SOLIUM CAPITAL INC. MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2017

Transcription

1 MANAGEMENT S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2017 This Management s Discussion and Analysis ( MD&A ) of Solium Capital Inc. ( Solium or the Company ) for the year ended December 31, 2017 is dated March 20, This MD&A should be read in conjunction with the audited Consolidated Financial Statements and the accompanying notes for the year ended December 31, The audited Consolidated 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, 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 potential impact of future accounting pronouncements 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 and Capshare Inc. businesses, the Company s acquisition strategy, the Company s ability to compete in the private company market, and the use of the proceeds raised pursuant to the Company s November 2017 bought deal financing. 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. 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 sufficient cash flow from operations to meet its current and future obligations; and the Company s ability to access Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 1

2 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. 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 year ended DECEMBER 31, 2017 Page 2

3 FINANCIAL HIGHLIGHTS 4 (in thousands of U.S. dollars except per share amounts and percentages) 2017 % % Change 2016 Change 2015 Total revenues 86,502 12% 77,219 7% 72,496 Adjusted EBITDA 1 12,217 (21%) 15,558 (2%) 15,943 Earnings before taxes 7,044 3% 6,859 (47%) 12,885 Net earnings 3,611 (9%) 3,974 (51%) 8,170 Per share basic (13%) (53%) Per share diluted (12%) (52%) Margins Adjusted EBITDA 14% (6%) 20% (2%) 22% Earnings before taxes 8% (1%) 9% (9%) 18% Net earnings 4% (1%) 5% (6%) 11% Total assets 173,417 48% 117,144 9% 106,997 Total non-current liabilities 2, % 765 (48%) 1,462 Notes: 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, amortization of intangible assets, foreign exchange gain or loss (on translation of working capital), share-based payments, gain on derecognition of liability, 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: Adjusted EBITDA 12,217 15,558 15,943 Foreign exchange (loss) gain (448) (1,223) 2,475 Share-based payments 3 (2,437) (2,195) (2,187) Gain on derecognition of liability Sales tax adjustment included in operating expenses 1,302 (330) (418) Change in estimate for SRED investment tax credits - (2,185) - EBITDA 10,634 10,070 15,813 Finance income 1, Depreciation of property and equipment (1,880) (1,225) (1,050) Amortization of intangible assets (2,712) (2,638) (2,502) Income tax (3,433) (2,885) (4,715) Net earnings 3,611 3,974 8,170 Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 3

4 Summary of results by geographic segment: Canada U.S. International Consolidated Revenues 29,731 27,516 41,902 35,939 14,869 13,764 86,502 77,219 Adjusted EBITDA (a) 8,268 7,876 4,678 7,319 (729) ,217 15,558 Adjusted EBITDA % (a) 28% 29% 11% 20% (5%) 3% 14% 20% Earnings (loss) from operations 5,383 3,478 2,632 3,940 (1,525) (433) 6,490 6,985 OVERALL PERFORMANCE Revenue increased by 12% to 86.5 million (2016: 77.2 million) and earnings from operations decreased by 7% to 6.5 million (2016: 7.0 million) for the year ended December 31, Adjusted EBITDA (a) decreased by 21% to 12.2 million (2016: 15.6 million) for the year ended December 31, (a) Adjusted EBITDA is a non-ifrs financial measure. A reconciliation of the consolidated year end adjusted EBITDA to net earnings is found under Financial Highlights in this MD&A. The key factors affecting the results for the year ended December 31, 2017 were: License revenue License and subscription fees increased by 6.1 million or 12% for the year ended December 31, 2017 as compared to Based on local currencies, the growth was 11% as compared to Growth in license revenue is largely driven by the Morgan Stanley and UBS license agreements in the U.S., organic growth from new sales, 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 3.6 million or 16% compared to The per-participant trading activity was 2% lower in 2017 compared to 2016 and 4% higher than the historical five-year rolling average. Despite the decrease in per-participant trading activity in 2017 compared to 2016, organic growth in client and participant levels throughout 2017 translated to increased transactional based revenue in the year. Operating costs Operating expenses (excluding a change in estimate to Scientific Research and Experimental Development (SRED) tax credit claims in 2016 and sales tax adjustment) increased by 13.6 million or 20% compared to The Company had 677 full-time equivalent employees (FTEs) at the end of 2017 compared to 520 FTEs at the end of Of the 157 new FTEs added in 2017, approximately 80% related to product development (including support for the Morgan Stanley and UBS partnerships), the acquisition of Capshare and the launch of Solium Analytics. The investments made in Capshare and Solium Analytics contributed to the loss from operations in the fourth quarter. Acquisitions and bought deal financing: In October 2017, the Company acquired Capshare Inc., a U.S. company that provides a cloud-based platform for capitalization table management, electronic share tracking, modeling and waterfall analysis and compliance for private companies, for total purchase consideration of 16.2 million, including potential earnouts. On November 1, 2017, the Company closed a bought deal financing for gross proceeds of 35.8 million (CAD 46.0 million). These funds provide Solium with the flexibility to move quickly on acquisition opportunities should they arise. Subsequent to the year end, in February 2018, the Company announced the acquisition of 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. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 4

5 RESULTS FROM OPERATIONS Currently included in the International reportable segment are the results relating to the U.K., Europe, Australia, and Hong Kong operations. Revenue Revenue increased by 12% to 86.5 million in 2017 (2016: 77.2 million). This represents an increase of 9.3 million over the results from Canadian revenue increased by 8% to 29.7 million in 2017 (2016: 27.5 million). Revenue increased between the comparable periods due to higher transaction volumes and associated transaction based revenue, as well as an increase in license and subscription fees primarily driven by organic growth. U.S. revenue increased by 17% to 41.9 million in 2017 (2016: 35.9 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 Morgan Stanley and UBS license agreements. International revenue increased by 8% to 14.9 million in 2017 (2016: 13.8 million). Revenue increased between the comparable periods due to higher transaction based revenue and growth in license and subscription fees, partially offset by lower one-time (non-recurring) revenue for ad hoc customization and consulting. Expenses Operating expenses were 80.0 million (2016: 70.2 million). This represents an increase of 9.8 million over the results from Operating expenses increased in 2017 compared to 2016 due to planned hiring to support the Morgan Stanley and UBS partnerships. The increase is partially offset by a change by a change in estimate of SRED credit accruals of 2.2 million recorded in 2016, as well as an adjustment to the accrual for historical sales tax owing in In Q2 2017, the Company performed a detailed nexus analysis and filed voluntary disclosure applications related to historical taxes owing. In Q3 2017, the Company invoiced clients for historical sales tax amounts and started to collect these amounts. As a result of performing the detailed nexus analysis, as well as strong collections from clients to date, the Company reassessed the accrual made at December 31, 2016, and reduced operating expenses by 1.3 million for 2017 (2016: 0.3 million expense). Finance Income and Costs Finance income of 1.0 million was recorded during 2017 (2016: 0.7 million), representing the interest earned on cash and short term deposits during the year ended December 31, Foreign Exchange Gain or Loss A foreign exchange loss of 0.4 million was recorded during 2017 (2016: 1.2 million loss). 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 December 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. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 5

6 Income Taxes 3.4 million of income tax expense was recorded in 2017 (2016: 2.9 million). The effective income tax rate relative to earnings before income taxes was 48.7% in 2017, an increase from 42.1% in The overall effective tax rate increased compared to 2016 mainly due the following factors: 1) an increase in unrecognized tax losses for the international segment; 2) a decrease in the U.S. deferred tax rate as a result of the U.S. tax reform, and offset by 3) a decrease in U.S. earnings before income taxes as a proportion of consolidated earnings before income taxes, resulting in a lower proportion of consolidated earnings before income taxes being taxed at a higher U.S. tax rate as compared to the same period in 2016, when a higher proportion of consolidated earnings before income taxes was taxed at the higher U.S. tax rate. Other Comprehensive Income An unrealized foreign currency translation gain of 5.3 million was recorded in 2017 (2016: 1.0 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 December 31, 2017 was million (December 31, 2017: 63.7 million). Working capital including cash and cash equivalents as at December 31, 2017 was 94.5 million (December 31, 2016: 63.2 million). Included in working capital was trade and other receivables of 15.0 million (December 31, 2016: 16.4 million) and trade payables and other accruals of 11.8 million (December 31, 2016: 8.8 million). Cash Flows During the year ended 2017, the Company had an overall increase to cash and cash equivalents of 36.5 million (2016: 11.0 million). Changes in working capital and cash tax payments brought total cash inflow from operating activities to 14.9 million for the year ended 2017 (2016: 9.8 million). Cash inflow from financing activities was 38.1 million for the year ended 2017 (2016: 1.7 million), the inflow is mainly due to the bought deal financing as well as proceeds from issuance of common shares from employee stock option exercises. Cash outflow from investing activities was 21.1 million for the year ended 2017 (2016: 1.5 million), the outflow is primarily as a result of the acquisition of Capshare and capital expenditures in the year. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 6

7 Liquidity The Company has a 15 million CAD undrawn revolving credit facility, as well as cash and cash equivalents and noncash working capital discussed above. Included in the cash and cash equivalents balance are funds generated from operations as well as 46 million CAD of gross proceeds from the bought deal financing closed on November 1, 2017, discussed below. On October 12, 2017, the Company entered into an agreement with a syndicate of underwriters, pursuant to which the Underwriters agreed to purchase on a bought deal basis 3,903,000 common shares of the Company at a price of CAD per share for gross proceeds of 40 million CAD (the Offering ). The Company granted the Underwriters an over-allotment option to purchase up to that number of additional shares equal to 15% of the shares purchased pursuant to the Offering, exercisable in whole or in part at any time up to 30 days after and including the closing date of the Offering. The over-allotment was exercised in full on November 1, 2017, resulting in the issuance of an additional 585,450 common shares at a price of CAD per share for additional gross proceeds of 6 million CAD. The Offering closed on November 1, The net proceeds from the Offering will be used for working capital and general corporate purposes, as well as to provide flexibility for future acquisitions including potentially material acquisitions. The Company believes it will generate sufficient cash and working capital from operations to fund ongoing operations and growth strategies. Contractual Obligations (in thousands of U.S. dollars) Payments Due by Fiscal Period Total and thereafter Operating leases 15,628 1,818 1,986 1,504 1,284 9,036 Trade payables and other accruals was 11.8 million as at December 31, 2017 (December 31, 2016: 8.8 million) Capital Expenditures Capital expenditures of 6.7 million in 2017 (2016: 1.6 million) were comprised of computer hardware, and computer software for the Company s data centre expansion, as well as leasehold improvements and office furniture for the new Calgary office. 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 December 31, 2017, the subsidiaries held more than the required amount of cash or short term investments, and met the net capital requirement. Share Capital As at December 31, 2017, the Company had 55,866,126 outstanding common shares. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 7

8 SUMMARY OF QUARTERLY RESULTS (in thousands of U.S. dollars except per share amounts) The following table summarizes the quarterly results for the eight most recently completed quarters Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Revenues 2 22,859 20,796 21,581 21,266 18,876 19,928 19,860 18,555 Operating Expenses 2 23,078 19,563 19,478 17,893 17,366 17,847 18,731 16,290 Adjusted EBITDA 1, 2 1,564 2,160 3,689 4,804 3,110 4,387 4,243 3,818 (Loss) earnings from operations 2 (219) 1,233 2,103 3,373 1,510 2,081 1,129 2,265 Earnings before income taxes ,946 3,958 1,313 2, ,251 Net earnings 2 (492) (112) 1,671 2, ,857 (49) 1,361 Net earnings (loss) per share basic 2 diluted 2 (0.009) (0.009) (0.002) (0.002) (0.001) (0.001) Notes: 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, amortization of intangible assets, foreign exchange gain or loss (on translation of working capital), share-based payments, gain on derecognition of liability, 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: Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Adjusted EBITDA 1,564 2,160 3,689 4,804 3,110 4,387 4,243 3,818 Foreign exchange gain (loss) 156 (649) (352) 397 (370) 391 (644) (600) Share-based payments 3 (786) (629) (562) (460) (551) (541) (560) (543) Gain on derecognition of liability Sales tax adjustment included in operating expenses (80) (85) (85) (80) Change in estimate for SRED investment tax credits (683) (1,502) - EBITDA 1,295 1,823 2,775 4,741 2,109 3,469 1,452 3,040 Finance income Depreciation of property and equipment (535) (621) (381) (343) (311) (337) (307) (270) Amortization of intangible assets (823) (618) (643) (628) (658) (660) (660) (660) Income tax (825) (919) (275) (1,414) (508) (781) (706) (890) Net earnings (492) (112) 1,671 2, ,857 (49) 1, 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, gain on derecognition of liability, share-based payments and sales tax adjustment. See also Factors Contributing to Quarterly Results Participant Activity. 3. Share-based payments was included as an add back to Adjusted EBITDA based on peer company analysis performed by the Company to ensure certain measures presented by the Company to users are comparable to other issuers. 4. Financial information has been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 8

9 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. Analysis of Fourth Quarter 2017 Revenue increased by 21% to 22.9 million in the fourth quarter of 2017 (2016: 18.9 million) as a result of growth from license and subscription fees and increased transactional based revenue. Growth in license revenue is largely driven by the Morgan Stanley and UBS license agreements in the U.S., organic growth from new sales, revenue from the acquired business Capshare and migration of customers from NASDAQ Private Market, LLC to Solium. The level of trades per participant in the fourth quarter of 2017 decreased by 7% compared to the fourth quarter of Organic growth in client and participant levels throughout 2017 translated to increased transactional based revenue in the quarter. Operating expenses increased by 33% to 23.1 million in the fourth quarter of 2017 (2016: 17.4 million). The increase is primarily as a result of planned hiring to support the Morgan Stanley and UBS partnerships. Adjusted EBITDA decreased by 48% to 1.6 million in the fourth quarter of 2017 (2016: 3.1 million). Net loss of 0.5 million in the fourth quarter of 2017 (2016: net earnings 0.8 million), a decrease of 1.3 million as compared to the same period in Net loss per share of in the fourth quarter of 2017 (2016: net earnings per share 0.016). 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 fourth quarter ended December 31, 2017 were as follows: Three Months Ended December 31, Canada U.S. International Consolidated Revenues 7,727 6,545 11,253 8,861 3,879 3,470 22,859 18,876 Adjusted EBITDA (a) 1, ,695 (90) 939 1,564 3,110 Adjusted EBITDA % (a) 17% 7% 3% 19% (2%) 27% 7% 16% Earnings (loss) from operations 414 (71) (300) 866 (333) 715 (219) 1,510 Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 9

10 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. Accrual for scientific 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. 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. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 10

11 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. 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. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 11

12 FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENTS i. IFRS 9 Financial instruments was issued by the IASB in July 2014 as a complete standard, including the requirements previously issued related to classification and measurement of financial assets and liabilities, and additional amendments to introduce a new expected loss impairment model for financial assets including credit losses. Retrospective application of this standard with certain exemptions is effective for fiscal years beginning on or after January 1, 2018, with earlier application permitted. The Company has completed its analysis and does not expect the adoption of this standard to have a material impact on the Company s consolidated financial statements. The Company will retroactively adopt this standard on the effective date of January 1, The adoption of this standard will result in a reclassification of financial assets currently classified as loans and receivables to financial assets at amortized costs, however there is no associated impact to the measurement of these financial assets. There will be no classification or measurement impact to the Company s financial liabilities. ii. IFRS 15 Revenue from contracts with customers was issued by the IASB in May 2014 and amended in September 2015 for application beginning on or after January 1, IFRS 15 replaces existing revenue recognition guidance and provides a single, principles-based five-step model to be applied to all contracts with customers. The standard requires revenue to be recognized at an amount that reflects the expected consideration receivable in exchange for transferring goods or services to a customer by applying the following five step model: 1. Identify the contract with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation IFRS 15 also provides guidance relating to the treatment of contract acquisition and contract fulfillment costs. Additional disclosures will also be required under the new standard. The Company has completed a project to identify differences between current accounting practices and the requirements of the new standard. Based on a review and analysis of a sample of the Company s contracts, it expects the application of the new standard will have an impact on the Company s consolidated financial statements. The Company has assessed that the impact will primarily relate to the accounting for software license revenue from the Transcentive software platform, and implementation revenue. Under the new standard, the Company expects to recognize license revenue for these customers at the start of the license period, currently it is recognized over the term of the license period. The Company expects to recognize implementation revenue when control of services have transferred to the customer, currently it is deferred and recognized over a three year period. Recognition of license and transactional revenue related to the Company s Shareworks platform are expected to remain substantially unchanged. The treatment of costs incurred in acquiring customer contracts (primarily sales commissions) will also be impacted under the new standard as the costs will be recognized as an asset and amortized into operating expenses over the expected life of the contract, currently the Company amortizes the costs into operating expenses over a one year period. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 12

13 The Company is adopting the standard effective January 1, 2018, using the full retrospective method upon transition. The Company is currently finalizing figures and anticipates the impact on the Company s consolidated statement of financial position and consolidated statement of operations and comprehensive income to be as follows: As at January 1, 2017, contract cost assets will increase by 2,500 to 3,000, deferred revenue will decrease by 1,500 to 2,000 with the offset being recorded as an increase to opening retained earnings. There will also be other less significant adjustments to prepaid expenses, foreign currency translation reserve and deferred taxes. For the year ended December 31, 2017, revenues will decrease by 100 to 500 with the offset being recorded to the Company s consolidated statement of financial position. There will also be other less significant adjustments to operating expenses, exchange gain on translating foreign operations and income taxes. The Company is in the process of finalizing the assessment for disclosure requirements. iii. IFRS 16 Leases was issued by the IASB in January IFRS 16 replaces the existing standard (IAS 17) and requires the recognition of most leases on the balance sheet. IFRS 16 effectively removes the classification of leases as either finance or operating leases and treats all leases as finance leases for lessees with exemptions for short-term leases where the term is twelve months or less and for leases of low value items. The accounting treatment for lessors remains the same. IFRS 16 is effective January 1, 2019, with earlier application permitted. The Company is still evaluating the impact the adoption of the standard will have on the consolidated financial statements but expects this standard will materially increase the Company s assets and liabilities, increase depreciation expense, increase financing expense, and decrease general and administration expenses. The Company is evaluating early adoption of the standard effective January 1, 2018 using the modified retrospective method. The Company did not adopt any new accounting standards in 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 December 31, 2017, 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. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 13

14 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. Management assessed the effectiveness of the Company s internal control over financial reporting as of December 31, 2017, based on the criteria set forth in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of December 31, 2017, the Company s internal control over financial reporting was effective based on the criteria established in the Internal Control Integrated Framework. Also, management determined that there were no material weaknesses in Solium s internal control over financial reporting as of December 31, 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 55,911,437 common shares outstanding. Employees, directors and officers 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 2,814,240 common shares. Employees and officers have been granted rights to receive common shares under a share award incentive plan. As at the date of this MD&A, there were 721,846 restricted share units outstanding. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 14

15 OUTLOOK In Q4 2016, Solium entered into a license agreement with Morgan Stanley, whereby Morgan Stanley s corporate customers and their respective employee participants will transition to a Morgan Stanley branded version of Shareworks. In order to execute on this agreement, Solium added headcount and committed additional resources in 2017 to ensure the success of this project. Solium migrated the first group of Morgan Stanley customers onto Shareworks in December 2017, and anticipates migrating all clients by the end of In Q2 2017, Solium entered into a license agreement with UBS Financial Services Inc., where UBS s corporate customers will transition to a UBS branded version of the plan administration modules of Shareworks. During 2017, Solium started to add additional employees to support the UBS implementation, and this hiring is anticipated to continue throughout Solium migrated the first UBS customers onto Shareworks in December 2017, and anticipates migrating 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, lower-cost 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 of Solium defines risk as the evaluation of probability that an event might happen in the future that could negatively affect the financial condition, results of operations, and/or reputation of the Company. The following section describes specific and general risks that could affect the Company. The following descriptions of risk do not include all possible risks as there may be other risks of which management is currently unaware. Cyber Risks As a software-as-a-service provider, Solium faces cyber risks such as data breaches, unauthorized access, phishing attacks and denial of service attacks as well as associated financial, reputational and business interruption risks. Because the Company's technology and services involve the storage and transmission of clients' proprietary information, unauthorized access or security breaches as a result of third-party action, employee error, malfeasance or otherwise could result in the loss of information, compromising of confidential client or employee information, inability to process client transactions, unauthorized access to proprietary or sensitive information, litigation, indemnity obligations and other significant liabilities. The unauthorized release of confidential or personal information could result in regulatory investigations, heightened regulatory scrutiny and regulatory penalties. In addition, Solium's reputation could be damaged, its applications could be perceived as not being secure and clients could reduce the use of, or stop using, Solium's services. These risks continue to be actively managed by the Company through enterprisewide technology and information security programs, with the goal of maintaining overall cyber resilience that prevents, detects and responds to such threats. Solium has also implemented a disaster recovery and risk mitigation strategy and has personnel responsible for the foregoing. Despite its commitment to cyber security, however, Solium may not be able to fully mitigate all such risk because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target. The Company currently carries professional liability errors & omissions insurance to partially cover the risk of significant loss due to errors made by its technology systems that result in third-party claims against the Company. Cyber security risks are overseen internally by the Senior Vice President, Technology, and the compliance, risk, and security steering Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 15

16 committee, which reports to the risk and compliance committee of the board of directors which was established in March Privacy Concerns and Legislation Solium's technology enables companies to manage equity plans that may involve the collection and use of personal information regarding their employees. The importance of protecting the confidential information held on the Solium platform and the associated regulatory requirements are increasing across the various jurisdictions in which Solium operates, its clients operate and where the clients associated employee participants reside. Federal, provincial, state and foreign government bodies and agencies have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, storage and disclosure of personal information obtained from consumers and individuals. These domestic and international legislative and regulatory initiatives may adversely affect the ability of Solium's clients to process, handle, store, use and transmit demographic and personal information relating to their employees, which could reduce demand for the Company's applications. Solium is working with its clients and subcontractors to comply with such legislation, including, but not limited to, the General Data Protection Regulation, to minimize the impact of such legislation on the Company s applications and services in general. Operational Trading Risk The Company s end-to-end services often involve the execution of an equity trade in the stock market through one of the Company s brokerage partners. If the Company fails to send instructions to the brokerage partner to conduct a trade on behalf of a client or participant, forwards incorrect trade instructions to the brokerage partner, or fails to send a trade instruction to the brokerage partner in a timely manner, the market value of a trade could fluctuate adversely and result in a financial loss that may be the responsibility of the Company. Such losses could adversely affect the Company s operating results. The Company currently carries professional liability errors & omissions insurance to partially cover the risk of significant loss due to errors made by its employees or technology systems that result in third-party claims against the Company. Operational Service Risk The Company s end-to-end services often involve the day-to-day administration of detailed aspects of a client s equity-based incentive plan. If the Company fails to properly setup or implement the client, or makes an error in updating or processing client data as per the instructions from a client or participant, a financial loss could occur that may be the responsibility of the Company. Such losses could adversely affect the Company s operating results. The Company currently carries professional liability errors & omissions insurance to partially cover the risk of significant loss due to errors made by its employees or technology systems that result in third-party claims against the Company. Delay or Failure to Realize Anticipated Benefits of Morgan Stanley and UBS Partnerships In November 2016, the Company entered into a license agreement with Morgan Stanley pursuant to which the Company s stock administration platform is expected to become the equity administration technology supporting Morgan Stanley s Global Stock Plan Services business for U.S. listed corporations and corporations that exist under U.S. laws or have headquarters in the U.S. The new partnership with Morgan Stanley will require a material up-front investment by Solium, predominantly in product development, of between US10 million and US15 million over the first two years of the agreement. In addition, the Company is incurring expenditures associated with client conversion and expansion of infrastructure. The partnership with Morgan Stanley is the Company s largest partnership. In order to achieve the benefits of increased fee revenue as a result of the partnership, the Company is required to invest a significant amount of capital and successfully support Morgan Stanley and its clients in all aspects of the migration process, in a timely and efficient manner. In addition, the work that must be completed in order for the Company to achieve the anticipated benefits of the partnership requires the dedication of management effort, time and resources, which may divert management's focus and resources from other strategic opportunities. The annual revenue for Solium as a result of the Morgan Stanley partnership is currently estimated to be US18 million once all client migrations are complete. Should clients not convert to Shareworks (as a result of moving to a competitor or for other reasons), the actual revenue from this partnership could differ materially from the Company s estimate. Any delay in, or failure to, achieve the anticipated Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 16

17 benefits of the Morgan Stanley partnership may have a material adverse effect on the Company's business, results of operations and financial condition. In May 2017, the Company also entered into a new agreement with UBS, pursuant to which UBS customers will upgrade to a UBS branded version Shareworks. The partnership with UBS requires Solium to deliver on successfully migrating UBS clients to Shareworks, in a timely and efficient manner. Significant capital investments are required to develop the features and capabilities in Shareworks required to handle the complexities of the global equity plans managed by UBS clients. Any delay in, or failure to, achieve the anticipated benefits of the UBS partnership may have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Market Growth There can be no assurance that the market for the Company's existing solutions will continue to grow, that customers will continue to adopt the Company's solutions or that the Company will be successful in establishing markets for its new products. If the various markets in which the Company's products are offered fail to grow, or grow more slowly than the Company currently anticipates, or if the Company is unable to establish markets for its new products, the Company's business, operating results and financial condition could be materially adversely affected. Failure to Manage Growth Successfully The Company's business has grown rapidly in the last several years. The Company s growth places a strain on managerial, financial and human resources. The Company will need to provide adequate operational, financial and management controls and reporting procedures to manage the continued growth in the number of employees, scope of operating and financial systems and the geographic area of operations. Expanding the business into new geographic areas and to new customers requires the Company to incur costs, which may be significant, before any associated revenues materialize. Future growth will depend upon a number of factors, including the Company s ability to: build and train staff to create an expanding presence in the evolving marketplace for Solium's solutions, and to keep staff informed regarding the technical features, issues and key selling points of Solium's solutions; hire, train and manage additional employees to provide agreed upon services; attract and retain qualified technical personnel to continue to develop reliable and scalable solutions and services that respond to evolving customer needs and technological developments; execute on, and successfully integrate, acquisitions; comply with regulations in the various jurisdictions where the Company has expanded; and expand Solium's internal management to maintain control over operations and provide support to other functional areas within Solium. Solium's inability to achieve any of these objectives could harm the Company's business, financial condition, reputation and operating results. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 17

18 Acquisition Related Risks Strategic acquisitions are important elements to Solium s business strategy. Although Solium engages in discussions with, and submits proposals to acquisition candidates, suitable acquisitions may not be available in the future on reasonable terms. If the Company does identify an appropriate acquisition candidate, the Company may not be able to successfully negotiate the terms of the acquisition, finance the acquisition or, if the acquisition occurs, effectively integrate the acquired business into the existing business. In addition, the negotiation of a potential acquisition and the integration of an acquired business may require a disproportionate amount of management's attention and resources. If Solium completes additional acquisitions, the new business acquired may not generate revenues as anticipated, and any anticipated cost efficiencies or synergies may not be realized. If Solium is unsuccessful in identifying, executing or effectively integrating future acquisitions, the Company s results of operations may be negatively affected. Even though Solium performs due diligence reviews of the businesses it acquires that it believes are consistent with industry practices, such reviews are subject to risk. Even an in-depth due diligence review of a business may not necessarily reveal existing or potential problems or permit Solium to become familiar enough with the business to fully assess its risks and potential. Even when problems are identified, Solium may assume certain risks and liabilities in connection with the acquired business. Economic Conditions The Company s revenues and operating results are and will continue to be influenced by prevailing general economic conditions and financial market conditions. In such cases, customers may reduce their purchases of new outsourced services and plan participant trading activity may be reduced. In addition, the deterioration of economic conditions could adversely affect payment patterns which could increase the Company s bad debt expense, decrease the level of client renewals and increase contraction in number of plan participants. During an economic downturn, there can be no assurance that the Company s operating results, prospects and financial condition would not be adversely affected. Dependence on Partners The Company has engaged certain service partners as part of the delivery of its solutions, including brokerage partners and financial institutions. Failure of any partner to perform required services could have a short-term adverse effect on the Company s business, and results of operation. The Company also relies on certain distribution partners to distribute its applications to their own clients. Further, the Company provides reporting technology tools to certain partners to be incorporated in their offerings to their own clients. Although Solium believes that it has a good relationship with its partners, the termination of these relationships for any reason whatsoever could have an adverse effect on the Company's business, and results of operation. Regulatory Environment Certain aspects of the Company s business are conducted within highly regulated industries. Changes in regulations can occur at any time and the Company may become subject to more strict standards in the future. Non-compliance and the cost of compliance with such changes in regulations could have an adverse effect on the Company s business, results of operation and financial condition. Dependence on Key Personnel The success of the Company is largely dependent on the performance of its key employees and directors. Failure to retain key employees and directors and to attract and retain additional key employees with necessary skills could have a material adverse impact on the Company's growth and profitability. Competition for highly skilled management, developers and other employees is intense. The departure of any key personnel could have a material adverse effect on the Company's business, results of operations and financial condition. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 18

19 Competition The market for the administration of alternative stock compensation arrangements for public and private companies and their employees is highly competitive. The Company has experienced and will continue to experience intense competition from other organizations with more established sales and marketing presence, more technical services, the ability to bundle equity administration with a broader set of ancillary services and greater financial resources. The Company's competitors may announce new products, services or enhancements that better meet the needs of customers or changing industry standards. Furthermore, additional competitors may enter the market and competition may intensify. Increased competition may cause price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, results of operation and financial condition. Risk Associated with a Change in the Company's Pricing Model The competitive market in which the Company conducts business may require Solium to change its pricing model. If the Company's competitors offer deep discounts on certain products or services in an effort to recapture or gain market share or to sell other products, the Company may be required to lower prices or offer other favourable terms to compete successfully. Any such changes would likely result in a reduction of margins and could adversely affect the Company s operating results. Failure to Continue to Adapt to Technological Change and New Product Development Solium believes that the future success of the Company depends upon its ability to enhance current products or develop and introduce new products. The Company's inability, for technological or other reasons, to develop and introduce products in a timely manner in response to changing market conditions or customer requirements could have a material adverse effect on the Company's business, results of operations and financial condition. The ability of the Company to compete successfully will depend in large measure on its ability to maintain technically competent research and development staff and to adapt to technological changes and advances in the industry. There can be no assurance that the Company will be successful in these efforts. Lengthy Sales and Implementation Cycle The Company's sales cycle, beginning with an interested customer and culminating in entering into a commercial agreement with the customer, typically ranges from one to twelve months and may be significantly longer. The implementation cycle typically ranges from one to twelve months and may be significantly longer. During these cycles the Company may devote a significant amount of time and resources and experience delays over which it has no control. The length of time it takes to achieve sales and complete implementation makes it difficult to predict when the Company can recognize the associated revenue. Intellectual Property Risks In part, the Company's operations and value lies in its ownership and use of intellectual property. As such, its failure to protect its intellectual property may negatively affect its operations and value. Solium regards its software as proprietary and attempts to protect it with copyrights, trademarks and trade secret measures, including restrictions on disclosure and technical measures. Despite these precautions, it may be possible for third parties to copy Solium's programs or aspects of its trade secrets or otherwise independently develop products similar to that of Solium. Solium has no patents, and existing legal and technical precautions afford only limited practical protection. Solium could incur substantial costs in protecting and enforcing its intellectual property rights. Although Solium is not aware that any of its products infringe the proprietary rights of third parties, there can be no assurance that third parties will not assert patent, trademark, copyright and other intellectual property rights to technologies that are important to Solium. In such event, Solium may be required to incur significant costs in litigating a resolution to the asserted claim, irrespective of the validity or the successful assertion of such claim. There can be no assurance that such a resolution would not require that Solium pay damages or obtain a license of a third party's proprietary rights in order to continue licensing its products as currently offered, or, if such license is required, that it will be available on terms acceptable to Solium. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 19

20 Risk of Defects in the Company's Solution Software products as complex as those offered by the Company may contain errors or defects, especially when first introduced or when new versions or updates are released. The Company regularly introduces new releases and periodically introduces new versions of its software. There can be no assurance that, despite testing by the Company and by its customers, defects and errors will not be found in existing products or in new products, releases, versions or enhancements after the commencement of commercial deployment. Any such defects and errors could result in litigation, adverse customer reactions, negative publicity regarding the Company and its products, harm to the Company's reputation, loss or delay in market acceptance or required product changes, any of which could have a material adverse effect upon the Company's business, results of operations and financial condition. The Company currently carries technology errors & omissions insurance to partially cover the risk of significant loss due to errors made by its technology systems that result in third-party claims against the Company. US Tax Reform Legislation On December 22, 2017, the U.S. government enacted H.R. 1, An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 as Public Law (informally titled the Tax Cuts and Jobs Act). Among a number of significant changes to the US federal income tax laws, the Tax Cuts and Jobs Act reduces the marginal U.S. corporate income tax rate from 35% to 21%, limits the deduction for net interest expense, shifts the U.S. toward a modified territorial tax system, and imposes new taxes to combat erosion of the U.S. federal income tax base. The long-term tax effect of the Tax Cuts and Jobs Act on Solium, whether adverse or favourable, is uncertain, and may not become evident for some period of time. Brexit In a non-binding referendum on the United Kingdom s membership in the European Union ( E.U. ) in June 2016, a majority of those who voted approved the United Kingdom s withdrawal from the European Union. Any withdrawal by the United Kingdom from the European Union ( Brexit ) would occur after, or possible concurrently with, a process of negotiation regarding the future terms of the United Kingdom s relationship with the E.U., which could result in the U.K. losing access to certain aspects of the single E.U. market and the global trade deals negotiated by the E.U. on behalf of its members. The Brexit vote and the perceptions as to the impact of the withdrawal of the U.K. may adversely affect business activity, political stability and economic conditions in the U.K., the Eurozone, the E.U. and elsewhere. The economic outlook could be further adversely affected by (i) the risk that one or more other E.U. countries could come under increasing pressure to leave the E.U., (ii) the risk of a greater demand for independence by Scottish nationalists or for unification in Ireland, or (iii) the risk that the euro as the single currency of the Eurozone could cease to exist. Any of these developments, or the perception that any of these developments are likely to occur, could have a material adverse effect on economic growth or business activity in the U.K., the Eurozone or the E.U. and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, political systems or financial institutions and the financial and monetary system. Given that Solium conducts business in the E.U. and the U.K., any of these developments could have a material adverse effect on the Company s regulatory licensing, business, financial position, liquidity and results of operations. Solium Capital Inc. MD&A for the year ended DECEMBER 31, 2017 Page 20

21 CONSOLIDATED FINANCIAL STATEMENTS December 31, 2017

22 Management s Report The accompanying consolidated financial statements of Solium Capital Inc. are the responsibility of the Company s management. These consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and, where necessary, reflects management s best estimates based on available information. Financial information contained in documents such as the annual report is reviewed to ensure consistency with the financial statements. The Company maintains appropriate internal control systems designed to reasonably ensure that assets are safeguarded and financial records are properly maintained to provide reliable information for the preparation of financial statements. The Board of Directors (the Board ) ensures that management fulfills its responsibilities for financial reporting and internal controls through its Audit Committee, which consists solely of outside directors. The Audit Committee meets periodically with the external auditors, with and without the Company s management, to ensure that management responsibilities are discharged and to review the financial statements before they are presented to the Board for approval. The Board has approved the Company s consolidated financial statements on the recommendation of the Audit Committee. The Company s external auditors, Deloitte LLP, have audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards. Deloitte LLP have full and unrestricted access to the Audit Committee to discuss their audit and related findings. Their auditor s report is presented with the consolidated financial statements. (signed) Marcos Lopez Chief Executive Officer (signed) Kelly Schmitt Chief Financial Officer March 20,

23 Deloitte LLP 700, Street SW Calgary, AB T2P 0R8 Canada Tel: Fax: Independent Auditor s Report To the Shareholders of Solium Capital Inc.: We have audited the accompanying consolidated financial statements of Solium Capital Inc., which comprise the consolidated statements of financial position as at December 31, 2017 and 2016, and the consolidated statements of operations and comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Solium Capital Inc. as at December 31, 2017 and 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants March 20, 2018 Calgary, Alberta