Computer Modelling Group Ltd. — Interim / Quarterly Report 2022

Aug 11, 2021

Condensed Consolidated Statements of Financial Position

UNAUDITED (thousands of Canadian $)	June 30, 2021	March 31, 2021
Assets
Current assets:
Cash	54,445	49,068
Trade and other receivables	8,817	23,239
Prepaid expenses	867	820
Prepaid income taxes (note 10)	682	8
	64,811	73,135
Property and equipment	11,624	12,025
Right-of-use assets	34,886	35,509
Deferred tax asset (note 10)	2,034	1,822
Total assets	113,355	122,491
Liabilities and shareholders' equity
Current liabilities:
Trade payables and accrued liabilities	4,570	6,316
Income taxes payable (note 10)	63	49
Deferred revenue (note 4)	23,451	30,461
Lease liability (note 5)	1,362	1,356
	29,446	38,182
Long-term stock-based compensation liability (note 11(c))	1,310	1,281
Long-term lease liability (note 5)	39,265	39,606
Total liabilities	70,021	79,069
Shareholders' equity:
Share capital (note 11)	80,051	80,051
Contributed surplus	14,445	14,251
Deficit	(51,162)	(50,880)
Total shareholders' equity	43,334	43,422
Total liabilities and shareholders' equity	113,355	122,491

Subsequent event (note 15)

Condensed Consolidated Statements of Operations and Comprehensive Income

Three months ended June 30,	2021	2020
UNAUDITED (thousands of Canadian $ except per share amounts)
Revenue (note 6)	14,414	16,672
Operating expenses (note 7)
Sales, marketing and professional services	3,412	4,284
Research and development (note 8)	4,017	4,959
General and administrative	1,412	1,718
	8,841	10,961
Operating profit	5,573	5,711
Finance income (note 9)	98	99
Finance costs (note 9)	(844)	(1,405)
Profit before income and other taxes	4,827	4,405
Income and other taxes (note 10)	1,094	1,143
Net and total comprehensive income	3,733	3,262
Earnings per share
Basic and diluted (note 11(d))	0.05	0.04

Condensed Consolidated Statements of Changes in Equity

	Share	Contributed		Total
UNAUDITED (thousands of Canadian $)	capital	surplus	Deficit	equity
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 11(c))	-	166	-	166
Balance, June 30, 2020	79,851	13,699	(55,766)	37,784
Balance, April 1, 2021	80,051	14,251	(50,880)	43,422
Total comprehensive income for the year	-	-	3,733	3,733
Dividends paid	-	-	(4,015)	(4,015)
Stock-based compensation:
Current period expense (note 11(c))	-	194	-	194
Balance, June 30, 2021	80,051	14,445	(51,162)	43,334

Condensed Consolidated Statements of Cash Flows

Three months ended June 30,	2021	2020
UNAUDITED (thousands of Canadian $)
Operating activities
Net income	3,733	3,262
Adjustments for:
Depreciation	1,023	1,056
Deferred income tax recovery (note 10)	(212)	(427)
	267
Stock-based compensation (note 11(c))		812
Funds flow from operations	4,811	4,703
Movement in non-cash working capital:
Trade and other receivables	14,422	18,585
Trade payables and accrued liabilities	(1,791)	(765)
Prepaid expenses	(47)	(40)
Income taxes payable	(660)	1,030
Deferred revenue	(7,010)	(8,346)
Decrease in non-cash working capital	4,914	10,464
Net cash provided by operating activities	9,725	15,167
Financing activities
Repayment of lease liability (note 5)	(306)	(315)
Dividends paid	(4,015)	(4,013)
Net cash used in financing activities	(4,321)	(4,328)
Investing activities
Property and equipment additions	(27)	(149)
Increase in cash	5,377	10,690
Cash, beginning of period	49,068	40,505
Cash, end of period	54,445	51,195
Supplementary cash flow information
Interest received (note 9)	98	99
Interest paid (notes 5 and 9)	507	525
Income taxes paid	1,728	184

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended June 30, 2021 and 2020.

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 interim financial statements as at and for the three months ended June 30, 2021 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, 2021, 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, 2021 were authorized for issuance by the Board of Directors on August 10, 2021.

(b) Basis of Measurement:

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

(c) Functional and Presentation Currency:

The condensed consolidated interim 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 interim financial statements were the same as those that applied to the consolidated financial statements for the year ended March 31, 2021.

(e) Impact of the COVID-19 Pandemic:

In March 2020, the World Health Organization declared coronavirus outbreak 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,

fluctuating demand for crude oil resulting from world economies emerging from and then entering into subsequent COVID-19 waves has resulted in significant volatility in global energy prices. These events are resulting in a challenging economic climate in which it is difficult to reliably estimate the length or severity of these developments and their financial impact. A potential adverse impact to the Company includes reductions in revenues and cash flows and increased risk of non-payment from customers. 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, 2021	March 31, 2021
Canada	45,485	46,393
United States	699	755
South America	278	325
Eastern Hemisphere(1)	48	61
	46,510	47,534

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

4. Deferred Revenue:

The following table presents changes in the deferred revenue balance:

(thousands of $)
Balance, March 31, 2021	30,461
Invoiced during the period, excluding amounts recognized as revenue during the period	3,731
Recognition of deferred revenue included in the balance at the beginning of the period	(10,741)
Balance, June 30, 2021	23,451

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, 2021	40,962
Interest on lease liability (note 9)	507
Lease payments	(813)
Remeasurement due to renegotiated lease payments	(29)
Balance, June 30, 2021	40,627
Current	1,362
Long-term	39,265

The following table presents contractual undiscounted payments for lease liability as at June 30, 2021:

(thousands of $)
Less than one year	3,349
Between one and five years	14,075
More than five years	42,317
Total undiscounted payments	59,741

6. Revenue:

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

Three months ended June 30	2021	2020
(thousands of $)
Annuity/maintenance license revenue
Canada	3,034	3,212
United States	2,984	4,235
South America	1,494	1,390
Eastern Hemisphere	4,774	5,686
	12,286	14,523
Perpetual license revenue
Canada	-	-
United States	125	-
South America	-	-
Eastern Hemisphere	-	-
	125	-
Total software license revenue	12,411	14,523
Professional services
Canada	1,835	1,817
United States	32	237
South America	-	26
Eastern Hemisphere	136	69
	2,003	2,149
Total revenue
Canada	4,869	5,029
United States	3,141	4,472
South America	1,494	1,416
Eastern Hemisphere	4,910	5,755
	14,414	16,672

During the three months ended June 30, 2021, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods (2020 – $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, 2021	March 31, 2021
Receivables (included in "Trade and other receivables")	8,178	22,812

During the three months ended June 30, 2021, one customer comprised 13.3% of the Company's total revenue (2020 – two customers, 13.5% and 10.4%).

7. Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy

As a result of the decline in revenue, CMG became eligible for the Canada Emergency Wage Subsidy ("CEWS") and the Canada Emergency Rent Subsidy ("CERS") programs and during the three months ended June 30, 2021 recorded CEWS and CERS benefits of $0.4 million. The CEWS and CERS benefits were recorded against the financial statement line items that they are intended to compensate, resulting in the following credits to the operating expense categories:

Three months ended June 30,	2021	2020
(thousands of $)
Sales, marketing and professional services	(62)	-
Research and development	(246)	-
General and administrative	(59)	-
	(367)	-

8. Research and Development Costs:

Three months ended June 30,(thousands of $)	2021	2020
Research and development, net of government grants	4,255	5,303
Scientific research and experimental development (SR&ED) investment tax credits	(238)	(344)
	4,017	4,959

9. Finance Income and Finance Costs:

Three months ended June 30,	2021	2020
(thousands of $)
Interest income	98	99
Finance income	98	99
Interest expense on lease liability (note 5)	(507)	(525)
Net foreign exchange loss	(337)	(880)
Finance costs	(844)	(1,405)

10. Income and Other Taxes:

The major components of income tax expense are as follows:

Three months ended June 30,	2021	2020
(thousands of $)
Current year income tax expense	1,273	1,449
Deferred tax recovery	(212)	(427)
Foreign withholding and other taxes	33	121
	1,094	1,143

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,	2021	2020
(thousands of $, unless otherwise stated)
Combined statutory tax rate	23.00%	24.75%
Expected income tax	1,110	1,090
Non-deductible costs	43	31
Withholding taxes	(63)	6
Effect of tax rates in foreign jurisdictions	(2)	(7)
Effect of statutory tax rate reduction	-	14
Other	6	9
	1,094	1,143

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

(thousands of $)	June 30, 2021	March 31, 2021
Right-of-use assets	1,303	1,245
Stock-based compensation liability	633	616
Property and equipment	148	115
SR&ED investment tax credits	(50)	(154)
Net deferred tax asset	2,034	1,822

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.

11. Share Capital:

(a) Authorized:

An unlimited number of common shares, an unlimited number of non-voting shares, and an unlimited number of preferred shares, issuable in series.

(b) Issued:

(thousands of shares)	Common shares
Balance, April 1, 2020	80,249
Balance, June 30, 2020	80,249

Balance, April 1, 2021	80,286
Balance, June 30, 2021	80,286

(c) Stock-Based Compensation:

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense:

Three months ended June 30,	2021	2020
(thousands of $)
Equity-settled plans	194	166
Cash-settled plans	73	646
Total stock-based compensation expense	267	812

Liability Recognized for Stock-Based Compensation (1)

The following table summarizes liabilities for the Company's cash-settled plans:

(thousands of $)	June 30, 2021	March 31, 2021
SARs	283	407
RSUs	1,838	1,641
PSUs	249	204
DSUs	382	426
Total stock-based compensation liability	2,752	2,678
Current, recorded within trade payables and accrued liabilities	1,442	1,397
Long-term, recorded in long-term stock-based compensation liability	1,310	1,281

(1) The intrinsic value of the vested awards at June 30, 2021 was $0.4 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, 2021, the Company may reserve up to 8,028,000 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 anniversary from the grant date and then 25% vest on each of the second and third anniversary dates. Stock options have a five-year life.

The following table outlines changes in stock options:

	Three months ended			Year ended
		June 30, 2021		March 31, 2021
	Number of	Weighted	Number of	Weighted
	Options	Average	Options	Average
	(thousands)	Exercise Price	(thousands)	Exercise Price
		($/share)		($/share)
Outstanding at beginning of period	3,524	7.82	3,900	9.64
Granted	-	-	796	5.10
Forfeited/expired	(21)	9.91	(1,172)	12.03
Outstanding at end of period	3,503	7.80	3,524	7.82
Options exercisable at end of period	2,213	8.94	2,234	8.95

			Outstanding		Exercisable
Exercise Price($/option)	Number ofOptions(thousands)	WeightedAverageRemainingContractual Life(years)	WeightedAverageExercise Price($/option)	Number ofOptions(thousands)	WeightedAverageExercise Price($/option)
5.08 to 6.30	786	4.1	5.08	-	-
6.31 to 6.60	748	3.1	6.32	373	6.32
6.61 to 9.20	497	2.2	9.18	368	9.19
9.21 to 9.33	767	1.1	9.33	767	9.33
9.34 to 9.78	705	0.1	9.78	705	9.78
	3,503	2.2	7.80	2,213	8.94

The range of exercise prices of stock options outstanding and exercisable at June 30, 2021 is as follows:

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

	Year ended
	March 31, 2021
Fair value at grant date ($/option)	1.00 to 1.50
Share price at grant date ($/share)	5.08 to 6.59
Risk-free interest rate (%)	0.22 to 0.37
Estimated hold period prior to exercise (years)	3 to 4
Volatility in the price of common shares (%)	35 to 41
Dividend yield per common share (%)	3.06 to 3.71

(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 endedJune 30, 2021		Year endedMarch 31, 2021
		Weighted Average		Weighted
	Number of SARs	Exercise Price	Number of SARs	Average Exercise
	(thousands)	($/SAR)	(thousands)	Price ($/SAR)
Outstanding at beginning of period	1,373	8.19	1,152	8.80
Granted	-	-	221	5.08
Outstanding at end of period	1,373	8.19	1,373	8.19
SARs exercisable at end of period	948	9.04	948	9.04

(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, 2021			Year endedMarch 31, 2021
	RSUs	PSUs	DSUs	RSUs	PSUs	DSUs
Outstanding at beginning of period	589	93	74	421	30	48
Granted	5	67	1	379	63	33
Exercised	-	-	-	(181)	-	(7)
Forfeited	(12)	-	-	(30)	-	-
Outstanding at end of period	582	160	75	589	93	74

(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)			2021			2020
		Weighted			Weighted
		average	Earnings		average	Earnings
	Earnings	shares	per share	Earnings	shares	per share
	($)	outstanding	($/share)	($)	outstanding	($/share)
Basic	3,733	80,286	0.05	3,262	80,249	0.04
Dilutive effect of share-based awards		337			182
Diluted	3,733	80,623	0.05	3,262	80,431	0.04

During the three months ended June 30, 2021, no awards (three months ended June 30, 2020 – no awards) were excluded from the computation of the weighted average number of diluted shares outstanding because their effect was not dilutive.

12. 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.

13. Commitments:

(a) Research Commitment:

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 $8.3 million in fiscal 2022) and Shell would be responsible for providing a contribution for the continuing development of the software (estimated to be $6.7 million in fiscal 2022).

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.

During the three months ended June 30, 2021, the Company recorded professional services revenue of $1.7 million (three months ended June 30, 2020 – $1.8 million) and CoFlow costs of $1.8 million to research and development expenses (three months ended June 30, 2020 – $2.2 million).

(b) Commitments:

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

(thousands of $)	June 30, 2021
Less than one year	1,103
Between one and five years	4,522
More than five years	12,553
	18,178

14. 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, 2021, $1.0 million (March 31, 2021 – $0.9 million) had been reserved on this line of credit for letters of credit supporting performance bonds.

15. Subsequent Event:

On August 10, 2021, the Board of Directors declared a quarterly cash dividend of $0.05 per share on its common shares, payable on September 15, 2021 to all shareholders of record at the close of business on September 7, 2021.