Computer Modelling Group Ltd. — Interim / Quarterly Report 2021

Feb 9, 2021

To Our Shareholders:

Computer Modelling Group Ltd. announces its third quarter results for the three and nine months ended December 31, 2020.

Third Quarter Highlights

Three months ended December 31,($ thousands, except per share data)	2020	2019	$ change	% change
Annuity/maintenance software licenses	13,477	16,612	(3,135)	-19%
Perpetual software licenses	660	964	(304)	-32%
Total revenue	16,038	19,275	(3,237)	-17%
Operating profit	8,437	7,538	899	12%
Net income	5,875	5,112	763	15%
Earnings per share - basic	0.07	0.06	0.01	17%
Funds flow from operations per share - basic	0.09	0.09	-	0%
Free cash flow per share - basic (1)	0.09	0.08	0.01	13%
Nine months ended December 31,	2020	2019	$ change	% change
($ thousands, except per share data)
Annuity/maintenance software licenses	42,144	48,741	(6,597)	-14%
Perpetual software licenses	2,435	3,269	(834)	-26%
Total revenue	50,562	57,271	(6,709)	-12%
Operating profit	24,009	23,949	60	0%
Net income	15,897	16,422	(525)	-3%
Earnings per share - basic	0.20	0.20	-	0%
Funds flow from operations per share - basic	0.25	0.26	(0.01)	-4%
Free cash flow per share - basic (1)	0.23	0.25	(0.02)	-8%

(1) Non-IFRS financial measures are defined in the "Non-IFRS Financial Measures" section.

Management's Discussion and Analysis

This Management's Discussion and Analysis ("MD&A") for Computer Modelling Group Ltd. ("CMG", the "Company", "we" or "our"), presented as at February 8, 2021, should be read in conjunction with the unaudited condensed consolidated interim financial statements and related notes of the Company for the three and nine months ended December 31, 2020 and 2019. Additional information relating to CMG, including our Annual Information Form, can be found at www.sedar.com. The financial data contained herein have been prepared in accordance with International Financial Reporting Standards ("IFRS") and, unless otherwise indicated, all amounts in this report are expressed in Canadian dollars.

Forward-Looking Information

Certain information included in this MD&A is forward-looking. Forward-looking information includes statements that are not statements of historical fact and which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as investment objectives and strategy, the development plans and status of the Company's software development projects, the Company's intentions, results of operations, levels of activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), business prospects and opportunities, research and development timetable, and future growth and performance. When used in this MD&A, statements to the effect that the Company or its management "believes", "expects", "expected", "plans", "may", "will", "projects", "anticipates", "estimates", "would", "could", "should", "endeavours", "seeks", "predicts" or "intends" or similar statements, including "potential", "opportunity", "target" or other variations thereof that are not statements of historical fact should be construed as forward-looking information. These statements reflect management's current beliefs with respect to future events and are based on information currently available to management of the Company. The Company believes that the expectations reflected in such forward-looking information are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking information should not be unduly relied upon.

With respect to forward-looking information contained in this MD&A, we have made assumptions regarding, among other things:

• future software license sales;
• the continued financing by and participation of the Company's CoFlow partner and it being completed in a timely manner, associated costs and future revenue;
• the Company's ability to increase or sustain its revenue if oil prices remain low;
• the Company's ability to pay dividends;
• ability to enter into additional software license agreements;
• ability to continue current research and new product development;
• ability to recruit and retain qualified staff;
• the impact of the ongoing COVID-19 pandemic on the global economy and the Company; and
• the Company's eligibility for the federal government's Canada Emergency Wage Subsidy ("CEWS") and Canada Emergency Rent Subsidy ("CERS") programs.

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 CMG's MD&A for the year ended March 31, 2020:

• Economic conditions in the oil and gas industry;
• Reliance on key customers;
• Foreign exchange;
• Economic and political risks in countries where the Company currently does or proposes to do business;
• Increased competition;
• Reliance on employees with specialized skills or knowledge;
• Protection of proprietary rights.

Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievement may vary materially from those expressed or implied by the forward-looking information contained in this MD&A. These factors should be carefully considered and readers are cautioned not to place undue reliance on forward-looking information, which speaks only as of the date of this MD&A. All subsequent forward-looking information attributable to the Company herein is expressly qualified in its entirety by the cautionary statements contained in or referred to herein. The Company does not undertake any obligation to release publicly any revisions to forward-looking information contained in this MD&A to reflect events or circumstances that occur after the date of this MD&A or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.

COVID-19 Risk

The Company's operations have been affected by the ongoing outbreak of COVID-19. The prolonged continuance of the COVID-19 pandemic could further adversely impact CMG's operations, including sales activities and financial performance. In addition, the decrease in global energy demand and the uncertainty surrounding the impacts of COVID-19 have led to significant declines in commodity prices and decreased oil and gas production. Low commodity prices resulting in lower cash flow and capital spending in the industry could adversely impact the demand for CMG's products. The extent to which the COVID-19 pandemic may impact our operating results, financial condition, and cash flows will depend on future global developments, which are highly uncertain, outside of the Company's control and cannot be accurately predicted at this time.

Corporate Profile

CMG is a computer software technology company serving the oil and gas industry. The Company is a leading supplier of advanced process reservoir modelling software with a diverse customer base of international oil companies and technology centers in approximately 60 countries. The Company also provides professional services consisting of highly specialized support, consulting, training, and contract research activities. CMG has sales and technical support services based in Calgary, Houston, London, Dubai, Bogota and Kuala Lumpur. CMG's Common Shares are listed on the Toronto Stock Exchange ("TSX") and trade under the symbol "CMG".

Quarterly Performance

	Fiscal 2019(1)Fiscal 2020(2)							Fiscal 2021(3)
($ thousands, unless otherwise stated)	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3
Annuity/maintenance licenses	16,734	15,756	16,373	16,612	15,233	14,523	14,144	13,477
Perpetual licenses	2,891	1,159	1,146	964	1,403	-	1,775	660
Software licenses	19,625	16,915	17,519	17,576	16,636	14,523	15,919	14,137
Professional services	1,513	1,208	2,354	1,699	1,879	2,149	1,933	1,901
Total revenue	21,138	18,123	19,873	19,275	18,515	16,672	17,852	16,038
Operating profit	8,750	7,068	9,343	7,538	7,802	5,711	9,861	8,437
Operating profit (%)	41	39	47	39	42	34	55	53
Profit before income and other taxes	8,400	6,439	9,350	7,054	9,613	4,405	9,360	7,410
Income and other taxes	2,426	1,997	2,482	1,942	2,550	1,143	2,600	1,535
Net income for the period	5,974	4,442	6,868	5,112	7,063	3,262	6,760	5,875
EBITDA(4)	9,250	8,118	10,426	8,644	8,923	6,767	10,933	9,509
Cash dividends declared and paid	8,023	8,022	8,026	8,025	8,024	4,013	4,013	4,015
Funds flow from operations	7,024	6,097	7,787	7,366	7,515	4,703	7,991	7,322
Free cash flow(4)	6,948	5,707	7,274	6,726	6,840	4,239	7,474	7,005
Per share amounts - ($/share)
Earnings per share (EPS) - basic and diluted	0.07	0.06	0.09	0.06	0.09	0.04	0.08	0.07
Cash dividends declared and paid	0.10	0.10	0.10	0.10	0.10	0.05	0.05	0.05
Funds flow from operations per share - basic	0.09	0.08	0.10	0.09	0.09	0.06	0.10	0.09
Free cash flow per share - basic(4)	0.09	0.07	0.09	0.08	0.09	0.05	0.09	0.09

(1) Q4 of fiscal 2019 includes $1.8 million in revenue that pertains to usage of CMG's products in prior quarters.

(2) Q1, Q2, Q3 and Q4 of fiscal 2020 include $0.2 million, $0.3 million, $0.2 million and $0.5 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.

(3) Q1 and Q2 of fiscal 2021 include $0.2 million and $0.2 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.

(4) Non-IFRS financial measures are defined in the "Non-IFRS Financial Measures" section.

Commentary on Quarterly Performance

For the Three months ended For the Nine months ended

December 31, 2020, and compared to the same period of the previous fiscal year, when appropriate:

• Annuity/maintenance license revenue decreased by 19%, primarily due to the ongoing disruption to the oil and gas industry caused by the COVID-19 pandemic, consolidations in the industry and reduced activity in unconventional shale plays both prior to and during the COVID-19 pandemic;
• Perpetual revenue, which is variable in nature, decreased by 32%;
• Total revenue decreased by 17%, with lower software revenue being slightly offset by higher professional services revenue;
• Total operating expenses decreased by 35%, as a result of $1.7 million of CEWS and CERS benefits and the Company implementing compensation reductions effective July 1;
• Quarterly operating profit was up 12% and the operating profit margin of 53% exceeded the comparative quarter's figure of 39%, mainly due to the CEWS and CERS benefits and compensation reductions. Without the CEWS and CERS benefit, quarterly operating profit was 42%, more in line with our fiscal 2019 and fiscal 2020 historic average of 40%;
• Basic EPS of $0.07 was slightly higher than the comparative period;
• Achieved free cash flow per share of $0.09; Achieved free cash flow per share of $0.25;
• Declared and paid a dividend of $0.05 per share. Declared and paid dividends of $0.15 per share.

CMG's Response to the COVID-19 Pandemic

• Annuity/maintenance license revenue decreased by 14%, primarily due to the ongoing disruption to the oil and gas industry caused by the COVID-19 pandemic, consolidations in the industry and reduced activity in unconventional shale plays both prior to and during the COVID-19 pandemic;
• Perpetual revenue decreased by 26%;
• Total revenue decreased by 12%, with lower software revenue being slightly offset by higher professional services revenue;
• Total operating expenses decreased by 20%, as a result of $4.2 million of CEWS and CERS benefits and the Company implementing compensation reductions effective July 1;
• Year-to-date operating profit was level with the comparative period and the operating profit margin was 47%. Without the CEWS and CERS benefits, year-todate operating profit was 39%, essentially tracking to our fiscal 2019 and fiscal 2020 historic average of 40%;
• Basic EPS of $0.20 was level with the comparative period;

In March, the COVID-19 pandemic led to a partial shutdown of the majority of the world's economies. The pandemic also led to declines in demand for oil and gas, which, combined with producer market share competition and concerns about a supply/demand imbalance, led to volatility in commodity prices. These conditions persisted through the second and third quarters.

The COVID-19 pandemic and the related economic uncertainty negatively impacted our financial results for the three and nine months ended December 31, 2020, as some of our customers, faced with the economic uncertainly and decreasing commodity prices, curtailed spending and chose not to renew their licensing agreements or to renew them at reduced levels. These factors continue to contribute to a decrease in software license revenue during the three and nine months ended December 31, 2020.

CMG realizes that retaining its employees and continuing to prioritize product development and customer support is important to its customers as well as the long-term success of the business. Accordingly, effective July 1, 2020, CMG took the following pre-emptive actions to minimize the negative impact that the COVID-19 pandemic is expected to have on its business, and liquidity:

• reduced the CEO's annual salary by 25%;
• reduced directors' cash compensation by 20%;
• reduced executive officers' annual salaries by 20%;
• implemented graduated salary reductions to staff.

The reductions to compensation are expected to continue throughout the fiscal year and will be reassessed following review of the fiscal 2021 results. The staff, executive and CEO's base salary concessions were reallocated to variable cash compensation which is associated with fiscal 2021 corporate performance.

As a result of the decline in revenue, CMG became eligible for the CEWS and CERS programs and, during the three and nine months ended December 31, 2020, recorded a CEWS benefit of $1.6 million and $4.1 million, respectively, and a CERS benefit of $0.1 million and $0.1 million, respectively.

To further preserve liquidity and maintain balance sheet strength, CMG's Board reduced the quarterly dividend from $0.10 per share to $0.05 per share, starting June 15, 2020. On February 8, 2021, CMG's Board approved a quarterly dividend of $0.05 per share on CMG's Common Shares, payable on March 15, 2020 to shareholders of record at the close of business on March 5, 2020.

We implemented these measures to protect CMG's profitability and optimize free cash flow generation to maintain the strength of our balance sheet, in all potential scenarios. These measures also allow for maximum flexibility in our capital allocation decisions, including delivering a sustainable dividend. At the same time, it is our intention to continue to invest in research and development, and sales and marketing efforts. Since the start of the pandemic, we have been operating almost entirely remotely, and our research and development activities and technical support for our customers have continued uninterrupted.

CMG will continue to monitor the impact of the current environment on its customers, operations and financial performance and may make further adjustments as appropriate.

Revenue

Three months ended December 31,	2020	2019	$ change	% change
($ thousands)
Software license revenue	14,137	17,576	(3,439)	-20%
Professional services	1,901	1,699	202	12%
Total revenue	16,038	19,275	(3,237)	-17%
Software license revenue as a % of total revenue	88%	91%
Professional services as a % of total revenue	12%	9%
Nine months ended December 31,	2020	2019	$ change	% change
($ thousands)
Software license revenue	44,579	52,010	(7,431)	-14%
Professional services	5,983	5,261	722	14%
Total revenue	50,562	57,271	(6,709)	-12%
Software license revenue as a % of total revenue	88%	91%
Professional services as a % of total revenue	12%	9%

CMG's revenue is comprised of software license sales, which provide the majority of the Company's revenue, and fees for professional services.

Total revenue for the three and nine months ended December 31, 2020 decreased by 17% and 12%, respectively, due to a decrease in software license revenue, partially offset by an increase in professional services revenue.

Software License Revenue

Software license revenue is made up of annuity/maintenance license fees charged for the use of the Company's software products, which is generally for a term of one year or less, and perpetual software license sales, whereby the customer purchases the then-current version of the software and has the right to use that version in perpetuity. Annuity/maintenance license fees have historically had a high renewal rate and, accordingly, provide a reliable revenue stream, while perpetual license sales are more variable and unpredictable in nature as the purchase decision and its timing fluctuate with the customers' needs and budgets. The majority of CMG's customers who have acquired perpetual software licenses subsequently purchase our maintenance package to ensure ongoing product support and access to current versions of CMG's software.

Three months ended December 31,	2020	2019	$ change	% change
($ thousands)
Annuity/maintenance license revenue	13,477	16,612	(3,135)	-19%
Perpetual license revenue	660	964	(304)	-32%
Total software license revenue	14,137	17,576	(3,439)	-20%
Annuity/maintenance as a % of total software license revenue	95%	95%
Perpetual as a % of total software license revenue	5%	5%
Nine months ended December 31,	2020	2019	$ change	% change
($ thousands)
Annuity/maintenance license revenue	42,144	48,741	(6,597)	-14%
Perpetual license revenue	2,435	3,269	(834)	-26%
Total software license revenue	44,579	52,010	(7,431)	-14%
Annuity/maintenance as a % of total software license revenue	95%	94%
Perpetual as a % of total software license revenue	5%	6%

Total software license revenue for the three and nine months ended December 31, 2020 decreased by 20% and 14%, compared to the same periods of the previous fiscal year, due to decreases in both annuity/maintenance license revenue and perpetual license revenue.

During the three-month period, CMG's annuity/maintenance license revenue decreased by 19%, compared to the same period of the previous fiscal year. Canada, the US and South America contributed to the decrease, while the Eastern Hemisphere stayed essentially level. The decreases in Canada, the US and South America were due to decreased licensing, some of which was triggered by the COVID-19 pandemic and the resulting economic uncertainty, as well as consolidation activity in the oil and gas industry and reduced activity levels in unconventional shale plays.

During the nine-month period, CMG's annuity/maintenance license revenue decreased by 14%, compared to the same period of the previous fiscal year. Canada, the US and South America contributed to the decrease, while the Eastern Hemisphere increased by 4%, due to the addition of a multi-year contract and increased licensing by existing customers.

Perpetual license revenue decreased by 32% and 26% during the three and nine months ended December 31, 2020, compared to the same periods of the previous fiscal year. Low commodity prices and resulting lower cash flows in the oil and gas industry reduced our customers' ability to purchase perpetual licenses in the near term. Sales of perpetual licenses may fluctuate significantly between periods due to the uncertainty associated with the timing and the location where sales are generated. For this reason, even though we expect to achieve a certain level of aggregate perpetual sales on an annual basis, we expect to observe fluctuations in the quarterly perpetual revenue amounts throughout the fiscal year. In our experience, the majority of perpetual sales are generated in South America and the Eastern Hemisphere, as North American customers usually prefer annuity leases to perpetual purchases.

We can observe from the tables below that the exchange rate between the US and Canadian dollar had a slight negative impact on reported software license revenue during the three and nine months ended December 31, 2020, compared to the same periods of the previous fiscal year.

The following table summarizes the US dollar-denominated revenue and the weighted average exchange rate at which it was converted to Canadian dollars:

Three months ended December 31,($ thousands)		2020	2019	$ change	% change
US dollar annuity/maintenance license revenueWeighted average conversion rate	US$	7,7871.333	9,7961.337	(2,009)	-21%
Canadian dollar equivalent	CDN$	10,380	13,094	(2,714)	-21%
US dollar perpetual license revenueWeighted average conversion rate	US$	5091.297	7321.318	(223)	-30%
Canadian dollar equivalent	CDN$	660	964	(304)	-32%
Nine months ended December 31,($ thousands)		2020	2019	$ change	% change
US dollar annuity/maintenance license revenueWeighted average conversion rate	US$	24,6501.333	28,7241.336	(4,074)	-14%
Canadian dollar equivalent	CDN$	32,847	38,375	(5,528)	-14%
US dollar perpetual license revenueWeighted average conversion rate	US$	1,8501.316	2,4611.328	(611)	-25%
Canadian dollar equivalent	CDN$	2,435	3,269	(834)	-26%
The following table quantifies the foreign exchange impact on our software license revenue:
Three months ended December 31,($ thousands)	2019	Incremental License	Growth	Foreign ExchangeImpact	2020
Annuity/maintenance license revenuePerpetual license revenueTotal software license revenue	16,61296417,576	(3,107)(3,400)	(293)	(28)(11)(39)	13,47766014,137
Nine months ended December 31,($ thousands)	2019	Incremental License	Growth	Foreign ExchangeImpact	2020

($ thousands)		Growth	Impact
Annuity/maintenance license revenue	48,741	(6,513)	(84)	42,144
Perpetual license revenue	3,269	(812)	(22)	2,435
Total software license revenue	52,010	(7,325)	(106)	44,579

Software Revenue by Geographic Region

Three months ended December 31,	2020	2019	$ change	% change
($ thousands)
Annuity/maintenance license revenue
Canada	3,097	3,950	(853)	-22%
United States	3,649	5,147	(1,498)	-29%
South America	1,320	2,015	(695)	-34%
Eastern Hemisphere(1)	5,411	5,500	(89)	-2%
	13,477	16,612	(3,135)	-19%
Perpetual license revenue
Canada	-	-	-	0%
United States	-	-	-	0%
South America	41	511	(470)	-92%
Eastern Hemisphere	619	453	166	37%
	660	964	(304)	-32%
Total software license revenue
Canada	3,097	3,950	(853)	-22%
United States	3,649	5,147	(1,498)	-29%
South America	1,361	2,526	(1,165)	-46%
Eastern Hemisphere	6,030	5,953	77	1%
	14,137	17,576	(3,439)	-20%
Nine months ended December 31,	2020	2019	$ change	% change
($ thousands)
Annuity/maintenance license revenue
Canada	9,452	11,653	(2,201)	-19%
United States	11,533	15,131	(3,598)	-24%
South America	4,412	5,931	(1,519)	-26%
Eastern Hemisphere(1)	16,747	16,026	721	4%
	42,144	48,741	(6,597)	-14%
Perpetual license revenue
Canada	-	-	-	0%
United States	-	298	(298)	-100%
South America	1,020	1,280	(260)	-20%
Eastern Hemisphere	1,415	1,691	(276)	-16%
	2,435	3,269	(834)	-26%
Total software license revenue
Canada	9,452	11,653	(2,201)	-19%
United States	11,533	15,429	(3,896)	-25%
South America	5,432	7,211	(1,779)	-25%
Eastern Hemisphere	18,162	17,717	445	3%
	44,579	52,010	(7,431)	-14%

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

During the three and nine months ended December 31, 2020, total software license revenue decreased in all geographic regions except for the Eastern Hemisphere.

The Canadian region (representing 21% of year-to-date software license revenue) experienced decreases of 22% and 19% in annuity/maintenance license revenue during the three and nine months ended December 31, 2020, compared to the same

periods of the previous fiscal year, due to decreases in licensing by existing customers, partially caused by consolidation activity in the industry, as discussed in the fourth quarter MD&A for the previous fiscal year.

The United States (representing 26% of year-to-date software license revenue) experienced decreases of 29% and 24% in annuity/maintenance license revenue during the three and nine months ended December 31, 2020, compared to the same periods of the previous fiscal year. The decreases were a result of decreased licensing by some customers, precipitated by consolidation in the industry and reduced activity levels in unconventional shale plays both before and during the COVID-19 pandemic.

South America (representing 12% of year-to-date software license revenue) experienced decreases of 34% and 26% in annuity/maintenance license revenue during the three and nine months ended December 31, 2020, mainly due to the negative impact of the COVID-19 pandemic and the resulting economic uncertainty on the renewal of some of our maintenance contracts. Perpetual sales during the three and nine months ended December 31, 2020 were lower than in the comparative periods.

The Eastern Hemisphere (representing 41% of year-to-date software license revenue) experienced a slight decrease of 2% in annuity/maintenance license revenue during the three months ended December 31, 2020, compared to the same period of the previous fiscal year, as decreased licensing by some customers was nearly offset by increased licensing by others, including a new multi-year annuity contract that commenced at the end of the previous fiscal year. During the nine months ended December 31, 2020, annuity/maintenance license revenue increased by 4%, due to increased licensing from existing customers and the afore-mentioned multi-year contract, partially offset by reduced licensing by some customers. Perpetual sales were up by 37% during the three months and down by 16% during the nine months ended December 31, 2020, compared to the same periods of the previous fiscal year.

As footnoted in the Quarterly Software License Revenue graph, in the normal course of business CMG may complete the negotiation of certain annuity/maintenance contracts and/or fulfill revenue recognition requirements within a current quarter that includes usage of CMG's products in prior quarters. This situation particularly affects contracts negotiated with countries that face increased economic and political risks leading to the revenue recognition criteria being satisfied only at the time of the receipt of cash. The dollar magnitude of such contracts may be significant to the quarterly comparatives of our annuity/maintenance license revenue stream. 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. Please refer to the yellow bars and the footnotes in the following graph:

Quarterly Software License Revenue

(1) Q4 of fiscal 2016 includes $0.9 million in revenue that pertains to usage of CMG's products in prior quarters.

(2) Q1, Q2, Q3 and Q4 of fiscal 2017 include $1.8 million, $0.3 million, $3.7 million, and $0.7 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.

(3) Q1, Q2, Q3 and Q4 of fiscal 2018 include $1.5 million, $1.0 million, $0.6 million, and $1.3 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.

(4) Q1, Q2, Q3 and Q4 of fiscal 2019 include $0.1 million, $0.3 million, $2.3 million, and $1.8 million, respectively, in revenue that pertains to usage of CMG's products in prior quarters.

(5) Q1, Q2, Q3 and Q4 of fiscal 2020 include $0.2 million, $0.3 million, $0.2 million and $0.5 million respectively, in revenue that pertains to usage of CMG's products in prior quarters.

(6) Q1, Q2 and Q3 of fiscal 2021 include $0.2 million, $0.2 million and 0.0 million, respectively in revenue that pertains to usage of CMG's products in prior quarters.

Deferred Revenue

($ thousands)	Fiscal 2021	Fiscal 2020	Fiscal 2019	$ change	% change
Deferred revenue at:
Q1 (June 30)	25,492	29,266		(3,774)	-13%
Q2 (September 30)	19,549	23,849		(4,300)	-18%
Q3 (December 31)	15,347	15,679		(332)	-2%
Q4 (March 31)		33,838	35,015	(1)(1,177)	-3%

(1) Includes current deferred revenue of $34.7 million and long-term deferred revenue of $0.3 million.

CMG's deferred revenue consists primarily of amounts for prepaid licenses. Our annuity/maintenance revenue is deferred and recognized ratably over the license period, which is generally one year or less. Amounts are deferred for licenses that have been provided and revenue recognition reflects the passage of time.

The above table illustrates the normal trend in the deferred revenue balance from the beginning of the calendar year (which corresponds with Q4 of our fiscal year), when most renewals occur, to the end of the calendar year (which corresponds with Q3 of our fiscal year). Our fourth quarter corresponds with the beginning of the fiscal year for most oil and gas companies, representing a time when they enter a new budget year and sign/renew their contracts.

The deferred revenue balance at the end of Q3 of fiscal 2021 decreased by 2% when compared to Q3 of fiscal 2020 and was positively affected by early renewals.

Professional Services Revenue

Professional services revenue for the three and nine months ended December 31, 2020 was $1.9 million and $6.0 million, respectively, an increase of $0.2 million and $0.7 million, respectively, from the same periods of the previous fiscal year. Both increases were largely due to additional development funding from Shell Global Solutions International B.V. ("Shell") for CoFlow development and support (see "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 a core part of our business and are primarily undertaken to increase our knowledge base and hence expand the technological abilities of our simulators in a funded manner, combined with servicing our customers' needs. In addition, these activities are undertaken to market the capabilities of our suite of software products with the ultimate objective to increase software license sales. Our experience is that consulting activities are variable in nature as both the timing and dollar magnitude of work are dependent on activities and budgets within customer companies.

Expenses

Three months ended December 31,($ thousands)	2020	2019	$ change	% change
Sales, marketing and professional services	3,335	4,744	(1,409)	-30%
Research and development	3,092	5,171	(2,079)	-40%
General and administrative	1,174	1,822	(648)	-36%
Total operating expenses	7,601	11,737	(4,136)	-35%
Direct employee costs(1)	5,590	9,202	(3,612)	-39%
Other corporate costs	2,011	2,535	(524)	-21%
	7,601	11,737	(4,136)	-35%
Nine months ended December 31,	2020	2019	$ change	% change
($ thousands)
Sales, marketing and professional services
	11,209	13,728	(2,519)	-18%
Research and development	11,158	14,461	(3,303)	-23%
General and administrative	4,186	5,133	(947)	-18%
Total operating expenses	26,553	33,322	(6,769)	-20%
Direct employee costs(1)	20,257	25,752	(5,495)	-21%
Other corporate costs	6,296	7,570	(1,274)	-17%

(1) Includes salaries, bonuses, stock-based compensation, benefits, commissions, and professional development. See "Non-IFRS Financial Measures".

Total operating expenses for the three and nine months ended December 31, 2020 decreased by 35% and 20%, respectively, compared to the same periods of the previous fiscal year, as both direct employee costs and other corporate costs decreased.

Direct Employee Costs

As a technology company, CMG's largest investment is its people. Approximately 76% of the total operating expenses for the nine months ended December 31, 2020 related to direct employee costs. Direct employee costs for the three and nine months ended December 31, 2020 decreased by 39% and 21%, respectively, compared to the same periods of the previous fiscal year. The decrease was due to the CEWS benefit and salary reductions that were announced in our March 31, 2020 MD&A and implemented effective July 1, 2020. As a result of the decline in revenue, CMG became eligible for the CEWS program and recorded a CEWS benefit of $1.6 million and $4.1 million during the three and nine months ended December 31, 2020.

This decrease was partially offset by an increase in direct employee costs due to higher staffing levels in the current fiscal year to date, compared to the previous fiscal year to date. At December 31, 2020, CMG's full-time equivalent staff complement was 197 employees and consultants, up from 193 full-time equivalent employees and consultants at December 31, 2019, the majority of the increase being due to the commitment under the CoFlow agreement.

Other Corporate Costs

Other corporate costs for the three and nine months ended December 31, 2020 decreased by 21% and 17%, respectively, compared to the same periods of the previous fiscal year, due to lower travel, marketing and office costs as a result of COVID-19 restrictions and the $0.1 million CERS benefit. These decreases were partially offset by lower SR&ED credits, as explained in the next section.

Research and Development

Three months ended December 31,($ thousands)	2020	2019	$ change	% change
Research and development, net of government grants	3,231	5,480	(2,249)	-41%
SR&ED credits	(139)	(309)	170	-55%
Research and development	3,092	5,171	(2,079)	-40%
Research and development as a % of total revenue	19%	27%
Nine months ended December 31,($ thousands)	2020	2019	$ change	% change
Research and development, net of government grants	11,709	15,642	(3,933)	-25%
SR&ED credits	(551)	(1,181)	630	-53%
Research and development	11,158	14,461	(3,303)	-23%
Research and development as a % of total revenue	22%	25%

CMG maintains a belief that its strategy of growing long-term value for shareholders is enhanced through continued investment in research and development. CMG works closely with its customers to provide solutions to complex problems related to proven and new advanced recovery processes.

The above research and development costs include $1.4 million and $5.0 million of costs for CoFlow for the three and nine months ended December 31, 2020, respectively, (three and nine months ended December 31, 2019 – $1.9 million and $5.2 million, respectively). See discussion under "Commitments, Off Balance Sheet Items and Transactions with Related Parties".

Research and development costs for the three and nine months ended December 31, 2020 decreased by 40% and 23%, respectively, compared to the same periods of the previous fiscal year, mainly due to the CEWS benefit and salary reductions. This decrease was partially offset by lower SR&ED credits and a higher headcount in the CoFlow department. Pursuant to its agreement with Shell, CMG received additional Professional Services Revenue to offset this expense.

SR&ED credits decreased by 55% and 53% for the three and nine months ended December 31, 2020, compared to the same periods of the previous fiscal year, due to the elimination of the Alberta SR&ED credit and also due to the CEWS benefit lowering salary expense.

Depreciation

Three months ended December 31,($ thousands)	2020	2019	$ change	% change
Depreciation of property and equipment, allocated to:Sales, marketing and professional servicesResearch and developmentGeneral and administrative	259675138	271696139	(12)(21)(1)	-4%-3%-1%
Total depreciation	1,072	1,106	(34)	-3%
Nine months ended December 31,($ thousands)	2020	2019	$ change	% change
Depreciation of property and equipment, allocated to:Sales, marketing and professional servicesResearch and developmentGeneral and administrative	7612,023416	8062,015418	(45)8(2)	-6%0%0%
Total depreciation	3,200	3,239	(39)	-1%

Depreciation for the three and nine months ended December 31, 2020 remained consistent with the same periods of the previous fiscal year.

Finance Income and Costs

Three months ended December 31,($ thousands)	2020	2019	$ change	% change
Interest income	92	278	(186)	-67%
Total finance income	92	278	(186)	-67%
Interest expense on lease liability	(517)	(532)	15	-3%
Net foreign exchange loss	(602)	(230)	(372)	162%
Total finance costs	(1,119)	(762)	(357)	47%
Nine months ended December 31,	2020	2019	$ change	% change
($ thousands)
Interest income	288	922	(634)	-69%
Total finance income	288	922	(634)	-69%
Interest expense on lease liability	(1,563)	(1,600)	37	-2%
Net foreign exchange loss	(1,559)	(428)	(1,131)	264%
Total finance costs	(3,122)	(2,028)	(1,094)	54%

Interest income decreased during the three and nine months ended December 31, 2020, compared to the same periods of the previous fiscal year, due to lower interest rates and lower cash balances. Interest expense on lease liability was consistent with the same period of the previous fiscal year.

CMG is impacted by foreign exchange fluctuations, as approximately 71% of CMG's revenue for the nine months ended December 31, 2020 (2019 – 74%) is denominated in US dollars, whereas only approximately 28% (2019 – 24%) of CMG's total costs are denominated in US dollars.

The following chart shows the exchange rates used to translate CMG's USD-denominated working capital at December 31, 2020, 2019 and 2018 and the average exchange rates used to translate income statement items during the three months ended December 31, 2020, 2019 and 2018:

CDN$ to US$	At June 30	At September 30	At December 31	Nine monthtrailing average
2018	0.7594	0.7725	0.7330	0.7673
2019	0.7641	0.7551	0.7699	0.7530
2020	0.7338	0.7497	0.7854	0.7408

CMG recorded net foreign exchange losses of $0.6 million and $1.6 million for the three and nine months ended December 31, 2020, due to a weakening of the US dollar during the three- and nine-month periods, which negatively affected the valuation of the USD-denominated portion of the Company's working capital.

Income and Other Taxes

CMG's effective tax rate for the nine months ended December 31, 2020 is 24.9% (2019 – 28.1%), whereas the blended Canadian statutory tax rate for the Company's 2021 fiscal year is 23.5% (down from 26.0% in fiscal 2020, due to a reduction in the provincial tax rate). The difference between the effective rate and the statutory rate is primarily due to the non-tax deductibility of stock-based compensation expense and the benefit of foreign withholding taxes being realized only as a tax deduction as opposed to a tax credit.

The benefit recorded in CMG's books on the scientific research and experimental development ("SR&ED") investment tax credit program impacts deferred income taxes. The investment tax credit earned in the current fiscal year reduces income taxes otherwise payable for the current fiscal year, but bears an inherent tax liability as the amount of the credit is included in the subsequent year's taxable income for both federal and provincial purposes. The inherent tax liability on these investment tax credits is reflected in the year the credit is earned as a non-current deferred tax liability and then, in the following fiscal year, is transferred to income taxes payable.

Operating Profit and Net Income

Three months ended December 31,($ thousands, except per share data)	2020	2019	$ change	% change
Total revenue	16,038	19,275	(3,237)	-17%
Operating expenses	(7,601)	(11,737)	4,136	-35%
Operating profit	8,437	7,538	899	12%
Operating profit as a % of revenue	53%	39%
Net income for the period	5,875	5,112	763	15%
Net income as a % of total revenue	37%	27%
Basic earnings per share ($/share)	0.07	0.06	0.01	17%

Nine months ended December 31,($ thousands, except per share data)	2020	2019	$ change	% change
Total revenue	50,562	57,271	(6,709)	-12%
Operating expenses	(26,553)	(33,322)	6,769	-20%
Operating profit	24,009	23,949	60	0%
Operating profit as a % of revenue	47%	42%
Net income for the period	15,897	16,422	(525)	-3%
Net income as a % of total revenue	31%	29%
Basic earnings per share ($/share)	0.20	0.20	0.00	0%

Operating profit as a percentage of total revenue for the three and nine months ended December 31, 2020 was 53% and 47%, respectively, up from 39% and 42% in the comparative periods, because, while both revenue and operating expenses decreased, operating expenses decreased by a higher percentage, as a result of the CEWS and CERS benefits and salary reductions. Without the impact of the CEWS and CERS benefits, operating profit as a percentage of total revenue was 42% and 39% for the three and nine months ended December 31, 2020, respectively, more in line with our fiscal 2019 and fiscal 2020 average quarterly operating profit of 40%.

Net income as a percentage of total revenue was 37% and 31% for the three and nine months ended December 31, 2020, respectively, up from 27% and 29% in the comparative periods, due to lower operating expenses, partially offset by lower revenue and interest income.

EBITDA(1)

Three months ended December 31,	2020	2019	$ change	% change
($ thousands)
Net income for the period	5,875	5,112	763	15%
Add (deduct):
Depreciation	1,072	1,106	(34)	-3%
Finance (income) costs	1,027	484	543	112%
Income and other taxes	1,535	1,942	(407)	-21%
EBITDA	9,509	8,644	865	10%
EBITDA as a % of total revenue	59%	45%
Nine months ended December 31,	2020	2019	$ change	% change
($ thousands)
Net income for the period	15,897	16,422	(525)	-3%
Add (deduct):
Depreciation	3,200	3,239	(39)	-1%
Finance (income) costs	2,834	1,106	1,728	156%
Income and other taxes	5,278	6,421	(1,143)	-18%
EBITDA	27,209	27,188	21	0%
EBITDA as a % of total revenue	54%	47%

(1) Non-IFRS financial measures are defined in the "Non-IFRS Financial Measures" section.

EBITDA as a percentage of total revenue for the three and nine months ended December 31, 2020 was 59% and 54%, respectively, up from 45% and 47% in the comparative periods, because, while both revenue and operating expenses decreased, operating expenses decreased by a higher percentage, as a result of the CEWS and CERS benefits and salary reductions. Without the impact of the CEWS and CERS benefits, EBITDA as a percentage of total revenue was 49% and 45% for the three and nine months ended December 31, 2020, respectively, relatively consistent with the comparative periods.

Liquidity and Capital Resources

Three months ended December 31,($ thousands)	2020	2019	$ change	% change
Cash, beginning of periodCash flow used in:	43,982	47,050	(3,068)	-7%
Operating activities	(474)	(1,612)	1,138	71%
Financing activities	(4,325)	(8,314)	3,989	48%
Investing activities	(7)	(351)	344	98%
Cash, end of period	39,176	36,773	2,403	7%
Nine months ended December 31,($ thousands)	2020	2019	$ change	% change
Cash, beginning of periodCash flow provided by (used in):	40,505	54,290	(13,785)	-25%
Operating activities	12,010	8,099	3,911	48%
Financing activities	(12,983)	(24,922)	11,939	48%
Investing activities	(356)	(694)	338	49%
Cash, end of period	39,176	36,773	2,403	7%

At December 31, 2020, CMG had $39.2 million in cash, no borrowings and access to approximately $1.0 million under a line of credit with its principal banker. The Company's primary non-operating use of cash is for paying dividends. Management believes that the Company has sufficient capital resources to meet its operating and capital expenditure needs.

During the nine months ended December 31, 2020, 20.9 million shares of CMG's public float were traded on the TSX. As at December 31, 2020, CMG's market capitalization based upon its December 31, 2020 closing price of $4.88 was $391.8 million.

Operating Activities

Funds flow from operations during the three months ended December 31, 2020 was consistent with the comparative quarter, yet cash used in operating activities decreased by $1.1 million due to the movement in the non-cash working capital.

Funds flow from operations during the nine months ended December 31, 2020 was lower than the comparative period, as the revenue and interest income decrease was greater that the expenses decrease; yet cash provided by operating activities increased by $3.9 million due to the movement in the non-cash working capital.

Financing Activities

Cash used in financing activities decreased in the three and nine months ended December 31, 2020, compared to the same periods of the previous fiscal year, due to a dividend decrease from $0.10 to $0.05 per Common Share.

In the nine months ended December 31, 2020, CMG paid $12.0 million in dividends, representing the following quarterly dividends:

($ per share)	Q1	Q2	Q3
Total dividends declared and paid	0.05	0.05	0.05

In the nine months ended December 31, 2019 CMG paid $24.1 million in dividends, representing the following quarterly dividends:

($ per share)	Q1	Q2	Q3
Total dividends declared and paid	0.10	0.10	0.10

On February 8, 2021, CMG announced the payment of a quarterly dividend of $0.05 per share on CMG's Common Shares. The dividend will be paid on March 15, 2021 to shareholders of record at the close of business on March 5, 2021. Decisions with respect to dividend payments are made by the Board of Directors on a quarterly basis and take into account market conditions and the financial performance of the Company.

Investing Activities

CMG's current needs for capital asset investment relate to office infrastructure costs and computer equipment, all of which are being funded internally. During the nine months ended December 31, 2020, CMG's cash expenditures on property and equipment were $0.4 million, primarily composed of computer equipment. CMG expects full year capital expenditures to be $0.5 million, which would be half of last year's amount.

Commitments, Off Balance Sheet Items and Transactions with Related Parties

CMG, in partnership with Shell Global Solutions International B.V. ("Shell") at present, and also in partnership with Petroleo Brasileiro S.A. historically, is the developer of CoFlow, the newest generation of reservoir and production system simulation software.

On January 1, 2017, Shell and CMG entered into an agreement (the "CoFlow Agreement") with an initial five year term whereby CMG would be responsible for the research and development costs of CoFlow (estimated to be $6.7 million in fiscal 2021) and Shell would be responsible for providing a contribution for the continuing development of the software (estimated to be $6.9 million in fiscal 2021).

On December 21, 2020, the CoFlow Agreement was amended when Shell exercised its right to request a five-year term extension, commencing January 1, 2022. All other terms and conditions in the CoFlow Agreement, including any related amendments, remain unchanged and in full force and effect during the extended term.

CMG has very little in the way of other ongoing material contractual obligations other than prepaid licenses, which are reflected as deferred revenue on the statement of financial position, and contractual obligations for office leases, which are estimated to be as follows as at December 31, 2020:

(thousands of $)	Undiscounted leaseliability payments	Operating costsand short-term leases	Total commitments
Less than one year	3,369	1,115	4,484
Between one and five years	14,128	4,496	18,624
More than five years	44,073	13,119	57,192
	61,570	18,730	80,300

Business Risks and Critical Accounting Estimates

These remain unchanged from the factors detailed in CMG's 2020 Financial Report.

Outstanding Share Data

The following table represents the number of Common Shares, stock options, restricted share units and performance share units outstanding:

As at February 8, 2021
(thousands)
Common Shares	80,286
Stock options	3,513
Restricted share units(1)	482
Performance share units(1)	69

(1) Upon vesting, restricted share units and performance share units can be exchanged for Common Shares of the Company or surrendered for cash.

The maximum number of Common Shares that may be 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 February 8, 2021, CMG could reserve up to 8,028,000 Common Shares for issuance under its security-based compensation plans.

Disclosure Controls and Procedures and Internal Control over Financial Reporting

Management is responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR") as defined under National Instrument 52-109. These controls and procedures were reviewed and the effectiveness of their design and operation was evaluated in fiscal 2020 in accordance with the COSO control framework (2013). The evaluation confirmed the effectiveness of DC&P and ICFR at March 31, 2020. During the 2021 fiscal year, we continue to monitor and review our controls and procedures. During the three months ended December 31, 2020, 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.

Additional IFRS Measure

Funds flow from operations is an additional IFRS measure that the Company presents in its consolidated statements of cash flows. Funds flow from operations is calculated as cash flows provided by operating activities adjusted for changes in non-cash working capital. Management believes that this measure provides useful supplemental information about operating performance and liquidity, as it represents cash generated during the period, regardless of the timing of collection of receivables and payment of payables, which may reduce comparability between periods.

Non-IFRS Financial Measures

Certain financial measures in this MD&A – namely, direct employee costs, other corporate costs, EBITDA and free cash flow – do not have a standard meaning prescribed by IFRS and, accordingly, may not be comparable to measures used by other companies. 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 direct employee 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.

Free cash flow is a non-IFRS financial measure that is calculated as funds flow from operations less capital expenditures and repayment of lease liabilities. Management uses free cash flow to help measure the capacity of the Company to pay dividends and invest in business growth opportunities.

	Fiscal 2019				Fiscal 2020			Fiscal 2021
($ thousands)	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3
Funds flow from operations	7,024	6,097	7,787	7,366	7,515	4,703	7,991	7,322
Capital expenditures	(76)	(108)	(235)	(351)	(296)	(149)	(200)	(7)
Repayment of lease liabilities	-	(282)	(278)	(289)	(379)	(315)	(317)	(310)
Free cash flow	6,948	5,707	7,274	6,726	6,840	4,239	7,474	7,005

Free Cash Flow Reconciliation to Funds Flow from Operations

Outlook

Through the COVID-19 pandemic and economic crises, we continue our research and development activities and continue providing technical support to our customers globally. We have seen increased support requests, training activity and commercial customers running "Energy Transition" models related to CO2 enhanced recovery, carbon sequestration and geothermal projects.

Our third quarter and year-to-date annuity/maintenance license revenue decreased by 19% and 14%, respectively, compared to the same periods of the previous fiscal year. The COVID-19 pandemic and the related economic uncertainty were partially responsible for the decrease, as were low commodity prices that constrained our customers' spending. The remaining decrease was due to pre-COVID licensing cuts by some of our customers, as discussed in the fourth quarter MD&A for the previous fiscal year.

While annuity/maintenance revenue from the Eastern Hemisphere essentially remained consistent on a quarterly basis and modestly increased on a year-to-date basis, annuity/maintenance revenue from Canada, the US and South America decreased on both a quarterly and year-to-date basis. On a year-to-date basis, the Eastern Hemisphere increased by 4%, due primarily to the addition of a multi-year annuity contract that started at the end of the previous fiscal year. Revenue from Canada decreased by 22% and 19% for the quarter and year to date, respectively, as consolidation activity in the oil and gas industry translated into lower licensing needs by the new, merged entities. The 29% and 24% decreases in US revenue for the quarter and year to date, respectively, were caused by a combination of consolidation in the industry and the slowdown of US shale production. The 34% and 26% decreases in South America revenue, for the quarter and year to date, respectively, were primarily due to the negative impacts of COVID-19 and the related economic uncertainty affecting the oil and gas industry.

Looking at perpetual revenue, we generated $0.7 million in perpetual sales in South America and the Eastern Hemisphere during the quarter and $2.4 million year to date. We are pleased to have realized 75% of last year's perpetual revenue over the same period. One significant perpetual sale during this fiscal year was to a customer in South East Asia, who chose CMG's software for enhanced oil recovery and improving their long-term production declines, which validates our belief that companies will need CMG's technology, even more so, as they engage in complex recovery processes to mitigate their declining production.

Total operating expenses were 35% and 20% lower than in the comparative quarter and year-to-date period, respectively, due to the CEWS and CERS benefits and cost containment measures. CMG recorded CEWS and CERS benefits of $1.7 million during the quarter and $4.2 million during the year to date.

Our cost containment measures, which came into effect on July 1, 2020, included reducing the CEO's annual salary and executives' annual salary by 25% and 20%, respectively, reducing directors' cash compensation by 20% and implementing graduated staff salary reductions. These measures will be reassessed following review of the fiscal 2021 results and adjusted as appropriate.

The reduction in operating expenses resulted in an operating profit of 53% for the quarter and 47% for the year to date. If we exclude the CEWS and CERS benefits from operating expenses, operating profit was 42% for the quarter and 40% for the year to date, more in line with our fiscal 2019 and fiscal 2020 quarterly average of 40%.

Recent progress in the development and distribution of the COVID-19 vaccine provides a reason for cautious optimism. While we are not in a position to predict the future, we are focusing on matters within our control: maintaining liquidity and protecting our bottom line by adjusting our cost structure. We are working closely with our customers to address their needs while acknowledging their ongoing challenges. Our business has remained comparatively resilient through the pandemic, as even though our customers are experiencing financial pressures, they recognize that they need CMG's technology. We believe that the value of our reservoir simulation software is even greater during times of market uncertainty, as companies strive to optimize their production and improve operating margins.

We closed the quarter with $39.2 million of cash and no debt. We realized free cash flow per share of $0.09 during the quarter and on February 8, 2021, the Board declared a dividend of $0.05 per share.

Ryan N. Schneider President and Chief Executive Officer February 8, 2021