SOLIUM CAPITAL INC. MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE QUARTER ENDED MARCH 31, 2018

Transcription

1 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE QUARTER ENDED MARCH 31, 2018 This Management s Discussion and Analysis ( MD&A ) of Solium Capital Inc. ( Solium or the Company ) for the quarter ended March 31, 2018 is dated May 8, This MD&A should be read in conjunction with the unaudited Condensed Consolidated Interim Financial Statements and the accompanying notes for the quarter ended March 31, 2018, the Company s audited Consolidated Financial Statements and the accompanying notes for the year ended December 31, 2017, and the Company s 2017 annual MD&A. The unaudited Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Additional information relating to the Company, including the Company s annual information form ( AIF ) for the year ended December 31, 2017, is available on SEDAR at under Solium Capital Inc. All dollar amounts discussed in the MD&A are in U.S. dollars unless otherwise specified. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements included or incorporated by reference in this MD&A constitute forward-looking statements or forward-looking information under applicable securities legislation. Forward-looking statements or information typically contain statements with words such as "anticipate", "believe", "expect", "plan", "intend", "estimate", "propose", or similar words suggesting future outcomes or statements regarding an outlook. Forward-looking statements or information in this MD&A include but are not limited to expectations regarding future revenues, earnings, capital expenditures and the funding thereof, and operating and other costs; the expectation that the Company will not suffer significant credit losses; business strategy and objectives; the sufficiency of cash and working capital for future operations and growth strategies; the potential impact of critical accounting estimates and judgements on the Company s consolidated financial statements; the projects with Morgan Stanley and UBS Financial Services Inc. including the revenue anticipated to be derived there from, the financial impact of new hires and plans to hire additional employees; the anticipated timing of completing migrating the Morgan Stanley and UBS customers onto Shareworks; the Company s investment strategy, including plans to commit additional resources to the Solium Analytics LLC, Capshare Inc. and Advanced-HR businesses, the Company s acquisition strategy and the Company s ability to compete in the private company market. Such forward-looking statements or information are based on a number of assumptions which may prove to be incorrect. In addition to other assumptions identified in this MD&A, assumptions have been made regarding, among other things, the Company's transition to new products and releases; the number of customer transactions; the length of the sales cycles; the competitive environment; the ability to maintain or accurately forecast revenue from the Company's products or services; the ability of the Company to identify, hire, train, motivate and retain qualified personnel; currency fluctuations; the ability of the Company to develop, introduce and implement new products as well as enhancements or improvements for existing products that respond, in a timely fashion, to customer/product requirements and rapid technological change; risks associated with operations; the impact of any changes in the laws and regulations in the jurisdictions in which the Company operates; the effect of new accounting pronouncements or guidance; and the Company s ability to realize the anticipated benefits from its investments in the partnerships with Morgan Stanley and UBS Financial Services Inc. and its investments to accelerate its position in the private company market. Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements or information because the Company can give no assurance that such expectations will prove to be correct. The forward-looking statements and information are based on Solium s current expectations, estimates and projections, and are subject to a number of significant risks and uncertainties that could cause actual results to differ materially from those anticipated. Such risks and uncertainties include, among others, general business and economic conditions; the overall performance of stock market(s); actions of competitors and partners; the regulatory environment; the corporate governance environment and regulatory reporting requirements for Solium s clients; product capability and acceptance; the Company s ability to generate Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 1

2 sufficient cash flow from operations to meet its current and future obligations; and the Company s ability to access external sources of financing if required. A more detailed assessment of the risks that could cause actual results to materially differ from current expectations is contained in the Risk Assessment section of this MD&A and in the Company s AIF. The foregoing is not exhaustive and other risks are detailed from time to time in other continuous disclosure filings of the Company. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements or information prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. These forward-looking statements contained herein are made as of the date of this MD&A. The Company does not intend to nor does it assume any obligation to update publicly or to revise any of the forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required by law. OVERVIEW OF THE COMPANY Solium Capital Inc. (TSX: SUM) provides cloud-enabled services for global equity-based incentive plans including administration, financial reporting and compliance. From offices in the United States, Canada, Europe, Australia, and Hong Kong, the Company s innovative software-as-a-service (SaaS) technology powers share plan administration and equity transactions for more than 3,000 corporate clients with employee participants in more than 100 countries. Solium s Shareworks platform provides functionality that streamlines a corporation s workflow relating to the issuance of equity incentives, the exercise of incentives, reporting of incentives and day-to-day maintenance of the incentives database. The technology provides constant online access to reports for securities regulators, internal management and financial disclosure purposes. Solium s solutions empower plan participants of corporations by providing them with online access to review their stock incentive portfolios from any internet-connected computer or mobile device, anywhere in the world. Plan participants have access to the financial markets through Solium s direct connection to its brokerage partners. Solium s private company solutions include capitalization table management, valuation services, compensation data and compensation planning tools. Revenue is primarily earned on a recurring basis through Solium s multiple sales channels (direct sales, white-label partners, and other third party channel partners). Through these channels, revenue is derived from corporate clients, and the equity transaction activities of their associated employee plan participants. From corporate clients and whitelabel partners, Solium receives recurring access, subscription or maintenance fees. From share transaction activity, revenue is received from participants in the form of transaction and money movement fees, foreign exchange services, and fees that are based on the share transactions executed by the brokerage partners for Solium s participants. In addition, the Company receives one-time (non-recurring) revenue for the implementation of plans for new clients onto the system, ad hoc customization and consulting. Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 2

3 OVERALL PERFORMANCE Revenue increased to $26.1 million for the first quarter of 2018 (2017: $21.2 million). Adjusted EBITDA (a) was $3.5 million for the first quarter of 2018 (2017: $5.0 million). (a) Adjusted EBITDA is a non-ifrs financial measure. A reconciliation of the adjusted EBITDA to net earnings is found under Summary of Quarterly Results in this MD&A. The key factors affecting the results for the quarter ended March 31, 2018 were: License revenue License and subscription fees increased by $3.5 million or 27% during the first quarter of 2018, as compared to the same period in Based on local currencies, the growth was 22% as compared to Growth in license revenue is largely driven by the U.S. white label agreements, organic growth from new sales in all regions, revenue from the acquired Capshare business and migration of customers from NASDAQ Private Market, LLC to Solium. Transaction activity In addition to the recurring license revenue that Solium collects for the use of its Shareworks platform, the Company also collects re-occurring transaction based revenue. Transaction based revenue increased by $1.0 million or 14% during the first quarter of 2018, as compared to the same period in The per-participant trading activity was 3% higher in the first quarter of 2018 compared to the same period in 2017 and 7% higher than the historical five-year Q1 average. Operating costs Operating expenses increased by $7.5 million or 42% during the first quarter of 2018, as compared to the same period in The increase is primarily as a result of planned hiring to support the U.S. white label agreements and the acquisition of Capshare. The Company had 713 full-time equivalent employees (FTEs) at the end of the first quarter of 2018 compared to 553 FTEs at the end of the first quarter of Acquisition: In February 2018, the Company acquired Advanced-HR, a U.S. company that provides compensation data and compensation planning software for private and venture backed companies. Advanced-HR provides compensation data through its products OptionDriver and OptionImpact to over 2,500 private companies and 120 venture capital firms. Changes in significant accounting policies: The Company has adopted IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases effective January 1, IFRS 9 Financial Instruments is also effective from January 1, 2018 but does not have an impact on the Company s financial information. For more information, refer to note 3 of the Company s Condensed Consolidated Interim Financial Statements for the three months ended March 31, Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 3

4 Results during the quarter ended March 31, 2018 compared to the results from the quarter ended March 31, 2017 are as follows (in thousands of U.S. dollars except per share amounts): Three Months Ended March 31, 2018 $ 2017 $ % Change Revenue 26,094 21,236 23% Operating expenses 25,316 17,852 42% Adjusted EBITDA (a) 3,476 4,954 (30%) Earnings from operations 778 3,384 (77%) Net earnings 1,278 2,539 (50%) Net earnings per share Basic (55%) Diluted (56%) RESULTS FROM OPERATIONS Currently included in the International reportable segment are the results relating to the U.K., Europe, Australia, and Hong Kong operations. Summary of results by geographic segment during the quarter ended March 31, 2018 are as follows: Three Months Ended March 31, Canada U.S. International Consolidated Revenues 8,576 7,987 13,132 9,626 4,386 3,623 26,094 21,236 Adjusted EBITDA (a) 2,433 2, , ,476 4,954 Adjusted EBITDA % (a) 28% 30% 5% 25% 10% 4% 13% 23% Earnings (loss) from operations 1,394 1,843 (588) 1,568 (28) (27) 778 3,384 (a) Adjusted EBITDA is a non-ifrs financial measure. A reconciliation of the adjusted EBITDA to net earnings is found under Summary of Quarterly Results in this MD&A. Revenue Revenue increased by 23% to $26.1 million in the first quarter of 2018 (2017: $21.2 million). This represents an increase of $4.9 million over the results from the first quarter of Canadian revenue increased by 7% to $8.6 million in the first quarter of 2018 (2017: $8.0 million). Revenue increased between the comparable periods due to an increase in license and subscription fees primarily driven by organic growth. U.S. revenue increased by 36% to $13.1 million in the first quarter of 2018 (2017: $9.6 million). Revenue increased between the comparable periods due to higher license and subscription fees, as well as higher transaction based revenue. The increase in license and subscription fees is largely driven by the U.S. white label agreements and revenue from the acquired business Capshare. International revenue increased by 21% to $4.4 million in the first quarter of 2018 (2017: $3.6 million). Revenue increased between the comparable periods due to growth in license and subscription fees and higher transaction based revenue. Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 4

5 Expenses Operating expenses were $25.3 million in the first quarter of 2018 (2017: $17.9 million). Operating expenses increased over the same period in 2017 due to planned hiring to support the U.S. white label agreements and the acquisition of Capshare. Finance Income and Costs Finance income of $0.3 million was recorded during the first quarter of 2018 (2017: $0.2 million), representing the interest earned on cash and term deposits, partially offset by the accretion of interest expense from lease liabilities during the three months ended March 31, Foreign Exchange Gain or Loss A foreign exchange gain of $1.0 million was recorded during the first quarter of 2018 (2017: $0.4 million). The gain or loss predominantly represents unrealized translation gains or losses on foreign currency denominated cash, trade receivables and payables, and intercompany receivables held by the Canadian parent company as at March 31, A gain primarily reflects the weakening of the CAD against foreign currencies during the period, while a loss represents the strengthening of the CAD against such currencies. Income Taxes $0.8 million of income tax expense was recorded in the first quarter of 2018 (2017: $1.4 million). The effective income tax rate relative to earnings before income taxes was 38.7% in the first quarter of 2018, an increase from 36.0% in the first quarter of The effective income tax rate increased compared to the first quarter of 2017 mainly due to the following factors: 1) a decrease in U.K. earnings before income taxes, resulting in a decrease in the utilization of U.K. tax losses that were previously unrecognized; 2) an increase in Canadian and U.S. permanent items as a proportion of consolidated earnings before income taxes; and partially offset by 3) a decrease in the U.S. statutory corporate income tax rate as a result of U.S. tax reform. Other Comprehensive Income An unrealized foreign currency translation loss of $2.3 million was recorded during the first quarter of 2018 (2017: gain $0.6 million) resulting from the translation of the Company s assets and liabilities in its Canadian, U.K., European, Australian, and Hong Kong operations to USD. A gain primarily reflects the strengthening of the foreign currencies against the USD during the period, while a loss represents the weakening of the foreign currencies against the USD. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash and Cash Equivalents and Working Capital Cash and cash equivalents on hand as at March 31, 2018 was $87.0 million (December 31, 2017: $100.2 million). Working capital including cash and cash equivalents as at March 31, 2018 was $85.2 million (December 31, 2017: $93.8 million). Included in working capital is trade and other receivables of $18.6 million (December 31, 2017: $15.0 million) and trade payables and other accruals of $8.8 million (December 31, 2017: $12.2 million). Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 5

6 Cash Flows During the three month period ended March 31, 2018, the Company had an overall decrease to cash and cash equivalents of $13.2 million (2017: increase $1.1 million). Changes in working capital, cash interest paid and cash tax payments, net of refund, brought total cash used in operating activities to $3.6 million during the three month period ended March 31, 2018 (2017: cash inflow $1.5 million). Cash from financing activities was nil for the three month period ended March 31, 2018 (2017: $0.2 million) as a result of the issuance of common shares from employee stock option exercises offset by payment of lease liabilities. Cash outflow from investing activities was $7.6 million for the three month period ended March 31, 2018 (2017: $1.2 million), the outflow is primarily as a result of the Advanced-HR acquisition. Liquidity In addition to cash and cash equivalents and non-cash working capital discussed above, the Company has a $15 million CAD undrawn revolving credit facility. The Company believes it will generate sufficient cash and working capital from operations to fund ongoing operations and growth strategies. Contractual Obligations Payments Due by Fiscal Period ($000 s) Total and thereafter Leases 17,151 1,347 1,987 1,788 1,743 10,286 Trade payables and other accruals was $8.8 million as at March 31, Capital Expenditures Capital expenditures of $0.6 million for the three month period ended March 31, 2018 (2017: $1.1 million) were comprised of computer hardware and computer software, as well as leasehold improvements and office furniture for the new U.K. and U.S. offices. It is expected that ongoing capital expenditures will be financed from funds generated by operating activities. Capital Resources Current economic conditions have not caused a change in the Company s objectives, policies or procedures for managing capital. The Company has regulated subsidiaries that are required to maintain a minimum cash or short term investment balance, or a net capital requirement. As at March 31, 2018, the subsidiaries held more than the required amount of cash or short term investments, and met the net capital requirement. Share Capital As at March 31, 2018, the Company had 55,923,937 outstanding common shares. Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 6

7 SUMMARY OF QUARTERLY RESULTS (In thousands of U.S. dollars except per share amount) The following table summarizes the quarterly results for the eight most recently completed quarters (3) (4) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Revenues 2 26,094 22,876 20,542 21,432 21,236 18,876 19,928 19,860 Operating expenses 2 25,316 23,054 19,566 19,450 17,852 17,366 17,847 18,731 Adjusted EBITDA 1, 2 3,476 1,760 2,055 3,712 4,954 3,110 4,387 4,243 Earnings (loss) from operations (178) 976 1,982 3,384 1,510 2,081 1,129 Earnings before income taxes 2 2, ,825 3,969 1,313 2, Net earnings (loss) 2 1,278 (458) (306) 1,583 2, ,857 (49) Net earnings (loss) per share basic 2 diluted 2 Notes: ($0.008) ($0.008) ($0.006) ($0.006) $0.031 $0.031 $0.051 $0.050 $0.016 $0.016 $0.037 $0.037 ($0.001) ($0.001) 1. Earnings before interest, taxes, depreciation and amortization ( EBITDA ) and Adjusted EBITDA are non-ifrs financial measures which do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. EBITDA and Adjusted EBITDA provide useful information to users as they reflect the net earnings prior to the effect of non-operating expenses such as finance income, income taxes, depreciation of property and equipment, depreciation of right of use assets, amortization of intangible assets, amortization of contract costs, foreign exchange gain or loss (on translation of working capital), share-based payments, sales tax adjustment, and change in estimate of scientific research and experimental development ( SRED ) investment tax credits. Management uses Adjusted EBITDA in measuring the financial performance of the Company. Management monitors Adjusted EBITDA against budget and past results on a regular basis. The measure is a component in determining the annual bonus pool for staff and management. The following is a reconciliation of Adjusted EBITDA to net earnings for the eight most recently completed quarters: (4) 2016 (5) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Adjusted EBITDA 3,476 1,760 2,055 3,712 4,954 3,110 4,387 4,243 Foreign exchange gain (loss) (649) (352) 397 (370) 391 (644) Share-based payments (749) (786) (629) (562) (460) (551) (541) (560) Sales tax adjustment included in operating expenses (80) (85) (85) Change in estimate for SRED investment tax credits (683) (1,502) EBITDA 3,703 1,491 1,718 2,798 4,891 2,109 3,469 1,452 Finance income Depreciation of property and equipment (574) (535) (621) (381) (343) (311) (337) (307) Depreciation of right of use assets (449) Amortization of intangible assets (722) (823) (618) (643) (628) (658) (660) (660) Amortization of contract costs (204) (155) (152) (144) (139) Income taxes (806) (832) (856) (242) (1,430) (508) (781) (706) Net earnings (loss) 1,278 (458) (306) 1,583 2, ,857 (49) 2. Comparability of quarterly results is affected by factors such as SRED investment tax credits, fluctuation of foreign currency exchange rates used to translate foreign denominated results into U.S. dollars, share-based payments and sales tax adjustment. See also Factors Contributing to Quarterly Results Participant Activity. 3. Financial information has been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. 4. Financial information for 2017 has been restated for the adoption of IFRS 15, no restatement for IFRS Financial information for 2016 has not been restated for the adoption of IFRS 15 and IFRS 16. Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 7

8 FACTORS CONTRIBUTING TO QUARTERLY RESULTS Participant Activity The transaction based fees collected from participants are affected by several factors, some of which are seasonal. These factors include: (i) grant vesting dates; (ii) grant termination dates; (iii) the pattern of the Canadian population of making retirement contributions in the first quarter of every year; (iv) the stock trading prices for a corporate client relative to an employee participant s associated option exercise price; and (v) employee participant perceptions of future stock trading prices. Historically, the first three factors contribute to higher transaction based fees in the first quarter of a given year. However, the actual magnitude of transaction based fees for a specific quarter or year is difficult to predict, primarily due to the last two factors. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes can differ from these estimates. The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the consolidated financial statements are: Business combinations The Company accounts for business combinations using the acquisition method, under which it allocates the excess of the purchase price of business acquisitions over the fair value of identifiable net assets acquired to goodwill. One of the most significant estimates relates to the determination of the fair value of the assets and liabilities acquired. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, purchase price allocations are derived from a formal valuation, which, where appropriate, is performed by an independent third party valuation expert. Fair values are determined using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows and are closely linked to the assumptions made by management regarding the future performance of the assets concerned and the discount rate applied. Any goodwill or intangible assets with indefinite useful lives acquired in business combinations are not amortized to income over their useful lives but are assessed annually for any potential impairment in value. All other intangible assets are amortized to operations over their estimated useful lives. The Company s intangible assets relate to acquired technology, brand, customer relationships and non-compete agreements. The Company also reviews the carrying value of amortizable intangible assets for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected from its use and eventual disposition. In assessing the recoverability of these intangible assets, the Company must make assumptions regarding estimated future cash flows, market conditions and other factors to determine the fair value of the assets. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges for these assets. Discount rate for the measurement of lease liability Lease liability is measured at the present value of the lease payments that are not paid at the commencement date. The lease payments are discounted using the implicit interest rate in the lease. If the rate cannot be readily determined, the lessee s incremental rate of borrowing is used. The Company estimates the incremental borrowing rate based on the economic environment, the nature and quality of the asset, the Company s credit rating and other factors. Accrual for scientific research and experimental development credits The Company accrues an estimated reduction to its operating expenses related to SRED credits based on an estimate of eligible expenses under the Canadian government s SRED incentive program. The estimated credits are reviewed periodically and updated if necessary. Where the final amounts of credit are different from the amounts accrued, such differences will affect the operating results in the period in which such determination is made. Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 8

9 Useful lives of property and equipment The Company estimates the useful lives of property and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of property and equipment are based on internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the property and equipment would increase the recorded expenses and decrease the non-current assets. Fair value of financial instruments The estimated fair value of financial assets and liabilities, by their very nature, are subject to measurement uncertainty. Impairment of non-financial assets Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from financial forecasts and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset s performance of the cash generating unit being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. Taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net earnings to the extent they relate to a business combination or are items recognized directly in equity or comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates substantively enacted at the reporting date. Deferred tax is recognized using the asset and liability method on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. However, deferred tax is not recognized if it arises from initial recognition of goodwill or an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting net earnings nor taxable income. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred tax asset is realized or deferred tax liability is settled. A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. Share-based payment transactions The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model including the expected life, volatility and dividend yield of the share option. Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 9

10 Determination of functional currency The determination of the functional currency is a matter of determining the primary economic environment in which an entity operates. Solium uses judgment in the ultimate determination of each subsidiary s functional currency based on factors in IAS 21 The Effects of Changes in Foreign Exchange Rates. The functional currency of the Canadian and U.S. operations were determined to be the Canadian and U.S. dollars, respectively. The functional currency of other operations is determined to be their local currencies. FINANCIAL INSTRUMENTS Exposure to counterparty credit risk, interest rate risk and foreign currency risk arises in the normal course of the Company s business. The Company currently does not enter into derivative financial instruments to reduce exposure to fluctuations in any of the risks impacting the Company s operations. The Company has credit risk as a result of its trade accounts receivable. The concentration of credit risk is limited due to the fact that the customer base is large and unrelated. As such, the Company does not anticipate any significant credit losses. Of the trade receivable balance at March 31, 2018, one customer represented greater than 10% of the balance. The Company has foreign currency risk mainly because it is exposed to foreign currency fluctuations due to its operations in Canada, the United States, United Kingdom, Europe, Australia, and Hong Kong. The Company currently has no interest rate risk as the Company has no long-term debt outstanding. DISCLOSURE CONTROLS AND PROCEDURES The Company has a Corporate Disclosure Policy in place to ensure that communications with the public about the Company are timely, factual and accurate; disseminated in accordance with all applicable legal and regulatory requirements; and that all material information in respect of the Company is communicated to the Chief Executive Officer and the Chief Financial Officer, and where appropriate, the Board of Directors and/or committees thereof. The Company s Chief Executive Officer and Chief Financial Officer have concluded that the Company s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed in the annual filings, interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to the Company s management, including its certifying officers, as appropriate to allow timely decisions regarding required disclosure. It should be noted that while the Chief Executive Officer and Chief Financial Officer believe that the disclosure controls and procedures will provide a reasonable level of assurance and that they are effective, they do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. INTERNAL CONTROL OVER FINANCIAL REPORTING The Chief Executive Officer and Chief Financial Officer of Solium are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 10

11 No changes were made in the Company s internal control over financial reporting during the period beginning January 1, 2018 and ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company s internal control over financial reporting. OUTSTANDING SHARE DATA The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares. As at the date of this MD&A, there were 55,925,337 common shares outstanding. Employees, directors, officers and consultants have been granted options to purchase common shares under a stock option plan. As at the date of this MD&A, there were options outstanding to purchase 2,809,905 common shares. Employees have been granted rights to receive common shares under a share award incentive plan. As at the date of this MD&A, there were 842,503 restricted share units outstanding. OUTLOOK In Q and Q2 2017, respectively, Solium entered into white label license agreements with U.S. partners Morgan Stanley and UBS Financial Services Inc. Solium added significant headcount and committed additional resources to ensure the success of these projects, and some hiring is anticipated to continue throughout The first customers for both partners were migrated to Shareworks in December 2017, and the Company is now actively migrating clients on a monthly basis. Solium remains on track to migrate all clients by the end of Solium has made three key investments recently to accelerate its position in the private company market. In October 2017, Solium announced the acquisition of Capshare Inc. The acquisition positions Solium to compete in the rapidly emerging early-stage angel and venture backed private company market. Shareworks is well positioned as the leading platform for late-stage private companies, including those seeking an Initial Public Offering. Capshare will allow Solium to provide a targeted solution that meets the unique requirements of earlier stage private companies. In Q3 2017, Solium also incorporated Solium Analytics LLC to provide 409A business valuation services to private companies. In February 2018, Solium announced the acquisition of Advanced-HR. Through the acquisition, Solium s private market clients will have the ability to access equity data and benchmarks to guide them in compensating their employees. Solium plans to commit additional resources to the Capshare, Analytics and Advanced-HR businesses. Solium continues to be in an investment phase and remains committed to investing for future revenue growth over the course of 2018, resulting in further pressure on profitability in the near-term. The Company continues to invest in its capabilities and infrastructure ensuring best-in-class technology and service to drive long term investor returns. RISK ASSESSMENT Management defines risk as the evaluation of probability that an event might happen in the future that could negatively affect the financial condition and/or results of operations of the Company. The risks that could affect the Company have been described in the Company s MD&A for the year ended December 31, The risks identified therein do not constitute an exhaustive list of all possible risks which may impact the Company as there may be additional risks of which management is currently unaware of. As it is difficult to predict whether any risk will happen or its related consequences, the actual effect of any risk on the business could be materially different from what is anticipated. Solium Capital Inc. MD&A for the quarter ended MARCH 31, 2018 Page 11

12 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the three months ended March 31, 2018 and 2017 (Unaudited)

13 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS Consolidated Statement of Financial Position As at (Unaudited, expressed in thousands of U.S. dollars) ASSETS March 31, 2018 December 31, 2017* Restated January 1, 2017* Restated Notes $ $ $ Current assets Cash and cash equivalents 87, ,194 63,669 Trade and other receivables 3, 5 18,608 14,986 16,416 Current portion of prepaid expenses 2,206 1,997 1, , ,177 81,565 Non-current assets Property and equipment 7,428 7,455 2,021 Right of use assets 3, 6 12, Contract costs 3, 5 3,326 3,265 2,895 Intangible assets 4 7,850 7,556 8,237 Goodwill 4 46,908 38,293 23,368 Deferred tax assets Prepaid expenses 958 1, ,744 58,580 37,722 Total Assets 187, , ,287 LIABILITIES Current liabilities Trade payables and other accruals 8,786 12,214 9,273 Holdback payable 4 1, Current portion of earn-out payable 1,770 1,770 - Current portion of deferred tenant inducements Deferred revenue 3, 5 10,125 9,287 8,230 22,581 23,345 17,688 Non-current liabilities Earn-out payable Deferred tenant inducements Lease liabilities 3, 6 12, Deferred tax liabilities ,488 1, SHAREHOLDERS EQUITY Share capital 7 100, ,358 59,814 Contributed surplus 7,897 7,316 6,876 Retained earnings 52,309 50,652 47,294 Foreign currency translation reserve (9,550) (7,255) (12,650) 151, , ,334 Total Liabilities and Shareholders Equity 187, , ,287 * See note 3 The accompanying notes are an integral part of these condensed consolidated interim financial statements. 1

14 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited, expressed in thousands of U.S. dollars except per share amounts) Three Months Ended March 31, * Restated Notes $ $ Revenue 3, 5 26,094 21,236 Operating expenses (25,316) (17,852) Earnings from operations 778 3,384 Finance income Foreign exchange gain Earnings before income taxes 2,084 3,969 Income taxes (806) (1,430) Net earnings 1,278 2,539 Other comprehensive (loss) income Exchange (loss) gain on translating foreign operations (2,307) 615 Total comprehensive (loss) income for the period (1,029) 3,154 Net earnings per share Basic Diluted * See note 3 The accompanying notes are an integral part of these condensed consolidated interim financial statements. 2

15 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS Consolidated Statement of Changes in Equity (Unaudited, expressed in thousands of U.S. dollars) Share capital Contributed surplus Retained earnings Foreign currency translation reserve Total equity $ $ $ $ $ As at January 1, 2017, as previously reported 59,814 6,876 43,547 (12,440) 97,797 Adjustment from adoption of IFRS 15, net of tax (note 3) - - 3,747 (210) 3,537 Restated balance at January 1, ,814 6,876 47,294 (12,650) 101,334 Restated net earnings - - 2,539-2,539 Restated exchange gain on translating foreign operations, net of tax Share based payment expense, net of tax Share unit releases, net of tax 33 (33) Stock options exercised, net of tax 242 (83) Restated balance at March 31, ,089 7,159 49,833 (12,035) 105,046 Restated net earnings Restated exchange gain on translating foreign operations, net of tax ,780 4,780 Share based payment expense, net of tax - 1, ,975 Share unit releases, net of tax 942 (899) Stock options exercised, net of tax 2,896 (919) - - 1,977 Shares issued subject to acquisition 2, ,191 Shares issued on bought deal financing 35, ,761 Transaction costs, net of tax (1,521) (1,521) Restated balance at December 31, ,358 7,316 50,652 (7,255) 151,071 Adjustment on initial application of IFRS 16, net of tax (note 3) Adjusted balance at January 1, ,358 7,316 51,031 (7,243) 151,462 Net earnings - - 1,278-1,278 Exchange loss on translating foreign operations, net of tax (2,307) (2,307) Share based payment expense, net of tax Share unit releases, net of tax 6 (6) Stock options exercised, net of tax 451 (141) Transaction costs, net of tax As at March 31, ,840 7,897 52,309 (9,550) 151,496 The accompanying notes are an integral part of these condensed consolidated interim financial statements. 3

16 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS Consolidated Statement of Cash Flows For the three months ended (Unaudited, expressed in thousands of U.S. dollars) Cash flows related to the following activities: March 31, 2018 March 31, 2017* Restated Notes $ $ Operating activities Net earnings 1,278 2,539 Adjustments for items not involving cash: Finance costs Income taxes 806 1,430 Share based payment expense Depreciation of property and equipment Depreciation of right of use asset 3, Amortization of intangible assets Amortization of contract costs 3, Amortization of tenant inducement - (52) Changes in non-cash working capital (8,797) (3,279) Cash taxes and installments paid, net of refund 387 (605) Cash interest paid (47) - Cash flow (used in) from operating activities (3,582) 1,542 Financing activities Issuance of common shares, net of share issue costs Payment of lease liabilities 3, 6 (263) - Cash flow from financing activities Investing activities Cash outflow on acquisition, net of cash acquired 4 (7,063) - Purchases of property, equipment and intangible assets (555) (1,217) Cash used in investing activities (7,618) (1,217) Effect of foreign exchange on cash held in foreign currencies (2,034) 602 (Decrease) increase in cash and cash equivalents (13,187) 1,086 Cash and cash equivalents, beginning of period 100,194 63,669 Cash and cash equivalents, end of period 87,007 64,755 * See note 3 The accompanying notes are an integral part of these condensed consolidated interim financial statements. 4

17 Notes to the Condensed Consolidated Interim Financial Statements For the three months ended March 31, 2018 and 2017 (Unaudited, expressed in thousands of U.S. dollars, except otherwise noted) 1 General information Solium Capital Inc. ( Solium or the Company ) was incorporated in September of 1999 under the laws of the Province of Alberta. Solium Capital Inc. (TSX: SUM) provides cloud-enabled services for global equity administration, financial reporting and compliance. From operation centers in the United States, Canada, Europe, Australia and Hong Kong, the Company s software-as-a-service (SaaS) technology powers share plan administration and equity transactions for more than 3,000 corporate clients with employee participants in more than 100 countries. Solium's technology platforms, Shareworks, Transcentive, Capshare and Advanced-HR are leading online solutions that integrate the management of multiple equity plan types including stock options, share units, share appreciation rights, restricted stock awards, and employee share purchase plans. The Company generates revenue predominantly from recurring license and subscription fees and from transaction based fees. The address of the registered office is 1500, rd Avenue SW, Calgary, Alberta, T2P 0G5. 2 Basis of preparation Statement of compliance These condensed consolidated interim financial statements present Solium s financial results of operations and financial position prepared in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ) as at and for the three months ended March 31, 2018, including 2017 restated comparative periods. The condensed consolidated interim financial statements are prepared using accounting policies consistent with the Company s annual audited consolidated financial statements issued under International Financing Reporting Standards ( IFRS ) for the year ended December 31, 2017 except as described in note 3. The condensed consolidated interim financial statements do not include all information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Company as at and for the year ended December 31, This is the first set of financial statements where IFRS 9 Financial instruments, IFRS 15 Revenue from contracts with customers and IFRS 16 Leases have been applied. Changes to significant accounting policies are described in note 3. 3 Changes in significant accounting policies Except as described below, the accounting policies applied in these condensed consolidated interim financial statements are the same as those applied in the Company s consolidated financial statements as at and for the year ended December 31, The Company has initially adopted IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases effective January 1, IFRS 9 Financial Instruments is also effective from January 1, 2018 but does not have a material impact on the Company s consolidated financial statements. The effect of initially applying these standards is mainly attributed to the following: earlier recognition of software license revenue from the Transcentive software platform; earlier recognition of implementation revenue; capitalization of costs incurred in acquiring customer contracts (primarily sales commissions); and recognition of right of use assets and associated lease liabilities for leases. 5

18 Notes to the Condensed Consolidated Interim Financial Statements For the three months ended March 31, 2018 and 2017 (Unaudited, expressed in thousands of U.S. dollars, except otherwise noted) IFRS 9 Financial Instruments IFRS 9 sets out requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The Company has adopted IFRS 9 retrospectively, changes in accounting policies resulting from the adoption of IFRS 9 does not have a material impact on the Company s consolidated financial statements. Classification and measurement of financial assets and financial liabilities IFRS 9 largely retains the existing requirements of IAS 39 for the classification and measurement of financial liabilities. However, it eliminates the previous IAS 39 categories for financial assets of held to maturity, loans and receivables and available for sale. Under IFRS 9, on initial recognition, a financial asset is classified as measured at: amortized cost; Fair Value through Other Comprehensive Income ( FVOCI ) debt investment; FVOCI equity investment; or Fair Value through Profit or Loss ( FVTPL ) The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. A financial asset (unless it is a trade receivable without a significant financing component that is initially measured at the transaction price) is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition. For financial assets measured at amortized cost, these assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss. There was no material impact on the carrying amounts of financial assets at January 1, 2018 upon adoption of IFRS 9. The following table notes the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company s financial assets as at January 1, Financial assets Original classification under IAS 39 New classification under IFRS 9 Cash and cash equivalents Loans and receivables Amortized cost Trade and other receivables Loans and receivables Amortized cost Impairment of financial assets IFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss ( ECL ) model. The new impairment model applies to financial assets measured at amortized cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments. Under IFRS 9, credit losses are recognized earlier than under IAS 39. Under IFRS 9, loss allowances are measured on either of the following bases: 12-month ECLs these are ECLs that result from possible default events within the 12 months after the reporting date; and Lifetime ECLs these are ECLs that result from all possible default events over the expected life of a financial instrument. 6