EX-99.10 11 tm2016525d3_ex99-10.htm EXHIBIT 99.10

 

Exhibit 99.10

 

 

 

 

 

 

 

 

 

 

Consolidated Financial Statements

 

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

  

 

 

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

As at      Mar. 31   Dec. 31 
(In thousands of Canadian dollars)     2019   2018 
Assets               
Current               
Cash and cash equivalents        48,193    47,252 
Fees receivable        7,816    8,635 
Loans receivable   (Note 5)    14,967    15,275 
Proprietary investments   (Note 3)    20,574    26,711 
Other assets   (Note 6)    12,038    10,774 
Income taxes recoverable        2,688    2,379 
Total current assets        106,276    111,026 
                
Loans receivable   (Note 5)    17,393    20,746 
Long-term investments   (Note 3)    114,107    102,560 
Other assets   (Note 6)    1,446    1,214 
Property and equipment, net        23,626    12,334 
Intangible assets   (Note 4)    149,855    148,324 
Goodwill   (Note 4)    25,590    26,115 
Deferred income taxes   (Note 8)    6,032    5,896 
         338,049    317,189 
Total assets        444,325    428,215 
                
Liabilities and Shareholders' Equity               
Current               
Accounts payable and accrued liabilities        32,465    41,641 
Compensation payable        4,268    9,466 
Obligations related to securities sold short   (Note 3)    —    255 
Loan facility   (Note 12)    5,000    — 
Income taxes payable        605    607 
Total current liabilities        42,338    51,969 
Other accrued liabilities        7,305    — 
Loan facility   (Note 12)    18,750    — 
Deferred income taxes   (Note 8)    3,779    3,125 
Total liabilities        72,172    55,094 
                
Shareholders' equity               
Capital stock   (Note 7)    415,952    412,938 
Contributed surplus   (Note 7)    44,140    43,383 
Deficit        (121,019)   (117,201)
Accumulated other comprehensive income        33,080    34,001 
Total shareholders' equity        372,153    373,121 
Total liabilities and shareholders' equity        444,325    428,215 
Commitments and provisions   (Note 13)           

 

The accompanying notes form part of the financial statements      

 

"Jack C. Lee"   "Sharon Ranson"  
Director   Director  

 

 

 

26

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

 

       For the three months ended 
       Mar. 31   Mar. 31 
(In thousands of Canadian dollars, except for per share amounts)          2019   2018 
Revenues            
Management fees        13,558    14,056 
Carried interest and performance fees        —    1,117 
Commissions        4,409    8,857 
Interest income        3,918    3,066 
Gain (loss) on proprietary investments   (Note 3)    73    (1,879)
Gain (loss) on long-term investments   (Note 3)    (67)   56 
Other income (loss)   (Note 6)    (644)   6,242 
Total revenue        21,247    31,515 
                
Expenses               
Compensation        8,118    10,902 
Stock-based compensation   (Note 7)    2,259    2,958 
Trailer and sub-advisor fees        —    47 
Placement and referral fees        78    204 
Selling, general and administrative        4,069    4,586 
Interest expense        324    66 
Amortization of intangibles   (Note 4)    292    555 
Amortization of property and equipment        809    133 
Other expenses   (Note 6)    637    1,179 
Total expenses        16,586    20,630 
Income before income taxes for the period        4,661    10,885 
Provision (recovery) for income taxes   (Note 8)    877    (2,772)
Net income for the period        3,784    13,657 
Basic earnings per share   (Note 7)   $0.02   $0.06 
Diluted earnings per share   (Note 7)   $0.01   $0.05 

 

Net income for the period   3,784    13,657 
Other comprehensive income          
Items that may be reclassified subsequently to profit or loss          
Foreign currency translation gain (loss) on foreign operations (taxes of $Nil)   (921)   1,559 
Total other comprehensive income (loss)   (921)   1,559 
Comprehensive income   2,863    15,216 

 

The accompanying notes form part of the financial statements      

 

 

 

27

 

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

 

                             
(In thousands of Canadian dollars, other than number of shares)      Number of
Shares
Outstanding		   Capital
Stock		   Contributed
Surplus		   Deficit   Accumulated
Other
Comprehensive
Income		   Total
 Equity		 
At Dec. 31, 2018        243,062,337    412,938    43,383    (117,201)   34,001    373,121 
Shares acquired for equity incentive plan   (Note 7)    (130,000)   (405)   —    —    —    (405)
Shares released on vesting of equity incentive plan   (Note 7)    968,967    2,285    (2,285)   —    —    — 
Foreign currency translation gain on foreign operations        —    —    —    —    (921)   (921)
Stock-based compensation   (Note 7)    —    —    2,259    —    —    2,259 
Issuance of share capital on conversion of RSUs and other share based considerations   (Note 7)    476,030    1,086    783    —    —    1,869 
Dividends declared   (Note 10)    15,323    48    —    (7,602)   —    (7,554)
Net income        —    —    —    3,784    —    3,784 
Balance, Mar. 31, 2019        244,392,657    415,952    44,140    (121,019)   33,080    372,153 
At Dec. 31, 2017        234,098,634    392,556    39,907    (118,272)   29,673    343,864 
IFRS 9 transition adjustment        —    —    —    (50)   —    (50)
Shares acquired for equity incentive plan        (2,362,500)   (7,058)   —    —    —    (7,058)
Shares released on vesting of equity incentive plan        675,656    1,656    (1,656)   —    —    — 
Foreign currency translation loss on foreign operations        —    —    —    —    1,559    1,559 
Issuance of share capital on purchase of management contracts        6,997,387    17,284    —    —    —    17,284 
Stock-based compensation        —    —    2,958    —    —    2,958 
Issuance of share capital on conversion of RSUs and other share based considerations        309,401    664    (601)   —    —    63 
Dividends declared        11,762    36    —    (7,553)   —    (7,517)
Net income        —    —    —    13,657    —    13,657 
Balance, Mar. 31, 2018        239,730,340    405,138    40,608    (112,218)   31,232    364,760 

 

The accompanying notes form part of the financial statements   

 

 

 

28

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   For the three months ended 
   Mar. 31   Mar. 31 
(In thousands of Canadian dollars, other than number of shares)  2019   2018 
Operating Activities          
Net income for the period   3,784    13,657 
Add (deduct) non-cash items:          
Loss (gain) on proprietary investments   (73)   1,879 
Loss (gain) on Long-term investments   67    (56)
Stock-based compensation   2,259    2,958 
Amortization of property, equipment and intangible assets   1,101    688 
Current portion of lease liability   (1,962)   — 
Deferred income tax recovery   500    (568)
Current income tax expense   377    (2,204)
Other items   440    (735)
Income taxes paid   (750)   (520)
Changes in:          
Fees receivable   819    2,492 
Loans receivable   3,661    (1,845)
Accounts payable, accrued liabilities and compensation payable   (14,374)   (4,485)
Other assets   (1,496)   13,697 
Cash provided by operating activities   (5,647)   24,958 
Investing Activities          
Purchase of investments   (13,366)   (12,645)
Sale of investments   7,323    13,117 
Purchase of property and equipment   (2,833)   (870)
Purchase of intangible assets   —    (114,995)
Cash provided by (used in) investing activities   (8,876)   (115,393)
Financing Activities          
Acquisition of common shares for equity incentive plan   (405)   (7,058)
Net advances from loan facility   23,750    — 
Dividends paid   (7,554)   (7,517)
Cash used in financing activities   15,791    (14,575)
Effect of foreign exchange on cash balances   (327)   987 
Net increase (decrease) in cash and cash equivalents during the period   941    (104,023)
Cash and cash equivalents, beginning of the period   47,252    156,120 
Cash and cash equivalents, end of the period   48,193    52,097 
Cash and cash equivalents:          
Cash   42,930    52,097 
Short-term deposits   5,263    — 
    48,193    52,097 
Supplementary disclosure of cash flow information          
Amount of interest received during the period   1,588    1,143 

 

The accompanying notes form part of the financial statements   

 

 

 

29

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

1 CORPORATE INFORMATION

 

Sprott Inc. (the "Company") was incorporated under the Business Corporations Act (Ontario) on February 13, 2008. Its registered office is at Royal Bank Plaza, South Tower, 200 Bay Street, Suite 2600, Toronto, Ontario M5J 2J1.

 

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Statement of compliance

 

The interim financial statements have been prepared in accordance with IFRS standards in effect as at March 31, 2019, specifically, IAS 34 Interim Financial Reporting.

 

Compliance with IFRS requires the Company to exercise judgment, make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may vary. Except as otherwise noted, significant accounting judgments and estimates are described in Note 2 of the December 31, 2018 annual audited financial statements and have been applied consistently to the interim financial statements as at and for the three months ended March 31, 2019.

 

Basis of presentation

 

These interim financial statements have been prepared on a going concern basis and on a historical cost basis, except for financial assets and financial liabilities classified as fair value through profit or loss ("FVTPL") or fair value through other comprehensive income ("FVOCI"), both of which have been measured at fair value. The financial statements are presented in Canadian dollars and all values are rounded to the nearest thousand ($000), except when indicated otherwise.

 

Principles of consolidation

 

These interim financial statements of the Company are prepared on a consolidated basis so as to include the accounts of all limited partnerships and corporations the Company is deemed to control under IFRS. Controlled limited partnerships and corporations ("subsidiaries") are consolidated from the date the Company obtains control. All intercompany balances with subsidiaries are eliminated upon consolidation. Subsidiary financial statements are prepared over the same reporting period as the Company and are based on accounting policies consistent with that of the Company.

 

Control exists if the Company has power over the entity, exposure or rights to variable returns from its involvement with the entity and the ability to use its power over the entity to affect the amount of returns the Company receives. In many, but not all instances, control will exist when the Company owns more than one half of the voting rights of a corporation, or is the sole limited and general partner of a limited partnership.

 

The Company currently controls the following principal subsidiaries:

 

• Sprott Asset Management LP ("SAM");

 

• Sprott Capital Partners LP ("SCP");

 

• Sprott Consulting LP ("SC");

 

• Sprott Asia LP ("Sprott Asia") and Sprott Korea Corporation ("Sprott Korea");

 

• Sprott U.S. Holdings Inc. ("SUSHI"), parent of: (1) Rule Investments Inc. ("RII") (2) Sprott Global Resource Investments Ltd. ("SGRIL"); (3) Sprott Asset Management USA Inc. ("SAM US"); and (4) Resource Capital Investment Corporation ("RCIC");

 

• Sprott Resource Lending Corp. ("SRLC");

 

• Sprott Genpar Ltd.; and

 

• Sprott Inc. 2011 Employee Profit Sharing Plan Trust (the "Trust")

 

 

 

30

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

Changes in accounting policies

 

In the first quarter of the year, the Company adopted IFRS 16 Leases (“IFRS 16”) and IFRIC 23 Uncertainty over Income Tax Treatments ("IFRIC 23"). As a result, the Company changed its accounting policies in the areas outlined below. As permitted by the transition provisions of IFRS 16, the Company applied a modified retrospective approach. Accordingly, the Company elected not to restate comparative period results and there was no impact to opening retained earnings. The adoption of IFRIC 23 did not have a material effect on the Company's financial statement.

 

Lease Commitments

 

The Company recognizes a right-to-use asset and a lease liability as at the lease commencement date. The right-to-use asset is initially measured at cost and subsequently at cost less any accumulated depreciation and impairment. The lease liability is initially measured at the present value of future lease payments over the anticipated lease term, discounted using the Company's incremental borrowing rate. Upon transition to IFRS 16, a right-to-use asset and lease liability of $9.8 million were recorded. The right-to-use asset is presented on the property and equipment line of the consolidated balance sheet and the short and long-term portions of the lease liability are presented on the accounts payable and accrued liabilities line and other accrued liabilities line, respectively, of the consolidated balance sheet.

 

The Company used the practical expedient when applying IFRS 16 for short-term leases under 12 months and low-value assets such as IT equipment, with lease payments being expensed as they are occurred.

 

Prior to the adoption of IFRS 16, the Company classified its lease obligation as operating leases, with the lease payments being presented as selling, general and administrative line of the statement of operations. Upon transition to IFRS 16, the right-to-use asset is amortized on a straight-line basis over the term of the lease with the amortization expense being presented on the amortization of property and equipment line of the statement of operations. The lease liability is subsequently remeasured at amortized cost using the effective interest rate method, with the interest charge on the incremental borrowing rate being presented on the interest expense line of the statement of operations.

 

Other accounting policies

 

All other accounting policies, judgments, and estimates described in the annual audited financial statements have been applied consistently to these financial statements unless otherwise noted.

 

 

 

31

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

3 PROPRIETARY INVESTMENTS, OBLIGATIONS RELATED TO SECURITIES SOLD SHORT AND LONG-TERM INVESTMENTS

 

Proprietary investments and Obligations related to securities sold short

 

Consist of the following (in thousands $):

 

   Classification and
measurement criteria		  March 31, 2019   Dec. 31, 2018 
Public equities and share purchase warrants  FVTPL   13,093    19,066 
Fixed income securities  FVTPL   2,777    2,796 
Private holdings:             
- Private investments  FVTPL   2,766    2,830 
- Energy contracts  Non-financial instrument   1,938    2,019 
Total proprietary investments      20,574    26,711 
              
Obligations related to securities sold short  FVTPL   —    255 

 

Long-term investments

 

Consists of the following (in thousands $):

 

   Classification and
measurement criteria		  March 31, 2019   Dec. 31, 2018 
            
Co-investments in funds  FVTPL   84,976    72,739 
Private holdings             
- Private investments  FVTPL   29,131    29,821 
Total long-term investments      114,107    102,560 

 

Realized gains and losses on financial assets classified at FVTPL are included in the gains (loss) on proprietary investments and Long-term investments on the consolidated statements of operations.

 

 

 

32

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

4 GOODWILL AND INTANGIBLE ASSETS

 

Consist of the following (in thousands $):

 

   Goodwill   Fund management
contracts - indefinite life		   Fund management
contracts - finite life		   Total 
Cost                    
At December 31, 2017   166,882    —    47,416    214,298 
Additions   —    133,303    —    133,303 
Net exchange differences   13,482    —    —    13,482 
At December 31, 2018   180,364    133,303    47,416    361,083 
Additions   —    1,830    —    1,830 
Net exchange differences   (3,391)   (7)   —    (3,398)
At March 31, 2019   176,973    135,126    47,416    359,515 
                     
Accumulated amortization                    
At December 31, 2017   (142,859)   —    (30,964)   (173,823)
Amortization charge for the period   —    —    (1,431)   (1,431)
Net exchange differences   (11,390)   —    —    (11,390)
At December 31, 2018   (154,249)   —    (32,395)   (186,644)
Amortization charge for the period   —    —    (292)   (292)
Net exchange differences   2,866    —    —    2,866 
At March 31, 2019   (151,383)   —    (32,687)   (184,070)
                     
Net book value at:                    
December31, 2018   26,115    133,303    15,021    174,439 
March 31, 2019   25,590    135,126    14,729    175,445 

 

 

 

33

 

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

Impairment assessment of goodwill

 

Previously, the Company reported seven cash generating units ("CGU") for goodwill impairment assessment and testing purposes:

 

•Exchange Listed Products

 

•Alternative Asset Management

 

•Global

 

•Lending

 

•Consulting

 

•Merchant Banking & Advisory

 

•Corporate

 

During the period, as the Company completed the reorganization of its reportable segments, the assets that were previously aggregated to create the Global CGU no longer met the requirements of a CGU as they no longer generated independent cash flows. As a result, these assets were disaggregated from the Global CGU, and were reallocated to existing CGUs with similar assets that generate largely independent cash flows (brokerage assets within the Brokerage CGU and fixed term LP assets within the Managed Equities CGU). Following this change, as at March 31, 2019, the Company CGUs are as follows:

 

•Exchange Listed Products

 

•Lending

 

•Managed Equities

 

•Brokerage

 

•Corporate

 

As at March 31, 2019, the Company had allocated $25.6 million (December 31, 2018 - $26.1 million) of goodwill on a relative value approach basis to the Exchange Listed Products and Managed Equities CGUs (previously called the Alternative Asset Management CGU).

 

In the normal course, goodwill is tested for impairment once per annum, which for the Company is during the fourth quarter of each year. During the first quarter impairment assessment process, there was no indicators of impairment in either the Exchange Listed Products CGU or the Managed Equities CGU.

 

Impairment assessment of indefinite life fund management contracts

 

As at March 31, 2019, the Company had an exchange listed fund management contract within the Exchange Listed Products CGU of $135.1 million related to Central Fund of Canada (December 31, 2018 - $133.3 million). There was no indicators of impairment as at March 31, 2019.

 

Impairment assessment of finite life fund management contracts

 

As at March 31, 2019, the Company had exchange listed fund management contracts within the Exchange Listed Products CGU of $14.7 million (December 31, 2018 - $15.0 million). There was no indicators of impairment as at March 31, 2019.

 

 

 

34

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

5LOANS RECEIVABLE

 

Components of loans receivable

 

Loans are reported at their amortized cost using the effective interest method. Loans are reported net of any expected credit loss provisions on the expected credit loss provisions line of the consolidated statements of operations. Total carrying value consists of the following (in thousands $):

 

   Mar. 31, 2019   Dec. 31, 2018 
Loans          
Loan principal   33,935    37,873 
Accrued interest   48    14 
Deferred revenue   (1,573)   (1,816)
Amortized cost   32,410    36,071 
Loan loss provisions   (50)   (50)
Less: current portion   (14,967)   (15,275)
Total carrying value of non-current loans receivable   17,393    20,746 

 

Expected credit losses ("ECL")

 

When a loan is classified as impaired, the original expected timing and amount of future cash flows may be revised to reflect new circumstances. These revised cash flows are discounted using the original effective interest rate to determine the net realizable value of the loan. Interest income is thereafter recognized on this net realizable value using the original effective interest rate. Additional changes to the amount or timing of future cash flows could result in further losses, or the reversal of previous losses, which would also impact the amount of subsequent interest income recognized.

 

As at March 31, 2019, the Company performed a comprehensive review of each loan measured at amortized cost in its portfolio to determine the requirement for an ECL provision. There were no credit events in the period.

 

Interest income on impaired loans and the changes in expected credit loss provisions are as follows (in thousands $):

 

   For the three months ended 
   March 31, 2019   Mar. 31, 2018 
Interest on impaired loans   —    — 
Expected credit loss provisions          
Balance, beginning of the year   50    — 
Transition adjustment   —    50 
Revised balance, beginning of the year   50    50 
Expected credit loss provision (recovery)   —    — 
Net exchange differences   —    — 
Balance, end of period   50    50 

 

 

 

35

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

Sector distribution of loan principal

 

Distribution of Company outstanding loan principal balances by sector:

 

   March 31, 2019   12/31/2018 
   Number of Loans   (in thousands $)   Number of Loans   (in thousands $) 
Loans                
Metals and mining   1    31,020    1    34,931 
Energy and other   2    2,915    2    2,942 
Total loan principal   3    33,935    3    37,873 

 

Geographic distribution of loan principal

 

Distribution of Company outstanding loan principal balances by geographic location of the underlying security:

 

   March 31, 2019   December 31, 2018 
   Number of Loans   (in thousands $)   Number of Loans   (in thousands $) 
Loans                
Canada   1    1,578    1    1,578 
United States of America   2    32,357    2    36,295 
Total loan principal   3    33,935    3    37,873 

 

 

 

36

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

6OTHER ASSETS, INCOME AND EXPENSES

 

Other assets

 

Consist of the following (in thousands $):

 

   Mar. 31, 2019   Dec. 31, 2018 
Fund recoveries and investment receivables   7,855    4,722 
Prepaid expenses   4,017    5,369 
Other (1)   1,612    1,897 
Total Other assets   13,484    11,988 

 

(1) Other includes miscellaneous third-party receivables.

 

Other income (loss)

 

Consist of the following (in thousands $):

 

   For the three months ended 
   Mar. 31, 2019   Mar. 31, 2018 
Net proceeds from Sale Transaction (1)   —    4,200 
Other investment income (2)   86    831 
Foreign exchange gain (losses)   (1,025)   857 
Total Other income (loss) (3)   (939)   5,888 

 

(1) Gross proceeds of $5.0 million, net of transaction costs of $0.8 million. This relates to the January 29, 2018 closing of the sale of our non-core private wealth client business.

(2) Primarily includes investment fund income, syndication and trailer fee income.

(3) Excludes royalty income of $0.3 million (March 31, 2018 - $0.4 million), which is presented net of operating, depletion and impairment charges below.

 

Other expenses

 

Consist of the following (in thousands $):

 

   For the three months ended 
   Mar. 31, 2019   Mar. 31, 2018 
Costs (recoveries) related to energy assets (1)   11    30 
Other   331    795 
Total Other expenses   342    825 

 

(1) Includes operating, depletion and impairment charges, net of royalty income of $0.3 million (March 31, 2018 - $0.4 million).

  

 

 

37

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

7      SHAREHOLDERS' EQUITY

 

Capital stock and contributed surplus

 

The authorized and issued share capital of the Company consists of an unlimited number of common shares, without par value.

 

   Number
of shares		   Stated value
 (in thousands $)		 
At Dec. 31, 2017   234,098,634    392,556 
Issuance of share capital under dividend reinvestment program   338,628    1,015 
Issuance of share capital on purchase of management contracts   6,997,387    17,284 
Released on exercise of stock option plan   558,048    1,217 
Issuance of share capital on conversion of RSU   635,939    1,581 
Acquired for equity incentive plan   (2,402,500)   (7,161)
Released on vesting of equity incentive plan   2,836,201    6,446 
At Dec. 31, 2018   243,062,337    412,938 
Issuance of share capital under dividend reinvestment program   15,323    48 
Issuance of share capital on conversion of RSU and other share based considerations   476,030    1,086 
Acquired for equity incentive plan   (130,000)   (405)
Released on vesting of equity incentive plan   968,967    2,285 
At Mar. 31, 2019   244,392,657    415,952 

 

Contributed surplus consists of: stock option expense; earn-out shares expense; equity incentive plans' expense; and additional purchase consideration.

 

   Stated value
(in thousands $)		 
At Dec. 31, 2017   39,907 
Expensing of Stock-based compensation over the vesting period   12,358 
Issuance of share capital on conversion of RSUs   (1,219)
Released on exercise of stock option plan   (1,217)
Released on vesting of common shares for equity incentive plan   (6,446)
At Dec. 31, 2018   43,383 
Expensing of Stock-based compensation over the vesting period   2,259 
Issuance of share capital on conversion of RSU and other share based considerations   783 
Released on vesting of common shares for equity incentive plan   (2,285)
At Mar. 31, 2019   44,140 

 

 

 

38

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

Stock option plan

 

The Company has an option plan (the "Plan") intended to provide incentives to directors, officers, employees and consultants of the Company and its wholly owned subsidiaries. The aggregate number of shares issuable upon the exercise of all options granted under the Plan and under all other stock-based compensation arrangements including the Trust and Equity Incentive Plan ("EIP") cannot exceed 10% of the issued and outstanding shares of the Company as at the date of grant. The options may be granted at a price that is not less than the market price of the Company's common shares at the time of grant. The options vest annually over a three-year period and may be exercised during a period not to exceed 10 years from the date of grant.

 

There were no stock options issued for the quarter ended ended March 31, 2019 (three months ended March 31, 2018 - 750,000). There were no options exercised or forfeited in the quarter ended March 31, 2019 (three months ended March 31, 2018 - nil).

 

For valuing share option grants, the fair value method of accounting is used. The fair value of option grants is determined using the Black-Scholes option-pricing model, which takes into account the exercise price of the option, the current share price, the risk-free interest rate, the expected volatility of the share price over the life of the option and other relevant factors. Compensation cost is recognized over the vesting period, assuming an estimated forfeiture rate, with an offset to contributed surplus. When exercised, amounts originally recorded against contributed surplus as well as any consideration paid by the option holder is credited to capital stock.

 

A summary of the changes in the Plan is as follows:

 

   Number of options
(in thousands)		   Weighted average
exercise price ($)		 
Options outstanding, December 31, 2017   6,975    5.14 
Options exercisable, December 31, 2017   5,625    5.79 
Options issued   750    2.33 
Options exercised   (2,000)   2.33 
Options expired   (2,450)   10.00 
Options outstanding, December 31, 2018   3,275    2.57 
Options exercisable, December 31, 2018   1,875    2.70 
Options outstanding, March 31, 2019   3,275    2.57 
Options exercisable, March 31, 2019   2,575    2.60 

 

Options outstanding and exercisable as at March 31, 2019 are as follows:

 

Exercise price ($)  Number of outstanding
options
(in thousands)		   Weighted average
remaining contractual life
(years)		   Number of options
exercisable
(in thousands)		 
6.60   150    1.6    150 
2.33   3,000    6.8    2,300 
2.73   125    7.1    125 
2.33 to 6.60   3,275    6.6    2,575 

 

 

 

39

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

Equity incentive plan

 

For employees in Canada, the Trust has been established and the Company will fund the Trust with cash, which will be used by the trustee to purchase: (1) on the open market, common shares of the Company that will be held in the Trust until the awards vest and are distributed to eligible members; or (2) from treasury, common shares of the Company that will be held in the Trust until the awards vest and are distributed to eligible employees; and (3) from time-to-time, purchases from 2176423 Ontario Ltd., a company controlled by Eric Sprott, pursuant to the terms and conditions of a previously announced share transaction. For employees in the U.S. under the EIP plan, the Company will allot common shares of the Company as either: (1) restricted stock; (2) unrestricted stock; or (3) restricted stock units ("RSUs"), the resulting common shares of which will be issued from treasury.

 

There were 256,719 RSUs granted during the quarter ended ended March 31, 2019 (three months ended March 31, 2018 - 309,401). The Trust purchased 0.1 million shares in the quarter ended March 31, 2019 (three months ended March 31, 2018 - 2.4 million).

 

   Number of common shares 
Common shares held by the Trust, December 31, 2017   10,365,957 
Acquired   2,402,500 
Released on vesting   (2,836,201)
Unvested common shares held by the Trust, December 31, 2018   9,932,256 
Acquired   130,000 
Released on vesting   (968,967)
Unvested common shares held by the Trust, March 31, 2019   9,093,289 

 

The table below provides a breakdown of the share-based compensation expense and the corresponding increase to contributed surplus:

 

 

 

40

 

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

   For the three months ended 
   March 31, 2019   March 31, 2018 
Stock option plan   74    235 
EPSP / EIP   2,185    2,723 
    2,259    2,958 

 

Basic and diluted earnings per share

 

The following table presents the calculation of basic and diluted earnings (loss) per common share:

 

   For the three months ended 
Numerator (in thousands $):  March 31, 2019   March 31, 2018 
Net income (loss) - basic and diluted   3,784    13,657 
           
Denominator (Number of shares in thousands):          
Weighted average number of common shares   253,417    251,391 
Weighted average number of unvested shares purchased by the Trust   (9,238)   (10,481)
Weighted average number of common shares - basic   244,179    240,910 
Weighted average number of dilutive stock options   3,125    1,201 
Weighted average number of unvested shares purchased by the Trust   9,238    10,481 
Weighted average number of common shares - diluted   256,542    252,592 
Net income per common share          
Basic  $0.02   $0.06 
Diluted  $0.01   $0.05 

 

 

 

 

41

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

Capital management

 

The Company's objectives when managing capital are:

 

•to meet regulatory requirements and other contractual obligations;

 

•to safeguard the Company's ability to continue as a going concern so that it can continue to provide returns for shareholders;

 

•to provide financial flexibility to fund possible acquisitions;

 

•to provide adequate seed capital for the Company's new product offerings; and

 

•to provide an adequate return to shareholders through growth in assets under management, growth in management fees, carried interest and performance fees and return on the Company's invested capital that will result in dividend payments to shareholders.

 

The Company's capital is comprised of equity, including capital stock, contributed surplus, retained earnings (deficit) and accumulated other comprehensive income (loss). SCP is a member of the Investment Industry Regulatory Organization of Canada ("IIROC"), SAM is a registrant of the Ontario Securities Commission ("OSC") and the U.S. Securities and Exchange Commission ("SEC"), SAM US is registered with the SEC and SGRIL is a member of the Financial Industry Regulatory Authority ("FINRA"). As a result, all of these entities are required to maintain a minimum level of regulatory capital. To ensure compliance, management monitors regulatory and working capital on a regular basis. As at March 31, 2019 and 2018, all entities were in compliance with their respective capital requirements.

 

 

 

42

 

 

SPROTT INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended March 31, 2019 and 2018

 

8        INCOME TAXES

 

The major components of income tax expense are as follows (in thousands $):

 

   For the three months ended 
   Mar. 31, 2019   Mar. 31, 2018 
Current income tax expense (recovery)          
Based on taxable income of the current period   377    (2,204)
    377    (2,204)
Deferred income tax expense (recovery)          
Total deferred income tax expense   500    (568)
Income tax expense reported in the consolidated statements of operations   877    (2,772)

 

Taxes calculated on the Company's earnings differs from the theoretical amount that would arise using the weighted average tax rate applicable to earnings of the Company as follows (in thousands $):

 

   For the three months ended 
   Mar. 31, 2019   Mar. 31, 2018 
Income before income taxes   4,661    10,885 
Tax calculated at domestic tax rates applicable to profits in the respective countries   1,246    2,873 
Tax effects of:          
Non-deductible stock-based compensation   45    103 
Non-taxable capital (gains) and losses   (152)   (458)
Intangibles   28    (4,794)
Other temporary differences not benefited   64    (334)
Non-capital losses not benefited previously   (476)   (1,014)
Rate differences and other   122    852 
Tax charge   877    (2,772)

 

The weighted average statutory tax rate was 26.7% (March 31, 2018 - 26.4%). This increase was primarily due to increased profitability of our Canadian businesses. The Company has $12 million of capital tax losses and $4 million of non-capital tax losses from prior years that will begin to expire in 2019 and 2027, respectively. The benefit of these capital and non-capital tax losses has not been recognized.

 

 

 

43

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. The ability to realize the tax benefits of these losses is dependent upon a number of factors, including the future profitability of operations in the jurisdictions in which the tax losses arose. The movement in significant components of the Company's deferred income tax assets and liabilities is as follows (in thousands $):

 

For the three months ended March 31, 2019

 

   Dec. 31, 2018   Recognized in income   Recognized in
other
comprehensive
income		   Mar. 31, 2019 
Deferred income tax assets                    
Other stock-based compensation   4,300    (151)   —    4,149 
Non-capital losses   5,018    219    (18)   5,219 
Unrealized gains   386    (256)        130 
Other   513    65    —    578 
Total deferred income tax assets   10,217    (123)   (18)   10,076 
                     
Deferred income tax liabilities                    
Fund management contracts   7,317    347    —    7,664 
Proceeds receivable   70    —    —    70 
Other   59    30    —    89 
Total deferred income tax liabilities   7,446    377    —    7,823 
Net deferred income tax assets   2,771    (500)   (18)   2,253 

 

For the year ended December 31, 2018

 

 

 

44

 

 

SPROTT INC.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three months ended March 31, 2019 and 2018

 

   Dec. 31, 2017   Recognized in income   Recognized in
other
comprehensive
income		   Dec. 31, 2018 
Deferred income tax assets                    
Other stock-based compensation   2,588    1,712    —    4,300 
Non-capital losses   820    4,185    13    5,018 
Unrealized gains   481    (95)   —    386 
Other   485    28    —    513 
Total deferred income tax assets   4,374    5,830    13    10,217 
                     
Deferred income tax liabilities                    
Fund management contracts   431    6,886    —    7,317 
Proceeds receivable   279    (209)   —    70 
Other   (116)   175    —    59 
Total deferred income tax liabilities   594    6,852    —    7,446 
Net deferred income tax assets   3,780    (1,022)   13    2,771 

 

 

 

45

 

 

 

SPROTT INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended March 31, 2019 and 2018 

9            FAIR VALUE MEASUREMENTS

 

The following tables present the Company's recurring fair value measurements within the fair value hierarchy. The Company did not have non-recurring fair value measurements as at March 31, 2019 and December 31, 2018 (in thousands $).

 

Proprietary Investments

 

March 31, 2019  Level 1   Level 2   Level 3   Total 
Public equities and share purchase warrants   11,280    1,813    —    13,093 
Fixed income securities   —    1,777    1,000    2,777 
Private holdings   —    —    2,766    2,766 
Total net recurring fair value measurements   11,280    3,590    3,766    18,636 

 

     
Dec. 31, 2018  Level 1   Level 2   Level 3   Total 
Public equities and share purchase warrants   13,680    5,386    —    19,066 
Fixed income securities   —    1,796    1,000    2,796 
Private holdings   —    —    2,830    2,830 
Obligations related to securities sold short   (255)   —    —    (255)
Total net recurring fair value measurements   13,425    7,182    3,830    35,103 

 

Long-term investments

 

March 31, 2019  Level 1   Level 2   Level 3   Total 
Co-investments in funds   —    84,976    —    84,976 
Private holdings   —    —    29,131    29,131 
Total net recurring fair value measurements   —    84,976    29,131    114,107 

 

Dec 31, 2018  Level 1   Level 2   Level 3   Total 
Co-investments in funds   —    72,739    —    72,739 
Private holdings   —    —    29,821    29,821 
Total net recurring fair value measurements   —    72,739    29,821    102,560 

 

 

 

46

 

 

SPROTT INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended March 31, 2019 and 2018 

The following tables provides a summary of changes in the fair value of Level 3 financial assets (in thousands $):

 

Proprietary Investments

 

   Changes in the fair value of Level 3 measurements - Mar. 31, 2019 
   Dec. 31, 2018   Purchases and reclassifications   Settlements   Net unrealized
gains (losses)
included in net
income		   Mar. 31, 2019 
Private holdings   2,830    —    —    (64)   2,766 
Fixed income securities   1,000    —    —    —    1,000 
    3,830    —    —    (64)   3,766 

 

   Changes in the fair value of Level 3 measurements - Dec. 31, 2018 
   Dec. 31, 2017   Purchases and reclassifications   Settlements   Net unrealized
gains (losses)
included in net
income		   Dec. 31, 2018 
Private holdings   4,269    2,135    (3,680)   106    2,830 
Fixed income securities   —    1,000    —    —    1,000 
    4,269    3,135    (3,680)   106    3,830 

 

Long-term investments

 

   Changes in the fair value of Level 3 measurements - Mar. 31, 2019 
   Dec. 31, 2018   Purchases and reclassifications   Settlements   Net unrealized
gains (losses)
included in net
income		   Mar. 31, 2019 
Private holdings   29,821    —    —    (690)   29,131 
    29,821    —    —    (690)   29,131 

 

   Changes in the fair value of Level 3 measurements - Dec. 31, 2018 
   Dec. 31, 2017   Purchases and reclassifications   Settlements   Net unrealized
gains (losses)
included in net
income		   Dec. 31, 2018 
Private holdings   12,152    13,145    —    4,524    29,821 
    12,152    13,145    —    4,524    29,821 

 

During the three months ended March 31, 2019, the Company transferred public equities of $3.6 million (December 31, 2018 - $0.7 million) from Level 2 to Level 1 within the fair value hierarchy due to the release of trading restrictions by the issuer. For the three months ended March 31, 2019, the Company purchased level 3 investments of $Nil (December 31, 2018 - $16.3 million). For the three months ended March 31, 2019, the Company transferred $Nil (December 31, 2018 - $Nil) from Level 3 to Level 1 within the fair value hierarchy.

 

 

 

47

 

 

SPROTT INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended March 31, 2019 and 2018 

The following table presents the valuation techniques used by the Company in measuring fair values:

 

Type Valuation Technique
Public equities and share purchase warrants Fair values are determined using pricing models which incorporate all available market-observable inputs.
Co-investments in funds Fair values are based on the last available Net Asset Value.
Fixed income securities Fair values are based on independent market data providers or third-party broker quotes.

 

The Company’s Level 3 securities consists of private holdings and fixed income securities of private companies. The Company determines fair value using a variety of valuation techniques, including discounted cash flows, comparable recent transactions and other techniques used by market participants. The significant unobservable input used in these valuation techniques can vary considerably over time, and include grey market financing prices, discount rates and extraction recovery rates of mining projects. A significant change in any of these inputs in isolation would result in a material impact in fair value measurement. The potential impact of a 5% change in the significant unobservable inputs on profit or loss would be approximately $1.2 million (December 31, 2018 - $1.2 million).

 

Financial instruments not carried at fair value

 

For fees receivable, other assets, accounts payable and accrued liabilities and compensation payable, the carrying amount represents a reasonable approximation of fair value due to their short term maturity.

 

10        DIVIDENDS

 

The following dividends were declared by the Company during the three months ended March 31, 2019:

 

Record date  Payment Date   Cash dividend
per share ($)		   Total dividend
amount (in
thousands $)		 
March 08, 2019 - Regular Dividend Q4 - 2018   March 25, 2019    0.03    7,602 
Dividends (1)             7,602 

 

(1) Subsequent to the quarter-end, on May 9, 2019, a regular dividend of $0.03 per common share was declared for the quarter ended March 31, 2019. This dividend is payable on June 5, 2019 to shareholders of record at the close of business on May 21, 2019.

 

 

 

48

 

 

SPROTT INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended March 31, 2019 and 2018  

11        SEGMENTED INFORMATION

 

For management purposes, the Company is organized into business units based on its products, services and geographical location and has five reportable segments as follows:

 

·Exchange Listed Products (reportable), which provides management services to the Company's closed-end physical trusts and exchange traded funds ("ETFs"), both of which are actively traded on public securities exchanges;

 

·Lending (reportable), which provides lending activities through limited partnership vehicles as well as through direct lending activities using the Company's balance sheet;

 

·Managed Equities (reportable), which provides asset management and sub-advisory services to the Company's branded funds, fixed-term LPs and managed accounts;

 

·Brokerage (reportable), which includes the activities of our Canadian and U.S broker-dealers;

 

·Corporate (reportable), which provides capital, balance sheet management and enterprise shared services to the Company's subsidiaries;

 

·All Other Segments (non-reportable), which do not meet the definition of reportable segments as per IFRS 8.

 

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on earnings before interest expense, income taxes, amortization and impairment of intangible assets and goodwill, gains and losses on proprietary investments (as if such gains and losses had not occurred), foreign exchange gains and losses, one time non-recurring expenses, non-cash and non-recurring stock-based compensation, carried interest and performance fees and carried interest and performance fee payouts (adjusted base EBITDA).

 

Adjusted base EBITDA is not a measurement in accordance with IFRS and should not be considered as an alternative to net income or any other measure of performance under IFRS.

 

Transfer pricing between operating segments is performed on an arm's length basis in a manner similar to transactions with third parties.

 

 

 

49

 

 

SPROTT INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended March 31, 2019 and 2018

 

The following tables present the operations of the Company's segments (in thousands $):

 

For the three months ended March 31, 2019

 

   Exchange Listed Products   Lending   Managed
Equities		   Brokerage   Corporate   Elimination and all other segments   Consolidated 
Total revenue   7,293    3,382    3,234    5,648    (152)   1,842    21,247 
Total expenses   2,542    1,523    2,867    6,023    2,535    1,096    16,586 
Pre-tax Income (loss)   4,751    1,859    367    (375)   (2,687)   746    4,661 
Adjusted base EBITDA   5,699    4,042    915    3    (1,691)   216    9,184 

 

For the three months ended March 31, 2018

 

   Exchange Listed Products   Lending   Managed  
    Equities (1)		   Brokerage (1)   Corporate  

Elimination

and all other

segments (1)

   Consolidated 
Total revenue   7,927    6,805    3,748    12,641    (160)   554    31,515 
Total expenses   2,473    1,600    2,833    8,090    3,674    1,960    20,630 
Pre-tax Income (loss)   5,454    5,205    915    4,551    (3,834)   (1,406)   10,885 
Adjusted base EBITDA   6,032    2,757    1,314    2,127    (2,428)   225    10,027 

 

(1) Prior year figures have been restated to reflect the changes in operating segments implemented in the quarter.

 

For geographic reporting purposes, transactions are primarily recorded in the location that corresponds with the underlying subsidiary's country of domicile that generates the revenue. The following table presents the revenue of the Company by geographic location (in thousands $):

 

   For the three months ended 
   Mar. 31, 2019   Mar. 31, 2018 
         
Canada   17,594    27,976 
United States   3,653    3,539 
    21,247    31,515 

 

 

 

50

 

 

SPROTT INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended March 31, 2019 and 2018 

12            LOAN FACILITY

 

As at March 31, 2019 the Company had $23.8 million (December 31, 2018 - $Nil) outstanding on its credit facility, $5 million of which is due within 12 months and $18.8 million is due after 12 months (December 31, 2018 - $Nil and $Nil respectively).

 

The Company has a 5 year, $90 million credit facility with a major Canadian schedule I chartered bank. The facility consists of a $25 million term loan and a $65 million revolving line of credit. Amounts may be borrowed under the facility through prime rate loans or bankers’ acceptances. Amounts may also be borrowed in U.S. dollars through base rate loans. During the quarter, the Company drew $23.8 million on the term loan portion of the credit facility to avoid its expiry and to partially fund near-term anticipated growth in the business, in particular, the anticipated pace of capital calls over the next 12-18 months in its lending LPs. Key terms under the credit facility are noted below:

 

Structure

◦            5-year, $65 million revolver with "bullet maturity" December 31, 2022

◦            5-year, $25 million term loan with 5% of principal amortizing quarterly

 

Interest Rate

◦            Prime rate + 0 bps or;

◦            Banker Acceptance Rate + 170 bps

 

Covenant Terms

◦            AUM more than 70% of AUM at origination date (compliant at March 31, 2019)

◦            Debt to EBITDA less than 3.25:1 for first 18 months, after which, debt to EBITDA less than 2.50:1

(compliant at March 31, 2019)

◦            EBITDA to interest expense more than 2.50:1 (compliant at March 31, 2019)

 

13         COMMITMENTS AND PROVISIONS

 

Besides the Company's long-term lease agreement, there may be commitments to provide loans arising from the Lending business or commitments to make investments in the net investments portfolio of the Company. As at March 31, 2019, the Company had $5.7 million in co-investment commitments from the Lending segment (December 31, 2018 - $38.7 million).

 

 

 

51

 

 

Corporate Information

 

Head Office Sprott Inc.
Royal Bank Plaza, South Tower
200 Bay Street, Suite 2600
Toronto, Ontario M5J 2J1, Canada
T: 416.943.8099
1.855.943.8099		 Legal Counsel
Baker & McKenzie LLP
Brookfield Place, Suite 2100
181 Bay Street, P.O. Box 874
Toronto, Ontario, Canada M5J 2T3 
  Auditors
Directors & Officers
Jack C. Lee, Chairman
Peter Grosskopf, Chief Executive Officer and Director
Rick Rule, Director
Sharon Ranson, FCPA, FCA, Director
Rosemary Zigrossi, Director
Ronald Dewhurst, Director
Whitney George, President
Kevin Hibbert, Chief Financial Officer
Arthur Einav, Corporate Secretary		 KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto, ON M5H 2S5

Investor Relations
Shareholder requests may be directed to
Investor Relations by e-mail at ir@sprott.com
or via telephone at 416.943.8099
or toll free at 1.855.943.8099
   
  Stock Information
Transfer Agent & Registrar
TMX Equity Transfer Services
200 University Avenue, Suite 30
Toronto, Ontario M5H 4H1
Toll Free: 1.866.393.4891
www.tmxequitytransferservices.com		 Sprott Inc. common shares are traded on the
Toronto Stock Exchange under the symbol ‘‘SII’’

 

 

 

 

 

 

www.sprott.com