Computer Modelling Group Ltd. — Interim / Quarterly Report 2021

Aug 11, 2020

Condensed Consolidated Statements of Financial Position

UNAUDITED (thousands of Canadian $)	June 30, 2020	March 31, 2020
Assets
Current assets:
Cash	51,195	40,505
Trade and other receivables	7,692	26,277
Prepaid expenses	953	913
Prepaid income taxes (note 9)	-	771
	59,840	68,466
Property and equipment	13,196	13,507
Right-of-use assets	37,305	37,901
Deferred tax asset (note 9)	1,419	992
Total assets	111,760	120,866
Liabilities and shareholders' equity
Current liabilities:
Trade payables and accrued liabilities	6,105	6,224
Income taxes payable (note 9)	319	60
Deferred revenue (note 4)	25,492	33,838
Lease liability (note 5)	1,324	1,313
	33,240	41,435
Lease liability (note 5)	40,736	41,062
Total liabilities	73,976	82,497
Shareholders' equity:
Share capital (note 10)	79,851	79,851
Contributed surplus	13,699	13,533
Deficit	(55,766)	(55,015)
Total shareholders' equity	37,784	38,369
Total liabilities and shareholders' equity	111,760	120,866

Subsequent event (note 14)

Condensed Consolidated Statements of Operations and Comprehensive Income

Three months ended June 30,UNAUDITED (thousands of Canadian $ except per share amounts)	2020	2019
Revenue (note 6)	16,672	18,123
Operating expenses
Sales, marketing and professional services	4,284	4,630
Research and development (note 7)	4,959	4,751
General and administrative	1,718	1,674
	10,961	11,055
Operating profit	5,711	7,068
Finance income (note 8)	99	323
Finance costs (note 8)	(1,405)	(952)
Profit before income and other taxes	4,405	6,439
Income and other taxes (note 9)	1,143	1,997
Net and total comprehensive income	3,262	4,442
Earnings per share
Basic and diluted (note 10(d))	0.04	0.06

Condensed Consolidated Statements of Changes in Equity

	Common	Contributed		Total
UNAUDITED (thousands of Canadian $)	Share Capital	Surplus	Deficit	Equity
Balance, April 1, 2019	79,711	12,808	(46,403)	46,116
Total comprehensive income for the year	-	-	4,442	4,442
Dividends paid	-	-	(8,022)	(8,022)
Stock-based compensation:
Current period expense (note 10(c))	-	216	-	216
Balance, June 30, 2019	79,711	13,024	(49,983)	42,752
Balance, April 1, 2020	79,851	13,533	(55,015)	38,369
Total comprehensive income for the year	-	-	3,262	3,262
Dividends paid	-	-	(4,013)	(4,013)
Stock-based compensation:
Current period expense (note 10(c))	-	166	-	166
Balance, June 30, 2020	79,851	13,699	(55,766)	37,784

Condensed Consolidated Statements of Cash Flows

Three months ended June 30,UNAUDITED (thousands of Canadian $)	2020	2019
Operating activities
Net income	3,262	4,442
Adjustments for:
Depreciation	1,056	1,050
Deferred income tax recovery (note 9)	(427)	(160)
Stock-based compensation (note 10(c))	812	765
Funds flow from operations	4,703	6,097
Movement in non-cash working capital:
Trade and other receivables	18,585	6,570
Trade payables and accrued liabilities	(765)	(1,734)
Prepaid expenses	(40)	50
Income taxes payable	1,030	(359)
Deferred revenue	(8,346)	(5,749)
Decrease (increase) in non-cash working capital	10,464	(1,222)
Net cash provided by operating activities	15,167	4,875
Financing activities
Repayment of lease liability (note 5)	(315)	(282)
Dividends paid	(4,013)	(8,022)
Net cash used in financing activities	(4,328)	(8,304)
Investing activities
Property and equipment additions	(149)	(108)
Increase (decrease) in cash	10,690	(3,537)
Cash, beginning of period	40,505	54,290
Cash, end of period	51,195	50,753
Supplementary cash flow information
Interest received	99	333
Interest paid (notes 5 and 8)	525	534
Income taxes paid	184	2,074

Notes to Condensed Consolidated Financial Statements

For the three months ended June 30, 2020 and 2019 (unaudited).

1. Reporting Entity:

Computer Modelling Group Ltd. ("CMG") is a company domiciled in Alberta, Canada and is incorporated pursuant to the Alberta Business Corporations Act, with its Common Shares listed on the Toronto Stock Exchange under the symbol "CMG". The address of CMG's registered office is 3710 33 Street N.W., Calgary, Alberta, Canada, T2L 2M1. The condensed consolidated financial statements as at and for the three months ended June 30, 2020 comprise CMG and its subsidiaries (together referred to as the "Company"). The Company is a computer software technology company engaged in the development and licensing of reservoir simulation software. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities.

2. Basis of Preparation:

(a) Statement of Compliance:

These condensed consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting. Accordingly, they do not include all of the information required for full annual financial statements and should be read in conjunction with the Company's most recent annual consolidated financial statements as at and for the year ended March 31, 2020, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

These unaudited condensed consolidated interim financial statements as at and for the three months ended June 30, 2020 were authorized for issuance by the Board of Directors on August 10, 2020.

(b) Basis of Measurement:

The condensed consolidated financial statements have been prepared on the historical cost basis, which is based on the fair value of the consideration at the time of the transaction.

(c) Functional and Presentation Currency:

The consolidated financial statements are presented in Canadian dollars, which is the Company's functional currency. 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. Estimates and underlying assumptions are reviewed on an ongoing 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.

Significant estimates and judgments used in the preparation of these condensed consolidated financial statements were the same as those that applied to the consolidated financial statements for the year ended March 31, 2020.

Impact of the COVID-19 pandemic

In March 2020, the World Health Organization declared coronavirus outbreak ("COVID-19") a pandemic. Responses to the spread of COVID-19 resulted in a partial shutdown of the global economy leading to significant disruption to business operations and a significant increase in economic uncertainty with volatile commodity prices and currency exchange rates. In addition, the decrease in demand for crude oil has resulted in a significant decline in global energy prices.

While market conditions improved during the three months ended June 30, 2020 as countries began easing lockdown restrictions, a challenging economic climate persists, and it is difficult to reliably estimate the length or severity of the pandemic and its financial impact. A potential adverse impact to the Company includes reductions in revenues and cash flows and

increased risk of non-payment from customers. At June 30, 2020, there has not been a significant increase in credit risk related to the Company's accounts receivable arising from COVID-19. As such, no allowance for doubtful accounts has been established at June 30, 2020 (none at March 31, 2020).

Estimates made during this period of extreme volatility are subject to a higher level of uncertainty and as a result, there may be a further prospective impact in future periods.

3. 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.

Property, equipment and right-of-use assets of the Company are located in the following geographic regions (for revenue by geographic region, refer to note 6):

(thousands of $)	June 30, 2020	March 31, 2020
Canada	49,138	49,957
United States	915	972
South America	404	427
Eastern Hemisphere(1)	44	52
	50,501	51,408

(1) Includes Europe, Africa, Asia and Australia.

4. Deferred Revenue:

The following table presents changes in the deferred revenue balance for the three months ended June 30, 2020:

(thousands of $)
Balance, March 31, 2020	33,838
Invoiced during the period, excluding amount recognized as revenue during the period	4,077
Recognition of deferred revenue included in the balance at the beginning of the period	(12,423)
Balance, June 30, 2020	25,492

5. Lease Liability:

The Company's leases are for office space, the most significant of which is the twenty-year head office lease that commenced in 2017. These leases contain renewal options for additional terms, but since the Company is not reasonably certain it will exercise the renewal options, they have not been included in the measurement of the lease obligations.

(thousands of $)
Balance, March 31, 2020	42,375
Additions	-
Interest on lease liability (note 8)	525
Lease payments	(840)
Balance, June 30, 2020	42,060
Current	1,324
Long-term	40,736

The following table presents contractual undiscounted payments for lease liability as at June 30, 2020:

(thousands of $)
Less than one year	3,383
Between one and five years	14,178
More than five years	45,680
Total undiscounted payments	63,241

6. Revenue:

In the following table, revenue is disaggregated by geographical region and timing of revenue recognition:

Three months ended June 30,	2020	2019
(thousands of $)
Annuity/maintenance license revenue
Canada	3,212	3,776
United States	4,235	4,934
South America	1,390	1,945
Eastern Hemisphere	5,686	5,101
	14,523	15,756
Perpetual license revenue
Canada	-	-
United States	-	298
South America	-	769
Eastern Hemisphere	-	92
	-	1,159
Total software license revenue	14,523	16,915
Professional services
Canada	1,817	1,025
United States	237	53
South America	26	43
Eastern Hemisphere	69	87
	2,149	1,208
Total revenue
Canada	5,029	4,801
United States	4,472	5,285
South America	1,416	2,757
Eastern Hemisphere	5,755	5,280
	16,672	18,123

The amount of revenue recognized during the three months ended June 30, 2020 from performance obligations satisfied (or partially satisfied) in previous periods is $0.2 million.

The Company applies the practical expedient available under IFRS 15 and does not disclose the amount of the transaction price allocated to unsatisfied performance obligations if the underlying contract has an expected duration of one year or less.

Receivables from contracts with customers were as follows:

(thousands of $)	June 30, 2020	March 31, 2020
Receivables (included in "Trade and other receivables")	7,477	26,020

During the three months ended June 30, 2020, two customers comprised more than 10% of the Company's total revenue each (13.5% and 10.4%). During the three months ended June 30, 2019, no customer comprised more than 10% of the Company's total revenue.

7. Research and Development Costs:

Three months ended June 30,	2020	2019
(thousands of $)
Research and development	5,303	5,192
Scientific research and experimental development ("SR&ED") investment tax credits	(344)	(441)
	4,959	4,751

8. Finance Income and Finance Costs:

Three months ended June 30,	2020	2019
(thousands of $)
Interest income	99	323
Finance income	99	323
Interest expense on lease liability (note 5)	(525)	(534)
Net foreign exchange loss	(880)	(418)
Finance costs	(1,405)	(952)

9. Income and Other Taxes:

The major components of income tax expense are as follows:

Three months ended June 30,	2020	2019
(thousands of $)
Current year income tax expense	1,449	2,109
Deferred tax recovery	(427)	(160)
Foreign withholding and other taxes	121	48
	1,143	1,997

During the three months ended June 30, 2020, the blended statutory tax rate was 24.75% (2019 – 26%). In May 2019, the Alberta government announced that the provincial corporate income tax rate will be reduced from 12% to 8% over a four year period. The rate was reduced from 12% to 11% effective July 1, 2019, reduced to 10% on January 1, 2020 and will be reduced by an additional 1% for each of the next two years until it reaches 8% on January 1, 2022.

The provision for income and other taxes reported differs from the amount computed by applying the combined Canadian Federal and Provincial statutory rate to the profit before income and other taxes. The reasons for this difference and the related tax effects are as follows:

Three months ended June 30,	2020	2019
(thousands of $, unless otherwise stated)
Combined statutory tax rate	24.75%	26.00%
Expected income tax	1,090	1,674
Non-deductible costs	31	74
Effect of statutory tax rate reduction	14	243
Withholding taxes	6	11
Effect of tax rates in foreign jurisdictions	(7)	(4)
Other	9	(1)
	1,143	1,997

The components of the Company's deferred tax asset are as follows:

(thousands of $)	June 30, 2020	March 31, 2020
SR&ED investment tax credits	(82)	(274)
Property and equipment	75	50
Right-of-use assets	1,060	999
Stock-based compensation liability	366	217
Net deferred tax asset	1,419	992

All movement in deferred tax assets and liabilities is recognized through net income of the respective period.

Prepaid income taxes and current income taxes payable have not been offset as the amounts relate to income taxes levied by different tax authorities on different taxable entities.

10. Share Capital:

(a) Authorized:

An unlimited number of Common Shares, an unlimited number of Non-Voting Shares, and an unlimited number of Preferred Shares, issuable in series.

(b) Issued:

(thousands of shares)	Common Shares
Balance, April 1, 2019	80,227
Balance, June 30, 2019	80,227

Balance, April 1, 2020	80,249
Balance, June 30, 2020	80,249

On May 23, 2018, the Board of Directors considered the merits of renewing the Company's shareholder rights plan on or before the third-year anniversary of shareholder approval of the plan and determined that it was in the best interest of the Company to continue to have a shareholder rights plan in place. The Board of Directors approved an amended and restated rights plan (the "Amended and Restated Rights Plan") between the Company and Computershare Trust Company of Canada. The Amended and Restated Rights Plan is similar in all respects to the existing shareholder rights plan, with the exception of certain minor amendments. The Amended and Restated Rights Plan was approved by the Company's shareholders on July 12, 2018.

(c) Stock-Based Compensation:

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense:

Three months ended June 30,	2020	2019
(thousands of $)
Equity-settled plans	166	216
Cash-settled plans	646	549
Total stock-based compensation expense	812	765

Liability Recognized for Stock-Based Compensation (1)

The following table summarizes liabilities for the Company's cash-settled plans, recorded within trade payables and accrued liabilities:

(thousands of $)	June 30, 2020	March 31, 2020
SARs	127	15
RSUs	1,206	745
PSUs	26	-
DSUs	230	183
Total stock-based compensation liability	1,589	943

(1) The intrinsic value of the vested awards at June 30, 2020 was $ 0.2 million.

The Company has several stock-based compensation plans, including a stock option plan, a share appreciation rights plan, a performance share unit and restricted share unit plan, and a deferred share unit plan.

The maximum number of Common Shares reserved for issuance under the Company's security-based compensation plans is limited to 10% of the issued and outstanding Common Shares. Based on this calculation, at June 30, 2020, the Company may reserve up to 8,024,000 Common Shares for issuance under its security-based compensation plans.

(i) Stock Option Plan

The Company adopted a rolling stock option plan as of July 13, 2005, which was reaffirmed by the Company's shareholders on July 16, 2020. Pursuant to the stock option plan, the maximum term of an option granted cannot exceed five years from the date of grant. Fifty percent of stock options vest on the first year anniversary from the grant date and then 25% vest on each of the second and third year anniversary dates. Stock options have a five-year life.

The following table outlines changes in stock options:

		Three months endedJune 30, 2020		Year endedMarch 31, 2020
	Number ofOptions(thousands)	WeightedAverageExercise Price($/share)	Number ofOptions(thousands)	WeightedAverageExercise Price($/share)
Outstanding at beginning of period	3,900	9.64	5,108	11.34
Granted	-	-	757	6.37
Exercised	-	-	-	-
Forfeited/expired	(92)	10.90	(1,965)	12.80
Outstanding at end of period	3,808	9.61	3,900	9.64
Options exercisable at end of period	2,613	10.60	2,704	10.61

The range of exercise prices of stock options outstanding and exercisable at June 30, 2020 is as follows:

			Outstanding		Exercisable
Exercise Price($/option)	Number ofOptions(thousands)	WeightedAverageRemainingContractual Life(years)	WeightedAverageExercise Price($/option)	Number ofOptions(thousands)	WeightedAverageExercise Price($/option)
6.31 to 6.60	745	4.1	6.32	9	6.60
6.61 to 9.20	501	3.2	9.18	241	9.20
9.21 to 9.33	798	2.1	9.33	599	9.33
9.34 to 9.78	737	1.1	9.78	737	9.78
9.79 to 13.98	1,027	0.1	12.28	1,027	12.28
	3,808	1.9	9.61	2,613	10.60

The fair value of stock options was estimated using the Black-Scholes option pricing model under the following assumptions:

	Year ended
	March 31, 2020
Fair value at grant date ($/option)	0.72 to 1.42
Share price at grant date ($/share)	6.31 to 8.70
Risk-free interest rate (%)	1.28 to 1.53
Estimated hold period prior to exercise (years)	3 to 4
Volatility in the price of common shares (%)	28 to 31
Dividend yield per common share (%)	4.71 to 6.28

(ii) Share Appreciation Rights Plan

The Company adopted a share appreciation rights plan ("SAR Plan") in November 2015. A share appreciation right ("SAR") entitles the holder to receive a cash payment equal to the difference between the stated exercise price and the market price of the Company's Common Shares on the date the SAR is exercised. SARs are granted to executive officers and employees residing and working outside of Canada. Fifty percent of SARs vest on the first year anniversary from the grant date and then 25% vest on each of the second and third year anniversary dates. SARs have a five-year life.

The following table outlines changes in SARs:

		Three months ended		Year ended
		June 30, 2020		March 31, 2020
		Weighted Average		Weighted
	Number of SARs	Exercise Price	Number of SARs	Average Exercise
	(thousands)	($/SAR)	(thousands)	Price ($/SAR)
Outstanding at beginning of period	1,152	8.80	952	9.38
Granted	-	-	221	6.31
Forfeited	-	-	(21)	9.42
Outstanding at end of period	1,152	8.80	1,152	8.80
SARs exercisable at end of period	657	9.44	657	9.44

(iii) Share Unit Plans

Performance Share Units (PSUs) and Restricted Share Units (RSUs)

The Performance Share Unit and Restricted Share Unit Plan ("PSU & RSU Plan") is open to all employees and contractors of the Company. PSUs cliff-vest at the end of three years, with the vesting multiplier ranging from 0.0 to 2.0 contingent upon achieving certain corporate performance criteria. RSUs vest annually over a three-year period. Upon vesting, PSUs and RSUs can be exchanged for Common Shares of the Company or surrendered for cash at the option of the holder. As such, the Company accounts for PSUs and RSUs as cash-settled awards and recognizes a liability for potential cash settlements.

The International Employees PSU & RSU Plan includes substantially the same terms, conditions and PSU performance criteria as the PSU & RSU Plan, with the main two exceptions being that (i) it is available only to employees and contractors residing and working outside of Canada and (ii) PSUs and RSUs under this plan can be redeemed for cash only. As such, the Company accounts for PSUs and RSUs issued under the International Employees PSU & RSU Plan as cash-settled awards and recognizes a liability for potential cash settlements.

Deferred Share Units (DSUs)

The DSU Plan was adopted in May 2017 and is limited to non-employee members of the Board of Directors. DSUs vest immediately, but are redeemable for cash only after a director ceases Board membership.

The following table summarizes the activity related to the Company's share unit plans:

(thousands)	Three months endedJune 30, 2020			Year endedMarch 31, 2020
	RSUs	PSUs	DSUs	RSUs	PSUs	DSUs
Outstanding at beginning of period	421	30	48	237	-	24
Granted	4	61	-	309	30	24
Exercised	-	-	-	(91)	-	-
Forfeited	(3)	-	-	(34)	-	-
Outstanding at end of period	422	91	48	421	30	48

(d) Earnings Per Share:

The following table summarizes the earnings and weighted average number of Common Shares used in calculating basic and diluted earnings per share:

Three months ended June 30,(thousands except per share amounts)			2020			2019
		Weighted	Earnings		Weighted
		Average	Per		Average	Earnings
	Earnings	Shares	Share	Earnings	Shares	Per Share
	($)	Outstanding	($/share)	($)	Outstanding	($/share)
Basic	3,262	80,249	0.04	4,442	80,227	0.06
Dilutive effect of share-based awards		182			101
Diluted	3,262	80,431	0.04	4,442	80,328	0.06

During the three months ended June 30, 2020, no awards (three months ended June 30, 2019 – 2,000 awards) were excluded from the computation of the weighted average number of diluted shares outstanding because their effect was not dilutive.

11. Financial Instruments:

Financial assets include cash and trade and other receivables which are classified as and measured at amortized cost, which approximates their fair values.

Financial liabilities include trade payables and accrued liabilities which are classified as other financial liabilities and are measured at amortized cost, which approximates their fair values.

12. Commitments:

(a) Research Commitment:

CMG, in partnership with Shell Global Solutions International B.V. ("Shell"), is the developer of CoFlow, the newest generation of reservoir and production system simulation software. Under a five-year agreement entered into by Shell and CMG on January 1, 2017 (the "CoFlow Agreement") and an amendment signed in July of 2019, CMG is responsible for the research and development costs of CoFlow (estimated to be $9.0 million in fiscal 2021), while Shell provides a contribution for the continuing development of the software (estimated to be $6.7 million in fiscal 2021).

During the three months ended June 30, 2020, the Company recorded professional services revenue of $1.8 million (three months ended June 30, 2019 – $1.0 million) and CoFlow costs of $2.2 million to research and development expenses (three months ended June 30, 2019 – $1.7 million).

(b) Commitments:

The Company's non-lease commitments include operating cost commitments and short-term office leases:

(thousands of $)	June 30, 2020
Less than one year	1,107
Between one and five years	4,376
More than five years	13,403
	18,886

13. Line Of Credit:

The Company has arranged for a $2.0 million line of credit with its principal banker, which can be drawn down by way of a demand operating credit facility or may be used to support letters of credit. As at June 30, 2020 $1.0 million (March 31, 2020 – $1.0 million) had been reserved on this line of credit for letters of credit supporting performance bonds.

14. Subsequent Event:

On August 10, 2020, the Board of Directors declared a quarterly cash dividend of $0.05 per share on its Common Shares, payable on September 15, 2020 to all shareholders of record at the close of business on September 4, 2020.