Computer Modelling Group Ltd. — Interim / Quarterly Report 2023

Feb 9, 2023

This version of the Management’s Discussion & Analysis, filed on February 9, 2023, includes the CEO Letter to Shareholders. It was previously filed separately on February 8, 2023.

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CEO Letter to Shareholders

February 8, 2023

Dear fellow shareholders,

In the third quarter, our comparative quarterly revenue grew by 14% which represents the fifth consecutive period of growth. With increased licensing by existing customers and the addition of new customers, our annuity and

maintenance revenue grew in all regions except Canada which remained flat due to the negative impact of consolidation activity that occurred in the first quarter. Strength in the U.S. and Europe in particular, continues to be buoyed by increased interest in our technology for use in carbon capture projects.

Approximately 15% of third quarter and 13% of year-to-date total software revenue has been generated by energy transition projects. This will be an important indicator of success as we capitalize on CMG as the technology of choice in Carbon Capture and Storage (CCS) and other energy transition projects.

CMG 4.0: Energy Transition

With evidence of immediate market demand for our simulators in the energy transition market, we have several initiatives that support us in capitalizing on our leadership position and continuing to define the role simulation technology plays in achieving success in the energy transition space.

First is the ground-breaking, innovative research being done in a Joint Industry Partnership (JIP) with Kongsberg. With the participation and support of numerous leading energy companies, this project attempts to solve one of the most challenging issues in CCS and emphasizes the acceptance of CMG’s established technology within the carbon capture space.

Second is our recently announced agreement with Hatch and McDaniel which demonstrates how we are embracing partnerships with industry leaders to underscore the integral part we play in providing technology and consulting expertise in CCS.

CMG 4.0: CoFlow | Integrated Decision Making

During my first nine months at CMG, I have travelled through the Americas, the Middle East and India, listening to and learning from our customers. The industry shift towards maximizing existing reserves, often in aging fields, and away from reserve replacement through exploration is underlining a new need for integrated decision making to optimize increasingly complex reserve recovery.

Integrated decision making is not unique to the energy industry. It was evident in my previous career in travel technology, and it has been on clear display in the past few months as holiday travel was upended by weather and airline disruptions.

For airlines, sorting out the crew, the aircraft, and the passengers needs to be done simultaneously to recover schedules quickly and efficiently. In reality, this is a problem with almost infinite variables, and it is incredibly difficult to solve. As a result, the problems are solved independent of one another and, as is evident to anyone who tried to travel over the holidays, are inefficient, costly and time consuming.

At the most senior executive level, the benefit of removing silos to optimize decision making is clear. The energy industry today is limiting its potential by engaging in siloed decision making. Having used advanced physics, mathematics, chemistry and high-performance computing for decades to address the unknown risks and mysteries of subsurface reservoirs, the industry must now embrace technology to break down barriers amongst functional groups and share decision making.

Connecting sub-surface expertise and understanding with the surface and production engineering has the potential to achieve yet another level of optimization to drive profitable, sustainable and critical resource development. Key development choices are improved by the ability of multiple disciplines to efficiently understand the end-to-end system from subsurface realizations through surface constraints. This is the vision of CoFlow, as a comprehensive platform of both surface and subsurface simulation. Our strategic partners in the development of CoFlow have embraced the benefits of this new approach.

This technology is a true differentiator for CMG, but not without risk. Developing our organizational sales strategy to properly educate the market will be critical in the successful commercialization of this tool, and our expectation is that, of all our growth initiatives, CoFlow will require the most time to execute.

CMG 4.0: CMG Collaboration Centre (C3)

For the past several days I have been in India, wrapping up CMG’s participation in India Energy Week. The event connected the global energy community for innovation, ideas and investment and I was both honored and excited to have joined our team for the occasion.

As the world’s third largest energy consumer with increasing energy needs, India is projected to experience the largest increase in energy demand of any country over the next two decades. Amid the vision to become self-reliant and increase domestic production of oil and gas with a parallel focus on energy transition, CMG has the cutting-edge specialized software and technical expertise to support these goals.

To this end, I am also excited to share that we opened a new CMG Collaboration Centre in Bengaluru, India, which we are calling C3. This new Centre is a component of the CMG 4.0 strategy focused on driving organic growth. As we transform CMG to a market-focused product organization, we require product strategy that builds on our leadership in reservoir simulation while meeting the evolving demand for simplified, fit-for-purpose applications and workflows. This Centre will leverage over 15 years of collaboration with educational institutions in the country to expand specific research and development capabilities, to support our core team based in Calgary, and advance our product development.

In addition, with over a third of our business regularly derived from the Eastern Hemisphere, C3 will have a team that is focused and dedicated to supporting our sales efforts in the region with both consulting and customer care capabilities and marketing efforts.

CMG 4.0: Organic and Inorganic Growth

Our commitment to leadership in energy transition, R&D and product development, and a long-term vision with CoFlow can drive organic growth within the context of strong industry trends.

Equally important, we continue to build a pipeline of opportunities for our inorganic growth strategy. We are evaluating where we can efficiently deploy capital to accelerate growth. This includes solutions within or as an extension to our core competencies to increase the value we deliver or technology acquisitions that serve as an entry into adjacent markets.

I look forward to continuing to provide updates on our progress as we execute on our CMG 4.0 strategy.

Sincerely,

Pramod Jain Chief Executive Officer

Management’s Discussion & Analysis

Computer Modelling Group Ltd. announces its third quarter results for the three and nine months ended December 31, 2022.

Third Quarter Highlights

Third Quarter Highlights
Three months ended December 31, 2022 2021	$ change	% change
($ thousands, exceptper share data)
Annuity/maintenance software licenses 15,533 13,575	1,958	14%
Perpetual software licenses 518 1,497	(979)	-65%
Total revenue 19,392 17,045	2,347	14%
Operating profit 8,435 7,755	680	9%
Net income 6,348 5,574	774	14%
Earnings per share - basic 0.08 0.07	0.01	14%
Funds flow from operations per share - basic 0.10 0.09	0.01	11%
Free cash flowper share - basic (1) 0.09 0.08	0.01	13%
Nine months ended December 31, 2022 2021	$ change	% change
($ thousands, exceptper share data)
Annuity/maintenance software licenses 43,887 39,100	4,787	12%
Perpetual software licenses 1,684 2,468	(784)	-32%
Total revenue 53,581 47,408	6,173	13%
Operating profit 18,951 18,768	183	1%
Net income 14,571 13,453	1,118	8%
Earnings per share - basic 0.18 0.17	0.01	6%
Funds flow from operations per share - basic 0.22 0.21	0.01	5%
Free cash flowper share - basic (1) 0.20 0.19	0.01	5%

(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, 2023, 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, 2022 and 2021. 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

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currently available to management of the Company. The Company believes that the expectations reflected in such forwardlooking 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 in a volatile oil price environment;

• 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; and

• the impact of the ongoing COVID-19 pandemic on the global economy and the Company.

Forward-looking information is not a guarantee of future performance and involves a number of risks and uncertainties, only some of which are described herein. Many factors could cause the Company’s actual results, performance or achievements, or future events or developments to differ materially from those expressed or implied by the forward-looking information including, without limitation, the following factors, which are discussed in greater detail in the “Business Risks” section of this MD&A:

• Economic conditions in the energy 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 forwardlooking 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 forwardlooking 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 forwardlooking 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.

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, adjusted total operating expenses, direct employee costs, adjusted direct employee costs, other corporate costs, adjusted other corporate costs, adjusted operating profit, adjusted net income, EBITDA, adjusted 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.

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Management’s Discussion & Analysis

Direct employee costs include salaries (net of CEWS), 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. Adjusted EBITDA also excludes CEWS and CERS subsidies and restructuring charges. EBITDA/adjusted EBITDA should not be construed as an alternative to net income as determined by IFRS. The Company believes that EBITDA/adjusted EBITDA are useful supplemental measures as they provide 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 “Adjusted EBITDA” heading for a reconciliation of EBITDA and adjusted 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. Free cash flow per share is calculated by dividing free cash flow by the number of weighted average outstanding shares during the period. Management uses free cash flow and free cash flow per share to help measure the capacity of the Company to pay dividends and invest in business growth opportunities.

Free Cash Flow Reconciliation to Funds Flow from Operations

Fiscal 2021 Fiscal 2022	Fiscal 2023	Fiscal 2023
($ thousands, unless otherwise stated) Q4 Q1 Q2 Q3 Q4	Q1	Q2 Q3
Funds flow from operations 6,267 4,811 4,904 7,022 7,105	4,558	4,974 8,169
Capital expenditures (41) (27) (133) (481) (62)	-	(130) (211)
Repayment of lease liabilities (471) (306) (277) (314) (459)	(303)	(339) (413)
Free cash flow 5,755 4,478 4,494 6,227 6,584	4,255	4,505 7,545
Weighted average shares – basic (thousands) 80,286 80,286 80,307 80,335 80,335	80,335	80,412 80,511
Free cash flowper share – basic 0.07 0.06 0.06 0.08 0.08	0.05	0.06 0.09

Corporate Profile

CMG is a computer software technology company serving the energy 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. CMG’s existing technology has differentiating capabilities built into its software products that can also be directly applied to the energy transition needs of its customers. 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”.

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Quarterly Performance

Quarterly Performance
Fiscal 2021(2) Fiscal 2022(3)		Fiscal 2023(4)
($ thousands, unless otherwise stated) Q4 Q1 Q2 Q3	Q4	Q1 Q2 Q3
Annuity/maintenance license revenue 13,790 12,286 13,239 13,575	14,306	13,529 14,825 15,533
Perpetual license revenue 1,184 125 846 1,497	2,351	386 780 518
Software license revenue 14,974 12,411 14,085 15,072	16,657	13,915 15,605 16,051
Professional services revenue 1,827 2,003 1,864 1,973	2,137	2,192 2,477 3,341
Total revenue 16,801 14,414 15,949 17,045	18,794	16,107 18,082 19,392
Operating profit 6,556 5,573 5,440 7,755	7,312	4,961 5,555 8,435
Operating profit (%) 39 39 34 45	39	31 31 43
Profit before income and other taxes 5,747 4,827 5,321 7,310	6,563	5,182 5,989 8,350
Income and other taxes 1,454 1,094 1,175 1,736	1,611	1,369 1,579 2,002
Net income for the period 4,293 3,733 4,146 5,574	4,952	3,813 4,410 6,348
EBITDA(1) 7,627 6,596 6,473 8,843	8,366	5,892 6,492 9,300
Cash dividends declared and paid 4,014 4,015 4,016 4,017	4,016	4,017 4,025 4,025
Funds flow from operations 6,267 4,811 4,904 7,022	7,105	4,558 4,974 8,169
Free cash flow(1) 5,755 4,478 4,494 6,227	6,584	4,255 4,505 7,545
Per share amounts – ($/share)
Earnings per share (EPS) – basic and diluted 0.05 0.05 0.05 0.07	0.06	0.05 0.05 0.08
Cash dividends declared and paid 0.05 0.05 0.05 0.05	0.05	0.05 0.05 0.05
Funds flow from operations per share – basic 0.08 0.06 0.06 0.09	0.09	0.06 0.06 0.10
Free cash flowper share – basic(1) 0.07 0.06 0.06 0.08	0.08	0.05 0.06 0.09

(1) This is a non-IFRS financial measure. See the “Non-IFRS Financial Measures” section.

(2) Q4 of fiscal 2021 includes $1.1 million in revenue that pertains to usage of CMG’s products in prior quarters.

(3) Q1, Q2 Q3 and Q4 of fiscal 2022 include $nil, $0.5 million, $nil and $0.8 million, respectively, in revenue that pertains to usage of CMG’s products in prior quarters.

(4) Q1, Q2 and Q3 of fiscal 2023 include $0.2 million, $0.3 million, and $0.3 million, respectively, in revenue that pertains to usage of CMG’s products in prior quarters.

Commentary on Quarterly Performance

For the Three Months Ended

For the Nine Months Ended

December 31, 2022 and compared to the same period of the previous fiscal year, when appropriate:

• Annuity/maintenance license revenue increased by 14%;

• Total revenue increased by 14%;

• Total operating expenses increased by 18%. Adjusted for the restructuring charges, operating expenses increased by 13%, primarily due to an increase in variable direct employee costs;

• Quarterly operating profit margin was 43%, decreasing from 45% in the comparative quarter of the prior year. Adjusted for the restructuring charges, operating profit margin was 43%, consistent with the adjusted operating profit margin of the comparative quarter;

• Basic EPS of $0.08 was higher than the comparative quarter’s EPS of $0.07;

• Achieved free cash flow per share of $0.09;

• Declared and paid a dividend of $0.05 per share.

• Annuity/maintenance license revenue increased by 12%;

• Total revenue increased by 13%;

• Total operating expenses increased by 21%. Adjusted for the restructuring charges and CEWS/CERS benefits, operating expenses increased by 7%, primarily due to higher professional services and travel-related costs;

• Year-to-date operating profit margin was 35%, decreasing from 40% in the comparative period. Adjusted for the restructuring charges and the CEWS/CERS benefits, operating profit margin was 43%, increasing from 40%, in the comparative quarter;

• Basic EPS of $0.18 was higher than the comparative period’s EPS of $0.17;

• Achieved free cash flow per share of $0.20;

• Declared and paid dividends of $0.15 per share.

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Management’s Discussion & Analysis

Revenue

Revenue
Three months ended December 31, 2022 2021	$ change	% change
($ thousands)
Software license revenue 16,051 15,072	979	6%
Professional services revenue 3,341 1,973	1,368	69%
Total revenue 19,392 17,045	2,347	14%
Software license revenue as a % of total revenue 83% 88%
Professional services revenue as a % of total revenue 17% 12%
Nine months ended December 31, 2022 2021	$ change	% change
($ thousands)
Software license revenue 45,571 41,568	4,003	10%
Professional services revenue 8,010 5,840	2,170	37%
Total revenue 53,581 47,408	6,173	13%
Software license revenue as a % of total revenue 85% 88%
Professional services revenue as a % of total revenue 15% 12%

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

Total revenue for the three and nine months ended December 31, 2022 increased by 14% and 13%, respectively, due to increases in both software license revenue and 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 recurring 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, 2022 2021	$ change	% change
($ thousands)
Annuity/maintenance license revenue 15,533 13,575	1,958	14%
Perpetual license revenue 518 1,497	(979)	-65%
Total software license revenue 16,051 15,072	979	6%
Annuity/maintenance as a % of total software license revenue 97% 90%
Perpetual as a % of total software license revenue 3% 10%

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Nine months ended December 31, 2022 2021	$ change	% change
($ thousands)
Annuity/maintenance license revenue 43,887 39,100	4,787	12%
Perpetual license revenue 1,684 2,468	(784)	-32%
Total software license revenue 45,571 41,568	4,003	10%
Annuity/maintenance as a % of total software license revenue 96% 94%
Perpetual as a % of total software license revenue 4% 6%

Total software license revenue for the three and nine months ended December 31, 2022 increased by 6% and 10%, respectively, compared to the same periods of the previous fiscal year, due to the increases in annuity/maintenance license revenue, partially offset by the decreases in perpetual license revenue.

Annuity/maintenance license revenue increased by 14% and 12% during the three and nine months ended December 31, 2022, respectively, due to increases in all regions except Canada, supported by license fee increases, increased license usage by existing customers and the addition of new customers. In particular, we are seeing an increase in revenue from the customers involved in carbon capture and storage projects, and estimate that about 15% and 13% of total software revenue for the three and nine months ended December 31, 2022, respectively, is attributable to the energy transition segment.

Perpetual license revenue during the three and nine months ended December 31, 2022 decreased by 65% and 32%, respectively, compared to the same periods of the previous fiscal year. 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 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 licenses to perpetual purchases.

We can observe from the tables below that the change in the exchange rate used to convert US dollar denominated revenue to Canadian dollars had a positive impact on reported annuity/maintenance license revenue during the three and nine months ended December 31, 2022, compared to the same periods of the previous fiscal year.

Three months ended December 31,	2021	Incremental License	Foreign Exchange	2022
($ thousands)		Growth/(Decrease)	Impact
Annuity/maintenance license revenue	13,575	1,763	195	15,533
Perpetual license revenue	1,497	(1,057)	78	518
Total software license revenue	15,072	706	273	16,051
Nine months ended December 31,	2021	Incremental License	Foreign Exchange	2022
($ thousands)		Growth/(Decrease)	Impact
Annuity/maintenance license revenue	39,100	4,636	151	43,887
Perpetual license revenue	2,468	(918)	134	1,684
Total software license revenue	41,568	3,718	285	45,571

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Management’s Discussion & Analysis

Software Revenue by Geographic Region

Three months ended December 31, 2022 2021	$ change	% change
($ thousands)
Annuity/maintenance license revenue
Canada 3,268 3,303	(35)	-1%
United States 4,061 3,429	632	18%
South America 2,247 1,884	363	19%
Eastern Hemisphere(1) 5,957 4,959	998	20%
15,533 13,575	1,958	14%
Perpetual license revenue
Canada - -	-	0%
United States - 180	(180)	-100%
South America - -	-	0%
Eastern Hemisphere 518 1,317	(799)	-61%
518 1,497	(979)	-65%
Total software license revenue
Canada 3,268 3,303	(35)	-1%
United States 4,061 3,609	452	13%
South America 2,247 1,884	363	19%
Eastern Hemisphere 6,475 6,276	199	3%
16,051 15,072	979	6%
Nine months ended December 31, 2022 2021	$ change	% change
($ thousands)
Annuity/maintenance license revenue
Canada 9,399 9,425	(26)	0%
United States 11,115 9,502	1,613	17%
South America 5,840 5,195	645	12%
Eastern Hemisphere(1) 17,533 14,978	2,555	17%
43,887 39,100	4,787	12%
Perpetual license revenue
Canada - -	-	0%
United States 157 401	(244)	-61%
South America - -	-	0%
Eastern Hemisphere 1,527 2,067	(540)	-26%
1,684 2,468	(784)	-32%
Total software license revenue
Canada 9,399 9,425	(26)	0%
United States 11,272 9,903	1,369	14%
South America 5,840 5,195	645	12%
Eastern Hemisphere 19,060 17,045	2,015	12%
45,571 41,568	4,003	10%

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

During the three and nine months ended December 31, 2022, compared to the same periods of the previous fiscal year, total software license revenue increased in all regions except Canada.

The Canadian region’s (representing 22% of year-to-date total software license revenue) annuity/maintenance revenue remained consistent during the three and nine months ended December 31, 2022, compared to the same periods of the previous

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fiscal year, due to the region continuing to be negatively affected by consolidation activity that started affecting its annuity/maintenance revenue in the first quarter of the current fiscal year.

The United States (representing 25% of year-to-date total software license revenue) experienced increases of 18% and 17% in annuity/maintenance license revenue during the three and nine months ended December 31, 2022, respectively, due to new customers, including those within the carbon capture and storage industry, and increased licensing by existing customers.

South America (representing 13% of year-to-date total software license revenue) experienced increases of 19% and 12% in annuity/maintenance license revenue during the three and nine months ended December 31, 2022, respectively, due to increased licensing by new and existing customers as well as due to a multi-year lease that commenced in the second quarter of the previous fiscal year.

The Eastern Hemisphere (representing 40% of year-to-date total software license revenue) experienced increases of 20% and 17% in annuity/maintenance license revenue during the three and nine months ended December 31, 2022, respectively, due to increased license fees as well as increased licensing by existing customers, and the addition of new customers, including new customers in the carbon capture and storage industry in Europe. Perpetual revenue decreased by 61% and 26%, respectively, during the three and nine months ended December 31, 2022, relative to the same period of the previous fiscal year.

As footnoted in the Quarterly Software License Revenue graph, during 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:

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Management’s Discussion & Analysis

Quarterly Software License Revenue

($ thousands)

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(1) Q4 of fiscal 2018 includes $0.6 million in revenue that pertains to usage of CMG’s products in prior quarters.

(2) 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.

(3) 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.

(4) Q1, Q2, Q3 and Q4 of fiscal 2021 include $0.2 million, $0.2 million, $nil and $1.1 million, respectively, in revenue that pertains to usage of CMG’s products in prior quarters.

• (5) Q1, Q2, Q3 and Q4 of fiscal 2022 include $nil, $0.5 million, $nil and $0.8 million, respectively, in revenue that pertains to usage of CMG’s products in prior quarters.

(6) Q1, Q2 and Q3 of fiscal 2023 include $0.2 million, $0.3 million and $0.3 million, respectively, in revenue that pertains to usage of CMG’s products in prior quarters.

Deferred Revenue

($ thousands) Fiscal 2023 Fiscal 2022 Fiscal 2021	$ change	% change
Deferred revenue at:
Q1 (June 30) 24,409 23,451	958	4%
Q2 (September 30) 24,164 21,242	2,922	14%
Q3 (December 31) 26,717 23,056	3,661	16%
Q4(March 31) 30,454 30,461	(7)	0%

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

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Computer Modelling Group Ltd.

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 2023 was 16% higher than Q3 of fiscal 2022 with only minor impact of timing differences on the balance.

Professional Services Revenue

Professional services revenue for the three and nine months ended December 31, 2022 was $3.3 million and $8.0 million which represents the increases of 69% and 37%, respectively, compared to the same periods of the previous fiscal year. These increases were due to increased revenue from consulting projects and due to receiving development funding from Kongsberg Digital (“Kongsberg”). During the quarter, CMG entered into a joint development agreement with Kongsberg to research and develop a new technology focused on carbon capture and storage.

Professional services revenue consists of specialized consulting, training, and contract research activities. CMG performs consulting and contract research activities on an ongoing basis. 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, 2022 2021	$ change	% change
($ thousands)
Sales, marketing and professional services 4,111 3,810	301	8%
Research and development 4,160 3,926	234	6%
General and administrative 2,686 1,554	1,132	73%
Total operatingexpenses 10,957 9,290	1,667	18%
Direct employee costs(1) 8,304 7,054	1,250	18%
Other corporate costs(1) 2,653 2,236	417	19%
10,957 9,290	1,667	18%
Nine months ended December 31, 2022 2021	$ change	% change
($ thousands)
Sales, marketing and professional services 11,574 11,062	512	5%
Research and development 13,484 12,599	885	7%
General and administrative 9,572 4,979	4,593	92%
Total operatingexpenses 34,630 28,640	5,990	21%
Direct employee costs(1) 26,748 22,703	4,045	18%
Other corporate costs(1) 7,882 5,937	1,945	33%
34,630 28,640	5,990	21%

(1) This is a non-IFRS financial measure. See the “Non-IFRS Financial Measures” section.

Adjusted total operating expenses, adjusted direct employee costs and adjusted other corporate costs are non-IFRS financial measures. They do not have a standard meaning prescribed by IFRS and, accordingly, may not be comparable to measures used by other companies. They are calculated by excluding CEWS subsidies, CERS subsidies and restructuring charges, as applicable, from the related non-adjusted measures. Management believes that analyzing the Company’s expenses exclusive of these items illustrates underlying trends in our costs and provides better comparability between periods.

Q3 2023

Computer Modelling Group Ltd.

10

Management’s Discussion & Analysis

The following tables provide a reconciliation of total operating expenses to adjusted total operating expenses, direct employee costs to adjusted direct employee costs and other corporate costs to adjusted other corporate costs:

Three months ended December 31	2022	2021
($ thousands)
Total operating expenses	10,957	9,290
CEWS	-	259
CERS	-	140
Adjusted total operatingexpenses	10,957	9,689
Direct employee costs	8,304	7,054
CEWS	-	259
Adjusted direct employee costs	8,304	7,313
Other corporate costs	2,653	2,236
CERS	-	140
Adjusted other corporate costs	2,653	2,376
Nine months ended December 31	2022	2021
($thousands)
Total operating expenses	34,630	28,640
CEWS	-	583
CERS	-	183
Restructuring charge	(3,943)	(851)
Adjusted totaloperating expenses	30,687	28,555
Direct employee costs	26,748	22,703
CEWS	-	583
Restructuring charge	(3,771)	(851)
Adjusted direct employee costs	22,977	22,435
Other corporate costs	7,882	5,937
CERS	-	183
Restructuring charge	(172)	-
Adjusted other corporate costs	7,710	6,120

Total operating expenses for the three and nine months ended December 31, 2022 increased by 18% and 21%, respectively, compared to the same periods of the previous fiscal year. Adjusted total operating expenses increased by 13% and 7%, respectively, for the three and nine months ended December 31, 2022, compared to the same periods of the previous fiscal year.

Direct Employee Costs

As a technology company, CMG’s largest investment is its people, and approximately 77% of total operating expenses during the nine months ending December 31, 2022 relate to direct employee costs (nine months ended December 31, 2021 – 80%).

In May 2022, Ryan Schneider stepped down as the Company’s President and CEO and Pramod Jain was appointed CEO. This change resulted in restructuring costs of $1.6 million in the first quarter of the current fiscal year. During the second quarter of the current fiscal year, the Company restructured primarily its Calgary office, resulting in additional restructuring costs of $2.3

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million in the second quarter and bringing the total restructuring charges for the fiscal year to $3.9 million. The restructuring that occurred in the second quarter was mainly aimed at streamlining operations to align resources with the Company’s priorities. This prioritization will allow the Company to strengthen other business operations that are necessary for the Company to be responsive, resilient and able to adapt more quickly to changing business priorities.

The restructuring decreased our headcount and at December 31, 2022, CMG’s full-time equivalent staff complement was 164 employees and consultants (December 31, 2021 – 178 employees).

In the three months ended December 31, 2022, adjusted direct employee costs increased by 14% due to increased variable compensation expense as well as a result of increased stock-based compensation expense due to the increase in share price during the current quarter. In the nine months ended December 31, 2022, adjusted direct employee costs increased by 2% due to the increase in direct employee costs experienced during the current quarter.

Other Corporate Costs

Adjusted other corporate costs increased by 12% and 26% for the three and nine months ended December 31, 2022, respectively, compared to the same periods of the previous fiscal year, primarily due to higher professional services costs and travel-related costs.

Research and Development

Three months ended December 31, 2022 2021	$ change	% change
($ thousands)
Research and development, net of government grants 4,278 4,104	174	4%
SR&ED credits (118) (178)	60	34%
Research and development 4,160 3,926	234	6%
Research and development as a % of total revenue 21% 23%
Nine months ended December 31, 2022 2021	$ change	% change
($ thousands)
Research and development, net of government grants 14,002 13,263	739	6%
SR&ED credits (518) (664)	146	22%
Research and development 13,484 12,599	885	7%
Research and development as a % of total revenue 25% 27%

CMG works closely with its customers to provide solutions to complex problems related to proven and new advanced recovery processes through investment in research and development.

The above research and development costs include $1.7 million and $5.5 million of costs for CoFlow for the three and nine months ended December 31, 2022, respectively, consistent with $1.8 million and $5.6 million in the same periods of the previous fiscal year. See discussion under “Commitments, Off Balance Sheet Items and Transactions with Related Parties”.

Research and development costs for the three months ended December 31, 2022 increased by 6%, compared to the same period of the previous fiscal year, as a result of the increase in direct employee costs due to increased stock-based compensation expense during the quarter. In the nine months ended December 31, 2022 research and development costs increased by 7%, compared to the same period of the previous fiscal year, primarily due to higher restructuring costs incurred in the current fiscal year compared to the previous fiscal year, partially offset by CEWS benefits received during the previous fiscal year which did not occur in the current fiscal year, and fewer full-time employees during the current fiscal year.

Q3 2023

Computer Modelling Group Ltd.

12

Management’s Discussion & Analysis

Depreciation

Three months ended December 31, 2022 2021	$ change	% change
($ thousands)
Depreciation of property and equipment, allocated to:
Sales, marketing and professional services 192 233	(41)	-18%
Research and development 538 719	(181)	-25%
General and administrative 135 136	(1)	-1%
Total depreciation 865 1,088	(223)	-20%
Nine months ended December 31, 2022 2021	$ change	% change
($ thousands)
Depreciation of property and equipment, allocated to:
Sales, marketing and professional services 623 669	(46)	-7%
Research and development 1,746 2,066	(320)	-15%
General and administrative 364 409	(45)	-11%
Total depreciation 2,733 3,144	(411)	-13%

Depreciation for the three and nine months ended December 31, 2022 decreased by 20% and 13%, respectively, compared to the same periods of the previous fiscal year.

Finance Income and Costs

Three months ended December 31, 2022 2021	$ change	% change
($ thousands)
Interest income 548 115	433	377%
Total finance income 548 115	433	377%
	(18) 91	-4% 152%
Interest expense on lease liability (482) (500)
Net foreign exchange loss (151) (60)
Total finance costs (633) (560)	73	13%
Nine months ended December 31, 2022 2021	$ change	% change
($ thousands)
Interest income 1,105 339	766	226%
Net foreign exchangegain 923 -	923	100%
Total finance income 2,028 339	1,689	498%
	(52) (139)	-3% -100%
Interest expense on lease liability (1,458) (1,510)
Net foreign exchange loss - (139)
Total finance costs (1,458) (1,649)	(191)	-12%

Interest income for the three and nine months ended December 31, 2022 was significantly higher compared to the same periods of the previous fiscal year, mainly due to higher interest rates.

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Q3 2023

Computer Modelling Group Ltd.

Interest expense on the lease liabilities for the three and nine months ended December 31, 2022 was consistent with the comparative period.

CMG is impacted by foreign exchange fluctuations, as 70% of CMG’s revenue for the nine months ended December 31, 2022 (2021 – 69%) is denominated in US dollars, whereas only 22% (2021 – 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, 2022, 2021 and 2020 and the average exchange rate used to translate income statement expense items during the nine months ended December 31, 2022, 2021 and 2020:

CDN$ to US$ At June 30 At September 30 At December 31	Nine month trailingaverage
2020 0.7338 0.7497 0.7854 2021 0.8068 0.7849 0.7888	0.7408 0.8015
2022 0.7744 0.7302 0.7370	0.7581

CMG recorded a net foreign exchange loss of $0.6 million for the three months ended December 31, 2022, due to a weakening of the US dollar during the quarter, which negatively affected the valuation of the USD- denominated portion of the Company’s working capital. For the nine months ended December 31, 2022, CMG recorded a net foreign exchange gain of $0.5 million due strengthening of the US dollar during the period.

Income and Other Taxes

CMG’s effective tax rate for the nine months ended December 31, 2022 is 25.4% (2021 – 22.9%), whereas the Canadian statutory tax rate for the Company’s 2023 fiscal year is 23% (December 31, 2021 – 23%). The difference between the effective rate and the statutory rate is primarily due to the non-tax deductibility of stock-based compensation expense.

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

Operating Profit and Net Income
Three months ended December 31, 2022 2021	$ change	% change
($ thousands, exceptper share data)
Total revenue 19,392 17,045	2,347	14% -18%
Operatingexpenses (10,957) (9,290)	(1,667)
Operating profit 8,435 7,755	680	9%
Operating profit as a % of revenue 43% 45%
Net income 6,348 5,574	774	14%
Net income as a % of total revenue 33% 33%
Basic earningsper share($/share) 0.08 0.07	0.01	14%

Q3 2023

Computer Modelling Group Ltd.

14

Management’s Discussion & Analysis

Nine months ended December 31, 2022 2021	$ change	% change
($ thousands, exceptper share data)
Total revenue 53,581 47,408	6,173	13% -21%
Operatingexpenses (34,630) (28,640)	(5,990)
Operating profit 18,951 18,768	183	1%
Operating profit as a % of revenue 35% 40%
Net income 14,571 13,453	1,118	8%
Net income as a % of total revenue 27% 28%
Basic earningsper share($/share) 0.18 0.17	0.01	6%

Adjusted operating profit and adjusted net income are non-IFRS financial measures. They do not have a standard meaning prescribed by IFRS and, accordingly, may not be comparable to measures used by other companies. Adjusted operating profit is calculated as operating profit excluding CEWS and CERS subsidies and restructuring charges. Adjusted net income is calculated as net income excluding tax-affected CEWS and CERS subsidies and restructuring charges. Management believes that analyzing the Company’s performance exclusive of these items illustrates underlying trends in our business and provides better comparability between periods.

The following table provides a reconciliation of operating profit to adjusted operating profit and net income to adjusted net income:

Three months ended December 31, ($thousands)	2022 2021
Operating profit CEWS CERS	8,435 7,755 - (259) - (140)
Adjusted operating profit Adjusted operating profit as a % of revenue	8,435 7,356 43% 43%
Net income CEWS CERS Tax impact of adjustingitems	6,348 5,574 - (259) - (140) - 91
Adjusted net income Adjusted net income as a % of total revenue	6,348 5,266 33% 31%

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Q3 2023

Computer Modelling Group Ltd.

Nine months ended December 31, ($thousands)	2022 2021
Operating profit CEWS CERS Restructuringcharge	18,951 18,768 - (583) - (183) 3,943 851
Adjusted operating profit Adjusted operating profit as a % of revenue	22,894 18,853 43% 40%
Net income CEWS CERS Restructuring charge Tax impact of adjustingitems	14,571 13,453 - (583) - (183) 3,943 851 (907) (20)
Adjusted net income Adjusted net income as a % of total revenue	17,607 13,518 33% 29%

Operating profit as a percentage of total revenue for the three months ended December 31, 2022 was 43%, down from 45% in the comparative quarter. Adjusted operating profit was 43%, consistent with the comparative quarter, due to an increase in revenue, partially offset by an increase in operating expenses.

Operating profit as a percentage of total revenue for the nine months ended December 31, 2022 was 35%, down from 40% in the comparative quarter. Adjusted operating profit was 43%, up from 40% in the comparative quarter, due to an increase in revenue, partially offset by a lower increase in operating expenses.

Net income as a percentage of total revenue for the three months ended December 31, 2022 was 33%, consistent with the comparative quarter. Adjusted net income as a percentage of total revenue was 33% in the current quarter, up from 31% in the comparative quarter, due to an increase in revenues, partially offset by a lower increase in operating expenses.

Net income as a percentage of total revenue for the nine months ended December 31, 2022 was 27%, down from 28% in the comparative period. Adjusted net income as a percentage of total revenue was 33% in the current period, up from 29% in the comparative period, primarily due to the same factors impacting adjusted operating profit and higher foreign exchange gains in the current period relative to the comparative period as a result of the impact of a stronger US dollar on CMG’s earnings.

Q3 2023

Computer Modelling Group Ltd.

16

Management’s Discussion & Analysis

Adjusted EBITDA[(1) ]

Adjusted EBITDA(1)
Three months ended December 31, 2022 2021 $ change	% change
($ thousands)
Net income 6,348 5,574 774	14%
Add (deduct):
Depreciation 865 1,088 (223)	-20%
Finance (income) costs 85 445 (360)	-81%
Income and other taxes 2,002 1,736 266	15%
EBITDA(1) 9,300 8,843 457	5%
Add (deduct):
CEWS - (259) 259	100%
CERS - (140) 140	100%
Adjusted EBITDA(1) 9,300 8,444 856	10%
Adjusted EBITDA(1)as a % of total revenue 48% 50%
Nine months ended December 31, 2022 2021 $ change	% change
($ thousands)
Net income 14,571 13,453 1,118	8%
Add (deduct):
Depreciation 2,733 3,144 (411)	-13%
Finance (income) costs (570) 1,310 (1,880)	-144%
Income and other taxes 4,950 4,005 945	24%
EBITDA(1) 21,684 21,912 (228)	-1%
Add (deduct):
CEWS - (583) 583	-100%
CERS - (183) 183	-100%
Restructuringcharge 3,943 851 3,092	363%
Adjusted EBITDA(1) 25,627 21,997 3,630	17%
Adjusted EBITDA(1)as a % of total revenue 48% 46%

(1) This is a non-IFRS financial measure. See the “Non-IFRS Financial Measures” section.

Adjusted EBITDA as a percentage of total revenue for the three and nine months ended December 31,2022 was 48% for both periods, compared to 50% and 46% in the same periods of the previous fiscal year, primarily due to the same factors impacting adjusted operating profit.

Liquidity and Capital Resources

Liquidity and Capital Resources
Three months ended December 31, 2022 2021	$ change	% change
($ thousands)
Cash, beginning of period 56,859 48,012	8,847	18%
Cash provided by (used in):
Operating activities 7,657 4,527	3,130	69%
Financing activities (4,419) (4,331)	(88)	-2%
Investingactivities (211) (481)	270	56%
Cash, end ofperiod 59,886 47,727	12,159	25%

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Q3 2023

Computer Modelling Group Ltd.

Nine months ended December 31, 2022 2021	$ change	% change
($ thousands)
Cash, beginning of period 59,660 49,068	10,592	22%
Cash provided by (used in):
Operating activities 13,255 12,245	1,010	8%
Financing activities (12,688) (12,945)	257	2%
Investingactivities (341) (641)	300	47%
Cash, end ofperiod 59,886 47,727	12,159	25%

At December 31, 2022, CMG had $59.9 million in cash, no borrowings and access to approximately $0.9 million under a line of credit with its principal banker. The Company’s primary non-operating use of cash is dividend payments. Management believes that the Company has sufficient capital resources to meet its operating and capital expenditure needs.

During the nine months ended December 31, 2022, 11.2 million shares of CMG’s public float were traded on the TSX. As at December 31, 2022, CMG’s market capitalization based upon its December 31, 2022 closing price of $5.83 was $469.4 million.

Operating Activities

Cash provided by operating activities increased by $3.1 million during the three months ended December 31, 2022, compared to the same period of the previous fiscal year. The increase is mainly due to higher funds flow from operations as a result of higher revenues and changes in non-cash working capital.

Cash provided by operating activities increased by $1.0 million during the nine months ended December 31, 2022, compared to the same period of the previous fiscal year due to higher revenue.

Financing Activities

Cash used in financing activities during the three and nine months ended December 31, 2022 was comparable with the amounts in the same period of the previous fiscal year.

In the nine months ended December 31, 2022, CMG paid $12.1 million in dividends, representing the following quarterly dividends:

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

In the nine months ended December 31, 2021, CMG paid $12.0 million in dividends, representing the following quarterly dividends:

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

On February 8, 2023, 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, 2023 to shareholders of record at the close of business on March 7, 2023. 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 investing activities consist of capital asset additions, all which are funded internally. During the nine months ended December 31, 2022, CMG’s capital asset additions were composed of computer equipment and totalled $0.3 million, a

Q3 2023

Computer Modelling Group Ltd.

18

Management’s Discussion & Analysis

decrease compared to $0.6 million in the same period of the previous fiscal year. CMG’s revised capital budget for fiscal 2023 is $1.5 million.

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”) for 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.

CMG has only minor 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, 2022:

(thousands of $) Undiscounted lease liability payments	Operating costs and short-term leases	Total commitments
Less than one year 3,670	1,096	4,766
Between one and five years 13,815	4,332	18,147
More than fiveyears 37,209	10,379	47,588
54,694	15,807	70,501

Business Risks, Critical Accounting Estimates and Judgments

These remain unchanged from the factors detailed in CMG’s 2022 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, 2023
(thousands)
Common shares	80,511
Stock options	5,332
Restricted share units(1)	564
Performance share units(1)	84

(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, 2023, CMG could reserve up to 8,051,067 common shares for issuance under its security-based compensation plans.

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Q3 2023

Computer Modelling Group Ltd.

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 2022 in accordance with the COSO control framework (2013). The evaluation confirmed the effectiveness of DC&P and ICFR at March 31, 2022. During the 2023 fiscal year, we continue to monitor and review our controls and procedures.

During the three months ended December 31, 2022, 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.

Quarterly Summary

Fiscal 2023 continues to be positive, with the strengthening fundamentals across the oil and gas sector, and new opportunities created by demand for energy transition projects.

During the three and nine months ended December 31, 2022, CMG’s annuity/maintenance revenue increased by 14% and 12%, respectively, compared to the same periods of the previous fiscal year, continuing the trend of comparative quarterly increases that started in the third quarter of the previous fiscal year, supported by improved industry conditions.

Geographically, all regions saw increases in annuity/maintenance revenue, except Canada which remained flat, due to the addition of new customers, including carbon capture and storage companies, increased license fees and increased licensing by some existing customers.

Perpetual license revenue decreased by 65% and 32% during the three and nine months ended December 31, 2022, compared to the same periods of the prior fiscal year, primarily due to lower perpetual license sales in the Eastern Hemisphere.

During nine months ended December 31, 2022, CMG’s expenses were impacted by restructuring charges of $3.9 million, which resulted in reduced full-time equivalent staff compared to the same period of the previous fiscal year. The Company made these changes to concentrate the focus of our research and development activities into the areas with the potential to deliver the greatest value to our customers and have the greatest commercial impact on the business. This allows the Company to reinvest to strengthen other business operations that are necessary to support our growth strategy without materially altering the current cost structure. When adjusted for the restructuring charges, as well as CEWS and CERS subsidies in the comparative periods of the previous year, total operating expenses increased by 13% and 7% in the three and nine months ended December 31, 2022, respectively, due to increases in professional services and travel costs as COVID-19 related travel restrictions eased.

Adjusted operating profit margins were 43% and 43% during the three and nine months ended December 31, 2022, respectively, compared to 43% and 40% during the same periods in the previous fiscal year which is reflective of CMG’s continuous cost management. Basic earnings per share were $0.08 and $0.18 for the three and nine months ended December 31, 2022, compared to $0.07 and $0.17 recorded in the same periods of the previous fiscal year.

CMG maintains a strong financial position and closed the period with $59.9 million of cash and no debt. Despite the restructuring charges and the increase in professional fees year-to-date, CMG generated $0.09 and $0.20 per share of free cash flow for the three and nine months ended December 31, 2022, respectively, representing a slight increase compared to the same periods of fiscal 2022.

Q3 2023

Computer Modelling Group Ltd.

20