Financial Statements
Require an entity present separately the items of other comprehensive
income that may be reclassified to profit or loss in the future from
those that would never be reclassified to profit or loss. The Company
intends to adopt the amendments in its financial statements for the
annual period beginning on April 1, 2013. As the amendments only require
changes in the presentation of items in other comprehensive income, the
Company does not expect the amendments to IAS 1 to have a material
impact on the financial statements.
- Amendments to IAS 32 and IFRS 7 Offsetting Financial Assets and
Liabilities
Amendments to IAS 32 clarifies when an entity has a legally enforceable
right to set-off and net versus gross settlement mechanisms, while
amendments to IFRS 7 contain new disclosure requirements for offset
financial assets and liabilities and netting arrangements. The Company
intends to adopt the amendments to IFRS 7 in its financial statements
for the annual period beginning on April 1, 2013, and the amendments to
IAS 32 in its financial statements for the annual period beginning April
1, 2014. The Company does not expect the amendments to have a material
impact on the financial statements.
5. Property and Equipment:
Furniture
Cost Computer and Leasehold
(thousands of $) Equipment Equipment Improvements Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at April 1, 2010 3,387 1,256 1,699 6,342
Additions 866 210 114 1,190
Disposals (152) (36) - (188)
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Balance at March 31, 2011 4,101 1,430 1,813 7,344
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Balance at April 1, 2011 4,101 1,430 1,813 7,344
Additions 476 357 668 1,501
Disposals (328) (226) (235) (789)
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Balance at March 31, 2012 4,249 1,561 2,246 8,056
----------------------------------------------------------------------------
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Accumulated Depreciation
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at April 1, 2010 (2,274) (620) (1,047) (3,941)
Depreciation charge for the
year (694) (186) (157) (1,037)
Disposals 152 36 - 188
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Balance at March 31, 2011 (2,816) (770) (1,204) (4,790)
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Balance at April 1, 2011 (2,816) (770) (1,204) (4,790)
Depreciation charge for the
year (764) (227) (236) (1,227)
Disposals 328 227 235 790
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Balance at March 31, 2012 (3,252) (770) (1,205) (5,227)
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Carrying Amounts
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At April 1, 2010 1,113 636 652 2,401
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At March 31, 2011 1,285 660 609 2,554
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At March 31, 2012 997 791 1,041 2,829
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6. Trade Payables and Accrued Liabilities:
(thousands of $) March 31, 2012 March 31, 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trade payables 340 192
Employee salaries, commissions and benefits
payable 3,218 2,554
Accrued liabilities and other payables 1,800 1,797
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5,358 4,543
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7. Revenue:
Years ended March 31, 2012 2011
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Software licenses 55,582 43,754
Professional services 5,452 8,073
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61,034 51,827
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8. Research and Development Costs:
Years ended March 31, 2012 2011
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Research and development 12,100 10,416
SRED investment tax credits (1,471) (1,078)
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10,629 9,338
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9. Personnel Expenses:
Years ended March 31, 2012 2011
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Salaries, commissions and short-term
employee benefits 21,222 18,630
Stock-based compensation (note 12(d)) 1,981 1,560
----------------------------------------------------------------------------
23,203 20,190
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10. Finance Income and Finance Costs:
Years ended March 31, 2012 2011
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest income 472 280
Net foreign exchange gain 548 -
----------------------------------------------------------------------------
Finance income 1,020 280
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Net foreign exchange loss - (523)
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Finance costs - (523)
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11. Income and Other Taxes:
The major components of income tax expense are as follows:
Years ended March 31, 2012 2011
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current year income taxes 9,001 7,021
Adjustments for prior year (561) -
----------------------------------------------------------------------------
Current income taxes 8,440 7,021
Deferred tax expense (26) 195
Foreign withholding and other taxes 819 1,052
----------------------------------------------------------------------------
9,233 8,268
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----------------------------------------------------------------------------
The provision for income and other taxes reported differs from the amount computed by applying the combined Canadian Federal and Provincial statutory rate to the profit before income and other taxes. The reasons for this difference and the related tax effects are as follows:
Years ended March 31, 2012 2011
(thousands of $, unless otherwise stated)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Combined statutory tax rate 26.13% 27.63%
----------------------------------------------------------------------------
Expected income tax 8,525 7,028
Non-deductible costs 545 458
Change in unrecognized temporary differences - (87)
Withholding taxes 586 754
Recognition of previously unrecognized SRED
investment tax credits (463) -
Adjustments for prior year (98) -
Other 138 115
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9,233 8,268
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The components of the Company's deferred tax liability are as follows:
(thousands of $) March 31, 2012 March 31, 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Tax liability on investment tax credits (267) (181)
Tax liability on property and equipment (91) (203)
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Deferred tax liability (358) (384)
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----------------------------------------------------------------------------
All movement in deferred tax assets and liabilities is recognized through
comprehensive income of the respective period.
12. Share Capital:
(a) AUTHORIZED:
An unlimited number of Common Shares, an unlimited number of Non-Voting Shares, and an unlimited number of Preferred Shares, issuable in series.
Effective June 20, 2011, the Common Shares were split on a two-for-one basis. Accordingly, the comparative number of shares and per share amounts have been retroactively adjusted to reflect the two-for-one adjustment.
(b) ISSUED:
Non-Voting
(thousands of shares) Common Shares Shares
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, April 1, 2010 31,117 4,543
Issued for cash on exercise of stock options 777 -
Common shares buy-back (10) -
Converted into common shares 4,543 (4,543)
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Balance, March 31, 2011 36,427 -
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Balance, April 1, 2011 36,427 -
Issued for cash on exercise of stock options 913 -
Common shares buy-back (33) -
----------------------------------------------------------------------------
Balance, March 31, 2012 37,307 -
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----------------------------------------------------------------------------
The Non-Voting Shares were convertible into an equivalent number of Common Shares at any time at the option of the holder.
Subsequent to March 31, 2012, 13,000 stock options were exercised for cash proceeds of $83,000.
On May 18, 2006, the Board of Directors adopted a shareholder rights plan (the “Original Rights Plan”), whereby the Company issued one right in respect of each share outstanding at the close of business on May 18, 2006 and for each additional share issued by the Company thereafter. The issuance of the rights was not dilutive and will not affect reported earnings per share until the rights separate from the underlying shares and become exercisable or until the exercise of the rights. The Original Rights Plan was approved by the Company’s shareholders on July 13, 2006.
On May 21, 2009, the Board of Directors reviewed the Original Rights Plan and determined that it was in the best interest of the Company to continue to have a shareholder rights plan in place. The Company, therefore, adopted a new shareholder rights plan (the “Rights Plan”) which is identical in all respects to the Original Rights Plan, with the exception of certain minor amendments which have been made to provide for renewal or approval of the Rights Plan every three years (rather than only one three-year period as was set out in the Original Rights Plan) and to update references to statutory provisions now out of date. The Rights Plan was approved by the Company’s shareholders on July 9, 2009.
(c) COMMON SHARES BUY-BACK:
On March 22, 2010, the Company announced a Normal Course Issuer Bid (“NCIB”) commencing on March 23, 2010 to purchase for cancellation up to 1,315,000 of its Common Shares. This NCIB ended on March 22, 2011 and a total of 10,000 shares were purchased at market price for a total cost of $125,000.
On April 6, 2011, the Company announced a NCIB commencing on April 7, 2011 to purchase for cancellation up to 1,636,000 of its Common Shares. During the year ended March 31, 2012, 33,000 Common Shares were purchased at market price for a total cost of $438,000.
On April 16, 2012, the Company announced a NCIB commencing on April 18, 2012 to purchase for cancellation up to 3,416,000 of its Common Shares.
(d) STOCK-BASED COMPENSATION PLAN:
The Company adopted a rolling stock option plan as of July 13, 2005, which was reaffirmed by the Company’s shareholders on July 7, 2011, which allows it to grant options to acquire Common Shares of up to 10% of the combined outstanding Common and Non-Voting Shares at the date of grant. Based upon this calculation, at March 31, 2012, the Company could grant up to 3,731,000 stock options. Pursuant to the stock option plan, the maximum term of an option granted cannot exceed five years from the date of grant. The outstanding stock options vest as to 50% after the first year anniversary, from date of grant, and then vest as to 25% of the total options granted after each of the second and third year anniversary dates.
The following table outlines changes in options:
Years ended March 31, 2012 2011
(thousands except per share
amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Granted ($/share) Granted ($/share)
----------------------------------------------------------------------------
Outstanding at beginning of year 2,825 7.41 2,572 5.90
Granted 1,071 13.43 1,094 9.07
Exercised (913) 6.43 (777) 4.76
Forfeited/cancelled (80) 10.57 (64) 7.08
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Outstanding at end of year 2,903 9.85 2,825 7.41
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Options exercisable at end of
year 1,120 7.31 969 5.91
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----------------------------------------------------------------------------
The range of exercise prices of options outstanding and exercisable at March
31, 2012 is as follows:
Outstanding Exercisable
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Number of Exercise
Exercise Price Options Contractual Price Options Price
($/option) (thousands) Life (years) ($/option) (thousands) ($/option)
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3.70 - 5.63 405 1.3 5.29 405 5.29
5.64 - 7.80 580 2.4 7.80 351 7.80
7.81 - 9.07 879 3.4 9.07 364 9.07
9.08 - 13.43 1,014 4.4 13.40 - -
13.44 - 16.35 25 4.6 14.37 - -
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2,903 3.2 9.85 1,120 7.31
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----------------------------------------------------------------------------
The fair value of stock options granted was estimated using the Black-Scholes option pricing model under the following assumptions:
Years ended March 31, 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair value at grant date ($/option) 1.23 to 3.42 1.56 to 1.78
Share price at grant date ($/share) 13.00 to 16.35 9.07
Risk-free interest rate (%) 0.99 to 2.06 1.37 to 2.17
Estimated hold period prior to exercise (years) 2 to 4 2 to 5
Volatility in the price of common shares (%) 24 to 37 35 to 39
Dividend yield per common share (%) 3.20 to 4.94 5.12
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The Company recognized total stock-based compensation expense for the year ended March 31, 2012 of $1,981,000 (2011 – $1,560,000).
(e) EARNINGS PER SHARE:
The following table summarizes the earnings and weighted average number of Common and Non-Voting Shares used in calculating basic and diluted earnings per share:
Years ended March
31,
(thousands except
per share amounts) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares Per Share Earnings Shares Per Share
($) Outstanding ($/share) ($) Outstanding ($/share)
----------------------------------------------------------------------------
Basic 23,391 36,866 0.63 17,166 36,066 0.48
Dilutive
effect of
stock
options 1,034 802
----------------------------------------------------------------------------
Diluted 23,391 37,900 0.62 17,166 36,868 0.47
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----------------------------------------------------------------------------
During the year ended March 31, 2012, 113,000 options (2011 – 57,000) were excluded from the computation of the weighted-average number of diluted shares outstanding because their effect was not dilutive.
13. Capital Management:
The Company’s objectives in managing capital are to ensure sufficient liquidity to pursue its strategy of organic growth combined with strategic acquisitions and to maximize the return to its shareholders. The capital structure of the Company consists of cash, credit facilities and shareholders’ equity. The Company does not have any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital.
The Company’s policy is to pay quarterly dividends based on the Company’s overall financial performance and cash flow generation. In addition, since May 2005, the Company has declared a special dividend after review of the full fiscal year results. Decisions on dividend payments are made on a quarterly basis by the Board of Directors. There can be no assurance as to the amount or payment of such dividends in the future.
Since November 2002, the Company embarked on a series of normal course issuer bids to buy back its shares. Reference is made to note 12(c).
The Company makes adjustments to its capital structure in light of general economic conditions and the Company’s working capital requirements. In order to maintain or adjust its capital structure, the Company, upon approval from its Board of Directors, may pay dividends, buy back shares or undertake other activities as deemed appropriate under the specific circumstances. The Board of Directors reviews and approves any material transactions not in the ordinary course of business.
14. Financial Instruments and Risk Management:
(i) Classification of financial instruments
Classification Measurement
----------------------------------------------------------------------------
Cash Held for trading Fair value
Trade and other receivables Loans and receivables Amortized cost
Trade payables and accrued
liabilities Other financial liabilities Amortized cost
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(ii) Fair values of financial instruments
The carrying values of cash, trade and other receivables, trade payables and accrued liabilities approximate their fair values due to the short-term nature of these instruments.
OVERVIEW:
The Company is exposed to risks of varying degrees of significance and likelihood which could affect its ability to achieve its strategic objectives for growth. The main objectives of the Company’s risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to those risks. The principal financial risks to which the Company is exposed are described below:
(a) CREDIT RISK:
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligation and arises principally from the Company’s cash and trade and other receivables. The amounts reported in the statements of financial position for trade receivables are net of allowances for bad debts, estimated by the Company’s management based on prior experience and their assessment of the current economic environment.
The Company’s trade receivables consist primarily of balances from customers operating in the oil and gas industry, both domestically and internationally, as the Company sells its products and services in over 50 countries worldwide. Some of these countries have greater economic and political risk than experienced in North America and as a result there may be greater risk associated with sales in those jurisdictions. The Company manages this risk by invoicing for the full license term in advance for the majority of software license sales and by invoicing as frequently as the contract allows for consulting and contract research services on a percentage-of-completion basis. In cases where collectability is not deemed probable, revenue is recognized upon receipt of cash, assuming all other criteria have been met. Historically, the Company has not experienced any significant losses related to individual customers or groups of customers in any particular geographic area; therefore, no allowance for doubtful accounts has been established at March 31, 2012 and 2011.
As at March 31, 2012, the Company has a concentration of credit risk with 11 domestic and international customers who represent 66% of trade receivables (2011 – 11 customers; 68%).
The carrying amount of trade and other receivables represents the maximum credit exposure. The maximum exposure to credit risk at March 31, 2012 was $15.5 million (2011 – $13.3 million). The aging of trade and other receivables at the reporting date was:
(thousands of $) March 31, 2012 March 31, 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current 7,648 6,547
31-60 days 5,519 2,786
61-90 days 159 2,672
Over 90 days 2,168 1,313
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Balance, end of year 15,494 13,318
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The Company assesses the creditworthiness of its customers on an ongoing basis and it regularly monitors the amount and age of balances outstanding. Payment terms with customers are 30 days from invoice date; however, industry practice can extend these terms. Accordingly, the Company views the credit risks on these amounts as normal for the industry.
The Company minimizes the credit risk of cash by depositing only with a reputable financial institution in highly liquid interest-bearing cash accounts.
(b) MARKET RISK:
Market risk is the risk that changes in market prices of the foreign exchange rates and interest rates will affect the Company’s income or the value of its financial instruments.
(i) Foreign Exchange Risk
The Company operates internationally and primarily prices its products in either the Canadian or US dollar. This gives rise to exposure to market risks from changes in the foreign exchange rates between the Canadian and US dollar. Approximately 73% of the Company’s revenues for the year ended March 31, 2012 (2011 – 68%) were denominated in US dollars and at March 31, 2012, the Company had approximately $13.4 million (2011 – $9.1 million) of its working capital denominated in US dollars. The Company currently does not use derivative instruments to hedge its exposure to those risks but as approximately 24% (2011 – 25%) of the Company’s total costs are also denominated in US dollars they provide a partial economic hedge against the fluctuation in this currency exchange. In addition, the Company manages levels of foreign currency held by converting excess US dollars into Canadian dollars at spot rates.
The Company’s operations are exposed to currency risk on US denominated financial assets and liabilities with fluctuations in the rate recognized as foreign exchange gains or losses in the Consolidated Statements of Operations and Comprehensive Income. It is estimated that a one cent change in the US dollar would result in a net change of approximately $99,000 to equity and net income for the year ended March 31, 2012. A weaker US dollar with respect to the Canadian dollar will result in a negative impact while the reverse would result from a stronger US dollar.
(ii) Interest Rate Risk
The Company has significant cash balances and no interest-bearing debt. The Company’s current policy is to invest excess cash in interest-bearing deposits and/or guaranteed investment certificates issued by its principal banker. The Company is exposed to interest cash flow risk from changes in interest rates on its cash balances. Based on the March 31, 2012 cash balance, each 1% change in the interest rate on the Company’s cash balance would change equity and net income for the year ended March 31, 2012 by approximately $409,000.
(c) LIQUIDITY RISK:
Liquidity risk is the risk that the Company is not able to meet its financial obligations as they fall due or can do so only at excessive cost. The Company manages liquidity risk through the management of its capital structure as outlined in note 13. The Company’s growth is financed through a combination of the cash flows from operations and its cash balances on hand. Given the Company’s available liquid resources as compared to the timing of the payments of its liabilities, management assesses the Company’s liquidity risk to be low. The Company monitors its expenditures by preparing annual budgets which are updated periodically. At March 31, 2012, the Company has significant cash balances in excess of its obligations and over $800,000 of the line of credit (note 16) available for its use.
15. 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 the upcoming fiscal year.
(b) LEASE COMMITMENTS:
The Company has operating lease commitments relating to its office premises with the minimum annual lease payments as follows:
Years ended March 31, 2012 2011
(thousands of $)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Less than one year 1,940 1,501
Between one and five years 6,784 3,934
----------------------------------------------------------------------------
8,724 5,435
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----------------------------------------------------------------------------
The Company leases a number of properties under operating leases. During the year ended March 31, 2012, $1.9 million (2011 – $1.6 million) was recognized as an expense in the statement of comprehensive income in respect of operating leases related to office premises.
16. Line Of Credit:
The Company has arranged for a $1.0 million line of credit with its principal banker, which can be drawn down by way of a demand operating credit facility or may be used to support letters of credit. As at March 31, 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.
17. Segmented Information:
The Company is organized into one operating segment represented by the development and licensing of reservoir simulation software. The Company provides professional services, consisting of support, training, consulting and contract research activities, to promote the use and development of its software; however, these activities are not evaluated as a separate business segment.
Revenues and property and equipment of the Company arise in the following geographic regions:
Property and
(thousands of $) Revenue equipment
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Years ended March 31, As at March 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Canada 18,940 18,066 2,670 2,295
United States 10,656 9,518 71 103
South America 11,920 9,873 68 113
Eastern Hemisphere(1) 19,518 14,370 20 43
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61,034 51,827 2,829 2,554
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(1) Includes Europe, Africa, Asia and Australia
No customer represents revenue in excess of 10% of total revenue in the years ended March 31, 2012 and 2011.
18. Subsidiaries:
CMG is the beneficial owner of the entire issued share capital and controls all the votes of its subsidiaries. The principal activities of all the subsidiaries are the sale and support for the use of CMG’s software licenses. Transactions between subsidiaries are eliminated on consolidation. The following is the list of CMG’s subsidiaries:
Subsidiary Country of Incorporation
----------------------------------------------------------------------------
Computer Modelling Group Inc. United States
CMG Venezuela Venezuela
CMG Middle East FZ LLC Dubai, UAE
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19. 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 statement of comprehensive income.
For the year ended March 31, 2012, CMG included $3.2 million (2011 – $3.1 million) of costs in its consolidated financial statements 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 $1.7 million during the year ended March 31, 2012 (2011 – $1.6 million).
20. Related Parties:
(a) INTERCOMPANY TRANSACTIONS
The Company has three wholly owned subsidiaries (note 18) which have intercompany transactions under the normal course of operations and are eliminated upon consolidation.
(b) KEY MANAGEMENT PERSONNEL COMPENSATION
The key management personnel of the Company are the members of the Company’s executive management team and Board of Directors, and control approximately 8.4% of the outstanding shares of CMG at March 31, 2012.
In addition to their salaries and director fees, as applicable, directors and executive officers, along with certain employees, of the Company, also participate in the Company’s stock option plan (note 12(d)).
Key management personnel compensation comprised the following:
Years ended March 31, 2012 2011
(thousands of $)
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Salaries, bonus and employee benefits 4,310 3,673
Stock-based compensation 616 516
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4,926 4,189
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21. Subsequent Events:
On May 23, 2012, the Board of Directors declared a quarterly cash dividend of $0.16 per share and a special cash dividend of $0.10 per share on its Common Shares, payable on June 15, 2012, to all shareholders of record at the close of business on June 8, 2012.
22. Transition to IFRS:
As stated in note 2(a), these consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The accounting policies described in note 3 have been applied in preparing the consolidated financial statements for the year ended March 31, 2012, the comparative information for the year ended March 31, 2011, and in preparation of an opening IFRS statement of financial position at April 1, 2010, the Company’s date of transition to IFRS.
This transition note explains the effect of the transition from previous Canadian GAAP to IFRS on the Company’s financial position, financial performance and cash flows.
22.1 ELECTED EXEMPTIONS FROM FULL RETROSPECTIVE APPLICATION:
In preparing these consolidated financial statements in accordance with IFRS 1, the Company applied the following optional exemptions from full retrospective application of IFRS:
- IFRS 3 - Business Combinations
IFRS 1 allows the Company to apply IFRS 3, Business Combinations,
retrospectively or prospectively from the date of transition. The
retrospective application would require restatement of all business
combinations that occurred prior to the transition date, April 1, 2010.
The Company elected not to retrospectively apply IFRS 3 to business
combinations that occurred prior to its transition date and such
business combinations have not been restated.
- IFRS 2 - Share-based Payments
IFRS 1 provides the exemption from retrospective application of IFRS 2,
Share-based Payments, to options granted on or before November 7, 2002
and options granted after November 7, 2002 that vested before April 1,
2010. The Company adopted the exemption in IFRS 1 and applied IFRS 2 to
employee options granted after November 7, 2002 that had not vested by
April 1, 2010. While minor differences occurred on the transition from
Canadian GAAP to IFRS, these differences were not material, and hence,
no adjustments have been made to the consolidated financial statements.
22.2 MANDATORY EXCEPTIONS TO RETROSPECTIVE APPLICATION:
In preparing these consolidated financial statements in accordance with IFRS 1, the Company applied the following mandatory exception:
- Estimates
IFRS 1 disallows hindsight to be used in creating or revising estimates.
Estimates made in accordance with IFRS at the date of transition are
consistent with estimates made under Canadian GAAP except where the
revision was necessary to reflect any difference in accounting policies.
In making estimates under IFRS not required under Canadian GAAP, the
estimates reflect conditions that existed at the relevant reporting date
and/or transition date.
22.3 RECONCILIATION OF FINANCIAL POSITION AND SHAREHOLDERS' EQUITY:
(thousands of $) March 31, 2011 April 1, 2010
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Canadian IFRS Canadian IFRS
GAAP Adj. IFRS GAAP Adj. IFRS
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Assets
Current assets:
Cash 41,753 41,753 28,826 28,826
Trade and other
receivables 13,318 13,318 16,072 16,072
Prepaid expenses 1,064 1,064 1,141 1,141
Prepaid income taxes - - 1,433 1,433
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56,135 56,135 47,472 47,472
Property and equipment 2,554 2,554 2,401 2,401
Deferred tax asset (note
22.5(a)) - - 33 (33) -
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Total assets 58,689 58,689 49,906 (33) 49,873
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Liabilities and
Shareholders' Equity
Current liabilities:
Trade payables and
accrued liabilities 4,543 4,543 5,398 5,398
Income taxes payable 1,237 1,237 - -
Deferred revenue 16,755 16,755 13,843 13,843
Deferred tax liability
(note 22.5(a)) 181 (181) - 222 (222) -
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22,716 (181) 22,535 19,463 (222) 19,241
Deferred tax liability
(note 22.5(a)) 203 181 384 - 189 189
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Total liabilities 22,919 - 22,919 19,463 (33) 19,430
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Shareholders' equity:
Share capital 24,801 24,801 20,390 20,390
Contributed surplus 2,655 2,655 1,816 1,816
Retained earnings 8,314 8,314 8,237 8,237
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Total shareholders'
equity 35,770 35,770 30,443 30,443
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Total liabilities and
shareholders' equity 58,689 58,689 49,906 (33) 49,873
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22.4 RECONCILIATION OF NET AND COMPREHENSIVE INCOME:
Year ended March 31, 2011 Canadian IFRS
(thousands of $) GAAP Adjustments IFRS
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Revenue 51,827 - 51,827
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Operating expenses
Sales, marketing and professional
services (note 22.5(b)) 11,393 311 11,704
Research and development 9,338 - 9,338
General and administrative (note
22.5(b)) 4,868 240 5,108
Depreciation (note 22.5(b)) 561 (561) -
Foreign exchange loss (note 22.5(c)) 523 (523) -
Interest and other income (note 22.5(c)) (290) 290 -
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26,393 (243) 26,150
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Operating profit 25,434 243 25,677
Finance income (note 22.5(c)) - 280 280
Finance costs (note 22.5(c)) - (523) (523)
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Profit before income and other taxes 25,434 - 25,434
Income and other taxes 8,268 - 8,268
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Net and total comprehensive income 17,166 - 17,166
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22.5 EXPLANATION OF PRESENTATION RECLASSIFICATIONS:
(a) Deferred taxes – deferred taxes are classified as non-current under IFRS. Under previous Canadian GAAP, deferred taxes were classified as current and non-current based on the classification of the underlying assets or liabilities to which they relate or based on the expected reversal of the temporary differences.
Transition rules resulted in the reclassification of the deferred tax liability associated with SRED credits from current to non-current. In addition, the deferred tax asset associated with property and equipment was offset against the deferred tax liability as both relate to income taxes levied by the same taxation authority for the same taxable entity.
(b) Expense classification – the Company has elected to present its expenses in the consolidated statements of operations and comprehensive income prepared under IFRS according to their function. As a result, depreciation, which was reported as a separate line item under previous Canadian GAAP, was allocated to its respective functions.
(c) Finance income and costs – under Canadian GAAP, interest income and foreign exchange gains and losses were classified as separate line items in the consolidated statement of earnings. Under IFRS, interest income and net foreign exchange gains are presented as finance income, and net foreign exchange losses are presented as finance costs. Finance income and costs are presented on a gross basis as required by IFRS.
22.6 ADJUSTMENTS TO THE STATEMENTS OF CASH FLOWS:
Interest received and income taxes paid have been moved into the body of the statement of cash flows under operating activities, whereas they were previously disclosed as supplemental information. There are no other material differences between the statement of cash flows presented under IFRS and the statement of cash flows previously presented under Canadian GAAP.
