2017 Annual Report
Summary Financial Information
(US$ millions)
Revenues
Net Revenue1
Adjusted EBITDA1
Net Loss
Adjusted Net Income1
FY 2017
$303.0
$92.3
$9.4
$(23.8)
$2.8
FY 2016
$248.5
$68.3
$12.8
$(6.1)
$6.0
About Real Matters
Real Matters is a leading network management services provider for the $16 billion mortgage lending and insurance
industries. Real Matters’ platform combines its proprietary technology and network management capabilities with tens of
thousands of independent qualified field agents to create an efficient marketplace for the provision of mortgage lending
and insurance industry services. Our clients include more than 60 of the top 100 mortgage lenders in the U.S. and some
of the largest insurance companies in North America. We are a leading independent provider of residential real estate
appraisals to the mortgage market and a leading independent provider of title and mortgage closing services in the U.S.
Established in 2004, Real Matters has offices in Buffalo (NY), Cincinnati (OH), Denver (CO), Middletown (RI), and Markham
(ON). Real Matters is listed on the Toronto Stock Exchange under the symbol REAL. For more information, visit
www.realmatters.com.
1. Net Revenue, Adjusted EBITDA and Adjusted Net Income are Non-GAAP measures. See page 4 of this Annual Report.
When we started Real Matters over a decade ago, our goal was to use technology to bring innovation and
efficiencies to a segment of the mortgage lending industry where we knew there was a great opportunity for
improvement. Put simply, my team and I knew that there were lender pain points that we could fix with the
right combination of technology, creativity and a never-ending commitment to operational excellence. We saw
an opportunity, through network management, to create a long-term competitive differentiator.
We sought to use technology to create a competitive marketplace for outsourced services that are essential to
the underwriting process by focusing on the most qualified independent field agents to deliver the highest
quality product and the best possible experience for the borrower.
Today, we have established an industry-leading
position in the $3 billion appraisal market. We
continue to gain market share, and we believe we
have just begun to tap into the potential gains
possible by doing more for our clients.
We also see substantial opportunities for growth in the $13 billion title and closing market where we can bring
the same approach to bear.
To our shareholders,
2017 was a landmark year for Real Matters. We added two of the largest Tier 1 lenders
in the U.S. to our customer base, expanded our platform into the title and closing
industry, and we raised C$125 million of common equity in conjunction with our initial
public offering in May.
Our business delivered strong financial performance in 2017, including market adjusted revenue growth of
26% and Net Revenue1 margin expansion. We also grew our appraisal market share by 30% and our title and
closing market share by 17% in 2017 – both of which are key leading indicators of the long-term franchise
value we are creating.
30%
2017 YoY Mortgage
Appraisal Market
Share2 Growth
17%
2017 YoY Title &
Closing Market
Share3 Growth
Our market share gains in 2017 provide an excellent baseline from which we will continue to deliver growth in
fiscal 2018 and beyond. We expect to leverage the franchise value of our existing client relationships with
more than 60 of the top 100 lenders in the U.S. and the strength of our network management platform to fuel
that growth.
We have a client retention rate of more than 95%, and many of our clients have given us more of their business
year after year. These long-term relationships are the foundation of our business.
Network Management Capabilities:
Our Long-Term Competitive Differentiator
When we started Real Matters over a decade ago, our goal was to use technology to bring innovation and
efficiencies to a segment of the mortgage lending industry where we knew there was a great opportunity for
improvement. Put simply, my team and I knew that there were lender pain points that we could fix with the
right combination of technology, creativity and a never-ending commitment to operational excellence. We saw
an opportunity, through network management, to create a long-term competitive differentiator.
We sought to use technology to create a competitive marketplace for outsourced services that are essential to
the underwriting process by focusing on the most qualified independent field agents to deliver the highest
quality product and the best possible experience for the borrower.
2. Management estimate based on data from the MBA Mortgage Finance Forecast Report of October 24, 2017. 3. Management estimate of Residential Title Written Premium Market Share based on data
from the American Land Title Association as of June 30, 2017 and Demotech, Inc. for period ending December 31, 2015.
Today, we have established an industry-leading
position in the $3 billion appraisal market. We
continue to gain market share, and we believe we
have just begun to tap into the potential gains
possible by doing more for our clients.
We also see substantial opportunities for growth in the $13 billion title and closing market where we can bring
the same approach to bear.
When we started Real Matters over a decade ago, our goal was to use technology to bring innovation and
efficiencies to a segment of the mortgage lending industry where we knew there was a great opportunity for
improvement. Put simply, my team and I knew that there were lender pain points that we could fix with the
right combination of technology, creativity and a never-ending commitment to operational excellence. We saw
an opportunity, through network management, to create a long-term competitive differentiator.
We sought to use technology to create a competitive marketplace for outsourced services that are essential to
the underwriting process by focusing on the most qualified independent field agents to deliver the highest
quality product and the best possible experience for the borrower.
$16B addressable market
Today, we have established an industry-leading
position in the $3 billion appraisal market. We
continue to gain market share, and we believe we
have just begun to tap into the potential gains
possible by doing more for our clients.
We also see substantial opportunities for growth in the $13 billion title and closing market where we can bring
the same approach to bear.
A Firm Commitment to Creating Long-Term Value
From day one, we have had a firm commitment to building long-term value that is fundamental to how we run
our business and measure our success.
We know that our business will be subject to secular trends and seasonality, as it was in 2016-2017 with the
boom and subsequent return to normalized levels in rate refinance driven mortgage originations. But we don’t
get distracted by short-term trends. Instead, we focus on the long term by consistently outperforming our
competitors, growing market share with our clients, and attracting and retaining franchise clients. We believe
that the true value of our company will be realized by building a business that can prosper in the peaks and
valleys, and thrive over the long term.
1 in 15 residential mortgage appraisals
in the U.S. on our platform
To that end, in 2017 we focused our energies on increasing capacity and driving efficiencies on our network to
support new customers and organic growth. We also leveraged our core logistics capabilities to launch
smarter assignment and enhanced consumer inspection scheduling. We are now able to bundle orders for
field agents and schedule inspections that meet 95% of consumers’ preferred inspection times based on
qualifications, capacity and availability on the network. These capabilities drive greater efficiencies for field
agents and lenders on our platform while offering new ways to improve the consumer residential lending
experience.
Being focused on the long term means we have said ‘no’ to a lot of opportunities, in order to say ‘yes’ to the
right ones. That is borne out in the choices we have made to grow organically, and in the businesses we have
acquired along the way.
This approach to managing our business is also reflected in our internal operating principles about people,
products and plain common sense.
Today, we have established an industry-leading
position in the $3 billion appraisal market. We
continue to gain market share, and we believe we
have just begun to tap into the potential gains
possible by doing more for our clients.
We also see substantial opportunities for growth in the $13 billion title and closing market where we can bring
the same approach to bear.
When we started Real Matters over a decade ago, our goal was to use technology to bring innovation and
efficiencies to a segment of the mortgage lending industry where we knew there was a great opportunity for
improvement. Put simply, my team and I knew that there were lender pain points that we could fix with the
right combination of technology, creativity and a never-ending commitment to operational excellence. We saw
an opportunity, through network management, to create a long-term competitive differentiator.
We sought to use technology to create a competitive marketplace for outsourced services that are essential to
the underwriting process by focusing on the most qualified independent field agents to deliver the highest
quality product and the best possible experience for the borrower.
People
• Culture is everything: running a high-growth
business requires smart, ambitious people —
not necessarily a lot of people, but the right kind
of people.
• We don’t believe in variable compensation or
short-term incentives — they incent the wrong
behaviour. Many of our employees have an
ownership interest in the Company and are aligned
to our long-term goals.
• We recognize the importance of working with
professional, qualified field agents and we work
hard to align our success to their success.
In 2017, we opened a new Denver operations centre, investing in a culturally aligned talent pool which will
help sustain our long-term commitment to running a high-growth business. We also began to expand our field
agent network for title and closing, laying the groundwork for growth in that business.
Products
• We build for scale — because our clients require
it and it’s how we can grow profitably.
• Customizations drag on growth — we focus on
scalable, repeatable processes.
• We are prudent with our capital and our resources
— we make trade-offs in the short-term to meet
our long-term goals and to set ourselves up for
continued success.
In 2017, we began the process of porting our title and closing business to our network management platform
by implementing our regional manager model and leveraging the same technology we use in the appraisal
business to drive better performance in title and closing. We also hardened the controls and processes around
our existing title and closing platform, in line with our capabilities in the appraisal business, such that we can
now meet the requirements of regulated banks.
Plain Common Sense
• Measure twice, cut once — not taking the time to make sure
of what you’re doing will cost you time or money, and most
likely both.
• Fail fast, learn faster.
• You only get one chance to make a first impression —
execution is key.
60+ of top 100 mortgage
lenders in the U.S. on
our platform
In October 2017, we announced the expansion of our platform into the title and closing industry – and we are
actively engaged in the sales cycle with many of our Tier 2 lenders. Our clients know the impact we have made
in the appraisal business, and they are equally excited to see how we can leverage our network management
capabilities to drive greater performance in the title and closing market. We now have one sales and account
management team presenting a unified brand, value proposition, and network management platform to
our clients.
We also launched a pilot for purchase transactions in the title and closing business with a Tier 2 lender in the
summer of 2017. We will be disciplined about using an evidenced-based product road map as we evolve our
strategy to address this significant market.
Looking Ahead
Real Matters serves one of the largest asset classes in the world and we have a long runway for growth in a
$16 billion total addressable market. By fiscal 2021, our objectives are to:
• Increase our U.S. residential mortgage appraisal market share to 15% - 20%;
• Increase the Company’s U.S. title and closing market share to 1% - 3%;
• Increase revenues by a compound annual growth rate of 20% - 25%, from base year September 30, 2016;
• Achieve target Net Revenue1 margins of 35% - 40%; and
• Achieve target Adjusted EBITDA1 margins of 25% - 30%.
We are confident in our ability to deliver; we also know that these objectives are not a terminal value for what
we believe we can achieve. This is just the beginning.
2017 was an outstanding year for Real Matters. We are proud of our achievements and excited about what the
future holds. Our success would not be possible without the trust of our customers, the loyalty and
professionalism of our field agents, the commitment and dedication of our employees, and the support and
encouragement of our Board of Directors and shareholders – and for that, we are grateful.
Jason Smith
Founder, President and CEO
Real Matters Inc.
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
The following Management Discussion and Analysis (“MD&A”) was prepared as of November 27, 2017 and should be
read in conjunction with our consolidated financial statements (“financial statements”), including notes thereto, for the
years ended September 30, 2017 and 2016. All amounts included in this MD&A are reported in thousands of U.S. dollars,
unless otherwise stated, and have been prepared in accordance with International Financial Reporting Standards (“IFRS”
or “GAAP”). Throughout this MD&A, Real Matters Inc. and its subsidiaries are referred to as “Real Matters,” “the
Company,” “we,” “our,” or “us.”
Initial public offering
On May 11, 2017, we completed an initial public offering (“IPO”) of common shares (the “Offering”). Our common shares
are listed on the Toronto Stock Exchange under the stock symbol “REAL”.
The Offering of 12.1 million common shares consisted of a treasury share issuance of 9.6 million common shares and a
secondary offering of 2.5 million common shares by certain selling shareholders. The Offering price of 13 Canadian dollars
(“C$”) resulted in net proceeds to us of C$117.6 million and C$29.8 million to the selling shareholders after underwriting
commissions of C$7.5 million and C$1.9 million, respectively.
Corporate Overview
We are a leading network management services provider for the mortgage lending and insurance industries. Our
“platform” combines our proprietary technology and network management capabilities with tens of thousands of
independent qualified field agents to create an efficient marketplace for the provision of mortgage lending and insurance
industry services. Our platform facilitates competition between field agents, such as residential real estate appraisers, to
deliver performance-driven services, which brings superior quality, transparency and efficiency to our clients.
Our platform was created to address key issues within the mortgage lending and insurance industries. We built our
platform to create a long-term competitive advantage relative to traditional service providers, who we believe have high-
touch, labour intensive and costly operations. Through our platform and network management capabilities, we believe
we are able to deliver services faster and with fewer errors. We believe the efficiencies we provide allow for fewer touch
points, which reduces our cost structure and is a scalable business model.
We operate different brands focused on individual market segments in the United States of America (“U.S.”) and Canada.
We service the U.S. and Canadian residential mortgage industry through our Solidifi brand, and the Canadian property
and casualty insurance industry through our iv3 brand.
In the U.S., our clients include more than 60 of the top 100 mortgage lenders, including all Tier 1 mortgage lenders, as
defined in the “Glossary” section of this MD&A. We provide approximately one in 15 residential mortgage appraisals in
the U.S. and we estimate we had approximately 6.5% market share as of September 30, 2017. We are also a national
independent provider of title and closing services and we estimate we had approximately 0.3% market share as of
September 30, 2017.
In Canada, our clients include a majority of the largest Canadian chartered banks as well as some of North America’s
largest insurance companies. We provide residential mortgage appraisals to three of the big five banks and we had
approximately 18% market share at the end of 2017. We provide residential and commercial property insurance
inspections to 10 of the top 15 insurance carriers in Canada and we had approximately 12% market share at the end of
2017.
We estimate that the total annual market spend for our services was approximately $16.0 billion in 2017, which
represented the current estimated annual spend by mortgage lenders on residential mortgage appraisal services and
written premiums for title insurance provided by us in the U.S., and residential mortgage appraisal and insurance
inspection services provided by us in Canada.
Real Matters Inc. – September 30, 2017 - 1
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Headquartered in Markham, Ontario, Real Matters had approximately 800 employees across North America on
September 30, 2017. Its principal offices include Buffalo, New York, Cincinnati, Ohio, Middletown, Rhode Island and
Denver, Colorado.
Seasonality and Trends
Mortgage unit volumes in North America are a key driver of our financial performance. Our transaction-based revenues
are impacted by the seasonality of the residential mortgage industry, with home buyers typically purchasing more homes
in our third and fourth fiscal quarters, representing the three months ending June 30 and September 30, respectively.
Mortgage unit volumes are also impacted by other factors such as interest rate fluctuations, refinancing rates, housing
prices, the availability of funds for mortgage loans, credit requirements, regulatory changes, household indebtedness,
employment levels and the general health of the North American economy. Our market share is impacted by the size of
the residential mortgage market but also our clients’ relative share of the mortgage origination market when compared
to the overall size of the market. Gains or losses in mortgage origination market share by our clients’ impacts our overall
market share.
Most of our services are subject to multi-year or evergreen Master Service Agreements (“MSAs”). These agreements do
not typically have minimum unit volume guarantees. Instead, we rely on our ability to outperform our competitors to
increase our market share of transaction volumes with our clients.
For the fiscal year ending September 30, 2017 (“fiscal 2017”), approximately 90% of our revenues were generated in the
U.S. For this reason, we have elected to report our consolidated financial results in U.S. dollars, although our functional
currency is the Canadian dollar. We don’t hedge the impact foreign currency exchange fluctuations between the Canadian
and U.S. dollar can have on our reported amounts of Canadian dollar denominated revenues and expenses.
Strategy and Outlook
Our mission is to be a leading network management services company, globally. We built our platform to address key
issues in the mortgage lending and insurance industries. In the U.S., our clients include more than 60 of the top 100
mortgage lenders, including all Tier 1 mortgage lenders.
Our platform creates a competitive marketplace for outsourced services that are essential to the underwriting process.
Our strategy is to leverage our platform to consistently outperform our competitors, build on our performance to grow
market share with our clients, and to attract and retain long-term franchise clients.
We believe that our strategy will strengthen our competitive position, and generate increased revenues, Net Revenue(A)
and profitability. This strategy is supported by our continuing focus on a scalable software development discipline, a
commitment to client service, operational excellence and creating long-term value for our clients, employees and
shareholders.
We take a long-term view to manage and measure the success of our ongoing business strategies. In this regard, our
principal focus is on market share growth. We seek to achieve market share increases irrespective of residential mortgage
origination market conditions. Market share growth is achieved through the onboarding of new customers and by
increasing market share within our existing client base, including those clients we’ve recently onboarded. The mortgage
market and residential mortgage originations are subject to the influence of many external factors, such as broader
economic conditions and fluctuating interest rates, over which we have no direct control.
Based on our track record to date, we have routinely been able to grow our market share of a newly onboarded client’s
residential mortgage appraisal business to 15% of that client’s transaction volume by the end of the first year of
operation, and to 35% to 40% by the end of the third year. Although the vast majority of mortgage lenders in the U.S. use
more than one service provider, we have a number of clients for which we are the majority residential mortgage appraisal
provider. Our long-term strategy targets are based on achieving a market share of approximately 30% to 40% with each
of our Tier 1 appraisal clients within five years of launch.
Real Matters Inc. – September 30, 2017 - 2
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
If we successfully execute our plan, we believe that we have significant growth opportunities by September 30, 2021
(“fiscal 2021”) to:
•
•
•
•
•
increase our U.S. residential mortgage appraisal market share to 15% to 20%;
increase the Company’s U.S. title and closing market share to 1% to 3%;
increase revenues by a compound annual growth rate (“CAGR”) of 20% to 25%, from base year September 30,
2016 (“fiscal 2016”);
achieve target Net Revenue(A) margins of 35% to 40%; and
achieve target Adjusted EBITDA(A) margins of 25% to 30%.
These long-term objectives are supported by continued growth of residential mortgage appraisal market share, disrupting
the title and closing market and continued pursuit of acquisition opportunities.
We expect our quarterly results to vary with the seasonal nature and size of the U.S. mortgage originations market, which
is significantly impacted by fluctuations in interest rates, amongst other factors.
There have been no significant changes to any assumption or estimate that would cause us to revise our outlook for fiscal
2021.
Important Factors Affecting Results from Operations
Many factors, including those that are beyond our direct control, may have a significant impact on our financial
performance. Since the vast majority of our revenues are generated in the U.S., the discussion outlined below pertains
to factors impacting the near-term outlook for the U.S. market. As discussed in the “Strategy and Outlook” section above,
our objectives and strategies have been established with a longer-term view of performance, which includes
consideration of the near-term factors expected to impact our operating results outlined below.
Residential Mortgage Originations
Our business is dependent on the strength of the mortgage lending industry, specifically the volume of U.S. residential
mortgage originations for purchase and refinance transactions. According to the MBA Mortgage Finance Forecast Report
of February 15, 2017, the U.S. mortgage origination market was estimated at $1.9 trillion in 2016. In that report, the MBA
expected residential mortgage originations to decline to $1.6 trillion in 2017, and to remain stable until 2019. The MBA
expected refinance transactions to decline to $500 billion in 2017 from $900 billion in 2016. In contrast, the MBA
estimated that residential mortgage originations for home purchases would increase by 10%, 8% and 6% in each of the
next three years, respectively, beginning in 2017. In the MBA’s most recent report, the only change to their February
estimates was for the refinance market to be modestly stronger than their original prediction for 2017 of $500 billion.
The MBA’s revised estimate is for the refinance market to deliver $600 billion of activity in 2017 and the overall market
for 2017 to be $1.7 trillion, all other estimates remain unchanged. The MBA’s anticipated decline in refinance transactions
will dampen our revenues through 2019, while the expected increase in residential mortgage originations for home
purchases, all else equal, will be a positive to revenues.
Economic Conditions
General economic conditions in the U.S. including the outlook for major leading indicators such as interest rates, Real
Gross Domestic Product (“GDP”) and unemployment levels have historically impacted home ownership levels and the
level of residential mortgage originations. Accordingly, the MBA factors all of these leading indicators into their residential
mortgage origination estimates. A rising interest environment could result in lower residential mortgage originations and
lower revenues, while a stronger U.S. economic environment can result in higher residential mortgage originations,
including purchase and refinance originations, which could lead to higher revenues. Lower unemployment levels could
lead to higher residential mortgage originations and result in higher revenues.
Real Matters Inc. – September 30, 2017 - 3
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Regulation
Changes in regulation can impact the supply of mortgage funding. All else equal, a greater supply of mortgage funding
could have a positive impact on our revenues. Conversely, a tighter supply of mortgage funding could lead to lower
residential mortgage originations and lower revenues. We do not currently anticipate a tightening of available mortgage
funding. The U.S. government may consider a review of certain regulations that, in combination with others, govern
residential mortgage originations. While less restrictive regulation could impact our revenues, we do not view the repeal
or easing of certain components of a particular piece of regulation as having a significant impact on our revenues.
We expect that anticipated market share growth with current and future clients will help mitigate the impact of any
weakness in the mortgage lending market, as forecasted by the MBA, on our operating performance.
We are also subject to a variety of risks and uncertainties. See “Caution Regarding Forward-Looking Statements”
contained elsewhere in this MD&A for a description of the risks that impact our business and that could cause actual
results to vary.
Factors Affecting the Comparability of Results from Operations
Our historical results include the acquisition of Linear which has been included in our consolidated results since April 1,
2016, which affects the comparability of fiscal 2016 results with fiscal 2017.
For more details on this acquisition and its contribution to our financial results, please see the “Review of Operations”
section of this MD&A.
Non-GAAP measures
We prepare our financial statements in accordance with IFRS. However, we consider certain non-GAAP financial measures
as useful additional information in measuring our financial performance and condition. These measures, which we believe
are widely used by investors, securities analysts and other interested parties in evaluating our performance, do not have
a standardized meaning prescribed by GAAP and therefore may not be comparable to similarly titled measures presented
by other publicly traded companies, nor should they be construed as an alternative to financial measures determined in
accordance with IFRS. Non-GAAP measures include “Adjusted EBITDA”, “Net Revenue” and “Adjusted Net Income or
Loss”.
(A)
Adjusted EBITDA
All references to ‘‘Adjusted EBITDA’’ in this MD&A are to net income or loss before stock-based compensation expense,
acquisition and IPO recovery or costs, amortization, impairment of assets, interest expense, interest income, net foreign
exchange gains or losses, gains or losses on fair value of warrants, re-measurement loss on previously held equity method
investment, net income or loss from equity accounted investees and income tax expense or recovery. Adjusted EBITDA
is a measure of our operating profitability, and by definition, excludes certain items detailed above. These items are
viewed by us as either non-cash (in the case of stock-based compensation expense, amortization, impairment of assets,
unrealized net foreign exchange gain or loss, gain or loss on fair value of warrants, re-measurement loss on previously
held equity method investment, net income or loss from equity accounted investees and deferred income taxes) or non-
operating (in the case of acquisition and IPO recovery or costs, realized net foreign exchange gain or loss, interest
expense, interest income and current income taxes). Adjusted EBITDA is a useful financial and operating metric for the
Company, the board of directors, and the Company’s lender, as it represents a measure of the Company’s operating
performance used to assess the value of the Company relative to its peers and compliance with a long-term debt facility
covenant. The underlying reasons for excluding each item are as follows:
Stock-based compensation expense: These costs represent non-cash expenditures on equity settled awards recognized
in connection with our IPO or ongoing stock-based compensation expense. These non-cash amounts are recorded to
operating expenses and represents a different class of expense than those included in Adjusted EBITDA.
Real Matters Inc. – September 30, 2017 - 4
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Acquisition and IPO (recovery) costs: These recoveries or costs represent non-operating items and include transaction
related recoveries or costs specific to acquisitions and costs incurred in connection with our IPO. These recoveries or
expenses are not indicative of continuing operations and represents a different class of recovery or expense than those
included in Adjusted EBITDA.
Amortization: As a non-cash item, amortization is not indicative of our operating profitability and represents a different
class of expense than those included in Adjusted EBITDA.
Impairment of assets: As a non-cash item, impairment of assets is not indicative of our operating profitability and
represents a different class of expense than those included in Adjusted EBITDA.
Interest expense and income: Interest expense or income reflects our debt/equity mix, interest rates and borrowing
position from time-to-time. Accordingly, interest expense or income reflects our treasury/financing activities and
represents a different class of expense or income than those included in Adjusted EBITDA.
Net foreign exchange gain or loss: As non-cash items, unrealized net foreign exchange gains or losses are not indicative
of our operating profitability. Realized net foreign exchange gains or losses reflects our treasury/financing activities and
represents a different class of expense than those included in Adjusted EBITDA.
Gains or losses on fair value of warrants: As a non-cash item, gains or losses on fair value of warrants is not indicative of
our operating profitability. Gains or losses on the fair value of warrants reflects our treasury/financing activities and
represents a different class of expense than those included in Adjusted EBITDA.
Re-measurement loss on previously held equity method investment: As a non-cash item, the re-measurement loss on a
previously held equity method investment is not indicative of our operating profitability and represents a different class
of expense than those included in Adjusted EBITDA.
Net income or loss from equity accounted investee: Net income or loss from our equity accounted investee is deducted
from or added to Adjusted EBITDA, and as a non-cash item is not indicative of our operating profitability.
Income taxes: Income taxes are a function of tax laws and rates and are affected by matters which are separate from our
daily operations. Income taxes are not indicative of our operating profitability and represents a different class of expense
than those included in Adjusted EBITDA.
Real Matters Inc. – September 30, 2017 - 5
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
The reconciling items between Adjusted EBITDA and net income or loss are detailed in the consolidated statement of
operations and comprehensive income or loss for the years ended September 30, 2017 and 2016. A reconciliation
between net income or loss and Adjusted EBITDA is provided for the three months ended September 30, 2017 and 2016
and fiscal years ending September 30, 2017 and 2016.
Net (loss) income
Stock-based compensation expense
Acquisition and IPO (recovery) costs
Amortization
Impairment of assets
Interest expense
Interest income
Net foreign exchange loss (gain)
(Gain) loss on fair value of warrants
Re-measurement loss on previously held
equity method investment
Net income from equity accounted investees
Income tax (recovery) expense
Adjusted EBITDA
Three months ended September 30
2016
2017
Year ended September 30
2017
2016
$
(3,822)
369
(1,151)
5,348
-
160
(116)
3,076
(281)
$
1,634
-
485
5,853
-
222
(5)
(3,538)
22
$
(23,769)
3,497
1,609
21,241
5,096
889
(139)
3,390
5,011
$
(6,079)
-
3,005
14,001
-
687
(20)
(2,841)
5,437
-
(104)
(563)
2,916
$
-
(139)
750
5,284
$
976
(18)
(8,403)
9,380
$
-
(475)
(891)
12,824
$
Management typically calculates Adjusted EBITDA as follows:
Three months ended September 30
2016
2017
Year ended September 30
2017
2016
Revenues
Less: Transaction costs
Less: Operating expenses
Add: Stock-based compensation expense
Adjusted EBITDA
$
$
$
$
82,892
58,863
21,482
369
2,916
80,983
56,030
19,669
-
5,284
302,976
210,682
86,411
3,497
9,380
248,547
180,247
55,476
-
12,824
$
$
$
$
Principle changes in Adjusted EBITDA
The decline in Adjusted EBITDA for the three months ended September 30, 2017 and fiscal 2017 versus the same periods
last year was due to the following:
• a significant decline in the residential mortgage originations market, specifically for refinance mortgage
activity;
• revenue growth recognized from lower margin appraisal and ancillary services versus higher margin title and
closing services;
lower margin service revenues in our title and closing service line;
•
• the transition of certain title and closing services to the network managed business model from the traditional
business model;
• higher public company costs; and, higher transaction costs to service organic appraisal and ancillary revenue
growth in the first half of fiscal 2017, partially offset by lower transaction costs to service organic appraisal and
ancillary revenue growth in the second half of fiscal 2017.
Real Matters Inc. – September 30, 2017 - 6
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Net Revenue
The reconciling items between net income or loss and Net Revenue are detailed in the consolidated statement of
operations and comprehensive income or loss. A reconciliation between net income or loss and Net Revenue is provided
below for the three months ended September 30, 2017 and 2016 and fiscal years ending September 30, 2017 and 2016.
Net (loss) income
Operating expenses
Acquisition and IPO (recovery) costs
Amortization
Impairment of assets
Interest expense
Interest income
Net foreign exchange loss (gain)
(Gain) loss on fair value of warrants
Re-measurement loss on previously held
equity method investment
Net income from equity accounted investees
Income tax (recovery) expense
Net Revenue
Three months ended September 30
2016
2017
Year ended September 30
2017
2016
$
(3,822)
21,482
(1,151)
5,348
-
160
(116)
3,076
(281)
$
1,634
19,669
485
5,853
-
222
(5)
(3,538)
22
$
(23,769)
86,411
1,609
21,241
5,096
889
(139)
3,390
5,011
$
(6,079)
55,476
3,005
14,001
-
687
(20)
(2,841)
5,437
-
(104)
(563)
24,029
$
-
(139)
750
24,953
$
976
(18)
(8,403)
92,294
$
-
(475)
(891)
68,300
$
Management typically calculates Net Revenue as follows:
Three months ended September 30
2016
2017
Year ended September 30
2017
2016
Revenues
Less: Transaction costs
Net Revenue
$
$
$
$
$
$
$
$
80,983
56,030
24,953
302,976
210,682
92,294
248,547
180,247
68,300
82,892
58,863
24,029
All references to “Net Revenue” in this MD&A are to Adjusted EBITDA (as defined above) plus operating expenses less
stock-based compensation. Net Revenue is an additional measure of our operating profitability, and by definition,
excludes certain items detailed above. Net Revenue comprises revenues less transaction costs, where transaction costs
comprise expenses that are directly attributable to a specific revenue transaction including: appraisal costs, various
processing fees, including credit card fees, connectivity fees, insurance inspection costs, title and closing agent costs,
external abstractor costs and external quality review costs. Net Revenue is a useful financial and operating metric for us
and our board of directors to assess our operating performance and the value of our Company relative to our peers.
Principle changes in Net Revenue
The decline in Net Revenue for the three months ended September 30, 2017 versus the same quarter last year was due
to the following:
• a significant decline in the residential mortgage originations market, specifically for refinance mortgage
activity;
• revenue growth recognized from lower margin appraisal and ancillary services versus higher margin title and
closing services;
lower margin service revenues in our title and closing service line;
•
• the transition of certain title and closing services to the network managed business model from the traditional
business model, partially offset by lower transaction costs to service organic appraisal and ancillary revenue
growth in the fourth quarter of fiscal 2017.
The increase in Net Revenue for fiscal 2017 was impacted by each of the items impacting Net Revenues for the three
months ended September 30, 2017, coupled with contributions to Net Revenues from acquisitions, partially offset by
higher transaction costs to service organic appraisal and ancillary revenue growth in the first half of fiscal 2017.
Real Matters Inc. – September 30, 2017 - 7
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Adjusted Net Income or Loss
All references to “Adjusted Net Income or Loss” in this MD&A are to net income or loss before stock-based compensation
expense, acquisition and IPO recovery or costs, amortization of intangibles, impairment of assets, net foreign exchange
gains or losses, gains or losses on fair value of warrants and re-measurement loss on a previously held equity method
investment, net of the related tax effects. Adjusted Net Income or Loss is a term we use that does not have a standardized
meaning prescribed by IFRS and is unlikely to be comparable to similar measures used by other entities. Adjusted Net
Income or Loss is a measure of our operating profitability and, by definition, excludes certain items detailed above. These
items are viewed by us as either non-cash (in the case of stock-based compensation expense, amortization of intangibles,
impairment of assets, unrealized net foreign exchange gain or loss, gain or loss on fair value of warrants and re-
measurement loss on a previously held equity method investment) or non-operating (in the case of acquisition and IPO
recovery or costs and realized net foreign exchange gains or losses). Adjusted Net Income or Loss is a useful financial and
operating metric for us and our board of directors as it represents net income from operations, which excludes treasury,
capital, acquisition and related costs, and non-operating costs.
The reconciling items between net income or loss and Adjusted Net Income or Loss are provided below for the three
months ended September 30, 2017 and 2016 and fiscal years ending September 30, 2017 and 2016.
Net (loss) income
Stock-based compensation expense
Acquisition and IPO (recovery) costs
Amortization of intangibles
Impairment of assets
Net foreign exchange loss (gain)
(Gain) loss on fair value of warrants
Re-measurement loss on previously held
equity method investment
Related tax effects
Adjusted Net Income
Three months ended September 30
2017
2016
Year ended September 30
2017
2016
$
(3,822)
369
(1,151)
4,918
-
3,076
(281)
$
1,634
-
485
5,483
-
(3,538)
22
$
(23,769)
3,497
1,609
19,649
5,096
3,390
5,011
$
(6,079)
-
3,005
12,839
-
(2,841)
5,437
-
(2,392)
717
$
-
(960)
3,126
$
976
(12,696)
2,763
$
-
(6,389)
5,972
$
Adjusted EBITDA, Net Revenue and Adjusted Net Income or Loss should not be considered in isolation as an indicator of
financial performance, or as an alternative to, or a substitute for, net income or other financial statement data presented
in our audited consolidated financial statements.
Real Matters Inc. – September 30, 2017 - 8
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Financial Performance
The following is a discussion of our consolidated financial condition and results of operations for the years ended
September 30, 2017 and 2016.
Foreign Currency Exchange (“FX”) Rates
We have elected to report our financial results in U.S. dollars to improve the comparability of our financial results with
our peers. Reporting our financial results in U.S. dollars also reduces the impact of foreign currency exchange fluctuations
in our reported amounts because our complement of assets and operations are larger in the U.S. than they are in Canada.
However, we remain a legally domiciled Canadian entity and our functional currency is the Canadian dollar. Accordingly,
our financial position, results of operations, cash flows and equity are initially translated to, and consolidated in, Canadian
dollars. The resulting translation adjustments are included in other comprehensive income or loss. Our consolidated
Canadian dollar statement of financial position (“balance sheet”) is further translated from Canadian to U.S. dollars
applying the foreign currency exchange rate in effect at the balance sheet date, while our consolidated Canadian dollar
results of operations and cash flows are translated to U.S. dollars applying the average foreign currency exchange rate in
effect during the reporting period. Translating the financial position, results of operations and cash flows of our U.S.
business into Canadian dollars, our functional currency, and re-translating these amounts to U.S. dollars, our reporting
currency, has no translation impact on our financial statements. Accordingly, our U.S. results retain their original values
when expressed in our reporting currency. Translation adjustments are only included in the determination of net income
or loss when we realize a reduction in the investment we hold in operations outside of Canada.
Our consolidated financial position and operating results have been translated to U.S. dollars applying FX rates outlined
in the table below. FX rates are expressed as the amount of U.S. dollars required to purchase one Canadian dollar.
Through March 31, 2017, FX rates represent noon rates according to the Bank of Canada. Subsequent to March 31, 2017,
FX rates represent the daily average rate published once each business day by the Bank of Canada.
Fiscal 2017
Fiscal 2016
Consolidated
Balance Sheet
Current
Consolidated
Statement of Operations and
Comprehensive Income or loss
Cumulative
Average
Average
Consolidated
Balance Sheet
Consolidated
Statement of Operations and
Comprehensive Income or loss
Current
Average
Cumulative
Average
December 31
March 31
June 30
September 30
$
$
$
$
0.7448
0.7506
0.7706
0.8013
$
$
$
$
0.7496
0.7559
0.7436
0.7984
$
$
$
$
0.7496
0.7528
0.7497
0.7613
$
$
$
$
0.7225
0.7710
0.7687
0.7624
$
$
$
$
0.7489
0.7274
0.7761
0.7662
$
$
$
$
0.7489
0.7380
0.7503
0.7542
Real Matters Inc. – September 30, 2017 - 9
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
FX Impact on Consolidated Results
The following table has been prepared to assist readers in assessing the FX impact on selected results for the year ended
September 30, 2017.
September 30,
2016
September 30,
2017
September 30,
2017
September 30,
2017
September 30,
2017
Year ended
(organic,
acquisition and
other non-
operating
changes)
(holding FX
constant with
the comparative
period)
$
54,132
30,187
30,760
(1,420)
7,233
5,096
200
(118)
6,195
(473)
$
302,679
210,434
86,236
1,585
21,234
5,096
887
(138)
3,354
4,964
(as reported)
$
248,547
180,247
55,476
3,005
14,001
-
687
(20)
(2,841)
5,437
-
976
(475)
(6,970)
(891)
(6,079)
$
457
(24,961)
(7,528)
(17,433)
$
976
-
(18)
(31,931)
(8,419)
(23,512)
$
(FX impact)
(as reported)
$
297
248
175
24
7
2
(1)
36
47
-
-
-
(241)
16
(257)
$
$
302,976
210,682
86,411
1,609
21,241
5,096
889
(139)
3,390
5,011
976
(18)
(32,172)
(8,403)
(23,769)
$
$
68,300
$
23,945
$
92,245
$
49
$
92,294
$
12,824
$
(3,350)
$
9,474
$
(94)
$
9,380
$
5,972
$
(3,066)
$
2,906
$
(143)
$
2,763
Consolidated Statement of Operations
Revenues
Transaction costs
Operating expenses
Acquisition and IPO costs
Amortization
Impairment of assets
Interest expense
Interest income
Net foreign exchange (gain) loss
Loss on fair value of warrants
Re-measurement loss on previously
held equity method investment
Net income from equity
accounted investees
Loss before income tax recovery
Net income tax recovery
Net loss
Net Revenue
(A)
Adjusted EBITDA
(A)
Adjusted Net Income
(A)
Note: (A) – Please refer to the “Non-GAAP measures” section of this MD&A
Real Matters Inc. – September 30, 2017 - 10
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Review of Operations - For the year ended September 30, 2017
We conduct our business in the U.S. and Canada. Please refer to the table above for additional details regarding the
impact FX had on our comparative operating results for fiscal 2017.
Revenues
Total
U.S.
Canada
2017
Year ended September 30
2016
Change
$
302,976
$
248,547
$
54,429
$
$
271,242
31,734
$
$
218,267
30,280
$
$
52,975
1,454
Revenue by geography and service type
Year ended September 30, 2017
Year ended September 30, 2016
Percent-
age of
revenues
U.S.
Canada -
expressed in
thousands of
Canadian
dollars
Percent-
age of
revenues
Percent-
age of
revenues
U.S.
Canada -
expressed in
thousands of
Canadian
dollars
Percent-
age of
revenues
Appraisal and
ancillary
Title and closing
Other
Revenues
$
$
200,168
69,500
1,574
271,242
73.8
25.6
0.6
100.0
%
%
%
%
$
$
36,970
-
4,714
41,684
88.7
-
11.3
100.0
%
%
%
%
$
$
181,036
36,935
296
218,267
83.0
16.9
0.1
100.0
%
%
%
%
$
$
35,348
-
4,802
40,150
88.0
-
12.0
100.0
%
%
%
%
Revenue growth or decline components
Organic, including market impact
Acquisition
FX
Total revenue growth
U.S.
Canada
Consolidated
Year ended September 30, 2017
%
%
%
%
6.0
18.3
-
24.3
%
%
%
%
3.8
-
1.0
4.8
5.7
16.1
0.1
21.9
%
%
%
%
Year ended
Consolidated revenues increased 21.9% to $303.0 million, on contributions from acquisitions of $40.0 million and organic
growth (including the estimated market impact) of $14.1 million. The impact of the change in FX of $0.3 million was
nominal. Our fiscal 2017 results were impacted by changes in the U.S. residential mortgage origination market, which the
MBA estimates declined by over 22%, comprising an estimated 4% decrease in residential mortgage purchase activity
and a 41% decline in refinance activity.
Our acquisition of Linear increased revenues by $37.8 million compared to fiscal 2016. We also acquired a small
complementary business in 2016 that contributed additional revenues of $1.1 million in 2017, and we recorded revenues
of $1.1 million from the consolidation of a joint venture previously accounted for as an equity accounted investee.
We generated consolidated organic revenue growth, including the negative market impact, of 5.7% in fiscal 2017 due to
higher transaction volumes gained through additional market share with our existing clients and higher transaction
volumes from new clients in both our appraisal and title and closing service lines.
Real Matters Inc. – September 30, 2017 - 11
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
U.S.
U.S. segment revenues increased 24.3% to $271.2 million for fiscal 2017. As outlined in the consolidated discussion above,
acquisitions accounted for $40.0 million of the increase in revenues. Excluding acquisitions, revenues increased $18.0
million compared to fiscal 2016 due to organic growth in appraisal volumes from market share gains with existing clients
and new client volumes. Title and closing volumes were significantly impacted by the MBA’s estimated 41% decline in
the refinance mortgage originations market. Our title and closing revenues declined $6.3 million in the second half of
fiscal 2017 compared to the same period last year due to lower refinance volumes resulting from a higher current period
interest rate environment. Title and closing revenues in fiscal 2017 also included lower margin revenues due to service
revenue mix.
Canada
Revenues in Canada increased 4.8% to $31.7 million in fiscal 2017. We managed higher appraisal volumes as a result of
increased market share and FX contributed 1.0% to the increase in fiscal 2017.
Please refer to the Strategy and Outlook section of this MD&A for additional discussion on economic trends affecting
revenues, our strategy and our operations.
Transaction costs
Transaction costs comprise expenses directly attributable to a specific revenue transaction, including appraisal costs,
various processing fees, including credit card fees, connectivity fees, insurance inspection costs, title and closing agent
costs, external abstractor costs and external quality review costs.
Total
U.S.
Canada
2017
Year ended September 30
2016
Change
$
210,682
$
180,247
$
30,435
$
$
184,119
26,563
$
$
155,179
25,068
$
$
28,940
1,495
Year ended
On a consolidated basis, transaction costs increased 16.9% to $210.7 million in fiscal 2017 due to organic and acquisition
growth. Organic revenue growth from the launch of new clients, market share gains with existing clients and revenue mix
accounted for $17.4 million of the increase in transaction costs from fiscal 2016. Transaction costs were also impacted
by our transition of certain title and closing services to a network managed business model from a traditional business
model. We incurred higher transaction costs to service organic appraisal and ancillary revenue growth in the first half of
fiscal 2017, which was partially offset by lower transaction costs to service the same growth in the second half of fiscal
2017. Acquisitions contributed $13.0 million to the year-over-year increase in transaction costs and were due to the
acquisitions of Linear and a small complementary business in 2016, as well as the consolidation of a previously equity
accounted investee in 2017.
U.S.
Transaction costs in our U.S. segment increased $28.9 million in fiscal 2017 as a result of organic and acquisition growth
which accounted for $15.9 million and $13.0 million of the increase, respectively. Our acquisition of Linear in April 2016,
coupled with a small complementary business acquired in January 2016 and the consolidation of a previously equity
accounted investee, generated higher transaction costs of $12.2 million, $0.5 million and $0.3 million, respectively.
Higher transaction costs attributable to organic revenue growth in fiscal 2017 were due to market share gains from
existing clients and new client additions, partially offset by lower transaction costs due to lower refinance mortgage
activity. As outlined above, we began to transition certain title and closing services to a network managed business model
in the second half of 2017, which also contributed to higher transaction costs. Leveraging our platform in the supply of
appraisal and ancillary services in the second half of fiscal 2017 improved transaction costs relative to revenues.
Real Matters Inc. – September 30, 2017 - 12
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Excluding the impact of acquisitions, Net Revenue(A) margins were lower compared to fiscal 2016 as our 2017
consolidated revenues included a higher proportion of lower-margin appraisal revenues, higher appraiser costs incurred
in conjunction with onboarding and deploying our platform with new clients, which included Tier 1 mortgage lenders in
the U.S., in the first half of fiscal 2017, lower margin work completed in our title and closing service line and the transition
of certain title and closing service offerings to a network managed model, which were partially offset by improvements
to Net Revenue(A) margins from improving our delivery of appraisal and ancillary services in the second half of fiscal 2017.
As we continue to build market share with clients, we expect to leverage our platform to lower transaction costs as a
percentage of revenues over the long-term.
Canada
Transaction costs in Canada increased $1.5 million in fiscal 2017 compared to fiscal 2016 in line with the increase in
appraisal revenues from market share gains. Transaction costs as a percentage of revenues increased by 90 basis points
due to revenue mix across our client base.
Operating expenses
Total
U.S.
Canada
Corporate
2017
Year ended September 30
2016
Change
$
86,411
$
55,476
$
30,935
$
$
$
67,722
2,886
15,803
$
$
$
42,898
2,413
10,165
$
$
$
24,824
473
5,638
Year ended
Consolidated operating expenses increased $30.9 million in fiscal 2017 compared to fiscal 2016. Higher operating
expenses in our U.S. segment accounted for the majority of the increase, driven primarily by acquisitions and organic
growth. Corporate segment operating costs increased due to stock-based compensation expense totaling $3.5 million,
compared to $nil in 2016. In 2017, we also hired additional staff to support our platform and growth strategies, including
public company readiness, and we incurred higher public company costs.
U.S.
The increase in U.S. segment operating expenses was due in part to our acquisition of Linear. Acquisitions contributed
$18.8 million of additional operating expenses in the current year, comprised principally of payroll and related costs of
$13.7 million and office and computer costs of $2.3 million. The remainder of the increase was related to travel and
entertainment, rent and bank charges. Excluding acquisitions, higher payroll and related costs were the largest
contributor to the increase in operating expense, increasing $4.8 million year-over-year. Higher payroll costs represent
our investment in new client deployment to support the anticipated growth from market share gains with recently
deployed clients. Similar to transaction costs, we expect to leverage our platform to lower operating expenses as a
percentage of Net Revenue(A) over the long-term. Computer costs, travel and entertainment and provisions for certain
receivables increased $1.5 million in total due to growth in the business and the timing of receivables collection.
Canada
The year-over-year increase in operating expenses was due to new hires and salary increases of $0.1 million, higher travel
and related expenses of $0.1 million and higher office related costs of $0.2 million.
Corporate
Corporate operating expenses increased $5.6 million in fiscal 2017 due to stock-based compensation expense of $3.5
million. Additional staff to support our platform and growth strategies, and new hires for public company readiness,
resulted in higher payroll and related costs of $1.1 million. Professional fees increased $0.7 million from fiscal 2016 due
to higher costs to operate as a public company and certain litigation related matters.
Real Matters Inc. – September 30, 2017 - 13
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Acquisition and IPO costs (recovery)
Total
U.S.
Canada
Corporate
2017
Year ended September 30
2016
Change
$
1,609
$
3,005
$
(1,396)
$
(953)
$
-
$
2,562
$
2,406
$
-
$
599
$
(3,359)
$
-
$
1,963
Year ended
We incurred acquisition and IPO costs of $1.6 million for third party services in fiscal 2017 which included a recovery due
to the settlement of certain amounts owing to the sellers of Linear of $1.4 million. IPO costs reflected professional and
consulting fees in both the current and prior fiscal years. Fiscal 2016 also included costs incurred on our purchase of
Linear and a complementary business we acquired in January 2016.
Amortization
Total
U.S.
Canada
Corporate
2017
Year ended September 30
2016
Change
$
21,241
$
14,001
$
7,240
20,539
$
-
$
$
702
12,817
$
$
-
$
1,184
7,722
$
$
-
$
(482)
Year ended
Amortization increased $7.2 million in fiscal 2017 compared to fiscal 2016. The U.S. segment increase was due to
acquisitions completed in 2016, resulting in higher intangible asset amortization of $7.3 million. Amortization of property
and equipment in our U.S. segment was $0.4 million higher due to the acquisition of Linear. The decline in amortization
expense for our Corporate segment was due to fully amortized investments in our platform.
Impairment of assets
2017
Year ended September 30
2016
Change
Total
$
5,096
$
-
$
5,096
Year ended
We incurred an impairment charge of $5.1 million in the second quarter of fiscal 2017 related to two equity accounted
investees recorded in our U.S. segment that we assessed as impaired. Ending these joint ventures arrangements aligns
with our long-term growth and integration strategy.
Interest expense
2017
Year ended September 30
2016
Change
Total
$
889
$
687
$
202
Year ended
Interest expense increased $0.2 million in fiscal 2017. Indebtedness incurred in conjunction with the acquisition of Linear,
including the accretion of deferred financing costs incurred in connection with this debt, and accretion of contingent
amounts payable to the sellers of Linear, was the primary reason for the increase in interest expense compared to fiscal
2016. These increases were partially offset by lower interest expense following our IPO due to the full repayment of
amounts drawn on our long-term debt facilities in May of this year.
Real Matters Inc. – September 30, 2017 - 14
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Interest income
2017
Year ended September 30
2016
Change
Total
$
(139)
$
(20)
$
(119)
Year ended
Interest income was nominal in both fiscal 2017 and fiscal 2016. Interest income in fiscal 2017 was marginally higher than
fiscal 2016 due to the investment of unutilized proceeds received on our IPO.
Net foreign exchange loss (gain)
2017
Year ended September 30
2016
Change
Total
$
3,390
$
(2,841)
$
6,231
Year ended
Foreign currency losses in fiscal 2017 and gains in fiscal 2016 principally represent non-cash losses or gains on long-term
financing arrangements between a Canadian and U.S. entity within the consolidated group of companies. In fiscal 2016,
net foreign exchange gains were partially offset by a realized loss on a foreign currency exchange agreement entered into
in advance of, and in connection with, the acquisition of Linear.
Loss on fair value of warrants
2017
Year ended September 30
2016
Change
Total
$
5,011
$
5,437
$
(426)
Year ended
The recorded loss for fiscal 2017 declined modestly compared to fiscal 2016. A lower increase in the value of common
shares used to value warrant liabilities in fiscal 2017 was the primary reason for the lower loss.
Re-measurement loss on previously held equity method investment
2017
Year ended September 30
2016
Change
Total
$
976
$
-
$
976
Year ended
Effective April 1, 2017, we amended an operating agreement with one of our joint venture partners. This amendment
resulted in us obtaining control over the joint venture and required that we re-measured our original investment in this
investee at the change of control date. We recorded a non-cash loss of $1.0 million in respect of this re-measurement.
Net income from equity accounted investees
2017
Year ended September 30
2016
Change
Total
$
(18)
$
(475)
$
457
Net income or loss from equity accounted investees represents our pro rata share of the investee’s post-acquisition
earnings, computed using the consolidation method.
Year ended
Prior to our acquisition of Linear in April 2016, we had no investment in equity accounted investees. The decline in
mortgage originations attributable to lower residential mortgage refinancing volumes contributed to lower net income
Real Matters Inc. – September 30, 2017 - 15
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
from equity accounted investees in fiscal 2017 compared to fiscal 2016. In addition, and as outlined above in the
discussion of the re-measurement loss on a previously held equity method investment, one of our joint ventures became
a controlled subsidiary which required us to discontinue the use of equity method of accounting.
Net income tax recovery
2017
Year ended September 30
2016
Change
Total
$
(8,403)
$
(891)
$
(7,512)
Year ended
We recorded a loss before income tax recovery for fiscal 2017 of $32.2 million. Income tax calculated at the statutory
rate resulted in an income tax recovery of $8.5 million. Income tax recoveries attributable to foreign earnings subject to
tax at a different statutory tax rate contributed an additional $3.4 million, bringing the total expected income tax recovery
to $11.9 million and representing an effective tax rate of 37.2%. Non-deductible and non-taxable expenses partially offset
income tax recoveries by $3.3 million, and relate to accounting losses on the fair value of warrant liabilities, net foreign
exchange gains or losses on long-term financing arrangements between a Canadian and U.S. entity and stock-based
compensation that are not deductible for tax. State and other tax expense or recoveries were nominal.
Review of Operations - For the three months ended September 30, 2017
FX Impact on Consolidated Results
The following table has been prepared to assist readers in assessing the FX impact on selected results for the three
months ended September 30, 2017.
September 30,
2016
September 30,
2017
September 30,
2017
September 30,
2017
September 30,
2017
Three months ended
(organic,
acquisition and
other non-
operating
changes)
(holding FX
constant with
the comparative
period)
(as reported)
$
80,983
56,030
19,669
485
5,853
222
(5)
(3,538)
22
$
1,595
2,571
1,627
(1,662)
(512)
(64)
(109)
6,577
(354)
(139)
2,384
35
(6,514)
$
82,578
58,601
21,296
(1,177)
5,341
158
(114)
3,039
(332)
-
(104)
(4,130)
(FX impact)
(as reported)
$
314
262
186
26
7
2
(2)
37
51
$
82,892
58,863
21,482
(1,151)
5,348
160
(116)
3,076
(281)
-
(255)
(104)
(4,385)
$
750
1,634
$
(1,330)
(5,184)
$
(580)
(3,550)
$
17
(272)
$
(563)
(3,822)
$
24,953
$
(976)
$
23,977
$
52
$
24,029
$
5,284
$
(2,268)
$
3,016
$
(100)
$
2,916
$
3,126
$
(2,258)
$
868
$
(151)
$
717
Consolidated Statement of Operations
Revenues
Transaction costs
Operating expenses
Acquisition and IPO costs (recovery)
Amortization
Interest expense
Interest income
Net foreign exchange (gain) loss
Loss (gain) on fair value of warrants
Net income from equity
accounted investees
Income (loss) before income tax
expense (recovery)
Net income tax expense (recovery)
Net income (loss)
Net Revenue
(A)
Adjusted EBITDA
(A)
Adjusted Net Income
(A)
Note: (A) – Please refer to the “Non-GAAP measures” section of this MD&A
Real Matters Inc. – September 30, 2017 - 16
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Revenues
Total
U.S.
Canada
2017
Three months ended September 30
Change
2016
$
82,892
$
80,983
$
1,909
$
$
74,233
8,659
$
$
72,231
8,752
$
$
2,002
(93)
Revenue by geography and service type
Three months ended September 30, 2017
Three months ended September 30, 2016
Percent-
age of
revenues
U.S.
Canada -
expressed in
thousands of
Canadian
dollars
Percent-
age of
revenues
Percent-
age of
revenues
U.S.
Canada -
expressed in
thousands of
Canadian
dollars
Appraisal and
ancillary
Title and closing
Other
Revenues
$
$
57,062
16,768
403
74,233
76.9
22.6
0.5
100.0
%
%
%
%
$
9,727
-
1,178
10,905
$
89.2
-
10.8
100.0
%
%
%
%
$
$
52,268
19,818
145
72,231
72.4
27.4
0.2
100.0
%
%
%
%
$
$
10,174
-
1,281
11,455
Percent-
age of
revenues
88.8
-
11.2
100.0
%
%
%
%
Revenue growth or decline components
Organic, including market impact
Acquisition
FX
Total revenue growth (decline)
Three months ended September 30, 2017
U.S.
Canada
Consolidated
%
%
%
2.1
0.7
-
%
%
%
(4.7)
-
3.6
2.8
%
(1.1)
%
1.4
0.6
0.4
2.4
%
%
%
%
Three months
We generated consolidated revenues of $82.9 million in the fourth quarter of 2017, representing an increase of $1.9
million or 2.4% over the same period last year. Organic market share gains in U.S. appraisal revenues exceeded the
estimated decline in the market for these services as estimated by the MBA, growing $4.8 million over the fourth quarter
of 2016. Organic market share gains in title and closing revenues were outpaced by the estimated decline in the overall
market, which resulted in a decrease to revenues of $3.5 million this quarter compared to the same quarter last year. On
a consolidated basis, and including the market impact, revenues increased organically by $1.1 million compared to the
same quarter last year. FX represented $0.3 million of the increase and an amendment to an operating agreement
between us and a joint venture partner resulted in the joint venture being accounted for as a controlled subsidiary, and
consolidated, versus its previous accounting treatment as an equity accounted investee, which increased consolidated
revenues by $0.5 million.
The U.S. residential mortgage origination market decreased by approximately 13% in the fourth quarter of 2017
compared to the same quarter last year according to the MBA Mortgage Finance Forecast Report of October 24, 2017.
The residential mortgage purchase market increased approximately 7% while the refinance market is estimated to have
declined by 38%.
Notwithstanding the estimated market impact, we achieved market share gains with our existing clients and recorded
transaction volumes from new clients. With more than 60 of the top 100 lenders as clients, we have a significant base
from which to grow market share in the future.
Real Matters Inc. – September 30, 2017 - 17
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
U.S.
U.S. segment revenues increased 2.8% to $74.2 million in the fourth quarter of fiscal 2017. Despite the market decline as
estimated by the MBA, we grew appraisal volumes from new clients, achieved market share gains with existing clients
and generated additional revenues in the fourth quarter of 2017 totaling $4.8 million. When we adjust for the MBAs
estimate of the market decline, title and closing revenues grew organically, but included lower margin revenues due to
service revenue mix. In total, however, title and closing revenues were lower in the fourth quarter of 2017 by $3.5 million
compared to the same quarter last year due to lower refinance volumes resulting from a higher current period interest
rate environment. As outlined above, acquisition revenue increased title and closing revenues by $0.5 million due to an
amendment to a joint venture agreement.
Canada
Revenues in Canada declined $0.1 million or 1.1% to $8.7 million in the fourth quarter of fiscal 2017. We managed
modestly lower appraisal volumes in the fourth quarter this year due to a decline in Canadian market activity. FX
increased revenues in the fourth quarter of 2017 by $0.3 million.
Please refer to the Strategy and Outlook section of this MD&A for additional discussion on economic trends affecting
revenues, our strategy and our operations.
Transaction costs
Total
U.S.
Canada
Three months ended September 30
Change
2016
2017
$
58,863
$
56,030
$
2,833
$
$
51,601
7,262
$
$
48,743
7,287
$
$
2,858
(25)
Three months
On a consolidated basis, transaction costs increased 5.1% to $58.9 million in fiscal 2017 due to acquisition and organic
growth. Acquisitions contributed $0.1 million to the fourth quarter increase in transaction costs, due to the consolidation
of a previously equity accounted investee.
Organic revenue growth from the launch of new clients, market share gains with existing clients and a change in revenue
mix accounted for $2.4 million of the increase in transaction costs compared to the fourth quarter in fiscal 2016. In
particular, lower margin appraisal revenues grew $4.8 million in the fourth quarter of 2017 compared to the same quarter
last year, while higher margin title and closing revenues declined $3.5 million. Transaction costs also increased due to our
transition of certain title and closing services to a network managed business model from a traditional business model,
coupled with an increase in lower margin search revenues in our title and closing service line, partially offset by lower
transaction costs to service organic appraisal and ancillary revenue growth.
U.S.
Transaction costs in our U.S. segment increased $2.9 million in the fourth quarter of fiscal 2017 due primarily to organic
growth of $2.8 million. Higher transaction costs attributable to organic revenue growth in the fourth quarter this year
were due to market share gains from existing clients and new client additions, partially offset by lower transaction costs
due to lower refinance mortgage activity. As outlined above, the transition of certain title and closing services to a
network managed business model also contributed to higher transaction costs, while improving our delivery of appraisal
and ancillary services in the second half of fiscal 2017 improved transaction costs relative to revenues in the fourth
quarter this year.
Excluding the impact of acquisitions, Net Revenue(A) margins were lower compared to the fourth quarter in fiscal 2016
due to consolidated revenues comprising a higher proportion of lower margin appraisal revenues, lower margin work
completed in our title and closing service line and the transition of certain title and closing service offerings to a network
managed model, partially offset by improvements to Net Revenue(A) margins by leveraging our platform in the supply of
Real Matters Inc. – September 30, 2017 - 18
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
appraisal and ancillary services in the fourth quarter this year. As we continue to build market share with clients, we
expect to continue to leverage our platform to lower transaction costs as a percentage of revenues over the long-term.
Canada
Transaction costs in Canada declined marginally in the fourth quarter of fiscal 2017 compared to the same quarter last
year due to lower market activity, net of FX.
Operating expenses
Total
U.S.
Canada
Corporate
Three months ended September 30
Change
2016
2017
$
21,482
$
19,669
$
1,813
$
$
$
16,931
789
3,762
$
$
$
16,169
583
2,917
$
$
$
762
206
845
Three months
Consolidated operating expenses increased $1.8 million in the fourth quarter of fiscal 2017. Higher operating expenses
in our Corporate segment accounted for the majority of the increase over the same quarter last year, due to stock-based
compensation expense of $0.4 million and higher professional fees of $0.3 million. Higher payroll and related costs of
$0.5 million were the largest contributor to the increase in U.S. segment operating expenses this quarter compared to
the same quarter last year. These costs relate to our investment in new client deployment to support growth from market
share gains with recently deployed clients, partially offset by lower payroll costs as we began the transition of our title
and closing service offering to a network managed solution. The balance of the increase is due to higher computer costs
and higher provisions for certain receivables.
U.S.
The increase in U.S. segment operating expenses was due to higher payroll and related costs, higher computer costs and
provisions for certain receivables. Higher payroll and related costs were the largest contributor to the increase totaling
$0.5 million. Looking forward, we expect to leverage our platform to lower operating expenses as a percentage of Net
Revenue(A).
Canada
The increase in operating costs was not significant.
Corporate
Operating expenses in our Corporate segment increased $0.8 million over the same quarter last year, due to stock-based
compensation expense of $0.4 million, and higher professional fees, including legal, accounting and advisory of $0.3
million, in aggregate.
Real Matters Inc. – September 30, 2017 - 19
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Acquisition and IPO (recovery) costs
Total
U.S.
Canada
Corporate
2017
Three months ended September 30
Change
2016
$
(1,151)
$
485
$
(1,636)
$
(1,389)
-
$
$
238
$
198
$
-
$
287
$
(1,587)
$
-
$
(49)
Three months
We recognized a recovery of $1.2 million in the fourth quarter of fiscal 2017 due to the settlement of certain amounts
owing to the sellers of Linear, partially offset by additional IPO costs. IPO costs reflected professional and consulting fees
in both the current and prior year quarters.
Amortization
Total
U.S.
Canada
Corporate
2017
Three months ended September 30
Change
2016
$
5,348
$
5,853
$
(505)
$
5,211
-
$
$
137
$
5,586
$
-
$
267
$
(375)
$
-
$
(130)
Three months
Amortization declined modestly in the fourth quarter of fiscal 2017 compared to the same quarter last year. The decrease
was due to lower intangible amortization in our U.S. segment from fully amortized intangible assets and lower
amortization expense recorded in our Corporate segment due to fully amortized investments in our platform.
Interest expense
2017
Three months ended September 30
Change
2016
Total
$
160
$
222
$
(62)
Three months
Interest expense declined $0.1 million in the fourth quarter of fiscal 2017 due to the full repayment of amounts drawn
on our long-term debt facilities from a portion of the proceeds raised on the Offering.
Interest income
2017
Three months ended September 30
Change
2016
Total
$
(116)
$
(5)
$
(111)
Three months
The increase in interest income for the fourth quarter of fiscal 2017 of $0.1 million was due to the investment of unutilized
proceeds received on our IPO.
Real Matters Inc. – September 30, 2017 - 20
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Net foreign exchange loss (gain)
2017
Three months ended September 30
Change
2016
Total
$
3,076
$
(3,538)
$
6,614
Three months
Foreign currency exchange losses in the fourth quarter of fiscal 2017 principally represented non-cash losses on long-
term financing arrangements between a Canadian and U.S. entity within the consolidated group of companies.
(Gain) loss on fair value of warrants
2017
Three months ended September 30
Change
2016
Total
$
(281)
$
22
$
(303)
Three months
We recognized a nominal gain in the fourth quarter of fiscal 2017 due to the decline in our share price since the third
quarter of fiscal 2017. We also recognized gains on certain warrants exercised during the current year quarter due to
their exercise occurring at a lower price than the fair value ascribed to each warrant on June 30, 2017.
Net income from equity accounted investees
2017
Three months ended September 30
Change
2016
Total
$
(104)
$
(139)
$
35
Three months
The decline in mortgage originations attributable to lower residential mortgage refinancing volumes contributed to lower
income in the fourth quarter of fiscal 2017 compared to the same quarter last year. In addition, effective April 1, 2017,
one of our joint ventures became a controlled subsidiary which resulted in us discontinuing the use of equity method of
accounting.
Net income tax recovery
2017
Three months ended September 30
Change
2016
Total
$
(563)
$
750
$
(1,313)
Three months
We recorded a loss before income tax recovery in the fourth quarter of fiscal 2017 of $4.4 million. Income tax calculated
at the statutory rate resulted in an income tax recovery of $1.2 million. Income tax recoveries attributable to foreign
earnings subject to tax at a different statutory tax rate contributed an additional $0.4 million, bringing the total expected
income tax recovery to $1.6 million, representing an effective tax rate of 36.1%. Non-deductible and non-taxable losses
or gains partially offset income tax recoveries by $1.0 million, and relate to accounting gains on the fair value of warrant
liabilities, net foreign exchange losses on long-term financing arrangements between a Canadian and U.S. entity and
stock-based compensation that are not deductible or included for tax. State and other tax expense or recoveries were
nominal.
Dividends
The Company’s current policy is not to pay dividends.
Real Matters Inc. – September 30, 2017 - 21
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Selected Annual Information
2017
Year ended September 30
2016(1)
2015(1)
Revenues
Net loss
Net loss per weighted average share, basic
Net loss per weighted average share, diluted
Total assets
Total long-term liabilities
Note
(1) Net loss per weighted average share, basic and diluted, have been restated to reflect the share consolidation (on the basis of one (new) for every
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
248,547
(6,079)
(0.09)
(0.09)
190,864
36,678
170,495
(5,103)
(0.08)
(0.08)
78,752
15,474
302,976
(23,769)
(0.30)
(0.30)
226,563
13,474
two (old) common shares) which took effect immediately prior to the closing of the Offering.
Revenues
2017-2016
Please see the Review of Operations section of this MD&A for a detailed discussion of the year-over-year changes in
revenues.
2016-2015
Consolidated revenues increased 45.8% to $248.5 million in fiscal 2016 compared to the year ended September 30, 2015
(“fiscal 2015”), due to revenues from acquisitions and organic growth of $65.5 million and $15.0 million, respectively,
partially offset by a decline in FX of $2.4 million.
Revenue growth from acquisitions was largely attributable to the results of Linear, which we acquired in April 2016.
Revenues from this acquisition contributed $37.2 million in fiscal 2016. The Linear acquisition provided us with a presence
in the residential and commercial real estate title and closing market. We also acquired a small complementary business
that contributed additional revenues of $5.2 million in fiscal 2016 and the fiscal 2015 acquisition of Southwest contributed
additional revenues of $23.1 million in fiscal 2016.
Our organic revenue growth in fiscal 2016 was the result of higher transaction volumes gained through additional market
share with our existing clients, coupled with transaction volumes from new clients and higher comparative market
volumes.
U.S. segment revenues increased 52.4% to $218.3 million in fiscal 2016. As outlined in the discussion above, acquisitions
accounted for $65.5 million of the increase in revenues in fiscal 2016. Excluding acquisitions, revenues increased year-
over-year due to the addition of a Tier 1 mortgage lender in June 2015 and growth of appraisal volumes and market share
following deployment with this client. Higher comparative market volumes also contributed to revenue growth between
fiscal 2016 and fiscal 2015.
Revenues in Canada increased 11.0% to $30.3 million in fiscal 2016 or 19.8% and $5.4 million when the impact of FX is
excluded. We managed higher appraisal volumes in fiscal 2016 as a result of market share gains. Lower insurance
inspection revenues in our Canadian segment represented the decline in revenues from other sources.
Net loss
2017-2016
Please see the Review of Operations section of this MD&A for a detailed discussion of the components comprising the
change in net loss between fiscal 2017 and fiscal 2016.
2016-2015
Our net loss was nominally higher in fiscal 2016 compared to fiscal 2015. Although we realized stronger Adjusted
EBITDA(A) related to organic and acquisition growth, this growth was more than offset by higher intangible asset
amortization expense due to the acquisitions completed in fiscal 2016. Acquisition and IPO costs increased over fiscal
2015 as well due to acquisitions completed in fiscal 2016 and the incurrence of costs in respect of our IPO. These amounts
Real Matters Inc. – September 30, 2017 - 22
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
were partially offset by net foreign currency exchange gains due to non-cash gains on long-term financing arrangements
between a Canadian and U.S. entity within the consolidated group of companies and higher income tax recoveries
attributable to higher recorded losses before income tax.
Total Assets
2017-2016
Total assets increased $35.7 million or 18.7% between September 30, 2017 and 2016. Cash and cash equivalents
increased $44.9 million, due to excess proceeds from the Offering of $51.4 million, partially offset by a $5.1 million use
of cash due to our election to pay appraisal vendors faster. Deferred tax assets increased $12.1 million between
September 30, 2017 and 2016. This increase was the result of a change in accounting and tax values for intangible assets,
due to the amortization of intangible assets more quickly for accounting than tax. The increase in deferred tax assets
from a change in intangible assets was partially offset by a decline in deferred tax assets due to a change in non-deductible
accounting reserves. Intangible assets declined $19.6 million between September 30, 2017 and 2016, due to normal
course amortization. The remainder of the change in total assets was due to lower investments in equity accounted
investees of $7.7 million, due in part to an impairment charge recorded in fiscal 2017, higher goodwill resulting from an
amendment to a joint venture agreement and the purchase of the remaining interest in a joint venture in fiscal 2017, and
higher trade and other receivables due to net organic growth from new clients and market share increases with existing
clients.
2016-2015
Total assets increased $112.1 million between September 30, 2016 and 2015, with goodwill accounting for $34.3 million
of the increase. Goodwill recorded on the acquisition of Linear was $33.0 million in 2016, while a complementary business
acquired in 2016 contributed $1.3 million to goodwill. Acquisitions also contributed to the increase in intangibles assets,
which increased $45.8 million over 2015. Intangible assets recognized on the acquisition of Linear were $55.9 million and
we recognized $2.7 million of intangibles on a complementary business acquisition completed in fiscal 2016. FX
accounted for the remainder of the increase to intangible assets and these additions were partially offset by normal
course amortization totaling $12.8 million. Investments in equity accounted investees contributed $7.9 million to the
increase in total assets between 2016 and 2015. This increase was directly attributable to the acquisition of Linear in
2016, combined with our share of net income from these investments since acquisition. Finally, total current assets
increased $19.9 million between September 30, 2016 and 2015, due in part to higher trade and other receivables, which
increased $15.1 million. The increase in trade and other receivables was due to acquisitions, with Linear accounting for
$8.2 million of the increase, and organic growth in our business from new clients and market share gains with existing
clients. Cash also increased $4.8 million between 2016 and 2015 on higher cash generated from operations of $4.2
million.
Total Long-Term Liabilities
2017-2016
Total long-term liabilities declined $23.2 million or 63.3% between September 30, 2017 and 2016. Long-term debt
declined $14.4 million year-over-year due to our full repayment of amounts outstanding from a portion of the proceeds
raised on the Offering. Other liabilities declined $9.5 million between September 30, 2017 and 2016. The decline in other
liabilities was due to the reclassification of contingent amounts payable to the sellers of Linear from other liabilities to
accrued charges since the amount payable will be satisfied within a year.
We expect to satisfy our total long-term liabilities as they come due based on our expectations of future operating
performance.
2016-2015
Total long-term liabilities increased $21.2 million at September 30, 2016 compared to September 30, 2015. Other
liabilities were the largest contributor to the increase, increasing $9.5 million year-over-year. Amounts payable at
September 30, 2016 represented contingent amounts payable to the sellers of Linear. There were no comparable
amounts due at September 30, 2015. Long-term debt also increased $5.6 million year-over-year. This increase was due
in part to the acquisition of Linear and a complementary business in 2016, partially offset by required repayments from
excess cash balances. The fair value of warrant liabilities increased $5.6 million year-over-year. The primary reason for
this increase was the rise in the fair value attributed to our common shares.
Real Matters Inc. – September 30, 2017 - 23
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Summary of Quarterly Results
2017
Revenues
U.S.
Canada
Total revenues
Net loss
Net loss - attributable to
common shareholders
Net loss per weighted
average share, basic
Net loss per weighted
average share, diluted
Q4
Q3
Q2
Q1(1)
Total
$
$
$
$
$
67,664
9,008
76,672
(8,754)
$
$
57,593
6,925
64,518
(8,908)
$
$
71,752
7,142
78,894
(2,285)
$
$
271,242
31,734
302,976
(23,769)
$
$
74,233
8,659
82,892
(3,822)
$
$
$
(3,886)
$
(8,813)
$
(8,980)
$
(2,335)
$
(24,014)
$
(0.04)
$
(0.11)
$
(0.12)
$
(0.03)
$
(0.30)
$
(0.04)
$
(0.11)
$
(0.12)
$
(0.03)
$
(0.30)
2016
Q4
Q3
Q2
Q1
Total
$
$
$
$
$
72,231
8,752
80,983
1,634
Revenues
U.S.
Canada
Total revenues
Net income (loss)
Net income (loss) - attributable to
common shareholders
Net income (loss) per weighted
average share, basic(1)
Net income (loss) per weighted
average share, diluted(1)
Note
(1) Net income or loss per weighted average share, basic and diluted, has been restated to reflect the share consolidation (on the basis of one (new)
218,267
30,280
248,547
(6,079)
40,332
6,086
46,418
(6,430)
67,185
9,470
76,655
(1,058)
38,519
5,972
44,491
(225)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(6,430)
(1,113)
(6,281)
(0.09)
(0.09)
(0.00)
(0.00)
(0.10)
(0.01)
(0.10)
(0.01)
1,487
(225)
0.02
0.02
for every two (old) common shares) which took effect immediately prior to the closing of the Offering.
Revenues
U.S. Segment
2017
2016
Change
Q4
74,233
72,231
$
$
Q3
67,664
67,185
$
$
Q2
57,593
40,332
$
$
Q1
71,752
38,519
$
$
Total
271,242
218,267
$
$
$
2,002
$
479
$
17,261
$
33,233
$
52,975
U.S. segment revenues increased in the first quarter of fiscal 2017 compared to the same quarter last year. Acquisitions
accounted for the majority of the increase in revenues. Excluding acquisitions, the increase in revenues was due to growth
in appraisal volumes and market share gains with existing clients. Revenues from the acquisition of Linear outperformed
expectations due to higher volumes of mortgage refinancing’s in the first quarter of fiscal 2017.
Second quarter U.S. segment revenues improved compared to the same quarter last year. Acquisitions accounted for a
significant portion of this increase. Excluding acquisitions, revenues increased on growth in appraisal volumes from new
clients and market share gains with existing clients. Our second quarter results were impacted by a decline in U.S.
residential mortgage refinance volumes, which the MBA estimates declined by 10% from the same quarter last year.
U.S. segment revenues increased in the third quarter of fiscal 2017. Despite the market decline as estimated by the MBA,
appraisal revenues increased organically due to growth in appraisal volumes from new clients and market share gains
with existing appraisal clients. Our title and closing revenues grew organically, and included lower margin revenues due
to service revenue mix, when adjusting for the MBAs estimate of the market decline. Acquisitions also contributed to
third quarter revenue growth. The U.S. residential mortgage declined approximately 9% as estimated by the MBA.
Real Matters Inc. – September 30, 2017 - 24
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
U.S. segment revenues increased in the fourth quarter of fiscal 2017. Despite the market decline as estimated by the
MBA, we grew appraisal volumes from new clients and market share gains with existing clients. When adjusting for the
MBAs estimate of the market decline, title and closing revenues grew organically, but included lower margin revenues
due to service revenue mix. In total, title and closing revenues were lower in the fourth quarter of 2017 compared to the
same quarter last year due to lower refinance volumes resulting from a higher current period interest rate environment.
Acquisition revenue increased title and closing revenues due to an amendment to a joint venture agreement which now
requires us to consolidate the entity.
Canadian Segment – expressed in thousands of C$
2017
2016
Change
Q4
10,905
11,455
$
$
Q3
12,091
12,355
$
$
$
$
Q2
9,161
8,367
$
$
Q1
9,527
7,973
Total
41,684
40,150
$
$
$
(550)
$
(264)
$
794
$
1,554
$
1,534
Revenues in Canada increased in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 due to higher
appraisal volumes from increased market share.
Second quarter revenues in Canada increased compared to the same quarter last year. We managed higher appraisal
volumes in the second quarter of fiscal 2017 as a result of increased market share with existing clients.
Third quarter revenues in Canada declined due to modestly lower appraisal volumes from a comparative decline in
market activity.
Revenues in Canada declined nominally in the fourth quarter of fiscal 2017. We managed modestly lower appraisal
volumes in the fourth quarter this year due to a decline in Canadian market activity.
Net (loss) income
2017
2016
Change
Q4
(3,822)
1,634
$
$
Q3
(8,754)
(1,058)
$
$
Q2
(8,908)
(6,430)
$
$
Q1
(2,285)
(225)
$
$
Total
(23,769)
(6,079)
$
$
$
(5,456)
$
(7,696)
$
(2,478)
$
(2,060)
$
(17,690)
Net loss or income generally follows the rise and fall in revenues due to the seasonal nature of our business. Net loss or
income is also impacted by changes in stock-based compensation expense, acquisition and IPO recoveries or costs,
amortization, impairment of assets, interest expense, interest income, net foreign exchange gains or losses, gains or
losses on fair value of warrants and re-measurement losses on a previously held equity method investment which are
not tied to the seasonal nature of our business and which fluctuate with other non-operating variables. Net income tax
expense or recovery and net income or loss from equity accounted investees also impacts net loss or income.
Our net loss in the first quarter of fiscal 2017 was greater than the net loss we posted in the first quarter of fiscal 2016.
The decline was due to a higher loss on fair value of warrants due to an increase in the fair value of our common shares
used to value our warrant liabilities and higher amortization expense due to acquisitions completed in 2016, which
resulted in higher intangible asset amortization in the first quarter of fiscal 2017. These higher expenses were partially
offset by stronger current period Adjusted EBITDA(A) related to organic and acquisition growth, and a significant foreign
exchange gain from the revaluation of long-term financing arrangements between a Canadian and U.S. entity within the
consolidated group of companies. Higher Adjusted EBITDA(A) led to higher income tax expense recognized in the period
which in isolation negatively impacted net loss.
Our net loss in the second quarter of fiscal 2017 was higher than the same period in 2016. An asset impairment charge
recognized on two investments in equity accounted investees was the single largest contributor to the increase. Other
factors included higher amortization expense from higher intangible amortization due to acquisitions completed in 2016
Real Matters Inc. – September 30, 2017 - 25
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
and lower Adjusted EBITDA(A). Higher appraiser costs incurred in conjunction with onboarding and deploying our platform
with new clients, the hire of additional staff to further enhance and support our platform to accommodate both our short
and longer-term growth strategies and new hires for public company readiness, resulted in higher payroll and related
costs which led to lower Adjusted EBITDA(A). We also incurred higher IPO costs from third party professionals and
consultants. Partially offsetting these increases were lower losses on the fair value of warrants due to a higher increase
in the fair value of common shares used to value warrant liabilities in the comparative period and an increase in deferred
income tax recoveries. Higher deferred income tax recoveries were due to lower deferred income tax liabilities from
intangible asset amortization related to intangibles recognized on acquisitions completed in 2016, the asset impairment
charge recognized on two equity accounted investees, coupled with an increase in deferred income tax assets from tax
loss carryforwards.
Our net loss in the third quarter of fiscal 2017 was higher than the same quarter last year. Higher operating expenses was
the primary reason for the increase in comparative net losses, the majority of which was due to stock-based
compensation expense. We did not incur stock-based compensation expense in the third quarter of fiscal 2016 as none
of the issued and outstanding options had vested. Higher payroll and related costs also contributed to higher net losses
in the third quarter of fiscal 2017 due to our investment in new client deployments to support growth from market share
gains from these recently deployed clients. Together, legal, bad debt and office rent expense increased in aggregate as
the result of various legal matters, including supporting our defense position in a collective action law suit, providing for
accounts receivable at risk of collection, and higher facilities expenses incurred for our new Denver operating facility.
Higher net foreign currency exchange losses also contributed to higher net losses in the third quarter this year due to
non-cash losses on long-term financing arrangements between a Canadian and U.S. entity within the consolidated group
of companies. Net losses in the third quarter of 2017 were also higher due to the amendment of an operating agreement
with one of our joint venture partners. This amendment resulted in us obtaining control over the joint venture and
required us to re-measure our original investment. Finally, we recorded a higher loss in the current quarter from the fair
value of warrants. These amounts were partially offset by higher income tax recoveries attributable to higher recorded
losses before income tax in the third quarter of fiscal 2017.
We posted a net loss in the fourth quarter of fiscal 2017 compared to net income in the fourth quarter of fiscal 2016.
Higher net foreign currency exchange losses was the primary reason for the net loss in the fourth quarter this year due
to non-cash losses on long-term financing arrangements between a Canadian and U.S. entity within the consolidated
group of companies from a strengthening Canadian dollar relative to its U.S. counterpart. Lower Adjusted EBITDA(A) also
contributed to the fourth quarter loss in fiscal 2017 on lower Net Revenue(A) and higher operating costs. Lower Net
Revenue(A) was due to revenue mix, lower comparative mortgage origination volumes, partially offset by new client
volumes and market share gains with existing clients. Higher operating expenses reflect stock-based compensation
expense, which we did not have in 2016, and higher professional fees. Higher payroll and related costs also increased
operating costs in our U.S. segment due to our investment in new client deployment to support growth from market
share gains with recently deployed clients. Higher payroll and related costs were partially offset by lower payroll costs as
we began the transition of our title and closing service offering to a network managed offering. The balance of the
increase is due to higher computer costs and higher provisions for certain receivables. Higher income tax recoveries
partially offset these contributions to higher net losses in the fourth quarter this year compared to the same period last
year. Higher income tax recoveries were due to higher net losses before income tax for the reasons outlined above. We
also recorded a recovery in the fourth quarter this year on the settlement of certain amounts owing to the sellers of
Linear, incurred lower amortization expense due to fully amortized assets and recognized lower losses on the fair value
of warrant liabilities due to a lower share price during, and at the end of, the fourth quarter of fiscal 2017 compared to
third quarter this year.
Net (loss) income per weighted average share, basic and diluted
Net loss per weighted average share was higher in the first quarter of fiscal 2017 compared to the same period last year
due to higher net losses, details of which are outlined above. The issuance of shares as consideration to the sellers of
Linear impacted our weighted average share count, basic and diluted, while stock option grants and forfeitures account
for the comparative change in our diluted weighted average share count. These changes only had a modest impact on
the net loss per share recognized comparatively.
Real Matters Inc. – September 30, 2017 - 26
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Net loss per weighted average share was higher in the second quarter of fiscal 2017 than the second quarter of fiscal
2016 due to higher net losses in the quarter, details of which are outlined above. The issuance of shares as consideration
to the sellers of Linear and additional shares issued for no consideration as a result of not completing our IPO before the
end of calendar year 2016, impacted our fiscal 2017 second quarter weighted average share count, basic and diluted. The
comparative change in our diluted weighted average share count was also impacted by stock option grants and
forfeitures. These changes only had a modest impact on the net loss per share amounts.
Net loss per weighted average share was higher in the third quarter of fiscal 2017 than the third quarter of fiscal 2016
due to higher net losses in that quarter, details of which are outlined above. The issuance of additional shares for no
consideration as a result of not completing our IPO before the end of calendar year 2016 and the successful completion
of our IPO in the third quarter of fiscal 2017 impacted our fiscal 2017 third quarter weighted average share count, basic
and diluted. In addition, the comparative change in our diluted weighted average share count was impacted by stock
option grants and forfeitures and the exercise of certain warrants. These changes only had a modest impact on the net
loss per share amounts.
Net loss per weighted average share was higher in the fourth quarter of fiscal 2017 than the fourth quarter of fiscal 2016
due to higher net losses in the current quarter, details of which are outlined above. The issuance of additional shares for
no consideration as a result of not completing our IPO before the end of calendar year 2016 and the successful completion
of our IPO in the third quarter of fiscal 2017 impacted our fiscal 2017 fourth quarter weighted average share count, basic
and diluted. In addition, the comparative change in our diluted weighted average share count was impacted by stock
option grants and forfeitures and the exercise of certain warrants. These changes only had a modest impact on the net
loss per share amounts.
Financial Condition
Select Consolidated Balance Sheet Information
Trade and other receivables
Intangibles
Goodwill
Working capital position
-(current assets less current liabilities)
Trade and other receivables
Intangibles
Goodwill
Working capital position
-(current assets less current liabilities)
U.S.
Canada
Corporate
Total
As at September 30, 2017
$
$
$
30,667
36,837
58,890
$
1,433
-
$
$
-
$
-
$
$
-
34
$
$
$
32,100
36,871
58,890
$
32,667
$
158
$
48,557
$
81,382
U.S.
Canada
Corporate
Total
As at September 30, 2016
$
$
$
27,267
56,106
56,643
$
1,945
$
-
$
-
$
-
$
412
$
-
$
$
$
29,212
56,518
56,643
$
10,429
$
(54)
$
221
$
10,596
Trade and other receivables – September 30, 2017 versus September 30, 2016
Change - Consolidated
Change - U.S.
Change - Canada
Change - Corporate
2,888
$
3,400
$
$
(512)
$
-
The increase in trade and other receivables was due to higher outstanding amounts in our U.S. segment, partially offset
by a decline in the Canadian segment. The increase in U.S. segment trade and other receivables is due to higher appraisal
volumes, specifically with recently launched Tier 1 clients, partially offset by higher provisions for certain receivables. The
decline in Canadian segment trade and other receivables was due to the timing of payments from two Canadian client’s
whose outstanding balance on September 30, 2017 were more current than they were on September 30, 2016.
Real Matters Inc. – September 30, 2017 - 27
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Intangibles – September 30, 2017 versus September 30, 2016
Change - Consolidated
Change - U.S.
Change - Canada
Change - Corporate
(19,647)
$
$
(19,269)
$
-
$
(378)
The decline in intangibles was due to normal course amortization recorded by our U.S. and Corporate segments.
Goodwill – September 30, 2017 versus September 30, 2016
Change - Consolidated
Change - U.S.
Change - Canada
Change - Corporate
2,247
$
$
2,247
$
-
$
-
In the third quarter of fiscal 2017, we amended an operating agreement with a joint venture partner, effectively obtaining
control of the joint venture on April 1, 2017. The equity method of accounting was discontinued in conjunction with the
amendment and we applied the business combination guidance which resulted in us recognizing goodwill of $2.2 million.
In addition, we purchased the remaining ownership interest in another joint venture which also resulted in us recognizing
a nominal amount of goodwill in the third quarter of fiscal 2017.
Working capital position – September 30, 2017 versus September 30, 2016
Change - Consolidated
Change - U.S.
Change - Canada
Change - Corporate
$
$
$
$
70,786
22,238
212
48,336
Our consolidated working capital position improved by $70.8 million at September 30, 2017 versus September 30, 2016.
The improvement was due to a $48.3 million increase in our Corporate segment’s working capital position due to excess
cash proceeds from the Offering. Our U.S. segment also contributed to the increase due to lower accrued charges and
trade payables.
Our U.S. segment working capital position increased due to lower trade payables of $7.0 million, lower accrued charges
of $14.0 million, and lower current amounts owing for long-term debt of $1.4 million. In November 2016, we elected to
pay our appraisal vendors faster to further strengthen our relationships with them. Electing to pay trade payables faster
had a similar impact on our recorded cash amounts and the resulting decline in cash was partially offset by cash generated
from operating activities in fiscal 2017 net of investment and financing activities. Lower accrued charges reflect the
payment of accrued amounts due to the sellers of Linear in respect of the year-one earn-out of $20.0 million. The payment
of this amount, and resulting decline in accrued charges, was partially offset by the reclassification of the year-two earn-
out of $9.7 million from other long-term liabilities to accrued charges. The payment of certain accrued bonus and other
accruals recorded at September 30, 2016 and paid in fiscal 2017 represented the balance of the decline in accrued
charges. In connection with the Offering, a portion of the proceeds raised were applied to the full repayment of amounts
drawn under our long-term debt facilities, resulting in lower amounts payable on long-term debt at September 30, 2017
versus September 30, 2016.
Real Matters Inc. – September 30, 2017 - 28
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Disclosure of outstanding share capital
Common shares
Preferred shares
Total contributed equity
Common shares
Preferred shares
Total contributed equity
September 30, 2017
$
Shares
87,532
-
87,532
259,625
-
259,625
November 27, 2017
$
Shares
87,939
87,939
261,234
261,234
Shareholders’ equity – Prior to the Offering
Prior to the Offering, our authorized share capital consisted of an unlimited number of Class A and Class B common
shares, issuable in series, having no par value. At that time, there were 153.6 million Class A common shares and no Class
B common shares issued and outstanding.
Changes to share capital
We completed a secondary private placement of 7.8 million Class A common shares in November 2016, receiving no
proceeds from the sale. The Class A common shares held by the selling shareholders were purchased by both current and
new shareholders. The issue price for each Class A common share was C$5.25.
In connection with a private placement completed in April 2016, we agreed to issue an additional 1.5 million Class A
common shares for no consideration if we did not complete an IPO before the end of calendar year 2016. In January
2017, we issued 1.5 million Class A common shares since we had not completed our IPO.
In February 2017, 1.8 million Class A common shares were issued on the exercise of stock options.
Shareholders’ equity – subsequent to the Offering
Immediately prior to the closing of the Offering, we amended our articles (the “share reorganization”) to effect the
following share capital changes:
• consolidated our Class A shares on a two (2) for one (1) basis pursuant to a share consolidation;
•
increased our authorized share capital by creating an unlimited number of preferred shares, issuable in series;
• decreased our authorized share capital by deleting the Class B shares and all rights, privileges, restrictions and
conditions attached thereto; and
• re-designated the post-share consolidation Class A shares as common shares.
As a result of these changes, our authorized share capital comprises an unlimited number of common shares, of which
77.2 million common shares were issued and outstanding immediately prior to the completion of the Offering, and an
unlimited number of preferred shares, none of which were issued and outstanding.
Following the share reorganization, the Offering of 12.1 million common shares consisted of a treasury share issuance of
9.6 million common shares and a secondary offering of 2.5 million common shares by certain selling shareholders. The
Offering price of C$13.00 resulted in net proceeds to us of C$117.6 million and C$29.8 million to the selling shareholders.
Common Shares
Common shareholders are entitled to one vote in respect of each common share held and receive dividends, as and when
determined by the board of directors. In the event of the liquidation, dissolution or wind-up of the Company or other
Real Matters Inc. – September 30, 2017 - 29
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
distribution of assets of the Company among shareholders for the purpose of winding-up the Company’s affairs, common
shares shall rank equally as to priority of distribution. Such distribution shall be made in equal amount per common share
on all the common shares outstanding without preference or distinction.
Preferred Shares
The board of directors has authority, without action by the common shareholders, to designate and issue an unlimited
number of preferred shares in one or more series and to designate the rights, preferences and privileges of each series.
The preferred shares of each series will rank on par with the preferred shares of every other series and, if so designated
by the board of directors, will be entitled to preference over the common shares with respect to the payment of dividends
and distribution of any assets in the event of the Company’s liquidation, dissolution or wind-up. Where the Company
does not pay cumulative dividends in full with respect to a series of its preferred shares, the shares of all series of
preferred shares will participate rateably with respect to the accumulated dividends in accordance with the amounts that
would be payable on those shares if all the accumulated dividends were paid in full.
The issuance of preferred shares and the terms selected by the board of directors could decrease the amount of earnings
and assets available for distribution to holders of common shares and/or adversely affect the rights and powers, including
the voting rights, of common shareholders without any further vote or action by the shareholders. Any series of preferred
shares issued by the board of directors could have priority over the common shares in terms of dividend or liquidation
rights or both. The issuance of preferred shares, or the issuance of rights to purchase preferred shares, could make it
more difficult for a third party to acquire a majority of our outstanding voting shares and thereby have the effect of
delaying, deferring or preventing a change of control of the Company or an unsolicited acquisition proposal, and could
make the removal of management more difficult. We have no current intention to issue any preferred shares.
Warrants
We issued a number of special warrants (the “Special Warrants”) which are exchangeable into share purchase warrants
(the “Purchase Warrants”) by the holders. All outstanding Special Warrants were automatically converted into Purchase
Warrants on the completion of the Offering by the Company together with other satisfied events. All Purchase Warrants
expire between two and five years following the date of our IPO.
From May 11, 2017 to September 30, 2017, 435 warrants were exercised through a cashless conversion, resulting in the
issuance of 388 common shares, and an additional 239 warrants were exercised for 239 common shares.
At September 30, 2017, warrants outstanding and exercisable to acquire common shares totaled 1.7 million, after giving
effect to the share capital changes outlined above. All outstanding warrants have an exercise price of C$1.38.
Stock options
In conjunction with the closing of the Offering, we awarded certain executive officers, directors and employees 1,325
stock options all having an exercise price equal to the Offering price of C$13.00.
Since the Offering, we awarded certain employees an aggregate of 70 stock options. In fiscal 2017, 1,483 stock options
were exercised, of which 495 were exercised on a cashless basis, resulting in the issuance of 1,407 common shares. In
addition, 329 stock options were forfeited in fiscal 2017.
Liquidity and Capital Resources
Contractual obligations
Operating leases
Capital leases
Contingent acquisition payables
Total contractual obligations
Total
Less than 1 year
Payments due
1-3 years
September 30, 2017
4-5 years
After 5 years
$
$
$
$
$
10,213
580
9,813
20,606
2,282
410
9,813
12,505
3,273
170
-
3,443
2,262
-
-
2,262
2,396
-
-
2,396
$
$
$
$
$
Real Matters Inc. – September 30, 2017 - 30
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Long-term debt
Summarized details of our long-term debt facilities at September 30, 2017 are as follows:
Senior term facilities
2016 facility
2015 facility
Revolving credit facility - expressed in C$
Revolving credit facility
Note
(1)
Available lending
Facility drawn
Available
capacity(1)
$
$
27,000
20,000
$
-
$
-
$
$
19,500
10,000
$
15,000
$
-
$
15,000
Available capacity is subject to senior funded debt to EBITDA and fixed charge coverage ratios, and unfunded capital expenditures in respect of
our senior term facilities, and good quality receivables in respect of our revolving credit facility.
In accordance with the terms of our long-term debt facilities, any amounts drawn under the term loans are subject to
mandatory prepayment from proceeds received on the issuance of equity. Accordingly, all amounts previously drawn on
the senior term facilities prior to the Offering were paid in full from the proceeds received on the Offering.
Senior funded debt to EBITDA and fixed charge coverage ratios
(as defined and calculated in accordance with the agreement)
Senior funded debt to EBITDA
Senior funded debt to EBITDA - maximum
Fixed charge ratio
Fixed charge ratio - minimum
2017
0.06
3.00
18.03
1.20
September 30
2016
1.02
3.25
7.56
1.20
On September 30, 2017, there were no advances under the senior term facilities or revolving credit facility. Available
capacity under the revolving facility was C$15.0 million and $29.5 million under the senior term facilities at September
30, 2017. Our senior funded debt to EBITDA ratio (as defined and calculated in accordance with the agreement) was 0.06
times.
At September 30, 2017, we were not in default of our covenants under the long-term debt facilities.
Long-term debt facilities – September 30, 2017
On March 31, 2016, in connection with the acquisition of Linear, we entered into our first amendment to a second
amended and restated term sheet amplification agreement with Bank of Montreal and Bank of Montreal, Chicago Branch
(the “agreement”). The agreement made available a C$15.0 million revolving credit facility and two term loans of $20.0
million and $27.0 million, each. The revolving credit facility (the “revolver”) is available for working capital and general
operating requirements and the term loans were used in conjunction with certain business acquisitions.
Repayments on the revolver are interest only until the date of maturity, April 30, 2020. Total advances under the revolver
cannot exceed 75% of our trade receivables, excluding trade receivables that are past due by 60 days or greater, and up
to 120 days or greater in certain circumstances, subject to certain adjustments (“good quality receivables”). The revolver
can be drawn in either Canadian or U.S. funds, subject to Canadian prime or U.S. base rates of interest, bankers’
acceptances or letters of credit. The senior term facilities are available for certain completed or permitted acquisitions
and general working capital and general corporate purposes. The term loans amortize at a rate of 2% quarterly, 8%
annually, over a five-year period with the remaining unamortized balance due at maturity, being May 1, 2020 and April
1, 2021, respectively. The term loans can consist of: (i) Canadian or U.S. prime rate advances, subject to interest at the
Canadian prime or U.S. base lending rate, respectively, plus the applicable credit spread, (ii) a LIBOR loan, bearing interest
at LIBOR plus the applicable credit spread, or (iii) Canadian bankers’ acceptances (“BAs”), bearing interest at BAs plus the
Real Matters Inc. – September 30, 2017 - 31
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
applicable credit spread. The term loans are subject to mandatory prepayment conditions, including: 50% of the excess
annual cash flow if the senior funded debt to EBITDA ratio is greater than 3.0:1.0; 100% of the proceeds from equity or
debt securities issued by the Company, including any sale or disposition of assets that is not in the ordinary course and
that aren’t reinvested within 180 days; and, proceeds from insurance claims not otherwise reinvested within 180 days
from receipt.
Applicable spreads vary based on senior funded debt to EBITDA levels ranging from under 1.0 times to over 3.0 times.
Canadian and U.S. prime/base rate advances are subject to an applicable spread between 25 and 175 basis points. BAs
and LIBOR loans are subject to an applicable spread between 150 and 300 basis points and we incur a standby fee of
between 40 and 60 basis points on unused drawings.
Included in the long-term debt facility is a treasury risk management facility of up to C$0.5 million to facilitate hedges of
foreign currency exchange risk between the Canadian and U.S. dollar occurring in the normal course of business. This
facility may be used to facilitate the use of foreign currency exchange contracts for up to one year. We bear fees
determined by the lenders’ treasury department on a per transaction basis. In addition, the long-term debt facility
provides us with a corporate credit card facility of up to C$0.8 million to assist with the management of corporate
expenses.
The long-term debt facility is secured by a general security agreement, which provides the lender with a first, fixed and
floating charge over all assets, including intellectual property, an unlimited guarantee and postponement of claim by all
wholly owned subsidiaries, and certain other securities.
Risks and restrictions
Our revolving and senior term facilities are subject to interest rate fluctuations with bank prime, BAs or LIBOR. All
drawings, if any, are subject to interest rate risk. Since we currently have no amounts drawn on our revolving or senior
term facilities, a rise or fall in the variable interest rate does not impact interest expense.
We are obligated under the terms of our long-term debt facilities to repay all remaining amounts outstanding, if any, at
maturity. A failure to comply with the terms of the long-term debt facilities could result in an event of default which, if
not cured or waived, could accelerate repayment of the underlying indebtedness. If repayment of the facility, when
amounts are outstanding, were to be accelerated, there can be no assurance that our assets would be sufficient to repay
these facilities in full.
Cash flows
Cash flows generated from (utilized in):
Operating activities
Investing activities
Financing activities
2017
Year ended September 30
2016
Change
$
$
$
(8,523)
(1,228)
51,227
$
$
$
4,191
(48,088)
48,831
$
$
$
(12,714)
46,860
2,396
Year ended
Operating activities
Cash utilized in operating activities was $8.5 million in fiscal 2017 and $12.7 million higher than fiscal 2016. Higher uses
of cash from non-cash working capital changes increased $3.1 million over last year. Electing to pay appraisers faster
increased our use of cash attributable to trade payables by $7.8 million. Changes in accrued charges and net foreign
exchange losses on long-term financing arrangements between a Canadian and U.S. entity, were partially offset by lower
cash uses for trade and other receivables, foreign currency translation adjustments and other non-cash changes. The
balance of the decline in cash generated from operating activities was due to a decline in Adjusted EBITDA(A) of $3.4
million in fiscal 2017 versus fiscal 2016. Changes to Adjusted EBITDA(A) are outlined in the Review of Operations section
of this MD&A.
Real Matters Inc. – September 30, 2017 - 32
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Investing activities
Cash utilized in investing activities declined $46.9 million in fiscal 2017 compared to fiscal 2016 due to lower acquisition
investments of $46.6 million. In fiscal 2016, we utilized cash to acquire Linear and a complementary business, which
contrasts with the current year inflow resulting from us obtaining control of certain joint ventures, including their cash,
that were previously accounted for as equity accounted investees for nominal consideration. We also incurred a loss in
fiscal 2016 of $0.7 million for a foreign currency exchange agreement entered into in advance of, and in connection with,
our acquisition of Linear. Higher investments in property and equipment in fiscal 2017 of $0.3 million partially offset the
decline in acquisition investments and realized losses on a foreign currency exchange agreement. In fiscal 2017, the build
out of our new Denver facility was the primary reason for the increase in investments in property and equipment.
Financing activities
Cash generated from financing activities increased $2.4 million in fiscal 2017 versus fiscal 2016. In fiscal 2016, we raised
equity and drew on our debt facilities to support the purchase of Linear and a complementary business acquisition,
representing a combined cash inflow of $49.5 million. In fiscal 2017, we completed the Offering, raising net proceeds of
$87.8 million. We used a portion of these proceeds to repay our long-term debt facilities in satisfaction of the mandatory
repayment requirements attached thereto, coupled with normal course long-term debt repayments, totaling $16.4
million. We also used a portion of these proceeds to pay $20.0 million to the sellers of Linear due to their achievement
of the year-one earn-out. Combined, this represented a net cash inflow of $51.4 million in fiscal 2017. The balance of the
change was the result of nominal changes in deferred financing costs, finance lease obligations, lease incentives,
dividends paid to non-controlling interests and proceeds from the exercise of stock options and warrants, net of issue
costs.
Critical Accounting Estimates
General
We use information from our consolidated financial statements, prepared in accordance with IFRS and expressed in U.S.
dollars, to prepare our MD&A. Our financial statements include estimates and judgments that affect the reported
amounts of our assets, liabilities, revenues, expenses and, where and as applicable, disclosures of contingent assets and
liabilities. On a periodic basis we evaluate our estimates, including those that require a significant level of judgment or
are otherwise subject to an inherent degree of uncertainty. Areas that are subject to judgment and estimate include
revenue recognition, impairment of goodwill and non-financial assets, the determination of fair values in connection with
business combinations, the determination of fair value for warrants and financial instruments and the likelihood of
realizing deferred income tax assets. Our estimates and judgments are based on historical experience, our observation
of trends, and information, valuations and other assumptions that we believe are reasonable when making an estimate
of an asset or liabilities fair value. Due to the inherent complexity, judgment and uncertainty in estimating fair value,
actual amounts could differ significantly from our estimates.
Areas requiring the most significant estimate and judgment are outlined below.
Revenue recognition
Transactions that contain separately identifiable components must be recognized at the fair value of consideration
received or receivable to reflect the substance of the transaction. We are required to make judgments about the fair
value of each component, including its allocation to each separately identified component, by considering the following:
our overall pricing objectives, the market in which the transaction occurs, the uniqueness of each component, the work
performed, the size of the transaction and any historical sales and contract prices.
Accordingly, we apply judgment in our assessment of whether we are acting as an agent or principal in a transaction.
When we don’t have exposure to the significant risks and rewards associated with the sale of goods or the rendering of
services we are acting as an agent in the transaction. We act as a principal in the transaction when we have exposure to
the significant risks and rewards associated with the sale of goods or the rendering of services. We consider these factors,
amongst others, in our assessment.
Real Matters Inc. – September 30, 2017 - 33
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Goodwill
Goodwill is not amortized and is tested annually for impairment or more frequently if an event or circumstance occurs
that more likely than not reduces the fair value of a cash generating unit (“CGU”), or group of CGUs, below its carrying
amount. Examples of such events or circumstances include: a significant adverse change in the technological, market,
economic or legal environment in which an entity operates; changes in market interest rates or other market rates of
return on investments that are likely to affect the discount rate used in calculating an assets value in use; the carrying
amount of the net assets of the entity is more than its market capitalization; evidence of physical damage to the asset or
obsolescence is present; significant changes to an asset’s expected use; or, performance expectations for the asset are
worse than were expected. Goodwill is not tested for impairment when the assets and liabilities that make up the CGU
unit have not changed significantly since the most recent fair value determination, the most recent fair value
determination results in an amount that exceeded the carrying amount by a substantial margin, and based on an analysis
of events that have occurred and circumstances that have changed since the most recent fair value determination, the
likelihood that a current fair value determination would be less than the current carrying amount of the CGU is remote.
The amount of goodwill assigned to each CGU and methodology employed to make such assignments has been applied
on a consistent basis. For the purpose of testing goodwill for impairment, our CGU align with our operating segments
since this is the level at which goodwill is monitored.
The carrying value of a CGU or group of CGUs is compared to its recoverable amount, where the recoverable amount is
the higher of fair value less cost to sell and its value in use. The value in use for a CGU or group of CGUs is determined by
discounting three-year cash flow projections from financial forecasts developed by management. Projections reflect past
experience and future expectations of operating performance. We applied perpetuity growth rates to cash flows in the
terminal year. None of the perpetuity growth rates exceed the long-term historical growth rates for the markets in which
we operate. The discount rates applied to the cash flow projections are derived from the weighted average cost of capital
for each CGU or group of CGUs.
We monitor both economic and financial conditions and we re-perform our goodwill test for impairment as conditions
dictate.
Business combinations
Applying the acquisition method to business combinations requires us to measure each identifiable asset and liability at
fair value. The excess, if any, of the fair value of consideration over the fair value of the net identifiable assets acquired
is recognized as goodwill. The purchase price allocation involves judgment with respect to the identification of intangible
assets acquired and fair value estimates for the assets acquired and liabilities assumed, including pre-acquisition
contingencies and contingent consideration. Changes in any of the assumptions or estimates used to determine the fair
value of acquired assets and liabilities assumed, including pre-acquisition contingencies or contingent consideration,
could affect the amounts assigned to assets, liabilities and goodwill in the purchase price allocation.
We make estimates, assumptions, and judgments when valuing goodwill and other intangible assets in connection with
the initial purchase price allocation of an acquired entity, in addition to evaluating the recoverability of goodwill and
other intangible assets on an ongoing basis. These estimates are based on a number of factors, including historical
experience, market conditions, information gained on our review of the target entities’ operations, and information
obtained from management of the acquired companies. Critical estimates in valuing certain intangible assets include, but
are not limited to, historical and projected attrition rates, discount rates, anticipated revenue growth from acquired
customers, acquired technology, and the expected use of the acquired assets. These factors are also considered in
determining the useful life of acquired intangible assets. The amounts and useful lives assigned to identified intangible
assets also impacts the amount and timing of future amortization expense.
Unanticipated events and circumstances may affect the accuracy or validity of such assumptions, estimates and our actual
results.
Warrants
We use the Black-Scholes-Merton option pricing model to estimate the fair value of warrant liabilities, which requires the
use of several input variables. These input variables are subject to estimate and changes in these inputs can materially
Real Matters Inc. – September 30, 2017 - 34
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
impact the estimated fair value of warrant liabilities. The fair value reported may not represent the transaction value if
these warrants were exchanged at a future date.
Income taxes
Deferred income tax is recognized applying the liability method, which recognizes the temporary differences between
the carrying amounts of assets and liabilities for financial reporting and their equivalent tax amounts. Deferred income
tax is not recognized on the initial recording of assets or liabilities for financial reporting purposes that is not a business
combination and that affects neither accounting income nor taxable income or loss. Deferred income tax assets and
liabilities are measured at the tax rates expected to be in effect when the temporary differences reverse, calculated using
tax rates that have been enacted or substantively enacted at the reporting date.
Significant changes to enacted tax rates or laws, or estimates of timing differences and their reversal, could result in a
material adverse or positive impact on our financial condition and operating performance. In addition, changes in
regulation or insufficient taxable income could impact our ability to utilize tax loss carryforwards, which could have a
significant impact on deferred income tax assets and deferred income tax expense or recovery.
The recognition of deferred tax assets related to unutilized loss carryforwards is supported by our historical and expected
ability to generate income subject to tax and other substantive evidence. However, should we be unable to continue
generating income subject to tax, deferred tax assets stemming from unutilized loss carryforwards may not be available
to us prior to their expiry. We have historically used, and will continue to use, every effort to limit the use of discretionary
tax deductions to maximize our use of loss carryforwards prior to their expiry. Should we not be able to realize our
deferred tax assets attributable to loss carryforwards, we would record a deferred income tax expense in the period
when we determined the likelihood of realizing these losses was less likely than not. Our maximum exposure is equal to
the carrying amount of the deferred tax asset attributable to loss carryforwards, $6.4 million at September 30, 2017.
Accordingly, due to our historical ability to generate income subject to tax and based on our expectations for the future,
we view the risk of not realizing these deferred tax assets as low.
Other
Other estimates include, but are not limited to, the following: identification of CGUs, impairment assessments for non-
financial assets, capitalization and the determination of internally generated intangible assets useful lives, inputs
employed in the Black-Scholes-Merton option pricing model to value share-based payments, estimating the useful lives
of property and equipment, assessing provisions, estimating the likelihood of collection to determine our allowance for
doubtful accounts, the fair value of financial instruments, control assessment of subsidiaries, contingencies related to
litigation and contingent acquisition payables, claims and assessments and various economic assumptions used in the
development of fair value estimates, including but not limited to interest and inflation rates, and a variety of option
pricing model estimates.
New Accounting Policies Adopted or Requiring Adoption
Revenue from Contracts with Customers
In May 2014, the International Accounting Standards Board (“IASB”) issued IFRS 15 “Revenue from Contracts with
Customers” (“IFRS 15”), which replaces IAS 18 “Revenue”, IAS 11 “Construction Contracts” and IFRIC 13 “Customer
Loyalty Programmes”, as well as various other interpretations applicable to revenue. IFRS 15 outlines a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers, except for
contracts that are within the scope of the standards on leases, insurance contracts, and financial instruments. The core
principle of IFRS 15 requires an entity to recognize revenue in accordance with the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition: identify the contract(s)
with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the
transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies
a performance obligation. IFRS 15 also contains enhanced disclosure requirements. This new standard is effective for
annual periods beginning on or after January 1, 2018 and will be applied using either a full retrospective approach for all
periods presented in the period of adoption or a modified retrospective approach. Early adoption is permitted. Based on
Real Matters Inc. – September 30, 2017 - 35
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
our preliminary assessment, we do not expect the implementation of IFRS 15 to have a significant impact on revenue
recognition. However, a detailed assessment is still on-going. We have not yet determined which transition method we
will apply or whether we will use the optional exemptions or practical expedients available.
Accounting for Acquisitions of Interest in Joint Arrangements
In May 2014, the IASB issued amendments to IFRS 11 “Accounting for Acquisitions of Interest in Joint Arrangements (“IFRS
11”). The amendments to IFRS 11 provide guidance on how to account for the acquisition of a joint operation that
constitutes a business as defined in IFRS 3 “Business Combinations” (“IFRS 3”). Specifically, the amendments state that
the relevant principles on accounting for business combinations in IFRS 3 and other standards should be applied. The
same requirements should be applied to the formation of a joint operation if, and only if, an existing business is
contributed to the joint operation by one of the parties that participate in the joint operation. A joint operator is also
required to disclose the relevant information required by IFRS 3 and other standards for business combinations. The
amendments should be applied prospectively to acquisitions of interests in joint operations (in which the activities of the
joint operations constitute businesses as defined in IFRS 3) occurring for annual periods beginning on or after January 1,
2016. This guidance did not have an impact on our consolidated financial statements.
Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 “Financial Instruments” (“IFRS 9”). IFRS 9 issued in November 2009
introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently
amended in October 2010 to include classification and measurement requirements for financial liabilities and de-
recognition. In November 2013, follow on amendments included new requirements for general hedge accounting. The
final revision to IFRS 9 was issued in July 2014, which included impairment requirements for financial assets and limited
amendments to the classification and measurement requirements for certain simple debt instruments. The new standard
established a single classification and measurement approach for financial assets that reflects the business model in
which they are managed and their cash flow characteristics. It also provides guidance on an entity’s own credit risk
relating to financial liabilities. IFRS 9 is effective for annual periods beginning on or after January 1, 2018 and permits
early adoption. Based on an analysis of our financial assets and financial liabilities, they are expected to continue to be
measured on the same basis. We anticipate that the application of the expected credit loss model of IFRS 9 may result in
earlier recognition of credit losses for trade receivables. Since we currently do not apply hedge accounting, the new
requirements for general hedge accounting are not applicable.
Disclosure Initiative
In December 2014, the IASB issued Disclosure Initiative Amendments to IAS 1 “Presentation of Financial Statements” as
part of the IASB’s Disclosure Initiative. These amendments encourage entities to apply professional judgment regarding
disclosure and presentation in their financial statements and are effective for annual periods beginning on or after
January 1, 2016. This guidance did not have an impact on our consolidated financial statements.
In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7 “Statement of Cash Flows”, which is also part
of the IASB’s Disclosure Initiative. These amendments require entities to provide additional disclosures to enable financial
statement users to evaluate changes in liabilities arising from financing activities, including changes arising from cash
flows and non-cash changes. These amendments are effective for annual periods beginning on or after January 1, 2017,
with earlier application permitted. The impact of these amendments will result in additional disclosures in the notes to
our consolidated financial statements, where applicable.
Leases
In January 2016, the IASB issued IFRS 16 – “Leases” (“IFRS 16”), which replaces IAS 17 - Leases (“IAS 17”) and related
interpretations. IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for
all leases, unless the lease term is 12 months or less or the underlying value of the asset is low. IFRS 16 substantially
carries forward the lessor accounting in IAS 17 with the distinction between operating leases and finance leases being
retained. IFRS 16 will be applied using either a full retrospective approach for all periods presented in the period of
adoption or a modified retrospective approach for annual periods beginning on or after January 1, 2019. Early adoption
of IFRS 16 is permitted if IFRS 15 has also been applied. We intend to adopt the standard using the modified retrospective
approach but currently have no intention of early adopting the standard. As at September 30, 2017, we have operating
Real Matters Inc. – September 30, 2017 - 36
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
lease commitments of $10.0 million. A preliminary assessment indicates that these arrangements will meet the definition
of a lease under IFRS 16 and we expect to recognize new assets and liabilities in respect of these operating leases, which
principally relate to office space, upon adoption of IFRS 16. The new requirement to recognize a right-of-use asset and a
related lease liability is expected to have an impact on the amounts recognized in our consolidated financial statements
but we are still conducting a detailed assessment to determine the potential impact. In addition, the nature and timing
of expenses related to these leases will change as IFRS 16 replaces straight-line operating lease expense with a
depreciation charge for right-of-use assets and interest expense on lease liabilities. For finance leases where we are a
lessee and have already recognized an asset and a related finance lease liability for the lease arrangement, we do not
anticipate the application of IFRS 16 will have a significant impact on the amounts recognized in our consolidated financial
statements.
Income Taxes
In January 2016, the IASB issued “Recognition of Deferred Tax Assets for Unrealized Losses”, an amendment to IAS 12 –
“Income Taxes” (“IAS-12”). The amendments address accounting for deferred tax assets for unrealized losses on debt
instruments measured at fair value. The amendments are effective for annual periods beginning on or after January 1,
2017, with earlier application permitted. The implementation of these amendments is not expected to have a significant
impact on our consolidated financial statements.
Share-Based Payment
In June 2016, the IASB issued amendments to IFRS 2 – “Share-based Payment” which clarifies how to account for the
effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share-based
payment transactions with a net settlement feature, and modifications to the terms and conditions that change the
classification of the transactions. These amendments are effective for annual periods beginning on or after January 1,
2018, with early adoption permitted. The implementation of these amendments is not expected to have a significant
impact on our consolidated financial statements.
Uncertainty over Income Tax Treatments
In June 2017, the IASB issued IFRS Interpretation Committee 23 – “Uncertainty over Income Tax Treatments”. The
interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty
over income tax treatments. The interpretation requires an entity to determine whether uncertain tax positions are
assessed separately or together with one or more uncertain tax positions and, in making such assessment, an entity is
required to assume that the taxation authority will examine amounts it has a right to examine and has full knowledge of
all information when making its examination. An entity must also consider the probability that the taxation authority will
accept an uncertain tax treatment used, or proposed to be used, by the entity in its income tax filings and reassess any
judgments and estimates made if the facts and circumstances change or new information becomes available. The
effective date of the interpretation is for annual periods beginning on or after January 1, 2019 applied retrospectively or
using a modified retrospective application without restatement of comparatives. Earlier application is permitted. The
adoption of the interpretation is not expected to have a significant impact on our consolidated financial statements.
Financial Instruments
Credit risk
Credit risk is defined as the risk that one party to a financial instrument will cause a financial loss for the other party by
failing to discharge its obligation. Our exposure to credit risk is limited principally to cash and cash equivalents and trade
and other receivables. In all instances, our risk management objective, whether of credit, liquidity, market or otherwise,
is to mitigate our risk exposures to a level consistent with our risk tolerance.
Cash and cash equivalents
Certain management are responsible for determining which financial institutions we bank and hold deposits with.
Management typically selects financial institutions that it has a relationship with and those deemed by management to
be of sufficient size, liquidity, and stability. Management reviews its exposure to credit risk from time-to-time or as
conditions indicate that its exposure to credit risk has or is subject to change. Our maximum exposure to credit risk is the
fair value of cash and cash equivalents recorded on our consolidated statement of financial position as at September 30,
Real Matters Inc. – September 30, 2017 - 37
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
2017, $71.6 million (September 30, 2016 – $26.7 million). We hold no collateral or other credit enhancements as security
over our cash or cash equivalent balances. We deem the credit quality of our cash and cash equivalent balances to be
high and no amounts are impaired.
Trade and other receivables
We are subject to credit risk on our trade and other receivables in the normal course of business. Our maximum exposure
to credit risk is the fair value of trade and other receivables recorded on our consolidated statement of financial position
as at September 30, 2017, $32.1 million (September 30, 2016 - $29.2 million). We may perform credit checks or accept
payment or security in advance to limit our exposure to credit risk. Our client base is sufficiently diverse, and consists of
banks and mortgage lending institutions that are of sufficient size and capitalization, to mitigate a portion of any exposure
we have to credit risk. We have also assigned various employees to carry out collection efforts in a manner consistent
with our trade receivable and credit and collections policies. These policies establish procedures to manage, monitor,
control, investigate, record and improve trade receivable credit and collection. We also have policies and procedures
which establish estimates for doubtful account allowances. These calculations are generally based on historical collection.
We conduct specific account balance reviews, where practical, and consideration is given to the credit quality of the
client, payment history, and other factors specific to the client, including bankruptcy or insolvency.
At September 30, 2017, we had one customer represent more than 10% (2016 – no customers represented more than
10%) of our total trade and other receivables.
Trade and other receivables deemed by management to be at risk of collection are provided for through an allowance
account. When trade or other receivables are considered uncollectable, they are written-off against this account.
Subsequent recoveries of amounts previously written-off are credited against the allowance account and subsequently
recorded to operating expenses in our consolidated statement of operations and comprehensive income or loss.
Management typically assesses aggregate trade and other receivables impairment applying our historical rate of
collection giving consideration to broader economic conditions.
Trade and other receivables are generally due within 15 to 45 days from the invoice date. Accordingly, all amounts
outstanding beyond this period are past due. Based on historical collections, we have been successful in collecting
amounts that are not outstanding for greater than 90 days. We assess the credit quality of trade and other receivables
that are neither past due nor impaired as high. Our maximum exposure to credit risk is equivalent to our net carrying
amount. Trade and other receivables considered impaired at September 30, 2017 are not considered significant.
Liquidity risk
Liquidity risk is the risk that we will encounter difficulty in meeting obligations associated with the settlement of our
financial liabilities. Our exposure to liquidity risk is due primarily to any reliance we may have on long-term debt financing.
Certain management are responsible to ensure that we have sufficient short, medium and long-term liquidity. When
amounts are drawn on our long-term credit facilities, we manage liquidity risk on a daily basis by monitoring actual and
forecasted cash flows and monitoring our available liquidity. Management regularly monitors the financial terms and
conditions attributable to its lending facilities and reports quarterly our compliance to the audit committee and its lender.
We actively manage our liquidity and we are in regular contact with our lender.
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in market prices. Market risk is comprised of currency, interest rate and other price risk.
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in FX rates. Our exposure to currency risk is attributable to the exchange of U.S. monies to the Canadian dollar or vice
versa. We may enter into FX agreements to mitigate our exposure to currency risk, however, as of the date of this MD&A,
we have no FX agreements outstanding that require settlement. Accordingly, we are exposed to currency risk on U.S.
dollars charged to our U.S. operations in the form of management fees, royalties and interest rates on long-term
financings. To mitigate this risk, management uses discretion, and actively reviews its exposure to and need for FX
agreements.
Real Matters Inc. – September 30, 2017 - 38
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market interest rates. Interest rate risk arises from our interest bearing financial assets and liabilities. We have
certain financial assets and liabilities which are exposed to interest rate risk, the most notable of which are our long-term
debt facilities when drawn. All long-term debt facilities are also subject to interest rate risk on maturity or renegotiation.
An increase or decrease in the variable interest rate results in a corresponding increase or decrease to interest expense
on principal amounts drawn under our long-term credit facilities. We are also subject to interest rate risk on any
investments we make in cash equivalent, short-term investments.
Risk management objectives
Our risk management objective is to mitigate risk exposures to a level consistent with our risk tolerance. Derivative
financial instruments are evaluated against the exposures they are expected to mitigate and the selection of a derivative
financial instrument may not increase our net exposure to risk. Derivative financial instruments may expose us to other
types of risk, which may include, but is not limited to, credit risk. The exposure to other types of risk is evaluated against
the selected derivative financial instrument and is subject to a cost versus benefit review and analysis. We do not use
derivative financial instruments for speculative or trading purposes and the value of the derivative financial instrument
cannot exceed the risk exposure of the underlying asset, liability or cash flow it expects to mitigate.
Fair value methods and assumptions
The fair values of financial instruments, warrants and contingent consideration are calculated using available market
information, commonly accepted valuation methods and third party valuation specialists, where required, or
expectations of achievement, in the case of contingent consideration discounted at a market rate of interest.
Considerable judgment is required to develop these estimates. Accordingly, fair value estimates are not necessarily
indicative of the amounts we, or counter-parties to the instruments, could realize in a current market exchange, or expect
to pay, in the case of contingent consideration. The use of different assumptions and or estimation methods could have
a material effect on these fair values.
Financial assets and liabilities recorded at fair value, as and where applicable, are recorded on our consolidated statement
of financial position as accrued charges and warrant liabilities.
Financial Information Controls and Procedures
Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be
disclosed by us in reports filed or submitted under Canadian securities laws is recorded, processed, summarized and
reported within the time periods specified under those laws, and include controls and procedures that are designed to
ensure that the information is accumulated and communicated to management, including our President and Chief
Executive Officer (“CEO”) and Executive Vice-President and Chief Financial Officer (“CFO”), to allow timely decisions
regarding required disclosure.
As at September 30, 2017, management evaluated, under the supervision of and with the participation of the CEO and
the CFO, the effectiveness of our disclosure controls and procedures, as defined in National Instrument 52-109 –
Certification of Disclosure in Issuers’ Annual and Interim Filings.
Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as at
September 30, 2017.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in National Instrument 52-109. Our internal control over financial reporting is a process designed under the
supervision of the CEO and CFO, and effected by the board of directors, management and other personnel of Real
Matters Inc., to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with International Financial Reporting Standards. However,
because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements
on a timely basis.
Real Matters Inc. – September 30, 2017 - 39
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Management evaluated, under the supervision of and with the participation of the CEO and the CFO, the effectiveness
of our internal control over financial reporting as at September 30, 2017, based on the criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”).
Based on that evaluation, the CEO and CFO concluded that our internal control over financial reporting was effective as
at September 30, 2017.
There have been no changes during the year ended September 30, 2017 in our internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Caution Regarding Forward-Looking Statements
This MD&A contains forward-looking statements within the meaning of applicable Canadian securities laws that relate to
our current expectations and views of future events including, in particular, the sections entitled ‘‘Strategy and Outlook’’
and ‘‘Liquidity and Capital Resources’’. In some cases, these forward-looking statements can be identified by words or
phrases such as ‘‘forecast’’, ‘‘target’’, ‘‘goal’’, ‘‘may’’, ‘‘might’’, ‘‘will’’, ‘‘expect’’, ‘‘anticipate’’, ‘‘estimate’’, ‘‘intend’’,
‘‘plan’’, ‘‘indicate’’, ‘‘seek’’, ‘‘believe’’, ‘‘predict’’, or ‘‘likely’’, or the negative of these terms, or other similar expressions
intended to identify forward-looking statements. The forward-looking statements and other forward-looking information
are provided as of the date of this MD&A and are based on management’s opinions, estimates and assumptions in light
of its experience and perception of historical trends, current trends, current conditions and expected future
developments, as well as other factors that management believes appropriate and reasonable in the circumstances.
Actual results may differ materially from those indicated or underlying forward-looking statements as a result of various
factors, including without limitation the factors set out below and discussed in detail in our Final Long Form Prospectus
dated May 5, 2017, which can be found at www.sedar.com, under the heading “Important Factors Affecting Results from
Operations” and outlined in the Strategy and Outlook section of this MD&A.
These forward-looking statements include, among other things, statements relating to:
•
•
•
•
•
•
•
•
•
•
•
•
•
our expectations regarding certain of our future results and information, including, among others, revenue,
expenses, Adjusted EBITDA(A), Net Revenue(A), sales growth, capital expenditures, operations and use of future
cash flows;
our anticipated cash needs and our need for additional financing;
our ability to protect, maintain and enforce our intellectual property;
third party claims of infringement or violation of, or other conflicts with, intellectual property rights;
our plans for and timing of expansion of services;
expectations regarding industry trends, overall market growth rates and our future growth rates, plans and
strategies;
the acceptance by our clients and the marketplace of new technologies and services;
our ability to attract new clients and further develop and maintain existing clients;
our ability to continue to attract and retain personnel;
our expectations with respect to the advancement of our service offerings;
our competitive position and the regulatory environment in which we operate;
anticipated trends and challenges in our business and the markets in which we operate;
our intentions with respect to the implementation of new accounting standards.
In addition, our assessment of, and targets for, revenues, market share, Net Revenue(A) and Adjusted EBITDA(A) margins
are considered forward-looking information. See the “Strategy and Outlook’’ section of this MD&A for additional
information concerning our strategies, assumptions and market outlook in relation to these assessments. Real Matters
cautions that the list of risk factors and uncertainties is not exhaustive and other factors could also adversely affect its
results.
Real Matters Inc. – September 30, 2017 - 40
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Risks and Uncertainties
Although we believe that the assumptions underlying these statements are reasonable, they may prove to be incorrect
and there can be no assurance that actual results will be consistent with these forward-looking statements. Given these
risks, uncertainties and assumptions, readers should not place undue reliance on these forward-looking statements.
Whether actual results, performance or achievements will conform to our expectations and predictions is subject to a
number of known and unknown risks, uncertainties, assumptions and other factors, which include:
Strategic
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
failing to grow market share in the residential mortgage appraisal business to anticipated levels;
failing to grow market share in the U.S. title and closing market to anticipated levels;
changes in economic conditions resulting in fluctuations in client demand;
increased dependence on larger industry clients;
risks associated with targeting larger industry clients;
growth placing significant demands on our management and infrastructure;
increased costs and demands upon management associated with being a public company;
inability to successfully develop or acquire and sell enhancements and new services;
failing to maintain demand for our services or diversify our revenue base;
risks associated with a competitive business environment;
inability to consummate or integrate acquisitions;
negative publicity;
ineffectiveness of our risk management efforts;
potential inability to successfully integrate Linear;
use of proceeds of the offering not being specified with certainty;
Operational
•
•
•
•
•
•
•
•
•
•
failure to adequately protect our technology infrastructure;
material defects or errors in our technology infrastructure;
system interruptions;
earthquakes, fires, floods and other natural catastrophic events or interruptions;
effort, time and expense associated with switching from competitors’ software to our software;
failing to adapt to technological changes;
failing to maintain field agent engagement;
risks associated with ‘‘open source’’ software;
losing corporate culture;
inability to retain or hire additional key personnel;
Legal and compliance
•
•
•
•
•
•
•
•
•
•
•
•
•
regulatory risks;
risks associated with U.S. operations;
field agent work product liability;
risks associated with the potential reclassification of exempt employees and field agents;
tax law changes or adverse tax examinations;
current or future litigation;
risks associated with our confidentiality agreements;
potential infringement on the proprietary rights of others;
risks associated with our insurance coverage;
failing to adequately protect intellectual property;
our by-laws potentially limiting an investor’s ability to obtain a favourable judicial forum for disputes with us;
difficulty enforcing judgments against non-resident directors;
claims for indemnification by directors or officers;
Real Matters Inc. – September 30, 2017 - 41
Real Matters Inc. – MD&A for the years ended September 30, 2017 and 2016
(tabular amounts are expressed in thousands of U.S. dollars and thousands of shares, excluding per share amounts, unless otherwise stated)
Financial and reporting
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
risks associated with the forward-looking statements contained in this MD&A potentially proving to be incorrect;
inaccurate accounting estimates and judgments;
potential inability to raise additional capital in the future;
potential deficiencies in our internal controls over financial reporting;
changing accounting standards or interpretations;
restrictive covenants contained in our credit facility;
dependence on subsidiaries;
exchange rate fluctuations;
future offerings of debt securities;
future sales of shares by existing shareholders reducing the market price of the shares;
dilution and future sales of shares;
risks associated with securities analysts’ research or reports potentially impacting the share price;
risks associated with current indebtedness and the potential failure to fund future endeavours;
risks associated with debt servicing costs; and
risks associated with our current policy with respect to dividends.
Real Matters cautions that the list of risk factors and uncertainties should be considered carefully, and readers should
not place undue reliance on the forward-looking statements. Real Matters has no intention and undertakes no obligation
to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise,
except as required by law.
Glossary
Tier 1 - refers to the top five U.S. banks by asset size as determined by U.S. Federal Reserve data, and the largest non-
bank mortgage lender in the U.S. according to the Inside Mortgage Finance website: Top 100 Mortgage Lenders.
Tier 2 - refers to the top 30 mortgage lenders in the U.S. according to the Inside Mortgage Finance website: Top 100
Mortgage Lenders, excluding Tier 1 mortgage lenders.
Tier 3 - refers to the top 100 mortgage lenders in the U.S. according to the Inside Mortgage Finance website: Top 100
Mortgage Lenders, excluding Tier 1 and Tier 2 mortgage lenders.
Tier 4 - refers to all mortgage lenders in the U.S. not included in Tier 1, Tier 2 or Tier 3.
Real Matters Inc. – September 30, 2017 - 42
Independent Auditor’s Report
To the Shareholders of
Real Matters Inc.
We have audited the accompanying consolidated financial statements of Real Matters Inc., which comprise the
consolidated statements of financial position as at September 30, 2017 and September 30, 2016 and the consolidated
statements of operations and comprehensive loss, consolidated statements of equity and consolidated statements of
cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the 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 Real
Matters Inc. as at September 30, 2017 and September 30, 2016, and its financial performance and its cash flows for the
years then ended in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
Chartered Professional Accountants
Licensed Public Accountants
November 27, 2017
Toronto, Ontario
Real Matters Inc. – September 30, 2017 - 43
Real Matters Inc.
Consolidated Statements of Financial Position
September 30, 2017 and 2016 (stated in thousands of United States (“U.S.”) dollars)
ASSETS
CURRENT
Cash and cash equivalents
Trade and other receivables (Note 18)
Prepaid expenses
NON-CURRENT
INTANGIBLES (Note 5)
GOODWILL (Note 6)
PROPERTY AND EQUIPMENT (Note 7)
INVESTMENT IN EQUITY ACCOUNTED INVESTEES
OTHER ASSETS
DEFERRED TAX ASSETS (Note 19)
TOTAL ASSETS
LIABILITIES
CURRENT
Trade payables
Accrued charges (Note 4)
Income taxes payable
Deferred revenues
Current portion of long-term debt (Note 8)
Finance lease obligations (Note 17)
NON-CURRENT
LONG-TERM DEBT (Note 8)
LEASEHOLD INDUCEMENTS
WARRANT LIABILITIES (Note 9)
FINANCE LEASE OBLIGATIONS (Note 17)
OTHER LIABILITIES (Note 4)
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 17)
EQUITY
NON-CONTROLLING INTERESTS
SHAREHOLDERS' EQUITY (Note 10)
Common shares
Contributed surplus
Accumulated deficit
Accumulated other comprehensive income (loss)
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
Approved by:
2017
2016
$
71,634
32,100
1,691
105,425
$
26,687
29,212
1,345
57,244
36,871
58,890
4,239
182
311
56,518
56,643
4,032
7,875
-
20,645
121,138
226,563
$
8,552
133,620
190,864
$
$
10,376
12,207
1,046
12
-
402
24,043
$
17,634
26,755
416
19
1,400
424
46,648
-
514
12,820
140
-
13,474
37,517
14,391
121
12,148
568
9,450
36,678
83,326
3,461
2,086
259,625
3,222
(77,393)
131
185,585
189,046
226,563
$
164,629
-
(53,379)
(5,798)
105,452
107,538
190,864
$
Blaine Hobson (signed) – Non-Executive Chairman
Garry M. Foster (signed) – Audit Committee Chair
The accompanying notes are an integral part of these consolidated financial statements.
Real Matters Inc. – September 30, 2017 - 44
Real Matters Inc.
Consolidated Statements of Operations and Comprehensive Loss
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars except share and net income or
loss per share amounts)
REVENUES (Note 21)
TRANSACTION COSTS
OPERATING EXPENSES (Note 12)
ACQUISITION AND INITIAL PUBLIC OFFERING COSTS (Note 12)
AMORTIZATION (Note 5 and 7)
IMPAIRMENT OF ASSETS (Note 13)
INTEREST EXPENSE (Note 8)
INTEREST INCOME
NET FOREIGN EXCHANGE LOSS (GAIN)
LOSS ON FAIR VALUE OF WARRANTS
RE-MEASUREMENT LOSS ON PREVIOUSLY HELD EQUITY METHOD INVESTMENT (Note 4)
NET INCOME FROM EQUITY ACCOUNTED INVESTEES
LOSS BEFORE INCOME TAX RECOVERY
INCOME TAX EXPENSE (RECOVERY) (Note 19)
Current
Deferred
TOTAL INCOME TAX RECOVERY
NET LOSS
OTHER COMPREHENSIVE INCOME (LOSS)
Items that will be reclassified to net income or loss:
Foreign currency translation adjustment
COMPREHENSIVE LOSS
NET LOSS - ATTRIBUTABLE TO COMMON SHAREHOLDERS
NET INCOME - ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
COMPREHENSIVE LOSS - ATTRIBUTABLE TO COMMON SHAREHOLDERS
COMPREHENSIVE INCOME - ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
Net loss per weighted average share, basic (Note 11)
Net loss per weighted average share, diluted (Note 11)
Weighted average number of shares outstanding (thousands),
basic (Note 11)
Weighted average number of shares outstanding (thousands),
diluted (Note 11)
2017
2016
$
302,976
210,682
86,411
1,609
21,241
5,096
889
(139)
3,390
5,011
976
(18)
(32,172)
$
248,547
180,247
55,476
3,005
14,001
-
687
(20)
(2,841)
5,437
-
(475)
(6,970)
1,824
(10,227)
(8,403)
(23,769)
529
(1,420)
(891)
(6,079)
5,929
(17,840)
$
(2,511)
(8,590)
$
$
$
$
$
(24,014)
245
(18,085)
245
$
$
$
$
(6,281)
202
(8,792)
202
$
$
(0.30)
(0.30)
$
$
(0.09)
(0.09)
80,280
69,489
85,092
76,606
The accompanying notes are an integral part of these consolidated financial statements.
Real Matters Inc. – September 30, 2017 - 45
Real Matters Inc.
Consolidated Statements of Cash Flows
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars)
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES
OPERATING
Net loss
Items not affecting cash
Stock-based compensation
Amortization of intangibles
Amortization of property and equipment
Impairment of assets
Leasehold inducements
Interest expense
Loss on forward foreign currency exchange agreement
Loss on fair value of warrants
Re-measurement loss on previously held equity method investment
Current and deferred income taxes
Net income from equity accounted investees
Changes in non-cash working capital items (Note 14)
Interest paid
Income taxes paid
Cash (utilized in) generated from operating activities
INVESTING
Acquisitions, net of cash acquired (Note 4)
Investment in equity accounted investees
Dividends received from equity accounted investees
Purchase of property and equipment (Note 7)
Intangible asset additions (Note 5)
Loss on forward foreign currency exchange agreement
Cash utilized in investing activities
FINANCING
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from finance lease obligations
Repayment of finance lease obligations
Payment of contingent consideration recorded at acquisition date (Note 4)
Proceeds from lease incentives
Deferred financing costs
Common shares issued, net of issue costs (Note 10)
Proceeds from the exercise of warrants
Proceeds from the exercise of stock options, net of issue costs
Dividends paid to non-controlling interests
Cash generated from financing activities
Effect of foreign currency translation on cash and cash equivalents
NET CASH INFLOW
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash and cash equivalents are comprised of:
Cash
Cash equivalents
2017
2016
$
(23,769)
$
(6,079)
3,497
19,649
1,592
5,096
148
889
-
5,011
976
(8,403)
(18)
(11,516)
(421)
(1,254)
(8,523)
428
(101)
252
(1,807)
-
-
(1,228)
-
(16,354)
144
(598)
(20,000)
230
-
87,741
251
179
(366)
51,227
3,471
44,947
-
12,839
1,162
-
25
687
697
5,437
-
(891)
(475)
(8,431)
(431)
(349)
4,191
(46,210)
-
294
(1,472)
(3)
(697)
(48,088)
7,346
(1,097)
153
(100)
-
-
(287)
43,220
-
-
(404)
48,831
(183)
4,751
26,687
71,634
$
21,936
26,687
$
$
$
30,984
40,650
71,634
$
$
26,687
-
26,687
Property and equipment acquired under finance lease
$
145
$
157
The accompanying notes are an integral part of these consolidated financial statements.
Real Matters Inc. – September 30, 2017 - 46
Real Matters Inc.
Consolidated Statements of Equity
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars)
Balance at September 30, 2016
Net income (loss)
Dividends paid to non-controlling interests
Common shares issued, net of issue costs and income tax (Note 10)
Common shares issued on exercise of stock options (Note 10)
Common shares issued on exercise of warrants (Note 9)
Stock-based compensation (Note 15)
Non-controlling interests, acquired (Note 4)
Foreign currency translation adjustment
Balance at September 30, 2017
Balance at September 30, 2015
Net income (loss)
Dividends paid to non-controlling interests
Common shares issued, net of issue costs and income tax (Note 10)
Common shares issued in connection with acquisitions (Note 4)
Non-controlling interests, acquired (Note 4)
Foreign currency translation adjustment
Balance at September 30, 2016
Non-
controlling
interests
2,086
245
(366)
$
1,496
Common
shares
164,629
$
Contributed
surplus
$
-
Accumulated
deficit
(53,379)
(24,014)
$
89,330
454
5,212
(275)
3,497
$
3,461
$
259,625
$
3,222
$
(77,393)
Non-
controlling
interests
-
$
202
(404)
2,288
Common
shares
98,871
$
Contributed
surplus
$
-
Accumulated
deficit
(47,098)
(6,281)
$
43,758
22,000
Accumulated
other
comprehen-
sive loss
(5,798)
$
5,929
131
$
Accumulated
other
comprehen-
sive loss
(3,287)
$
$
2,086
$
164,629
$
-
$
(53,379)
(2,511)
(5,798)
$
Total equity
107,538
$
(23,769)
(366)
89,330
179
5,212
3,497
1,496
5,929
189,046
$
Total equity
48,486
$
(6,079)
(404)
43,758
22,000
2,288
(2,511)
107,538
$
The accompanying notes are an integral part of these consolidated financial statements.
Real Matters Inc. September 30, 2017 - 47
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
1.
Nature of Operations
Real Matters Inc. (“Real Matters” or the “Company”) is a leading technology company providing appraisal, title and
closing and other ancillary services through its Solidifi, Linear Title & Closing and iv3 brands to the mortgage lending and
insurance industries in the U.S. and Canada. Linear Title & Closing was subsequently rebranded as Solidifi in October
2017.
Real Matters’ head office and Canadian operations are located at 50 Minthorn Boulevard, Markham, Ontario and its U.S.
subsidiaries operate in Buffalo, New York, Cincinnati, Ohio, Middletown, Rhode Island and Denver, Colorado.
Initial public offering
On May 11, 2017, the Company completed an initial public offering (“IPO”) of common shares (the “Offering”). The
Company’s common shares are listed on the Toronto Stock Exchange under the stock symbol “REAL”.
Immediately prior to the closing of the Offering, the Company amended its articles (the “share reorganization”) to effect
the following share capital changes:
•
•
•
•
consolidate the Company’s Class A shares on a two-for-one basis pursuant to a share consolidation;
increase the authorized share capital of the Company by creating an unlimited number of preferred shares,
issuable in series;
decrease the authorized share capital of the Company by deleting the Class B shares and all rights, privileges,
restrictions and conditions attached thereto; and
re-designate the post-share consolidation Class A shares as common shares.
The Offering of 12,056 common shares consisted of a treasury share issuance by the Company of 9,620 common shares
and a secondary offering of 2,436 common shares by selling shareholders. The Offering price of 13 Canadian dollars (“C$”)
resulted in net proceeds to the Company of C$117,556 and C$29,770 to the selling shareholders after underwriting
commissions of C$7,504 and C$1,900, respectively.
Please refer to Note 10 for further details regarding the impact of the Offering on the Company’s share capital.
The consolidated financial statements (“financial statements”) were authorized for issue by the board of directors on
November 27, 2017.
2.
Basis of Presentation and Significant Accounting Policies
Statement of compliance
The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”).
Basis of presentation
The financial statements are presented in thousands of U.S. dollars and have been prepared applying the historical cost
method, except for certain financial instruments which are measured at fair value. Historical cost reflects the fair value
of consideration exchanged for the asset at the date it was acquired.
The significant accounting policies and methodologies outlined below have been applied consistently throughout the
Company and to all periods presented in these financial statements.
Real Matters Inc. – September 30, 2017 - 48
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Basis of consolidation
These financial statements include the accounts of the Company and subsidiaries controlled by the Company. The
Company is deemed to control a subsidiary when it is exposed to, or has the right to, variable returns from its involvement
with an investee and it has the ability to direct the activities of the investee that significantly affects the investee’s returns
through its power over the subsidiary. Where the Company’s interest in a subsidiary is less than one hundred percent,
the Company recognizes a non-controlling interest in the investee. All intercompany transactions, balances, revenues
and expenses are eliminated on consolidation.
Subsequent to acquisition, the carrying amount of non-controlling interests is the amount recognized initially, plus the
non-controlling interests’ share of changes in the capital of the company in addition to changes in ownership interests.
Total comprehensive income or loss is attributed to non-controlling interests, even if this results in the non-controlling
interests having a deficit balance.
The financial statements of controlled entities are included in these financial statements from the date control is effective
until control ceases to exist.
Functional and presentation currency
The Company’s functional currency is the Canadian dollar. Accordingly, its financial position, results of operations, cash
flows and equity are consolidated in Canadian dollars.
The Company translates its U.S. subsidiaries’ assets and liabilities to Canadian dollars from their functional currency of
U.S. dollars using the exchange rate in effect at the statement of financial position date. Revenues and expenses are
translated to Canadian dollars at the average monthly exchange rate in effect during the year. The resulting translation
adjustments are included in other comprehensive income or loss.
The Company has elected to report its financial results in U.S. dollars. Accordingly, the Company’s consolidated
statements of financial position are translated from Canadian to U.S. dollars at the foreign currency exchange rate in
effect at the statement of financial position date. Certain transactions affecting shareholders’ equity are translated at
historical foreign currency exchange rates. The statements of operations and comprehensive income or loss and
statements of cash flows are translated to U.S. dollars applying the average foreign currency exchange rate in effect
during the reporting period. The resulting translation adjustments are included in other comprehensive income or loss.
Reporting the Company’s financial results in U.S. dollars reduces the impact of foreign currency fluctuations in its
reported amounts because the Company’s operations are larger in the U.S than they are in Canada. The Company remains
a legally domiciled Canadian entity and its functional currency is the Canadian dollar. Translating the Company’s U.S.
financial position, results of operations and cash flows into Canadian dollars, the Company’s functional currency, and re-
translating these amounts to U.S. dollars, the Company’s reporting currency, has no translation impact on the Company’s
financial statements. Accordingly, U.S. results retain their original values when expressed in the Company’s reporting
currency.
Monetary assets and liabilities denominated in foreign currencies, including certain long-term financing arrangements
between Canadian and U.S. entities within the consolidated group of companies that are not considered part of the net
investment in the foreign operation, that are different from the functional currency are translated to the functional
currency applying the foreign exchange rate in effect at the statement of financial position date. Realized and unrealized
foreign currency differences are recognized in the consolidated statement of operations and comprehensive income or
loss.
Real Matters Inc. – September 30, 2017 - 49
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Exchange differences on monetary assets and liabilities receivable or payable to a foreign operation for which settlement
is neither planned nor likely to occur, and therefore form part of the net investment in the foreign operation, are
recognized initially in other comprehensive income or loss and presented within equity. The cumulative amount of related
exchange differences recorded in other comprehensive income or loss is reclassified from equity to the consolidated
statements of operations and comprehensive income or loss on settlement.
Cash and cash equivalents
Cash and cash equivalents include short-term investments in highly liquid marketable securities, having a term to
maturity of three months or less.
Included in cash is $2,295 (2016 - $2,295) set aside by the Company to demonstrate that it has sufficient liquidity to carry
on business and retain its California county title license.
The Company’s residential and commercial real estate title and closing services requires it to hold cash in escrow accounts
that it does not have title to. Accordingly, cash held in escrow, escrow receivables and escrow liabilities, are not recorded
as assets or liabilities on the Company’s consolidated statements of financial position. All cash held in escrow is deposited
in non-interest bearing bank accounts.
Intangibles
Intangible assets with finite useful lives are carried at cost less accumulated amortization and accumulated impairment
losses, if any. Intangibles are tested for impairment when a triggering event occurs. Amortization is recognized on a
straight-line basis over the estimated useful life of the intangible asset and recorded to the consolidated statements of
operations and comprehensive income or loss. The estimated useful life and amortization method are reviewed at least
annually, with any change in estimate recognized prospectively. Estimated useful lives for intangibles having finite lives
are as follows:
Internally generated intangible assets
Customer relationships
Brand names
Technology
License
2.5 years
3 years
3 years
3 years
10 years
Internally generated intangible assets are capitalized if, and only if, all of the following have been demonstrated:
•
•
•
•
•
•
The technical feasibility of completing the intangible asset is expected to make it available for use or sale;
The Company intends to complete and use or sell the intangible asset;
The Company has the ability to use or sell the intangible asset;
How the Company expects the intangible asset will generate probable future economic benefits;
Adequate technical, financial and other resources to complete the development and to use or sell the intangible
asset exists; and
The Company has the ability to reliably measure the expenditures attributable to its development.
Real Matters Inc. – September 30, 2017 - 50
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
The amount recognized as an internally generated intangible asset represents the sum of expenditures incurred from the
date when the intangible asset first meets the recognition criteria listed above to the date the asset is available for use.
Where no internally generated intangible asset is recognized, development expenditures are recognized in the
consolidated statements of operations and comprehensive income or loss in the period in which the cost is incurred.
When the asset is available for use, the cost model is applied which requires the asset to be carried at cost less
accumulated amortization and accumulated impairment losses, if any. During the period of development, the asset is
tested for impairment at least annually.
Internally generated intangible assets consist of computer software costs associated with the internal development and
enhancement of the Company’s platforms. Costs associated with the maintenance of the Company’s platforms are
expensed as incurred.
Goodwill
Goodwill represents the excess of consideration over the fair value of the net identifiable assets acquired in a business
combination. Goodwill is recorded at cost less accumulated impairment losses, if any. Goodwill is not amortized. Goodwill
is allocated to each of the Company’s cash-generating units (“CGU or “CGUs”) or group of CGUs that benefit from the
acquisition, irrespective of whether other assets or liabilities acquired are assigned to those units. For the purpose of
goodwill impairment testing the Company’s CGUs correspond to its operating segments as this is the level at which
goodwill is monitored.
Goodwill is tested annually for impairment, or more frequently when there is an indication that goodwill may be impaired.
If the recoverable amount, representing the higher of its fair value less cost to sell and its value in use, of the CGU is less
than its carrying amount, any resulting impairment loss is first allocated to goodwill and subsequently to other assets on
a pro rata basis for the CGU. Any goodwill impairment loss is recorded to the consolidated statements of operations and
comprehensive income or loss in the period of impairment. Previously recognized impairment losses for goodwill are not
reversed in subsequent periods.
On disposal of a CGU or group of CGUs, the portion of goodwill attributable to the CGU is included in the determination
of profit or loss recorded on the consolidated statements of operations and comprehensive income or loss.
Goodwill is tested for impairment annually as at June 30. In prior years, the Company tested goodwill for impairment as
at September 30.
Property and equipment
Property and equipment is stated at cost less accumulated amortization and accumulated impairment losses, if any. The
initial cost includes the purchase price and any expenditures directly attributable to ready the asset for use. Purchased
software that is integral to the function of certain equipment is capitalized. When components of property and
equipment have different useful lives, those components are accounted for as separate items of property and equipment
and amortized separately.
Gains and losses on the disposal of property and equipment are determined as the difference between the proceeds
recovered, if any, on disposal of the asset and its carrying amounts. Any resulting gain or loss is recognized in the
consolidated statements of operations and comprehensive income or loss.
Amortization is recognized using the straight-line method for each component of property and equipment. Capitalized
finance lease assets are amortized over their expected useful lives on the same basis as owned assets. However, when
there is no reasonable certainty that ownership will transfer at the end of the lease term, capitalized finance lease assets
are amortized over the lesser of the lease term and their useful lives. The Company reviews the amortization methods,
Real Matters Inc. – September 30, 2017 - 51
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
useful lives and residual values at each reporting date. The expected useful lives of property and equipment is set forth
below:
Computer equipment
Furniture and fixtures
Leasehold improvements
3 - 5 years
5 years
Lesser of the remaining term of the lease and expected useful life
Investment in equity accounted investees
Investments where the Company has joint control or the ability to exercise significant influence, where significant
influence is the power to participate in the financial and operating policy decisions of the investee that is not control or
joint control over those policies, are accounted for using the equity method of accounting.
A joint venture is an arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the arrangement. Joint control is the contractual sharing of control in an arrangement, which only exists when
decisions about the relevant activities require the unanimous consent of the parties sharing control. To determine
whether significant influence or joint control is present, considerations similar to those necessary to determine control
over subsidiaries are reviewed.
The equity method of accounting requires the Company to record its initial investment at cost. At the time of initial
recognition, if the cost of the associate or joint venture is lower than the proportionate share of the investment’s
underlying fair value, the Company records a gain on the difference between the cost and the underlying fair value of the
investment to the statements of operations and comprehensive income or loss. If the cost of the associate or joint venture
is greater than the Company’s proportionate share of the underlying fair value, goodwill relating to the associate or joint
venture is included in the carrying amount of the investment.
The carrying value of the Company’s initial investment is adjusted to include its pro rata share of the investee’s post-
acquisition earnings which is included in the Company’s determination of net income or loss. Investments are reviewed
at each reporting period to determine whether there is any objective evidence of impairment. If evidence of impairment
exists, the Company compares the carrying amount of the investment to its recoverable amount.
Should the Company lose joint control of a joint venture, the Company re-measures its remaining investment at fair value.
Any resulting difference between the carrying amount of its investment in the joint venture and its fair value of the
retained investment and any proceeds from disposal is recognized in the consolidated statements of operations and
comprehensive income or loss.
The financial statements of the equity accounted investee are prepared for the same reporting period as the Company.
When necessary, adjustments are made to bring the accounting policies in line with those of the Company.
Leases and leasehold inducements
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of
ownership to the lessee. Assets held under finance leases are initially recognized as assets of the Company at fair value
or, if lower, at the present value of the future minimum lease payments. The corresponding liability is included in the
consolidated statement of financial position as a finance lease obligation. Leases for which the risks and rewards are
retained by the lessor are considered operating leases. Operating lease payments are recognized as an expense and
charged to the consolidated statements of operations and comprehensive income or loss on a straight-line basis over the
lease term.
Leasehold inducements represent rent-free periods, rent escalations and lease incentives which are amortized on a
straight-line basis over the respective lease terms to rent expense.
Real Matters Inc. – September 30, 2017 - 52
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Income taxes
Income tax expense or recovery is comprised of current and deferred income tax which is recognized in the consolidated
statements of operations and comprehensive income or loss, except for income taxes attributable to a business
combination or equity transaction.
Current income tax represents the expected amounts payable or receivable derived from taxable income or loss
generated by the Company in the period. Current income tax is calculated by applying enacted or substantively enacted
tax rates, at the reporting date, to taxable income or loss. Current income taxes may include prior period adjustments to
income taxes payable or receivable.
Deferred income tax is recognized applying the liability method, which recognizes the temporary differences between
the carrying amounts of assets and liabilities for financial reporting and their equivalent tax amounts. Deferred income
tax is not recognized on the initial recording of assets or liabilities for financial reporting purposes that is not a business
combination and that impacts neither accounting income nor taxable income or loss. Deferred income tax assets and
liabilities are measured at the tax rates expected to be in effect when the temporary differences reverse, calculated using
tax rates that have been enacted or substantively enacted at the reporting date.
Deferred income tax assets are recognized when it is probable that future taxable income will be available to realize the
benefit of the deferred tax asset. Deferred income tax liabilities are not recognized on temporary differences that arise
from goodwill that is not deductible for tax purposes. Deferred tax assets are reviewed at each reporting date and are
reduced to the extent it is no longer probable that the related tax benefit will be realized and only recovered when the
probability of future taxable income improves.
Deferred income tax assets and liabilities are offset when the entity has a legally enforceable right to set off current tax
assets against current tax liabilities and the deferred tax assets and the liabilities relate to income taxes levied by the
same taxation authority on the same taxable entity or different taxable entities which intend to either settle current
income tax liabilities on a net basis or realize the assets and settle the liability simultaneously in a future period.
Warrant liabilities
At the time of issuance, warrants are classified as a financial liability or equity instrument in accordance with the
substance of the contractual arrangement. Warrants that obligate the Company to deliver a variable number of shares
whose value equals a fixed amount or an amount based on changes in an underlying variable, is not an equity instrument,
and is therefore classified as a financial liability. Subsequent changes to the conversion option that fixes the number of
shares and price of shares issuable, are not considered by the Company when the contractual terms of the warrant do
not change and there has been no change in the circumstances of the Company. Warrants classified as liabilities in the
consolidated statements of financial position are re-measured at their estimated fair value at each reporting date. Any
change to the fair value of the warrants is recognized in the consolidated statements of operations and comprehensive
income or loss.
Real Matters Inc. – September 30, 2017 - 53
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Revenues
The Company recognizes revenue when all of the following criteria have been met:
•
•
•
•
•
•
Significant risks and rewards of ownership have transferred to the buyer;
The Company does not retain continuing managerial involvement or effective control over the goods or services
sold;
The amount can be reliably measured;
It is probable that the economic benefits associated with the transaction will flow to the Company;
The stage of completion for the transaction can be reliably measured; and
The costs incurred, or to be incurred, in the transaction can be reliably measured.
The Company measures revenue at the fair value of the consideration received or receivable, taking into account any
contractually defined terms for volume discounts, rebates or refunds. The Company records payments received in
advance of satisfying the revenue recognition criteria as deferred revenues until all criteria are satisfied.
When the Company sells multiple services to the same customer it assesses whether each delivered element is
considered a separate transaction that can be recorded separately. In certain circumstances, it is necessary to apply the
recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of
the transaction. Conversely, the recognition criteria are applied to two or more transactions together when they are
linked in such a way that the commercial effect cannot be understood without reference to the series of transactions
taken as a whole.
The Company also assesses its revenue arrangements against specific criteria in order to determine if it is acting as
principal or agent. The Company records revenue on a gross basis, as a principal to the transaction, unless otherwise
indicated below.
Residential Mortgage Appraisals
The Company provides residential mortgage appraisals through its technology-based platform (the “Platform”) and
network of independent qualified field agents. Revenue is derived from platform transaction fees earned from mortgage
lenders on residential appraisal products such as complete home appraisals, a broker price opinion, property condition
reports and desktop appraisals. The Company records revenue in conjunction with the delivery of appraisal reports to its
clients.
Insurance Inspection
The Company provides insurance inspections to property and casualty insurers through its Platform. The Company
records revenue in conjunction with the delivery of insurance inspection reports to its clients.
Title and Closing
The Company provides title and closing services to residential and commercial clients which include title search
procedures for title insurance policies, escrow and other closing services. Title and closing revenues, which are recorded
net of amounts remitted to third party insurance underwriters, are recorded at the time a home sale transaction or
refinancing closes. Recording services are recognized at the time the documents are submitted to the county for
recording.
Search Services
The Company provides current owner, tax and commercial title search and property reports to other title insurance
companies or property investment companies. Search revenues are recorded at the time the report is delivered to the
client.
Real Matters Inc. – September 30, 2017 - 54
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Software Services
The Company provides three hosted software solutions. Contracts for these services are generally term based ranging
from 1 to 3 years. Set up and implementation fees typically do not meet the criteria as a separate transaction. Accordingly,
revenues are deferred and recognized on a straight-line basis over the longer of the term of the contract or the estimated
customer life. On-going service fees are recognized as revenue over the service period. Any usage-based fees and
minimum transaction fees are recognized monthly over the term.
Transaction costs
Transaction costs comprise expenses that are directly attributable to a specific revenue transaction including: appraisal
costs, various processing fees, including credit card fees, connectivity fees, insurance inspection costs, title and closing
agent costs, external abstractor costs and external quality review costs.
Business combinations
Business combinations are accounted for applying the acquisition method of accounting, where the fair value of
consideration is allocated to the fair value of assets acquired and liabilities assumed at the date of acquisition. If the fair
value of the net assets acquired is in excess of the aggregate consideration transferred, the Company re-assesses if it has
correctly identified all of the assets acquired and liabilities assumed and reviews the procedures used to measure the
amounts recognized at the date of acquisition. If following its reassessment, the Company concludes that the fair value
of net assets acquired exceeds the aggregate consideration transferred, the Company will record a gain to the
consolidated statements of operations and comprehensive income or loss.
The excess of consideration over the fair value of the identifiable net assets acquired is recorded as goodwill and allocated
to CGUs. For each business combination that includes a non-controlling interest, the Company, at its election, measures
the non-controlling interest’s investment in the acquiree at fair value or at the proportionate share of the acquiree’s net
identifiable assets acquired.
Any contingent consideration is recognized at fair value on the acquisition date. All contingent consideration (except that
which is classified as equity) is measured at fair value with changes in fair value recorded to the statements of operations
and comprehensive income or loss. Contingent consideration classified to equity is not re-measured and settlement is
accounted for within equity.
The fair value measurement and recognition of net assets acquired may require adjustment when information is absent
and fair value allocations are presented on an estimated or preliminary basis. Adjustments to estimated or preliminary
amounts, reflecting new information obtained about facts and circumstances that existed at the date of acquisition and
occurring not later than one year from the date of acquisition, are recorded in the period the adjustment is determined.
Transaction costs incurred in connection with a business combination, other than costs associated with the issuance of
debt or equity securities, are expensed in the statements of operations and comprehensive income or loss.
Provisions
Provisions are recognized when it is probable that the Company is required to settle an obligation (legal or constructive),
as a result of a past event, and the obligation can be reliably estimated. The provision represents the Company’s best
estimate of the amounts required to settle the obligation at the end of the reporting period. When a provision is
determined applying a measure of cash flows estimated to settle the present obligation, its carrying amount is the present
value of those cash flows (when the impact of the time value of money is material). When some or all of the amounts
required to settle a provision are expected to be recoverable from a third party, a receivable is recognized when it is
virtually certain that reimbursement is receivable and the expected reimbursement can be reliably measured.
Real Matters Inc. – September 30, 2017 - 55
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Financial instruments
Financial assets and financial liabilities, including derivatives, are recognized in the consolidated statements of financial
position when the Company becomes party to the contractual provisions of a financial instrument or non-financial
derivative contract.
The Company classifies financial instruments, or its component parts, on initial recognition as a financial liability, a
financial asset or an equity instrument in accordance with the substance of the contractual arrangement. A financial
instrument is any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument
for another entity. All financial instruments are measured at fair value on initial recognition and subsequently measured
at either fair value or amortized cost using the effective interest method, depending upon their classification. Financial
instruments are classified as one of the following: (i) held-to-maturity, (ii) loans and receivables, (iii) fair value through
profit or loss (“FVTPL”), (iv) available-for-sale, or (v) other financial liabilities. The Company’s financial assets and financial
liabilities are classified and measured as follows:
Asset/liability
Classification
Measurement
Cash and cash equivalents
Trade and other receivables
Trade payables
Accrued charges
Accrued charges (contingent consideration)
Long-term debt
Finance lease obligations
Other liabilities (contingent consideration)
Warrant liabilities
Loans and receivables
Loans and receivables
Other financial liabilities
Other financial liabilities
Fair value through profit and loss
Other financial liabilities
Other financial liabilities
Fair value through profit and loss
Fair value through profit and loss
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value
Amortized cost
Amortized cost
Fair value
Fair value
The Company offsets financial assets and liabilities and presents them net on the consolidated statements of financial
position when the Company has a legal right to offset and intends to settle on a net basis or realize the asset and liability
simultaneously.
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market.
Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest
method, less any impairment, excluding trade and other receivables. Gains and losses are recognized in the consolidated
statements of operations and comprehensive income or loss in the period that the asset is derecognized or impaired.
Other financial liabilities
Other financial liabilities are initially recorded at fair value and subsequently measured at amortized cost, using the
effective interest method. Gains and losses are recognized in the consolidated statements of operations and
comprehensive income or loss in the period that the liability is derecognized.
FVTPL
FVTPL financial assets or financial liabilities are measured at fair value at each reporting date, with changes in fair value
recognized in the consolidated statements of operations and comprehensive income or loss. Derivatives are classified as
FVTPL unless they are designated as effective hedging instruments.
Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities, other
than financial assets and financial liabilities classified as FVTPL, are added to or deducted from the fair value of financial
Real Matters Inc. – September 30, 2017 - 56
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
assets or financial liabilities, as appropriate. Transaction costs directly attributable to the acquisition of financial assets
or financial liabilities classified as FVTPL are expensed in the statements of operations and comprehensive income or loss.
Costs of issuing debt and equity
The cost of issuing debt is included as part of long-term debt and is accounted for at amortized cost using the effective
interest method. When long-term debt amounts are nil, but amounts are still available to be drawn, costs of issuing debt
are reclassified to other assets in the consolidated statements of financial position. The cost of issuing equity is reflected
as a direct charge to common shares.
Derivative financial instruments
The Company may enter into foreign currency exchange agreements from time-to-time as part of its strategy to manage
foreign currency exposure. The Company does not hold or issue derivative financial instruments for trading purposes.
Derivatives, including derivatives that are embedded in financial or non-financial contracts that are not closely related to
the host contract, are measured at their estimated fair value. Gains or losses on financial instruments measured at their
estimated fair values are recognized in the statements of operations and comprehensive income or loss in the periods in
which they arise, with the exception of gains and losses on certain financial instruments that are part of a designated
hedging relationship.
Fair value
Fair value represents the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Company classifies its fair value measurements
using a fair value hierarchy that reflects the significance of inputs used in making such measurements. IFRS establishes a
fair value hierarchy based on the level of independent, objective evidence applied to measure fair value. A financial
instrument’s categorization within the fair value hierarchy is based on the lowest level of input that is significant to the
fair value measurement. An entity is required to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The following three levels of inputs are applied to measure fair value:
•
•
•
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted
market prices in markets that are not active, or model derived valuations or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3 – unobservable inputs that are supported by little or no market activity
Impairment
Financial assets
A financial asset, other than those classified as FVTPL, is assessed at each reporting date for indicators of impairment. A
financial asset is deemed to be impaired if objective evidence indicates that one or more events have had a negative
effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at
amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future
cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for
impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar
credit risks and all impairment losses are recognized immediately in the consolidated statements of operations and
comprehensive income or loss.
Impairments of financial assets recognized in a prior period are re-assessed at the end of each reporting period to
determine if the indicators of impairment have reversed or no longer exist. An impairment loss is reversed if the
estimated recoverable amount exceeds the asset or asset groups carrying amount. The reversal of an impairment loss
may not exceed the carrying amount of the asset or asset group had no impairment loss been recognized. Reversals of
impairment losses are recognized immediately in the consolidated statements of operations and comprehensive income
or loss.
Real Matters Inc. – September 30, 2017 - 57
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Non-financial assets
The carrying value of property and equipment and intangibles are reviewed at each reporting period to determine if
indicators of impairment are present. If any such indication exists, the asset’s recoverable amount is estimated.
For the purpose of impairment testing, the recoverable amount is determined for an individual asset or are grouped
together into CGUs, representing the smallest group of assets that generates independent cash inflows. If the carrying
amount of the asset or CGU exceeds its recoverable amount, an impairment loss is recognized in the consolidated
statements of operations and comprehensive income or loss as a reduction in the carrying amount of the asset to its
recoverable amount. The recoverable amount of an asset or CGU is the higher of its fair value less costs to sell and its
value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-
tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset
or CGUs.
Impairments of non-financial assets recognized in a prior period are re-assessed at the end of each reporting period to
determine if the indicators of impairment have reversed or no longer exist. An impairment loss is reversed if the
estimated recoverable amount exceeds the asset or CGU’s carrying amount. The reversal of an impairment loss may not
exceed the carrying amount, net of amortization, of the asset or CGU had no impairment loss been recognized.
Share-based payments
The Company grants equity-settled stock options under its share-based compensation plan. The fair value of stock options
at the grant date is estimated using the Black-Scholes-Merton option pricing model and is subject to the satisfaction of
certain vesting conditions. Uncertain vesting conditions do not result in compensation expense being recognized until
they are satisfied or deemed to be probable of satisfaction. Compensation expense is recorded to the statements of
operations and comprehensive income or loss over the vesting period based on the estimated number of options
expected to vest with a corresponding increase in shareholder’s equity. Management’s estimate of the number of awards
expected to vest occurs at the time of grant and at each reporting date up to the vesting date. The estimated forfeiture
rate is adjusted for actual forfeitures in the period.
Net income or loss per share
Basic net income or loss per share is calculated by dividing net income or loss attributable to common shareholders of
the Company by the weighted average number of common shares outstanding during the reporting period. Diluted net
income or loss per share is calculated by dividing the net income or loss attributable to common shareholders of the
Company by the weighted average number of shares outstanding adjusted for all potentially dilutive equity instruments,
comprising stock options and warrants.
Operating segments
An operating segment is a component of the Company that engages in business activities. An operating segment may
earn revenues and incur expenses, including revenues and expenses incurred by virtue of activities with any of the
Company’s other operations. An operating segment has discrete financial information available which is regularly
reviewed by the Company’s Chief Operating Decision Maker (“CODM”) to assess performance or make resource
allocation decisions.
Significant judgments, estimates and assumptions
The preparation of these financial statements in conformity with IFRS requires management to make judgments,
estimates and assumptions that affect the application of accounting policies and the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions
are reviewed at least annually or more frequently as required. Revisions to accounting estimates are recognized in the
period of revision, which may impact future reporting periods. Areas that are subject to judgment and estimate include
revenue recognition, the identification of CGUs, impairment of goodwill and non-financial assets, the determination of
fair values in connection with business combinations, internally generated intangible assets, the determination of fair
Real Matters Inc. – September 30, 2017 - 58
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
value for warrants and financial instruments, share-based payments, the useful lives of property and equipment and
intangible assets, the likelihood of realizing deferred income tax assets, provisions and contingencies.
Critical accounting judgments and estimates
Management believes the following accounting policies are subject to the most critical judgments and estimates and
could have the most significant impact on the amounts recognized in the financial statements.
(a)
(b)
(c)
(d)
Revenue recognition
Transactions which contain separately identifiable components must be recognized at the fair value of
consideration received or receivable to reflect the substance of the transaction. The Company is required to
make judgments about the fair value of each component, including its allocation to each separately identified
component, by considering the following: its overall pricing objectives, the market in which the transaction
occurs, the uniqueness of each component, the work performed, the size of the transaction and any historical
sales and contract prices.
The Company uses judgment in its assessment of whether it is acting as an agent or principal in a transaction.
When the Company does not have exposure to the significant risks and rewards associated with the sale of goods
or the rendering of services it is acting as an agent in the transaction. The Company is acting as a principal when
it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services.
The Company considers these factors, amongst others, in its assessment.
Identification of CGUs
The Company has allocated its tangible assets, intangible assets and goodwill to the smallest identifiable group
of assets that generate cash inflows and that are largely independent of the cash inflows from other assets. The
determination of CGUs or groups of CGUs for the purpose of annual impairment testing requires judgment.
Impairment of goodwill and non-financial assets
Goodwill is tested for impairment annually or more frequently if there is an indication of impairment. The
carrying value of property and equipment and intangible assets is reviewed each reporting period to determine
whether indications of impairment exist. The recoverable amounts attributed to CGUs reflect the higher of fair
value less costs to sell or value in use. The Company’s determination of a CGU’s recoverable amount, which
could include an estimate of fair value less costs to sell, uses market information to estimate the amount the
Company could obtain from disposing of the asset in an arm’s length transaction, less the estimated cost of
disposal. The Company estimates value in use by discounting estimated future cash flows from the CGU or asset
to its present value using a pre-tax discount rate reflecting a current market assessment of the time value of
money and certain risks specific to the asset. Estimated cash flows are based on management’s assumptions and
business plans which are supported by internal strategies, plans and external information.
The estimate of the recoverable amount for an asset or CGU requires significant estimates such as future cash
flows and growth, coupled with terminal and discount rates.
Business combinations
Applying the acquisition method to business combinations requires an entity to measure each identifiable asset
and liability at fair value. The excess, if any, of the fair value of the consideration over the fair value of the net
identifiable assets acquired is recognized as goodwill. The purchase price allocation involves judgment with
respect to the identification of intangible assets acquired and estimates of fair value for assets acquired and
liabilities assumed, including pre-acquisition contingencies and contingent consideration. Changes in any of the
assumptions or estimates used to determine the fair value of acquired assets and liabilities assumed, including
pre-acquisition contingencies or contingent consideration, could affect the amounts assigned to assets, liabilities
and goodwill in the purchase price allocation.
Real Matters Inc. – September 30, 2017 - 59
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
The Company makes estimates, assumptions, and judgments when valuing goodwill and other intangible assets
in connection with the initial purchase price allocation of an acquired entity, in addition to evaluating the
recoverability of goodwill and other intangible assets on an ongoing basis. These estimates are based upon a
number of factors, including historical experience, market conditions, and information obtained from the
management of acquired companies. Critical estimates in valuing certain intangible assets include, but are not
limited to, historical and projected attrition rates, discount rates, anticipated revenue growth from acquired
customers, acquired technology, and the expected use of the acquired assets. These factors are also considered
in determining the useful life of acquired intangible assets. The amounts and useful lives assigned to identified
intangible assets also impacts the amount and timing of future amortization expense.
Unanticipated events and circumstances may affect the accuracy or validity of such assumptions, estimates or
actual results.
Internally generated intangible assets
The initial capitalization of costs is based on management’s judgment that technological and economic feasibility
is confirmed, usually when a product development project has reached a defined milestone according to an
established project management model. In determining the useful life of the internally generated intangible
asset, management makes assumptions regarding the expected periods of benefit. The amounts and useful lives
assigned to internally generated intangible assets impacts the amount and timing of future amortization
expense. The Company also makes judgments with regards to the point in time in which an internally generated
intangible asset may not be viable and the related costs are written-off.
Fair value of warrant liabilities
The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of warrant
liabilities, which requires the use of several input variables. The inputs to the model are subject to estimate and
changes in these inputs can materially impact the estimated fair value of warrant liabilities. The fair value
reported may not represent the transaction value if these warrants were exchanged at any point in time.
Share-based payments
The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of stock-based
compensation which requires the use of several input variables. The inputs to the model are subject to estimate
and changes in these inputs can materially affect the estimated fair value of stock-based compensation. The fair
value reported may not represent the transaction value if these options were exercised at any point in time.
Amortization of property and equipment and intangible assets
Judgment is applied to determine an asset’s useful life, and where applicable, estimated residual value, used in
the computation of amortization. Accordingly, an asset’s actual useful life and estimated residual value may
differ significantly from these estimates.
Where an item of property and equipment can be subdivided into its major components, and these components
are assessed as having different useful lives, the components are accounted for as separate items of property
and equipment. The application of this policy requires judgment in the determination of each significant
identifiable component.
Valuation of deferred income tax assets
The Company assesses its ability to generate taxable income in future periods from its internal budgets and
forecasts. Taxable income is adjusted to reflect certain non-taxable income and expense or the use of unused
credits and tax losses. The Company’s estimate of taxable income generated in the future, for the purposes of
determining the existence of a deferred tax asset, depends on many factors, including the Company’s ability to
(e)
(f)
(g)
(h)
(i)
Real Matters Inc. – September 30, 2017 - 60
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
generate income subject to tax and other substantive evidence. The occurrence or non-occurrence of certain
future events may lead to significant changes in the measurement of deferred tax assets.
Provisions
Due to the uncertain nature of provisions, there is a degree of uncertainty inherent in their measurement.
Management uses its best estimate to provide for potential losses. Assumptions used reflect the most probable
set of economic conditions and planned courses of action by the Company.
Other
Other areas where the Company employs judgment and estimate include, the determination of its allowance for
doubtful accounts, financial instruments, its control assessment of subsidiaries and contingencies related to
litigation, claims and assessments.
Recent Accounting Pronouncements
(j)
(k)
3.
Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers” (“IFRS 15”), which replaces IAS 18
“Revenue”, IAS 11 “Construction Contracts” and IFRIC 13 “Customer Loyalty Programmes”, as well as various other
interpretations applicable to revenue. IFRS 15 outlines a single comprehensive model for entities to use in accounting for
revenue arising from contracts with customers, except for contracts that are within the scope of the standards on leases,
insurance contracts, and financial instruments. The core principle of IFRS 15 requires an entity to recognize revenue in
accordance with the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-
step approach to revenue recognition: identify the contract(s) with a customer; identify the performance obligations in
the contract; determine the transaction price; allocate the transaction price to the performance obligations in the
contract; and recognize revenue when (or as) the entity satisfies a performance obligation. IFRS 15 also contains
enhanced disclosure requirements. This new standard is effective for annual periods beginning on or after January 1,
2018 and will be applied using either a full retrospective approach for all periods presented in the period of adoption or
a modified retrospective approach. Early adoption is permitted. The Company is still conducting a detailed assessment
to determine the impact of IFRS 15 on its financial statements. The Company has not yet determined which transition
method it will apply or whether it will use the optional exemptions or practical expedients available.
Accounting for Acquisitions of Interest in Joint Arrangements
In May 2014, the IASB issued amendments to IFRS 11 “Accounting for Acquisitions of Interest in Joint Arrangements (“IFRS
11”). The amendments to IFRS 11 provide guidance on how to account for the acquisition of a joint operation that
constitutes a business as defined in IFRS 3 “Business Combinations” (“IFRS 3”). Specifically, the amendments state that
the relevant principles on accounting for business combinations in IFRS 3 and other standards should be applied. The
same requirements should be applied to the formation of a joint operation if, and only if, an existing business is
contributed to the joint operation by one of the parties that participate in the joint operation. A joint operator is also
required to disclose the relevant information required by IFRS 3 and other standards for business combinations. The
amendments should be applied prospectively to acquisitions of interests in joint operations (in which the activities of the
joint operations constitute businesses as defined in IFRS 3) occurring for annual periods beginning on or after January 1,
2016. This guidance did not have an impact on the Company’s financial statements.
Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 “Financial Instruments” (“IFRS 9”). IFRS 9 issued in November 2009
introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently
amended in October 2010 to include classification and measurement requirements for financial liabilities and de-
recognition. In November 2013, follow on amendments included new requirements for general hedge accounting. The
final revision to IFRS 9 was issued in July 2014, which included impairment requirements for financial assets and limited
Real Matters Inc. – September 30, 2017 - 61
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
amendments to the classification and measurement requirements for certain simple debt instruments. The new standard
established a single classification and measurement approach for financial assets that reflects the business model in
which they are managed and their cash flow characteristics. It also provides guidance on an entity’s own credit risk
relating to financial liabilities. IFRS 9 is effective for annual periods beginning on or after January 1, 2018 and permits
early adoption. Based on an analysis of the Company’s financial assets and financial liabilities, they are expected to
continue to be measured on the same basis. The Company anticipates that the application of the expected credit loss
model of IFRS 9 may result in earlier recognition of credit losses for trade receivables. Since the Company currently does
not apply hedge accounting, the new requirements for general hedge accounting are not applicable.
Disclosure Initiative
In December 2014, the IASB issued Disclosure Initiative Amendments to IAS 1 “Presentation of Financial Statements” as
part of the IASB’s Disclosure Initiative. These amendments encourage entities to apply professional judgment regarding
disclosure and presentation in their financial statements and are effective for annual periods beginning on or after
January 1, 2016. The implementation of these amendments did not have a significant impact on the Company’s financial
statements.
In January 2016, the IASB issued Disclosure Initiative Amendments to IAS 7 “Statement of Cash Flows”, which is also part
of the IASB’s Disclosure Initiative. These amendments require entities to provide additional disclosures to enable financial
statement users to evaluate changes in liabilities arising from financing activities, including changes arising from cash
flows and non-cash changes. These amendments are effective for annual periods beginning on or after January 1, 2017,
with earlier application permitted. The impact of these amendments will result in additional disclosures in the notes to
the Company’s financial statements, where applicable.
Leases
In January 2016, the IASB issued IFRS 16 – “Leases” (“IFRS 16”), which replaces IAS 17 - Leases (“IAS 17”) and related
interpretations. IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for
all leases, unless the lease term is 12 months or less or the underlying value of the asset is low. IFRS 16 substantially
carries forward the lessor accounting in IAS 17 with the distinction between operating leases and finance leases being
retained. IFRS 16 will be applied using either a full retrospective approach for all periods presented in the period of
adoption or a modified retrospective approach for annual periods beginning on or after January 1, 2019. Early adoption
of IFRS 16 is permitted if IFRS 15 has also been applied. The Company intends to adopt the standard using the modified
retrospective approach but currently has no intention of early adopting the standard. As at September 30, 2017, the
Company has operating lease commitments of $10,213. A preliminary assessment indicates that these arrangements will
meet the definition of a lease under IFRS 16 and the Company expects to recognize new assets and liabilities in respect
of these operating leases, which principally relate to office space, upon adoption of IFRS 16. The new requirement to
recognize a right-of-use asset and a related lease liability is expected to have an impact on the amounts recognized in the
Company’s financial statements but the Company is still conducting a detailed assessment to determine the potential
impact. In addition, the nature and timing of expenses related to these leases will change as IFRS 16 replaces straight-
line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities.
For finance leases where the Company is a lessee and has already recognized an asset and a related finance lease liability
for the lease arrangement, the Company does not anticipate the application of IFRS 16 will have a significant impact on
the amounts recognized in its financial statements.
Income Taxes
In January 2016, the IASB issued “Recognition of Deferred Tax Assets for Unrealized Losses”, an amendment to IAS 12 –
“Income Taxes” (“IAS 12”). The amendments address accounting for deferred tax assets for unrealized losses on debt
instruments measured at fair value. The amendments are effective for annual periods beginning on or after January 1,
2017, with earlier application permitted. The implementation of these amendments is not expected to have a significant
impact on the Company’s financial statements.
Real Matters Inc. – September 30, 2017 - 62
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Share-Based Payment
In June 2016, the IASB issued amendments to IFRS 2 – “Share-based Payment” which clarifies how to account for the
effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share-based
payment transactions with a net settlement feature, and modifications to the terms and conditions that change the
classification of the transactions. These amendments are effective for annual periods beginning on or after January 1,
2018, with early adoption permitted. The implementation of these amendments is not expected to have a significant
impact on the Company’s financial statements.
Uncertainty over Income Tax Treatments
In June 2017, the IASB issued IFRS Interpretation Committee 23 – “Uncertainty over Income Tax Treatments”. The
interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty
over income tax treatments. The interpretation requires an entity to determine whether uncertain tax positions are
assessed separately or together with one or more uncertain tax positions, and in making such assessment, an entity is
required to assume that the taxation authority will examine amounts it has a right to examine and has full knowledge of
all information when making its examination. An entity must also consider the probability that the taxation authority will
accept an uncertain tax treatment used, or proposed to be used, by the entity in its income tax filings and reassess any
judgments and estimates made if the facts and circumstances change or new information becomes available. The
effective date of the interpretation is for annual periods beginning on or after January 1, 2019 applied retrospectively or
using a modified retrospective application without restatement of comparatives. Earlier application is permitted. The
adoption of the interpretation is not expected to have a significant impact on the Company’s financial statements.
4.
Acquisitions
Acquisition of equity accounted investees
Keylink National Title, LLC (“Keylink”)
Effective April 1, 2017, the Company purchased the remaining forty-nine percent interest in Keylink. Accordingly, the
Company re-measured its previously held fifty-one percent ownership interest at its estimated fair value upon obtaining
control. No gain or loss was recognized in the statement of operations and comprehensive income or loss since the
carrying amount of this investment already reflected its current fair value resulting from a previously recorded
impairment charge (Note 13).
The acquisition of Keylink qualified as a business and was accounted for using the acquisition method of accounting.
Accordingly, the results of Keylink have been consolidated in the financial statements of the Company from April 1, 2017.
Financial results before April 1, 2017 were recorded to net income or loss from equity accounted investees in the
statement of operations and comprehensive income or loss.
Real Matters Inc. – September 30, 2017 - 63
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Cash consideration paid, the carrying amount of the Company’s previously held equity method investment and the fair
value allocation to the net assets acquired were as follows:
2017
Consideration
Cash
Carrying amount of previously held equity method investment
Net assets acquired
Cash
Prepaid expenses
Goodwill (Note 6)
Trade payables
Accrued charges
Total net assets acquired
$
$
$
50
50
100
69
4
62
(3)
(32)
100
$
Goodwill was allocated to the Company’s U.S. segment and is deductible for tax purposes.
Linear Title & Settlement Services, LLC (“LTSS”)
Effective April 1, 2017, the Company amended the operating agreement with its LTSS joint venture partner. The
amendment resulted in the Company obtaining control over the joint venture. Therefore, LTSS became a controlled
subsidiary of the Company which required the Company to discontinue the use of equity method accounting. Accordingly,
the Company re-measured its previously held forty-nine percent ownership interest at its estimated fair value and
recorded a non-cash loss in the statement of operations and comprehensive income or loss upon obtaining control.
The acquisition of LTSS qualified as a business and was accounted for using the acquisition method of accounting.
Accordingly, the results of LTSS have been consolidated in the financial statements of the Company from April 1, 2017.
Financial results before April 1, 2017 were recorded to net income or loss from equity accounted investees in the
statement of operations and comprehensive income or loss.
The fair value of non-controlling interests, the carrying amount of the Company’s previously held equity method
investment, the re-measurement loss recorded, and the fair value allocation to the net assets acquired were as follows:
Fair value of fifty-one percent ownership interest (non-controlling interests)
Carrying amount of previously held equity method investment
Re-measurement loss on previously held equity method investment
Net assets acquired
Cash
Trade and other receivables
Prepaid expenses
Goodwill (Note 6)
Property and equipment (Note 7)
Trade payables
Accrued charges
Total net assets acquired
Real Matters Inc. – September 30, 2017 - 64
$
$
$
2017
1,496
2,414
(976)
2,934
409
468
6
2,185
29
(103)
(60)
2,934
$
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Goodwill was allocated to the Company’s U.S. segment and is not deductible for tax purposes. Goodwill arising from this
acquisition was largely attributable to the revenue streams generated from the relationship between the Company and
its joint venture partner.
Linear Title & Closing Ltd. (“Linear”)
On April 1, 2016, the Company acquired substantially all of the assets and liabilities of Linear. Linear provides residential
and commercial real estate title and closing services in the U.S. to lenders for refinance, purchase, and real estate owned
transactions. The Company is licensed or authorized to provide these services in 42 states, as well as Puerto Rico. In eight
states, the Company offers title and closing solutions through agreements with licensed title providers. The Company
also derives revenue from its abstracting services which are offered nationally to clients in the real estate industry and
provides access to its various software platforms to other title agencies for a subscription fee.
The Company completed the acquisition of Linear with the objective of leveraging its strong customer relationships,
established in the appraisal services market, in the title and closing market. The Company expects to further leverage its
network strategy.
The acquisition of Linear qualified as a business and was accounted for using the acquisition method of accounting.
Accordingly, the results of the acquisition have been included in the financial statements of the Company from the date
of closing.
Consideration and the final fair value allocation to net assets acquired were as follows:
2016
Consideration
Cash
Common shares
Contingent consideration
Net assets acquired
Cash
Trade and other receivables (net of $706 for amounts not expected to be collected)
Prepaid expenses
Intangibles (Note 5)
Goodwill (Note 6)
Property and equipment (Note 7)
Investment in equity accounted investees
Trade payables
Accrued charges
Finance lease obligations
Non-controlling interests (measured at fair value)
Total net assets acquired
$
$
$
44,165
22,000
31,772
97,937
2,295
5,155
214
55,920
33,011
1,700
7,694
(4,687)
(341)
(736)
(2,288)
97,937
$
Goodwill was allocated to the Company’s U.S. segment and is deductible for tax purposes. Goodwill arising on the
acquisition reflected the benefits attributable to synergies, revenue growth, future market development and the
estimated fair value of an assembled workforce. These benefits were not recognized separately from goodwill because
they did not meet the recognition criteria for identifiable intangible assets.
Contingent consideration was principally comprised of earn-out payments due to certain sellers for meeting certain
performance conditions. The Company assessed the amounts payable at full for each earn-out payment, reflecting its
assessment of the markets, historical performance, expectations about future performance, the economic environment,
Real Matters Inc. – September 30, 2017 - 65
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
and other factors that could meaningfully impact the earn-outs. The estimated amount payable in respect of the
acquiree’s first year performance was not discounted and was included in accrued charges on the Company’s
consolidated statement of financial position. The earn-out for the acquiree’s first year performance was achieved and
$20,000 was paid in May 2017.
The estimated $10,000 amount payable in respect of the acquiree’s second year earn-out has been discounted at a rate
of 3.85% and was recorded to other liabilities on the Company’s consolidated statement of financial position until March
31, 2017 and has since been reclassified to accrued charges. In addition, the Company is required to reimburse the sellers
up to $2,500 in the event that the sellers are liable for additional tax owing to the regulatory authorities as a result of the
acquisition’s structure. The Company has entered into a subsequent agreement with the sellers of Linear which will result
in the Company guaranteeing the second year earn-out at $10,000. In addition, the subsequent agreement will settle the
Company’s contingent obligation to reimburse the sellers for certain tax amounts for no consideration. Accordingly, the
amount previously accrued for contingent tax amounts totaling $2,500 has been reversed. The reversal was recorded to
acquisition and initial public company costs in the consolidated statements of operations and comprehensive income or
loss.
Linear contributed revenues of $37,232 and a net loss of $255 to the Company’s results of operations for 2016 from its
date of closing.
The following unaudited pro forma results of operations assume Linear was acquired by the Company on October 1,
2015:
2016
(unaudited)
Revenues
Net loss
Net loss attributable to common shareholders
Net loss per weighted average share, basic(1)
Net loss per weighted average share, diluted(1)
Note
(1) Net loss per weighted average share, basic and diluted, have been restated to reflect the share consolidation which took effect immediately prior to
the closing of the Offering.
$
$
$
276,490
(9,340)
(9,542)
$
$
(0.13)
(0.13)
The pro forma results of operations are not intended to reflect the results that would have actually occurred had the
acquisition closed on October 1, 2015. Further, the pro forma results of operations are not necessarily indicative of the
results that may be generated by the Company in the future, or reflect future events that may occur following the
acquisition in a subsequent period or periods.
The net cash outflow related to the acquisition of Linear was as follows:
Consideration paid in cash
Less: cash balances acquired
$
$
44,165
2,295
41,870
Other Acquisition
On January 4, 2016, the Company acquired a business, comprising certain assets and liabilities of the Mark to Market
(“M2M”) business, from Mortgage Specialists International LLC. M2M arranged or facilitated valuation services, including
appraisals and broker price opinions (“BPOs”).
Real Matters Inc. – September 30, 2017 - 66
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Management acquired M2M to diversify its product offerings to include BPOs. In addition, management intends to cross-
sell services amongst and between customers in its existing and newly acquired business.
The acquisition of M2M qualified as a business and was accounted for using the acquisition method of accounting.
Accordingly, the results of the acquisition have been included in the financial statements of the Company from the date
of closing.
Consideration and the final fair value allocation to net assets acquired, were as follows:
Consideration
Cash
Net assets acquired
Trade and other receivables
Intangibles (Note 5)
Goodwill (Note 6)
Property and equipment (Note 7)
Trade payables
Total net assets acquired
2016
$
4,340
612
2,673
1,300
128
(373)
4,340
$
Goodwill was allocated to the Company’s U.S. segment and is deductible for tax purposes. Goodwill arising on the
acquisition reflected the benefits attributable to synergies, revenue growth and future market development. These
benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable
intangible assets.
Acquisition expenses
Transaction costs for acquisitions are included in acquisition and initial public offering costs. For the year ended
September 30, 2017, no transaction costs were incurred for current year acquisitions (September 30, 2016 - $2,202 and
$204 for the Linear and M2M acquisitions, respectively). For the year ended September 30, 2017, the Company recorded
a recovery of $1,344 to acquisition costs. The recovery was due to the reversal of the contingent liability for additional
tax owing by the sellers of Linear partially offset by adjustments to receivable amounts for net working capital.
Real Matters Inc. – September 30, 2017 - 67
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
5.
Intangibles
Cost
Balance, beginning
of year
Additions
Additions,
acquisitions
Foreign currency
translation adjustment
Balance, end of year
Accumulated amortization
Balance, beginning
of year
Amortization
Foreign currency
translation adjustment
Balance, end of year
Net carrying value,
end of year
Cost
Balance, beginning
of year
Additions
Additions,
acquisitions (Note 4)
Foreign currency
translation adjustment
Balance, end of year
Accumulated amortization
Balance, beginning
of year
Amortization
Other movements
Foreign currency
translation adjustment
Balance, end of year
Net carrying value,
end of year
Internally
generated
intangible
assets
Customer
relation-
ships Brand name
Technology
Licenses
Total
2017
$
8,371
-
$
55,984
-
$
2,297
-
$
5,720
-
$
13,840
-
$
86,212
-
-
-
-
-
-
-
427
8,798
$
310
56,294
$
-
2,297
$
-
5,720
$
-
13,840
$
737
86,949
$
$
7,959
$
19,032
$
718
$
1,411
$
574
$
29,694
380
15,140
720
1,907
1,502
19,649
425
8,764
$
310
34,482
$
-
1,438
$
-
3,318
$
-
2,076
$
735
50,078
$
$
34
$
21,812
$
859
$
2,402
$
11,764
$
36,871
Internally
generated
intangible
assets
Customer
relation-
ships Brand name
Technology
Licenses
Total
2016
$
8,198
-
$
17,013
3
$
812
-
$
1,295
-
-
$
-
$
27,318
3
-
38,843
1,485
4,425
13,840
58,593
173
8,371
$
125
55,984
$
-
2,297
$
-
5,720
$
-
13,840
$
298
86,212
$
$
6,893
$
9,276
$
223
$
178
$
-
$
16,570
909
-
9,631
-
495
-
1,230
3
574
-
12,839
3
157
7,959
$
125
19,032
$
-
$
718
-
1,411
$
-
$
574
282
29,694
$
$
412
$
36,952
$
1,579
$
4,309
$
13,266
$
56,518
Real Matters Inc. – September 30, 2017 - 68
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
6.
Goodwill
Cost
Balance, beginning of year
Acquisitions (Note 4)
Balance, end of year
Accumulated impairment
Balance, beginning of year
Balance, end of year
Net carrying value, end of year
2017
2016
$
$
$
$
56,643
2,247
58,890
22,332
34,311
56,643
$
-
$
-
$
-
$
-
$
58,890
$
56,643
The carrying value of the Company’s goodwill as at September 30, 2017 and 2016 has been fully allocated to a group of
CGUs which ultimately represents its U.S. segment.
Impairment testing
The value in use for each CGU group is determined by discounting three-year cash flow projections from financial
forecasts developed by senior management. Projections reflect past experience and future expectations of operating
performance. The Company applied perpetuity growth rates to cash flows in the terminal year. None of the perpetuity
growth rates exceed the long-term historical growth rates for the markets in which the Company operates. The discount
rates applied to the cash flow projections are derived from the weighted average cost of capital adjusted for a size
premium for each group of CGUs.
The following table outlines the key assumptions used to estimate the recoverable amounts of the Company’s CGU group
where goodwill has been allocated:
Key assumptions used
Pre-tax discount rate
Perpetuity growth rate
2017
U.S. Segment
2016
U.S. Segment
21.3%
2.4%
24.2%
2.5%
Management believes that any reasonably possible change in the key assumptions would not cause the carrying amount
of the CGU group to exceed its recoverable amount.
Real Matters Inc. – September 30, 2017 - 69
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
7.
Property and Equipment
Computer
equipment
Furniture and
fixtures
Leasehold
improve-
ments
2017
Total
$
$
$
$
Cost
Balance, beginning of year
Additions
Additions, acquisitions (Note 4)
Disposals
Other movements and transfers
Foreign currency translation adjustment
Balance, end of year
Accumulated amortization
Balance, beginning of year
Amortization
Disposals
Other movements and transfers
Foreign currency translation adjustment
Balance, end of year
Cost
Balance, beginning of year
Additions
Additions, acquisitions (Note 4)
Disposals
Foreign currency translation adjustment
Balance, end of year
Accumulated amortization
Balance, beginning of year
Amortization
Disposals
Foreign currency translation adjustment
Balance, end of year
$
$
$
$
$
$
$
$
2,384
541
3
(54)
123
27
3,024
808
911
(54)
88
18
1,771
1,120
504
1,075
(411)
96
2,384
486
728
(411)
5
808
1,456
431
26
-
(123)
12
1,802
429
367
-
(44)
3
755
600
589
323
(80)
24
1,456
240
266
(80)
3
429
2,235
835
-
-
-
46
3,116
806
314
-
20
37
1,177
1,421
379
430
-
5
2,235
627
168
-
11
806
6,075
1,807
29
(54)
-
85
7,942
2,043
1,592
(54)
64
58
3,703
3,141
1,472
1,828
(491)
125
6,075
1,353
1,162
(491)
19
2,043
$
$
$
$
$
$
$
$
$
$
$
$
Net carrying value, end of year
$
1,253
$
1,047
$
1,939
$
4,239
Computer
equipment
Furniture and
fixtures
Leasehold
improve-
ments
2016
Total
$
$
$
$
$
$
$
$
Net carrying value, end of year
$
1,576
$
1,027
$
1,429
$
4,032
At September 30, 2017, assets under finance leases totaled $202 (2016 - $220). There were no impairment write-downs
or any reversals of previous write-downs in the years presented.
Real Matters Inc. – September 30, 2017 - 70
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
8.
Long-Term Debt
Senior term facilities
Revolving credit facility
Deferred financing costs(1)
Less: accumulated amortization
Total
Less: current portion of long-term debt
2017
2016
-
$
-
$
-
-
$
-
$
-
-
$
-
$
-
$
$
16,196
-
16,196
$
$
(484)
79
(405)
$
$
15,791
1,400
14,391
Note
(1) Deferred financing costs were reclassified to other assets on the consolidated statements of financial position subsequent to the repayment of all
amounts under the senior term facilities after the closing of the Offering.
Senior term facilities (the “senior facilities”)
In February 2016, the Company entered into an agreement for a committed term loan of $27,000 (the “2016 facility”).
The 2016 facility requires the Company to make quarterly principal repayments of $150 and a $4,650 balloon payment
at maturity. The 2016 facility matures on April 1, 2021 and bears interest ranging from Prime + 0.25% to 1.75% or LIBOR
+ 1.50% to 3.00%. At September 30, 2017, the Company had drawn $nil (2016 - $7,196) on the 2016 facility.
In May 2015, the Company through its subsidiary, Solidifi U.S. Inc., entered into an agreement for a committed term loan
of $20,000 (the “2015 facility”). The 2015 facility requires the Company to make quarterly principal repayments of $200
and a $6,200 balloon payment at maturity. The 2015 facility matures on May 1, 2020 and bears interest ranging from
Prime +0.25% to 1.75% or LIBOR +1.50% to 3.00%. At September 30, 2017, the Company had drawn $nil (2016 - $9,000)
on the 2015 facility.
All amounts drawn on the senior facilities were repaid in connection with the Offering as required by the mandatory
prepayment conditions of this indebtedness.
Unutilized portions of the facilities continue to be available to the Company subject to the original terms of the senior
facilities.
Revolving credit facility
The Company has available a demand revolving credit facility (the “revolving credit facility”) totaling C$15,000. The
revolving credit facility bears interest ranging from Prime +0.25% to 1.75% or LIBOR +1.50% to 3.00%. At September 30,
2017, the Company had drawn $nil (2016 - $nil) on the revolving credit facility. Availability under the revolving credit
facility is subject to good quality receivables.
Security and debt covenants
All facilities are secured by a general security agreement, which provides the lender with a first, fixed and floating charge
over all assets, including intellectual property, an unlimited guarantee and postponement of claim by all wholly owned
subsidiaries, and certain other securities.
The Company is subject to certain covenants and was in compliance with all such covenants related to these facilities,
including financial covenants regarding debt and fixed charge coverage ratios and capital expenditure restrictions, as of
September 30, 2017.
Real Matters Inc. – September 30, 2017 - 71
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Interest expense recognized in the current year is comprised of the following:
2017
2016
Senior and revolving credit facilities
Amortization of deferred financing costs
Accretion
Finance leases
Other
9.
Warrant Liabilities
$
$
343
104
363
66
13
889
378
79
177
42
11
687
$
$
The Company had issued special warrants which were exchangeable for common share purchase warrants. All special
warrants were automatically converted into common share purchase warrants on the completion of the Offering
(together with other satisfied events). All outstanding purchase warrants are exercisable and expire between two and
five years following the date of the Offering. Warrant liabilities convert into the Company’s common shares when
exercised and the associated non-cash liability will be reclassified to share capital. The non-cash liability associated with
any warrants that expire unexercised will be recorded as a gain in the consolidated statement of operations and
comprehensive income or loss. There are no circumstances which require the Company to pay cash upon exercise or
expiry of the warrants.
From May 11, 2017 to September 30, 2017, 674 warrants were exercised, of which 435 were exercised in a cashless
conversion, resulting in the issuance of 627 common shares. These warrants had a fair value of $4,961 at the date of
exercise, determined using the Black-Scholes-Merton option pricing model and this amount was transferred from warrant
liabilities to common shares. The Company also recorded a $240 loss, resulting from fair valuing the warrants on exercise,
to the consolidated statement of operations and comprehensive loss.
At September 30, 2017, there were 1,732 (September 30, 2016 – 2,406) warrants outstanding after giving effect to the
share capital changes occurring immediately prior to the closing of the Offering, all having an exercise price of C$1.38
(September 30, 2016 - C$1.38) per share and representing a total liability of $12,820 at September 30, 2017 (September
30, 2016 - $12,148).
Warrants are measured at fair value using the Black-Scholes-Merton option pricing model applying the following
assumptions: volatility of 13.7% (2016 - 16.2%), a risk-free interest rate of 1.14% (2016 - 0.52%), a dividend yield of nil%
(2016 - nil %) and expected life of 26 months (2016 - 7 months).
10.
Shareholder’s Equity
Common shares
Prior to the Offering, the Company’s authorized share capital consisted of an unlimited number of Class A and Class B
common shares having no par value. There were 153,646 Class A common shares and no Class B common shares issued
and outstanding at that time.
Immediately prior to the closing of the Offering, the Company amended its articles to effect the share capital changes
outlined in Note 1.
As a result of these changes, the authorized share capital of the Company consisted of an unlimited number of common
shares, of which 77,242 common shares were issued and outstanding immediately prior to the Offering, and an unlimited
number of preferred shares, none of which were issued and outstanding.
Real Matters Inc. – September 30, 2017 - 72
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Following the share reorganization, the Company issued 9,620 common shares from treasury in connection with the
Offering for cash proceeds of $93,756. The Company incurred share issuance costs of $6,000 and the related tax effect
thereon was $1,566.
Details of common shares are as follows:
Number of
shares
2017
Amount
Balance, beginning of year
Common shares issued, net of issue costs and income taxes, during the year
Common shares issued on exercise of stock options, during the year
Common shares issued on exercise of warrants, during the year
Balance, end of year
75,128
10,370
1,407
627
87,532
$
$
164,629
89,330
454
5,212
259,625
Number of
shares(1)
2016
Amount
Balance, beginning of year
Common shares issued, net of issue costs and income taxes, during the year
Common shares issued as partial consideration for an acquisition
Balance, end of year
Note
(1) The number of common shares have been restated to reflect the share consolidation which took effect immediately prior to the closing of the
Offering.
98,871
43,758
22,000
164,629
63,880
7,500
3,748
75,128
$
$
On April 4, 2016, the Company completed a private placement and issued 7,500 common shares in exchange for cash
proceeds of $45,251 to partially fund the acquisition of Linear, (Note 4). In connection with this private placement, the
Company incurred share issuance costs of $2,031 and the related tax effect thereon totaled $538. In conjunction with
the Linear acquisition, the Company also issued 3,748 common shares to the sellers of Linear representing consideration
of $22,000.
In connection with this private placement, the Company was further obligated to issue an additional 750 common shares
for no consideration if it did not complete its IPO before the end of calendar year 2016. An additional 750 common shares
were issued in January 2017 as the Company did not meet the target date for the completion of its IPO.
Real Matters Inc. – September 30, 2017 - 73
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
11.
Net Loss per Weighted Average Share
The following table outlines the components used in the calculation of basic and diluted net loss per share attributable
to common shareholders:
Net loss
Net loss attributable to common shareholders
Weighted average number of shares, basic
Dilutive effect of stock options and warrants
Dilutive effect of contingently issuable common shares (Note 10)
Weighted average number of shares, diluted
2017
2016(1)
$
$
(23,769)
(24,014)
$
$
(6,079)
(6,281)
80,280
4,812
-
85,092
69,489
6,367
750
76,606
Net loss per weighted average share, basic
Net loss per weighted average share, diluted
Note
(1) The weighted average number of shares, basic and diluted, the dilutive effect of stock options, warrants and contingently issuable common shares
and net loss per weighted average share, basic and diluted, have been restated to reflect the share consolidation which took effect immediately prior
to the closing of the Offering outlined in Note 1.
$
$
$
$
(0.30)
(0.30)
(0.09)
(0.09)
12.
Operating Expenses and Acquisition and Initial Public Offering Costs
2017
2016
Operating expenses:
Salaries and benefits
Sales and marketing
Travel and entertainment
Office and computer
Professional fees
Other
Acquisition and initial public offering costs:
Acquisition (recovery) costs
Initial public offering costs
$
$
64,739
951
2,221
12,532
2,753
3,215
86,411
(1,344)
2,953
1,609
$
$
2017
2016
$
$
$
$
41,507
863
1,529
7,779
2,090
1,708
55,476
2,406
599
3,005
For the year ended September 30, 2017, the Company recognized an expense of $622 (2016 - $308) in salaries and
benefits, which represents contributions made in connection with defined contribution plans.
Real Matters Inc. – September 30, 2017 - 74
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
13.
Impairment of Assets
In April 2017, the Company and two of its joint venture partners had discussions to end their joint venture arrangements.
These discussions constituted an indication of impairment under IAS 36, Impairment of Assets. Accordingly, the Company
assessed the recoverable amount of these equity accounted investments. As a result of this assessment, the two
investments in equity accounted investees recorded in the Company’s U.S. segment were determined to be impaired.
The Company recorded an impairment charge of $5,096 to the consolidated statement of operations and comprehensive
loss. The charge was determined by comparing the carrying value of the investments to their fair value less costs of
disposal. The Company estimated fair value based on information available reflecting the amount that it could obtain
from the disposal of the investments in an arm’s length transaction, Level 2 in the fair value hierarchy. The resulting
carrying value of these investments was $50 following the impairment charge.
14.
Changes in Non-Cash Working Capital Items
The following table outlines changes in non-cash working capital items:
Trade and other receivables
Prepaid expenses
Trade payables
Accrued charges
Deferred revenues
Effect of foreign currency translation adjustments and
other non-cash changes
15.
Stock Based Compensation
2017
2016
$
(2,420)
(335)
(7,364)
(3,960)
(7)
$
(9,289)
202
452
2,317
(31)
2,570
(11,516)
$
(2,082)
(8,431)
$
The Company had a legacy stock option plan (the “legacy plan”) for directors, officers, contractors and employees. Stock
options granted under the legacy plan qualified to vest in accordance with the qualification schedule determined by the
board of directors or compensation committee as set out in the stock option certificate. A qualified stock option
represented the portion of an option qualified to vest in accordance with the qualification schedule specified in the stock
option certificate and included the portion of options that would otherwise have qualified to vest within twelve months
of a vesting event. Qualified stock options vest and are exercisable on the occurrence of certain vesting events.
In February 2017, the vesting event for 945 qualified options (reflecting the share consolidation) was modified to allow
for these awards to vest immediately. All 945 stock options were exercised following the modification. As a result of this
modification, the Company recognized stock-based compensation expense of $53.
On November 7, 2016, the Company awarded a certain director 25 stock options (reflecting the share consolidation). On
December 15, 2016, the Company awarded certain employees and a director 207 stock options (reflecting the share
consolidation). Options granted to directors, 50, vested immediately on grant, while the balance of the options vest
equally on their grant date and their first, second and third anniversary from the date of grant. All options expire on the
10th anniversary from the date of grant.
In conjunction with the Offering, stock options granted under the legacy plan to acquire Class A common shares were
consolidated on a two-for-one basis to acquire common shares at a post-consolidation exercise price, leaving the value
of such options unchanged. The closing of the Offering was a deemed vesting event under the Company’s legacy plan,
such that all qualified stock options vested and became exercisable. Options which were not qualified options as of the
closing date of the Offering continue to time vest in accordance with the provisions of the qualification schedule issued
Real Matters Inc. – September 30, 2017 - 75
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
concurrent with the original grant and once time vested, are exercisable. Following the Offering, no additional options
will be granted under the legacy plan and any outstanding legacy plan options will be governed by the terms of the
Company’s newly adopted long-term incentive plan (“LTIP”).
LTIP
The purpose of the LTIP is to attract and retain the best available personnel for positions of substantial responsibility, to
provide additional incentive to employees, directors and consultants and to promote the success of the Company’s
business. The following types of awards may be issued under the LTIP: restricted share units (“RSUs”), performance share
units (“PSUs”) or stock options. The Company’s current intention is to only issue stock options as long-term incentive and
has no intention to grant RSUs or PSUs.
RSUs
Subject to the discretion of the plan administrator, RSUs granted under the LTIP vest equally on their first, second and
third anniversary from the date of grant. Upon vesting, holders will receive, at the option of the Company, either one
common share from treasury for each vested RSU or the cash equivalent in respect of each vested RSU.
PSUs
A PSU entitles the holder to receive common shares based on the achievement of performance goals over a period of
time as established by the plan administrator. The performance goals established by the plan administrator may be based
on the achievement of corporate, divisional or individual goals, and may be established relative to performance against
an index or comparator group, in each case as determined by the plan administrator. The performance goals may include
a threshold level of performance below which no payment will be made, levels of performance at which specified
payments will be made and a maximum level of performance above which no additional payment will be made. Upon
vesting, holders will receive, at the option of the Company, either common shares issued from treasury in proportion to
the number of vested PSUs held and the level of performance achieved or the cash equivalent.
RSUs and PSUs shall be credited with dividend equivalents in the form of additional RSUs or PSUs, as applicable. Dividend
equivalents shall vest in proportion to the awards to which they relate.
Stock options
Subject to the discretion of the plan administrator, stock options granted under the LTIP vest equally on their first, second
and third anniversary from the date of grant. Each stock option expires on the date that is the earlier of 10 years from
the date of grant or such earlier date as may be set out in the participant’s award agreement.
On May 11, 2017, the Company awarded certain executive officers, directors and employees an aggregate of 1,325 stock
options all having an exercise price equal to the Offering price and expiring 10 years from the date of grant. Options
granted to directors, 203, vested immediately on grant, while the balance of the options vest equally on their first, second
and third anniversary from the date of grant.
On May 17, 2017, the Company awarded certain employees an aggregate of 18 stock options. All the options granted
vest equally on their first, second and third anniversary dates and expire on the 10th anniversary from the date of grant.
On August 15, 2017, the Company awarded certain employees an aggregate of 52 stock options. All the options granted
vest equally on their first, second, and third anniversary dates and expire on the 10th anniversary from the date of grant.
To estimate the fair value of its options, the Company used the Black-Scholes-Merton option pricing model which requires
the use of several input variables. These variables include the expected volatility, the risk free interest rate and the
estimated length of time employees will retain their options before exercising them. Changes in these variables can
materially impact the estimated fair value of stock-based compensation and consequently, the related amount
recognized to operating expenses in the consolidated statement of operations and comprehensive income or loss. In
calculating the fair value of stock options at the date of grant, the following weighted average assumptions were used:
Real Matters Inc. – September 30, 2017 - 76
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Grant date - November 7, 2016 and December 15, 2016
Dividend yield
Expected volatility
Risk free interest rate
Expected remaining life, stated in years
Exercise price (expressed in C$)
Fair value, per option (expressed in C$)
Grant date - May 11, 2017
Dividend yield
Expected volatility
Risk free interest rate
Expected remaining life, stated in years
Exercise price (expressed in C$)
Fair value, per option (expressed in C$)
Grant date - May 17, 2017
Dividend yield
Expected volatility
Risk free interest rate
Expected remaining life, stated in years
Exercise price (expressed in C$)
Fair value, per option (expressed in C$)
Grant date - August 15, 2017
Dividend yield
Expected volatility
Risk free interest rate
Expected remaining life, stated in years
Exercise price (expressed in C$)
Fair value, per option (expressed in C$)
Outstanding balance, beginning of year
Granted, during the year
Exercised, during the year(2)
Forfeited, during the year
Outstanding balance, end of year
2017
Weighted
average
exercise price
(C$),
expressed in
dollars
Number of
options
6,315
1,627
(1,483)
(329)
6,130
$
$
$
$
$
2.46
12.50
0.82
4.57
5.40
-
16.7%
0.8%
6.0
10.50
1.92
$
$
-
16.0%
1.3%
5.9
13.00
2.44
$
$
-
16.3%
1.3%
6.0
12.80
2.48
$
$
-
18.3%
1.1%
6.0
8.63
1.78
$
$
2016(1)
Weighted
average
exercise price
(C$), expressed
in dollars
Number of
options
5,723
822
-
(230)
6,315
1.74
$
$
7.20
$
-
$
1.80
$
2.46
Options outstanding and exercisable
Notes
(1) The number of options and weighted average exercise price have been restated to reflect the share consolidation which took effect immediately
prior to the closing of the Offering.
(2) During the year, 495 options, included in the total number of options exercised, were exercised on a cashless basis which resulted in the issuance of
419 common shares.
$
-
$
4,511
3.28
-
Real Matters Inc. – September 30, 2017 - 77
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
The Company recorded stock option expense of $3,497 (2016 - $nil) to operating expenses in the consolidated statement
of operations and comprehensive income or loss for the year ended September 30, 2017.
The following table summarizes certain information for stock options outstanding as at September 30, 2017:
Exercise price,
expressed in C$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.91
1.23
1.69
1.84
2.21
2.28
2.40
4.60
5.00
8.00
8.63
10.50
12.80
13.00
Weighted
average
remaining
contractual
life, expressed
in years
Number of
options
Number of
stock options
exercisable
301
218
445
722
134
178
1,643
156
224
529
50
218
18
1,294
6,130
1.09
1.86
2.46
4.45
5.56
2.97
6.86
7.79
8.15
8.72
9.88
9.20
9.63
9.61
6.58
301
218
445
722
134
178
1,616
135
122
344
-
93
-
203
4,511
16.
Related Party Transactions
Compensation of Key Management Personnel
The Company’s key management personnel comprise the board of directors and certain members of the executive team.
Compensation for key management personnel, recorded to operating expenses, was as follows:
Salaries and benefits
Stock-based compensation
2017
2016
$
$
2,466
2,586
$
3,109
$
-
Equity Accounted Investees
The Company provides services to, and purchases services from, its equity accounted investees. Transactions during the
year were as follows:
Services sold
Services purchased
$
$
2017
326
115
$
$
2016
711
652
The following balances were outstanding at the end of the year between the Company and its equity accounted investees:
Amounts owed by equity accounted investees
Amounts owed to equity accounted investees
2017
$
506
$
-
$
$
2016
825
844
Real Matters Inc. – September 30, 2017 - 78
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
17.
Commitments and Contingencies
The Company leases office space and equipment under various operating leases. Payments for the next five years ending
September 30 and thereafter are as follows:
2018
2019
2020
2021
2022
Thereafter
$
2,282
1,833
1,440
1,160
1,102
2,396
10,213
$
The Company has entered into finance leases for computer equipment and furniture and fixtures with maturities and
interest rates ranging from 2018 to 2020 and 2.2% to 12.5%, respectively. Future minimum lease payments required
under finance lease obligations in each of the next five years ending September 30 and thereafter are as follows:
2018
2019
2020
2021
2022
Thereafter
Less: amount representing interest
Less: current portion
$
410
161
9
-
-
-
580
38
542
402
140
$
The Company administers escrow accounts which represent undisbursed funds received for the settlement of certain
residential and commercial real estate title and closing transactions. Deposits at Federal Deposit Insurance Corporation
(“FDIC”) institutions are insured up to $250. Cash deposited in these escrow accounts totaled $57,890 at September 30,
2017 (2016 - $77,876) which are not assets of the Company and, therefore excluded from the Company’s consolidated
statements of financial position. However, the Company remains contingently liable for the distribution of these deposits.
The Company has been named as defendant in a putative collective action lawsuit filed on October 17, 2016 (the
“Complaint”) on behalf of certain current and former employees of the Company. The Complaint alleges, amongst other
things, that the Company owes certain employees overtime compensation for work performed. The Company has
determined that the collective action applies to approximately 30 current and former employees of the Company. The
opt-in period for the collective action expired with a total of six former employees joining.
The Company intends to vigorously defend the Complaint. Based on the Company’s review of the claim and consultation
with external counsel, $120 has been accrued in respect of this matter.
The Company is also subject to certain lawsuits and other claims arising in the ordinary course of business. The outcome
of these matters is subject to resolution. Based on management’s evaluation and analysis of these matters, when
determinable, the amount of any potential loss is accrued. Management believes that any amounts above those accrued
will not be material to the financial statements.
Real Matters Inc. – September 30, 2017 - 79
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
18.
Financial Instruments
The following tables outline the hierarchical measurement categories for the fair value of financial assets and liabilities.
At September 30, 2017 and 2016, financial assets and liabilities measured on a recurring basis had the following estimated
fair values expressed on a gross basis:
Warrant liabilities
Contingent consideration - accrued charges
Quoted prices in
active markets
for identical
assets
(Level 1)
$
-
-
$
-
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
2017
Total
$
$
(12,820)
-
(12,820)
$
-
(9,813)
(9,813)
$
$
$
(12,820)
(9,813)
(22,633)
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
2016
Total
Warrant liabilities
Contingent consideration - accrued charges
Contingent consideration - other liabilities
-
$
-
-
$
-
-
$
-
-
$
-
$
$
(12,148)
(22,500)
(9,450)
(44,098)
(12,148)
(22,500)
(9,450)
(44,098)
$
$
For financial instruments that are recognized at fair value on a recurring basis, the Company determines whether
transfers have occurred between levels of the fair value hierarchy by re-assessing categorization at the end of the
reporting period. For the year ended September 30, 2017, transfers out of Level 3 related to warrant liabilities as a
significant previously unobservable input (Level 3) became observable (Level 2) due to the Offering.
For the year ended September 30, 2017, there were no changes to the valuation techniques.
The following table outlines the change in estimated fair value for recurring Level 3 financial instrument measurements
for the years ended September 30, 2017 and 2016, respectively:
Significant unobservable inputs (Level 3)
Balance, beginning of year
Issued as contingent consideration for an acquisition
Unrealized losses included in the consolidated
statement of operations, during the year
Settlements
Transfers out, during the year
Foreign currency translation adjustment
Balance, end of year
2017
2016
$
(44,098)
-
$
(6,514)
(31,772)
(2,875)
25,486
12,820
(1,146)
(9,813)
$
(5,615)
-
-
(197)
(44,098)
$
Details regarding the fair value of contingent consideration are outlined in Note 4.
Real Matters Inc. – September 30, 2017 - 80
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
The fair value of warrant liabilities are calculated using the Black-Scholes-Merton option pricing model which is subject
to considerable judgment and estimate. Accordingly, the fair value estimate is not necessarily indicative of the amount
the Company, or a counter-party to the instrument, could realize in a current market exchange. The use of differing
assumptions, and or estimation methods, could affect fair value.
Estimated fair value
The carrying value of cash and cash equivalents, trade and other receivables, trade payables and accrued charges
approximate their fair values due to the relatively short-term maturities of these instruments.
Financial risk management
In the normal course of business, the Company is exposed to financial risks that have the potential to impact its financial
performance, including credit risk, liquidity risk and market risk. The Company’s primary objective is to protect its
operations, cash flows and ultimately shareholder value. The Company designs and implements risk management
strategies but does not typically use derivative financial instruments to manage these risks.
Credit risk
Credit risk is the risk that the Company’s counterparties will fail to meet their financial obligations to the Company,
causing the Company a financial loss. The Company’s principal financial assets are cash and cash equivalents and trade
and other receivables. The carrying amounts of financial assets on the consolidated statements of financial position
represent the Company’s maximum credit exposure at the statement of financial position date. The Company’s credit
risk is primarily attributable to its trade receivables which is limited by the Company’s broad customer base. At
September 30, 2017, one customer represented more than 10% (2016 – no customers represented more than 10%) of
the Company’s total trade and other receivables.
To limit credit risk, the Company monitors its aged receivable balances on a continuous basis. In addition, a significant
portion of the Company’s revenue is settled on closing through an escrow account having no credit terms attributable to
collection. The Company’s customers are financial and lending institutions that are typically well funded, which also limits
the Company’s exposure to credit risk. In certain circumstances, the Company may also require customer deposits or pre-
payments to limit credit risk. While the Company has risk mitigation processes in place, there can be no certainty that it
can eliminate all credit risk. Accordingly, these processes may not be effective in the future and the potential for credit
losses may increase.
Trade and other receivables
Trade receivables
Settlement receivables
Other
Allowance for doubtful accounts
2017
2016
$
$
30,789
935
1,153
(777)
32,100
26,422
1,217
1,583
(10)
29,212
$
$
The following table outlines the change in the allowance for doubtful accounts:
Balance, beginning of year
Impairment losses recognized, during the year
Write-offs, during the year
Recoveries, during the year
Foreign currency translation adjustment
Balance, end of year
2017
2016
$
(10)
(848)
84
-
$
(19)
(326)
333
-
$
(3)
(777)
$
2
(10)
Real Matters Inc. – September 30, 2017 - 81
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
The aging of trade and other receivables was as follows:
2017
2016
Current
Over 30 days
Over 60 days
Over 90 days
Total gross trade and other receivables
Less: allowance for doubtful accounts
Total trade and other receivables
$
$
23,403
5,110
1,149
3,215
32,877
777
32,100
21,660
4,114
1,354
2,094
29,222
10
29,212
$
$
Foreign currency risk
Foreign currency risk arises because of fluctuations in foreign currency exchange rates. The Company’s objective is to
minimize its net exposure to foreign currency cash flows by holding U.S. dollar cash balances and matching them with
U.S. dollar obligations arising from its U.S. operations and matching Canadian dollar obligations to its Canadian
operations.
Since the Company has elected to report its financial results in U.S. dollars, the Company is exposed to foreign currency
fluctuations on its reported amounts of Canadian assets and liabilities. As at September 30, 2017, the Company had net
assets of $51,687 (2016 – net liabilities of $18,201) denominated in Canadian dollars. A 10% change in the exchange rate
between the U.S. and Canadian dollar results in plus or minus $5,169 (2016 - $1,820) change in the value of net assets
recorded on the Company’s statements of financial position. All such changes are recorded to other comprehensive
income or loss.
Interest rate risk
The Company’s drawings on its senior facilities and revolving credit facility are subject to interest rate fluctuations with
bank prime or LIBOR. Accordingly, senior facility and revolving facility drawings, if any, are subject to interest rate risk.
Since the Company currently has no amounts drawn on its senior facilities or revolving credit facility, a rise or fall in the
variable interest rate does not impact interest expense.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting its obligations to settle financial liabilities
through the delivery of cash or another financial asset. The Company’s objective is to manage operational uncertainties,
including, but not limited to, unfavourable real estate trends, market share and sales volumes.
The Company also maintains sufficient levels of working capital to settle its financial liabilities when they are contractually
due and manages its debt covenant compliance.
Real Matters Inc. – September 30, 2017 - 82
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
The following tables outline the Company’s remaining contractual maturities for its non-derivative financial liabilities
based on the earliest date the Company is required to pay amounts owing:
Total
Less than 1
year
Payments due
2017
1-3 years
4-5 years
After 5 years
Trade payables
Accrued charges
Finance lease obligations
$
$
$
10,376
12,207
580
$
$
$
10,376
12,207
410
$
-
$
-
$
170
-
$
$
-
$
-
-
$
$
-
$
-
Total
Less than 1
year
Payments due
2016
1-3 years
4-5 years
After 5 years
$
$
$
$
$
17,634
26,755
1,105
16,196
9,450
17,634
$
26,755
$
426
$
$
1,400
$
-
$
-
$
-
$
679
$
2,800
$
9,450
$
-
$
-
$
-
$
11,996
$
-
$
-
$
-
$
-
$
-
$
-
Trade payables
Accrued charges
Finance lease obligations
Long-term debt
Other liabilities
19.
Income Taxes
The components of income tax expense (recovery) are as follows:
Current income tax expense
Current year
Adjustments for prior periods
Deferred income tax recovery
Origination and reversal of temporary differences
Adjustments for prior periods
Total income tax recovery
2017
2016
$
1,729
95
1,824
$
567
(38)
529
(10,146)
(81)
(10,227)
(8,403)
$
(1,367)
(53)
(1,420)
(891)
$
Real Matters Inc. – September 30, 2017 - 83
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
The following table reconciles income tax recovery calculated at the Company’s applicable statutory income tax rate with
the reported amounts:
Loss before income tax expense
Statutory income tax rate
Expected income tax recovery at the statutory income tax rate
Foreign income subject to tax at a different statutory income tax rate
Adjustments for prior periods
Non-deductible expenses and non-taxable income
Minimum tax
State tax
Movements in deferred tax assets and liabilities during the year are as follows:
2017
(32,172)
$
2016
(6,970)
$
26.5%
(8,526)
(3,427)
29
3,342
-
179
(8,403)
$
26.5%
(1,847)
(740)
(97)
1,524
91
178
(891)
$
Deferred tax (liabilities) assets
Property and equipment
Intangibles
Financing fees
Unutilized tax loss carryforwards
Unrealized foreign exchange gains
Contingent liabilities
Interest expense
Other
Deferred tax (liabilities) assets
Property and equipment
Intangibles
Financing fees
Unutilized tax loss carryforwards
Unrealized foreign exchange gains
Contingent liabilities
Interest expense
Other
(153)
(8,880)
611
4,298
(1,294)
12,780
1,127
63
8,552
(93)
629
292
5,594
-
-
-
88
6,510
Foreign
currency
translation
adjust-
ments
-
$
35
117
89
(6)
-
-
9
244
$
Foreign
currency
translation
adjust-
ments
(1)
12
9
61
-
-
-
3
84
2017
Total
(4)
7,257
2,367
6,397
(1,607)
3,974
2,015
246
20,645
$
2016
Total
(153)
(8,880)
611
4,298
(1,294)
12,780
1,127
63
8,552
$
$
$
$
Balance,
beginning of
year
Recognized in
net loss
Recognized in
equity
149
16,102
17
2,010
(307)
(8,806)
888
174
10,227
-
$
-
1,622
-
-
-
-
-
1,622
$
$
$
Balance,
beginning of
year
Recognized in
net loss
Recognized in
equity
$
$
$
$
(59)
(9,521)
(228)
(1,357)
(1,294)
12,780
1,127
(28)
1,420
-
-
538
-
-
-
-
-
538
$
$
$
$
Real Matters Inc. – September 30, 2017 - 84
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Deferred income tax assets are recognized for unutilized tax loss carryforwards when the realization of the related tax
benefit through future taxable income is probable. At September 30, 2017, the Company and its subsidiaries have $6,863
(2016 - $7,564) of non-capital loss carryforwards in Canada expiring in varying amounts between 2031 and 2037. The
Company also has $12,241 (2016 - $7,403) of non-capital loss carryforwards in the U.S. expiring in varying amounts
between 2032 and 2037. Total deferred tax assets of $6,397 (2016 -$4,298) were recognized on the full amount of these
loss carryforwards. Although the Company has incurred losses in the current and prior years, deferred tax assets have
been recorded because management has assessed that the combination of existing earnings before amortization and the
ability to implement tax planning measures should allow the Company to realize the benefit of its deferred tax assets
before factoring in expected growth in earnings.
No deferred tax is recognized on the amount of temporary differences arising between the carrying amount of an
investment in subsidiary and an interest in a joint arrangement accounted for in these financial statements and the cost
amount of these investments for tax purposes. The Company is able to control the timing of the reversal of these
temporary differences and believes it is probable that they will not reverse in the foreseeable future.
20.
Capital Management
The Company actively manages its debt and equity capital in support of its growth objectives and to ensure sufficient
liquidity is available to support its financial obligations and operating and strategic plans, with a view to maximizing
stakeholder returns.
The Company defines capital as equity (currently comprising common share capital), short-term and long-term
indebtedness and cash and cash equivalents. The Company manages its capital structure, commitments and maturities
and makes adjustments, where required, based on general economic conditions, financial markets, operating risks and
working capital requirements. To maintain or adjust its capital structure, the Company may, with approval from its board
of directors, as required, issue or repay debt and/or short-term borrowings, issue share capital or undertake other
activities deemed appropriate. The board of directors reviews and approves the annual operating budgets, and any
material transactions that are not part of the ordinary course of business, including proposals for acquisitions or other
major capital transactions.
The Company monitors its capital structure by measuring its key covenants which include a debt-to-earnings ratio and
interest coverage ratio. Key financial covenants contained in existing debt agreements are reviewed by management on
a quarterly basis to monitor compliance.
The Company is not subject to any externally-imposed capital requirements.
21.
Segmented Reporting
The Company conducts its business through two separate geographic segments: Canada and the U.S. The geographic
locations of each operating segment limits the volume and number of transactions between them. The Company reports
segment information based on internal reports used by the CODM to make operating and resource decisions and to
assess performance. The CODM is the President and Chief Executive Officer.
The Canadian segment’s primary service offering is residential mortgage appraisals for purchase, refinance and home
equity mortgage origination transactions which are provided through its Solidifi brand. Additionally, the Company
provides insurance inspection services to property and casualty insurers across Canada through its iv3 brand.
Real Matters Inc. – September 30, 2017 - 85
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
The U.S. segment provides residential mortgage appraisals for purchase, refinance and home equity services through the
Solidifi brand. In addition, Linear serves the title and closing market through residential and commercial real estate title
and closing services directly in 42 states, as well as Puerto Rico and in 8 states through agreements with licensed title
providers. In October 2017, Linear was rebranded Solidifi. Other title and closing service offerings include abstracting
services and providing access to its software platforms to other title insurance agencies for a subscription fee.
The Company excludes corporate costs in the determination of each operating segment’s performance. Corporate costs
include certain executive and employee costs, legal, finance, internal audit, treasury, investor relations, human resources,
technical and software development and other administrative support function costs.
The accounting policies for each operating segment are the same as those described in the basis of presentation and
significant accounting policies (Note 2). The Company evaluates segment performance based on revenues, net of
transaction costs.
2017
2016
Revenues
Canada
U.S.
Revenues net of transaction costs
Canada
U.S.
Amortization
Canada
U.S.
Corporate
Operating expenses
Acquisition and IPO costs
Impairment of assets
Interest expense
Interest income
Net foreign exchange loss (gain)
Loss on fair value of warrants
Re-measurement loss on previously held equity method investment
Net income from equity accounted investees
$
$
$
$
$
$
$
$
31,734
271,242
302,976
5,171
87,123
92,294
30,280
218,267
248,547
5,212
63,088
68,300
$
-
20,539
702
21,241
$
$
$
$
$
$
$
$
$
$
86,411
1,609
5,096
889
(139)
3,390
5,011
976
(18)
-
$
12,817
1,184
14,001
$
55,476
$
3,005
$
$
-
$
687
$
(20)
$
(2,841)
$
5,437
$
-
$
(475)
Loss before income tax recovery
$
(32,172)
$
(6,970)
Real Matters Inc. – September 30, 2017 - 86
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
Canada
U.S.
Corporate
2017
Total
Intangibles
Goodwill
Property and equipment
Investment in equity accounted investees
$
-
$
-
$
-
$
-
$
$
$
$
36,837
58,890
3,693
182
$
34
$
-
$
546
$
-
$
$
$
$
36,871
58,890
4,239
182
Canada
U.S.
Corporate
2016
Total
Intangibles
Goodwill
Property and equipment
Investment in equity accounted investees
$
-
$
-
$
-
$
-
$
$
$
$
56,106
56,643
3,370
7,875
$
412
$
-
$
662
$
-
$
$
$
$
56,518
56,643
4,032
7,875
Revenues by service type
Appraisal and ancillary
Title and closing
Other
2017
2016
$
$
228,312
69,500
5,164
302,976
207,694
36,935
3,918
248,547
$
$
For the year ended September 30, 2017, one customer represented more than 10% of the Company’s revenues which
amounted to $31,780 and was included in the U.S. segment (2016 – no customers represented more than 10% of the
Company’s revenues).
22.
Guarantees
In the normal course of business, the Company enters into agreements that meet the definition of a guarantee. A
guarantee requires the issuer to make a specified payment or payments to reimburse the beneficiary for a loss it incurs
if the issuer fails to make a payment when due.
The Company’s primary guarantees are as follows:
The Company has provided indemnities under lease agreements for the use of various office space. Under the terms of
these agreements the Company agrees to indemnify the counterparties for various items including, but not limited to, all
liabilities, loss, suits and damage arising during, on or after the term of the agreement. The maximum amount of any
potential future payment cannot be reasonably estimated. These indemnities are in place for various periods beyond the
original term of the lease and these leases expire between 2018 and 2023.
Through the Company’s by-laws, indemnity has been provided to all directors and officers of the Company and its
subsidiaries for various items including, but not limited to, all costs to settle suits or actions due to association with the
Company and its subsidiaries, subject to certain restrictions. The Company has purchased directors’ and officers’ liability
insurance to mitigate the cost of any potential future suits or actions. The maximum amount of any potential future
payment cannot be reasonably estimated.
Real Matters Inc. – September 30, 2017 - 87
Real Matters Inc.
Notes to the Consolidated Financial Statements
For the years ended September 30, 2017 and 2016 (stated in thousands of U.S. dollars and shares, except per share
amounts, unless otherwise stated)
In the normal course of business, the Company has entered into agreements that include indemnities in favour of third
parties, such as purchase and sale agreements, confidentiality agreements, engagement letters with advisors and
consultants, outsourcing agreements, leasing contracts, underwriting and agency agreements, information technology
agreements and service agreements. These indemnification agreements may require the Company to compensate
counterparties for losses incurred as a result of breaches in representation and regulations or as a result of litigation
claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The terms
of these indemnities are not explicitly defined and the maximum amount of any potential reimbursement cannot be
reasonably estimated.
The nature of these indemnification agreements prevents the Company from making a reasonable estimate of the
maximum exposure due to the difficulty in assessing the amount of liability which stems from the unpredictability of
future events and the unlimited coverage offered to the counterparties. Historically, the Company has not made any
significant payments under these or similar indemnification agreements and therefore no amount has been accrued in
the consolidated statement of financial position with respect to these agreements.
Real Matters Inc. – September 30, 2017 - 88
Executive Leadership Team
Jason Smith
President and Chief
Executive Officer
William Herman
Executive Vice President
and Chief Financial Officer
Kim Montgomery
Executive Vice President
Nick Liuzza
Executive Vice President
President, Solidifi
Title & Closing
Kevin Walton
Executive Vice President,
Corporate Development
Board of Directors
Nathan Chandler
Executive Vice President,
Chief Operating Officer,
Solidfi Title & Closing
Craig Rowsell
Executive Vice President,
Operations and Program
Management
Loren Cooke
Executive Vice President
President of Solidifi
Ryan Smith
Executive Vice President and
Chief Technology Officer
Blaine Hobson1
Chairman
Robert Courteau2
Director
Garry M. Foster3
Director
William T. Holland2
Director
Frank V. McMahon4
Director
Lisa Melchior4
Director
Jason Smith
Director
1. Compensation Committee Chair
2. Compensation Committee Member
3. Audit Committee Chair
4. Audit Committee Member
Corporate Information
Headquarters
CANADA
50 Minthorn Blvd., Suite 401
Markham, Ontario
L3T 7X8
1.877.739.2212
U.S.
701 Seneca St., Suite 660
Buffalo, New York
14210
1.866.583.3983
Investor Relations
289.843.3383
ir@realmatters.com
Listing
TSX: REAL
Independent Auditors
Deloitte, LLP
Transfer Agent
TSX Trust Company
301 - 100 Adelaide St. West
Toronto, Ontario
M5H 4H1
416.361.0930 or
1.866.393.4891 x.205
TMXEInvestorServices@tmx.com
Code of Conduct
Copies the Company’s Code of Conduct can be found at www.realmatters.com/investors/governance
or can be obtained by writing to:
Corporate Secretary
Real Matters
50 Minthorn Blvd., Suite 401
Markham, Ontario
L3T 7X8
2017 Annual Report