Solution Financial Inc. — Interim / Quarterly Report 2021

Apr 1, 2021

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MANAGEMENT’S DISCUSSION AND ANALYSIS

FOR THE THREE MONTHS ENDED JANUARY 31, 2021 AND 2020

(Expressed in Canadian Dollars)

MANAGEMENT’S DISCUSSION AND ANALYSIS

The Management’s Discussion and Analysis (“ MD&A ”) of Solution Financial Inc. (the “ Company ” or “ Solution ” or “ we ” or “ our ”) (formerly known as Shelby Ventures Inc.(“ Shelby ”)), should be read in conjunction with the Company’s audited year end financial statements for the year ended October 31, 2020 and 2019 (“reporting period”) and the accompanying notes to those financial statements.

The Company’s consolidated year end financial statements have been prepared in accordance with International Financial Reporting Standards (“ IFRS ”) and are presented in accordance with the International Accounting Standards (“ IAS ”), as issued by the International Accounting Standards Board (“ IASB ”) and are reported in Canadian dollars.

CAUTIONARY STATEMENT

This analysis has been prepared taking into consideration the information available up to March 31, 2021. ‐ Certain statements contained in this report constitute ʺforward looking statements. ʺ When used in this report, the words ʺmayʺ, ʺwouldʺ, ʺcouldʺ, ʺwillʺ, ʺintendʺ, ʺplanʺ, ʺanticipateʺ, ʺbelieveʺ, ʺestimateʺ, ʺexpectʺ, ‐ and similar expressions, as they relate to the Company or its management, are intended to identify forward looking statements. Such statements reflect our current views with respect to future events and are subject to inherent risks, uncertainties and numerous assumptions, including, without limitation, general economic ‐ conditions, reliance on debt financing, dependence on non prime borrowers, inability to sustain receivables, competition, interest rates, regulation, insurance, failure of key systems, debt service, future capital needs and such other risks or factors described from time to time in reports of Solution that are filed with securities ‐ regulatory authorities. By their nature, forward looking statements involve numerous assumptions, known and unknown, risks and uncertainties, both general and specific, which contribute to the possibility that ‐ predictions, forecasts, projections and other forms of forward looking information may not be achieved. 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 and readers are cautioned that the list of factors in the foregoing paragraph is not exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward ‐ looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Accordingly, readers are cautioned not ‐ ‐ to place undue reliance on forward looking statements or interpret or regard forward looking statements as guarantees of future outcomes.

OVERVIEW

Solution Financial Inc. (formerly known as Shelby Ventures Inc.) was incorporated on February 27, 2007 under the Company Act of British Columbia and commenced trading on the TSX Venture Exchange (“TSXV”) on December 6, 2007.

The Company’s registered and records office is Unit 137, 8680 Cambie Road, Richmond, British Columbia, Canada, V6X 4K1.

The Company’s wholly-owned operating subsidiary, Solution Financial (Canada) Inc. (“Solution Canada”) (formerly Solution Auto Lease and Sales Ltd.) was incorporated under the Company Act of British Columbia on August 8, 2003. Solution Canada specializes in sourcing and leasing luxury and exotic vehicles, yachts and other high value assets.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

OVERVIEW (CONTINUED)

Solution works with a select group of automotive and marine dealerships providing lending solutions to clients who cannot obtain leasing terms with traditional Canadian financial institutions. Typical customers include new immigrants, business owners and international students.

Solution provides a unique leasing experience whereby it partners with its clients to help them navigate the challenges of acquiring, insuring, maintaining and upgrading vehicles and luxury assets in Canada.

Solution derives its revenue from three inter-related business streams: brokerage leases; in-house leases including financial leases and operating leases; and auto sales.

On June 22, 2018, Shelby completed a qualifying transaction by acquiring Solution Canada. The Qualifying Transaction was accomplished through an exchange of shares which resulted in the former shareholders of Solution Canada obtaining control of the Company. Accordingly, this transaction was recorded as a reverse acquisition for accounting purposes as Solution Canada was deemed to be the acquirer. These consolidated financial statements are a continuation of the financial statements of Solution Canada while the capital structure is that of the Company. The consolidated financial statements include the historical operations and assets and liabilities of Solution Canada from its inception and those of Shelby from June 22, 2018 to January 31, 2020.

Concurrent with this transaction, the Company changed its name from Shelby Ventures Inc. to Solution Financial Inc. and effected a change in directors, management and business. On June 27, 2018, its common shares resumed trading on the TSX Ventures Exchange (“TSX-V”) under the symbol “SFI”.

SIGNIFICANT EVENTS AND RECENT DEVELOPMENTS

• On November 16, 2020, the Company appointed Randy Smyth to the Company’s Board of Directors. The Company also granted an aggregate of 350,000 fully vested stock options.

• On December 15, 2020, the Company paid a quarterly dividend of $0.001 per share to common shareholders of record as of the close of business on November 30, 2020.

• On December 15, 2020, the Company renewed its Normal Course of Issuer Bid (The “NCIB”) Under the NCIB, a total of up to 4,068,111 common shares may be purchased through the facilities of the TSXV, representing 5% of the issued and outstanding common shares of the Company, and any such purchases will be at market prices.

• On March 5, 2021, the Company submitted its application to the Toronto Stock Exchange (the “TSX”) seeking a listing on the TSX (the “Proposed TSX Graduation”). The Company’s intention to seek a listing on the TSX is subject to conditions, including satisfaction of the TSX’s listing criteria and other TSX approvals.

• On March 8, 2021, the Company issued unsecured convertible debentures (the “5% Debentures”) in the principal amount of $3,225,400 (the “Debenture Financing”). The 5% Debentures will bear interest at a rate of 5% per annum, calculated and paid semi-annually, and mature on the second anniversary of the date of issuance (the “5% Debenture Maturity Date”). The 5% Debentures consist of a reinvestment of $2,615,400 of maturing debentures and interest and $610,000 of new investments.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

SIGNIFICANT EVENTS AND RECENT DEVELOPMENTS (CONTINUED)

• On March 10, 2021, the Company filed a preliminary short form prospectus in connection with an offering of a minimum of 7,500,000 units of the Company and a maximum of 25,000,000 units at a price of $0.40 per unit for minimum gross proceeds of $3,000,000 and maximum gross proceeds of $10,000,000.

QUARTERLY RESULT HIGHLIGHTS (in $ except ratios)

	Jan 31,	Oct 31,	Jul 31,	Apr 30,	Jan 31,	Oct 31,	Jul 31,	Apr 30,
Quarter ended	2021	2020	2020	2020	2020	2019	2019	2019
Total revenue	3,882,792	4,620,444	3,936,630	2,755,551	2,986,445	2,512,233	2,494,338	2,468,507
Net Income (Loss) for
the period before	172,133	312,197	235,222	98,430	144,899	101,811	147,929	27,828
Income Taxes
Net Income (Loss) and
comprehensive income	94,133	49,197	235,222	39,595	76,399	71,216	98,565	2,943
for the period
Net Income (Loss) and
comprehensive income	0.001	0.001	0.003	0.001	0.001	0.001	0.001	0.000
per share
Carrying value of assets under operating lease	23,838,913	24,523,140	24,694,385	23,908,674	23,393,165	21,297,057	18,572,282	16,359,391
Lease receivables balance	673,272	662,706	657,693	720,707	671,481	697,257	498,582	340,293

SELECTED FINANCIAL INFORMATION

The following table summarizes key financial data to be read in conjunction with the audited consolidated financial statements of the Company for the three months ended January 31, 2021 and 2020.

For 3 months ended January 31, 2021 For 3 months ended January 31, 2020	For 3 months ended January 31, 2021 For 3 months ended January 31, 2020
Sales and lease income$ 3,748,574 $ 2,868,158
Brokerage commissions	134,218 118,287
Total Revenue	3,882,792 2,986,445
Income before income taxes	172,133 144,899
Net income and comprehensive income	94,133 76,399
Net income and comprehensive income per share
Basic and diluted earnings per common share $ 0.001$ 0.001
Weighted average number of common shares outstanding	81,379,503 79,299,048

Financial Highlights

During the quarter ended January 31, 2021, the Company’s net operating lease portfolio decreased by a moderate $684,227 or 3% to $23,838,913. The decease was a result of comparatively lower new leases to terminating leases during the quarter.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Financial Highlights (continued)

Total revenues were $3,882,792 for the three months ended January 31, 2021 compared to $2,986,445 for the three months ended January 31, 2020, an increase of $896,347(or 30%). The quarterly increase in revenue is primarily due an increase of interest and leasing income from the Company’s growing in-house lease portfolio.

For the three months ended January 31, 2021, the Company reported a net income of $94,133 compared to $76,399 for the comparative three months period ending January 31, 2020. The three months income in 2021 were consistent with the Company’s growing in-house lease portfolio. The Company anticipates slower leasing activities while COVID-19 remains problematic, however, the Company has seen a steady demand for leasing despite the pandemic. The Company is pursuing region expansion plans to better serve its target luxury market in other underserved markets in Canada.

DESCRIPTION OF NON‐IFRS FINANCIAL METRICS (in $ except ratios)

Throughout this MD&A, management uses the following terms and ratios not found in IFRS and which do not have a standardized meaning under IFRS and are unlikely to be comparable to similar measures presented by other issuers, and therefore require definition. These non ‐ IFRS measures and additional information should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. Management reviews non-IFRS measures on an ongoing basis and expects to introduce additional NON-IFRS measures in the near future.

Revenue run-rate

Revenue run rate is the financial revenue in a particular period, annualized. It provides an indication of annual revenue that would be generated based on the revenue in the particular reported period. As the Company expands its in-house leasing portfolio, it will recognize revenue as interest income. This gets recognized over the lease term rather than brokered lease transactions that get recognized immediately. As a result, the annualized run-rate provides a useful longer-term perspective on the Company’s expected revenue performance.

Financial leverage ratio and total capitalization

The financial leverage ratio is defined as the total of credit facilities and loans divided by the total equity. The financial leverage ratio provides an indication and extent to which the Company can access additional debt financing with which to expand its operating lease portfolio. This is one of the primary growth drivers for the business and is helpful for evaluating the Company’s ability to leverage additional debt.

	Jan 31,	Oct 31,	Jul 31,	Apr 30,	Jan 31,	Oct 31,	Jul 31,	Apr 30,
Quarter ended	2021	2020	2020	2020	2020	2019	2019	2019
Revenue run-rate
(annualized)	15,531,169	18,481,776	15,746,520	11,022,204	11,945,780	10,048,932	9,977,352	9,874,028
Financial Leverage ratio	1.67 : 1	1.79: 1	1.85: 1	1.99 : 1	1.82 : 1	1.58: 1	1.32: 1	1.01: 1

The Company’s annualized revenue run rate was $15,531,169 compared to $11,945,780 for the comparative quarter in 2020. This increase is a result of the increase in the volume of in-house leases during 2021.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Financial leverage ratio and total capitalization (continued)

The Company’s financial leverage ratio as of January 31, 2021 was 1.67 : 1 as compared to that of 1.82 :1 at the end of the quarter ended January 2020. The Company plans on utilizing both debt facilities and equity financing to continue to expand the Company’s in-house leasing portfolio.

RESULTS OF OPERATIONS

The following table summarizes financial results for each of the reported periods:

Revenue $ Cost of sales Gross profit Interest expenses Operating expenses Other income Income before income taxes	For 3 months ended January 31, 2021 For 3 months ended January 31, 2020	For 3 months ended January 31, 2021 For 3 months ended January 31, 2020
	3,882,792 $ 2,986,445
	2,889,481	2,164,986
	993,311	821,459
	117,415	177,906
	714,533	499,901
	10,770	1,247
	172,133	144,899

Revenue

ue
	For 3 months ended January 31, 2021 For 3 months ended January 31, 2020
Interest and administrative income $	596,106 $ 509,973
Rental and registration revenue	1,392,529 1,294,052
Total direct lease revenues	1,988,635 1,804,025
Vehicle Sales	1,626,017 1,037,145
Finance lease vehicle sales	133,922 26,988
Brokerage commissions	134,218 118,287
Total	3,882,792 2,986,445

Revenue from direct leases and loans

The Company provides direct leases and loans (“in-house leasing”) to consumers that are typically unable to obtain financing from traditional sources. The Company generates interest and fee income from these leases. For the three months ended January 31, 2021, the revenues derived from direct leases increased to $1,988,635 compared to $1,804,025 for the three months ended January 31, 2020, an increase of $184,610 (or 10%).

The mix of in-house leasing versus brokerage leasing directly impacts these comparative figures. During 2021, the Company increased its ratio of in-house leasing as a result of working capital surplus from debt financings which was the primary reason for these increases.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Vehicle sales

For the three months ended January 31, 2021, the revenues from vehicle sales increased to $1,626,017 compared to $1,037,145 for the three months ended January 31, 2020, reflecting an increase of $588,872 (or 57%). These increases were the result of more vehicle sales coming from the Company’s in-house lease portfolio which get recognized at the full value of the vehicle, whereas brokered sales are recognized on a net basis.

Finance lease vehicle sales

For the three months ended January 31, 2021, the revenues from finance lease vehicle sales increased to $133,922 compared to $26,988 for the three months ended January 31, 2020. This increase was the result of a higher number of leases in 2021 with a lower residual value which are classified as finance type lease. The Company specializes more in operating leases than finance type leases.

Brokerage commissions

In addition to providing direct leases and loans, the Company facilitates lease brokering and end of lease sales through third-party dealerships. The Company bears limited inventory risks in these transactions and does not have latitude in setting vehicle prices and therefore, the Company only recognizes the net fees or brokerage commissions.

The following table summarizes the brokerage leases and sales for each of the reported periods:

For 3 months ended January 31, 2021 For 3 months ended January 31, 2020	For 3 months ended January 31, 2021 For 3 months ended January 31, 2020
Brokerage lease $ 2,294 $ 4,668
Cost of brokerage lease	- -
	2,294 4,668
Brokerage sale	3,032,129 2,025,416
Cost of brokerage sale	(2,900,205) (1,911,797)
	131,924 113,619
Total brokerage commissions	134,218 118,287

For the three months ended January 31, 2021, the Company brokered $2,294 of brokerage lease compared to $4,668 during the three months ended January 31, 2020, a decrease of $2,374 or 51%. The decrease was primarily the result of changing to more in-house leasing from brokering from more available working capital.

For the three months ended January 31, 2021, the Company brokered $3,032,129 of sales transactions compared to $2,025,416 during the three months ended January 31, 2020, an increase of $1,006,713 or 50%. For the three months ended January 31, 2021, the Company net brokerage sales revenue was $131,924 compared to $113,619 for the three months ended January 31, 2020, reflecting an increase of $18,305 or 16%. End of lease sales margins can vary from quarter to quarter and depend on market conditions at the time of lease termination, as well as the residual value set in the original lease agreements.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Brokerage commissions (continued)

Volumes and margins on brokered transactions can vary from quarter to quarter and year to year depending on the timing of new luxury model release dates, weather conditions, and interest rates. The Company tries to finance leases itself (in-house) rather than broker lease transactions depending on its working capital position, which can also impact the volumes of brokerage transactions. When interest rates rise, the volumes and margins are often impacted depending on customers willingness to absorb the higher interest rates.

Operating and other expenses

The following table summarizes the operating and other expenses:

	For 3 months ended January 31, 2021 For 3 months ended January 31, 2020
Interest expenses $	117,415 $ 177,906
General and administration	237,759 213,029
Sales and marketing	396,133 242,122
Amortization	8,130 7,456
Stock based compensation	72,511 37,294
Total	831,948 677,807

Interest on loans

Interest expense for the three months ended January 31, 2021, decreased by $60,491 (or 34%), as compared to that in the corresponding periods of the prior fiscal year.

General and administrative

‘

General and administrative expenses include the following major expenses by nature:

	For 3 months ended January 31, 2021	For 3 months ended January 31, 2020
Accounting and legal $	57,267 $	40,840
Consulting fees	31,081	20,725
Regulatory and transfer agent	15,095	8,459
Insurance, license and permit	13,442	15,103
Office and miscellaneous	24,713	26,955
Repairs and maintenance	650	650
Salaries and wages	95,511	100,297
Total	237,759	213,029

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

General and administrative (continued)

Significant components of the Company’s general and administrative expenses include salaries and benefits, regulatory and transfer agent fees, and lease administration costs that are not directly attributable to the acquisition of a direct lease or loan. For the three months ended January 31, 2021, general and administrative expenses increased by $24,730 (or 12%), as compared the corresponding periods of the prior fiscal year.

General and administrative expenses increased marginally during the first quarter of 2021 compared to 2020. Accounting and legal expenses increased related to the Company’s expansion into Ontario as the Company’s consulting fees also did. Licensing and other office and miscellaneous costs were all relatively consistent with the prior year comparison.

Sales and marketing

Sales and marketing expenses include the following major expenses by nature:

	For 3 months ended January 31, 2021 For 3 months ended January 31, 2020
Advertising and promotion $	37,683 $ 21,676
Commissions Marketing	333,825 154,474 16,516 20,855
Meals and entertainment	4,011 4,057
Vehicle rental	4,098 41,060
Total	396,133 242,122

Significant components of the Company’s sales and marketing expenses include commissions and benefits paid to sales personnel. For the three months and ended January 31, 2021, sales and marketing expenses increased by $154,011 (or 64%) as compared to that in the corresponding period of the prior fiscal year. The increase in commissions and advertising and promotion costs were generally in line with the increase in revenues. The relatively larger commissions were because of an increase in the proportion of sales revenues during the quarter compared to the volume of lease revenue. When commissions are paid on a new lease facility, the costs are capitalized and amortized over the lease term, whereas, when they are paid for facilitating a brokerage lease or sale, they are expensed immediately. The other sales and marketing costs were relatively consistent. The Company anticipates some increases to its marketing costs going forward with the goal of increasing dealer, lease customer and investor awareness of its services.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

FINANCIAL POSITION

The following table summarizes the Company’s financial position:

As at		January 31, 2021		October 31, 2020
Receivable under car loans	$	4,185	$	6,598
Receivable under finance leases		673,272		662,706
Property under operating leases		23,838,913		24,523,140
Cash and cash equivalents		2,380,190		2,526,379
Inventory		886,909		554,029
Other assets		516,114		798,189
Total assets		28,299,583		29,071,041
Credit facilities and loans		9,236,012		10,062,818
Customers' deposits and advances		2,074,244		2,375,715
Deferred revenue		2,627,915		2,657,063
Other liabilities		3,770,715		3,540,879
Total liabilities		17,708,886		18,636,475
Net assets	$	10,590,697	$	10,434,566

Assets

Total assets decreased by $771,458 (or 3%) to $28,299,583 as at January 31, 2021 from $29,071,041 as at October 31, 2020. The Company’s revenue generating assets consist of car loans (Loan agreements that repay 100% of the principal), finance lease receivable and operating leases. These asset groups make up the Company’s portfolio assets. The Company’s non-portfolio assets represented 13% (October 31, 2020 - 13%) of the total assets, and consist primarily of cash and cash equivalents, inventory, prepaids, other receivables, and property and equipment.

Car loan receivables

Car loan receivables decreased by $2,413 (or 37%) to $4,185 as at January 31, 2021 from $6,598 as at October 31, 2020. Management anticipates that car loan receivables will continue to decrease in the future as the Company is focusing on providing operating leases.

Lease receivables

Lease receivables contain leases that are classified as finance leases. Under a finance lease substantially all the risks and rewards incidental to legal ownership are transferred by the lessor to the lessee at the inception of the lease transaction. Lease receivables increased by $10,566 (or 2%) at January 31, 2021 to $673,272 from $662,706 as at October 31, 2020.

Properties under operating lease

An operating lease is one that does not transfer substantially all the risks and rewards of ownership to the lessee. The carrying value of properties under operating lease decreased by $684,227 (or 3%) to $23,838,913 as at January 31, 2021 from $24,523,140 as at October 31, 2020. The decrease in the properties under operating lease is a result of a greater number of terminating operating leases during the quarter compared to the number of new operating leases added during the quarter. This occurred because the Company was particularly selective with its new leasing opportunities during the quarter ended January 31, 2021 because the Company was approaching its limit on available new equity capital. In January and March 2021, the Company initiated new capital raising activities to ensure the Company has sufficient capital to continue to grow its lease portfolio.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Properties under operating lease (continued)

The following tables sets forth the composition of our properties under operating leases as of January 31, 2021 and October 31, 2020:

Original Retail Price Range Unit % 0 - 54,999 102 34% 55,000 - 149,999 158 52% 150,000 and above 41 14% Total 301 100% Operating Lease Portfolio Jan-21	Operating Lease Portfolio
	Oct-20
	Original Retail Price Range Unit %
	0 - 54,999 124 37%
	55,000 - 149,999 165 49%
	150,000 and above 45 13%
	Total 334 100%

LIQUIDITY AND CAPITAL RESOURCES

The Company’s approach to managing capital is to ensure that it will have sufficient liquidity to meet liabilities as they come due. The Company currently settles all of its financial obligations out of cash generated from operations. The ability to do so relies on the Company maintaining sufficient cash in excess of anticipated needs. To help manage its liquidity the Company has obtained an operating loan agreement through a major schedule 1 Canadian Financial Institution. To fund the acquisition of vehicles for leasing purposes, the Company utilizes its credit facilities and when additional capital is required, it will be raised through debt and share issuances.

The Company is subject to externally imposed capital requirements pursuant to the covenants of the secured credit facility. Management reviews its capital management approach on an ongoing basis.

The table below represents the financial leverage ratio and equity capitalization for the periods ended January 31, 2021 and October 31, 2020:

As at		January 31, 2021		October 31, 2020
Credit facilities and loans	$	9,236,012	$	10,062,818
Other liabilities		8,472,874		8,573,657
Total liabilities		17,708,886		18,636,475
Total Equity		10,512,697		10,434,566
Financial leverage ratio		1.67 : 1		1.79 :1

Cash flows and liquidity

Cash flows provided from operating activities for the three months ended January 31, 2021 was $1,403,042 compared to $1,520,329 for the comparative period ended January 31, 2020, a decrease of $117,287. The decrease in operating cash flow was a result of an increase in inventory by $178,674 and a net increase in accounts receivable of $70,819 during the quarter compared to a net decrease in accounts receivable of $496,298 during the comparative quarter in 2020. Inventory, accounts receivable and trade payables often fluctuate quarter over quarter but are generally tied to short-term timing of purchase and leasing transactions or lease end sales transactions.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Cash flows and liquidity (continued)

Cash flows used in investing activities for the three months ended January 31, 2021 were $628,620 as compared to $3,299,624 for the three months ended January 31, 2020. The decrease of $2,668,267 was due to COVID-19 and resultingly, a lower demand for lease opportunities as well as the Company being particularly selective with new lease originations as the Company’s available leasing capital was reaching capacity. In January and subsequent to quarter end, the Company initiated additional capital raising to increase the available capital resources to ensure that these lease investing activities can continue to grow and are available when the COVID-19 pandemic restrictions are ultimately released.

Cash flows used in financing activities for the three months ended January 31, 2021 were $920,613 as compared to cash flow provided $1,691,146 for the comparative period ended January 31, 2020. The decrease of $2,611,759 was primarily attributable to a net increase in cash proceeds from sales and lease terminations that were used to reduce the Company’s Credit Loan Facility.

The Company’s Credit Loan Facility allows the Company to borrow up to $12,500,000 at prime plus 1.25% subject to certain limitations. The bank covenant limitations require the Company to maintain a cash flow coverage ratio of not less than 1.25:1 and a debt to tangible net worth ratio not greater than 2:25:1 which is tested annually. As at January 31, 2021 and 2020, the Company was in compliance with these noted covenants.

OUTSTANDING SHARE DATA

The Company had 81,384,731 common shares issued and outstanding at January 31, 2021 and 81,402,231 at March 31, 2021. Please refer to Note 17 – “Share Capital” in the Company’s audited consolidated year end financial statements for additional information.

The Company had Nil share purchase warrants issued and outstanding at January 31, 2021 and at March 31, 2021. Please refer to Note 17 – “Share Capital” in the Company’s audited consolidated year end financial statements for additional information.

The Company had 4,906,000 share purchase options issued and outstanding at January 31, 2021 and March 31, 2021. Please refer to Note 17 – “Share Capital” in the Company’s audited consolidated year end financial statements for additional information.

The Company had 21,706,069 shares deposited into escrow pursuant to the policies of the TSX-V at January 31, 2021 and at March 31, 2021. Please refer to Note 17 – “Share Capital” in the Company’s audited consolidated year end financial statements for additional information.

The Company had a total of $2,705,000 5.00% convertible debentures outstanding at January 31, 2021 and $3,225,400 at March 31, 2021 that are convertible at $0.50 into a total of 6,450,800 common shares.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are made with reference to the Company’s interim financial statement for the three months ended January 31, 2021. A summary of the Company’s significant accounting policies is presented in the notes to those financial statements. Some of the Company’s accounting policies, as required by International Financial Reporting Standards (IFRS), require management to make subjective, complex judgments and estimates to matters that are inherently uncertain. The Company believes the policies below are the most critical accounting estimates that affect its operating results, and that would have the most material effect on the financial statements should these policies change or be applied in a different manner.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Revenue recognition

Brokerage Commissions

The Company facilitates vehicle sales through third-party dealerships where customers have low or limited credit history. The Company bears limited inventory risk in the transaction and does not have latitude in setting vehicle prices and therefore the Company only recognizes the net fees. In these situations, the fees are recorded as revenue at the time the customer enters into the contract and the Company is entitled to the fee. The Company is not the obligor under any of these contracts.

Automobile sales

Revenue is recognized when the risks and rewards of ownership have been transferred to the customer and the revenue and costs can be reliably measured and it is probable that economic benefits will flow to the Company. In practice, this means that revenue is recognized when vehicles are invoiced and physically delivered to the customer and payment has been received or credit approval has been obtained by the customer.

Lease interest and rental income

Finance lease interest income is included in the statement of comprehensive income for all financial assets measured at amortized cost using the effective interest method. The effective interest rate is the rate that discounts estimated future cash flows through the expected life of the financial instrument back to the net carrying amount of the financial asset. The calculation takes into account all contractual terms of the financial instrument including prepayment options, fee income charged to the customer on the origination of all financial assets, and all purchase premiums or discounts, net of any transaction costs that are directly attributable to the financial instrument, but not future credit losses. The application of the method has the effect of recognizing revenue on the financial instrument evenly in proportion of the amount outstanding over the period to maturity or repayment. Once the recorded value of a financial asset has been reduced due to an impairment loss, interest revenue continues to be recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. This is offset by a corresponding adjustment to the loan loss provision charge to reflect the fact that this additional revenue may not be collectible.

Rental income on operating leases is recognized on a straight-line basis over the lease term.

Financial instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial assets

Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset.

Financial assets carried at amortized cost are assessed at each reporting date for any potential impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the carrying amount and the present value of estimated future cash flows discounted using the original effective interest rate. The carrying amount of the asset is then reduced by the amount of the impairment and is recognized in the consolidated statements of comprehensive income.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Financial assets (continued)

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the reversal of the previously recognized impairment loss is recognized in the consolidated statements of comprehensive income.

Purchases or sales of financial assets that require delivery of assets in a timeframe established by regulation or convention in the marketplace (regular way trades) are recognized on the trade date, which is the date that the Company commits to purchase or sell the asset.

The Company’s financial assets include cash, term deposits, accounts receivable, due from related company, car loans receivable and receivable under finance lease.

Fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments, as defined by IAS 39. The Company’s cash and term deposit are classified as fair value through profit or loss.

Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.

The Company's loans and receivables are comprised of accounts receivable, due from related company, car loans receivable, and receivable under finance lease.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are designated as available-forsale and are not classified in any of the previous categories of financial assets. Available-for-sale financial assets are recognized initially at fair value plus any directly attributable transaction costs.

Subsequent to initial recognition, these assets are measured at fair value and changes therein, other than impairment losses, are recognized in other comprehensive income and presented within equity. When an investment is derecognized through sale or has an impairment that is other than temporary, the cumulative gain or loss in other comprehensive income is transferred to profit or loss.

The Company does not have any financial assets that are classified as available-for-sale.

Held-to-maturity financial assets

If the Company has the positive intent and ability to hold debt securities to maturity, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method, less any impairment losses. The Company does not have any financial assets that are classified as held-to-maturity.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Financial liabilities

All financial liabilities are initially recorded at fair value and designated upon inception as fair value through profit or loss or other financial liabilities.

Financial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest rate method. The effective interest rate method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. The Company’s bank indebtedness, accounts payable and accrued liabilities, customers’ advances, customers’ deposits, due to shareholder, and short-term loans are classified as other financial liabilities.

Financial liabilities classified as fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as fair value through profit or loss. Derivatives, including separated embedded derivatives are also classified as held for trading and recognized at fair value with changes in fair value recognized in profit or loss unless they are designated as effective hedging instruments. Fair value changes on financial liabilities classified as fair value through profit or loss are recognized in profit or loss.

Property under operating leases

The Company determines the classification of a lease at its lease inception date. An operating lease is one that does not transfer substantially all of the risks and rewards of ownership to the lessee.

Property classified as operating leases are carried at cost less accumulated depreciation and are being depreciated to their estimated residual values using the straight-line method over the lease term. Properties under operating leases are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds the higher of the asset’s fair value less costs to sell and its value in use.

The Company has not been required to record an impairment loss to date.

Impairment of non-current assets

The carrying amounts of the Company's non-current assets are reviewed at each reporting date for indicators of impairment. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the amount of the impairment, if any. The recoverable amount of an asset is evaluated at the Cash Generating Unit ("CGU") level, which is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

The recoverable amount of a CGU is the greater of its fair value less costs to sell and its value in use. Fair value less cost to sell is determined as the amount that would be obtained from the sale of the asset in an arm's length transaction between knowledgeable and willing parties, less the costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

ADOPTION OF NEW ACCOUNTING POLICIES

There were no new accounting policies adopted since October 31, 2020.

RELATED PARTY TRANSACTIONS

The Company’s related party transactions are set out in Note 11 to the unaudited consolidated financial statements for the three months ended January 31, 2021 and 2020. The transactions with related parties occurred in the normal course of operations.

The Company uses an office leased by Solution Lease Club, a Company controlled by the Company’s CEO for administration and promotional purposes. Solution Lease Club’s office is at Unit 6, 11220 Voyager Way, Richmond. The Company pays Solution Lease Club a $125 fee for each sales and lease transaction for property usage. During the three months ended January 31, 2021, the Company paid $12,500 to Solution Lease Club (2020- $8,400).

During the three months ended January 31, 2021, remuneration of directors and other members of key management personnel are $72,972 (2019 – $70,143).

During the three months ended January 31, 2021, the Company paid a total of $5,858 to law firm where a partner is a director of the Company (2020 – $10,914).

OFF-BALANCE SHEET ARRANGEMENTS

‐ The Company has not entered into any off balance sheet arrangements such as guarantee contracts, contingent interests in assets transferred to an entity, derivative instrument obligations or any other obligations which will have or are reasonably likely to have a current or future effect on the financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, other than operating leases.

RISK MANAGEMENT

Several trends and factors that the Company could be out of control can affect the operation of Company, and have the potential of affecting its financial condition, profitability, and cash flows. These trends and factors may be changes in the vehicle market sector, the state of the domestic and global economic conditions. Management has difficulty in accurately predicting the impact of changes in these risk factors and forecasting their effects on the Company’s results of operations and the financial conditions.

The Company is exposed to a few financial risks in the normal course of its business operations, including market risks resulting from policies, fluctuations in interest rates, as well as credit and liquidity risks. The following summarizes the types of market risks that the Company is exposed, and the policies and procedures for measuring and managing risk.

COVID-19 risk

The spread of COVID-19 is expected to have a material adverse effect on global and regional economies and continues to negatively impact stock markets. The adverse effects on the economy and the stock market could adversely impact the Company’s ability to raise capital, or its ability to pursue other strategic initiatives.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

RISK MANAGEMENT (CONTINUED)

Credit Risk

Credit risk is the risk that the Company will incur a loss a counter party will fail to perform its obligations. The Company’s financial instruments that are exposed to concentrations of credit risk consist of cash, term deposits, accounts receivable, due from related company, car loans receivable, and lease receivables. The Company attempts to mitigate the risks associated with cash and term deposits by dealing only with major Canadian financial institutions with good credit ratings and performs credit assessments of all customers making material orders. The Company attempts to mitigate the risks associated with car loans receivable and lease receivables through its credit check process performed before entering into any sales arrangement.

Liquidity risk

Liquidity risk is the risk that the Company cannot meet a demand for cash or fund its obligations as they come due. Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities as they come due. The Company currently settles all of its financial obligations out of cash generated from operations. The ability to do so relies on the Company maintaining sufficient cash in excess of anticipated needs. To help manage its liquidity the Company has obtained an operating loan agreement through the Bank of Montreal.

Interest rate risk

Interest rate risk is the risk that the fair values and future cash flows of the Company will fluctuate because of changes in market interest rates. The Company’s financial instruments that are exposed to concentrations of interest rate risk consist of bank indebtedness and short-term loans. A change in the prime rate of interest of 1% would result in additional interest expense for the Company of $92,360 per year. In order to mitigate this risk, the Company carefully monitors its borrowing costs to ensure its rates reflect appropriate spreads to insulate against sudden unexpected interest rate movements.

Competitive environment

There can be no assurance that the Company will be able to compete successfully against its current or future competitors, or that such competition will not have a material adverse effect on the financial condition and results of operations of the Company. Overall, the market for the financial services offered by the Company is highly competitive and some of the companies operating in this sector have greater financial resources than the Company.

Potential acquisitions and investments

The Company seeks to acquire or invest in businesses that expand or complement its current business. Such acquisitions or investments may involve significant commitments of financial or other resources of the Company. There can be no assurance that any such acquisitions or investments will generate additional earnings or other returns for the Company, or that financial or other resources committed to such activities will not be lost. Such activities could also place additional strains on the Company’s administrative and operational resources and its ability to manage growth.

Profitability

There is no assurance that the Company will earn profits in the future, or that profitability will be sustained. There is no assurance that future revenues will be sufficient to generate the funds required to continue the Company’s business development and marketing activities. If the Company does not have sufficient capital to fund its operations, it may be required to reduce its sales and marketing efforts or forego certain business opportunities.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

Debt Levels

Solution has had and will continue to increase its indebtedness. Its ability to make payments of principal and interest on the debt or to refinance its indebtedness will depend on Solution’s future operating performance and its ability to enter into additional debt and equity financings, which to a certain extent is subject to economic, financial, competitive and other factors beyond its control.

If Solution is unable to generate sufficient cash flow in the future to service its debt, it may be required to refinance all or a portion of its existing debt or obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained on terms acceptable to Solution.

General Economic Conditions

The automobile finance business has historically been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects. Delinquencies, defaults, repossessions and losses increase during periods of economic recession. These periods also are accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding loans, which weakens collateral coverage and increases the amount of a loss in the event of default. Significant increases in the inventory of used automobiles during periods of economic recession will depress the prices at which repossessed automobiles may be sold or delay the time of these sales.

Solution’s financial results are sensitive to immigration policies, number of international students in Canada, fluctuations in general interest rates, gross domestic product growth, and the level of consumer confidence, among other factors. Although Solution’s actual rates of delinquencies, defaults, repossessions and losses on these loans are very low comparing to our competitors in the general automobile finance industry, some government policies and general economic conditions would adversely affect its business, financial condition, liquidity and results of operations or future prospects.

Dependence on Management Information Systems

Solution depends on its management information systems in each stage of its operations. These management information systems also form the basis of its financial reporting. Irreparable damage to its information systems and databases, or loss of the information contained therein, could have a material adverse effect on Solution’s business, financial condition, liquidity and results of operations or future prospects.

More Stringent Government Regulations

Solution is subject to various federal, provincial and municipal laws and regulations. Such laws, regulations and related rules and policies are administered by various federal, provincial and municipal agencies and other governmental authorities. New laws governing Solution’s business could be enacted and changes to any existing laws could have a significant impact on the business of Solution. Failure by Solution to comply with applicable laws and regulations may subject it to civil or regulatory proceedings which may have a material adverse effect on Solution’s business, financial condition, liquidity and results of operations or future prospects.

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SOLUTION FINANCIAL INC. Management Discussion and Analysis - January 31, 2021

INTERNAL CONTROLS OVER DISCLOSURE AND FINANCIAL REPORTING

The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) are responsible for designing disclosure controls and procedures to ensure that material information is being recorded, processed, summarized, and reported to senior management, including the certifying officers and members of the Company’s Audit Committee on a timely basis, so that appropriate decisions can be made regarding public disclosure. In addition, the CEO, and CFO are responsible to design, or cause to be designed under their supervision, internal controls over financial reporting (“ICFR”), to a standard that provides reasonable assurance of the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

Disclosure controls and procedures

‐ Disclosure controls and procedures, as defined in National Instrument 52 109, Certification of Disclosure in Issuers’ Annual and Interim Filings, means controls and other procedures of an issuer that are designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by an issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to the issuer’s management, including its certifying officers, as appropriate to allow timely decisions regarding required disclosure.

Internal controls over financial reporting

The Company’s management, including the CEO, and CFO, has evaluated the design of the Company’s Internal Controls over Financial Reporting using the control framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded that the Company’s ICFR as at October 31, 2020 were designed and operating effectively and provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

Limitations of effectiveness of disclosure controls and internal controls over financial reporting

It should be noted that while the Company’s Chief Executive Officer, and Chief Financial Officer believe that the Company’s internal controls system and disclosure controls and procedures provides a reasonable level of assurance that the objectives of the control systems are met, they do not expect that the Company’s control system will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurances that any design will succeed in achieving its stated goals under all potential conditions. The Company will continue to periodically review our disclosure controls and procedures and internal control over financial reporting and may make modifications from time to time as considered necessary or desirable.

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