Caldwell Partners International Inc.
Annual Report 2017

Plain-text annual report

Annual Report 2017 AT CALDWELL, WE BELIEVE IN THE TRANSFORMATIVE POWER OF GREAT PEOPLE. Directors Officers G. Edmund King, Chair of the Board John N. Wallace Corporate Director Paul R. Daoust President and Chief Executive Officer The Caldwell Partners International Inc. Consultant and Corporate Director C. Christopher Beck, CPA Chief Operating & Finance Officer and Corporate Secretary The Caldwell Partners International Inc. Richard D. Innes Consultant and Corporate Director John N. Wallace President & Chief Executive Officer The Caldwell Partners International Inc. Kathryn A. Welsh Consultant and Corporate Director Shareholder Information Auditors Transfer Agent PricewaterhouseCoopers LLP Computershare Limited Chartered Accountants, Toronto, Ontario Counsel Miller Thomson LLP Barristers and Solicitors, Toronto, Ontario Stock Exchange Listing The Toronto Stock Exchange (symbol: CWL) Computershare Limited operates a telephone information inquiry line that can be reached by dialing toll free: +1 866 313 1872 or +1 604 699 4954 Correspondence may be addressed to: The Caldwell Partners International Inc. c/o Computershare Limited 100 University Avenue, 8th floor Toronto, Ontario, M5J 2Y1 for other information, please contact: C. Christopher Beck Chief Operating & Finance Officer The Caldwell Partners International Inc. One Six Five Avenue Road Toronto, Ontario, M5R 3S4 +1 416 920 7702 fax +1 416 920 8533 leaders@caldwellpartners.com Dear Shareholders, Clients, and Friends: Fiscal 2017 was a year of new faces, new energy, and new ideas. We closed out the year with $57.8 million in annual revenue, and the $3.1 million in operating profit we achieved is a marked increase over the previous year. After a challenging Fiscal 2016, our Canadian team had an extraordinary comeback, with tremendous work in client development driving strong search volume and revenue increases over last year. In the United States, where the majority of our search business is derived from, we continued to experience a steady economic environment with higher search volumes that were offset by lower average fees. While our operating results in the United Kingdom were hurt by two partner departures that reduced our local partner base to one for most of the fiscal year, we have since hired two partners in London, bringing our partner count back up and continuing our European expansion strategy. We are enormously pleased to see the ongoing transformation of Caldwell Partners into an integrated international firm. We have seen increased traction in cross- border collaboration with our colleagues in Latin America and New Zealand, to the betterment of our ability to connect our clients with transformational talent across the globe. We added six new partner teams resident in Stamford, New York, Miami, Atlanta and London in Fiscal 2017, expanding the depth and breadth of our capabilities across functions, practices and geographies. As we look ahead to Fiscal 2018, additional revenue and earnings growth remains a priority, but at a measured pace that will not otherwise impede our long-term profitability and regular dividend payments. We expect future growth to be driven by targeted partner hires as we seek to continue to build our practice and functional Shareholders Letter 1 Caldwell Partners – offerings across geographies in United States, Canada and Europe. We are additionally looking to expand our service lines in prudent areas that can leverage the existing expertise of our search teams, as evidenced by the recent launch of our Cyber Advisory Solutions. It never ceases to impress us how our team stands strong together, providing support and strength when and where it is needed. It speaks to a larger purpose that we all have – a fundamental reason why we are in this firm – not just what we do or how we do it. Our strength lies in our common drive to make our clients better, more competitive and more successful by connecting them with talent that transforms. We work tirelessly together, across offices, competencies and geographies, and will continue to increase the breadth and depth of our team to strengthen our ability to achieve this goal. “If everyone is moving forward together, then success takes care of itself." Henry Ford once said It has been another exciting year, and we look forward to moving forward together with our whole team here at Caldwell Partners. As always, we thank our entire team for their tireless dedication to our clients, our candidates and to each other. Yours sincerely, G. Edmund King Chair of the Board John N. Wallace President & Chief Executive Officer Shareholders Letter 2 Caldwell Partners – (Expressed in $000s Canadian, except per share amounts) For the Years Ended August 31, 2017 and 2016 Management Discussion and Analysis Company description The Caldwell Partners International Inc. (“Caldwell Partners®” or “the Company” or “We”) is a premier international provider of executive search and has been for over 40 years. As one of the most trusted advisors in executive search, the Company has a sterling reputation built on successful searches for boards, chief and senior executives, and selected functional experts. We take pride in delivering an unmatched level of service and expertise to our clients through our client teams from 22 locations throughout the world including Atlanta, Calgary, Charleston, Dallas, London, Los Angeles, Nashville, New York, Philadelphia, San Francisco, Stamford, Toronto and Vancouver, and through our licensee locations in Auckland, Bogota, Buenos Aires, Caracas, Lima, Mexico City, Miami, Santiago and São Paulo. The Caldwell Partners’ common shares are listed on the Toronto Stock Exchange (TSX: CWL). Please visit our website at www.caldwellpartners.com for further information. Forward-Looking Statements Forward-looking statements in this document are based on current expectations that are subject to the significant risks and uncertainties cited. These forward-looking statements generally can be identified by use of statements that include phrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “may,” “will,” “likely,” “estimates,” “potential,” “continue” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. The Company is subject to many factors that could cause our actual results to differ materially from those contemplated by the relevant forward looking statement including, but not limited to, our ability to attract and retain key personnel; exposure to our Partners taking our clients with them to another Management Discussion and Analysis 3 Caldwell Partners – firm; the performance of the Canadian, US and international economies; competition from other companies directly or indirectly engaged in executive search; liability risk in the services we perform; potential legal liability from clients, employees and candidates for employment; cybersecurity requirements, vulnerabilities, threats and attacks; damage to our brand reputation; our ability to align our cost structure to changes in our revenue; adverse tax law rulings; our ability to generate sufficient cash flow from operations to support our growth and maintain our dividend; foreign currency exchange rate fluctuations; marketable securities valuation fluctuations; volatility of the market price and volume of our common shares; and any potential impairment of our acquired goodwill and intangible assets. For more information on the factors that could affect the outcome of forward-looking statements, refer to the “Risk Factors” section of our Annual Information Form and other public filings (copies of which may be obtained at www.sedar.com). These factors should be considered carefully and the reader should not place undue reliance on the forward-looking statements. Although any forward-looking statements are based on what management currently believes to be reasonable assumptions, we cannot assure readers that actual results, performance or achievements will be consistent with these forward-looking statements, and management’s assumptions may prove to be incorrect. Except as required by Canadian securities laws, we do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf; such statements speak only as of the date made. The forward-looking statements included herein are expressly qualified in their entirety by this cautionary language. Presentation The following discussion and analysis, prepared on November 9, 2017, should be read in conjunction with the consolidated annual audited financial statements and related notes for the year ended August 31, 2017. Unless otherwise noted, all currency amounts are provided in thousands of Canadian dollars (except percentages and per share amounts). All references to quarters or years are for the fiscal periods unless otherwise noted. Unless otherwise noted as a non-GAAP financial measure and other operating measure, financial results are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS). The Company’s presentation currency is the Canadian dollar. The company manages its business in three geographic segments: Canada, United States (US) and Europe whose functional currencies are the Canadian dollar, US dollar and British pound, respectively. Segment discussions within are in Canadian dollars, with references made to the impact of changes in exchange rates from period to period. The Company’s Canadian parent legal entity holds the right to the Company’s brand and intellectual property. As discussed in note 22 to the consolidated annual financial statements, on July 13, 2015, the Company entered into an affiliation licensing agreement with CPGroup LATAM Ltd. and its subsidiaries (“CPGroup”). As of August 31, 2017 CPGroup had 16 revenue producing partners plus related staff operating out of 8 offices including Bogota, Buenos Aires, Caracas, Lima, Mexico City, Miami, Santiago and São Paulo. The licensing agreement has 4 Management Discussion and Analysis Caldwell Partners – an initial term of five years and provides for CPGroup to pay the Company 2.25% of Latin American revenue for the first two years of the agreement and 4.25% in subsequent years. On June 6, 2017, the Company agreed to extend the 2.25% licensee fee rate to CPGroup for one additional year through July 13, 2018 to provide for their continued increased branding and marketing initiatives in Latin America. Effective November 8, 2015 the Company entered into a similar licensing agreement with Simon Monks and Partners Limited, a New Zealand corporation, which subsequently changed its name to The Caldwell Partners International New Zealand Limited (“Caldwell NZ”). Caldwell NZ had 3 revenue producing partners plus related staff operating out of Auckland as of August 31, 2017. In exchange for the license fee payments, CPGroup and Caldwell NZ each have the right to use the Caldwell Partners brand, search processes, methodologies and related intellectual property. Non-GAAP Financial Measures and Other Operating Measures Certain non-GAAP financial measures and other operating measures are used by Company management to manage the business and explain the results of its operations. Such measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. Non-GAAP measures and other operating measures used herein have been calculated on a consistent basis for the periods presented and include the following defined terms: • • • • • Average Number of Partners: Excluding affiliation partners, the number of partners at the beginning of a period plus the number of partners at the end of each month during a period, divided by the related number of months. The Average Number of Partners is indicative of our capacity to generate professional fees. Annualized Professional Fees per Partner: Professional fees divided by the Average Number of Partners; and if a quarterly period, multiplied by four to reflect an annualized number. The Annualized Revenue per Partner is indicative of how highly our Partners are performing taken as a whole. This performance will be driven by the Number of Assignments performed and the Average Fee per Assignment. Number of Assignments: the number of new executive search assignments contracted for during a period. This metric shows the search volume and is one of the drivers of professional fees. Number of Assignments per Partner: the Number of Assignments divided by the Average Number of Partners. This metric analyzes our partner productivity and utilization and is a measure used to identify and track volume trends as one of the key drivers of our professional fees. Average Fee per Assignment: Professional fees for a given period divided by the related Number of Assignments. This metric is used to identify and track price trends as a key driver of our professional fees. It is impacted by both economic and competitive conditions as well as the seniority level of searches undertaken. Management Discussion and Analysis 5 Caldwell Partners – • Unencumbered Cash: a measure used to identify cash available beyond that required to fund short term obligations, calculated as the net of i) cash and cash equivalents, restricted cash, short-term marketable securities, accounts receivable and net deferred tax assets to be recovered within 12 months less ii) total current liabilities excluding deferred revenue and deferred compensation expense related specifically to the deferred revenue. Selected Financial Information The following table summarizes selected financial information for the three years ended August 31: ($ 000s except dividends and earnings per share) $ ¹ ¹ ¹ ¹ ¹ ¹ Total revenue Period end number of partners Average Number of Partners Annualized Professional Fees per Partner Number of Assignments Number of Assignments per Partner Average Fee per Assignment Net earnings for the year attributable to owners of the Company Basic earnings per share Diluted earnings per share Total assets Total non-current financial liabilities Unencumbered cash Cash dividends per share ¹ $ 2017 57,805 39 37.5 1,533 432 11.5 133 1,957 0.096 0.096 34,302 958 7,883 0.08 $ $ $ $ $ $ $ $ $ $ $ 2016 58,748 38 38.0 1,516 383 10.1 150 881 0.044 0.043 34,699 687 6,297 0.08 $ $ $ $ $ $ $ $ $ 2015 54,527 37 34.8 1,566 428 12.3 127 1,976 0.093 0.092 37,831 1,326 8,381 0.08 $ $ $ $ $ $ $ $ Please refer to the section on Non-GAAP Financial Measures and Other Operating Measureson page 2 of this document Discussion of factors impacting the Company’s results The Company experienced a 1.6% revenue decline from 2016 to 2017, after achieving a 7.7% revenue increase from 2015 to 2016. The 1.6% decline in revenue from 2016 to 2017 was the result of decreases in our Average Fee of 11.3% (10.9% excluding the impact of foreign exchange rate fluctuations) and our Average Number of Partners of 1.3%. These declines were partially offset by a 13.9% increase in the Number of Assignments per partner. The 7.7% increase from 2015 to 2016 was driven by increases in our Average Fee of 18.1% (11.0% excluding the impact of foreign exchange rate fluctuations) and our Average Number of Partners (9.2%), partly offset by an 18.0% decrease in the Number of Assignments per partner. Management Discussion and Analysis 6 Caldwell Partners – Our Average Fee is impacted by economic conditions and related competitive pricing pressures as well as the seniority level of searches undertaken. We attempt to protect our Average Fee by maintaining a strategic focus towards securing high level executive placements, which, in turn, have higher compensation levels upon which our fees are based. Yearly average foreign exchange rate movements can also have a significant impact on our Average Fee. The average US dollar rate was stable from 2016 to 2017, declining 0.8% relative to the Canadian dollar after experiencing a 9.0% increase from 2015 to 2016. The United Kingdom’s announced departure from the European Union caused a decline of 13.5% in the average British Pound rate from 2016 to 2017 relative to the Canadian Dollar, but given the small size of our operations in the UK, this did not have a significant result on our financial results. The following table summarizes the approximate foreign exchange rates impacting the business during fiscal 2017, 2016 and fiscal 2015 according to geographic segment. Exchange Rates to the Canadian Dollar Fiscal 2016 Fiscal 2017 Fiscal 2015 Functional Currency United States US dollar – average US dollar – period end Canada Canadian dollar – average Canadian dollar – period end Europe British pound – average British pound – period end 1.32 1.25 1.00 1.00 1.67 1.62 1.33 1.31 1.00 1.00 1.93 1.72 1.22 1.32 1.00 1.00 1.90 2.03 The Number of Assignments per Partner rebounded from 2016 to 2017, after falling from 2015 to 2016. The fluctuations were attributable largely to Canada where we faced significantly weaker market conditions during 2016 relative to 2015 and 2017. The weakness in 2016 was attributable in large part to the impact of falling oil prices to which Western Canada’s economy is tied and which then spread to financial services. A general rebound in financial services and the diversification of our search work in Western Canada has led to notably increased search volumes in 2017. The increase in the Average Number of Partners over the past two years has been driven primarily by organic hires as well as our acquisition of Hawksmoor Search, Ltd. based in the United Kingdom in October 2015. The partner headcount metric has increased from 37 in 2015 to 39 at the close of 2017 within our owned operations and from 37 to 58 including our affiliation partners during the same timeframe. Management Discussion and Analysis 7 Caldwell Partners – In fiscal 2017, net earnings increased $1,076 to $1,957 from $881 in the prior year. The net earnings increase resulted from a $1,835 increase in operating profit, partially offset by a decrease in investment income of $366 from the marketable securities gains realized on sales during 2016 and a $393 increase in income tax expense on the higher overall profit. The key components of the $1,835 increase in operating profit from 2016 to 2017 were lower direct costs resulting from expense alignment initiatives and non-recurring costs last year related to the sublease and relocation of our New York office premises and separation costs associated with aligning our support staff structure totaling $1,009. These cost decreases were partially offset by increases in management operating performance bonus accruals of $939 relating to achievement of performance targets in the current year versus non- attainment in the prior year. The 2017 financial results and cost drivers are discussed more fully in the following Operating Results section. Additionally, the Business Outlook section discusses our current views on future operating profit performance. In 2016, net earnings decreased $1,095 to $881 compared to 2015, the result of a decrease in operating profit and an increase in income tax expense offset by realized marketable security investment gains. The $898 decrease in operating profit was the result of increased losses in the UK of $993 over the prior year, charges in the fourth quarter of fiscal 2016 of $759 related to the sublease and relocation of our New York office premises and $250 of separation costs associated with aligning our support staff structure to current-state business needs. These year-over-year cost increases were partially offset by reductions in management short-term and long term compensation of $1,305 relating to non-attainment of financial performance goals and share price-based accrual adjustments. The $538 increase in income tax expense resulted from a shift in taxable income being generated in the United States where income tax rates are higher relative to Canada and the UK, and an increase in investment income of $341 from the realization of gains from the sale of marketable securities. The increase in unencumbered cash from 2016 to 2017 of $1,586 was due to an increase in cash and cash equivalents ($2,495); decreases in accounts receivable ($638), net current deferred tax assets ($962) and total current liabilities ($810); coupled with net decreases across other components ($119). The decrease in unencumbered cash from 2015 to 2016 of $2,084 was the result of decreases in cash and cash equivalents ($1,534) and current marketable securities ($2,709) offset by increases in accounts receivable ($1,702) and net increases across other components ($457). A reconciliation of unencumbered cash and discussion of the drivers from 2016 to 2017 and from 2015 to 2016 is included in the Liquidity and Capital Resources section of this Management Discussion and Analysis and the prior year’s Management Discussion and Analysis, respectively. Fiscal 2016 and 2015 results are more fully discussed under Operating Results within the 2016 and 2015 Management Discussion and Analysis documents, respectively, as filed on SEDAR (www.sedar.com). Management Discussion and Analysis 8 Caldwell Partners – Revenue Operating Results 2017 2016 Professional Fees Investment income Professional revenue License fee revenue Revenue ¹ Period end number of partners Average Number of Partners Annualized Professional Fees per Partner Number of Assignments Number of Assignments per Partner Average Fee per Assignment ¹ ¹ ¹ ¹ Professional Fees Investment income Professional revenue License fee revenue Revenue ¹ Period end number of partners Average Number of Partners Annualized Professional Fees per Partner Number of Assignments Number of Assignments per Partner Average Fee per Assignment ¹ ¹ ¹ ¹ ¹ ¹ Q1 13,629 $ $ - $ 13,629 $ 75 $ 13,704 Q2 13,665 $ $ - $ 13,665 $ 62 $ 13,727 Q3 14,443 $ $ - $ 14,443 $ 81 $ 14,524 $ $ $ 37 37.8 1,442 116 3.1 117 35 36.0 1,518 88 2.4 155 40 37.0 1,561 116 3.1 125 $ $ $ 13,945 $ $ - $ 13,945 $ 65 $ 14,010 $ $ $ $ $ 14,281 787 15,068 67 15,135 $ $ $ $ $ 13,680 90 13,770 57 13,827 $ $ $ 38 37.5 1,487 105 2.8 133 38 38.0 1,503 77 2.0 185 38 38.0 1,440 107 2.8 128 $ $ $ Q4 15,758 $ $ - $ 15,758 $ 92 $ 15,850 Annual 57,495 $ $ - $ 57,495 $ 310 $ 57,805 $ $ 39 39.5 1,596 112 2.8 141 39 37.5 1,533 432 11.5 133 $ $ 15,712 $ $ - $ 15,712 $ 64 $ 15,776 $ $ $ $ $ 57,618 877 58,495 253 58,748 $ $ 38 38.5 1,632 94 2.4 167 38 38.0 1,516 383 10.1 150 $ $ ¹ Please refer to the section on Non-GAAP Financial Measures and Other Operating Measures on page 2 of this document Revenue and operating income are difficult to predict and have historically varied significantly from quarter to quarter. There is no discernible seasonality in our business on a quarterly basis. We track our revenue by professional fees, investment income and license fee revenue. Our capacity to generate revenue increases with the number of partners we employ and affiliate with, and is dependent on the fees we are able to charge and our partners’ productivity that is, in turn influenced significantly by competition and general economic hiring conditions. Additionally, given our relatively small partner base, we have limited diversification, and consequently, results will fluctuate significantly from quarter to quarter. The preceding chart sets forth select revenue and operating measures. We believe these measures help explain our revenue and its variation from period to period. Professional Fees Fourth Quarter Consolidated Professional Fees Professional fees for the fourth quarter of 2017 increased 0.3% (0.9% excluding an Management Discussion and Analysis 9 Caldwell Partners – unfavourable 0.6% variance from exchange rate fluctuations) over the comparable period last year to $15,758 (2016: $15,712). The positive impact of a higher Average Number of Partners at 39.5 compared to 38.5 in the prior year period and higher productivity per partner was partially offset by a lower Average Fee. The Number of Assignments per Partner increased to 2.8 (2016: 2.4), resulting in an increase in the total Number of Assignments to 112 (2016: 94). The Average Fee per Assignment decreased to $141 (2016: $167). Year-to-Date Consolidated Professional Fees Professional fees for the year decreased 0.2% (an increase of 0.4% excluding an unfavourable 0.6% variance from exchange rate fluctuations) over the comparable period last year to $57,495 (2016: $57,618). A slightly lower Average Number of Partners at 37.5 compared to 38.0 in the prior year and a lower Average Fee per Assignment were partially offset by higher productivity per partner. The Average Fee per Assignment decreased to $133 (2016: $150). The year-to-date Number of Assignments per Partner increased to 11.5 (2016: 10.1), resulting in an increase in the total Number of Assignments to 432 (2016: 383). Fourth Quarter and Year-to-Date Professional Fees by Geography United States: Fourth quarter professional fees in the US were down 13.0% (12.3% excluding an unfavourable 0.7% variance from exchange rate fluctuations) to $10,492 (2016: $12,063). Increases in both the Average Number of Partners and Number of Assignments per Partner were more than offset by a decrease in the Average Fee per Assignment during the period. Professional fees in the US for the year were down 3.5% (3.0% excluding an unfavourable 0.5% variance from exchange rate fluctuations) to $41,658 (2016: $43,170). Similar to the results for the quarter, increases in both the Average Number of Partners and Number of Assignments per Partner were more than offset by a decrease in the Average Fee per Assignment during the period. Canada: Fourth quarter professional fees in Canada were up 61.9% to $5,079 (2016: $3,139). The impact of a slightly lower Average Number of Partners was more than offset by a higher Number of Assignments per Partner and a higher Average Fee per Assignment. Two specific assignments generating Professional Fees in excess of $800 drove professional fees and the Average Fee per Assignment in the current year quarter. Professional fees in Canada for the year were up 21.1% to $14,852 (2016: $12,260), with a higher Average Number of Partners and higher Number of Assignments per Partner partially offset by a lower Average Fee per Assignment. Europe: Fourth quarter professional fees in Europe were down 63.3% (down 59.4% excluding an Management Discussion and Analysis 10 Caldwell Partners – unfavourable 3.9% variance from exchange rate fluctuations) to $187 (2016: $509). During the fourth quarter of fiscal 2016 and first quarter of fiscal 2017, two partners, whose aggregate related costs were significantly higher than the revenue produced, left the firm and corresponding reductions were made to the support staff. Despite a new partner being hired near the end of the current year third quarter, there was still a decrease during the quarter in the Average Number of Partners, exacerbated by a decrease in the Number of Assignments per Partner and only partially offset by an increase in the Average Fee per Assignment. Professional fees in Europe for the year were down 55.0% (down 47.1% excluding an unfavourable 7.9% variance from exchange rate fluctuations) to $985 (2016: $2,188) with lower Average Number of Partners and lower Number of Assignments per Partner being offset slightly by a higher Average Fee per Assignment, for the reasons noted above. Investment income During fiscal 2016, the firm monetized an equity position obtained as a portion of professional fee consideration in the US from a prior period which resulted in the recognition of $877 of investment income recorded during the second quarter ($787) and third quarter ($90) of fiscal 2016. The investment was settled in a combination of cash ($491) and shares of a publicly traded company restricted by a mandatory hold period of six months ($386). The investment was sold during the third quarter of fiscal 2017 upon expiration of the hold period. The Company holds $172 (August 31, 2016: $573) in investments in illiquid marketable securities in private companies obtained in addition to cash for performance of search services and these investments are reflected in non-current assets in the consolidated statements of financial position. Accounting for investment income and the related equity interests is described in note 3 to the annual consolidated financial statements. License Fees License fees from our affiliations in Latin America and New Zealand for the use of the Caldwell Partners brand and intellectual property were $92 (2016: $64) for the fourth quarter and $310 (2016: $253) for the full year. Cost of Sales 2017 2016 Cost of sales Cost of sales as a % of professional revenue Cost of sales Cost of sales as a % of professional revenue $ $ Q1 10,221 75.0% 10,868 77.9% $ $ Q2 9,725 71.2% 11,693 77.6% $ $ Q4 11,588 73.5% 11,447 72.9% $ $ Q3 10,771 74.6% 10,596 76.9% Annual $ $ 42,305 73.6% 44,604 76.3% Cost of sales pertains to professional revenue (including professional fees and investment income) and comprises partner compensation, related search delivery personnel compensation and the direct costs of providing our search services. Compensation costs include fixed salaries, variable incentive compensation and related employee benefits and Management Discussion and Analysis 11 Caldwell Partners – payroll taxes. In aggregate and over time, these costs are largely variable to professional revenue, with fluctuations arising from changes in incentive compensation based on Average Professional Fee per Partner and the leverage impact of certain fixed support costs during periods of growth or decline. Variable incentive compensation for our Partners is based on a percentage of the amount of collected professional revenue attributed to each respective Partner; the higher the collected professional revenue in a fiscal year, the higher the percentage the Partner is eligible to earn. Significant fluctuations can be seen by geography from quarter to quarter based on the relatively small number of partners in each region and how those individuals’ estimated compensation changes based on annualizing their quarterly results in recording compensation accruals. Costs associated with license fee revenue such as legal and professional fees are included in general and administrative expenses. Fourth Quarter Consolidated Cost of Sales Fourth quarter cost of sales increased 1.2% or $141 to $11,588 (1.8% excluding a favourable 0.6% variance from exchange rate fluctuations) from $11,447. On a segment basis, the year- over-year cost of sales increase of $141 came from an increase in Canada ($1,547) partially offset by decreases in the US ($1,101) and Europe ($305). As a percentage of professional revenue, cost of sales increased 0.6% to 73.5%, up from 72.9% in the same period last year. Higher partner compensation (up 0.8% as a percentage of professional revenue) caused by higher partner compensation tiers obtained during the fourth quarter and applied to year-to-date revenue and higher costs of search delivery materials (up 0.7% as a percentage of professional revenue) were partially offset by fixed cost partner support personnel compensation (down 0.9% as a percentage of professional revenue). Year-to-Date Consolidated Cost of Sales Cost of sales for the year decreased 5.2% to $42,305 (4.5% excluding a favourable 0.7% variance from exchange rate fluctuations) from $44,604. As a percentage of professional revenue, cost of sales decreased to 73.6%, down $2,299 or 2.7% of professional revenue from 76.3% in the same period last year. Lower partner compensation (down 1.1% as a percentage of professional revenue) was driven by lower variable commission tiers in the current year compensation plan compared to the prior year lower partner support personnel compensation (down 1.7% as a percentage of professional revenue). These favourable variances were partially offset by slightly higher costs of search delivery materials (up 0.1% as a percentage of professional revenue). Fourth Quarter and Year-to-Date Cost of Sales by Geography United States: Compared to the 13.0% decrease in US professional revenue, fourth quarter cost of sales in the US decreased $1,101 or 12.5% ($1,050 or 12.0% on a constant dollar basis) to $7,683 (2016: $8,784). Cost of sales increased as a percentage of professional revenue, and represented 73.2% of professional revenue compared to 72.8% in the prior year. Higher fixed Management Discussion and Analysis 12 Caldwell Partners – cost partner support personnel compensation (up 1.0% as a percentage of professional revenue) and higher costs of search delivery materials (up 0.8% as a percentage of professional revenue) were partially offset by lower partner compensation (down 1.4% as a percentage of professional revenue). Compared to the 3.5% decrease in US professional revenue, full year cost of sales in the US decreased $2,606 or 7.9% ($2,486 or 7.5% on a constant dollar basis), to $30,412 (2016: $33,018). As a percentage of professional revenue these costs represented 73.0% of professional revenue compared to 75.0% in the prior year. Lower partner compensation (down 1.0% as a percentage of professional revenue), lower partner support personnel compensation (down 1.0% as a percentage of professional revenue) and search delivery material costs remaining flat account for the decline in cost of sales as a percentage of revenue. Canada: Compared to the professional revenue increase of 61.9%, fourth quarter cost of sales in Canada increased $1,547 or 71.1% to $3,724 (2016: $2,177). As a percentage of professional revenue, these costs represented 73.3% of professional revenue vs. 69.4% in the prior year. The increase was driven by higher variable partner compensation on increasing commission tiers from elevated average revenue per partner (up 8.6% as a percentage of professional revenue) and higher search delivery material costs (up 0.8% as a percentage of professional revenue). These increases were partially offset by lower partner support personnel compensation as a percentage of revenue, as leverage was obtained from the fixed cost nature of support costs in the short-term during a period of rapidly increasing revenue, effectively reducing the costs percentage by 5.5% as a percentage of professional fees. Relative to the professional revenue increase of 21.1%, full year cost of sales in Canada increased $1,990 or 21.9% to $11,085 (2016: $9,095). As a percentage of professional revenue these costs represented 74.6% vs. 74.2% in the prior year. Increases in variable partner compensation (up 2.9% as a percentage of professional revenue) and search delivery materials costs (up 0.4% as a percentage of professional revenue) have been partially offset by lower partner support personnel compensation costs (down 2.9% as a percentage of professional revenue). Europe: Compared to the 63.3% decrease in professional revenue, fourth quarter cost of sales in Europe decreased $305 or 62.8% ($289 or 59.5% on a constant currency basis) to $181 from $486 in the comparable period a year ago. Cost of sales represented 96.8% of professional revenue compared to 95.3% in the fourth quarter of last year. This percentage cost increase is the result of higher partner support personnel compensation (up 8.3% as a percentage of professional revenue) and higher costs of search delivery materials (up 1.1% as a percentage of professional revenue) being partially offset by lower partner compensation (down 7.9% as a percentage of professional revenue). Management Discussion and Analysis 13 Caldwell Partners – Compared to the 55.0% decrease in professional revenue, cost of sales in Europe for the year decreased $1,683 or 67.6% ($1,558 or 62.5% on a constant currency basis), to $808 from $2,491 in the comparable period a year ago. Costs as a percentage of professional revenue decreased to 82.0% vs. 113.8% in the same period last year. This decrease was the result of lower partner compensation on reduced staffing (down 28.1% as a percentage of professional revenue), lower partner support personnel compensation (down 2.1% as a percentage of professional revenue) and lower costs of search delivery materials (down 1.6% of professional revenue). Gross Profit and Margin $ $ Q4 4,262 26.9% 4,329 27.4% Annual $ $ 15,500 26.8% 14,144 24.1% $ $ Q3 3,753 25.8% 3,231 23.4% $ $ Q2 4,002 29.2% 3,442 22.7% Q1 $ $ 3,483 25.4% 3,142 22.4% 2017 2016 Gross profit in the fourth quarter decreased 1.5% (0.7% excluding an unfavourable 0.8% variance from exchange rate fluctuations) to $4,262 or 26.9% of revenue in the previous year (2016: $4,329 or 27.4% of revenue). The 0.5% increase in total revenue was offset by the 0.6% increase in Cost of Sales as a percentage of Revenue. On a segment basis, gross profit was $2,809 from the US, $1,447 from Canada ($1,681 less $234 in intercompany license fee revenue), and $6 from Europe. For the year, gross profit increased 9.6% (10.2% excluding an unfavourable 0.6% variance from exchange rate fluctuations) to $15,500, from $14,144 in 2016. The higher gross profit was driven by the 2.7% decrease in cost of sales as a percentage of revenue, partially offset by the unfavourable impact of a 1.6% revenue decrease. As a result, gross margin for 2017 was 26.8% (2016: 24.1%). On a segment basis, gross profit was $11,246 from the US, $4,077 from Canada ($5,012 less $935 in intercompany license fee revenue), and $177 from Europe. The quarter and full year variances are discussed in detail under Revenue and Cost of Sales. Expenses 2017 2016 Q1 $ $ 2,384 3,290 Q2 3,396 2,733 $ $ Q3 3,131 2,551 $ $ Q4 3,476 4,292 $ $ Annual $ $ 12,387 12,866 Management Discussion and Analysis 14 Caldwell Partners – Fourth Quarter Expenses: Fourth quarter expenses decreased 19.0% or $816 from the prior year comparable period to $3,476 (2016: $4,292). Excluding exchange rate variances of $15, expenses on a constant currency basis decreased $831 or 19.3% versus the same period last year. During the fourth quarter of the previous year we incurred certain expenses in connection with reducing the fixed costs of the Company. This included charges of $759 related to the sublease and relocation of our New York office premises and $250 of separation costs associated with aligning our support staff structure to current‐state business needs. Adjusting for the charges taken, the remaining expenses increased $178 on a constant currency basis or 5.6% over the same period last year. The $178 increase is the result of management operating performance bonus accruals based on achievement of performance targets in the current year versus non‐attainment in the prior year ($387), higher marketing and business development costs ($105), partner recruitment expenses ($62) and the change in foreign exchange losses ($43), being offset by lower share‐based compensation expense ($148), lower legal fees resulting from costs associated with our support staff restructure and global trademark filings last year not recurring ($116), lower management and corporate support staff salaries ($42), lower occupancy costs on our New York office relocation and a reduction in the square footage at our United Kingdom location partially offset by operating lease cost escalations ($35) and general cost decreases across other categories ($78). On a segment basis, expenses were $2,593 from the US ($2,359 net of $234 in intercompany Year‐to‐Date Expenses: license fees), $969 from Canada and $148 from Europe. Full year expenses decreased 3.7% or $479 over the prior year to $12,387 (2016: $12,866). Excluding exchange rate variances of $119, remaining expenses on a constant currency basis decreased $360 or 2.8% over the same period last year. The decrease includes the charges taken in the fourth quarter of 2016 discussed above of $759 related to the sublease and relocation of our New York office space as well as the separation costs of $250. Adjusting for the charges taken, year over year expenses increased $649 on a constant currency basis, or 5.5%. Constant currency cost increases were seen in management operating performance bonus accruals based on achievement of performance targets in the current year versus non‐attainment in the prior year ($958) and partner recruitment expenses ($121). These were partially offset by lower management and corporate support staff salaries ($130), a reduction in the contingent consideration payable related to the Hawksmoor acquisition based on final earn‐out achievement calculations ($115), lower partner conference costs ($97), lower foreign exchanges gains on intercompany loan balances and USD bank account balances ($36) and general decreases across other categories ($52). On a segment basis, expenses were $9,346 from the US ($8,411 net of $935 in intercompany license fees), $3,311 from Canada and $665 from Europe. Management Discussion and Analysis 15 Caldwell Partners – Operating Profit 2017 2016 Q1 $ Q2 $ Q3 $ 1,099 8.0% (148) (1.1%) 606 4.4% 709 4.7% 622 4.3% 680 4.9% $ $ $ Q4 $ Annual $ 786 5.0% 37 0.2% 3,113 5.4% 1,278 2.3% $ $ For the 2017 fourth quarter, higher revenue ($74) and lower expenses ($816) partially offset by higher cost of sales ($141) resulted in an increase in operating profit of $749 over the comparable period in the prior year to $786 (2016: $37). Exchange rate variances accounted for net reduction of $47 in operating profit relative to the rates in effect in the prior year period. On a segment basis, the fourth quarter operating profit of $786 came from the US producing $216 ($450 income excluding the impact of intercompany license fees), Canada $712 ($478, excluding intercompany license fee revenue) and Europe generating an operating loss of $142. For the 2017 full year, lower revenue ($943) more than offset by decreases in cost of sales ($2,299) and expenses ($479) from variances discussed above resulted in an increase in operating profit of $1,835 to $3,113 (2016: $1,278). Exchange rate variances accounted for a net $23 increase in operating profit relative to the rates in effect in the prior year. On a segment basis, full year operating profit of $3,113 came from operating profit in the US of $1,900 ($2,835 net of intercompany license fees) and operating profit in Canada of $1,701 ($766 net of intercompany license fee revenue) being offset by an operating loss in Europe of $488. The quarter and full year variances are discussed in detail under Revenue, Cost of Sales and Expenses. Investment Income from Marketable Securities 2017 2016 Q1 $ - $ 1 Q2 $ - $ 403 Q3 (142) $ $ - Q4 $ 180 $ - Annual $ $ 38 404 The Company invests excess cash balances and manages market risk by using a third party investment manager to follow the specific investment criteria established and approved by the Board of Directors and designed to reduce exposure to market risk. We also previously held an equity security with a short-term trade restriction in a publicly traded company. This security was obtained when a client company was acquired in which the we held an equity Management Discussion and Analysis 16 Caldwell Partners – position previously obtained through the settlement of search fees being paid partially in equity of the client company. The entire position in this security was sold during the third quarter of fiscal 2017 resulting in a realized loss of $142 being recognized in investment income which had previously been recorded to other comprehensive income in the consolidated interim statements of comprehensive earnings. As at August 31, 2017, managed funds and client equity investments classified as short-term were $5,048 (August 31, 2016: $4,784) and nil (2016: $272), respectively. Additionally, we have a portfolio of illiquid equity investments obtained through search fees that are classified as long-term with a balance of $172 at August 31, 2017 (August 31, 2016: $573). Regarding investments generated from search services with clients, compensation equal to 50% of the investment is paid to the respective partners involved with the search upon monetization of the investment. As of August 31, 2016, a partner’s entitlement to any amounts upon liquidation was contingent upon being employed at the time of liquidation and we recorded the investment at 100% of the fair market value with a related 50% compensation payable liability. Effective in fiscal 2017, the continuing employment requirement was lifted, and all rights to the partners’ 50% of the equity instruments were transferred and assigned beneficially to the respective partners. As a result of this change, the gross asset value and compensation payable have been offset, with the investment now recorded at the net amount to which the Company has economic rights. Estimated changes in the fair value of this carrying amount are recorded in other comprehensive income. When the investments are ultimately settled, any accumulated gains or losses would transferred from accumulated other comprehensive income and realized as investment income in the consolidated statement of earnings during such settlement period. The Company’s policy regarding equity instruments within marketable securities is to sell the investments as soon as the Company is reasonably able to do so. For the fourth quarter of 2017, the Company reported investment income of $180. No investment income was reported in the comparable period last year. For the full year 2017, the Company reported investment income of $38 compared to $404 in 2016. This year’s income includes $180 of realized gains earned on the liquidation of funds and $142 of realized losses on the liquidation of an equity position obtained through search fees being paid partially in equity of the client. The previous year amount includes $403 of realized gains earned on the liquidation of funds as well as interest on term deposits and other cash balances. Management Discussion and Analysis 17 Caldwell Partners – Earnings Before Income Taxes Earnings 2017 2016 Q1 $ $ 1,099 (147) Q2 $ $ 606 1,112 Q3 $ $ 480 680 Net Earnings 2017 2016 Q1 $ $ 762 (165) Q2 $ $ 267 764 Q3 $ $ 224 339 Basic Earnings Per Share 2017 2016 Q1 $ $ 0.038 (0.008) Q2 0.013 0.038 $ $ Q3 0.011 0.017 $ $ Q4 $ $ 966 37 Annual $ $ 3,151 1,682 Q4 $ $ 704 (57) Annual $ $ 1,957 881 Q4 0.034 (0.003) $ $ Annual $ $ 0.096 0.044 Income tax expense in the fourth quarter of fiscal 2017 was $262 (2016: $94) arising from a current income tax recovery of $462 (2016: $309 recovery) offset by a deferred tax expense of $724 (2016: $403). Income tax expense for the year ending August 31, 2017 was $1,194 (2016: $801) reflecting current tax expense of $470 (2016: $398) and deferred tax expense of $724 (2016: $403). Income tax expense for Canada for the quarter ended August 31, 2017 was $202 (2016: $172). For the full year income tax expense for 2017 was $460 (2016: $366) reflecting an effective tax rate of 24.5% compared to a statutory tax rate of approximately 26.5% in Canada. Income tax expense for the US for the quarter ended August 31, 2017 was $60 (2016: $78 recovery). Full year income tax expense for 2017 was $734 (2016: $496) or 41.8% compared to a US effective tax rate of approximately 40.0%. No income tax expense recovery was recognized during 2017 for the UK (2016: recovery of $61). Deferred income tax assets of $98 (2016: $245) that can be carried forward against future taxable income have not been recognized. Fourth quarter net earnings were $704 ($0.034 per share) in 2017, as compared to a net loss of $57 ($0.003 per share) in the comparable period a year earlier. The full year net earnings after tax were $1,957 ($0.096 per share) in 2017, versus $881 ($0.044 per share) in 2016. Management Discussion and Analysis 18 Caldwell Partners – Dividends The Board of Directors continues to believe that the payment of regular dividends is in the best interests of the Company and its shareholders. In setting quarterly dividend payments, the Board of Directors considers many factors including current earnings results, future earnings projections, cash needs for operational growth and balances of Unencumbered Cash (as defined in Non-GAAP Financial Measures on page 3 and discussed below in Liquidity and Capital Resources) which can act as a buffer against short-term earnings volatility. Subsequent to shareholder approval of the restatement of capital on May 1, 2012, the Company has now declared twenty-two quarterly dividends through August 31, 2017 with total dividends declared of 40.0 cents per share or $7,871 in total. On November 9, 2017 the Board of Directors declared a dividend of 2.0 cents per share, payable to holders of Common Shares of record on November 20, 2017 and to be paid on December 15, 2017. Liquidity and Capital Resources The Company maintains cash balances at various financial institutions and in various geographies through its subsidiaries. While the Company has the ability to move funds between geographies and legal entities, there are certain dividend taxes applicable, including a five percent tax on dividends paid from the United States to Canada. Additionally, in order to lend or dividend funds between the Company’s legal entities, each entity must maintain certain statutory liquidity levels at its subsidiaries in order to ensure their liquidity. As at August 31, 2017, the Company had $5,048 of current marketable securities plus cash and cash equivalents including restricted cash of $11,050, for a total cash and current marketable securities balance of $16,098, up $2,433 from $13,665 at year-end 2016. The increase is the result of cash flow from operations being only partially offset by sign-on payments to certain new partner hires, dividend payments issued during the year and capital expenditures. The Company’s cash and compensation payable balances fluctuate significantly from period to period based on the timing of commission payments per the Company’s compensation plans. Compensation payable is generally at its lowest after the largest deferred compensation payments are made at the end of each February, and generally grows during subsequent periods. The compensation payable is funded by the company’s cash, marketable security balances and accounts receivable which build during the same cycle as the compensation liability and are similarly reduced as cash is used to satisfy the compensation liability. As a result, the cash balances and compensation payable typically move together taking into account non-operating sources and uses of cash. At August 31, 2017, current Compensation Payable was $15,896 (2016: $16,125), total cash and current marketable securities were $16,098 (2016: $13,665) and Accounts Receivable were $9,393 (2016: Management Discussion and Analysis 19 Caldwell Partners – $10,031). As a result of these trends, the Company uses the non-GAAP measure of Unencumbered Cash as a more consistent measure for the cash the company has available beyond that needed for short-term obligations. Unencumbered Cash is defined in the section on Non-GAAP Financial Measures and Other Operating Measures on page 3 of this document. The following chart sets forth the calculation of Unencumbered Cash and provides reconciliation to cash and cash-equivalents: as at Cash and cash-equivalents Restricted cash Marketable securities - current Accounts receivable Net current deferred tax assets August 31 2017 August 31 2016 $10,917 133 5,048 9,393 1,929 27,420 $8,422 187 5,056 10,031 2,891 26,587 Total current liabilities Excluding (20,091) (20,901) Deferred revenue Deferred compensation Total Unencumbered Cash 1,107 (553) $7,883 1,187 (576) $6,297 Accounts receivable were $9,393 at August 31, 2017, down $638 from $10,031 at the end of fiscal 2016. Days outstanding based on quarterly revenue were 51 days at August 31, 2017 versus 54 days at August 31, 2016. At August 31, 2017, a reserve of $522 or approximately 52% of accounts over 90 days old has been taken (2016 $598 or 42% of accounts over 90 days). Total liabilities were $21,182 at August 31, 2017, down $590 from $21,772 at the end of 2016 reflecting, lower accounts payable ($340) and the payment and reversal of contingent consideration ($289) offset by net increases across other liabilities ($39). The Company’s investment in property and equipment at August 31, 2017 was $1,699 compared with $1,838 at the end of 2016. This reflects additions of $469, depreciation expense of $559 and exchange rate fluctuations over the year of $49. Capital expenditures included computer hardware and software, leasehold improvements and office furniture and equipment. Shareholders’ equity at August 31, 2017 was $13,120, up $193 from $12,927 at the end of 2016. This increase reflects the net earnings for the year of $1,957, dividends declared of $1,622, employee option plan share issuance of $187, realized capital gains moved out of accumulated other comprehensive income of $38, translation losses on consolidation of $414 and an unrealized gain on marketable securities of $123. Management Discussion and Analysis 20 Caldwell Partners – Total 2018 2019 2020 2021 2022 Thereafter Contractual Obligations $ Operating leases Accounts payable Compensation payable Dividends payable 11,648 2,044 16,854 408 $ 3,242 2,044 15,896 408 $ 2,842 - 335 - $ 2,322 - 264 - $ 1,737 - - - 818 - - - $ 687 - 359 - Total $ 30,954 $ 21,590 $ 3,177 $ 2,586 $ 1,737 $ 818 $ 1,046 The operating lease commitments are in respect to the office space required to operate our business and do not reflect offsetting sublease payments from which the Company expects to recoup $2,824 through September 30, 2021. Cash outlays for our contractual obligations and commitments identified above are expected to be funded by cash on hand and cash generated by operating activities in the respective year of the outlay. The Company does not have any material commitments to purchase property and equipment. Outstanding Shares As at November 9, 2017 the authorized share capital of the Company consists of an unlimited number of Common Shares of which 20,404,555 are issued and outstanding (August 31, 2017: 20,404,555; August 31, 2016: 20,129,555). The holders of Common Shares are entitled to share equally, share for share, in all dividends declared by the Company and equally in the event of a liquidation, dissolution or winding-up of the Company or other distribution of the assets among shareholders. On September 23, 2015 the Company completed its previously announced purchase of shares of the Company from DHR International, Inc. The 1,145,600 shares were purchased at $1.40 per share for $1,604 plus associated legal fees. The shares were then cancelled, reducing the Company’s outstanding shares from 21,275,155 to 20,129,555. On February, 3, 2017 an employee of the Company exercised 275,000 options increasing the number of outstanding shares from 20,129,555 to 20,404,555. On September 14, 2017, options to purchase 250,000 shares of the Company were issued to an employee of the Company. As of November 9, 2017 options to purchase 350,000 common shares of the Company were outstanding (August 31, 2017: 100,000; August 31, 2016: 375,000). Business Outlook In Canada, fiscal 2017 saw a significant rebound from the previous year’s challenges. Although the energy sector is still depressed in Western Canada, our teams have expanded their work across other industries while we have also seen a strengthening in the financial services market from coast to coast. The early indications in fiscal 2018 are a continuation of this stability. Continued pressure on the Average Fee in Canada during fiscal 2018 is probable given that 2017 benefitted from certain unusually high fee assignments that may not recur, including two engagements during the fourth quarter generating aggregate fees in excess of $800. Management Discussion and Analysis 21 Caldwell Partners – In the United States, where the majority of our search business is generated, we continued to experience a strong economic environment as evidenced by the higher search volumes, although they were more than offset by a lower Average Fee per Assignment. We do not believe this was caused by specific pricing pressures on our fee model, but a reflection of our taking on slightly lower level assignments. Additionally, we hired five new partners in the United States during the second half of fiscal 2017 and we expect their revenues to increase fiscal 2018 results, as they integrate into our firm and log a full year here. Incremental staffing costs are expected in fiscal 2018 as additional staff hired late in fiscal 2017 to support the new partners will be with us for the full fiscal 2018 year. In the United Kingdom, operating results were negatively impacted by the departure of two partners who had been hired in the prior fiscal year, reducing our partner base to one for most of the fiscal year. Near the end of the third quarter we hired an additional partner for our London office and have also added another partner in the first quarter of fiscal 2018. With these hires, we believe we have substantially enhanced our revenue base for future periods, although we may not see the impact immediately as they ramp up to full productivity. We remain committed to being in the United Kingdom and view it as important to our strategy of delivering services to our clients and growing a long-term globally profitable business. However, additional modest operating losses in the UK region are possible during fiscal 2018 as our hires become fully productive. Additional revenue and earnings growth remains a priority for the Company, but at a measured pace that will not otherwise impede the long term profitability and continuation of regular dividend payments. We expect future growth to be driven by targeted partner hires as we seek to continue to build our practice and functional offerings across geographies in United States, Canada and Europe. As appropriate, we will review acquisition opportunities. We are additionally looking to prudently expand our service lines in areas that can leverage the existing expertise of our search teams. We have recently entered into Executive Advisory Solutions whereby we will leverage our executive search network to provide talent and knowledge solutions to our clients, where full time hires are not required. Specifically, we have launched Cyber Advisory Solutions whereby executives who are experts in cyber security are structured in operational ongoing advisory boards available to work with client companies to aid in training, mentoring, organizational design, best practices and use of existing and emerging technologies. These same executives can also be made available to address specific client needs regarding a market or technology on a short-term, ad-hoc basis. We anticipate addressing other functional areas in a similar manner. We cannot ensure the success of such service line expansion, and will only continue to scale our efforts upon successful results of our initial functional areas chosen. We do not believe this will result in significant additional cost in the short term, but feel it will provide meaningful differentiation and added value to our clients. Management Discussion and Analysis 22 Caldwell Partners – Related Party Transactions Pursuant to its lease agreements, the Company paid rent for its Toronto office to an affiliated company owned by a shareholder, C. Douglas Caldwell, registered as owning more than 10% of the Company. The amount of consideration agreed to by the parties was determined to be fair market rental rates at the inception of the lease by an independent commercial real estate counselor and was approved by the independent Members of the Board of Directors. Occupancy costs within general and administrative expenses in the consolidated statements of earnings have been recognized for the year ended August 31, 2017 in the amount of $223 (2016: $223). Critical Accounting Estimates & Judgments The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following are the estimates and judgments applied by management that most significantly affect the Company's consolidated financial statements. These estimates and judgments have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The following discussion sets forth management’s most significant estimates and assumptions in determining the value of assets and liabilities, and the most significant judgments in applying Revenue recognition accounting policies. The Company’s method of revenue recognition requires it to estimate the expected average performance period and the percentage of completion, based on the proportion of the estimated effort to fulfill the Company’s obligations throughout the expected average performance period for its executive searches. Differences between the estimated percentage of completion and the amounts billed will give rise to a deferral of revenue to a future period. Changes in the average performance period or the proportion of effort expended throughout the performance period for its executive searches could lead to an under or overvaluation of revenue. Further information on deferred revenue is included in note 11 to the financial statements. Subsequent changes in fair value of the equity interests are recorded as unrealized gains or losses in other comprehensive income and are recognized to investment Allowance for doubtful accounts income within revenue when realized. Estimates are used in determining the allowance for doubtful accounts related to trade receivables. The estimates are based on management’s best assessment of the collectability of the related receivable balance based, in part, on the age of the specific receivable balance. An allowance is established when the likelihood of collecting the account has significantly diminished. Future collections of receivables that differ from management’s current estimates would affect the results of operations in future periods. Management Discussion and Analysis 23 Caldwell Partners – Valuation of equity interests in clients Equity interests held in clients can be difficult to obtain valuation information on. Equity instruments are most often in privately held companies without a specific obligation to share ongoing business performance and valuation information. The Company values such interests in accordance with its financial instruments policy with available information. As a result, the Impairment of goodwill current and future valuation of these interests could differ materially from current estimates. The Company tests at least annually whether goodwill is subject to any impairment. Various assumptions are made in performing this test, including estimates of future revenue streams, operating costs and discount rates. Future results that differ from management’s current estimates would affect the results of operation in future periods.. Risks and Uncertainties Below are the material risks facing our Company. Other risks not currently known or deemed to be material may also impact our business. Our business and financial results could be The ability to attract and retain experienced search professionals is critical to our materially adversely affected by any of these risks. business We compete with other executive recruitment firms for experienced consultants. Attracting and retaining consultants in our industry is important because consultants have primary responsibility for client relationships, and the loss of consultants often leads to the loss of client relationships. While we believe we offer one of the most competitive compensation plans in the industry and offer freedom for our partners to operate in the marketplace, the ability to continue to generate revenue and profits will depend on our ability to attract and Exposure to our partners taking our clients with them to another firm retain key professionals. Our success depends upon our ability to develop and maintain strong, long-term relationships with our clients. In many cases, one or two partners have primary responsibility for a client relationship. When a partner leaves one executive search firm and joins another, clients who have established relationships with the departing partner may move their business to the partner’s new employer. We may also lose clients if the departing partner has widespread name recognition or a reputation as a specialist in executing searches in a specific industry or management function. If we fail to retain important client relationships when a partner departs our firm, our business, financial condition and results of operations may be adversely affected. During 2017, approximately 10% of consolidated revenues were attributed to one revenue generating employee of the Company. We attempt to mitigate this risk by maintaining strong relationships with our partners and providing for certain contractual client and employee non-solicitation covenants in our offer of employment letters with our partners. Management Discussion and Analysis 24 Caldwell Partners – Our business is impacted by economic conditions Our revenue is affected by global economic conditions and economic activity in the regions where we operate. During economic slowdowns, companies may hire fewer employees which may have a negative impact on our financial condition. This risk is mitigated to some extent through our increasing diversity within our revenue base across geographies, industries and Competition functions. The executive search business is highly competitive in terms of both winning and pricing new engagements. The level of future profits of the Company will depend on its ability to retain its established client base, attracting new clients and maintaining fee levels. Some of our competitors possess greater resources, greater name recognition and may be further along in the development and design of technological solutions to meet client requirements. One area in which we mitigate competitive risk with our larger competitors is by having fewer client non-solicitation arrangements. It is standard practice in the industry to provide clients with a non-solicitation right ranging in scope from the placed executive to the entire client organization; this is known as “off-limits” protection. If too many off-limit arrangements are created, the ability to broadly and effectively source candidates for prospective client Liability risk in the services we perform engagements becomes impeded. In the normal course of our operations, we become involved in various legal actions, either as plaintiff or defendant, including but not limited to our commercial relationships, employment matters and services delivered, in addition to other things. Such matters include both actual as well as threatened claims. Possible claims include failure to maintain the confidentiality of the candidate’s employment search or for discrimination or other violations of the employment laws or malpractice. In various countries, we are subject to data protection laws impacting the processing of candidate information. To mitigate this risk, we engage outside counsel on a regular basis to review our policies and form of contracts. We utilize protective language in our standard client contracts and maintain professional liability insurance in amounts and coverage that we believe are adequate; however, we cannot guarantee that our insurance will cover all claims or that coverage will always be available. Significant uninsured liabilities could have a negative impact on our business, financial condition and results of operations. Furthermore, even if any action is settled within insurance limits, this can result in increases to our insurance premiums. Therefore there can be no assurance that their resolution will not have a material adverse effect on the Company’s financial condition or Potential legal liability from clients, employees and candidates for employment results of operations. We are exposed to potential claims with respect to the executive search process. For example, a client could assert a claim for matters such as breach of an off-limit agreement or recommending a candidate who subsequently proves to be unsuitable for the position filled. Further, the current employer of a candidate whom we placed could file a claim against us Management Discussion and Analysis 25 Caldwell Partners – alleging interference with an employment contract, a candidate could assert an action against us for failure to maintain the confidentiality of the candidate’s employment search, and a candidate or employee could assert an action against us for alleged discrimination, violations of labor and employment law or other matters. Also, in various countries, we are subject to data protection laws impacting the processing of candidate information and other regulatory requirements including the legality of gathering historical compensation data from candidates pursuant to an expanding number of equal pay laws. We attempt to mitigate these risks through onboarding and continuing training for our employees of existing and developing legal guidelines. We also carry insurance policies which may reimburse us for certain suffered losses in this area, although such reimbursement and the amount cannot be Cybersecurity requirements, vulnerabilities, threats and attacks guaranteed. Increased global cybersecurity vulnerabilities, threats and more sophisticated and targeted cyber-related attacks pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. We have a program in place to detect and respond to data security incidents. However, we remain potentially vulnerable to additional known or unknown threats. We also have access to sensitive, confidential or personal data or information that is subject to privacy and security laws, regulations and client-imposed controls. Despite our efforts to protect sensitive, confidential or personal data or information, we may be vulnerable to security breaches, theft, lost data, employee errors and/or malfeasance that could potentially lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems or networks, unauthorized access, use, disclosure, modification or destruction of information. In addition, a cyber-related attack could result in other negative consequences, including damage to our reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action which could result in a negative impact to our results of operations. We attempt to mitigate this risk through maintaining and complying with our data privacy policy informing our clients and candidates of how we use their personal information. We additionally utilize a third party information and security technology company to advise us on risk testing and mitigation to aid our own internal information technology staff. We also maintain a cyber- insurance policy which might mitigate certain financial costs in the event we were to suffer a Brand Reputation breach that caused us to incur financial losses. We depend on our overall professional reputation and brand name recognition to secure new engagements and hire qualified consultants. Our success also depends on the individual reputations of our consultants. We obtain many of our new engagements from existing clients or from referrals by those clients. A client who is dissatisfied with our work can adversely affect our ability to secure new engagements. If any factor, including poor performance, hurts our reputation we may experience difficulties in competing successfully for both new engagements and qualified consultants. Failure to maintain our professional reputation and Management Discussion and Analysis 26 Caldwell Partners – brand name could seriously harm our business, financial condition and results of operations. We attempt to mitigate this risk through the use of a client feedback process utilizing the third-party product Net Promoter Score® which provides us with feedback on our Alignment of our cost structure with revenue engagements and highlighting dissatisfied clients so we may respond. We must ensure that our costs and workforce continue to be in proportion to demand for our services. Failure to align our cost structure and headcount with net revenue could adversely affect our business, financial condition, and results of operations. We attempt to mitigate this risk related to short-term revenue shifts through having a large portion of our search professionals’ compensation tied to their individual and team revenue and for management Unfavorable tax law changes and tax authority rulings may adversely affect results to consolidated revenue and operating profit. We are subject to income taxes in Canada, the United States and in various other foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings among countries with differing statutory tax rates, or changes in the valuation allowance of deferred tax assets or tax laws. We attempt to mitigate this risk through working with our third party income tax consultants in reviewing our tax structure We may not generate sufficient cash flow from operations to support our strategic and providing advice regarding optimal tax structures. growth plan and maintain our dividend without utilizing funds invested in marketable securities The Company currently has investments in marketable securities and short-term money market instruments. However, if additional cash is required to grow the business and pay dividends in excess of cash generated, marketable securities and money market instruments Foreign currency exchange rate risks may affect our financial results may be liquidated and the returns on those instruments could be negatively impacted. With operations in Canada, the United States and the United Kingdom, we do business in multiple currencies. In 2017, approximately 74% of our revenue was generated outside of Canada and transacted in a currency other than the Canadian dollar. Our profitability is impacted by the translation of foreign currency financial statements into Canadian dollars. Fluctuations in relative currency values, particularly the strengthening of the Canadian dollar, could have an adverse effect on our profitability and financial condition. When management believes it has a significant short term net cash or intercompany loan balance, it will on occasion hedge its currency exposure by buying or selling the exposed currency on a forward We invest in marketable securities whose valuations fluctuate basis. Marketable securities consist of investments in professionally managed fixed income funds and certain equity securities obtained through search fees being paid partially in equity of the 27 Management Discussion and Analysis Caldwell Partners – client. The securities are subject to market risk, and should they decline in value, the unrealized losses and potential realized losses could negatively impact the Company’s financial position and aggregate results of operations. We mitigate the risk in managed funds by investing in relatively conservative investments and by engaging professional investment fund advisors independent from the company with added oversight from the Investment Committee of the Board of Directors. We mitigate the risk in equity securities by liquidating our positions as soon as reasonably able and reviewing for the potential use of hedging Potential volatility of the market price and volume of common shares derivatives if applicable. From time to time, the TSX has experienced significant price and volume volatility unrelated to the performance of specific companies, which could impact the market price of the Common Shares. Moreover, the market price of the Common Shares may also be adversely affected by factors such as the concentration of Common Shares held by a small number of shareholders and the low number of Common Shares that trade on average on a daily basis, the combination of which has the potential to increase the volatility of the volume of Common Shares offered to be purchased or sold at any particular time. Certain management compensation components are based on the share price change in the company and could fluctuate with significant movement up or down in the Company’s share price. The Company has mitigated the negative impact of share price movements on compensation by also linking Impairment of our goodwill, other intangible assets and other long-lived assets the payments to profitability of the Company after accounting for such fluctuations. All of our acquisitions have been accounted for as purchases and involved purchase prices well in excess of tangible asset values, resulting in the creation of a significant amount of goodwill and other intangible assets. Goodwill is initially recorded as the excess of amounts paid over the fair value of net assets acquired. While goodwill is not amortized, in accordance with generally accepted accounting principles, we perform assessments of the carrying value of our goodwill at least annually and we review our goodwill, other intangible assets and other long-lived assets for impairment whenever events occur or circumstances indicate that a carrying amount of these assets may not be recoverable. These events and circumstances include a significant change in business climate, attrition of key personnel, changes in financial condition or results of operations, a prolonged decline in our stock price and market capitalization, competition, and other factors. In performing these assessments, we must make assumptions regarding the estimated fair value of our goodwill and other intangible assets. These assumptions include estimates of future market growth and trends, forecasted revenue and costs, capital investments, discount rates, and other variables. If the fair market value of one of our reporting units or other long term assets is less than the carrying amount of the related assets, we would be required to record an impairment charge. Due to continual changes in market and general business conditions, we cannot predict whether, and to what extent, our goodwill and long-lived intangible assets may be impaired in future periods. Any Management Discussion and Analysis 28 Caldwell Partners – resulting impairment loss could have an adverse impact on our business, financial condition Ability to access credit could be limited and results of operations. Our bank can be expected to strictly enforce the terms of our credit agreement. Although we are currently in compliance with the financial covenants of our revolving credit facility, a deterioration of economic conditions may negatively impact our business resulting in our failure to comply with these covenants, which could limit our ability to borrow funds under our credit facility or from other borrowing facilities in the future. The credit agreement with the bank is a demand facility and may also be cancelled at any time by our bank. In such circumstances, we may not be able to secure alternative financing or may only be able to do so at significantly higher costs. We attempt to mitigate this risk through the negotiation of flexible financial covenants to the extent we are able, and working to maintain strong Significant Shareholder relationships with our banking team. C. Douglas Caldwell, the former Chief Executive Officer of The Caldwell Partners International, Inc., is reported to own, directly or indirectly approximately 21% of the Company’s outstanding Common shares. Mr. Caldwell’s shares could have a material impact on any Provisions that may make an acquisition of us more difficult and expensive matters brought forth to the shareholders for a vote. Anti-takeover provisions in our Certificate of Incorporation, our Bylaws and under Ontario law may make it more difficult and expensive for us to be acquired in a transaction that is not approved by our Board of Directors. Some of the provisions in our Certificate of Incorporation and Bylaws include: limitation on stockholder actions; advance notification requirements for director nominations and actions to be taken at stockholder meetings; and the ability to issue additional shares by action of our Board of Directors. These provisions could discourage an acquisition attempt or other transaction in which stockholders could receive a premium over the current market price for the common stock. Disclosure Controls and Procedures The Company’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining the Company’s disclosure controls and procedures. The Chief Executive Officer and Chief Financial Officer, in conjunction with the Board of Directors, review any material information affecting the Company to evaluate and determine the appropriateness and timing of public release. The Chief Executive Officer and the Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure procedures as at August 31, 2017, have concluded that the Company’s disclosure controls and procedures are adequate and effective to ensure that material information relating to the Company and its subsidiaries would have been known to them. Management Discussion and Analysis 29 Caldwell Partners – Internal Control over Financial Reporting Management is also responsible for establishing and maintaining adequate internal controls over financial reporting. Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS. In designing and evaluating such controls, it should be recognized that due to inherent limitations, any controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect misstatements. Projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Additionally, management is required to use judgment in evaluating controls and procedures. Management carried out an evaluation of the effectiveness of the design and operation of the Company’s internal controls over financial reporting as at August 31, 2017. Based on that evaluation, the Chief Executive Officer and the Chief Operating and Financial Officer concluded that internal controls over financial reporting are effective as at August 31, 2017. Management has also evaluated whether there were changes in the Company’s internal controls over financial reporting during the reporting period ended August 31, 2017 that materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting. Management has determined that no changes occurred during the year ended August 31, 2017 that would have a material impact. Other Information Additional information relating to the Company, including the Company’s Annual Information www.sedar.com. Form, is available on SEDAR at Management Discussion and Analysis 30 Caldwell Partners – Consolidated Financial Statements For the Years Ended August 31, 2017 and 2016 Consolidated Financial Statements 31 Caldwell Partners – Management’s Report to Shareholders The consolidated financial statements and all information contained in this annual report are the responsibility of management and the Board of Directors of The Caldwell Partners International Inc. and its subsidiaries (“the Company”). The 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 appropriate, reflect management’s best estimates and judgments based on currently available information. The Company has established accounting and reporting systems supported by internal controls designed to safeguard assets from loss or unauthorized use and to ensure the accuracy of the financial records. The financial information presented throughout this annual report is consistent with the consolidated financial statements. PricewaterhouseCoopers LLP, an independent firm of chartered professional accountants, has been appointed by the shareholders as the external auditors of the Company. The Independent Auditor’s Report to the Shareholders, which describes the scope of their examination and expresses their opinion, is presented herein. The Audit Committee of the Board of Directors, whose members are not employees of the Company, meets with management and the independent auditors to satisfy itself that the responsibilities of the respective parties are properly discharged and to review the consolidated financial statements before they are presented to the Board of Directors for approval. John N. Wallace C. Christopher Beck, CPA PRESIDENT AND CHIEF EXECUTIVE OFFICER CHIEF OPERATING AND FINANCIAL OFFICER AND CORPORATE SECRETARY November 9, 2017 Consolidated Financial Statements 32 Caldwell Partners – Independent Auditor’s Report To the Shareholders of The Caldwell Partners International Inc. We have audited the accompanying consolidated financial statements of The Caldwell Partners International Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at August 31, 2017 and August 31, 2016 and the consolidated statements of earnings, comprehensive earnings, changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, 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 The Caldwell Partners International Inc. and its subsidiaries as at August 31, 2017 and August 31, 2016 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. (Signed) “PricewaterhouseCoopers LLP” Chartered Professional Accountants, Licensed Public Accountants Toronto, Ontario November 9, 2017 Consolidated Financial Statements 33 Caldwell Partners – THE CALDWELL PARTNERS INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in $000s Canadian) Assets Current assets Cash and cash equivalents Marketable securities (note 4) Accounts receivable Prepaid expenses and other assets Non-current assets Restricted cash Marketable securities (note 4) Advances Property and equipment (note 5) Intangible assets (note 6) Goodwill (note 7) Deferred income taxes (note 13) Total assets Liabilities Current liabilities Accounts payable Compensation payable (notes 10 and 11) Dividends payable (note 15) Income taxes payable Contingent consideration Deferred revenue (note 11) Non-current liabilities Compensation payable (note 10) Provisions (note 8) Equity attributable to owners of the Company Share capital (note 15) Contributed surplus (note 15) Accumulated other comprehensive income Deficit Total equity Total liabilities and equity As at August 31 2017 As at August 31 2016 10,917 5,048 9,393 1,848 27,206 133 172 503 1,699 178 2,761 1,650 8,422 5,056 10,031 2,416 25,925 187 573 502 1,838 279 2,920 2,475 34,302 34,699 2,044 15,896 408 636 - 1,107 20,091 958 133 21,182 7,515 14,992 850 (10,237) 13,120 34,302 2,384 16,125 403 513 289 1,187 20,901 687 184 21,772 7,295 15,025 1,179 (10,572) 12,927 34,699 The accompanying notes are an integral part of these consolidated financial statements. Signed on behalf of the Board: G. Edmund King Chair of the Board Kathryn A. Welsh Chair of the Audit Committee Consolidated Financial Statements 34 Caldwell Partners – THE CALDWELL PARTNERS INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF EARNINGS (in $000s Canadian, except per share amounts) Revenues Professional fees (note 11) Investment income (note 12) Licence fees (note 22) Cost of sales (notes 8, 10 and 11) Gross profit Expenses General and administrative (note 8) Sales and marketing Foreign exchange loss Operating profit Investment income (note 4) Earnings before income taxes Income taxes (note 13) Net earnings for the year attributable to owners of the Company Earnings per share (note 14) Basic Diluted CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (in $000s Canadian) Net earnings for the year Other comprehensive income: Items that may be reclassified subsequently to net earnings Realization of gains on marketable securities included in net earnings (note 4) Unrealized gain (loss) on marketable securities (note 4) Cumulative translation adjustment Comprehensive earnings (loss) for the year attributable to owners of the Company The accompanying notes are an integral part of these consolidated financial statements. Twelve months ended August 31 2017 2016 57,495 - 310 57,805 42,305 15,500 11,210 1,173 4 12,387 3,113 38 3,151 1,194 1,957 57,618 877 253 58,748 44,604 14,144 11,682 1,144 40 12,866 1,278 404 1,682 801 881 $0.096 $0.096 $0.044 $0.043 Twelve months ended August 31 2017 1,957 (38) 123 (414) 1,628 2016 881 (403) (100) (430) (52) Consolidated Financial Statements 35 Caldwell Partners – THE CALDWELL PARTNERS INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in $000s Canadian) Accumulated Other Comprehensive Income (Loss) Deficit Share Capital Contributed Surplus Cumulative Translation Adjustment Unrealized Gains (Loss) on Marketable Securities Total Equity Balance - August 31, 2015 (9,843) 7,295 15,025 1,272 840 14,589 Net earnings for the year Dividend payments declared (note 15) Realization of gains on marketable securities included in net earnings Change in unrealized loss on marketable securities Change in cumulative translation adjustment 881 (1,610) - - - - - - - - - - - - - Balance - August 31, 2016 (10,572) 7,295 15,025 Net earnings for the year Dividend payments declared (note 15) Employee share option plan share issue (note 15) Realization of gains on marketable securities included in net earnings Change in unrealized loss on marketable securities Change in cumulative translation adjustment 1,957 (1,622) - - - - - - - - 220 (33) - - - - - - Balance - August 31, 2017 (10,237) 7,515 14,992 The accompanying notes are an integral part of these consolidated financial statements. - - - - (430) 842 - - - - - - - 881 (1,610) (403) (100) - (403) (100) (430) 337 12,927 - - - (38) 123 1,957 (1,622) 187 (38) 123 (414) 428 - (414) 422 13,120 Consolidated Financial Statements 36 Caldwell Partners – THE CALDWELL PARTNERS INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOW (in $000s Canadian) Twelve months ended August 31 2017 2016 Cash flow provided by (used in) Operating activities Net earnings for the year Adjustments for: Depreciation Amortization Amortization of advances Realized gain on marketable securities Change in fair value of contingent consideration Unrealized foreign exchange on subsidiary loans Non-cash professional fees received as equity Reduction in marketable securities following assignment to partner (note 3) Decrease in deferred taxes Increase (decrease) in cash settled share-based compensation Loss on disposal of property and equipment Decrease (increase) in accounts receivable Decrease (increase) in prepaid expenses and other assets (Decrease) increase in accounts payable Increase (decrease) in compensation payable Increase in income taxes payable Payment of cash settled share-based compensation Payment of contingent consideration (Decrease) increase in deferred revenue (Decrease) increase in provisions Net cash provided by (used in) operating activities Investing activities Proceeds from sale of marketable securities Purchase of marketable securities Payment of advances Decrease in restricted cash Additions to property and equipment Net cash (used in) provided by investing activities Financing activities Share issuance from employee share option plan Share purchase and cancellation Dividend payments Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 1,957 559 94 803 (38) (109) (12) - 432 723 271 - 338 759 (277) 929 162 (709) (181) (65) (51) 5,585 1,101 (1,000) (1,125) 48 (469) (1,445) 187 - (1,622) (1,435) (210) 2,495 8,422 10,917 881 539 94 992 (403) 10 28 (1,121) - 403 (377) 77 (1,916) (473) 401 (95) 193 (449) (254) 245 184 (1,041) 3,171 - (592) 313 (414) 2,478 - (1,604) (1,633) (3,237) 266 (1,534) 9,956 8,422 T he accompanying notes are an integral part of these consolidated financial statements. Consolidated Financial Statements 37 Caldwell Partners – THE CALDWELL PARTNERS INTERNATIONAL INC. Notes to Consolidated Financial Statements For The Years Ended August 31, 2017 and August 31, 2016 (in $000s Canadian unless otherwise stated) 1. General Information The Caldwell Partners International Inc. (the Company) is an executive search firm specializing in recruiting executives for full-time and advisory roles on behalf of its clients. The Company contracts with its clients, on an assignment basis, to provide advice on the identification, evaluation, assessment and recommendation of qualified candidates for specific positions. The Company concentrates its activities on locating executives to fill senior executive positions. The Company was incorporated by articles of incorporation under the Business Corporations Act (Ontario) on August 22, 1979 and is listed on the Toronto Stock Exchange (symbol: CWL). The Company’s head office is located at 165 Avenue Road, Toronto, Ontario. The Company operates in Canada, the United States, Europe, and, through its licence partners, Latin America and New Zealand. 2. Basis of Presentation The Board of Directors approved these consolidated financial statements for issue on November 9, 2017. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS). 3. Summary of Significant Accounting Policies, Judgments and Estimation Uncertainty The significant accounting policies used in the preparation of these consolidated financial statements are described below. Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value, including available-for-sale marketable securities and contingent consideration. Consolidation These consolidated financial statements include the assets and liabilities and results of operations of the Company and its subsidiaries. In the United States, the subsidiary is The Caldwell Partners International Ltd. In the United Kingdom, the subsidiary is The Caldwell Partners International Europe Ltd. All intercompany transactions and balances are eliminated on consolidation. Subsidiaries are all those entities over which the Company has control. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities assumed at the date of acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Company's share of the identifiable tangible and intangible net assets acquired is recorded as goodwill. The Company records contingent consideration agreements at fair value, which are classified at fair value through profit or loss with Consolidated Financial Statements 38 Caldwell Partners – movements in the fair value being recognized within general and administrative expenses in the consolidated statements of earnings. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. Foreign currency translation (i) Functional and presentation currency The financial statements of the parent company and each subsidiary in the consolidated financial statements of The Caldwell Partners International Inc. are measured using the currency of the primary economic environment in which the subsidiary operates (the “functional currency”). The functional and presentation currency of the Company is the Canadian dollar. The functional currency of the subsidiary located in the United States is the US dollar. The functional currency of the subsidiary located in the United Kingdom is the British pound sterling. The financial statements of subsidiaries that have a functional currency different from the presentation currency are translated into Canadian dollars as follows: assets and liabilities at the closing rate at the date of the consolidated statements of financial position, and income and expenses at the average rate of the period (as this is considered a reasonable approximation of the actual rates prevailing at the transaction dates). All resulting changes are recognized in other comprehensive income as cumulative translation adjustments. If the Company disposes of its entire interest in a foreign subsidiary, or loses control over a foreign subsidiary, the foreign currency gains or losses accumulated in other comprehensive income related to the foreign subsidiary are recognized in profit or loss. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of these transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than an entity’s functional currency are recognized in the consolidated statements of earnings, within foreign exchange loss. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held with banks and other short-term highly liquid investments with original maturities of three months or less. Restricted cash Restricted cash includes a cash balance set aside by a US financial institution for collateral security on a letter of credit made out to the landlord of a leased facility. Advances Advances are sign-on payments made to employees to join the Company. Such amounts may be recouped if the employee leaves the Company before a contractually stipulated period of time has lapsed, usually 36 months from their start date. The advances are amortized to expenses on a straight-line basis over the life of the contractual recoupment period. Financial instruments Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Consolidated Financial Statements 39 Caldwell Partners – Financial assets and liabilities are offset and the net amount is reported in the consolidated statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires. At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: (i) Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category. No such instruments held by the Company are classified in this category. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the consolidated statements of earnings. Gains and losses arising from changes in fair value are presented in the consolidated statements of earnings within general and administrative expenses in the period in which they arise. Financial assets and liabilities at fair value through profit or loss are classified as current except for the portion expected to be realized or paid beyond twelve months of the consolidated statements of financial position date, which are classified as non-current. (ii) Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories. The Company's available-for-sale assets comprise its investments in marketable securities. investments: Available-for-sale Available-for-sale investments are recognized initially at fair value plus transaction costs and are subsequently carried at fair value. Gains or losses arising from changes in fair value are recognized in other comprehensive income. Available-for-sale investments are classified as current, unless the investment matures beyond twelve months. Interest on available-for-sale investments, calculated using the effective interest method, is recognized in the consolidated statements of earnings as part of investment income. Dividends on available-for-sale equity instruments are recognized in the consolidated statements of earnings as part of investment income when the Company's right to receive payment is established. When an available-for-sale investment is sold or impaired, the accumulated gains or losses are moved from accumulated other comprehensive income to the consolidated statements of earnings and are included in investment income. (iii) Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company's loans and receivables comprise accounts receivable and cash and cash equivalents, and are included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. Other financial liabilities at amortized cost: Financial liabilities at amortized cost include accounts payable, (iv) compensation payable and dividends payable which are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, financial liabilities at amortized cost are measured at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. Impairment of financial assets At each reporting date, the Company assesses whether there is objective evidence that a financial asset (other than a financial asset classified as fair value through profit or loss) is impaired. If such evidence exists, the Company recognizes an impairment loss as follows: Consolidated Financial Statements 40 Caldwell Partners – (i) Financial assets carried at amortized cost: The loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument's original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account. (ii) Available-for-sale financial assets: The impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the consolidated statements of earnings. This amount represents the cumulative loss in accumulated other comprehensive income that is reclassified to net earnings. Impairment losses on financial assets carried at amortized cost and available-for-sale financial assets are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Impairment losses on available-for-sale equity investments are not reversed. Property and equipment Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statements of earnings during the period in which they are incurred. The major categories of property and equipment are depreciated as follows: Furniture and equipment Computer equipment Computer application software Leasehold improvements 20% declining balance 30% declining balance straight-line over three years straight-line over the term of the lease Residual values, methods of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate. Gains and losses on disposal of property and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of general and administrative expenses in the consolidated statements of earnings. Impairment of non-financial assets Property and equipment and intangible assets (other than goodwill) are tested for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units or CGUs). The recoverable amount is the higher of an asset's fair value less costs to sell and value in use (which is the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. Goodwill is reviewed for impairment annually or at any time if an indicator of impairment exists. Goodwill acquired through a business combination is allocated to each CGU or group of CGUs that are expected to benefit from the related business combination. A group of CGUs represents the lowest level within the Company at which the goodwill is monitored for internal management purposes, which is not higher than an operating segment. The Company evaluates impairment losses, other than goodwill impairment, for potential reversals whenever events or circumstances warrant such consideration. 41 Consolidated Financial Statements Caldwell Partners – Commission and bonus plans (Short Term Incentive Plans) The Company recognizes a liability and an expense for bonuses and commissions, based on performance measures relevant to the particular employee group. Revenue-producing employees earn bonuses tied directly to individual and team revenue production. Management bonuses are primarily determined based on achievement of planned revenue and operating profit levels, approved by the Board of Directors at the outset of the fiscal year. The Company recognizes the expense and compensation payable in the year such performance levels are attained. To the extent revenue is deferred for recognition in a future period, the Company will also defer the related amount of estimated compensation expense directly associated with such deferred revenue. Stock-based compensation (Long Term Incentive Plans) The Company has granted performance stock units, restricted stock units, deferred stock units and stock options periodically to certain employees and directors. Performance stock units (PSUs) are notional common shares of the Company that cliff vest three years from the date of grant and are settled in cash. The amount to be paid on vesting is dependent on notional dividends received on the holdings, the Company’s share price at the vesting date and a performance factor ranging between 50% and 150% based on the Company’s actual revenue and net operating profit performance compared to targets set by the Board of Directors each year over the cumulative three-year vesting period. Compensation expense is recognized on a straight-line basis over the three-year vesting period. Notional dividend awards and changes in performance factors and fair value are reflected in current period compensation expense in proportion to the amount of the vesting period that has lapsed, with the balance being amortized straight-line over the remaining vesting period. Restricted stock units (RSUs) are notional common shares of the Company that are restricted to be issued to members of the management team. RSU balances are adjusted for notional dividends received on the holdings. These restricted stock units cliff vest three years from the date of grant, and may be settled either in shares or in cash. The Board of Directors may elect to settle in either cash or shares; should the Board of Directors elect to settle in shares, the individual may elect to receive up to half of the settlement in cash. Fair value of each tranche is based on the fair value of the awards at the date of grant, with the fair value updated at each reporting date. Compensation expense is recognized on a straight-line basis over the three-year vesting period. Notional dividend awards and changes in fair value are reflected in current period compensation expense in proportion to the amount of the vesting period that has lapsed with the balance being amortized straight-line over the remaining vesting period. There are no longer any RSUs outstanding and the plan is now considered inactive. Deferred stock units (DSUs) are notional shares of the Company that are issued to the Board of Directors as a component of their annual retainer. DSU balances are adjusted for notional dividends received on the holdings. Each non-employee Board Member receives approximately 50% of the annual retainer in cash and 50% in the form of DSUs issued at fair value on the date of the grant, which track the performance of the Company’s common shares over time. These DSUs vest upon grant, but are redeemable only when the Board Member leaves the Board, at which time they are settled in cash. DSUs are recorded as compensation expense at the fair value of the units when issued. Notional dividend awards and subsequent changes in the fair value of DSUs are recorded in current period compensation expense when the change occurs. The awards of PSUs, RSUs and DSUs have been recorded in current or non-current compensation payable depending on when they vest. Stock options currently outstanding vest over two years and have a contractual life of five years. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. Fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche's vesting period by increasing contributed surplus based on the number of awards expected to vest. Provisions Provisions, where applicable, are recognized when the Company has a present legal or constructive obligation as a result of past events and it is more likely than not that an outflow of resources will be required to settle the 42 Consolidated Financial Statements Caldwell Partners – obligation, and the amount can be reliably estimated. Provisions are measured at management's best estimate of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to present value where the effect is material. Income taxes Income taxes comprise both current and deferred tax. Income tax is recognized in the consolidated statements of earnings except to the extent that it relates to items recognized in other comprehensive income or directly in equity, in which case the income tax is also recognized in other comprehensive income or directly in equity. Current income taxes are the expected taxes payable on the taxable income for the year, using tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustment to taxes payable in respect of previous years. In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the consolidated statements of financial position dates and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary difference can be recognized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are presented as non-current. Revenue Revenue consists of professional fees, investment income and licence fee revenue. Professional fees: Professional fees represent the revenue derived from the executive search services provided to the Company’s clients. Professional fees are comprised of retainers and indirect expenses billed to clients based on terms set forth in signed engagement letters with each client. The Company is typically paid a retainer for its executive search services, equal to one-third of the position’s estimated first year compensation. The Company’s standard practice is to bill its clients for its retainer and indirect expenses in one-third increments over a three-month period commencing in the month of a client’s acceptance of the contract. Any fees earned in excess of the retainer or fees that are contingent on a candidate’s future compensation are billed when actual compensation of the placed candidate is known. Indirect expenses are generally calculated as a percentage of the retainer with certain dollar limits per search. Professional fees are recognized when it is probable the economic benefits will flow to the Company and service has been provided, the fee is determinable and collectibility is reasonably assured. Revenue from standard executive search engagements is recognized over the expected average performance period, in proportion to the estimated effort to fulfill the Company’s obligations under the engagement terms. To the extent that there are differences between the estimated percentage of completion based on the expected average performance period and amounts billed, the Company defers a portion of revenue to be recognized in a future period and records this as deferred revenue on the consolidated statements of financial position. Revenue in excess of the retainer, resulting from actual compensation of the placed candidate exceeding the estimated compensation, is recognized on completion of the executive search when the amount of the additional fee is known. Revenue from certain non-standard executive search engagements is recognized in accordance with the completion of the engagement deliverables. Professional fees are paid to the Company predominantly in the form of cash and, on occasion, in the form of equity interests in the Company’s clients as a portion of the search fee. These interests may take the form of common stock, preferred stock, restricted stock, warrants, options or similar instruments depending on the 43 Consolidated Financial Statements Caldwell Partners – client and the agreement. Equity payments occur most commonly in venture capital and private equity backed entities where executive cash compensation is often lower in lieu of the executive receiving compensation more prominently in equity as well as a desire by early stage companies to preserve cash. The accounting for these equity payments is described below under investment income. Investment Income: Equity interests in the Company’s clients are available-for-sale financial assets and changes in their value are recorded in other comprehensive income. Once an equity interest from a client is monetized, the accumulated gain or loss recorded within other comprehensive income since the initial valuation date is reclassified to investment income within revenue. Through 2016, the partners’ entitlement to any amounts on liquidation was contingent on being employed at the time of liquidation and the Company recorded the investment at 100% of the fair value with a related 50% compensation payable liability. Effective in 2017, the continuing employment requirement was lifted and all rights to the partners’ 50% of the equity instruments were transferred and assigned beneficially to the partners. As a result of this change, the gross asset value and compensation payable have been offset, with the investment now recorded at the net amount the Company has economic rights to with changes in this amount being recorded in other comprehensive income. Licence fee revenue: Licence fee revenue is comprised of the licence and technical assistance fees paid by the Company’s affiliates, as discussed in note 22. The license fee revenue is recognized as earned, based on the revenue of the affiliates during the respective periods. Cost of sales Cost of sales includes direct costs associated with the generation of professional fees, which is both variable and fixed compensation, and the related costs of employees involved in search activities. When professional fees are deferred, the related amount of estimated compensation expense directly associated with such professional fees is also deferred. This expense deferral is recorded as a reduction in compensation payable in the consolidated statements of financial position. Leases The Company leases certain property and equipment. Leases are classified as either operating or finance, based on the substance of the transaction at the inception of the lease. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases, net of any incentives received from the lessor, are charged to profit or loss within general and administrative expenses on a straight-line basis over the period of the lease. Leases in which the Company assumes substantially all the risks and rewards of ownership, are classified as finance leases and capitalized at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. With a finance lease, each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in borrowings. The interest element of the finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property and equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset and the lease term. Currently, all of the Company’s leases pertain to its office space and are considered operating leases. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Consolidated Financial Statements 44 Caldwell Partners – Dividends Dividends on common shares are recognized in the Company's financial statements in the period in which the dividends are approved by the Board of Directors of the Company. Earnings per share Basic earnings per share (EPS) is calculated by dividing the net earnings for the period attributable to equity owners of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options and similar instruments is computed using the treasury stock method. The Company’s potentially dilutive instruments consist of stock options. Accounting standards issued but not yet applied Revenue recognition In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (IFRS 15). IFRS 15 replaces the detailed guidance on revenue recognition requirements that currently exists under IFRS. IFRS 15 specifies the accounting treatment for all revenue arising from contracts with customers, unless the contracts are within the scope of other IFRS. The standard also provides a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets that are not an output of the Company's ordinary activities. Additional disclosure is required under the standard including disaggregation of total revenue, information about performance obligations, changes in contract asset and liability account balances between periods, and key judgments and estimates. In July 2015, the effective date for IFRS 15 was deferred to apply to annual periods beginning on or after January 1, 2018; early application is permitted either following a full retrospective approach or a modified retrospective approach. The modified retrospective approach allows the standard to be applied to existing contracts beginning at the initial period of adoption and restatements to the comparative periods are not required. The Company intends to adopt IFRS 15 in its consolidated financial statements for the annual period beginning September 1, 2018. The Company began a scoping and adoption plan during fiscal 2017 and has thus far identified the following areas that may be impacted by the IFRS 15 adoption: • The Company is paid a retainer for its executive search services which is based on a percentage of the placed candidate’s anticipated first year cash compensation. If the candidate’s actual compensation exceeds this estimate, an additional fee may be billed. These additional fees are currently recognized in the period in which the placed candidate begins working. Under IFRS 15, the Company will be required to estimate the additional fee revenue, if any, at the inception of the executive search contract and recognize it over the performance period of the search. The Company is still evaluating the financial impact of this change. • The Company incurs reimbursable direct out of pocket expenses in the performance of its services for items such as candidates and partner travel, meals, accommodation, third party executive assessments, background checks and other costs directly identifiable to a specific search assignment. Such costs are incurred and paid by the Company, and are in turn billed to the Company’s clients. These costs are currently included within cost of sales as the net amount of direct expenses incurred by the Company, offset by amounts billed and recovered from clients. Pursuant to IFRS 15, the Company will be deemed to be a principal with regard to these transactions as the vendors are selected by the Company and the obligation to pay the vendors is borne by the Company. As such, on adoption of IFRS 15, the Company will show the gross amount of direct expenses billed and recovered from clients as revenue, with the gross amount incurred as a cost of sales. The full year impact of this treatment in fiscal 2017 would have been an increase in both revenue and cost of sales by approximately $1,900 (2016: $2,000), with no net change to gross profit. The adoption plan review will continue throughout fiscal 2018, and as such, the extent of the full financial and disclosure impact of adoption of IFRS 15 has not yet been determined. Consolidated Financial Statements 45 Caldwell Partners – Financial instruments – recognition and measurement In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments (IFRS 9), with a mandatory effective date for annual reporting periods beginning on or after January 1, 2018. The new standard brings together the classification and measurement, impairment, and hedge accounting phases of the IASB’s project to replace IAS 39, Financial Instruments Recognition and Measurement. In addition to the new requirements for classification and measurement of financial assets, a new general hedge accounting model and other amendments issued in previous versions of IFRS 9, the standard also introduces new impairment requirements that are based on a forward-looking expected credit loss model. The Company intends to adopt IFRS 9 in its consolidated financial statements for the annual period beginning September 1, 2018. The extent of the impact of the adoption of IFRS 9 has not yet been determined. The disclosure requirements in IFRS 7, Financial Instruments Disclosure (IFRS 7), have also been amended to include the additional disclosure required under IFRS 9. The Company intends to adopt these amendments to IFRS 7 at the same time as adoption of IFRS 9 beginning September 1, 2018. The extent of the impact of the adoption of the amendments to IFRS 7 has not yet been determined. Leases In January 2016, the IASB issued IFRS 16, Leases (IFRS 16), with a mandatory effective date of January 1, 2019. The new standard will replace IAS 17, Leases, and will carry forward the accounting requirements for lessors. IFRS 16 provides a new framework for lessee accounting that requires substantially all assets obtained through operating leases to be capitalized and a related liability to be recorded. The new standard seeks to provide a more accurate picture of a company's leased assets and related liabilities and create greater comparability between companies who lease assets and those who purchase assets. The Company intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning September 1, 2019 and will recognize assets and liabilities for all leases on the consolidated statements of financial position. Share-based payments In June 2016, the IASB issued final amendments to IFRS 2, Share-based Payments (IFRS 2), clarifying how to account for certain types of share-based payment transactions. The amendments, which were developed through the IFRS Interpretations Committee, provide requirements on the accounting for: (i) the effect of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; (ii) share-based payment transactions with a net settlement feature for withholding tax obligations; and (iii) a modification to the terms and conditions of a share-based payment that changes the classifications of the transaction from cash- settled to equity-settled. The standard is effective for annual reporting periods beginning on or after January 1, 2018. The Company intends to adopt the amendments to IFRS 2 in its consolidated financial statements for the annual period beginning September 1, 2018. The extent of the impact of the adoption of the amendments has not yet been determined. Uncertainty over income tax treatments In June 2017, the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments (IFRIC 23) with a mandatory effective date of January 1, 2019. The interpretations provide guidance on how to value uncertain income tax positions based on the probability of whether the relevant tax authorities will accept a company's tax treatments. A company is to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. IFRIC 23 is to be applied by recognizing the cumulative effect of initially applying these guidelines in opening retained earnings without adjusting comparative information. The Company intends to adopt the amendments to IFRIC 23 in its consolidated financial statements for the annual period beginning September 1, 2019.The extent of the impact of the adoption of IFRIC 23 has not yet been determined. There are no other standards or interpretations that are not yet effective that would be expected to have a material impact on the Company. Consolidated Financial Statements 46 Caldwell Partners – Critical accounting estimates and judgments The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following are the estimates and judgments applied by management that most significantly affect the Company's consolidated financial statements. These estimates and judgments have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The following discussion sets forth management’s most significant estimates and assumptions in determining the value of assets and liabilities, and the most significant judgments in applying accounting policies. Revenue recognition The Company’s method of revenue recognition requires it to estimate the expected average performance period and the percentage of completion, based on the proportion of the estimated effort to fulfill the Company’s obligations throughout the expected average performance period for its executive searches. Differences between the estimated percentage of completion and the amounts billed will give rise to a deferral of revenue to a future period. Changes in the average performance period or the proportion of effort expended throughout the performance period for its executive searches could lead to an under or overvaluation of revenue. Further information on deferred revenue is included in note 11. Allowance for doubtful accounts Estimates are used in determining the allowance for doubtful accounts related to accounts receivable. The estimates are based on management’s best assessment of the collectibility of the related receivable balance based, in part, on the age of the specific receivable balance. An allowance is established when the likelihood of collecting the account has significantly diminished. Future collections of receivables that differ from management’s current estimates would affect the results of operations in future periods. Valuation of equity interests in clients Equity interests held in clients can be difficult to obtain valuation information on. Equity instruments are most often in privately held companies without a specific obligation to share ongoing business performance and valuation information. The Company values such interests in accordance with its financial instruments policy with available information. As a result, the current and future valuation of these interests could differ materially from current estimates. Impairment of goodwill The Company tests at least annually whether goodwill is subject to any impairment in accordance with the accounting policy. Various assumptions are made in performing this test, including estimates of future revenue streams, operating costs and discount rates. These assumptions are disclosed in note 7. Future results that differ from management’s current estimates would affect the results of operation in future periods. 4. Marketable Securities The Company’s marketable securities (classified as available for sale financial assets) which are comprised of managed bond funds and certain equity securities held for investment obtained through search fees being paid partially in equity of the client. As at August 31, 2017 managed funds and client equity investments were $5,048 and $172, respectively and as at August 31, 2016 managed funds and client equity investments were $4,784 and $845, respectively. August 31, 2017 2016 Fair value Current Non-current portion portion 5,220 5,629 5,048 5,056 172 573 During fiscal 2017, the Company recorded $38 (2016: $404) in realized gains on the disposition of available- for-sale marketable securities and this is included in investment income in the consolidated statements of earnings. An unrealized gain of $123 was recognized as part of other comprehensive income during the year (2016 loss of $100). Consolidated Financial Statements 47 Caldwell Partners – 5. Property and Equipment Furniture and equipment Computer equipment Computer application software Leasehold improvements Total Year ended August 31, 2016: Opening net book value Additions Reclassification Disposals Depreciation for the year Exchange differences Closing net book value At August 31, 2016: Cost Accumulated depreciation Net book value Year ended August 31, 2017: Opening net book value Additions Depreciation for the year Exchange differences Closing net book value At August 31, 2017: Cost Accumulated depreciation Net book value 603 152 - (57) (124) (6) 568 2,505 (1,937) 568 568 120 (120) (15) 553 2,610 (2,057) 553 315 137 - - (116) (3) 333 2,491 (2,158) 333 333 247 (136) (9) 435 2,729 (2,294) 435 22 6 - - (17) - 11 762 (751) 11 11 - (8) - 3 762 (759) 3 878 119 238 (20) (282) (7) 926 3,531 (2,605) 926 926 102 (295) (25) 708 3,608 (2,900) 708 1,818 414 238 (77) (539) (16) 1,838 9,289 (7,451) 1,838 1,838 469 (559) (49) 1,699 9,709 (8,010) 1,699 Depreciation of property and equipment is included in general and administrative expenses in the consolidated statements of earnings. There were no disposals of property and equipment in the current year. In the previous year, disposals of property and equipment were derecognized amounting to cost and accumulated depreciation of $260 and $183, respectively and a loss on disposal of $77 was recognized. Consolidated Financial Statements 48 Caldwell Partners – 6. Intangible Assets Year ended August 31, Opening net book value Amortization for the year Exchange differences Closing net book value At August 31, Cost Accumulated amortization Net book value 2017 2016 279 (94) (7) 178 847 (669) 178 375 (94) (2) 279 855 (576) 279 Intangible assets consist of client lists from acquired entities and are stated at cost less accumulated amortization. These intangible assets are amortized on a straight-line basis in the consolidated statements of earnings to general and administrative expenses over their estimated useful life of ten years with two years remaining. 7. Goodwill In assessing goodwill for impairment as at August 31, 2017 and 2016, the Company compared the aggregate recoverable amount of the assets included in the CGUs in its United States and Europe segments to their respective carrying amounts. In each case, the recoverable amount has been determined based on the estimated value in use of the CGU using a one-year cash flow budget. For periods beyond the budget period, cash flows were extrapolated using the following assumptions: United States Average growth rate Expected gross margin Discount rate Europe Average growth rate Expected gross margin Discount rate 2017 5% 27% 8% 2017 5% 30% 8% 2016 5% 27% 8% 2016 5% 30% 8% The impairment tests performed resulted in no impairment as at August 31, 2017 or 2016. Consolidated Financial Statements 49 Caldwell Partners – 8. Nature of Expenses 2017 2016 Compensation costs Occupancy costs Sales and marketing Onerous lease costs Depreciation Amortization Foreign exchange loss Other 45,809 4,638 1,173 - 559 94 4 2,415 54,692 47,567 4,710 1,144 759 539 94 40 2,617 57,470 During the year ended August 31, 2016, the Company entered into agreements to sublease its existing premises in New York, NY and lease new space. The cumulative proceeds to be received from the sublease are less than the Company’s contracted lease obligations. Onerous lease costs include the present value of these net sublease expenses over the approximate five-year term of the sublease ($465), real estate commissions ($206) and other costs associated with moving from the premises ($88) and were recorded within general and administrative expenses in the consolidated statements of earnings during the year ended August 31, 2016. The current portion of sublease costs total $43 (2016 $316) and is included in accounts payable and the non-current portion of $133 (2016 $149) is included in provisions in the consolidated statements of financial position. A reconciliation of the provisions balance is below: 2017 Outstanding at beginning of year Amounts charged against the provision Increase arising from the passage of time Foreign exchange Outstanding at end of year 465 (302) 11 2 176 9. Compensation of Key Management Key management includes the Board of Directors and the named executive officers of the Company. Effective with fiscal 2017 two additional executive officers were named, bringing the total to five. Including the two additional named executive officers, fiscal 2017 salaries and short-term benefits increased by $661. Compensation expense pertaining to key management included: 2016 2017 Salaries and short-term benefits Share-based compensation expense 2,681 642 3,323 1,273 606 1,879 Consolidated Financial Statements 50 Caldwell Partners – 10. Compensation Payable The Company maintains certain short-term and long-term incentive plans designed to align compensation with performance. Compensation payable consists of the following: Current compensation payable Commissions and bonuses Performance stock units (PSUs) As at August 31, 2017 August 31, 2016 15,216 909 16,125 15,325 571 15,896 Non-current compensation payable As at August 31, 2017 August 31, 2016 412 275 687 599 359 958 Performance Stock Units Deferred stock units (DSUs) Commissions and bonuses Commissions and bonuses represent incentive compensation for search delivery and support personnel. Such amounts are paid at various points during the year and are short-term in nature. Share-based compensation plans Performance stock units (PSUs) and restricted stock units (RSUs) The estimated cost of the PSU plan is being amortized on a straight-line basis over the three-year vesting period with a weighted average performance factor currently estimated at 111% (2016 96%) of target. PSU expense for the year ended August 31, 2017 of $559 (2016 $458) was recorded within general and administrative expenses in the consolidated statements of earnings. There was no RSU expense recorded for the year ended August 31, 2017 (2016 $113) within general and administrative expenses in the consolidated statements of earnings as there are no longer any RSUs outstanding and the plan is now considered inactive. During the year ended August 31, 2016, a final payment of $449 was made to the holders of RSUs. A summary of the Company’s PSU and RSU plans is presented below: 2017 2016 Notional Notional units (000s) units (000s) Outstanding at beginning of year 1,611 1,363 Granted Dividends declared Settled Outstanding at end of year 640 116 (733) 1,634 457 84 (293) 1,611 Consolidated Financial Statements 51 Caldwell Partners – Deferred stock units (DSUs) DSU expense of $84 (2016 $73) for the year ended August 31, 2017 has been recorded within general and administrative expenses in the consolidated statements of earnings. A summary of the Company’s DSU plan is presented below: 2016 2017 Outstanding at beginning of year Granted Dividends declared Outstanding at end of year Notional units (000s) 248 77 20 345 Notional units (000s) 161 76 11 248 11. Deferred Revenue The Company’s method of revenue recognition requires it to estimate the expected average performance period and the proportion of the estimated effort to fulfill the Company’s obligations throughout the average performance period for its executive searches. The average performance period ranges from period to period but averages between three and four months. Differences between the revenue recognition period and the billing period will give rise to a deferral of revenue. When this occurs, the Company defers a portion of the amounts billed to be recognized in a future period. At August 31, 2017, the Company had deferred revenue of $1,107 (2016: $1,187) and related deferred compensation expense of $554 (2016: $576), with such amounts to be recognized during a future period. These amounts are reflected as reductions in revenue and cost of sales in the consolidated statements of earnings. 12. Investment Income No investment income derived from equity interest in clients has been recorded during the year ended August 31, 2017 (2016 $877). As discussed in note 3, partner commission costs on investment income derived from equity interest in clients are directly offset against marketable securities with the investment recorded at the net amount the Company has economic rights to with changes in this amount being recorded in other comprehensive income. 13. Income Taxes Current tax: Current tax on net earnings for the year Deferred tax: Origination and reversal of temporary differences 2017 2016 470 724 1,194 398 403 801 Consolidated Financial Statements 52 Caldwell Partners – The tax on the Company's earnings before income tax differs from the amount that would arise using the weighted average tax rate applicable to earnings of the consolidated entities as follows: Combined statutory income tax rate Deferred tax assets not recognized Non-deductible expenses Prior years taxes Other 2017 2016 34.5% 2.4% 1.6% 0.3% (0.9%) 37.9% 41.0% 11.5% (1.8%) (3.6%) 0.5% 47.6% The analysis of deferred tax assets and liabilities is as follows: 2017 2016 Deferred tax assets: Deferred tax assets to be recovered after more than 12 months Deferred tax assets to be recovered within 12 months Deferred tax liabilities: Deferred tax liabilities to be realized after more than 12 months Deferred tax liabilities to be realized within 12 months Deferred tax assets (net) 254 2,304 (718) (190) 1,650 182 3,242 (688) (261) 2,475 The movement of the deferred income tax account is as follows: 2017 2016 As of September 1 Debit to consolidated statements of earnings Exchange differences As at August 31 2,475 (724) (101) 1,650 2,900 (403) (22) 2,475 The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Deferred tax assets At August 31, 2015 Credited to the consolidated statements of earnings Exchange differences At August 31, 2016 (Charged) credited to the consolidated statements of earnings Exchange differences At August 31, 2017 Compensation payable 2,982 109 (17) 3,074 (757) (125) 2,192 Other 359 32 (41) 350 31 (15) 366 Consolidated Financial Statements 53 Caldwell Partners – Deferred tax liabilities At August 31, 2015 Credited to consolidated statements of earnings Exchange differences At August 31, 2016 Charged (credited) to the consolidated statements of earnings Exchange differences At August 31, 2017 Excess carrying Revenue not taxable until value of PP&E over tax base a future year 308 14 1 323 16 25 364 - 361 4 365 6 (17) 354 Total 441 544 (36) 949 (2) (39) 908 Deferred income tax assets are recognized for tax loss carry-forwards and other temporary differences to the extent that the realization of the related tax benefit through future taxable earnings are probable. The Company did not recognize deferred income tax assets of $283 (2016: $245) that can be carried forward against future taxable income. As at August 31, 2017, the Company has non-capital losses with the following expiry dates available to reduce income of future years in the United Kingdom: Expiry Amount Indefinite 1,413 The Company also has capital losses of $2,850 that can only be utilized against capital gains and are without expiry date. 14. Earnings per share (i) Basic Basic earnings per share are calculated by dividing the net earnings attributable to owners of the Company by the weighted average number of common shares outstanding during the years. 2016 2017 Net earnings for the year Weighted average number of common shares outstanding Basic earnings per share 1,957 20,288,093 $0.096 881 20,198,416 $0.044 (ii) Diluted Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding to assume conversion of all dilutive potential common shares. A calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average market price of the Company’s outstanding shares for the year), based on the exercise prices attached to the stock options currently outstanding. 2017 2016 Net earnings for the year Weighted average number of common shares outstanding Adjustment for stock options Weighted average number of common shares for diluted earnings per share Diluted earnings per share 1,957 20,288,093 4,369 20,292,462 $0.096 881 20,198,416 145,237 20,343,653 $0.043 Consolidated Financial Statements 54 Caldwell Partners – 15. Capital Stock Common Shares As at August 31, 2017 the authorized share capital of the Company consists of an unlimited number of common shares of which 20,404,555 are issued and outstanding (August 31, 2016: 20,129,555). The holders of common shares are entitled to share equally, share for share, in all dividends declared by the Company and equally in the event of a liquidation, dissolution or winding up of the Company or other distribution of the assets among shareholders. On February, 3, 2017, an employee of the Company exercised 275,000 options increasing the number of outstanding shares from 20,129,555 to 20,404,555. The Company has declared quarterly dividends since May 1, 2012. A summary of dividends declared during fiscal 2016 and 2017 is as follows: Declaration date November 17, 2015 January 7, 2016 April 12, 2016 July 7, 2016 November 10, 2016 January 11, 2017 April 13, 2017 July 5, 2017 Payment date December 11, 2015 March 14, 2016 June 16, 2016 September 12, 2016 December 16, 2016 March 15, 2017 June 20, 2017 September 8, 2017 Dividend per share $0.0200 $0.0200 $0.0200 $0.0200 $0.0200 $0.0200 $0.0200 $0.0200 Aggregate dividends declared $403 $403 $403 $403 $403 $403 $408 $408 The dividend payable September 8, 2017 has been accrued in the Company’s consolidated financial statements as at August 31, 2017. Stock Options Stock options are granted periodically to directors, officers and employees of the Company. Cash received on exercise of options for common shares is credited to capital stock. Total outstanding stock options are summarized as follows: August 31, 2017 August 31, 2016 Number of Weighted Number of Weighted options average options average outstanding (000s) exercise price outstanding (000s) exercise price Outstanding at beginning of year Exercised during year Outstanding at end of year Exercisable at end of year $0.77 $0.68 $1.02 375 (275) 100 100 $0.77 - $0.77 375 - 375 375 All options currently outstanding vest over two years and have a contractual life of five years. Options have an exercise price equal to the fair value of the common shares on the date of issuance. No stock option expense has been recorded in the years ended August 31, 2017 and 2016. Consolidated Financial Statements 55 Caldwell Partners – 16. Segmented Information The Company has consolidated operations in Canada, the United States and Europe. All geographic segments provide retained executive search consulting services to clients. The following provides a reconciliation of the Company’s consolidated statements of earnings by geographic segment to the consolidated results: 2017 Canada United States Europe Elimination Total Professional fees Investment income License fees Revenues Gross profit General and administrative Sales and marketing Licence fees Foreign exchange (loss) gain Operating profit (loss) Investment income (loss) Income taxes Net earnings (loss) for the year Professional fees Investment income License fees Revenues Gross profit (loss) General and administrative Sales and marketing Licence fees Foreign exchange loss Operating profit (loss) Investment income Income taxes Net earnings (loss) for the year 14,852 - 1,245 16,097 5,012 (3,146) (153) - (12) 1,701 180 (460) 1,421 41,658 - - 41,658 11,246 (7,439) (972) (935) - 1,900 (142) (734) 1,024 985 - - 985 177 (625) (48) - 8 (488) - - (488) - - (935) (935) (935) - - 935 - - - - - 57,495 - 310 57,805 15,500 (11,210) (1,173) - (4) 3,113 38 (1,194) 1,957 Canada United States Europe Elimination Total 2016 12,260 - 1,243 13,503 4,408 (3,037) (242) - (7) 1,122 404 (366) 1,160 43,170 877 - 44,047 11,029 (7,821) (831) (990) (7) 2,188 - - 2,188 (303) (824) (71) - (26) 1,380 (1,224) - (496) 884 - 61 (1,163) - - (990) (990) (990) - - 990 - - - - - 57,618 877 253 58,748 14,144 (11,682) (1,144) - (40) 1,278 404 (801) 881 Certain items within general and administrative expenses, sales and marketing expenses and foreign exchange gains and losses comprise corporate support costs and are transferred across the segments. For the year ended 56 Consolidated Financial Statements Caldwell Partners – August 31, 2017 corporate support costs totalled $5,391 (2016 $4,289) with $3,934 allocated to the US (2016 $3,216), $1,364 to Canada (2016: $913) and $93 to Europe (2016: $160). Intercompany licence fee revenues have been eliminated on consolidation. A summary of property and equipment, goodwill and total assets by country is as follows: At August 31, 2016 Europe At August 31, 2017 Europe United States United States Canada Canada Total 629 1,045 628 1,168 25 - 1,699 178 178 - - 279 - - 1,238 1,523 2,761 1,296 1,624 2,920 Total 42 - 1,838 279 Property and equipment Intangible assets Goodwill Total assets 13,974 18,793 1,535 34,302 12,293 19,860 2,546 34,699 Depreciation recorded on property and equipment and amortization on intangible assets by country is as follows: Total United States United States Canada Canada Europe Europe Total 2017 2016 Depreciation expense Amortization expense 228 - 306 94 25 - 559 94 205 - 318 94 16 - 539 94 17. Commitments The Company's future operating lease commitments for premises excluding operating costs, including those amounts paid to related parties as set out in note 18, are as follows: Twelve months ending August 31, 2018 Twelve months ending August 31, 2019 Twelve months ending August 31, 2020 Twelve months ending August 31, 2021 Twelve months ending August 31, 2022 September 1, 2022 and thereafter 3,115 2,734 2,229 1,664 784 657 11,183 The operating lease commitments include gross obligations in connection with the New York, NY sublease as discussed in note 8. The Company expects to recoup $2,824 through September 30, 2021, which is not reflected in the above. During the year ended August 31, 2017, the Company expensed $3,339 (2016 $3,452) relating to operating leases for its eleven locations in Canada, the United States and the United Kingdom, inclusive of rents paid to a related party described in note 18. This expense is included in general and administrative expenses. With the exception of the Toronto office, all leases are with third party commercial landlords at fair market rental rates. Lease terms at inception are five to ten years, depending on the location. During 2014, the Company entered into a five-year letter of credit agreement with a United States financial institution for collateral security on a letter of credit made out to the landlord of a leased facility. The letter of credit commitment as at August 31, 2017 was $133 (2016 $143). 18. Related Party Transactions Pursuant to its lease agreements, the Company paid rent for its Toronto office to an affiliated company owned by a shareholder, C. Douglas Caldwell, registered as owning more than 10% of the Company. The amount of 57 Consolidated Financial Statements Caldwell Partners – consideration agreed to by the parties was determined to be the fair market rental rates at the inception of the lease by an independent commercial real estate counselor and was approved by the independent Members of the Board of Directors. Occupancy costs within general and administrative expenses in the consolidated statements of earnings have been recognized for the year ended August 31, 2017 in the amount of $223 (2016: $223). Classification of financial instruments 19. Financial Instruments The classification of the financial instruments is shown in the table below. Classification Measurement Cash and cash equivalents loans and receivables Marketable securities Accounts receivable Restricted cash Accounts payable available-for-sale loans and receivables loans and receivables other financial liabilities Compensation payable other financial liabilities Dividends payable other financial liabilities amortized cost fair value amortized cost amortized cost amortized cost amortized cost amortized cost Contingent consideration fair value through profit or loss fair value Fair value hierarchy The Company categorizes its financial assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs used in the measurement. Level 1: This level includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. Level 2: This level includes financial instruments that are not traded in an active market and whose value is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. The specific valuation techniques used to value financial instruments include quoted market prices or dealer quotes for similar instruments. Level 3: This level includes valuations based on inputs, which are less observable, unavailable or where the observable data does not support a significant portion of the instruments’ fair value. The Company’s financial instruments measured at fair value as at August 31, 2017 and August 31, 2016 consist of marketable securities which are comprised of managed funds and certain equity securities held for investment obtained through search fees being paid partially in equity of the client as discussed in note 4. In addition, contingent consideration is also included at August 31, 2016. August 31, 2017 Marketable securities - 5,048 172 Level 1 Level 2 Level 3 August 31, 2016 Marketable securities Contingent consideration Level 1 Level 2 Level 3 272 - 272 4,784 - 4,784 573 289 862 Consolidated Financial Statements 58 Caldwell Partners – Fair value Cash and cash equivalents, restricted cash, accounts receivable, accounts payable, compensation payable and dividends payable are short-term financial instruments whose fair value approximates their carrying amount given their short-term maturity. The Company has designated marketable securities as available-for-sale and as a result, these marketable securities are recorded at fair value with unrealized gains and losses that are considered temporary in nature being recorded in other comprehensive income. The professionally managed fixed income funds within marketable securities hold a combination of government and corporate bonds and are included within Level 2 of the fair value hierarchy. Since there is only an ‘Over the Counter’ market for fixed income securities, such securities owned and sold short are valued using independent prices obtained directly from third party pricing vendors and the investment fund’s prime brokers. The prices obtained from these sources usually reflect recent trading activity and therefore are indicative of fair value. A portion of the marketable securities held for investment in the previous year and obtained through search fees being paid partially in equity trade on the NASDAQ and was measured at fair value using quoted prices and included within Level 1 of the fair value hierarchy. The remaining marketable securities are included within Level 3 of the fair value hierarchy and are in a private company whose value is derived from estimates used in recent financings with discounts applied to factor in vesting and transferability restrictions on the units held. Other than temporary impairments of marketable securities are recorded within the Company’s consolidated statements of earnings. Realized gains and losses are removed from accumulated other comprehensive income and are recognized within the consolidated statements of earnings. A 5% depreciation or appreciation in the value of the marketable securities included within Level 3 of the fair value hierarchy, assuming all other variables remained the same, would have resulted in an increase or decrease in other comprehensive income (loss) of $9 recognized in the unrealized gain (loss) on marketable securities in the Company’s consolidated statements of comprehensive earnings for the year ended August 31, 2017 (2016 $29). The Company is exposed to various financial risks resulting from its operating, investing and financing activities. Financial risk management is carried out by the Company’s management, in conjunction with the Investment Committee of the Board of Directors, with respect to investments in marketable securities and management of the Company’s cash position. The Company does not enter into arrangements on financial instruments for speculative purposes. The Company’s main financial risk exposures, as well as its risk management policy, are detailed as follows: Foreign currency risk The Company is exposed to exchange rate risk on US and UK currency denominated monetary assets and liabilities. There is a risk to the Company’s earnings from fluctuations in the US dollar and British pound sterling exchange rates and the degree of volatility of changes in those in rates as the Company’s financial results are reported in Canadian dollars. As at August 31, 2017, the Company has a net monetary asset exposure of $5,117 denominated in US dollars (2016 $5,691). A 5% depreciation or appreciation in the Canadian dollar against the US dollar, assuming all other variables remained the same, would have resulted in an increase or decrease in foreign exchange gain (loss) of $256 recognized in the cumulative translation adjustment in the Company’s consolidated statements of comprehensive earnings for the year ended August 31, 2017 (2016 $285). As these are long-term investments and not expected to be liquidated to Canadian dollars, they are not hedged. As at August 31, 2017, the Company has net monetary asset exposure of $915 denominated in British pounds sterling (2016 $2,079). A 5% depreciation or appreciation in the Canadian dollar against the British pounds sterling, assuming all other variables remained the same, would have resulted in an increase or decrease in foreign exchange gain (loss) of $46 recognized in the cumulative translation adjustment in the Company’s consolidated statements of comprehensive earnings for the year ended August 31, 2017 (2016 $104). As these are long-term investments and not expected to be liquidated to Canadian dollars, they are not hedged. Consolidated Financial Statements 59 Caldwell Partners – The Company also has intercompany loans denominated in US Dollars and British pounds. From time to time, this short-term foreign currency risk is hedged. At August 31, 2017 and August 31, 2016 no hedges were in place. Liquidity risk Liquidity risk is the risk the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, it will have sufficient cash resources to meet its financial liabilities as they come due. The Company manages liquidity by maintaining adequate cash and cash equivalents balances, monitoring its investment portfolio of marketable securities and monitoring cash requirements to meet expected operational expenses, including capital requirements. The future ability to pay its obligations relies on the Company collecting its accounts receivable in a timely manner and by maintaining sufficient cash and cash equivalents in excess of anticipated needs. The contractual undiscounted future cash flows of the Company’s significant non-derivative financial liabilities are as follows: As at August 31, 2016 As at August 31, 2017 Less than 6 months Less than 6 months 6 months to 1 year 1 to 3 years 6 months to 1 year 1 to 3 years Accounts payable Compensation payable Dividends payable Contingent consideration 2,044 15,896 408 - - - - - - 958 - - 2,384 16,125 403 289 - - - - - 687 - - Credit risk Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents, marketable securities, restricted cash and accounts receivable. The Company places its cash and cash equivalents with high credit quality financial institutions. Similarly, the professionally managed fixed income funds within marketable securities are held by reputable financial institutions and hold government and other investment grade fixed income securities. The Company’s policy regarding equity instruments within marketable securities is to sell the investments as soon as the Company is reasonably able to do so. Accounts receivable were comprised of the following as at August 31: As at August 31 Accounts receivable Less: Allowance for doubtful accounts Other receivables 2017 2016 9,499 (522) 8,977 416 9,393 10,049 (598) 9,451 580 10,031 No financial assets are past due except for a portion of accounts receivable. As at August 31, 2017, accounts receivable of $8,503 (2016 $8,616) were fully performing, $474 (2016 $835) were over 90 days but not impaired and $522 (2016 $598) were over 90 days and impaired. Consolidated Financial Statements 60 Caldwell Partners – The following table summarizes the changes in the allowance for doubtful accounts for the accounts receivable: As at August 31 Beginning of year Provision for impairment Receivables written off during the year as uncollectible Unused amounts reversed End of year Interest rate risk and market price risk 2017 2016 598 926 (661) (341) 522 575 419 (148) (248) 598 The Company has no external debt outstanding and therefore exposure to interest rate risk on debt facilities is minimal. The Company does invest excess cash in short-term deposits and therefore decreases in interest rates impact the amount of interest income earned from those investments. Marketable securities are comprised of investments in pooled funds, equities and private company investments, which are also subject to market price risk (i.e., fair value fluctuates based on changes in market prices). As at August 31, 2017, the Company has $5,220 invested in marketable securities (2016 $5,629). A 5% variation in the market price of underlying securities would have resulted in an increase or decrease in the value of this asset of $261 (2016 $281). 20. Capital Management The Company’s capital is comprised of common shares of the Company, contributed surplus and deficit. The Company manages its capital to ensure financial flexibility, to increase shareholder value through organic growth and selective acquisitions, as well as to allow the Company to respond to changes in economic and/or market conditions. Because the Company continues to remain debt free, it is not subject to any externally imposed capital requirements. There have been no changes in the Company’s approach to capital management during the current year. 21. Credit Facility On September 28, 2016, the Company entered into an agreement with TD Bank to establish a $3,000 revolving demand, floating rate credit facility for future working capital needs. The facility is limited based on 85.0% of the Company’s eligible global accounts receivable as defined in the credit agreement, and further reduced to the extent the facility is used in connection with the issuance of letters of credit. The facility bears variable interest on drawn amounts based on the Canadian prime rate plus 1.0% per annum. As at August 31, 2017, no amounts were outstanding on the credit facility and letters of credit of $256 (August 31, 2016 $nil) have been issued against the facility. 22. Affiliation Relationships The Company has entered into licensing arrangements with certain entities to provide executive search services in markets not directly served by the Company. In exchange for the licence fee payments, the licensees will have rights to use the Caldwell Partners brand, search processes, methodologies and related intellectual property. For the year ended August 31, 2017, licence fees amounted to $310 (2016 $253). On July 13, 2015, the Company entered into a licensing agreement with CPGroup LATAM Ltd. and its subsidiaries (CPGroup). CPGroup operates throughout Latin America. The affiliation agreement has an initial term of five years and provides for CPGroup to pay the Company 2.25% of Latin American revenue for the first two years of the agreement and 4.25% in subsequent years. On June 6, 2017, the Company agreed to extend the 2.25% licensee fee rate to CPGroup for one additional year through July 13, 2018 to provide for their continued increased branding and marketing initiatives in Latin America. The Government of Venezuela has imposed restrictions on removing cash from its country and as a result, 61 Consolidated Financial Statements Caldwell Partners – licence fee revenue related to CPGroup’s Venezuelan operations is not currently recognized. Such licence fees relating to Venezuela will accumulate but will only be recognized when the ability for payment outside of the country is available. Effective November 8, 2015, the Company entered into a licensing agreement with Simon Monks and Partners Limited, a New Zealand corporation, which subsequently changed its name to The Caldwell Partners International New Zealand Limited. 23. Subsequent Events On November 9, 2017, the Board of Directors declared a dividend of 2.0 cents per share, payable to holders of common shares of record on November 20, 2017 and to be paid on December 15, 2017. Consolidated Financial Statements 62 Caldwell Partners – Caldwell Partners is one the world’s premier providers of executive search and has been for more than 45 years. Our sterling reputation is built on our record of successful searches for board directors, chief and senior executives, and selected functional experts, and our focus on providing the highest quality client service. www.caldwellpartners.com @CaldwellPtners Atlanta 3424 Peachtree Road N.E., Suite 1250 Atlanta, GA 30326 United States +1 404 946 4199 Auckland Level 31, Vero Centre 48 Shortland Street Auckland, New Zealand +64 21 838 428 Bogota Carrera 10 No. 97A–13 Torre B, Oficina 702 Edificio Bogotá Trade Center Bogotá, Colombia +57 1 642 3891 Buenos Aires Av. del Libertador 602, 8B C1001ABT, Buenos Aires Argentina +54 11 4813 3493 Calgary 520 Fifth Avenue, S.W., Suite 2000 Calgary, AB T2P 3R7 Canada +1 403 265 8780 Caracas Torre Extebandes, Piso 7 Avenida Tamanaco, El Rosal, 1060-A Caracas, Venezuela +58 212 951 4522 Charleston 1240 Winnowing Way, Suite 100 Mt. Pleasant, SC, 29466 United States +1 843 804 6051 Dallas 2100 Ross Avenue, Suite 880 Dallas, TX 75201 United States +1 214 748 3200 Lima Víctor Andrés Belaúnde 147, Torre Real 3, Of. 1402 San Isidro, Lima Perú +51 1 399 0970 London 4 Lombard Street London EC3V 9HD United Kingdom +44 20 31 67 2500 Los Angeles 1925 Century Park East, Suite 1200 Los Angeles, CA 90067 United States +1 310 402 5701 Miami 20900 NE 30th Avenue, Suite 311 Aventura, FL 33180 United States +1 305 359 3590 Mexico City Av. Presidente Masaryk, N° 111, Piso 1 Col. Chapultepec Morales, C.P. 11570, Mexico City, Mexico, D.F. +52 55 4123 2900 Nashville 205 Powell Place Brentwood, TN 37027 United States +1 615 815 1770 New York 140 East 45th Street, Suite 23C New York, NY 10017 United States +1 212 953 3220 Philadelphia 1050 Dale Road Meadowbrook, PA 19046 United States +1 215 600 1225 San Francisco One Post Street, Suite 500 San Francisco, CA 94104 United States +1 415 983 7700 Santiago Edificio Isidora Foster Isidora Goyenechea 3477 Piso 12, Oficina 120 Las Condes Santiago, Chile +56 2 2591 4100 São Paulo Av. Nações Unidas 12.901 – CENU Torre Norte – 3o andar – Conjunto 302 Brooklin Paulista, 04578-000 Sao Paulo, Brazil +55 11 3513 6300 Stamford 263 Tresser Boulevard, Suite 800 Stamford CT 06901 United States +1 203 324 6400 Toronto One Six Five Avenue Road, Suite 600 Toronto, ON, M5R 3S4 Canada +1 416 920 7702 Vancouver 650 West Georgia Street, Suite 2605 Vancouver, BC V6B 4N9 Canada +1 604 669 3550 Copyright ©2017 The Caldwell Partners International Inc. All rights reserved. Reproduction without permission is prohibited. Trademarks and logos are copyrights of their respective owners. Premier providers of executive search since 1970 

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