Senvest Capital Inc.
Annual Report 2017

Plain-text annual report

Financial Highlights SELECTED FINANCIAL DATA (In thousands, except per share amounts) (years ended December 31) 2017 $ 2016 $ 2015 $ 2014 $ 2013 $ SUMMARY OF OPERATIONS Total revenues and investment gains (loss) Net income (loss) Diluted earnings (loss) per share 488,972 197,805 60.03 335,828 117,181 34.50 (166,763) (111,261) (35.39) 297,551 141,179 41.26 489,676 243,324 73.20 FINANCIAL DATA Total assets Total equity 2,976,026 1,063,385 2,563,217 942,562 2,146,380 856,290 2,020,142 821,740 1,400,326 630,362 COMMON STOCK INFORMATION The company’s common shares are listed on the Toronto Stock Exchange under the symbol SEC. FISCAL QUARTER First Second Third Fourth 2017 $ 2016 $ High 175.64 211.05 231.55 250.00 Low 162.99 171.00 210.43 226.13 High 153.00 173.00 154.00 181.99 Low 122.42 126.00 134.91 148.47 TOTAL ASSETS ($ thousands) TOTAL EQUITY ($ thousands) BOOK VALUE PER SHARE 2,976,026 1,063,385 344.00 2,563,217 942,362 304.00 2,146,380 2,020,142 856,290 821,740 276.00 264.00 1,400,326 630,362 201.69 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2017 annual report 1 OVERALL PERFORMANCE Senvest Capital (“Senvest” or the “Company”) continued its successful run from 2016 with a good year of performance noted by outperforming broader equity indices through the first three quarters and then experiencing a pullback in the fourth quarter. Wall Street strategists had modest expectations for the markets at the start of 2017, with Barron’s citing an average of a 5% projected gain for the S&P 500. Equity markets, of course, defied predictions as the U.S. equity market saw the best returns since 2013 (Morgan Stanley). The strong stock market performance was noted for its low volatility, lack of correlation among stocks, strength of the technology sector and the momentum factor. Technology stocks performed as the best sector (up 39%) in the S&P 500, also leading the tech-heavy Nasdaq to outpace other U.S. benchmark indices (up 33% for the year). The “FAANG” stocks (Facebook, Amazon, Apple, Netflix, Google) contributed 37% of the Nasdaq’s gains, with those stocks increasing anywhere from 30% to 55%. The “VIX” (a volatility index established by the Chicago Board Options Exchange which measures investors’ expectation of 30-day volatility in the S&P 500, widely regarded as a measure of market risk and a “fear gauge”) remained low all year, averaging a measure of 11.1 and hit an all-time low level of just above 9. The S&P 500 moved 1% or more eight times last year – the last time it moved eight times or fewer was 1965 and the 60-year average, until last year, was 53 times (Morgan Stanley). Record low correlations between stocks were also featured in last year’s market dynamics. Analysts at S&P Global hypothesized that “markedly different reactions to the year’s major events created stronger diversification effects, dampening volatility in the benchmarks.” The past year was notable for the performance of the “Momentum factor”. Goldman Sachs reported “2017 was an exceptional year for the Momentum factor, especialy in the US – the first year where Momentum outperformed all other factors”. Senvest was able to generate comparable to market returns in 2017 (even though we underperformed the market in the fourth quarter) while not being part of the Momentum game. Our modus operandi has always been that of stock pickers. In last year’s annual letter, we discussed our optimism for the economy, equity markets and our investments. Despite a remarkable year of tumult, the Trump administration has largely delivered on three of the four tailwinds we mentioned. Even with all the uncertainty of what this unconventional President might bring, his administration’s notable achievements, from a business perspective, included passage of tax reform legislation and reduced regulation. (As usual we do not comment on the administration’s non-business related platform). Tax reform established lower corporate tax rates and incentives (which would create higher earnings and increased capital spending) and generally lower consumer tax rates (greater disposable income, except for certain high income tax states). On the regulatory front, according to the U.S. Chamber of Commerce the administration completed 67 deregulatory actions to only three new regulatory actions, reducing the burden of regulations, they estimate, by $570 million annually. While the absolute numbers may not be impressive, this represents a major inflection from the consistent burden in prior years (for example, an added $6.9 billion annually in 2015 alone) and the first time the cumulative regulatory burden has been reduced. Perhaps even more importantly, the New York Times observes “…the administration has instilled faith in business executives that new regulations are not coming.” In addition to higher earnings and less commercial friction, the change in the regulatory environment creates a meaningful change in business confidence, which one would expect to lead to more business investment. As 2018 begins the public perception appears to be that “Every major economy on earth is expanding at once, a synchronous wave of growth that is creating jobs, lifting fortunes and tempering fears of popular discontent.” (NY Times, January 27, 2018). Small business and consumer confidence soared post the Trump election and remained close to their highs into year end. European economic sentiment and consumer confidence has also registered new highs not seen for more than a decade. In light of the strong global economy, it’s no surprise that domestic equity markets have hit all-time highs. We do not know what the 2018 year will bring but one would think that market volatility has nowhere to go but up. Some of the largest holdings as at December 31, 2017 were, Paramount Resources (POU), Tower Semiconductors (TSEM), Radware (RDWR), Quotient Technology (QUOT), TrueCar (TRUE), Solar Edge (SEDG) and Northstar Realty Europe (NRE). While Canadian oil and gas exploration and production company POU was the biggest loser in the fourth quarter, it was still one of the top winners for the 2017 year as a whole. We have discussed this investment in past letters and we view the fourth quarter decline as a speedbump rather than as an indicator of problems. In December, POU management announced a normal course issuer bid indicating that they see value in their stock. Analog semiconductor foundry Tower Semiconductor (“TSEM”) was the largest gainer for the year. TSEM continued its spectacular performance with a 10% price increase in the fourth quarter. The company has announced a partnership with a Chinese company to co-develop a new fab in China. This should enable TSEM to address the large and burgeoning Chinese market while simultaneously increasing capacity with relatively minimal capital expenditure. Management has a track record of growing capacity in an intelligent, capital efficient manner. Solar energy equipment supplier Solar Edge (“SEDG”) was the second biggest gainer in 2017 and also increased by over 30% in the fourth quarter. SEDG has unveiled its next generation power optimizer, a larger capacity commercial inverter to address large scale commercial installations and an innovative product for the electric vehicle charger market. TrueCar (“TRUE”), an online marketplace that enables price discovery for car buyers and introductions to car dealers, had an up and down year. It performed very well in certain parts of the year while suffering large price declines in other parts of the year. On the negative side, Depomed was the biggest loser in the 2017 year. The problems with Depomed have been discussed in prior letters, as well as the long road ahead for the restructuring it undertook earlier in the year. Depomed had positive performance in the fourth quarter so it seems that the stock has stabilized for now. Aegean Marine Petroleum Network (ANW) was another of the biggest losers in 2017. Management has attributed the poor performance to unusually 2 Management’s Discussion and Analysis2017 annual reportcompetitive conditions in a few of its larger ports. ANW’s business historically has been lumpy and the company has a history of sporadically posting a weak quarter. Management has announced ongoing cost cutting initiatives which involve asset sales and a move to more of an “asset light” brokering business model. Senvest recorded a net income attributable to the owners of the parent of $166.0 million or $60.03 per basic and diluted common share for the year ended December 31, 2017. This compares to net income attributable to owners of the parent of $96.8 million or $34.50 per basic and diluted common share for the 2016 year. After prior years where there was significant appreciation in the US dollar versus the Canadian dollar, the current year has seen a reversal of some of that appreciation. For the year, the result has been a currency translation loss of about $58.5 million from the net income attributable to the owners of the parent. This amount is not reported in the Company’s income statement rather it is reflected in its Comprehensive income. As a result the comprehensive income attributable to owners of the parent was $107.4 million The Company’s income from equity investments in 2017 was the biggest contributor to the net income recorded and was more than the corresponding amount in 2016. The net gain on equity investments and other holdings (and also securities sold short and derivative liabilities) totalled $485.9 million in the current year versus $322.0 million in 2016. Due to the depreciation of the US dollar versus other major currencies, our foreign exchange loss for the year was approximately $19.7 million The Company has made significant investments in its US operations, primarily in people, systems, technology and office space. This investment represents a significant effort in a short amount of time to raise the quality of its infrastructure and personnel. As a result, the Company’s operating costs have been increasing in the recent past from historical levels. The compensation costs have increased for this year versus the prior year due to significantly higher bonus payments. Interest expense is also significantly higher than the prior year due to both higher interest rates and higher short rebate costs. The Senvest Master Fund (Senvest Partners Fund) is focused primarily on small and mid-cap companies. The fund recorded a profit of over 17% net of fees for the year. In April the fund marked its 20 year anniversary. With most of the long portfolio invested in small and mid-cap stocks, the fund outperformed its most relevant benchmark, the Russell 2000, for the year. The fund was a little below the S&P 500 index for the year but does not consider this index as a benchmark. The Senvest Israel Partners Fund was initiated in 2003 to focus on investing in Israel related companies. This fund recorded a profit of almost 33% net of fees for the year (monthly results of both funds can be found on the Company’s website). The two funds had approximately $1.57 billion of net assets under management at December 31, 2017. Both of these funds are consolidated into the accounts of the Company. The Company has a portfolio of real estate investments as at December 31, 2017. One part of this amount represents investments in different US REITs. These REITs are not publicly traded and there is no established market for them. The most likely scenario for a disposal of these holdings is an eventual sale of the underlying real estate properties of the REITs and the distribution to its holders. Also, there are minority interests in private entities whose main assets are real estate properties. As described above for the REITs, the most likely scenario for a disposal of these holdings is an eventual sale of the underlying real estate properties. The Company also has investment properties in lands and buildings used to earn rental income. Investment properties are initially measured at cost, including transaction costs. Subsequent to initial recognition, investment properties will be remeasured at fair value, using the fair value model. The fair value is based on external valuations from third party valuators. Gains or losses arising from changes in fair value of investment properties will be included in the Company’s net profit or loss. The Company acquired a majority of these properties pursuant to a business combination. The Company (the acquirer) purchased 100% of the voting and equity interests of Bogas Costa Del Sol SL, Globalbox Arganda SL, Globalbox Rivas SL and Coldstream SL (the acquirees) on January 16, 2017. The payment was cash consideration of approximately $9.8 million. The transaction was accounted for under the purchase method. The net assets of the acquired companies were valued at fair value and there was no resulting goodwill on the purchase. There was no contingent consideration nor any non-controlling interests that arose due to the transaction. The related debt against these investment properties as at December 31, 2017 totaled approximately $4.5million and has been included as part of Trade and other payables. The Company consolidates the Senvest Management LLC entity that serves as the investment manager of Senvest Partners and Senvest Israel Partners as well as the general partners of the funds. The portion of the expected residual returns of structured entities that do not belong to the Company is reflected as a non-controlling interest on the statement of financial position. This non-controlling interest is owned by an executive of the Company and totalled $119.9 million as at December 31, 2017 from $98.1 million as at December 31, 2016. At the end of December 31, 2017, Senvest had total consolidated assets of $2,976.0 million versus $2,563.2 million at the end of 2016. The main reason for this was the change in equity investments and other holdings. Equity investments and other holdings increased to $2,533.1 million from $2,289.3 million in the prior year. The Company purchased $1,552.9 million of investment holdings in the year and sold $1,808.3 million of such holdings. The Company’s liabilities increased to $1,912.6 million this year versus $1,620.7 million in 2016. A contributor to this increase was a $115.0 million change in the liability for redeemable units. One reason for the increase in this account was the appreciation of the interests of the non- Senvest investors in the funds. In addition, the securities sold short and derivative liabilities also increased by approximately $190 million from the end of the prior year. The proceeds of securities sold short were $2,627.0 million and the amount of shorts covered was $2,568.1 million in the year. Both these figures were more than the corresponding amounts for the prior year. The net selling resulted in an increase in our short position. As a whole, the 2017 year was less volatile than 2016. 3 Management’s Discussion and Analysis2017 annual report Functional currency Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currency of the parent company is the US dollar. to use short-term floating rate debt. The Company does not mitigate its exposure to interest rate fluctuation on floating rate debt. If interest rates spike, then the Company could enter into interest rate swaps or more probably just reduce its debt level. As at December 31, 2017, the Company had listed sufficient equity securities that it can sell to reduce its floating rate debt to zero. Presentation currency Currency risks The Company has adopted the Canadian dollar as its presentation currency, which in the opinion of management is the most appropriate presentation currency. Historically, the Company’s consolidated financial statements have been presented in Canadian dollars, and since the company’s shares are listed on a Canadian stock exchange, management believes it would better serve the use of shareholders to continue issuing consolidated financial statements in Canadian dollars. The US dollar consolidated financial statements are translated into the presentation currency as follows: assets and liabilities – at the closing rate at the date of the consolidated statement of financial position; and income and expenses – at the average rate for the period. All resulting changes are recognized in other comprehensive income (loss) as currency translation differences. Equity items are translated using the historical rate. Risks Financial risk factors The Company’s activities expose it to a variety of financial risks: market risk (including fair value interest rate risk, cash flow interest rate risk, currency risk and equity price risk), credit risk and liquidity risk. The Company’s overall risk management program seeks to maximize the returns derived for the level of risk to which the Company is exposed and seeks to minimize potential adverse effects on the Company’s financial performance. Managing these risks is carried out by management under policies approved by the Board. The Company uses different methods to measure and manage the various types of risk to which it is exposed; these methods are explained below. Market risk Fair value and cash flow interest rate risks Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates. The majority of the Company’s debt is based on floating rates which expose the Company to cash flow interest rate risk. The Company does not have a long-term stream of cash flows that it can match against this type of fixed debt, so it prefers Currency risk refers to the risk that values of monetary financial assets and liabilities denominated in foreign currencies will vary as a result of changes in underlying foreign exchange rates. The Company’s functional currency is the US dollar. The Company has foreign currency exposure to the Canadian dollar, the British pound sterling, the Euro, the Swedish krone, and the Israeli shekel. Equity price risk Equity price risk is the risk that the fair value of equity investments and other holdings and equities sold short and derivatives will vary as a result of changes in the market prices of the holdings. The majority of the Company’s equity investments and other holdings and all of the securities sold short are based on quoted market prices as at the consolidated statement of financial position date. Changes in the market price of quoted securities and derivatives may be related to a change in the financial outlook of the investee entities or due to the market in general. Where non-monetary financial instruments − for example, equity securities − are denominated in currencies other than the US dollar, the price, initially expressed in a foreign currency and then converted into US dollars, will also fluctuate because of changes in foreign exchange rates. Securities sold short represent obligations of the Company to make future delivery of specific securities and create an obligation to purchase the security at market prices prevailing at the later delivery date. This creates the risk that the company’s ultimate obligation to satisfy the delivery requirements will exceed the amount of the proceeds initially received or the liability recorded in the consolidated financial statements. In addition, the Company has entered into derivative financial instruments, which have a notional value greater than their fair value, which is recorded in the financial statements. This creates a risk that the Company could settle these instruments at a value greater or less than the amount that they have been recorded in the financial statements. The Company’s equity investments and other holdings have a downside risk limited to their carrying value, while the risk of equities sold short and derivatives is open ended. The Company is subject to commercial margin requirements which act as a barrier to the open-ended risks of the securities sold short and derivatives. The Company closely monitors both its equity investments and other holdings and its equities sold short and derivatives. 4 Management’s Discussion and Analysis2017 annual report The impact of a 30% change in the market prices of the Company’s equity holdings with quoted value and derivatives, securities sold short and derivative liabilities as at December 31, 2017 would be as follows (in thousands): Equity investments and other holdings Listed equity securities and derivatives Securities sold short and derivative liabilities Before-tax impact on net earnings Fair value 2,395,241 (899,655) Estimated fair value 30% price increase Estimated fair value 30% price decrease 3,113,813 (1,169,551) 448,676 1,676,668 (629,758) (448,676) Liquidity risk Capital risk management Liquidity risk is the risk the Company will encounter difficulties in meeting its financial obligations. The Company’s largest assets are equity investments and other holdings. Most of these assets are made up of equities in public holdings which can be liquidated in a relatively short time. Due to its large holding of liquid assets, the Company believes that it has sufficient resources to meet its obligations. All financial liabilities other than securities sold short and derivative liabilities and some other payables as at the consolidated statement of financial position date mature or are expected to be repaid within one year. The liquidity risk related to these liabilities is managed by maintaining a portfolio of liquid investment assets. Credit risk Credit risk is the risk that a counterparty will fail to fulfill its obligations under a contract and will cause the Company to suffer a loss. All transactions in listed securities are settled or paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is executed only once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligations. The Company is also exposed to counterparty credit risk on its cash and cash equivalents, restricted short term investment and due from brokers. From time to time, the Company enters into derivative financial instruments consisting primarily of options and warrants to purchase or sell equities, equity indices and currencies, equity swaps, foreign currency forward contracts, and foreign currency futures contracts. These derivative instruments are marked to market. There is deemed to be no credit risk for futures and certain options that are traded on exchanges. The warrant contracts and certain options that are not traded on an exchange allow the company to purchase underlying equities at a fixed price. Equity swaps represent future cash flows that are agreed to be exchanged between the Company and counterparties at set dates in the future. Foreign currency forward contracts are contracts to buy or sell foreign currencies at a specified price at a future point in time. The Company’s objective when managing its capital is to maintain a solid capital structure appropriate for the nature of its business. The Company considers its capital to be its shareholders equity. The Company manages its capital structure in light of changes in economic conditions. To maintain or adjust its capital structure, the Company initiates normal course issuer bids or adjusts the amount of dividends paid. The Company monitors capital on the basis of its net liabilities-to-capital ratio, which is as follows (in millions): Total net liabilities Total equity Debt to Capital ratio December 31, 2017 December 31, 2016 $1,612.6 $1,063.4 1.52 $1,429.1 $942.6 1.52 The Company’s goal is to maintain a net debt to Capital ratio below 2.0 in order to limit the amount of risk. The Company defines its net liabilities to equal its total liabilities less its due from brokers. The Company believes that limiting its net liabilities to Capital ratio in this manner is the best way to control risk. The Company’s net liabilities to capital ratio stayed at 1.52 at the end of December 2017 from the same ratio at the end of 2016. Investment Risk To the extent not discussed above, the Company is subject to additional risks with respect to the investments made. The value of the Company’s portfolio may decrease as well as increase, due to a variety of factors, including general economic conditions, and market factors. Additionally, investment decisions made by the Company may not always be profitable or prove to have been correct. Investment strategies, at any given time, may incur significant losses. Losses can occur for a number of reasons, including but not limited to, an overall decline in the underlying market, a lack of liquidity in the underlying markets, excessive volatility in a particular market, government intervention or monetary and/or fiscal policies of a specific region or country. The profitability of a significant portion of the Company’s investments also depends to a great extent upon the Company’s ability to correctly assess the future course of the price movements of securities and other investments. There can be no assurance that the Company will be able to accurately predict these price movements. 5 Management’s Discussion and Analysis2017 annual report The Company’s investment strategy is speculative and involves risk. The Company trades in options and other derivatives, as well as using short sales and utilizing leverage. The portfolio may not be diversified among a wide range of issuers or industries. In addition, the Company may take concentrated positions in its high conviction ideas, invest in high yield securities or invest in foreign markets outside the US and Canada. Accordingly, the investment portfolio may be subject to more rapid change in value than would be the case if the Company were required to maintain a wide diversification in the portfolios among industries, areas, types of securities and issuers. The Company may make investments in the securities of high growth companies. More specifically, the Company may have significant investments in smaller-to-medium sized companies with market capitalizations of less than $2 billion US. While smaller companies may have potential for rapid growth, they often involve higher risks because they lack the management experience, financial resources, product diversification, and competitive strengths of larger corporations. These factors make smaller companies far more likely than their larger counterparts to experience significant operating and financial setbacks that threaten their short-term and long-term viability. In addition, in many instances, the frequency and volume of their trading is substantially less than is typical of larger companies. As a result, the securities of smaller companies may be subject to wider price fluctuations and exiting investments in such securities at appropriate prices may be difficult, or subject to substantial delay. Furthermore, some of the portfolio may be invested in technology, technology-related markets and biotech. These types of companies may allocate greater than usual amounts to research and product development. The securities of such companies may experience above-average price movements associated with the perceived prospects of success of the research and development programs. Also, these companies could be adversely affected by lack of commercial acceptance of a new product or products or by technological change and obsolescence. Some of these companies may have limited operating histories. As a result, these companies may face undeveloped or limited markets, have limited products, have no proven profit-making history, operate at a loss or with substantial variations in operating results from period to period, have limited access to capital and/or be in the developmental stages of their businesses. The Company tries to manage the above risks by monitoring its leverage, actively following its investee companies and trying to react to market conditions. At the same time the Company expects its portfolio to exhibit a higher degree of volatility than portfolios that invest in larger more stable companies and that invest within more defined limits. As at December 31, 2017, approximately 90% of the Company’s portfolio was invested in Level 1 securities. The Company monitors its Level 1 securities as percentage of its total investments; however, it does not have a fixed number that this percentage cannot fall below. Critical accounting estimates and judgments The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following are the estimates applied by management that most significantly affect the Company’s consolidated financial statements. These estimates have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Consolidation of entities in which the company holds less than 50% of the voting rights. Management considers that the company has de facto control of Senvest Management LLC (SML), RIMA Senvest Master Fund GP LLC, and Senvest Israel Partners GP LLC., three legal entities wholly owned by an executive of the Company, because of the Company’s board representation and the contractual terms of the investment advisory agreement. SML is the investment adviser to the Funds, whereas RIMA Senvest Master Fund GP LLC is the General Partner of Senvest Master Fund LP and Senvest Israel Partners GP LLC is the General Partner of Senvest Israel Partners Master Fund LP. Management considers that the Company has control of Senvest Master Fund LP, Senvest Israel Partners Master Fund LP and Senvest Cyprus Recovery Investment Partners LP even though the Company has less than 50% of the voting rights in each of the Funds. The Company assessed that the removal rights of non-affiliated unitholders are exercisable but not strong enough given the Company’s decision-making authority over relevant activities, the remuneration to which it is entitled and its exposure to returns. The Company, through its structured entity, is the majority unitholder of each of the Funds and acts as a principal while there are no other unitholders forming a group to exercise their votes collectively. Fair value estimates of financial instruments The fair value of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using valuation techniques. In these cases, the fair values are estimated from observable data in respect of similar financial instruments or by using models. Where market observable inputs are not available, they are estimated based on appropriate assumptions. To the extent practical, models use only observable data; however, areas such as credit risk (both the company’s own credit risk and counterparty credit risk), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments. Financial instruments in Level 1 The fair value of financial assets and financial liabilities traded in active markets are based on quoted market prices at the close of trading on the balance sheet date. The quoted market price used for financial assets and financial liabilities held by the Company is the close price. Investments classified in Level 1 include active listed equities and derivatives traded on an exchange. The financial assets classified as Level 1 were approximately 90% of the total financial assets. Financial instruments in Level 2 Financial instruments classified with Level 2 trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or valuation techniques that use market data. These valuation techniques maximize the use of observable market data where available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. These include corporate bonds, thinly traded listed equities, over- the-counter derivatives and private equities. 6 Management’s Discussion and Analysis2017 annual reportThe Company uses a variety of methods and makes assumptions that are based on market conditions existing at each year-end date. Valuation techniques used for non-standardized financial instruments such as options and other over-the-counter derivatives include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analyses, option pricing models and other valuation techniques commonly used by market participants, making maximum use of market inputs and relying as little as possible on entity-specific inputs. The financial assets classified as Level 2 were under 6% of the total financial assets. Financial instruments in Level 3 Investments classified in Level 3 have significant unobservable inputs, as they trade infrequently. Level 3 instruments consist mainly of unlisted equity investments and real estate investments. As observable prices are not available for these securities, the Company has used valuation techniques to derive the fair value. The financial assets classified as Level 3 were under 5% of the total fair value of financial assets. Level 3 valuations are reviewed by the Company’s Chief Financial Officer (CFO), who reports directly to the Board on a quarterly basis in line with the Company’s reporting dates. On an annual basis, close to the year-end date, the Company obtains independent, third party appraisals to determine the fair value of the Company’s most significant Level 3 holdings. The quarterly and annual valuations of the significant level 3 holdings are carried out externally. The Company’s CFO reviews the results of the independent valuations. Emphasis is placed on the valuation model used to determine its appropriateness, the assumptions made to determine whether it is consistent with the nature of the investment, and market conditions and inputs such as cash flow and discount rates to determine reasonableness. As at December 31 2017, Level 3 instruments are in various entities and industries. The real estate investments are made up of investments in private real estate companies, in real estate income trusts and in investment properties. For the main Level 3 instruments, the Company relied on appraisals carried out by independent third party valuators or on recent transactions. There was no established market for any of these investments, so the most likely scenario is a disposal of the underlying assets. For the investments in real estate income trusts, the company relied mainly on audited financial statements, valuing the assets at fair value. The most likely scenario is an eventual sale of the underlying properties and their subsequent distribution to the holders. Liability for redeemable units Liability for redeemable units represents the units in the consolidated funds that are not owned by the Company. Units may be redeemed as of the end of any calendar quarter; provided, however, that redemptions made within the first 24 months will be subject to a redemption fee which is payable to the funds. In addition, there are notice periods of 60 days that must be given prior to any redemption. Senvest Cyprus Recovery Investment Fund LP has units that cannot be redeemed until December 2018. These units are recognized initially at fair value, net of any transaction costs incurred, and subsequently measured at redemption amount. At the individual fund level, this item is not shown as a liability but as part of shareholders equity. It is deemed to be a liability only for the consolidated financial statements as they are prepared from the point of view of the parent company. Income taxes TThe Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provisions for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the year in which such determination is made. QUARTERLY RESULTS (In thousands except for earnings (loss) per share information) Total revenue and investments gain (losses) Net income (loss) – owners of the parent Earnings (loss) per share 2,234 236,284 121,348 129,106 64,623 328,896 73,023 ) (130,714 491 74,964 42,669 47,843 26,923 109,942 14,748 ) (54,830 0.29 27.10 15.40 17.24 9.67 39.08 5.22 ) (19.47 Year 2017-4 2017-3 2017-2 2017-1 2016-4 2016-3 2016-2 2016-1 7 Management’s Discussion and Analysis2017 annual reportCONTRACTUAL OBLIGATIONS (In thousands) Due to Brokers Operating leases Other commitments Total Less than 1 year 1-3 years 4-5 years 16,784 1,182 9,641 27,607 - 2,484 - 2,484 - 2,176 - 2,176 Total 16,784 5,842 9,641 32,267 SELECTED ANNUAL INFORMATION (In thousands except for earnings (loss) per share information) Total revenue and investment gains (loss) Net income (loss) – owners of the parent Earnings (loss) per share 2017 488,972 165,967 60.03 2016 335,828 96,783 34.50 2015 (166,763 (99,826 (35.39 ) ) ) Total assets 2,976,026 2,563,217 2,146,380 The Company has had wide swings in profitability from quarter to quarter in the past two years, as seen above. Of the eight most recent quarters, there have been seven profitable quarters and one losing quarters. Still the profit has fluctuated a significant amount quarter to quarter. Also, the highest earning quarter showed a profit of over $100 million and the least profitable quarter had a loss of over $50 million. These wide swings are primarily due to the large quarterly mark to market adjustments in the Company’s portfolio of public holdings. However, we expect the volatility and choppiness of the markets to result in wide profit swings from year to year and from quarter to quarter. Reference is made to the section on Investment risk above. The Company maintains accounts with several major financial institutions in the U.S. who function as the Company’s main prime brokers. The Company has assets with the prime brokers pledged as collateral for leverage. Although the prime brokers are large financial institutions, there is no guarantee that any financial institution will not become insolvent. In addition, there may be practical or time problems associated with enforcing the Company’s rights to its assets in the case of such insolvency. While both the U.S. Bankruptcy Code and the Securities Investor Protection Act seek to protect customer property in the event of a failure, insolvency or liquidation of a broker dealer, there is no certainty that, in the event of a failure of a broker dealer that has custody of the Company’s assets, the company would not incur losses due to its assets being unavailable for a period of time, ultimately less than full recovery of its assets, or both. As a significant majority of the Company’s assets are in custody with four prime brokers, such losses could be significant. On August 14, 2017, Senvest commenced a new normal course issuer bid to purchase a maximum of 82,000 of its own common shares until August 13, 2018. There were 25,400 shares repurchased under the new bid and 38,100 purchased for the year. The number of common shares outstanding as at December 31, 2017 was 2,739,724 and as at March 28, 2018 was 2,725,924. There were no stock options outstanding as at December 31 2017 and none have been issued since 2005. The Company has financing with a bank, composed of a credit facility and a guarantee facility. A first ranking movable hypothec in the amount of $30 million on all of its assets has been granted as collateral for both of the facilities. According to the terms of the facilities, the Company is required to comply with certain financial covenants. During the period, the Company met the requirements of all the covenants. The Company also has margin facilities with brokers. New and amended accounting standard adopted in 2017 The Company has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2017: • Recognition of Deferred Tax Assets for Unrealized Losses – Amendments to IAS 12, and • Disclosure initiative – Amendments to IAS 7. The adoption of these amendments did not have any impact on the amounts recognized in prior periods. The amendments also do not affect significantly the current or future periods. Accounting standards and amendments issued but not yet adopted The Company presents the developments that are relevant to its activities and transactions. The following revised standards and amendments are not mandatory for December 31, 2017 reporting periods and have not been applied in preparing these consolidated financial statements. The Company has not early adopted these standards and amendments. • IFRS 15, Revenue from Contracts with Customers (IFRS 15), deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and 8 Management’s Discussion and Analysis2017 annual reportthus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18, Revenue, and IAS 11, Construction Contracts, and related interpretations. The standard is effective for annual periods beginning on or after January 1, 2018 and earlier application is permitted. The Company is in the final stage of analyzing the impact of the adoption of IFRS 15. The impact is not expected to be significant. IASB • In July 2014, the issued the complete version of IFRS 9, Financial Instruments (IFRS 9), first issued in November 2009, which brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 introduces a principles-based approach to the classification of financial assets based on an entity’s business model and the nature of the cash flows of the asset. All financial assets, including hybrid contracts, are measured at fair value through profit or loss, fair value through other comprehensive income or amortized cost. For financial liabilities, IFRS 9 includes the requirements for classification and measurement previously included in IAS 39. IFRS 9 also introduces an expected loss impairment model for all financial assets not at fair value through profit or loss. Finally, IFRS 9 introduces a new hedge accounting model that aligns the accounting for hedge relationships more closely with an entity’s risk management activities, permits hedge accounting to be applied more broadly to a greater variety of hedging instruments and risks, and requires additional disclosures. The standard is effective for annual periods beginning on or after January 1, 2018. The Company is currently in the final stage of analyzing the impact of the adoption of IFRS 9 on the consolidated financial statements. The Company does not expect the new guidance to significantly affect the classification of measurement of its financial assets. • IFRS 16, Leases, was published in January 2016 by the IASB. This standard will replace the current guidance in IAS 17, Leases, and require lessees to recognize an asset and a lease liability reflecting a “right-of-use asset” and future lease payments, respectively, for virtually all lease contracts. The standard applies to annual periods beginning on or after January 1, 2019, with earlier application permitted if IFRS 15 is adopted. The Company is currently assessing the impact of this standard on the consolidated financial statements. As at December 31, 2017, the operating leases disclosed in Note 20 to the audited consolidated financial statements are in scope with IFRS 16. • IFRS 10, Consolidated Financial Statements, and IAS 28, Investments in Associates and Joint Ventures, were amended in 2014 to address an inconsistency between those standards when accounting for the sale or a contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when the transaction involves a business combination, whereas a partial gain is recognized when the transaction involves assets that do not constitute a business. The mandatory effective date of this amendment will be determined by the IASB at a future date. Voluntary application is permitted. • The amendment to IAS 40 related to the transfers of investment property clarify that transfers to, or from, investment property can only be made if there has been a change in use that is supported by evidence that a change in use as occurred. A change in use occurs when the property meets, or ceases to meet, the definition on investment property. A change in intention alone is not sufficient to support a transfer. The amendments are effective for annual periods beginning on or after January 1, 2018 with earlier adoption permitted. The Company is currently assessing the impact of this standard on the consolidated financial statements. Related party transactions The Company consolidates the Senvest Management LLC entity that serves as the investment manager of Senvest Partners and Senvest Israel Partners as well as the general partners of the funds. The portion of the expected residual returns of structured entities that do not belong to the Company is reflected as a non-controlling interest on the statement of financial position. This non-controlling interest is owned by an executive of the Company and totalled $119.9 million as at December 31, 2017 from $98.1 million as at December 31, 2016. Significant Equity Investments For information on a summary of financial information from certain significant investees please refer to the 2017 annual report. The accounts of Senvest Partners, Senvest Israel Partners and Senvest Cyprus Recovery Investment Fund are consolidated with the Company’s accounts. FORWARD LOOKING STATEMENTS This MD&A contains “forward looking statements” which reflect the current expectations of management regarding our future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”,“believe”, “plan”, “expect”, “intend”, “estimate”, “aim”, “endeavour”, “likely”, “think” and similar expressions have been used to identify these forward looking statements. These statements reflect our current beliefs with respect to future events and are based on information currently available to us. Forward looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward looking statements including, without limitation, those Risk Factors listed in the Company’s annual information form. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward looking statements contained in this MD&A. These forward looking statements are made as of March 29, 2018 and will not be updated or revised except as required by applicable securities law. OTHER FINANCIAL INFORMATION There is additional financial information about the Company on Sedar at www.sedar.com and on the Company’s website at www. senvest.com, as well the Company’s or Senvest Management’s U.S. SEC section 13 and other filings on www.sec.gov. 9 Management’s Discussion and Analysis2017 annual reportManagement’s Discussion and Analysis INTERNAL CONTROLS Disclosure controls and procedures Internal control over financial reporting 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 Senvest’s President and CEO and Vice-President and CFO, to allow timely decisions regarding required disclosure. As at December 31, 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, under 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 December 31, 2017. Management is responsible for establishing and maintaining adequate internal control over financial reporting under National Instrument 52-109. Our internal control over financial reporting is a process designed under the supervision of the CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. 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 December 31, 2017, based on the criteria established in the 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 December 31, 2017. There have been no changes during the year ended December 31, 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. Victor Mashaal Chairman of the Board and President March 29, 2018 (Management Discussion and Analysis (“MD&A”) provides a review of Senvest Capital Inc.’s operations, performance and financial condition for the period ended December 31, 2017, and should be read in conjunction with the 2017 annual filings. Readers are also requested to visit the SEDAR website at www.sedar.com for additional information. This MD&A also contains certain forward-looking statements with respect to the Corporation. These forward-looking statements, by their nature necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by these forward-looking statements. We consider the assumptions on which these forward-looking statements are based to be reasonable, but caution the reader that these assumptions regarding future events, many of which are beyond our control may ultimately prove to be incorrect.) 10 2017 annual report Management’s Report The consolidated financial statements for the fiscal year ended December 31, 2017 and December 31, 2016, were prepared by the management of Senvest Capital Inc., reviewed by the Audit Committee and approved by the Board of Directors. They were prepared in accordance with International Financial Reporting Standards and are consistent with the company’s business. The company and its subsidiaries maintain a high quality of internal controls, designed to provide reasonable assurance that the financial information is accurate and reliable. The information included in this Annual Report is consistent with the financial statements contained herein. The financial statements have been audited by PricewaterhouseCoopers LLP, the company’s auditors, whose report is provided below. Victor Mashaal Chairman of Board and President Senvest Capital Inc. March 29, 2018 Independent Auditor’s Report To the Shareholders of Senvest Capital Inc. We have audited the accompanying consolidated financial statements of Senvest Capital Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2017 and 2016 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, 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 Senvest Capital Inc. and its subsidiaries as at December 31, 2017 and 2016 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. 1 CPA auditor, CA, public accountancy permit No. A125840 Montréal, Quebec March 29, 2018 11 2017 annual reportConsolidated Statements of Financial Position AS AT DECEMBER 31, 2017 AND 2016 (IN THOUSANDS OF CANADIAN DOLLARS) Note 4 5(a) 5(b) 6 7 8 9 5(a) 11 5(b) 6 12(b) 13 17 2017 $ 2016 $ 53,122 460 299,996 2,533,174 12,681 30,789 26,738 13,771 5,295 26,978 459 191,602 2,289,288 12,461 35,938 1,874 - 4.617 2,976,026 2,563,217 2,276 29,130 16,784 917,511 10,265 16,992 - 43,485 876,198 509 20,055 56,754 727,644 2,299 3,315 1,253 47,599 761,227 1,912,641 1,620,655 22,751 122,019 798,718 943,488 119,897 1,063,385 23,057 180,596 640,816 844,469 98,093 942,562 2,976,026 2,563,217 Assets Cash and cash equivalents Restricted short-term investments Due from brokers Equity investments and other holdings Investments in associates Real estate investments Investment properties Income taxes receivable Other assets Total assets Liabilities Bank advances Trade and other payables Due to brokers Securities sold short and derivative liabilities Redemptions payable Subscriptions received in advance Income taxes payable Deferred income tax liabilities Liability for redeemable units Total liabilities Equity Equity attributable to owners of the parent Share capital Accumulated other comprehensive income Retained earnings Total equity attributable to owners of the parent Non-controlling interest Total equity Total liabilities and equity Approved by the Board of Directors Victor Mashaal, Director Frank Daniel, Director 12 2017 annual reportThe accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Income FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (IN THOUSANDS OF CANADIAN DOLLARS. EXCEPT PER SHARE DATA) Revenue Interest income Net dividend income Other income Investment gains (losses) Net change in fair value of equity investments and other holdings Net change in fair value of real estate investments Net change in fair value of investment properties Share of profit (loss) of associates Foreign exchange loss Total revenue and net investment gains Operating costs and other expenses Employee benefit expense Interest expense Transaction costs Other operating expenses Change in redemption amount of redeemable units Income before income tax Note 7 2017 $ 6,972 5,940 2,504 2016 $ 4,184 10,561 810 15,416 15,555 485,893 321,977 3,814 1,345 2,182 (19,678 ) 5,147 111 (505 ) (6,457 ) 473,556 320,273 488,972 335,828 54,138 40,930 12,037 14,748 27,769 18,669 7,960 9,917 121,853 64,315 146,030 133,726 221,089 137,787 Income tax expense 12(a) 23,284 20,606 Net income for the year Net income attributable to: Owners of the parent Non-controlling interests 197,805 117,181 165,967 31,838 96,783 20,398 Earnings per share attributable to owners of the parent: Basic and diluted 14 60.03 34.50 13 2017 annual reportThe accompanying notes are an integral part of these consolidated financial statements.Consolidated Statements of Comprehensive Income FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (IN THOUSANDS OF CANADIAN DOLLARS) Net income for the year Other comprehensive loss Currency translation differences Comprehensive income for the year Comprehensive income attributable to: Owners of the parent Non-controlling interests Other comprehensive loss is composed solely of items that will not be reclassified subsequently to net income. 2017 $ 2016 $ 197,805 117,181 (66,014 ) (24,667 ) 131,791 92,514 107,390 24,401 74,237 18,277 14 2017 annual reportThe accompanying notes are an integral part of these consolidated financial statements.Consolidated Statements of Changes in Equity FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (IN THOUSANDS OF CANADIAN DOLLARS) Equity attributable to owners of the parent Share capital $ Note Accumulated other comprehensive income $ Retained earnings $ Non- controlling interests $ Total $ Total equity $ Balance – December 31, 2015 23,376 203,142 549,774 776,292 79,998 856,290 Net income for the year Other comprehensive loss Comprehensive income (loss) for the year - - - - 96,783 96,783 (22,546 ) - (22,546 ) 20,398 (2,121 ) 117,181 (24,667 ) (22,546 ) 96,783 74,237 18,277 92,514 Repurchase of common shares 13 (319 ) Contribution from non-controlling interests Distributions to non-controlling interests - - - - - (5,741 ) (6,060 ) - - - - - 1,590 (1,772 ) (6,060 ) 1,590 (1,772 ) Balance – December 31, 2016 23,057 180,596 640,816 844,469 98,093 942,562 Net income for the year Other comprehensive loss Comprehensive income (loss) for the year - - - - 165,967 165,967 (58,577 ) - (58,577 ) 31,838 (7,437 ) 197,805 (66,014 ) (58,577 ) 165,967 107,390 24,401 131,791 Repurchase of common shares Distributions to non-controlling interests 13 (306 ) - - - (8,065 ) (8,371 ) - - - (2,597 ) (8,371 ) (2,597 ) Balance – December 31, 2017 22,751 122,019 798,718 943,488 119,897 1,063,385 15 2017 annual reportThe accompanying notes are an integral part of these consolidated financial statements.Consolidated Statements of Cash Flows FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Cash flows provided by (used in) Operating activities Net income for the year Adjustments for non-cash items Purchase of equity investments and other holdings held for trading Purchase of securities sold short and derivative liabilities Proceeds on sale of equity investments and other holdings held for trading Proceeds from securities sold short and derivative liabilities Dividends and distributions received from real estate investments Changes in working capital items Net cash provided by (used in) operating activities Investing activities Transfers to restricted short-term investments Purchase of real estate investments Purchase of investment properties Purchase of equity investments and other holdings designated as fair value through profit or loss Proceeds on sale of equity investments and other holdings designated as fair value through profit or loss Proceeds from investments in associates Acquisition of subsidiaries, net of cash acquired Net cash used in investing activities Financing activities Contribution from non-controlling interests Distributions paid to non-controlling interests Increase in bank advances Repurchase of common shares Proceeds from issuance of redeemable units Amounts paid on redemption of redeemable units Net cash provided by financing activities Increase (decrease) in cash and cash equivalents during the year Effect of changes in foreign exchange rates on cash and cash equivalents Cash and cash equivalents – Beginning of year Cash and cash equivalents – End of year Amounts of cash flows classified in operating activities: Cash paid for interest Cash paid for dividends on equities sold short Cash received on interest Cash received on dividends Cash paid for income taxes Note 15(a) 15(b) 18 4 2017 $ 2016 $ 197,805 (348,261 ) (1,552,882 ) (2,568,067 ) 1,808,257 2,626,988 8,199 (165,844 ) 117,181 (186,721 ) (1,008,552 ) (1,208,881 ) 924,817 1,675,155 15,662 (336,884 ) 6,195 (8,223 ) (32 ) (2,561 ) (7,630 ) (12,457 ) 21,949 1,106 (9,658 ) (9,283 ) - (2,597 ) 1,863 (8,371 ) 123,954 (83,137 ) 31,712 28,624 (2,480 ) 26,978 53,122 40,412 10,699 5,482 13,831 34,528 (15 ) (520 ) - (3,956 ) 2,674 647 - (1,170 ) 1,590 (1,772 ) 262 (6,060 ) 35,243 (21,929 ) 7,334 (2,059 ) (889 ) 29,926 26,978 7,737 6,051 4,607 16,044 15,538 The accompanying notes are an integral part of these consolidated financial statements. 16 2017 annual report1 General information Senvest Capital Inc. (the “Company”) was incorporated under Part I of the Canada Corporations Act on November 20, 1968 under the name Sensormatic Electronics Canada Limited, and was continued under the Canada Business Corporations Act under the same name effective July 23, 1979. On April 21, 1991, the Company changed its name to Senvest Capital Inc. The Company and its subsidiaries hold investments in equity and real estate holdings that are located predominantly in the United States. The Company’s head office and principal place of business is located at 1000 Sherbrooke Street West, Suite 2400, Montréal, Quebec H3A 3G4. The Company’s shares are traded on the Toronto Stock Exchange under the symbol “SEC”. Refer to note 17 for the composition of the Company. 2 Summary of significant accounting policies Basis of preparation The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) as set out in Part I of the Chartered Professional Accountants of Canada (CPA Canada) Handbook – Accounting. The Board of Directors (Board) approved these consolidated financial statements for issue on March 29, 2018. The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3. Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, except for financial assets and financial liabilities held at fair value through profit or loss, including derivative instruments which have been measured at fair value. Consolidation Business Combinations The acquisition method of accounting is used to account for all business combinations. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The company recognizes any non controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. Acquisition related costs are expensed as incurred. The excess of the consideration transferred, amount of any non-controlling interest in the acquired entity, and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognized directly in profit or loss as a bargain purchase. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognized in profit or loss. Subsidiaries Subsidiaries are all entities (including structured entities) over which the Company has control. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. The financial statements of the Company consolidate the accounts of the Company, its subsidiaries and its structured entities. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation. Where applicable, amounts reported by subsidiaries, associates and structured entities have been adjusted to conform with the Company’s accounting policies. Investments in associates Associates are entities over which the Company has significant influence but not control, generally accompanying a holding of between 20% to 50% of the voting rights. The financial results of the Company’s investments in its associates are included in the Company’s consolidated financial statements according to the equity method. Subsequent to the acquisition date, the Company’s share of profits or losses of associates is recognized in the consolidated statement of income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Company’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Dilution gains and losses arising from changes in interests in investments in associates are recognized in the consolidated statement of income. The Company assesses at each year-end whether there is any objective evidence that its interests in associates are impaired. If impaired, the carrying value of the Company’s share of the underlying assets of associates is written down to its estimated recoverable amount (being the higher of fair value less cost to sell and value in use) and charged to the consolidated statement of income. In accordance with International Accounting Standard (IAS) 36, Impairment of Assets, impairment losses are reversed in subsequent years if the recoverable amount of the investment subsequently increases and the increase can be related objectively to an event occurring after the impairment was recognized. 17 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Liability for redeemable units Consolidation and foreign operations Liability for redeemable units represents the units in Senvest Master Fund, L.P., Senvest Israel Partners Master Fund, L.P. and Senvest Cyprus Recovery Investment Partners, L.P. Fund (the Funds or individually the Fund) that are not owned by the Company. Senvest Master Fund, L.P. and Senvest Israel Partners Master Fund, L.P. units may be redeemed as of the end of any calendar quarter; however, redemptions made within the first 24 months will be subject to a redemption fee of 3% to 5% which is payable to Senvest Master Fund, L.P. and Senvest Israel Partners Master Fund, L.P. In addition, there are notice periods of 60 days that must be given prior to any redemption. Senvest Cyprus Recovery Investment Partners, L.P. Fund has units that cannot be redeemed until December 31, 2018. These units are recognized initially at fair value, net of any transaction costs incurred, and subsequently units are measured at the redemption amount. Redeemable units are issued and redeemed at the holder’s option at prices based on each Fund’s net asset value per unit at the time of subscription or redemption. Each Fund’s net asset value per unit is calculated by dividing the net assets attributable to the holders of each class of redeemable units by the total number of outstanding redeemable units for each respective class. In accordance with the provisions of the Funds’ offering documents, investment positions are valued at the close price for the purpose of determining the net asset value per unit for subscriptions and redemptions Non-controlling interests Non-controlling interests represent equity interests in the consolidated structured entity owned by outside parties. The share of net assets of the structured entity attributable to non- controlling interests is presented as a component of equity. Their share of net income (loss) and comprehensive income (loss) is recognized directly in equity. Changes in the parent company’s ownership interest in the structured entity that do not result in a loss of control are accounted for as equity transactions. Foreign currency translation Functional currency Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currency of the parent company is the US dollar. Transactions and balances Foreign currency transactions are translated into the relevant functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than an entity’s functional currency are recognized in the consolidated statement of income. All foreign exchange gains and losses are presented in the consolidated statement of income in foreign exchange gain (loss). . The financial statements of an entity that has a functional currency different from that of the parent company are translated into US dollars as follows: assets and liabilities – at the closing rate at the date of the consolidated statement of financial position; and income and expenses – at the average rate for the period (as this is considered a reasonable approximation of actual rates). All resulting changes are recognized in other comprehensive loss as currency translation differences. When an entity disposes of its interest in a foreign operation, or loses control or significant influence over a foreign operation, the foreign exchange gains or losses accumulated in other comprehensive loss related to the foreign operation are recognized in net income. If an entity disposes of part of an interest in a foreign operation which remains a subsidiary, a proportionate amount of foreign exchange gains or losses accumulated in other comprehensive loss related to the subsidiary are reallocated between controlling and non-controlling interests. Presentation currency The Company has adopted the Canadian dollar as its presentation currency, which in the opinion of management is the most appropriate presentation currency. Historically, the Company’s consolidated financial statements have been presented in Canadian dollars, and since the Company’s shares are listed on a Canadian stock exchange, management believes it would better serve the use of shareholders to continue issuing consolidated financial statements in Canadian dollars. The US dollar consolidated financial statements described above are translated into the presentation currency as follows: assets and liabilities – at the closing rate at the date of the consolidated statement of financial position; and income and expenses – at the average rate for the period. All resulting changes are recognized in other comprehensive loss as currency translation differences. Equity items are translated using the historical rate. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, deposits held with banks and other short-term highly liquid investments with original maturities of three months or less. Financial instruments At initial recognition, the Company classifies its financial instruments in the following categories, depending on the purpose for which the instruments were acquired: a) Financial assets and financial liabilities at fair value through profit or loss Classification The Company classifies its equity investments and other holdings, real estate investments and equities sold short and derivatives as financial assets or financial liabilities at fair value through profit or loss. This category has two subcategories: financial assets or financial liabilities held for trading and those designated at fair value through profit or loss. 18 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)i) Financial assets and financial liabilities held for trading A financial asset or financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if on initial recognition it is part of a portfolio of identifiable financial investments that are managed together and for which there is evidence of a recent actual pattern of short- term profit-taking. Derivatives are also categorized as held for trading. The Company does not classify any derivatives as hedges in a hedging relationship. The Company makes short sales in which a borrowed security is sold in anticipation of a decline in the market value of that security, or it may use short sales for various arbitrage transactions. From time to time, the Company enters into derivative financial instruments for speculative purposes. These instruments are marked to market, and the corresponding gains and losses for the year are recognized in the consolidated statement of income. The carrying value of these instruments is fair value, which approximates the gain or loss that would be realized if the position were closed out as at the consolidated statement of financial position date. The fair value is included in equity investments and other holdings if in an asset position or securities sold short and derivative liabilities if in a liability position. ii) Financial assets and financial liabilities designated as fair value through profit or loss Financial assets and financial liabilities designated as fair value through profit or loss are financial instruments that are not classified as held for trading but are managed, and their performance is evaluated on a fair value basis in accordance with the Company’s documented investment strategy. The Company’s policy requires management to evaluate the information about these financial assets and financial liabilities on a fair value basis together with other related financial information. Recognition, derecognition and measurement Regular purchases and sales of investments are recognized on the trade date – the date on which the Company commits to purchase or sell the investment. Financial assets and financial liabilities at fair value through profit or loss are initially recognized at fair value. Transaction costs are expensed as incurred in the consolidated statement of income. Subsequent to initial recognition, all financial assets and financial liabilities at fair value through profit or loss are measured at fair value. Gains and losses arising from changes in the fair value of financial assets or financial liabilities at fair value through profit or loss are presented in the consolidated statement of income in net change in fair value of equity investments and other holdings or net change in fair value of real estate investments in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognized in the consolidated statement of income as net dividend income when the Company’s right to receive payment is established. Dividend expense on securities sold short is included in net dividend income. Interest on debt securities at fair value through profit or loss is recognized in the consolidated statement of income in interest income based on the effective interest rate. Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognized amounts and when there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. b) Loans and receivables Classification Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company’s loans and receivables comprise cash and cash equivalents, restricted short-term investments and due from brokers, as well as loans to employees, which are included in other assets. Recognition, derecognition and measurement Loans and receivables are initially recognized at fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss as follows: • The loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account. • Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. 19 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) c) Financial liabilities at amortized cost Income tax Classification Financial liabilities at amortized cost comprise bank advances, trade and other payables, due to brokers, redemptions payable and subscriptions received in advance. Recognition, derecognition and measurement Trade and other payables are initially recognized at fair value. Subsequently, trade and other payables are measured at amortized cost using the effective interest method. Bank advances, due to brokers, redemptions payable and subscriptions received in advance are recognized initially at fair value, net of any transaction costs incurred (where applicable), and subsequently at amortized cost using the effective interest method. Due from and to brokers Amounts due from and to brokers represent positive and negative cash balances or margin accounts, and pending trades on the purchase or sale of securities. Where terms in the prime brokerage agreements permit the prime broker to settle margin balances with cash accounts or collateral, the due from brokers cash balances are offset against the due to brokers margin balances at each prime broker. A provision for impairment of amounts due from brokers is established when there is objective evidence that the Company will not be able to collect all amounts due from the relevant broker. Significant financial difficulties of the broker, probability that the broker will enter bankruptcy or financial reorganization, and default in payments are considered indicators that the amount due from brokers is impaired. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Investment properties Investment properties are properties held to earn rental income and/or for capital appreciation and are not occupied by the Company. Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are measured at faire value. Changes in fair values are recognized in the consolidated statement of income as part of net change in fair value of investment properties in the period in which they arise. Provision A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. Income tax comprises current and deferred tax. Income tax is recognized in the consolidated statement of income except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity. Current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the consolidated statement of financial position date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted at the consolidated statement of financial position date and will apply when it is expected that the related deferred income tax asset will be realized or the deferred income tax liability settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be used. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Interest income and dividend income Interest income Interest income is recognized using the effective interest method. It includes interest income from cash and cash equivalents and interest on debt securities at fair value through profit or loss. Dividend income Dividend income is recognized when the Company’s right to receive payments is established. 20 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)Transaction costs Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of an investment. Transaction costs related to financial assets and financial liabilities at fair value through profit or loss are expensed as incurred. Transaction costs for all other financial instruments are capitalized, except for instruments with maturity dates, in which case transaction costs are amortized over the expected life of the instrument using the effective interest method. Employee benefits Post-employment benefit obligations Employees of companies included in these consolidated financial statements have entitlements under Company pension plans which are defined contribution pension plans. The cost of defined contribution pension plans is charged to expense as the contributions become payable and is included in the same line item as the related compensation cost in the consolidated statement of income. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issue of new common shares or options are recorded in equity as a deduction, net of tax, from the proceeds. Dividend distribution Dividends on the Company’s common shares are recognized in the Company’s consolidated statement of changes in equity in the year in which the dividends are declared and approved by the Company’s Board. Earnings per share Basic earnings per share is calculated by dividing the net income for the year attributable to equity owners of the parent by the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated by adjusting the weighted average number of common shares outstanding to assume conversion of all potentially dilutive instruments. The Company’s potentially dilutive common shares comprise stock options granted to employees, directors and senior executives. In calculating diluted earnings per share, the assumed proceeds on exercise of options are regarded as having been used to repurchase common shares at the average market price during the year. New and amended accounting standard adopted in 2017 The Company has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2017: • Recognition of Deferred Tax Assets for Unrealized Losses – Amendments to IAS 12, and • Disclosure Initiative – Amendments to IAS 7 Statement of Cash Flows. The adoption of these amendments did not have any impact on the amounts recognized in prior periods. The amendments will not affect significantly the current period or future periods. Accounting standards and amendments issued but not yet adopted The Company presents the developments that are relevant to its activities and transactions. The following revised standards and amendments are not mandatory for December 31, 2017 reporting periods and have not been applied in preparing these consolidated financial statements. The Company has not early adopted these standards and amendments. • IFRS 15, Revenue from Contracts with Customers, deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18, Revenue, and IAS 11, Construction Contracts, and related interpretations. The standard is effective for annual periods beginning on or after January 1, 2018 and earlier application is permitted. The Company is in the final stage of analyzing the impact of the adoption of IFRS 15. The impact is not expected to be significant. • In July 2014, the IASB issued the complete version of IFRS 9, Financial Instruments, first issued in November 2009, which brings together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39, Financial Instruments: Recognition and Measurement. • IFRS 9 introduces a principles-based approach to the classification of financial assets based on an entity’s business model and the nature of the cash flows of the asset. All financial assets, including hybrid contracts, are measured at fair value through profit or loss, fair value through other comprehensive income or amortized cost. For financial liabilities, IFRS 9 includes the requirements for classification and measurement previously included in IAS 39. IFRS 9 also introduces an expected loss impairment model for all financial assets not at fair value through profit or loss. Finally, IFRS 9 introduces a new hedge accounting model that aligns the accounting for hedge relationships more closely with an entity’s risk management activities, permits hedge accounting to be applied more broadly to a greater variety of hedging instruments and risks, and requires additional disclosures. The standard is effective for annual periods beginning on or after January 1, 2018. The Company is currently in the final stage of analyzing the impact of the adoption of IFRS 9 on the consolidated financial statements. The Company does not expect the new guidance to significantly affect the classification of measurement of its financial assets. • IFRS 16, Leases, was published in January 2016 by the IASB. This standard will replace the current guidance in IAS 17, Leases, and require lessees to recognize an asset and a lease liability reflecting a “right-of-use asset” and future lease payments, respectively, for virtually all lease contracts. The standard applies to annual periods beginning on or after January 1, 2019, with earlier application permitted if IFRS 15 is adopted. The Company is currently assessing the impact 21 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)Income taxes The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the consolidated provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the year in which such determination is made. Critical accounting judgments Consolidation of entities in which the Company holds less than 50% of the voting rights Management considers the Company to have de facto control of Senvest Management L.L.C. (RIMA) and RIMA Senvest Master Fund GP, L.L.C., two legal entities wholly owned by an executive of the Company, because of the Company’s Board representation and the contractual terms of the investment advisory agreement. RIMA is the investment adviser to the Funds, whereas RIMA Senvest Master Fund GP, L.L.C. is the General Partner. As compensation for its sub- advisory services, the Company is entitled to receive 60% of the management and incentive fees earned by RIMA each fiscal year. Management considers the Company to have control of Senvest Master Fund, L.P., Senvest Israel Partners, Master Fund L.P. and Senvest Cyprus Recovery Investment Fund, L.P. even though the Company has less than 50% of the voting rights in each of the Funds. The Company assessed that the removal rights of non- affiliated unitholders are exercisable but not strong enough given the Company’s decision-making authority over relevant activities, the remuneration to which it is entitled and its exposure to returns. The Company, through its structured entities, is the majority unitholder of each of the Funds and acts as a principal while there are no other unitholders forming a group to exercise their votes collectively. 4 Cash and cash equivalents Cash on hand and on deposit Short-term investments 2017 $ 44,302 8,820 53,122 2016 $ 26,616 362 26,978 of this standard on the consolidated financial statements. As at December 31, 2017, the operating leases disclosed in note 20 to the consolidated financial statements are in scope with IFRS 16. • IFRS 10, Consolidated Financial Statements, and IAS 28, Investments in Associates and Joint Ventures, were amended in 2014 to address an inconsistency between those standards when accounting for the sale or a contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when the transaction involves a business combination, whereas a partial gain is recognized when the transaction involves assets that do not constitute a business. The mandatory effective date of this amendment will be determined by the IASB at a future date. Voluntary application is permitted. • The amendment to IAS 40, Investment property, related to the transfers of investment property clarify that transfers to, or from, investment property can only be made if there has been a change in use that is supported by evidence that a change in use as occurred. A change in use occurs when the property meets, or ceases to meet, the definition on investment property. A change in intention alone is not sufficient to support a transfer. The amendments are effective for annual periods beginning on or after January 1, 2018 with earlier adoption permitted. The Company is currently assessing the impact of this standard on the consolidated financial statements. 3 Critical accounting estimates and judgments Critical accounting estimates The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following are the estimates applied by management that most significantly affect the Company’s consolidated financial statements. These estimates have a significant risk of causing a significant adjustment to the carrying amounts of assets and liabilities within the next fiscal year. Fair value of financial instruments The fair value of financial instruments where no active market exists or where listed prices are not otherwise available are determined by using valuation techniques. In these cases, the fair values are estimated from observable data in respect of similar financial instruments or by using models. Where market observable inputs are not available, they are estimated based on appropriate assumptions. To the extent practical, models use only observable data; however, areas such as credit risk (both the Company’s own credit risk and counterparty credit risk), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments. Refer to note 16 for risk sensitivity information for the Company’s financial instruments. 22 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)5 Credit facilities and due from and due to brokers a) Credit facilities Bank advances In 2014, the Company renegotiated its credit facility with a bank and has available a demand revolving loan (credit facility) and a guarantee facility. The credit facility is in the amount of $3,000 and is payable on demand. As at December 31, 2017, $2,276 was outstanding (2016 – $509). Under the credit facility, the Company may, upon delivery of a required notice, opt to pay interest at the bank’s prime rate plus 0.25%, the bank’s US base rate plus 0.25% or LIBOR plus 1.75% per annum. All of the credit facility available is also available by way of banker’s acceptances plus a stamping fee of 1.75% per annum, or by US dollar advances. Guarantee facility The Company also has available a EUR450,000 guarantee facility (2016 – EUR450,000) to issue standby letters of credit. A fee of 1.00% per annum on the face amount of each standby letter of credit applies. All amounts paid by the bank under the guarantee facility are payable on demand. As at December 31, 2017, no standby letters of credit were outstanding; however, the Company has provided a $460 (2016 – $459) term deposit to guarantee future letters of credit. This term deposit has been disclosed in restricted short-term investments on the consolidated statement of financial position. In addition, a first-ranking movable hypothec in the amount of $30,000 on all of the Company’s assets has been granted as collateral for both the credit and guarantee facilities. According to the terms of the facilities, the Company is required to comply with certain financial covenants. As at December 31, 2017 and 2016, the Company had met the requirements of all the covenants. b) Due from and due to brokers The Company has margin facilities with its prime brokers. As at December 31, 2017 and 2016, the Company’s amounts due to brokers have no specific repayment terms, and they are governed by the margin terms set forth in the prime brokerage agreements. As at December 31, 2017, listed equity securities and due from brokers amounting to $2,615,157 have been pledged as collateral (2016 – $2,346,784). The fair value of the collateral-listed equity securities is calculated daily and compared to the Company’s margin limits. The prime brokers can at any time demand full or partial repayment of the margin balances and any interest thereon or demand the delivery of additional assets as collateral. Due from and due to brokers balances are presented on a net basis by broker in the consolidated statement of financial position. Under the prime broker agreements, the broker may upon events of default offset, net and/or regroup any amounts owed by the Company to the broker by amounts owed to the Company by the broker. The following tables set out the offsetting of the Company’s various accounts with prime brokers Due from brokers Due to brokers Due from brokers Due to brokers Gross amounts due from brokers $ 440,284 1,279 Gross amounts due to brokers $ 140,288 18,063 Gross amounts due from brokers $ 191,602 14,011 Gross amounts due to brokers $ - 70,765 2017 Net amount $ 299,996 (16,784) 2016 Net amount $ 191,602 (56,754) 23 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)6 Equity investments and other holdings, securities sold short and derivative liabilities Equity investments and other holdings Note 2017 $ 2016 $ Assets Financial assets held for trading Equity securities Debt securities Derivative financial assets Financial assets designated as fair value through profit or loss Equity securities Unlisted equity securities Private investments Less: current portion Non-current portion Securities sold short and derivative liabilities Liabilities Financial liabilities held for trading Securities sold short 6(a) 6(b) 2,313,472 62,598 85,728 2,151,422 23,491 60,228 2,461,798 2,235,141 2,143 8,811 60,422 2,004 8,745 43,398 2,533,174 2,289,288 2,461,798 2,235,141 71,376 54,147 Note 2017 $ 2016 $ Listed equity securities (proceeds of $803,845; 2016 – $783,973) Debt securities (proceeds of $15,644; 2016 – nil) Derivative financial liabilities (proceeds of $130; 2016 – $2,825) 6(a) 892,203 15,696 9,612 917,511 725,798 - 1,846 727,644 24 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)a) From time to time, the Company enters into derivative financial instruments consisting primarily of warrants and options to purchase or sell equity indices and currencies, equity swaps, foreign currency forward contracts and foreign currency futures contracts. The following tables list the notional amounts, fair values of derivative financial assets and financial liabilities and net change in fair value by contract type, including swaps, options, warrants, rights, foreign currency futures contracts, foreign currency forward contracts and swaps and options sold short included in equity investments and other holdings or securities sold short and derivative liabilities: Fair value of derivative financial assets $ Notional value $ 245,124 78,844 1,380 3,476 65,234 186,000 - 781 705 31 5,367 Notional value $ 81,184 2,202 - - - - 200,720 501,214 85,728 284,106 As at December 31, 2017 Fair value of derivative financial liabilities $ 7,304 148 - - - 2,160 9,612 Fair value of derivative financial assets $ 40,043 773 76 9,913 6,571 2,852 Notional value $ 223,963 14,988 3,999 289,056 186,000 58,672 As at December 31, 2016 Fair value of derivative financial liabilities $ 139 1,661 - 46 - - Notional value $ 9,581 39,411 - 209,461 - - 776,678 60,228 258,453 1,846 For the year ended December 31, 2017 Net change in fair value $ 46,859 511 656 (283 ) 14,786 (2,316 ) 60,213 For the year ended December 31, 2016 Net change in fair value $ 40,060 747 (156 ) (8,350 ) (2,230 ) 2,815 32,886 Equity swaps Equity options Warrants and rights Foreign currency options Foreign currency futures contracts Foreign currency forward contracts Equity swaps Equity options Warrants and rights Foreign currency options Foreign currency futures contracts Foreign currency forward contracts b) These holdings are in private entities whose shares/units do not trade in an active market. There is no established market for these securities. The most likely scenario of a disposal of these holdings is an eventual sale of the underlying entities. 25 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)7 Investments in associates The Company has invested in a number of individually insignificant associates that are accounted for using the equity method. The aggregated financial information on these associates is as follows: Aggregate carrying amount of individually immaterial associates Aggregate amounts of the Company’s share of: Net income (loss) from continuing operations and comprehensive income 2017 $ 12,681 2016 $ 12,461 2,182 (505) Commitments, contingent liabilities and borrowing arrangements of associates There are no commitments, contingent liabilities or borrowing arrangements relating to the Company’s interests in these associates. 8 Real estate investments Real estate investments comprise the following: Financial assets designated as fair value through profit or loss Investments in private entities Investments in real estate income trusts Non-current portion Note 8(a) 8(b) 2017 $ 17,630 13,159 30,789 30,789 2016 $ 18,644 17,294 35,938 35,938 a) These investments are minority interests in private entities whose main assets are real estate properties. There is no established market for these investments. The most likely scenario for a disposal of these investments is an eventual sale of the underlying real estate properties. b) These real estate investments are US real estate income trusts (commonly referred to as REITs). A REIT is an entity that owns and operates income-producing real estate and annually distributes to its holders at least 90% of its taxable income. The Company’s investments are non-publicly-traded REITs. There is no established market for these REITs. The most likely scenario for a disposal of these holdings is an eventual sale of the underlying real estate properties of the REITs and the distribution to their holders. 26 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)9 Investment properties Opening balance as at January 1 Acquired through a business combination Capitalized subsequent expenditure Net gain from fair value adjustment Currency translation adjustments Closing balance as at December 31 Non-current portion a) Amounts recognized in profit or loss for investment properties Rental income Direct operating expenses from property that generated rental income Direct operating expenses from property that does not generate rental income Net change in fair value of investment properties b) Contractual obligations Note 2017 $ 1,874 15,482 7,630 1,345 407 26,738 26,738 2017 $ 2,770 2,168 937 1,345 2016 $ 1,880 - - 111 (117 ) 1,874 1,874 2016 $ - - 120 111 Refer to note 20 for disclosure of contractual obligations to purchase, construct or develop investment property or for repairs, maintenance and enhancements. c) Leasing arrangements The investment properties are leased to tenants under short-term month to month operating leases with rentals payable monthly. d) Fair value measurements This note explains the judgments and estimates made in determining the fair values of the investment properties that are recognized and measured at fair value in the consolidated financial statements. Based on the reliability of the inputs used in determining the fair value, the Company has classified its investment properties in Level 3 of the fair value hierarchy (a description of the levels is provided in note 16). There was no transfers between levels for recurring fair value measurements of investment properties during the years ended December 31, 2017 and 2016. i) Valuation techniques used to determine Level 3 fair values The Company obtains independent valuations for its investment properties annually. At the end of each reporting period, the directors update their assessment of the fair value of each property, taking into account the most recent independent valuations. The directors determine a property’s value within a range of reasonable fair value estimates. The best evidence of fair value is current prices in an active markets for similar properties. Where such information is not available the independent valuators consider information from a variety of sources including: • current prices in active markets for properties of similar properties in similar markets and in less active market, adjusted to reflect those differences; • discounted cash flow projections based on reliable estimates of future cash flows; and • capitalized income projections based upon a property’s estimated net market income, and a capitalization rate derived from an analysis of market evidence. 27 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) ii) Fair value measurements using significant unobservable inputs (Level 3) The following table summarizes the quantitative information about the significant unobservable inputs used in recurring Level 3 fair value measurement. See (i) above for the valuation technique adopted. Description Leased buildings – Storage facilities Description Fair value (rounded) 2017 $ 26,738 Fair value (rounded) 2016 $ Valuation technique Comparable sales approach Significant unobservable inputs Weighted average input Reasonably possible shifts +/− Change in value $ Value/m2 1,100 10% +/-2,700 Valuation technique Significant unobservable inputs Weighted average input $ Reasonably possible shifts +/− Change in value $ Leased buildings – Storage facilities Comparable sales approach 1,874 Value/m2 560 10% +/-190 The following table presents the changes in Level 3 investment properties: 2017 $ 1,874 15,482 7,630 - 1,345 407 26,738 2016 $ 1,880 - - 111 (117 ) 1,874 As at December 31, 2016 Acquired through a business combination Capitalized subsequent expenditure Disposals Gains recognized in net income Currency translation adjustments As at December 31, 2017 As at December 31, 2015 Acquisition Disposals Gains recognized in net income Currency translation adjustments As at December 31, 2016 28 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)10 Financial instruments by category and related income, expenses and gains and losses Assets (liabilities) at fair value through profit or loss Held for trading $ Designated $ Loans and receivables $ Financial liabilities at amortized cost $ 2017 Total $ Assets (liabilities) as per consolidated statement of financial position Cash and cash equivalents Restricted short-term investments Due from brokers - - - Equity investments and other holdings 2,461,798 Real estate investments Other assets* Bank advances Trade and other payables Due to brokers - - - - - Securities sold short and derivative liabilities (917,511 ) Redemptions payable Subscriptions received in advance - - - - - 71,376 30,789 - - - - - - - 53,122 460 299,996 - - 1,767 - - - - - - - - - - - - (2,276 ) (29,130 ) (16,784 ) 53,122 460 299,996 2,533,174 30,789 1,767 (2,276 ) (29,130 ) (16,784 ) - (917,511 ) (10,265 ) (16,992 ) (10,265 ) (16,992 ) 1,544,287 102,165 355,345 (75,447 ) 1,926,350 Amounts recognized in consolidated statement of income Net change in fair value Interest income (expense) Net dividend income 455,939 6,650 4,902 33,768 30 1,038 467,491 34,836 - 324 - 324 - (40,917 ) - 489,707 (33,913 ) 5,940 (40,917 ) 461,734 * Includes loans to employees and other financial receivables but excludes capital assets and other non-financial assets. 29 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)Assets (liabilities) at fair value through profit or loss Held for trading $ Designated $ Loans and receivables $ Financial liabilities at amortized cost $ 2016 Total $ Assets (liabilities) as per consolidated statement of financial position Cash and cash equivalents Restricted short-term investments Due from brokers - - - Equity investments and other holdings 2,235,141 Real estate investments Other assets* Bank advances Trade and other payables Due to brokers - - - - - Securities sold short and derivative liabilities (727,644 ) Redemptions payable Subscriptions received in advance - - - - - 54,147 35,938 - - - - - - - 26,978 459 191,602 - - 252 - - - - - - - - - - - - (509 ) (20,055 ) (56,754 ) 26,978 459 191,602 2,289,288 35,938 252 (509 ) (20,055 ) (56,754 ) - (727,644 ) (3,315 ) (2,299 ) (3,315 ) (2,299 ) 1,507,497 90,085 219,291 (82,932 ) 1,733,941 Amounts recognized in consolidated statement of income (loss) Net change in fair value Interest income (expense) Net dividend income 324,417 3,846 10,343 2,707 29 218 338,606 2,954 - 309 - 309 - (18,464 ) - 327,124 (14,280 ) 10,561 (18,464 ) 323,405 * Includes loans to employees but excludes capital assets and other non-financial assets. 30 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)11 Trade and other payables Trade payables Employee benefits accrued Mortgages Interest payable Other 2017 $ 1,008 13,946 4,448 4,482 5,246 29,130 2016 $ 614 15,464 - 1,529 2,448 20,055 Mortgages of $4,448 (2016 – nil) are on investment properties acquired through a business combination. The terms of the mortgages range from four to seven years and bear interest rates of 0.8% to 1.0%. Investment properties of $15,413 are pledged as collateral against the mortgages. 12 Income taxes a) Income tax expense Current tax Current tax on income for the year Adjustments in respect of prior years Deferred tax Origination and reversal of temporary differences Changes in deferred tax rates 2017 $ 24,296 45 24,341 1,660 (2,717 ) (1,057 ) 23,284 2016 $ 7,720 6,603 14,323 6,283 - 6,283 20,606 31 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)The tax on the Company’s income before income tax differs from the theoretical amount that would arise using the federal and provincial statutory tax rate applicable to income of the consolidated entities. The statutory tax rate for 2017 decreased from 26.9% to 26.8%. This decrease is in line with Quebec’s tax rate reduction from 11.9% to 11.8%. The difference between the Company’s income tax and theoretical tax is as follows: 2017 $ 221,089 59,251 (544 ) 6,698 (2,717 ) (8,717 ) (956 ) (15,126 ) 72 (14,555 ) 191 (313 ) 23,284 2016 $ 137,787 37,065 (1,912 ) 2,645 - (4,616 ) - (9,017 ) 163 (4,175 ) 489 (36 ) 20,606 2017 $ 2016 $ - - - 43,485 - 43,485 - - - 47,599 - 47,599 Income before income tax Income tax expense based on statutory rate of 26.8% (2016 – 26.9%) Prior year adjustments Difference in tax rate Change in deferred tax rates Portion of income recoverable in hands of non controlling interests Non-taxable dividend Non-taxable portion of capital gains Non-deductible expenses Foreign exchange Unrecognized deferred income tax assets Other Income tax expense b) The analysis of deferred income tax assets and liabilities is as follows: Deferred income tax assets Deferred tax assets to be recovered After more than 12 months Within 12 months Deferred income tax assets Deferred income tax liabilities Deferred tax liabilities to be settled After more than 12 months Within 12 months Deferred income tax liabilities 32 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows. Deffered income tax assets As at December 31, 2015 Credited (charged) to consolidated statement of income Foreign exchange differences As at December 31, 2016 Charged to consolidated statement of income Foreign exchange differences As at December 31, 2017 Deffered income tax liabilities As at December 31, 2015 Charged (credited) to consolidated statement of income Foreign exchange differences As at December 31, 2016 Charged (credited) to consolidated statement of income Effect of tax rate changes Foreign exchange differences As at December 31, 2017 Equity investments and other holdings $ Investments in associates $ Real estate investments $ 385 1,013 1 1,399 (671 ) (69 ) 659 108 (103 ) (5 ) - - - - 487 (240 ) (17 ) 230 (140 ) (11 ) 79 Tax loss carry- forward $ 141 900 8 1,049 (1,014 ) (35 ) - Equity investments and other holdings $ Investments in associates $ Real estate investments $ 3,708 (685 ) (120 ) 2,903 2,145 (801 ) (236 ) 4,011 32,901 5,012 (914 ) 36,999 5,875 (1,876 ) (2,566 ) 38,432 1,906 (146 ) (59 ) 1,701 47 (40 ) (112 ) 1,596 Other $ 495 (474 ) (21 ) - - - - Other $ 5,602 3,197 (125 ) 8,674 (8,198 ) - (292 ) 184 Total $ 1,616 1,096 (34 ) 2,678 (1,825 ) (115 ) 738 Total $ 44,117 7,378 (1,218 ) 50,277 (131 ) (2,717 ) (3,206 ) 44,223 Deferred income tax assets for temporary differences totalling $8,518 (2016 – $8,253) and non-expiring capital loss carry-forwards totalling $9,628 (2016 – $8,974) and non-expiring operating loss carry-forwards of $9,534, of which $8,374 originated from a business combination, have not been recognized in the consolidated financial statements. Deferred income tax liabilities have not been recognized on unremitted earnings totalling $69,754 as at December 31, 2017 (2016 – $62,938) with respect to the investment in subsidiaries, branches and associates and interest in joint arrangements because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future. 33 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)13 Share capital Authorized Unlimited number of common shares, without par value Movements in the Company’s share capital are as follows: Balance – Beginning of year Shares repurchased Balance – End of year Number of shares 2,777,824 (38,100 ) 2,739,724 2017 Amount $ 23,057 (306 ) 22,751 Number of shares 2,817,624 (39,800 ) 2,777,824 2016 Amount $ 23,376 (319 ) 23,057 In 2017, the Company began a normal course issuer bid to purchase a maximum of 82,000 of its own common shares before August 14, 2018. In 2017, the Company purchased 38,100 common shares (2016 – 39,800) for a total cash consideration of $8,370 (2016 – $6,060). The excess of the consideration paid over the stated capital was charged to retained earnings in the consolidated statement of changes in equity. No dividends were declared in 2017 and 2016 14 Earnings per share a) Basic Net income (loss) attributable to owners of the parent Weighted average number of outstanding common shares Basic earnings (loss) per share b) Diluted For the years ended December 31, 2017 and 2016, there were no dilutive instruments. 2017 $ $165,967 2,764,851 2016 $ $96,783 2,805,213 60.03 34.50 34 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)15 Supplementary information to consolidated statements of cash flows a) Adjustments for non-cash items are as follows: Net change in fair value of equity investments and other holdings Net change in fair value of real estate investments Net change in fair value of investment properties Share of profit (loss) of associates, adjusted for distributions received Change in redemption amount of redeemable units Deferred income tax b) Changes in working capital items are as follows: Note 12 (a) Note Decrease (increase) in Due from brokers Income taxes receivable Other assets Increase (decrease) in Trade and other payables Due to brokers Income taxes payable 2017 $ (485,893 ) (3,814 ) (1,345 ) (2,182 ) 146,030 (1,057 ) (348,261 ) 2017 $ (125,233 ) (14,256 ) 72 12,300 (37,516 ) (1,211 ) (165,844 ) 2016 $ (321,977 ) (5,147 ) (111 ) 505 133,726 6,283 (186,721 ) 2016 $ (178,156 ) 121 27 11,296 (170,268 ) 96 (336,884 ) 35 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)16 Financial risks and fair value Financial risk factors The Company’s activities expose it to a variety of financial risks: market risk (including fair value interest rate risk, cash flow interest rate risk, currency risk and equity price risk), credit risk and liquidity risk. The Company’s overall risk management program seeks to maximize the returns derived for the level of risk to which the Company is exposed and seeks to minimize potential adverse effects on the Company’s financial performance. Managing these risks is carried out by management under policies approved by the Board. The Company uses different methods to measure and manage the various types of risk to which it is exposed; these methods are explained below. Market risk Fair value and cash flow interest rate risks Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates. The majority of the Company’s debt is based on floating rates, which exposes the Company to cash flow interest rate risk. The Company does not have a long-term stream of cash flows that it can match against this type of fixed debt, so it prefers to use short-term floating rate debt. The Company does not mitigate its exposure to interest rate fluctuation on floating rate debt. If interest rates spike, then the Company could enter into interest rate swaps or more probably just reduce its debt level. As at December 31, 2017, the Company has listed equity securities of $2,315,615 (2016 – $2,153,426). It can sell these securities to reduce its floating rate debt. As at December 31, 2017, a 1% (2016 – 1%) increase or decrease in interest rates, with all other variables remaining constant, would impact interest expense by approximately $191 over the next 12 months (2016 – $573). The Company’s exposure to interest rate risk is summarized as follows: Cash and cash equivalents Restricted short-term investments Debt securities Loans to employees Credit facilities Bank advances Guarantee facility Trade and other payables Due to brokers Mortgages 2017 2016 Between nil and 1.0% Between nil and 0.81% Between 0.30% and 0.50% Between 0.15% and 0.30% Between 1.016% and 12.0% Between 1.26% and 11.0% Non-interest bearing Non-interest bearing Prime rate plus 0.25% Prime rate plus 0.25% 1.0% Non-interest bearing 0.00% to 1.17% 0.80% to 1.0% 1.0% Non-interest bearing 0.00% to 0.88% - 36 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)The Company also holds debt securities held for trading of $62,598 (2016 – $23,491). Debt securities are usually highly sensitive to interest rate changes. Theoretically, when interest rates rise, it causes the value of debt securities to decline. The opposite generally happens when interest rates fall, then debt securities usually rise in value. However, interest rates are only one factor affecting the value of debt securities. Other factors such as the creditworthiness of the issuer and the spreads attached thereto, the state of the economy and market sentiment can also have a significant effect on debt securities. At any time, one or more factors may have more or less of an effect on the fair value of debt securities than the change in interest rates. If all other factors are assumed not to change, then a change of 100 basis points in the yield to maturity will affect the fair value of the debt securities held for trading as follows. Estimated effect on the fair value of debt securities due to: An increase of 100 basis points in the yield to maturity A decrease of 100 basis points in the yield to maturity Currency risk 2017 $ (914 ) 1,030 2016 $ (709 ) 749 Currency risk is the risk that the value of monetary financial assets and financial liabilities denominated in foreign currencies will vary as a result of changes in underlying foreign exchange rates. The Company is exposed to currency risk due to potential variations in currencies other than the US dollar. The following tables summarize the Company’s main monetary financial assets and financial liabilities whose fair value is predominantly determined in currencies other than the US dollar, the Company’s functional currency, and the effect on pre-tax net income of a 10% change in currency exchange rates: Canadian dollar British pound sterling Euro Swedish Krone Israeli shekel Canadian dollar British pound sterling Euro Norwegian krone Japanese yen Israeli shekel Financial assets $ 816 - 1,356 - - 2,172 Financial assets $ 138,618 9,431 2,171 - - - 150,220 Financial liabilities $ (134,497 ) (816 ) (6,959 ) (2,456 ) (11,091 ) (155,819 ) Financial liabilities $ (6,852 ) (2,888 ) (10,247 ) (791 ) (2,865 ) (22,144 ) (45,787 ) 2017 Net effect of a 10% increase or decrease $ (13,368 ) (82 ) (560 ) (246 ) (1,109 ) (15,375 ) 2016 Net effect of a 10% increase or decrease $ 13,177 654 (808 ) (79 ) (287 ) (2,214 ) 10,443 Net exposure $ (133,681 ) (816 ) (5,603 ) (2,456 ) (11,091 ) (153,647 ) Net exposure $ 131,766 6,543 (8,076 ) (791 ) (2,865 ) (22,144 ) 104,433 37 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)Equity price risk Equity price risk is the risk that the fair value of equity investments and other holdings and equities sold short and derivatives will vary as a result of changes in the market prices of the holdings. The majority of the Company’s equity investments and other holdings and all of the equities sold short and derivatives are based on quoted market prices as at the consolidated statement of financial position date. Changes in the market price of quoted securities and derivatives may be related to a change in the financial outlook of the investee entities or due to the market in general. Where non-monetary financial instruments − for example, equity securities − are traded in currencies other than the US dollar, the price, initially expressed in a foreign currency and then converted into US dollars, will also fluctuate because of changes in foreign exchange rates. Securities sold short represent obligations of the Company to make future delivery of specific securities and create an obligation to purchase the security at market prices prevailing at the later delivery date. This creates the risk that the Company’s ultimate obligation to satisfy the delivery requirements will exceed the amount of the proceeds initially received or the liability recorded in the consolidated financial statements. In addition, the Company has entered into derivative financial instruments which have a notional value greater than their fair value which is recorded in the consolidated financial statements. This information is disclosed in note 6(a) to these consolidated financial statements. This creates a risk that the Company could settle these instruments at a value greater or less than the amount that they have been recorded in the consolidated financial statements. The Company’s equity investments and other holdings have a downside risk limited to their carrying value, while the risk of equities sold short and derivatives is open-ended. The Company is subject to commercial margin requirements which act as a barrier to the open-ended risks of the equities sold short and derivatives. The Company closely monitors both its equity investments and other holdings and its equities sold short and derivatives. The impact of a 30% change in the market prices of the Company’s listed equity investments and other holdings and equities sold short and derivatives would be as follows: Equity investments and other holdings Listed equity securities and derivatives Equities sold short and derivative liabilities Pre-tax impact on net income Equity investments and other holdings Listed equity securities and derivatives Equities sold short and derivative liabilities Pre-tax impact on net income Fair value $ 2,395,241 (899,655 ) Fair value $ 2,194,242 (727,598 ) Estimated fair value with a 30% price increase $ 3,113,813 (1,169,551 ) 448,676 2017 Estimated fair value with a 30% price decrease $ 1,676,668 (629,758 ) (448,676 ) 2016 Estimated fair value with a 30% price increase $ Estimated fair value with a 30% price decrease $ 2,852,515 (945,877 ) 439,993 1,535,969 (509,319 ) (439,993 ) The above analysis assumes that listed equity investments, derivatives and equities sold short would increase or decrease at the same rate. As these portfolios are not hedged together, a change in market prices will affect each one differently. 38 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)Credit risk Credit risk is the risk that a counterparty will fail to fulfill its obligations under a contract and will cause the Company to suffer a loss. All transactions in listed securities are settled or paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is executed only once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligations. The Company is also exposed to counterparty credit risk on its cash and cash equivalents, restricted short-term investments and due from brokers. The Company manages counterparty credit risk by dealing only with parties approved by the Board. From time to time, the Company enters into derivative financial instruments consisting primarily of warrants and options to purchase or sell equity indices and currencies, equity swaps, foreign currency forward contracts and foreign currency futures contracts. These derivative instruments are marked to market. There is deemed to be no credit risk for futures and certain options because they are traded on exchanges. The warrant contracts and certain options are not traded on an exchange and allow the Company to purchase underlying equities at a fixed price. Equity swaps represent future cash flows that are agreed to be exchanged between the Company and counterparties at set dates in the future. Foreign currency forward contracts are contracts to buy or sell foreign currencies at a specified price at a point in time in the future. The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available on Standard & Poor’s, Moody’s or Fitch rating agencies) or to historical information about counterparty default rates. Credit ratings are presented using Standard & Poor’s rating scale as follows: Financial assets Cash and cash equivalents Restricted short-term investments Due from brokers Debt securities Debt securities Financial liabilities Debt securities sold short Mortgages Rating A A A B- CCC and below B- A Counterparties without external credit rating Loans to employees* * Related parties with which the Company has not experienced defaults in the past. Liquidity risk 2017 $ 53,122 460 299,996 5,304 57,294 15,696 4,448 2017 $ 127 2016 $ 26,978 459 191,602 - 23,491 - - 2016 $ 252 Liquidity risk is the risk the Company will encounter difficulties in meeting its financial obligations. The Company’s largest assets are equity investments and other holdings. Most of these assets are made up of equities in listed companies which can be liquidated in a relatively short time. Due to its large investments in liquid assets, the Company believes that it has sufficient resources to meet its obligations as they come due. All financial liabilities other than equities sold short and derivative liabilities as at the consolidated statement of financial position date mature or are expected to be repaid within one year (2016 – one year). The liquidity risk related to these liabilities is managed by maintaining a portfolio of liquid investment assets. 39 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Capital risk management The Company’s objective when managing its capital is to maintain a solid capital structure appropriate for the nature of its business. The Company considers its capital to be its equity. The Company manages its capital structure in light of changes in economic conditions. To maintain or adjust its capital structure, the Company initiates normal course issuer bids or adjusts the amount of dividends paid. The Company monitors capital on the basis of its net debt-to-capital ratio. Net liabilities used in the net debt-to-capital ratio is calculated by subtracting the due from broker balances from total liabilities. The net debt-to-capital ratio is as follows: Total liabilities Total equity Debt-to-capital ratio 2017 $1,612,645 $1,063,385 1.52 2016 $1,429,053 $942,562 1.52 The Company’s objective is to maintain a debt-to-capital ratio below 2.0. The Company believes that limiting its debt-to-capital ratio in this manner is the best way to monitor risk. The Company does not have any externally imposed restrictive covenants or capital requirements, other than those included in the credit facilities (note 5). Fair value estimation The tables below analyze financial instruments carried at fair value by the inputs used in the valuation method. The different levels have been defined as follows: Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices); and Level 3 – Inputs that are not based on observable market data. The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability. The determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. 40 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The following tables analyze within the fair value hierarchy the Company’s financial assets and financial liabilities measured at fair value as at December 31, 2017 and 2016: Assets Financial assets held for trading Equity securities Debt securities Derivative financial assets Financial assets designated as fair value through profit or loss Equity securities Real estate investments Liabilities Financial liabilities held for trading Equity holdings sold short Debt securities Derivative liabilities Assets Financial assets held for trading Equity securities Debt securities Derivative financial assets Financial assets designated as fair value through profit or loss Equity securities Real estate investments Liabilities Financial liabilities held for trading Equity holdings sold short Derivative liabilities Level 1 $ Level 2 $ Level 3 $ 2,303,077 - 5,367 2,133 - 10,395 50,029 80,361 8,821 - - 12,569 - 60,422 30,789 2017 Total $ 2,313,472 62,598 85,728 71,376 30,789 2,310,577 149,606 103,780 2,563,963 892,203 15,696 9,612 917,511 2016 Total $ 2,151,422 23,491 60,228 54,147 35,938 2,325,227 892,203 - - 892,203 - 15,696 9,612 25,308 - - - - Level 1 $ Level 2 $ Level 3 $ - - - 43,108 35,938 79,046 2,150,822 - 6,571 1,984 - 2,159,377 725,798 - 725,798 600 23,491 53,657 9,055 - 86,804 - 1,846 1,846 - - - 725,798 1,846 727,64 41 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)Financial instruments in Level 1 The fair value of financial assets and financial liabilities traded in active markets are based on quoted market prices at the close of trading on the year-end date. The quoted market price used for financial assets and financial liabilities held by the Company is the close price. Investments classified in Level 1 include active listed equities and derivatives traded on an exchange. Financial instruments in Level 2 Financial instruments classified with Level 2 trade in markets that are not considered to be active but are valued based on quoted market prices, broker quotations or valuation techniques such as financial models that use market data. These valuation techniques maximize the use of observable market data where available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. These include corporate bonds, thinly traded listed equities and derivatives, over-the-counter derivatives and private equities. The Company uses a variety of methods and makes assumptions that are based on market conditions existing at each year-end date. Valuation techniques used for non-standardized financial instruments such as options and other over-the-counter derivatives include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analyses, option-pricing models and other valuation techniques commonly used by market participants, making maximum use of market inputs and relying as little as possible on entity-specific inputs: Description Equity securities Private equities Debt securities Derivatives Valuation technique Quoted market prices or broker quotes for similar instruments Valuation techniques or net asset value based on observable inputs Quoted market prices or broker quotes for similar instruments Quoted market prices or broker quotes for similar instruments Financial instruments in Level 3 Investments classified in Level 3 have significant unobservable inputs, as they trade infrequently. Level 3 instruments consist of unlisted equity investments, debt securities and real estate investments. As observable prices are not available for these securities, the Company has used valuation techniques to derive the fair value. Level 3 valuations are reviewed by the Company’s chief financial officer (CFO), who reports directly to the Board on a quarterly basis in line with the Company’s reporting dates. The Board considers the appropriateness of the valuation models and inputs used. On an annual basis, close to the year-end date, the Company obtains independent, third party appraisals to determine the fair value of the Company’s most significant Level 3 holdings. The Company’s CFO reviews the results of the independent valuations. Emphasis is placed on the valuation model used to determine its appropriateness, the assumptions made to determine whether it is consistent with the nature of the investment, and market conditions and inputs such as cash flow and discount rates to determine reasonableness. As at December 31, 2017 and 2016, Level 3 instruments are in various entities and industries. Real estate investments are disclosed in more detail in note 8, comprising investments in private real estate companies and in real estate income trusts. The real estate companies are involved with various types of buildings in different geographical locations. For the main Level 3 instruments, the Company relied on appraisals carried out by independent third party valuators. There was no established market for any of these investments, so the most likely scenario is a disposal of the underlying assets. For the investments in real estate income trusts, the Company relied mainly on audited financial statements, valuing the assets at fair value. The most likely scenario is an eventual sale of the underlying properties and the subsequent distribution to the holders. 42 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The following tables present the changes in Level 3 instruments: As at December 31, 2016 Transferred out of Level 3 Purchases Sales proceeds Distributions Gains (losses) recognized in net income On financial instruments held at end of year On financial instruments disposed of during the year Currency translation adjustments As at December 31, 2017 As at December 31, 2015 Purchases Distributions Gains (losses) recognized in net income On financial instruments held at end of year On financial instruments disposed of during the year Currency translation adjustments As at December 31, 2016 Real estate investments $ Unlisted securities $ 35,938 (1,078 ) 2,561 - (8,199 ) 3,814 - (2,247 ) 30,789 43,108 - 25,412 (21,111 ) - 18,430 11,132 (3,980 ) 72,991 Real estate investments $ Unlisted securities $ 47,482 520 (15,662 ) 5,147 - (1,549 ) 35,938 42,102 3,956 - 2,257 (4,009 ) (1,198 ) 43,108 2017 Total $ 79,046 (1,078 ) 27,973 (21,111 ) (8,199 ) 22,244 11,132 (6,227 ) 103,780 2016 Total $ 89,584 4,476 (15,662 ) 7,404 (4,009 ) (2,747 ) 79,046 In 2016, there were no transfers between levels in the Company’s consolidated financial instruments. 43 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The table below presents the investments whose fair values are measured using valuation techniques classified as Level 3 as at December 31, 2017. Description Unlisted private equity holdings - Internet services -Equity securities Unlisted private equity holdings - Internet services -Convertible bonds Unlisted private equity holdings - Pharmaceuticals Unlisted private equity holdings - Food and beverage Unlisted private equity holdings - Software developers Unlisted private equity holdings - Other Fair value (rounded) 2017 $ 29,700 Valuation technique Significant unobservable inputs Weighted average input Reasonably possible shifts +/− Change in value $ Comparable company approach Recent transaction Black-Scholes option pricing Enterprise value/ users vs Revenue/users Number of users EV/User 10M 10% +/-400 +/-700 none - - - Share price 0.38 10% +/-15 12,600 Comparable debt method Yield to maturity 8.08% 10% +/-255 13,200 11,000 Recent Transaction Comparable company approach Recent transaction 4,000 Recent transaction none - - - Revenue estimate Revenue multiple $17,000 2.31 $1M 10% +/-100 +/-100 none none - - - - - - Comparable company approach 2,400 Revenue estimate $80.57M Revenue multiple 1.56 $1M 10% +/-15 +/-100 REITs 14,500 Discounted cash flows Discount rate Capitalization rate Discounted cash flow term 7.0%-12% 5.0%-9.0% 10-13 years Rental growth rate (12.0)%- 39.10% The REITs consist of numerous investments in commercial and residential properties, each with different unobservable inputs tailored to best estimate their fair value. The inputs disclosed cover the range used for all the real estate holdings in the REITs. A general analysis of the change in inputs would not reveal a fair change in value. Real estate investments in private entities 16,300 Capitalization model Rate of return 7.0% 1,0% +2,200 -1,600 44 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The table below presents the investments whose fair values are measured using valuation techniques classified as Level 3 as at December 31, 2016. Description Fair value (rounded) 2016 $ Valuation technique Significant unobservable inputs Weighted average input Reasonably possible shifts +/− Unlisted private equity holdings Software developers 12,000 Unlisted private equity holdings Internet services 15,000 Comparable company approach Comparable company approach Revenue estimate $36,000 $3,000 Revenue multiple M&A multiple Number of users EV/User 1.57 3.97 114.4M 113.69 10% 10% 10M 10% Change in value $ +/-300 +/-400 +/-800 +/-800 +/-900 Unlisted private equity holdings Other 16,000 Comparable company approach Revenue estimate $8M-11.5M $1,000 +/-100 Revenue multiple 1.97-3.55 10% +/-50-100 M&A multiple Yield to maturity Probability of success 1.88 12.48%- 12.92% 78% WACC 11.19% 10% +/-100 10% 10% 2% +/-100 +/-600 +/- 2,000 +/-1,000 REITs 17,300 Discounted cash flows Discount rate 7.0%-12.0% Capitalization rate 5.5%-9.0% Discounted cash flow term Rental growth rate 10-13 years (12.0)%- 39.10% The REITs consist of numerous investments in commercial and residential properties, each with different unobservable inputs tailored to best estimate their fair value. The inputs disclosed cover the range used for all the real estate holdings in the REITs. A general analysis of the change in inputs would not reveal a fair change in value. Real estate investments in private entities 18,700 Capitalization model Rate of return 8.0% 1.0% +1,700 -1,300 Assets and liabilities not carried at fair value but for which fair value is disclosed The carrying amount of cash and cash equivalents, restricted short-term investments, due from brokers, bank advances, credit facilities, trade and other payables, due to brokers, redemptions payable, and subscriptions received in advance represent a reasonable approximation of their respective fair value due to their short-term nature. 45 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)17 Disclosure of the composition of the Company Principal subsidiaries and structured entities The consolidated financial statements include the accounts of the Company and all of its subsidiaries and structured entities as at December 31, 2017 and 2016. The principal operating subsidiaries and structured entities and their activities are as follows. Name Senvest Global (KY) L.P. Senvest Global L.P. RIMA Senvest Master Fund GP, L.L.C. Senvest Israel Partners GP, L.L.C. Argentina Capital Inc. Pennsylvania Properties Inc. Senvest Equities Inc. Senvest Fund Management Inc. Senvest Management L.L.C. Senvest Master Fund, L.P. Senvest Israel Partners Master Fund, L.P. Senvest Cyprus Recovery Investment Fund, L.P. Punto Box SL Bogas Costa Del Sol, SL Global Box Arganda, SL Global Box Rivas, SL Country of incorporation Cayman Islands United States United States United States Canada United States Canada United States United States Cayman Islands Cayman Islands Cayman Islands Spain Spain Spain Spain % Interest held 2017 2016 100 100 - - 100 100 100 100 - 45 53 73 100 100 100 100 100 100 - - 100 100 100 100 - 45 47 59 100 10 10 10 Nature of business Investment company Investment company General partner of Senvest Master Fund, L.P. General partner of Senvest Israel Partners Master Fund L.P. Real estate Real estate Investment company Investment company Investment manager of the Funds Investment fund Investment fund Investment fund Real estate Real estate Real estate Real estate The total non-controlling interest for the year is $24,401 (2016 – $18,277), which is mostly attributed to Senvest Management L.L.C. The change in redemption amount of liability for redeemable units for the year is $146,030 (2016 – $133,726), all of which is attributed to the Funds. 46 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)Set out below is the summarized financial information for each subsidiary that has non-controlling interest that is material to the group. The amounts disclosed are before inter-company eliminations. Summarized balance sheets Senvest Management L.L.C. Assets Liabilities Net assets Accumulated NCI 2017 $ 113,027 8,994 104,033 104,033 The participation owned by the parent company is reflected as a liability in the subsidiary’s financial statements. Summarized statements of comprehensive income (loss) Revenue and net investment gains Expenses Net income Other comprehensive loss Total comprehensive income Net income allocated to NCI 2017 $ 37,269 14,866 22,403 (4,773 ) 17,630 22,403 2016 $ 253,064 157,225 95,839 95,839 2016 $ 42,044 22,325 19,719 (2,153 ) 17,566 19,719 The participation allocated to the parent company is reflected as a part of the statement of income (loss) in the subsidiary’s financial statements. Summarized statements of cash flows Cash flow from operating activities Cash flow from financing activities Net decrease in cash and cash equivalents 2017 $ 4,609 (2,597 ) 2,012 2016 $ 1,640 (1,772 ) (132 ) No guarantees or collateral were provided to the subsidiaries and structured entities except for the guarantee of an operating lease of Senvest Management L.L.C. The amounts in question have been included in the Company’s commitments in note 20(a). The Company is not liable for any other contingent liabilities arising in its subsidiaries and structured entities and will not settle any other liabilities on their behalf. 47 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)18 Acquisition of a subsidiaries On January 16, 2017, the Company acquired the remaining share capital of Bogas Costa Del Sol SL, Global Box Arganda SL, Global Box Rivas SL and Coldstream SL. Prior to the acquisition on January 16, 2017, the Company owned as an investment in real estate an interest of 10% in each of the entities acquired. These companies are all incorporated in Spain and are engaged in the short-term rental of storage facilities. The purchase price paid for all four entities was a cash consideration of $9,658. There is no contingent consideration. The transaction was accounted for under the purchase method. The net assets of the acquired companies were valued at fair value, and there was no resulting goodwill on the purchase. The related debt against the investment properties as at December 31, 2017 totaled $4,448 and has been included as part of trade and other payables on the consolidated Statement of Financial Position. Details of the assets and liabilities recognized as a result of the acquisition are as follows: Cash and cash equivalents Investment properties Other assets Trade and other payables Mortgages Net identifiable assets acquired Less: Non-controlling interest Net assets acquired Fair value $ 104 15,482 670 (502 ) (5,018 ) 10,736 1,078 9,658 The acquired businesses contributed revenues of $2,770 and net loss of $330 to the for the period from January 16, 2017 to December 31, 2017. 19 Related party transactions Key management compensation Key management includes the Board, the president and chief executive officer, the vice-president, the secretary-treasurer and the CFO. The compensation paid or payable to key management for employee services is as follows: Salaries and other short-term employee benefits Post-employment benefits – Defined contribution Management fees 2017 $ 13,121 39 13,160 2016 $ 9,423 39 9,462 Certain employees and related parties that have invested in the Funds do not pay management fees that are charged to outside investors. The amount invested by these participants in 2017 totals $103,454 (2016 – $73,762). 48 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)20 Commitments a) The future minimum rental payments for premises under long-term leases are as follows: 2018 2019 2020 2021 2022 Thereafter $ 1,182 1,217 1,267 1,088 1,088 2,353 b) As required by certain of the Company’s equity investments and other holdings, the Company has capital commitments of $1,589. c) As required by certain of the Company’s real estate investments, the Company has capital commitments of $7,085. d) As required by certain of the Company’s investment properties, the Company has capital commitments of $967. 21 Segmented and geographical information The Company operates in a single reportable segment, which is the management of its own investments and those of the Funds. The following tables summarize the Company’s revenues by geographical area for the years ended December 31: United States $ 5,450 (6,776 ) 903 United States $ 3,266 7,890 278 Canada $ 485 7,229 470 Canada $ 313 (22 ) 532 Great Britain $ - 181 - Great Britain $ 1 605 - Rest of European Union $ 1,037 840 1,131 Rest of European Union $ (396 ) 450 - Argentina $ - 1,133 - Argentina $ - 104 - Other $ - 3,333 - Other $ 1,000 1,534 - 2017 Total $ 6,972 5,940 2,504 2016 Total $ 4,184 10,561 810 Revenue Interest income Net dividend income Other income Revenue Interest income Net dividend income Other income 49 2017 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2017 AND 2016(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)Board of Directors Officers Victor Mashaal Chairman of the Board & President Frank Daniel Secretary-Treasurer Richard Mashaal Vice-President George Malikotsis C.A., C.P.A. Vice-President, Finance Senvest Capital Inc. 1000 Sherbrooke West, Suite 2400 Montréal (Québec) H3A 3G4 (514) 281-8082 Victor Mashaal Chairman of the Board & President Senvest Capital Inc. *Ronald G. Assaf Business Executive Frank Daniel Secretary-Treasurer Senvest Capital Inc. *David E. Basner Business Executive *Jeffrey L. Jonas Partner, Brown Rudnick L.L.P. Richard Mashaal Vice-President Senvest Capital Inc. *Member of the Audit Committee Investor Information AUDITORS PricewaterhouseCoopers L.L.P. Montréal (Canada) LEGAL COUNSEL Howard M. Levine Blake, Cassels & Graydon L.L.P. 1 Place Ville-Marie Suite 3000 Montreal (Quebec) H3B 4N8 TRANSFER AGENT & REGISTRAR Computershare Trust Company of Canada 1500 Robert-Bourassa Boulevard 7th Floor Montréal (Québec) H3A 3S8 Computershare Trust Company of Canada 100 University Street Toronto (Ontario) M5J 2Y1 50 2017 annual report

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