Computer Modelling Group Ltd. — Interim / Quarterly Report 2024

Aug 11, 2023

Condensed Consolidated Statements of Financial Position

UNAUDITED (thousands of Canadian $)	June 30, 2023	March 31, 2023
Assets
Current assets:
Cash	64,242	66,850
Trade and other receivables	20,028	23,910
Prepaid expenses	1,061	1,060
Prepaid income taxes (note 9)	254	444
	85,585	92,264
Property and equipment	10,102	10,366
Right-of-use assets	30,138	30,733
Intangible assets	1,264	1,321
Deferred tax asset (note 9)	2,492	2,444
Total assets	129,581	137,128
Liabilities and shareholders' equity
Current liabilities:
Trade payables and accrued liabilities	7,157	9,883
Income taxes payable (note 9)	7,158204	33
Deferred revenue (note 4)	-26,616	34,797
Lease liabilities (note 5)	1,853	1,829
	35,830	46,542
Long-term stock-based compensation liability (note 10(c))	1,848	1,985
Long-term lease liabilities (note 5)	35,715	36,151
Total liabilities	73,393	84,678
Shareholders' equity:
Share capital (note 10(b))	82,650	81,820
Contributed surplus	15,514	15,471
Deficit	(41,976)	(44,841)
Total shareholders' equity	56,188	52,450
Total liabilities and shareholders' equity	129,581	137,128

Subsequent event (note 14)

Condensed Consolidated Statements of Operations and Comprehensive Income

Three months ended June 30,	2023	2022
UNAUDITED (thousands of Canadian $ except per share amounts)		(note 2(e))
Revenue (note 6)	20,748	16,107
Cost of revenue	1,905	1,764
Gross profit	18,843	14,343
Operating expenses
Sales and marketing	2,355	1,903
Research and development (note 7)	4,052	4,129
General and administrative	2,672	3,350
	9,079	9,382
Operating profit	9,764	4,961
Finance income (note 8)	760	711
Finance costs (note 8)	(1,376)	(490)
Profit before income and other taxes	9,148	5,182
Income and other taxes (note 9)	2,244	1,369
Net and total comprehensive income	6,904	3,813
Earnings per share – basic (note 10(d))	0.09	0.05
Earnings per share – diluted (note 10(d))	0.08	0.05
Dividend per share	0.05	0.05

Condensed Consolidated Statements of Changes in Equity

	Share	Contributed		Total
UNAUDITED (thousands of Canadian $)	capital	surplus	Deficit	equity
Balance, April 1, 2022	80,248	15,009	(48,539)	46,718
Total comprehensive income for the period	-	-	3,813	3,813
Dividends paid	-	-	(4,017)	(4,017)
Stock-based compensation:
Current period expense (note 10(c))	-	210	-	210
Balance, June 30, 2022	80,248	15,219	(48,743)	46,724
Balance, April 1, 2023	81,820	15,471	(44,841)	52,450
Total comprehensive income for the period	-	-	6,904	6,904
Dividends paid	-	-	(4,039)	(4,039)
Stock-based compensation:
Shares issued on receipt of cash	830	(129)	-	701
Current period expense (note 10(c))	-	172	-	172
Balance, June 30, 2023	82,650	15,514	(41,976)	56,188

Condensed Consolidated Statements of Cash Flows

Three months ended June 30,	2023	2022
UNAUDITED (thousands of Canadian $)
Operating activities
Net income	6,904	3,813
Adjustments for:
Depreciation and amortization of property, equipment, right-of-use assets	904	931
Amortization of intangible assets	57	-
Deferred income tax recovery (note 9)	(49)	(154)
Stock-based compensation (note 10(c))	104	(32)
Funds flow from operations	7,920	4,558
Movement in non-cash working capital:
Trade and other receivables	3,882	2,396
Trade payables and accrued liabilities	(2,794)	(945)
Prepaid expenses	(1)	(62)
Income taxes payable	361	(160)
Deferred revenue	(8,181)	(6,045)
Changes in non-cash working capital	(6,733)	(4,816)
Net cash provided by (used in) operating activities	1,187	(258)
Financing activities
Proceeds from issue of common shares	701	-
Repayment of lease liabilities (note 5)	(412)	(303)
Dividends paid	(4,039)	(4,017)
Net cash used in financing activities	(3,750)	(4,320)
Investing activities
Property and equipment additions	(45)	-
Decrease in cash	(2,608)	(4,578)
Cash, beginning of period	66,850	59,660
Cash, end of period	64,242	55,082
Supplementary cash flow information
Interest received (note 8)	760	180
Interest paid (notes 5 and 8)	469	490
Income taxes paid	1,778	1,496

Notes to Condensed Consolidated Interim Financial Statements

For the three months ended June 30, 2023 and 2022.

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, 2023 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 interim financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting as issued by the International Accounting Standards Board ("IASB"). 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, 2023, 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, 2023 were authorized for issuance by the Board of Directors on August 10, 2023.

(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 based on historical experience and other assumptions that are considered reasonable in the circumstances and 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.

(e) Change in Presentation of Operating Expenses:

Prior to April 1, 2023, the Company classified costs related to software licenses and professional services (including costs associated with customer support and training, and consulting services) under sales and marketing expenses, and costs related to public cloud hosting services under research and development expenses in the statement of operations. In order to better align with industry peers for comparability purposes, the Company has changed the presentation of the direct costs to deliver professional services and software licenses as a cost of revenue. Cost of revenue includes direct employee, external consultant and overhead costs associated with customer support, training, consulting, and public cloud hosting applications. The change in presentation had no effect on the reported results of operations. The comparative period has been updated to reflect this presentation change.

(thousands of $)

	As presented	Reclassification	Restated
	June 30, 2022	in Presentation	June 30,2022
Cost of Revenue	-	1,764	1,764
Sales and marketing	3,591	(1,688)	1,903
Research and development	4,205	(76)	4,129

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, intangible 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, 2023	March 31, 2023
Canada(1)	41,020	41,835
United States	288	345
South America	125	148
Eastern Hemisphere(2)	71	92
	41,504	42,420

(1) Includes intangible assets, refer to Note 5 in the annual consolidated financial statements as at and for the year ended March 31, 2023.

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

4. Deferred Revenue:

The following table presents changes in the deferred revenue balance:

(thousands of $)	June 30, 2023	March 31, 2023
Balance, beginning of period	34,797	30,454
Invoiced during the period, excluding amounts recognized as revenue
during the period	5,298	33,533
Recognition of deferred revenue included in the balance at the beginning
of the period	(13,479)	(29,190)
Balance, end of period	26,616	34,797

5. Lease Liabilities:

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 $)	June 30, 2023	March 31, 2023
Balance, beginning of period	37,980	39,588
Interest on lease liabilities (note 8)	469	1,931
Lease payments	(881)	(3,539)
Balance, end of period	37,568	37,980
Current	1,853	1,829
Long-term	37,535,715	36,151

The following table presents contractual undiscounted payments for lease liabilities as at June 30, 2023:

(thousands of $)
Less than one year	3,617
Between one and five years	17,512
More than five years	31,593
Total undiscounted payments	52,722

6. Revenue:

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

Three months ended June 30,(thousands of $)	2023	2022
Annuity/maintenance license revenue
Canada	3,241	2,950
United States	4,254	3,350
South America	1,822	1,699
Eastern Hemisphere	6,290	5,530
	15,607	13,529
Perpetual license revenue
Canada	115	-
United States	233	-
South America	-	-
Eastern Hemisphere	1,501	386
	1,849	386
Total software license revenue	17,456	13,915
Professional services
Canada	2,348	2,074
United States	255	55
South America	376	29
Eastern Hemisphere	313	34
	3,292	2,192
Total revenue
Canada	5,702	5,024
United States	4,743	3,405
South America	2,199	1,728
Eastern Hemisphere	8,104	5,950
	20,748	16,107

The amount of revenue recognized during the three months ended June 30, 2023 from performance obligations satisfied (or partially satisfied) in previous periods is $0.7 million (2022 – $0.4 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, 2023	March 31, 2023
Receivables (included in "Trade and other receivables")	19,103	22,901

During the three months ended June 30, 2023, one customer comprised 10.1% of the Company's total revenue (2022 – one customer, 13.7%).

7. Research and Development Costs:

Three months ended June 30,	2023	2022
(thousands of $)
Research and development	4,164	4,316
Scientific research and experimental development ("SR&ED") investment tax	(112)	(187)
	4,052	4,129

8. Finance Income and Finance Costs:

Three months ended June 30,(thousands of $)	2023	2022
Interest income	760	180
Net foreign exchange gain	-	531
Finance income	760	711
Interest expense on lease liabilities (note 5)	(469)	(490)
Net foreign exchange loss	(907)	-
Finance costs	(1,376)	(490)

9. Income and Other Taxes:

The major components of income tax expense are as follows:

Three months ended June 30,(thousands of $)	2023	2022
Current year income tax expense	2,165	1,369
Deferred tax recovery	(49)	(154)
Foreign withholding and other taxes	128	154
	2,244	1,369

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,	2023	2022
(thousands of $, unless otherwise stated)
Combined statutory tax rate	23.00%	23.00%
Expected income tax	2,104	1,192
Non-deductible costs	47	50
Withholding taxes	85	101
Effect of tax rates in foreign jurisdictions	20	23
Other	(12)	3
	2,244	1,369

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

(thousands of $)	June 30, 2023	March 31, 2023
Right-of-use assets	1,687	1,653
Stock-based compensation liability	1,026	1,041
Property and equipment	(59)	70
Intangible Assets	(137)	(150)
SR&ED investment tax credits	(25)	(170)
Net deferred tax asset	2,492	2,444

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, 2022	80,335
Balance, June 30, 2022	80,335
Balance, April 1, 2023	80,637
Issued for cash on exercise of stock options	162
Balance, June 30, 2023	80,799

(c) Stock-Based Compensation:

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense:

Three months ended June 30,	2023	2022
(thousands of $)
Equity-settled plans	172	210
Cash-settled plans	(68)	(136)
Total stock-based compensation expense	104	74

Liability Recognized for Stock-Based Compensation(1)

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

(thousands of $)	June 30, 2023	March 31, 2023
SARs	771	931
RSUs	2,173	1,975
PSUs	420	437
DSUs	1,095	1,184
Total stock-based compensation liability	4,459	4,527
Current, recorded within trade payables and accrued liabilities	2,611	2,542
Long-term	1,848	1,985

(1) The intrinsic value of the vested awards at June 30, 2022 was $0.5 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, 2023, the Company may reserve up to 8,079,000 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. Stock options granted by the Company provide the holder with the right to purchase common shares at the market price on the grant date, subject to fulfilling vesting terms. The majority of the Company's options vest over a three-year period, with fifty percent vesting on the first-year anniversary from the grant date and 25% vesting on each of the second and third year anniversary dates. In fiscal 2023, the Company granted stock options that vest when certain share price thresholds are achieved. All stock options have a five-year life.

The following table outlines changes in stock options:

		Three months endedJune 30, 2023		Year endedMarch 31, 2023
	Number ofOptions(thousands)	WeightedAverageExercise Price($/share)	Number ofOptions(thousands)	WeightedAverageExercise Price($/share)
Outstanding at beginning of period	5,017	5.21	3,680	6.38
Granted(1)	-	-	3,196	4.86
Exercised	(162)	4.87	(236)	4.52
Forfeited/expired	(58)	6.15	(1,623)	7.30
Outstanding at end of period	4,797	5.21	5,017	5.21
Options exercisable at end of period	1,410	6.22	1,573	6.14

(1) 2,525,000 stock options granted during the year ended March 31, 2023 are exercisable when specified share price targets are achieved.

			Outstanding		Exercisable
Exercise Price($/option)	Number of Options(thousands)	WeightedAverageRemainingContractual Life(years)	WeightedAverageExercise Price($/option)	Number ofOptions(thousands)	WeightedAverageExercise Price($/option)
3.98 to 4.62	787	3.4	4.13	275	3.98
4.63 to 4.87	1,800(1)	3.9	4.74	-	-
4.88 to 5.04	667	4.2	5.00	-	-
5.05 to 5.88	739	3.0	5.23	333	5.08
5.89 to 9.20	804	0.8	7.45	802	7.45
	4,797	3.2	5.21	1,410	6.22

The range of exercise prices of stock options outstanding and exercisable at June 30, 2023 is as follows:

(1) 2,525,000 stock options granted during the year ended March 31, 2023 are exercisable when specified share price targets are achieved.

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

	Year ended
	March 31, 2023
Fair value at grant date ($/option)	0.10 to 1.37
Share price at grant date ($/share)	4.49 to 5.45
Risk-free interest rate (%)	2.55 to 3.76
Estimated hold period prior to exercise (years)	3 to 5
Volatility in the price of common shares (%)	39 to 45
Dividend yield per common share (%)	3.91 to 4.45

(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, 2023		Year endedMarch 31, 2023
	Number ofSARs(thousands)	WeightedAverageExercise Price($/SAR)	Number ofSARs(thousands)	WeightedAverageExercise Price($/SAR)
Outstanding at beginning of period	957	6.47	1,395	7.11
Granted	-	-	304	6.25
Exercised	-	-	(23)	5.42
Forfeited/expired	(28)	6.81	(719)	7.64
Outstanding at end of period	929	6.48	957	6.47
SARs exercisable at end of period	520	7.05	544	7.04

(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:

	Three months ended					Year ended
(thousands)	June 30, 2023					March 31, 2023
	RSUs	PSUs	DSUs	RSUs	PSUs	DSUs
Outstanding at beginning of period	542	68	163	722	165	123
Granted	4	-	1	305	3	82
Exercised	-	-	-	(273)	-	(42)
Forfeited/expired	(26)	-	-	(212)	(100)	-
Outstanding at end of period	520	68	164	542	68	163

(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)			2023			2022
		Weighted	Earnings		Weighted	Earnings
		average	per		average	per
	Earnings	shares	share	Earnings	shares	share
	($)	outstanding	($/share)	($)	outstanding	($/share)
Basic	6,904	80,685	0.09	3,813	80,335	0.05
Dilutive effect of share-based awards		1,525			539
Diluted	6,904	82,210	0.08	3,813	80,874	0.05

During the three months ended June 30, 2023 and 2022, no awards were excluded from the computation of the weighted average number of diluted shares outstanding because their effect was not dilutive.

11. Financial Instruments and Risk Management:

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") 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 and Shell would be responsible for providing a contribution for the continuing development of the software.

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. In September 2021, CMG and Shell agreed that CMG would add and/or allocate up to six additional full-time employees in order to accelerate CoFlow development and support targeted CoFlow deployments, and Shell's contribution would increase accordingly.

During the three months ended June 30, 2023, the Company recorded professional services revenue of $1.9 million (2022 – $2.0 million) and CoFlow costs of $1.7 million to research and development expenses (2022 – $1.8 million).

(b) Commitments:

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

(thousands of $)	June 30, 2023
Less than one year	1,083
Between one and five years	4,332
More than five years	9,838
	15,253

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, 2023, $1.0 million (June 30, 2022 – $1.0 million) had been reserved on this line of credit for letters of credit supporting performance bonds.

14. Subsequent Event:

On August 10, 2023, the Board of Directors declared a quarterly cash dividend of $0.05 per share on its common shares, payable on September 15, 2023 to all shareholders of record at the close of business on September 7, 2023.