Table of Contents
Management's Discussion and Analysis
Letter to Shareholders
Management's Discussion and Analysis
Consolidated Financial Statements
Management's Responsibility for Financial Reporting
Independent Auditors' Report
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
2
3
5
29
30
31
32
37
Management's Discussion and Analysis
Year-ended December 31, 2011
March 27, 2012
Dear Shareholders,
Looking back at 2011, it was a year characterized by volatility and government intervention in the financial markets. For the Sprott organization, it
was a year of contrasts. While we made great progress building our investment team and increasing the diversity of our business, our investment
performance did not meet our expectations.
Our views on economic weakness and the dangers inherent in the financial system are well publicized and our funds were defensively positioned
throughout 2011. For the first nine months of the year this positioning served us well, as we were able to deliver relatively strong results while markets
see-sawed due to the European debt crisis. In August, the Standard & Poor's (“S&P”) downgrade of U.S. treasury debt led to a broad market decline
that negatively impacted most asset classes with the exception of, ironically, U.S. Treasury bonds. Central banks were active providing liquidity measures
to financial institutions but precious metals sold off in the rush to liquidity. Our performance suffered due to the declines of gold, silver, and energy
equities, which accelerated into year-end.
For most of the year, investors shunned risk and capital flowed into investment grade bonds. The S&P/TSX Composite Index fell by 11.1% in 2011,
while the DEX Universe Bond Index gained 9.7%. The mining and small cap sectors were hit particularly hard, with the S&P Global Gold Index
falling by 14.3% on the year and the S&P/TSX Small Cap Total Return Index posting a loss of 16.4%.
The end result for Sprott was that, despite our accurate assessment of the macro-economic environment, many of our funds finished 2011 in negative
territory. Our financial results were affected accordingly, as performance fees fell to a net $4.0 million from $200 million the prior year and our net
income decreased by 75%.
Despite these declines, we continued to see the benefits of the increased scale of our organization. Base EBITDA, which we consider to be an
important gauge of the growth of our core business, increased and our Assets Under Management (“AUM”) grew to $9.1 billion as of December
31, 2011 from $8.5 billion the prior year. Our expanded product offering was received well by clients and helped us generate $1.4 billion in net sales,
driven largely by the success of our physical bullion products and our fixed-income product line.
Our investment philosophy is guided by a commitment to long-term, secular themes. We believe that by continuing to focus on strategic asset and
sector allocations, and recruiting leading analysts and portfolio managers, we will be successful in delivering superior long-term performance to our
clients and investors.
Building a Global Alternative Asset Manager
Our goal is to build Sprott into a global alternative asset manager. This commitment is underscored by our ongoing investments in our business. Most
importantly, we continue to add to our investment team and expertise with the objective of enhancing future performance. The latest addition to the
team is John Wilson, who joined us in February of this year as Senior Portfolio Manager. John has a history of delivering superior performance to
investors and fits in well with our team and culture. He is an independent thinker with a high conviction style of investing and a strong focus on
protecting capital. John's core expertise and strategy fall within the asset class categories that represent the largest pools of invested capital in Canada.
John was recently appointed lead portfolio manager on the Sprott Opportunities Funds and, looking ahead, we expect to launch new investment
options with Canadian equity and Canadian balanced mandates for which John will serve as the lead manager.
In 2011, we completed the acquisition and integration of the Global Group of Companies (the “Global Companies”) into our organization. We are
pleased with the progress we have made so far at our U.S. operations, launching our first Sprott-branded products through Sprott Asset Management
USA Inc. and bringing on Paul Meehl as CEO of our U.S. broker dealer.
Through the acquisition of the “Global Companies”, we also bolstered our resource expertise with the addition of Rick Rule and his team of resource
specialists. We recently made a key hire to further strengthen this group with Neil Adshead joining as Investment Strategist. Neil brings deep technical
expertise in evaluating resource investments and will assist Rick Rule in managing the Exploration Partnerships.
During the year and subsequent to year end, we were active in launching several new precious metal, fixed income, and enhanced equity products. In
keeping with our commitment to offering our clients innovative investment solutions, we also introduced the Sprott Corporate Class of tax-efficient
mutual funds, which includes the Sprott Silver Equities Class, the first fund of its kind in Canada.
3
In 2012, we will continue to launch new products. Building on the success of our Physical Bullion franchise, we have filed a preliminary prospectus
for a new Physical Platinum and Palladium Trust. We are also close to launching a new team-based, offshore fund geared to international institutional
investors.
Our Physical Gold and Physical Silver Trusts, which are traded on both the TSX and NYSE Arca exchanges, continue to grow, both through asset
appreciation and follow-on offerings. Combined, the two Trusts now account for more than $3.5 billion in AUM. These products provide us with
valuable brand exposure in the U.S. and internationally, as well as a stable and growing EBITDA contribution.
To support our recent and planned product launches, we have made commensurate investments in our sales and client service teams. We hired J.D.
Rothstein as National Sales Manager with a mandate to improve our sales reach and ability to service the growing number of independent financial
advisors who distribute Sprott funds. Under James Fox, we are building our Offshore and Institutional sales team to support the launches of new
Institutional products.
Sprott Consulting
Our direct investing business, Sprott Consulting, continues to grow and to seek new investment opportunities.
Sprott Resource Corp. has built an impressive portfolio of investments concentrated in the energy and agriculture sectors. In 2011, the team was again
successful in advancing the development of its investments and creating value for their shareholders. Sprott Resource Corp. continues to increase its
AUM, which now stands at more than $500 million, most of which has been generated by its outstanding record of compounding its retained earnings.
Sprott Resource Lending Corp. continues to build its business with the objective of becoming a preferred lender to the resource industry. Since
commencing resource lending activities, it has successfully initiated over $650 million of loans and currently holds over $100 million of such loans
as well as a substantial cash balance.
Sprott Power Corp. has made steady progress since listing on the TSX in February of 2011. Over the last twelve months, the company has grown its
portfolio of renewable energy projects and expects to double its revenue run rate to over $20 million during the second quarter of 2012.
Strategic Acquisitions
We are committed to evaluating acquisition opportunities to build out new areas of expertise. In keeping with this strategy, we recently announced a
Letter of Intent to acquire Toscana Capital Corporation and Toscana Energy Corporation (the “Toscana Companies”), a Calgary-based group that
helps finance energy companies and invests in the oil and gas sector. We expect the transaction to close sometime in the second quarter of 2012. The
Toscana Companies bring to us a leading team of energy specialists and lenders as well as a Calgary presence that will help us accelerate our activities
in the energy sector.
We believe that the alternative asset management area offers good opportunities for growth, acquisition and consolidation. Sprott is well-positioned
to consider such opportunities due to the quality and breadth of our operational platform, in addition to our financial strength.
Market Outlook
Our outlook for the remainder of 2012 remains cautious. Governments globally are using market intervention and loose monetary policies in an
effort to defer taking the difficult actions required to deal with their long term debt issues. As our founder, Eric Sprott, recently wrote: “The scale
and frequency of their maneuvering seems to increase with every passing week and speaks to the fragility that continues to define much of the financial
system today.”
In this environment, we expect to maintain our defensive positioning for the foreseeable future. We continue to believe that investments in hard
assets remain the best means to preserve and grow our clients' wealth.
Despite our views on the structural failings of the financial system, we see good investment opportunities in certain sectors. We believe the potential
for precious metals to outperform has never been better and we note that gold and silver-related equities are trading at historically low multiples.
Fuelled by ongoing strength of oil prices, the long term fundamentals for the energy sector remain compelling. We will continue to build our investments
in energy, agriculture and other defensive areas.
In closing, I would like to first thank you, our shareholders and clients, for your continued support. I would also like to thank all of our employees
for their commitment and our Board of Directors for their ongoing counsel and guidance. We look forward to reporting to you on our progress in
the quarters to come.
Sincerely,
Peter Grosskopf
Chief Executive Officer
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion & Analysis (“MD&A”) of financial condition and results of operations, dated March 27, 2012, presents an analysis
of the financial condition of Sprott Inc. (the “Company”) and its subsidiaries as of December 31, 2011 compared with December 31, 2010, and
results of operation for the year ended December 31, 2011, compared with the year ended December 31, 2010. The Board of Directors approved
this MD&A on March 27, 2012.
The Company was incorporated under the Business Corporations Act (Ontario) on February 13, 2008.
On February 4, 2011, the Company completed the acquisition, through its wholly-owned subsidiary Sprott U.S. Holdings Inc., of all of the outstanding
stock of Rule Investments, Inc. (the owner of Global Resource Investments, Ltd. (“GRIL”), Sprott Asset Management USA Inc. (“SAM US”) (formerly
Terra Resource Investment Management, Inc.) and Resource Capital Investment Corporation (“RCIC”) (collectively, the “Global Companies”)).
FORWARD LOOKING STATEMENTS
This MD&A contains “forward looking statements” which reflect the current expectations of management regarding our future growth, results of
operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”,
“believe”, “plan”, “expect”, “intend”, “estimate”, “aim”, “endeavour” and similar expressions have been used to identify these forward looking
statements. These statements reflect our current beliefs with respect to future events and are based on information currently available to us. Forward
looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause our actual results,
performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by
such forward looking statements including, without limitation, those listed in the “Risk Factors” section of the Company's annual information form
dated March 27, 2012 (the “AIF”). Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward
looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward
looking statements contained in this MD&A. These forward looking statements are made as of March 27, 2012 and will not be updated or revised
except as required by applicable securities law. For a more complete discussion of the risk factors that impact actual results, please refer to the "Risk
Factors" section of the Company's most recent Annual Information Form which is available at www.sedar.com.
PRESENTATION OF FINANCIAL INFORMATION
On January 1, 2011, the Company adopted International Financial Reporting Standards (“IFRS”) for financial reporting purposes, using a transition
date of January 1, 2010. The financial statements for the year ended December 31, 2011, including the required comparative information, have been
prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”). Previously, the Company prepared annual
consolidated financial statements in accordance with Canadian Generally Accepted Accounting Principles (“Canadian GAAP”).
The preparation of these annual audited consolidated financial statements under IFRS has resulted in certain changes to the Company's accounting
policies as compared to those disclosed in the Company's annual audited consolidated financial statements for the year ended December 31, 2010
issued under Canadian GAAP. The adoption of IFRS has not had an impact on the Company's operations, strategic decisions or cash flow.
An explanation of the transition to IFRS is presented in note 16 to these consolidated financial statements and includes an explanation of initial
elections made upon first-time adoption of IFRS, changes to accounting policies, and a reconciliation of amounts previously reported under Canadian
GAAP to amounts reported under IFRS for comparative financial information.
Financial results, including related historical comparatives, contained in this MD&A, unless otherwise specified herein, are based on these consolidated
financial statements. The Canadian dollar is our functional and reporting currency for purposes of preparing the Company's consolidated financial
statements, given that we conduct most of our operations in that currency. Accordingly, all dollar references in this MD&A are in Canadian dollars,
unless otherwise specified herein.
5
KEY PERFORMANCE INDICATORS (NON-IFRS FINANCIAL MEASURES)
We measure the success of our business using a number of key performance indicators that are not measurements in accordance with IFRS and
should not be considered as an alternative to net income or any other measure of performance under IFRS. Non-IFRS financial measures do not
have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.
Our key performance indicators include:
Assets Under Management
Assets Under Management or AUM refers to the total net assets of our public mutual funds, hedge funds, offshore funds and bullion funds (the
“Funds”), managed accounts (“Managed Accounts”), which include the accounts managed by Sprott Asset Management LP (“SAM”), RCIC and
SAM US and managed companies (“Managed Companies”) managed by Sprott Consulting LP (“SC”) on which management fees (“Management
Fees”), performance fees (“Performance Fees”) and/or carried interests (“Carried Interests”) are calculated. We believe that AUM is an important
measure as we earn Management Fees, calculated as a percentage of AUM, and may earn Performance Fees or Carried Interests, calculated as a
percentage of: (i) our Funds', Managed Accounts' and Managed Companies' excess performance over the relevant benchmark; (ii) the increase in
net asset values of our Funds over a predetermined hurdle, if any; or (iii) the net profit in our Funds over the performance period. We monitor
the level of our AUM because they drive our level of Management Fees. The amount of Performance Fees and Carried Interests we earn is related
to both our investment performance and our AUM.
Assets Under Administration
Assets Under Administration or AUA refers to client assets held in accounts at SPW or GRIL. AUA is a measure used by management to assess
the performance of the broker-dealer companies within the group.
Investment Performance (Market Value Appreciation (Depreciation) of Investment Portfolios)
Investment performance is a key driver of AUM. Our investment track record through varying economic conditions and market cycles has been
and will continue to be an important factor in our success. Growth in AUM resulting from positive investment performance increases the value of
the assets that we manage for our clients and we, in turn, benefit from higher fees. Alternatively, poor absolute and/or relative investment performance
will likely lead to a reduction in our AUM and, hence, our fee revenue.
Net Sales
AUM fluctuates due to a combination of investment performance and net sales (gross sales net of redemptions). Net sales, together with investment
performance determine the level of AUM which, as discussed above, is the basis on which Management Fees are charged and to which Performance
Fees or Carried Interests may be applied.
EBITDA
Our method of calculating EBITDA is defined as earnings before interest expense, income taxes, amortization of property and equipment,
amortization of intangible assets and non-cash stock-based compensation. We believe that this is an important measure as it allows us to assess
our ongoing business without the impact of interest expense, income taxes, amortization and non-cash compensation, and is an indicator of our
ability to pay dividends, invest in our business and continue operations. EBITDA is a measure commonly used in the industry by management,
investors and investment analysts in understanding and comparing results by factoring out the impact of different financing methods, capital
structures, the amortization of deferred sales charges and income tax rates between companies in the same industry. While other companies may
not utilize the same method of calculating EBITDA as we do, we believe it enables a better comparison of the underlying operations of comparable
companies and we believe that it is an important measure in assessing our ongoing business operations.
Base EBITDA
Base EBITDA refers to EBITDA after adjusting for: (i) the exclusion of any gains (losses) on our proprietary investments including our initial
contributions to our Funds on their inception, as if such gains (losses) had not been incurred and (ii) Performance Fees, Performance Fee related
compensation and other Performance Fee related expenses. With the exception of Performance Fees attributable to redeemed units (termed as
“Crystallized Performance Fees”), Performance Fees are earned on the last day of the fiscal year other than for the Funds that are managed by
RCIC and certain accounts managed by SAM. Performance Fees are not as predictable and stable as Management Fees and therefore Base EBITDA
enables us to evaluate the day-to-day results of operations throughout the year and is meaningful for the same reason.
RCIC manages a family of Funds whereby performance fees are earned by way of Carried Interests. Carried Interests are often realized towards
the end of the life of these fixed term Funds which, as at December 31, 2011 have an average remaining life of approximately 6 years. The Carried
Interests relating to these Funds will be earned once management is assured of their realization.
Base EBITDA also allows us to assess our ongoing business operations, with adjustments for non-recurring items as well as items that are not
related to our core operations, such as income or losses relating to our proprietary investments.
6
Cash Flow from Operations
Our method of calculating cash flow from operations is defined as cash provided by operating activities adjusted for the impact of the net change
in non-cash balances relating to operations.
This is a relevant measure in the investment management business since it represents cash available for distribution to our shareholders and for
general corporate purposes.
We believe that these Key Performance Indicators are important for a more meaningful presentation of our results of operations.
OVERVIEW
The Company operates through four wholly-owned subsidiaries, SAM, SPW, SC and Sprott U.S. Holdings Inc., the parent of the Global Companies.
Through these four subsidiaries, the Company is an independent asset management company dedicated to achieving superior returns for our clients
over the long term. Our business model is based foremost on delivering excellence in investment management services to our clients.
On June 1, 2009 we completed a corporate reorganization whereby the prior business was dissolved and its operations were separated into three
business lines: discretionary portfolio management by SAM, broker-dealer services by SPW and consulting services by SC. SAM is registered with the
Ontario Securities Commission (“OSC”) as an investment fund manager ("IFM"), portfolio manager (“PM”) and exempt market dealer (“EMD”).
SPW is an investment dealer and a member of the Investment Industry Regulatory Organization of Canada (“IIROC”). SC provides active management,
consulting and administrative services to other companies. Currently SC provides these services to Sprott Resource Corp. (“SRC”), Sprott Resource
Lending Corp. (“SRLC”) and Sprott Power Corp. (“SPC”).
On February 4, 2011 we completed the acquisition of the Global Companies, based in Carlsbad, California, through Sprott U.S. Holdings Inc. GRIL
is a California limited partnership that operates as a securities broker-dealer and is registered with the Financial Industry Regulatory Authority (“FINRA”)
and SAM US, registered with the U.S. Securities and Exchange Commission, provides discretionary investment management services. RCIC is the
general partner and discretionary asset manager to the Exploration Capital Partners family of limited partnerships.
Effective February 4, 2011, the accounts of the Global Companies have been consolidated with those of the Company.
The majority of the Company's revenues are earned through SAM in the form of Management Fees and Performance Fees earned from the management
of the Funds and Managed Accounts; SPW earns most of its revenues via intercompany trailer fee payments from SAM (these intercompany fees
are eliminated on consolidation) and from commissions earned on new and follow-on offerings of Funds managed by SAM and through various
private placements. SC earns the majority of its revenues through the management of its Managed Companies in the form of Management Fees and
Performance Fees. RCIC earns revenue in the form of Management Fees and Carried Interests through the management of the Funds; GRIL earns
commissions and other fees from the sale and purchase of stocks by its clients and from the sale of private placements to its clients. SAM US earns
revenue in the form of Management Fees from the management of Managed Accounts.
SPW provides us with a competitive advantage by providing a unique distribution channel for our Fund products and other investment opportunities
that we are able to make available to our private clients; as well, it serves as a platform to brand and grow our wealth management business. SC enables
us to benefit from our expertise in managing other companies, both public and private. SC provides us with a competitive advantage by providing
SPW and GRIL clients access to merchant banking and private equity-style investments.
While we operate through several operating companies, all are focused on growing the AUM or AUA of the Funds, Managed Accounts and Managed
Companies that we manage for the benefit of the unitholders, shareholders and partners of those entities and the AUA of our clients, ultimately for
the benefit of our shareholders.
The most significant factor that drives our business results continues to be the performance of the assets that we manage. Absolute returns generate
growth in AUM, and hence Management Fees while absolute and/or relative returns may result in the receipt of Performance Fees and/or Carried
Interests. While there are many factors that influence sales and redemptions of our Funds and Managed Accounts such as general investor sentiment
towards certain asset classes and the global economic environment, past investment returns play an important part in an investment decision to buy,
hold or sell a particular investment product.
The Company derives revenue primarily from Management Fees earned from the management of our Funds, Managed Accounts and Managed
Companies and from Performance Fees earned from the investment of the AUM of our Funds, Managed Accounts and Managed Companies. Our
Management Fees are calculated as a percentage of AUM. Our Performance Fees are calculated as a percentage of the return earned by our Funds,
Managed Accounts and Managed Companies. Our Carried Interests are calculated as a percentage of profits earned by monetizing events at our
Funds managed by RCIC. Accordingly, the growth in our fees is based on both the growth in AUM and the absolute or relative return, as applicable,
earned by our Funds, Managed Accounts and Managed Companies. With the addition of GRIL, the Company now derives additional revenue from
fees associated with its AUA. Commission and other income is generated from the sale and purchase of stocks by GRIL's clients, and to a lesser
extent SPW, and from the sale of private placements to their clients. As at December 31, 2011, we managed approximately $9.1 billion in assets among
our various Funds, Managed Accounts and Managed Companies. AUA in client assets totaled to approximately $4.4 billion.
7
Management Fees are less variable and more predictable than Performance Fees and Carried Interests. Management Fees are generally closely correlated
with changes in AUM. However, the rate of change in our Management Fees may not mirror the rate of change in our AUM, primarily a result of
two factors. First, m
structures are offered in some of our Funds whereby the Management Fee differs among the applicable
series or classes. Second, equity mutual Funds have the highest rate of Management Fees, followed by hedge Funds and offshore Funds. We have
introduced a suite of income Funds that have lower Management Fees than equity mutual Funds and hedge Funds. In addition, we have a substantial
amount of our total AUM in bullion Funds that have the lowest rate of Management Fees. Fees for managing the various Managed Accounts and
Managed Companies are negotiated on a case by case basis. Therefore, the weighting of AUM among our various Funds, Managed Accounts and
Managed Companies impacts Management Fees as a percentage of AUM.
or m
Commission income is specific to SPW and GRIL and is generated from the trading of securities by clients and from the sale of new and follow-on
offerings of products or companies managed by SAM, RCIC or SC, and through private placements of unrelated companies to clients of SPW and
GRIL. Commission income is recorded in the financial statements in the month in which the service is rendered.
The majority of Performance Fees are determined as of December 31 each year. However, Performance Fees are accrued in the relevant Funds,
Managed Accounts and Managed Companies, as applicable, to properly reflect the Performance Fee that would be payable, if any, based on the Net
Asset Value of that Fund, Managed Account or Managed Company. Where an investor redeems a domestic hedge Fund or an offshore Fund, any
Performance Fee attributable to those units redeemed is paid to SAM as manager of the Funds. These Crystallized Performance Fees, as well as the
related allocation to the employee bonus pool, are accrued for in the financial statements of SAM for the appropriate month. At SC, Performance
Fees are generated from time-to-time and are usually based on monetizing events at the Managed Companies. These Performance Fees can be significant
when realized. At RCIC, Carried Interests are accrued in the Funds, as applicable, to properly reflect the Carried Interest that would be payable, if
any, based on the Net Asset Value of that Fund. The Carried Interests are usually realized towards the end of the term of the Fund and can be
significant when realized.
Our most significant expenses include compensation and benefits and trailer fees. With respect to compensation and benefits, employees are paid
either a base salary and/or commissions based on sales, trading revenues or other measurable activities. In addition, employees may be eligible to
share in a bonus pool, with the size of such discretionary bonuses being tied to both individual performance and the overall financial performance
of the Company. Trailer fees are paid to dealers that distribute units of a Fund. Such dealers may receive a trailer fee (annualized but paid monthly
or quarterly) of up to 1% of the value of the assets held in the respective Fund by the dealer's clients. Both the employee bonus pool component of
compensation and trailer fees are correlated with Management Fees whereas only the employee bonus pool component of compensation is correlated
with realized Performance Fees and Carried Interests. Changes in levels of trailer fees are generally a reflection of changes in domestic Fund sales
through the advisor and dealer channel as well as changes in Management Fees.
In 2009 we introduced a low load sales charge option for some of our Funds. The commissions for these sales have been financed from internal cash
flow. Other expenses incurred by our business are general and administration costs, including sales and marketing costs, occupancy, regulatory and
professional fees, expenses absorbed by SAM on behalf of certain Funds that it manages, as well as charitable donations and amortization.
BUSINESS HIGHLIGHTS AND GROWTH INITIATIVES
We continued to be active in 2011 executing on various growth and development initiatives across the organization:
Acquisition of the Global Companies
On February 4, 2011, the Company completed the acquisition of the Global Companies. As consideration, the Company issued 19,467,500 common
shares from treasury and will issue a further 532,500 common shares from treasury. The common shares of the Company issued and to be issued
as consideration were valued at $8.67 per share using the closing price of the Company's common shares on February 4, 2011, for total consideration
of $173.4 million. As previously mentioned and in accordance with the terms of the Share Exchange Agreement, an additional 532,500 common
shares of the Company were committed to employees of the Global Companies. Subsequent to the year end, on February 4, 2012, 177,500 of the
committed shares were issued to employees of the Global Companies. In addition, the seller and certain current and future employees of the Global
Companies will be eligible to earn up to an additional 8 million common shares of the Company with the achievement of certain financial targets
by the Global Companies over a period of up to five years.
The acquisition is providing benefits across the Company, including the Global Companies, through the sharing of intellectual capital, the
development of new products, beneficial exchange of investment theses and ideas between investment managers and analysts, and by leveraging
the Company's products and brands in the United States and internationally.
The Global Companies are experts in the natural resource investing sector providing both investment management and specialized broker services.
The Global Companies are led by Rick Rule, a respected natural resources investor with over 35 years of experience in the investment industry,
and have developed a specialized team of resource investing experts, including geologists and mining engineers. They offer their expertise through
pooled investment vehicles, managed accounts and brokerage accounts and have delivered strong investment performance to their clients. The
Global Companies are based in Carlsbad, California but invest globally.
8
Acquisition of the Toscana Companies
Subsequent to the year end, on February 29, 2012, the Company announced the signing of a non-binding letter of intent (“LOI”) reflecting an
agreement in principle to acquire Toscana Capital Corporation and Toscana Energy Corporation (collectively "Toscana").
It is anticipated that the acquisition will provide benefits across the Company through the sharing of investment ideas, deal origination, the
development of new products, and by leveraging Toscana's and the Company's products and brands in the oil and gas sector.
Hiring and Retention of Top Talent
In February 2011, Rick Rule joined the Company as a condition of the acquisition of the Global Companies. Mr. Rule is CEO of Sprott U.S.
Holdings Inc., the parent of the Global Companies.
In March 2011, David Franklin assumed the role of CEO of SPW. Mr. Franklin joined the Company in 2008 and has been a key contributor in his
role as Market Strategist by helping guide the portfolio management team's investment decisions.
In March 2011, Paul Wong joined SAM's investment team as a Portfolio Manager. Mr. Wong is an industry veteran with specialization in natural
resource investing, asset allocation and capital market research.
In June 2011, Paul Meehl joined the Company as the CEO of GRIL and Jeff Howard assumed the role of CEO of SAM US. Both Paul and Jeff
are focusing their efforts under the leadership of Rick Rule to implement the Company's growth strategy in the U.S.
In September 2011, John David (J.D.) Rothstein joined SAM as Senior Vice President and National Sales Manager. Mr. Rothstein is playing a key
role in strengthening and expanding SAM's sales team to increase the number of third party investment advisors that sell our Funds and to better
service the needs of our growing client base.
Subsequent to the year end, Dr. Neil Adshead joined the Company as an Investment Strategist with specific responsibilities for the Exploration
Capital Partners Limited Partnerships managed by RCIC. Dr. Adshead will use his skills and industry experience to identify, analyze and monitor
public and private investment opportunities .
Also, subsequent to the year end, John Wilson joined SAM as a Senior Portfolio Manager. In the coming months, Sprott expects to launch new
investment solutions with core Canadian equity and core Canadian balanced mandates for which Mr. Wilson will serve as a lead manager.
In order to motivate and retain key employees and to further align the interests of employees and those of our shareholders, the Company adopted
an Employee Profit Sharing Plan (“EPSP”) for Canadian employees and an Equity Incentive Plan (“EIP”) for U.S. employees. These plans were
approved by the Company's shareholders at our Annual General Meeting on June 2, 2011. We are focused on rewarding the types of performance
that increase long-term shareholder value, including growing our AUM and AUA, retaining investors in our Funds, developing new investor
relationships, improving operational efficiency and managing risks. Pursuant to the EPSP and the EIP, a portion of the bonus allocated to certain
employees will be paid by way of the Company's common shares. The shares will either be issued from treasury or purchased in the open market
and will be available to the relevant employees over a specified vesting period.
Product and Business Line Expansion
In January 2011, we introduced our second flow-through fund, the Sprott 2011 Flow-Through Limited Partnership. The initial and follow-on
offering raised total gross proceeds of $90.7 million in total.
In February 2011, as a result of the acquisition of the Global Companies, new AUM and AUA of $0.7 billion and $1.8 billion, respectively, were
added.
In April 2011, we completed a follow-on offering of the Sprott Physical Gold Trust units, raising gross proceeds of US$341 million. On July 20,
2011, we completed another follow-on offering of the Sprott Physical Gold Trust units and together with the exercise of the over-allotment option
in August 2011, raised gross proceeds of US$306 million.
On May 9, 2011, we launched the Sprott Silver Bullion Fund, an open-ended mutual fund trust that invests primarily in unencumbered, fully allocated
silver bullion.
In July 2011, we completed the initial public offering of 22 million units of the Sprott Strategic Fixed Income Fund raising gross proceeds of $220
million. This fund was created to provide exposure, on a tax advantaged basis, to an actively managed portfolio comprised primarily of long and
short positions in fixed income securities from across the globe.
In September 2011, SAM US launched its managed accounts platform for US investors. These products allow US investors to access the investment
expertise of the combined portfolio management teams in Canada and the US by selecting among four investment programs specifically tailored
to meet investor needs.
9
In October 2011, we launched the Sprott Corporate Class Inc. ("Corporate Class”), a mutual fund corporation designed to provide greater tax-
efficiency for investors. Corporate Class offers eleven share classes, six of which invest in an underlying Sprott fund, one of which closely mirrors
the Sprott Tactical Balanced Fund and a new Resource Class Fund. Subsequent to the year end, three new share classes including Sprott Silver
Equities Class, Sprott Silver Bullion Class and Sprott Gold Bullion Class were added to the Corporate Class.
Subsequent to the year end, in January 2012, we completed a follow-on offering of the Sprott Physical Silver Trust units, raising gross proceeds of
US$349 million.
Subsequent to the year end, in February 2012, we completed a follow-on offering of the Sprott Physical Gold Trust units and together with the
exercise of the over-allotment option, raised gross proceeds of US$349 million.
Subsequent to the year end, we introduced our third flow-through fund, the Sprott 2012 Flow-Through Limited Partnership. The initial and follow-
on offering raised gross proceeds of $30 million in total.
We continue to develop new products and investment vehicles that will be available in 2012. The addition of these products and the acquisition
of the Global Companies has required, and will require, us to make investments in technology, infrastructure and resources in order to continue
to be able to provide effective and efficient service to our clients and to the Funds, Managed Accounts and Managed Companies that we manage.
FINANCIAL HIGHLIGHTS
Financial highlights for the year ended December 31, 2011 are:
•
•
AUM at December 31, 2011 were $9.1 billion. This reflects an increase of $0.6 billion (6.9%) from $8.5 billion at December 31, 2010.
Average AUM for 2011 was $9.8 billion compared to $5.9 billion in 2010, an increase of 66.7%. For the year ended December 31, 2011,
AUM of RCIC and SAM US at the date of their acquisition added $0.7 billion to AUM. This AUM combined with net subscriptions of
$1.4 billion and offset by a net depreciation of market value of portfolios totaling $1.5 billion, resulted in an increase of $0.6 billion in
AUM for the year.
AUA at December 31, 2011 were $4.4 billion. This reflects an increase of $0.8 billion (22.7%) from $3.6 billion at December 31, 2010. For
the year ended December 31, 2011, AUA of GRIL added $1.5 billion to these assets.
• Management Fees for the year ended December 31, 2011 were $146.8 million, representing an increase of $43.1 million (41.6%) over the
year ended December 31, 2010.
• Gross Performance Fees for the year ended December 31, 2011 were $5.3 million ($4.1 million after related payments to sub-advisors)
representing a decrease of $194.8 million (97.3%) over the year ended December 31, 2010.
•
•
•
Base EBITDA for the year ended December 31, 2011 was $69.4 million representing an increase of $26.0 million (59.9%)compared with
the year ended December 31, 2010.
EBITDA for the year ended December 31, 2011 was $64.5 million representing a decrease of $138.0 million (68.2%) compared with the
year ended December 31, 2010.
Cash flow from operations for the year ended December 31, 2011 was $47.9 million ($0.29 per share) representing a decrease of $144.4
million (75.1%) from $192.3 million ($1.28 per share) for the year ended December 31, 2010.
• Net income for the year ended December 31, 2011 decreased by 75.1% to $33.0 million as compared with the previous year, and represents
basic and diluted earnings per share of $0.20. Net income for the year ended December 31, 2010 was $132.7 million, representing basic
and diluted earnings per share of $0.88.
10
SUMMARY FINANCIAL INFORMATION
Key Performance Indicators
($ in thousands, except per share amounts)
2011
2010
2009
(Canadian GAAP)
For the year ended
December 31,
December 31,
December 31,
Assets Under Management
Assets Under Administration
Net Sales (Redemptions)
EBITDA
Base EBITDA
Cash Flow from Operations
EBITDA Per Share - basic and fully diluted
Base EBITDA Per Share - basic and fully diluted
Cash Flow From Operations Per Share - basic and fully diluted
9,137,084
4,398,554
1,418,045
64,473
69,387
47,905
0.38
0.41
0.29
8,545,276
3,584,115
1,448,419
202,437
43,384
192,273
1.35
0.29
1.28
4,773,789
2,485,551
(571,153)
48,450
33,682
30,683
0.32
0.22
0.20
Summary Balance Sheet
($ in thousands)
Total Assets
Total Liabilities
Shareholders' Equity
As at
December 31,
December 31,
January 1, 2010
2011
2010
2010
400,536
99,095
301,441
342,767
128,505
214,262
97,947
21,585
76,362
11
Summary Income Statement and Reconciliation to EBITDA and Base EBITDA
($ in thousands, except per share amounts)
Total revenue
Total expenses
Income before income taxes
Provision for income taxes
Net income
Other expenses (1)
Provision for income taxes
EBITDA
Unrealized and realized (gains) losses on proprietary investments
Performance fees net of perfor mance fee related compensation and other
performance fee related expenses (2)
Base EBITDA
Earnings Per Share - basic and fully diluted
EBITDA Per Share - basic and fully diluted
Base EBITDA Per Share - basic and fully diluted
For the year ended
December 31,
2011
2010
161,252
117,283
43,969
10,931
33,038
20,504
10,931
64,473
7,986
(3,072)
69,387
0.20
0.38
0.41
(1)
(2)
Includes amortization of proper ty and equipment, amortization of intangibles and non-cash stoc k-based compensation expense.
Performance Fee related compensation is equal to 25% of Performance Fee revenue.
323,501
148,946
174,555
41,854
132,701
27,882
41,854
202,437
(9,013)
(150,040)
43,384
0.88
1.35
0.29
12
Summary Cash Flow Statements and Reconciliation to Cash Flow from Operations
($ in thousands, except per share amounts)
Operating activities
Net income for the year
Non-cash items
Income taxes paid
Cash flow from operations
Non-cash balances relating to operations
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Net increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash flow from operations per share - basic
Cash flow from operations per share - fully diluted
RESULTS OF OPERATIONS
Year ended December 31, 2011 compared to year ended December 31, 2010
Overall Performance
For the year ended
December 31,
2011
2010
33,038
36,589
(21,722)
47,905
154,683
202,588
(33,866)
(130,425)
38,297
81,209
119,506
0.29
0.28
132,701
60,069
(497)
192,273
(131,188)
61,085
(7,136)
(21,750)
32,199
49,010
81,209
1.28
1.28
AUM increased to $9.1 billion at December 31, 2011 compared with $8.5 billion at December 31, 2010. Net sales for the year ended December 31,
2011 were $1.4 billion, together with the addition of the acquired AUM of the Global Companies of $0.7 billion, offset partially by market depreciation
of $1.5 billion resulted in a $0.6 billion increase in AUM for the year. Average AUM for the year ended December 31, 2011 was $9.8 billion compared
with $5.9 billion for the year ended December 31, 2010, an increase of 66.7%.
Total revenues decreased by $162.2 million or 50.2% from $323.5 million in the year ended December 31, 2010 to $161.3 million in the year ended
December 31, 2011. Management Fees for the year ended December 31, 2011 were $146.8 million, representing an increase of $43.1 million (41.6%)
over the year ended December 31, 2010. Gross Performance Fees for the year ended December 31, 2011were $5.3 million, compared to $200.1 million
in the year ended December 31, 2010. Unrealized and realized losses on proprietary investments totaled $8.0 million for the year ended December 31,
2011 compared to unrealized and realized gains of $9.0 million for the year ended December 31, 2010. Commissions increased by $8.0 million to
$14.2 million in the year ended December 31, 2011 when compared to $6.2 million in the year ended December 31, 2010. Other income decreased
by $1.6 million to $2.9 million in the year ended December 31, 2011, when compared to $4.5 million in the year ended December 31, 2010.
Expenses totaled $117.3 million for the year ended December 31, 2011, which is a decrease of $31.7 million or 21.3% from $148.9 million in the year
ended December 31, 2010.
Net income of $33.0 million for the year ended December 31, 2011, decreased by $99.7 million (75.1%) when compared with net income of $132.7
million for the year ended December 31, 2010.
13
Assets Under Management, Investment Performance and Net Sales
The breakdown of AUM by investment product type as at December 31, 2011 and December 31, 2010 was as follows:
Product Type
Mutual Funds
Bullion Funds
Domestic Hedge Funds
Offshore Hedge Funds
Direct Management (Managed Companies)
Managed Accounts
Fixed Term Limited Partnerships
Total
December 31, 2011
December 31, 2010
$ (in millions)
% of AUM
$ (in millions)
% of AUM
2,497
2,971
1,717
566
700
288
398
9,137
27.3%
32.5%
18.8%
6.2%
7.7%
3.2%
4.3%
100%
3,429
2,025
1,739
686
513
153
—
8,545
The table below summarizes the changes in AUM for the relevant periods.
($ in millions)
AUM, beginning of year
Net sales
Business acquisition
Market value appreciation (depreciation) of portfolios
AUM, end of year
For the year ended
December 31,
2011
2010
8,545
1,418
695
(1,521)
9,137
40.1%
23.7%
20.4%
8.0%
6.0%
1.8%
—
100%
4,774
1,448
—
2,323
8,545
The performance of our Funds and Managed Accounts for the year ended December 31, 2011 resulted in AUM decreasing by $1.5 billion or 17.8%
of opening AUM. All but a few of our Funds generated negative performance for the year ended December 31, 2011. Our Managed Companies
added $187 million to our AUM at December 31, 2011.
Net sales for the year ended December 31, 2011 were $1.4 billion. The initial and follow-on offering of Sprott 2011 Flow-Through LP, follow-on
offerings of Sprott Physical Gold Trust, the launch of Sprott Silver Bullion Fund and Sprott Strategic Fixed Income Fund and the addition of a new
managed account, added approximately $1.2 billion to sales for the year. Collectively, our other mutual Funds and domestic hedge Funds experienced
net sales of approximately $171 million. Similarly our offshore Funds had net subscriptions resulting in net inflows of approximately $43 million or
6.2% of opening offshore AUM.
The acquisition of the Global Companies during the year added $695 million to the Company's AUM, representing 8.1% of opening AUM.
14
Revenues
During the year ended December 31, 2011, total revenues decreased by $162.2 million (50.2%) from $323.5 million in the year ended December 31,
2010 to $161.3 million in the year ended December 31, 2011.
Management Fees increased by $43.1 million or 41.6% from $103.7 million in the year ended December 31, 2010 to $146.8 million in the year ended
December 31, 2011, as average AUM increased by approximately 66.7% over the same period. In addition, the Company recognized approximately
$3.2 million of Management Fees from SRLC as management determined it was probable that the Management Fees would be received. This recognition
of revenue represents approximately 16 months of Management Fees from this Managed Company. Management Fee margins (defined as Management
Fees as a percentage of AUM) fell to 1.5% in 2011 from 1.8% in 2010. The decrease in Management Fee margins is mainly due to the addition of
fixed income Funds and bullion Funds that have lower average Management Fees than most of our other Funds. Average AUM for fixed income
Funds and bullion Funds increased by $1.1 billion to $2.0 billion for the year ended December 31, 2011, compared to $0.9 billion for the year ended
December 31, 2010.
Gross Performance Fees were $5.3 million ($4.1 million net Performance Fees) for the year ended December 31, 2011 versus $200.1 million for the
year ended December 31, 2010. All but a few of our Funds and Managed Accounts underperformed in 2011 resulting in lower Performance Fees in
the current year as compared to the previous year.
Losses from our capital that is invested in our proprietary investments (realized and unrealized) for the year ended December 31, 2011 totaled $8.0
million, compared with gains of $9.0 million for the year ended December 31, 2010. During the year ended December 31, 2011, sales of proprietary
investments resulted in a net realized gain of $0.2 million and the market value of proprietary investments depreciated by $8.2 million. The unrealized
losses in 2011 were driven predominantly by declines in the market value of most of our proprietary investments despite an increase in the value of
our gold bullion holdings. The realized gains in the year ended December 31, 2010 were primarily due to the sale of publicly traded equities in the
gold sector and the unrealized gains were driven by market appreciation in virtually all of the Company's proprietary investments.
Commission revenue for the year ended December 31, 2011, was $14.2 million compared to $6.2 million during the year ended December 31, 2010.
In the year ended December 31, 2011, commission revenue was mainly due to commissions generated by GRIL and to a lesser extent, SPW. During
the year ended December 31, 2010, SPW earned commissions primarily from the sale of Sprott sponsored Funds and shares of Managed Companies
to SPW clients in 2010.
Other income decreased by $1.6 million from $4.5 million in the year ended December 31, 2010 to $2.9 million in the year ended December 31, 2011.
The main components of other income include interest income and redemption fee revenue.
Expenses
Total expenses for the year ended December 31, 2011 were $117.3 million a decrease of $31.7 million or 21.3%, compared with $148.9 million for
the year ended December 31, 2010.
Changes in specific categories are described in the following discussion:
Compensation & Benefits
Compensation and benefits expense for the year ended December 31, 2011 amounted to $48.7 million, including contributions to the discretionary
employee bonus pool of $21.6 million. For the year ended December 31, 2010, compensation and benefits expense was $83.7 million, with contributions
to the discretionary employee bonus pool amounting to $60.5 million. Excluding the discretionary employee bonus pool, compensation and benefits
for the year ended December 31, 2011 increased by $3.9 million from $23.2 million in 2010 to $27.1 million in 2011. This is primarily due to the
increase in headcount of the Company with the average number of employees increasing from 95 for the year ended December 31, 2010 to 154 for
the year ended December 31, 2011, which includes the headcount added through the acquisition of the Global Companies in 2011. The discretionary
employee bonus pool decreased in 2011 mainly due to lower Performance Fees earned in the current year.
Stock-based compensation
Stock-based compensation was $4.4 million for the year ended December 31, 2011, a decrease of $22.5 million, compared to $26.9 million in 2010.
The decrease from 2010 is mostly the result of a share incentive program personally funded by Mr. Sprott for the benefit of the Company's new
Chief Executive Officer and the Company's President in the amount of $25.7 million in 2010. Excluding this one-time share incentive program, there
was an increase in stock-based compensation expense in 2011 resulting from the accounting for the earn-out shares (see note 8 to the annual audited
consolidated financial statements) in the amount of $3.9 million for the 11 months since the acquisition of the Global Companies.
At January 1, 2010, a reduction of $1.6 million to retained earnings relating to stock-based compensation (stock options) was made with a corresponding
increase of $1.6 million to contributed surplus. The transition to IFRS required a retrospective adjustment to opening retained earnings of the prior
year. This adjustment was required to reflect the accounting treatment of share-based payments (stock options) under IFRS which results in the
expensing of such awards on a graded basis unlike the straight-line methodology previously followed by the Company. The impact of this change
results in a tapering effect of expensing the Company's stock options with a greater proportion of the expense being charged to income in earlier
years. The impact to the comparative periods is explained further under Highlights of the Impact of IFRS later on in this MD&A.
15
Trailer Fees
Trailer fees are somewhat correlated with AUM and with Management Fees. For the year ended December 31, 2011 trailer fees were $25.7 million
versus $21.6 million, an increase of 18.8% over the corresponding period of 2010. This increase is reflective of the significant year-over-year increase
in the average AUM of our mutual Funds and domestic hedge Funds which are the primary products to which trailer fees relate. Trailer fees as a
percentage of Management Fees for the year ended December 31, 2011 have decreased to 17.5% from 20.9% for the year ended December 31, 2010.
This decline is due to the addition of AUM of the Global Companies along with AUM of the Managed Companies which do not have an associated
trailer fee obligation and the increase in the AUM of bullion Funds and our family of fixed income Funds, which pay no or lower trailer fees. In
addition, and as mentioned in the Revenues section earlier in this MD&A, a Management Fee representing approximately 16 months of Management
Fees was recognized in the year as management determined it was probable that the Management Fees would be received. This recognition of revenue
reduced trailer fees as a percentage of Management Fees for the year ended December 31, 2011 as there are no trailer fees associated with that revenue.
General & Administrative
General and administrative expenses increased by $8.0 million, (59.5%) to $21.3 million for the year ended December 31, 2011 when compared to
the year ended December 31, 2010. General and administrative expenses consist primarily of rent, marketing, regulatory fees, sub-advisory fees, fund
expenses absorbed by SAM on behalf of certain Funds that it manages, legal, insurance, trading costs and professional fees as well as miscellaneous
costs such as quote and news services, printing and systems maintenance. The increase in general and administrative expenses in 2011 is partially due
to the addition of the Global Companies. The Company also experienced increases in most of the expense categories listed above as a result of an
increase in the level of business activity including more employees, additional space, new funds and new streams of expenses resulting from the
brokerage activities at GRIL and SPW. In the second quarter of 2010, the Company launched Sprott Private Credit Fund LP and retained a third
party to provide investment advisory services to that Fund. The year ended December 31, 2011 includes full year sub-advisory fees and Performance
Fee related sub-advisory fees when compared to 2010.
Charitable Donations
In 2008, the Company introduced a charitable donations program in terms of which 1% of the previous year's net income before tax, as may be
adjusted from time to time based on profitability, cash flow and other similar measures, is donated to children's charities. In order to better match the
charitable donations expense with the associated income, the Company changed the calculation methodology of the donation policy in the fourth
quarter of 2010. Previously, the charitable donation accrual was calculated on 1% of the previous year's pre-tax income. Beginning in 2010, we accrued
1% of the current year's income before taxes. In addition to donations under the program described above, we make other corporate donations to
selected causes. The donation expense in the year ended December 31, 2011 decreased by $1.4 million from the corresponding year ended December 31,
2010 mainly due to the decrease in Performance Fees realized in 2011.
Amortization
Amortization expense of intangibles is composed of (i) the amortization of deferred sales commissions and (ii) the amortization of fund management
contracts and carried interests, the latter of which was the result of the acquisition of the Global Companies. Amortization expense also includes
impairments losses on the intangible assets. This amortization expense increased by $14.7 million in 2011 when compared to 2010 due to (i) the
amortization of the intangible assets arising on the acquisition of the Global Companies, (ii) an increase in the payment of deferred sales commissions
resulting in higher amortization, and (iii) impairment losses realized on fund management contracts and carried interests. The identified intangible
assets relating to the Global Companies' acquisition are being amortized on a straight-line basis over 7 years which reflects the average remaining
useful life of the Funds (at the time of acquisition) on which these intangible assets are based. At December 31, 2011, management determined that
the carrying value of the fund management contracts and carried interests were in excess of their respective recoverable amounts. As a result, an
impairment charge was recorded in the amount of $7.7 million. Management will continue to monitor the recoverable amount of these intangible
assets on a quarterly basis and, if appropriate, may reverse all or part of these impairment losses in future periods. Amortization of property and
equipment increased by $0.5 million in 2011 when compared to 2010 as a result of investments in leasehold improvements, office furniture and
computer hardware and software.
16
EBITDA, Base EBITDA, Cash Flow from Operations and Net Income
As discussed earlier, there are a number of non-IFRS measures we use to evaluate the success of our business.
EBITDA allows us to assess our ongoing business without the impact of interest expense, income taxes and certain non-cash expenses, such as
amortization and stock-based compensation. EBITDA is an indicator of our ability to pay dividends, invest in our business and continue operations.
For the year ended December 31, 2011, EBITDA was $64.5 million, compared with $202.4 million for the year ended December 31, 2010. EBITDA
decreased for the year ended December 31, 2011 when compared to the year ended December 31, 2010 mainly as a result of (i) lower Performance
Fees and (ii) losses on proprietary investments. Basic and diluted EBITDA per share for the year ended December 31, 2011 was $0.38 compared to
$1.35 for the year ended December 31, 2010. For further clarity, EBITDA is reconciled to Net Income in the Summary Financial Information table
earlier in this MD&A.
Base EBITDA, as previously defined in this MD&A, allows us to assess our ongoing business operations, with adjustments for non-recurring items
as well as items that are not related to our core operations. For the year ended December 31, 2011 Base EBITDA was $69.4 million compared with
$43.4 million in the year ended December 31, 2010, representing an increase of $26.0 million (59.9%). Base EBITDA for 2011 increased when
compared to 2010 based predominantly on higher Management Fees. Base EBITDA excludes (i) unrealized and realized gains and losses on proprietary
investments and (ii) Performance Fees net of Performance Fee related compensation and other expenses. In the year ended December 31, 2011,
unrealized and realized losses on proprietary investments were $8.0 million, compared to unrealized and realized gains of $9.0 million in the year
ended December 31, 2010. In the year ended December 31, 2011, Performance Fees net of Performance Fee related compensation and other
Performance Fee related expenses were $3.1 million compared to $150.0 million in the year ended December 31, 2010. Base EBITDA per share for
the year ended December 31, 2011 was $0.41 compared to $0.29 for the year ended December 31, 2010. For further clarity, Base EBITDA is reconciled
to Net Income in the Summary Financial Information table earlier in this MD&A.
The Company also assesses its performance using Cash Flow from Operations. Previously defined in this MD&A, this metric helps to assess the
ability of the Company to generate cash to fund day-to-day operations, pay dividends, pay sales commissions and support any other capital requirements
of the Company. Cash Flow from Operations for the year ended December 31, 2011 was $47.9 million, a decrease of $144.4 million from the $192.3
million reported in the year ended December 31, 2010. Similar to EBITDA and Base EBITDA, the primary contributor to this was the increase in
the general business of the Company coupled with the cash flow produced by the Global Companies since their acquisition on February 4, 2011. A
significant difference between this measure and EBITDA and Base EBITDA is that it takes into consideration the income taxes paid or payable by
the Company. For the year ended December 31, 2010, income taxes of $0.5 million was paid and for the year ended December 31, 2011, income taxes
of $21.7 million was paid. Cash Flow from Operations per share for the year ended December 31, 2011 was $0.29 versus $1.28 for the year ended
December 31, 2010. For further clarity, Cash Flow from Operations is reconciled to Net Income in the Summary Financial Information table earlier
in this MD&A.
Income before taxes for the year ended December 31, 2011 was $44.0 million compared with a pre-tax income of $174.6 million for the year ended
December 31, 2010. The effective tax rate of 24.9% was marginally higher for the year ended December 31, 2011 when compared to 24.0% for the
year ended December 31, 2010 primarily as a result of higher tax rates in the US despite the partial drawdown of the deferred tax liability arising on
the acquisition of the Global Companies. The acquisition of the Global Companies resulted in a deferred income tax liability of $20.1 million relating
to the identified intangible assets which is being drawn down over 7 years; the same period over which the associated intangible assets are being
amortized to income. At December 31, 2011, management determined that the carrying value of these identified intangible assets were in excess of
their respective recoverable amounts. As a result, an impairment charge was recorded resulting in a further drawdown of the deferred income tax
liability of $3.1 million. The drawdown of the deferred tax liability results in a reduction to the provision for income taxes on the consolidated
statement of income. This deferred tax liability is not a cash liability of the Company but is an accounting item resulting from the accounting for the
acquisition.
Net income for the year ended December 31, 2011 was $33.0 million compared to net income of $132.7 million for the year ended December 31,
2010. The decrease in 2011 as compared to 2010 reflects the net effect of the changes previously discussed in this MD&A including the addition of
the operations of the Global Companies since February 4, 2011. Basic and diluted net income per share for the year ended December 31, 2011 was
$0.20, versus $0.88 for the year ended December 31, 2010.
Balance Sheet
Total assets at December 31, 2011 increased by $57.8 million to $400.5 million. Cash and cash equivalents were $119.5 million, an increase of $38.3
million from December 31, 2010 due to cash inflows, including higher Management Fees, the monetization of prior year's accrued Performance Fees
and the collection of commissions by GRIL and SPW that more than offset the cash outflow from operating expenses, purchase of proprietary
investments and the payment of bonuses, taxes and dividends.
Proprietary investments are comprised of investments in various Funds that we manage, including those managed by RCIC, notes receivable, equities
and warrants, including an investment in SRLC and gold and silver bullion. Proprietary investments are discussed in more detail in the Revenue section
of this MD&A.
17
Fees receivable at December 31, 2011 were $10.2 million, which is a decrease of $198.9 million since December 31, 2010 as approximately $197 million
of year end Performance Fees that were outstanding at the end of 2010, were received in early 2011.
Intangible assets as at December 31, 2011 of $39.9 million consist of finite and indefinite life intangible assets. Intangible assets with indefinite useful
lives relate to costs incurred to create fund management contracts between SAM and certain Funds managed by SAM. Intangible assets with finite
lives relate to (i) the costs assigned to management contracts and carried interests as a result of the acquisition of the Global Companies and, (ii)
deferred sales commissions the Company pays to brokers and dealers on the sale of mutual Fund securities. At December 31, 2011, management
determined that the carrying value of the finite life fund management contracts and carried interests were in excess of their respective recoverable
amounts. As a result, an impairment charge was recorded in the amount of $7.7 million. Management will continue to monitor the recoverable amount
of these intangible assets on a quarterly basis and, if appropriate, may reverse all or part of these impairment losses in future periods. Deferred sales
commissions are recorded at cost and amortized on a straight line basis over a maximum of three years. Deferred sales commissions at December 31,
2011 of $2.2 million were $1.3 million more than at December 31, 2010. During 2011, $2.1 million in commissions were paid for low load funds
partially offset by amortization of $0.8 million.
The acquisition of the Global Companies in the first quarter of 2011 resulted in goodwill of $125.7 million at December 31, 2011. Included in
goodwill is $3.6 million of foreign exchange differences which form part of other comprehensive income. The Company had not recorded any
goodwill prior to the acquisition of the Global Companies. Goodwill is not amortized, but is subject to impairment tests on at least an annual basis.
As at December 31, 2011, the goodwill recorded by the Company was not impaired.
Net tangible assets acquired as a result of the Global Companies acquisition amounted to approximately $12.3 million which included cash of
approximately $6.4 million. There were no fair value adjustments made to the net tangible assets acquired.
Accounts payable and accrued liabilities were $10.4 million at December 31, 2011, which is a decrease of $6.6 million from December 31, 2010. This
is primarily due to the remittance of the Harmonized Sales Tax to the Government of Canada that was due as a result of Performance Fees charged
to certain Funds and Managed Accounts as of December 31, 2010.
Compensation and employee bonuses payable were $24.2 million at December 31, 2011 compared to $61.6 million at December 31, 2010. The decrease
from December 31, 2011 primarily reflects the payment of the fiscal 2010 year-end bonus during 2011.
RESULTS OF OPERATIONS - REPORTABLE SEGMENTS
SAM Segment
The SAM segment provides asset management services to the Company's branded Funds and Managed Accounts and includes the operating results
of SAM.
Results of operations - SAM Segment
For the year ended December 31 ($ in thousands)
2011
2010
Revenue
Management fees
Performance fees
Other
Total revenue
Expenses
General and administrative
Trailer fees
Amortization of intangibles, property and equipment
Total expenses
Income before income taxes for the year
EBITDA
Base EBITDA
125,838
5,303
1,762
132,903
41,979
37,058
1,813
80,850
52,053
54,100
51,168
97,661
200,054
629
298,344
83,749
30,857
934
115,540
182,804
184,767
34,585
18
Year ended December 31, 2011 compared to year ended December 31, 2010
Revenues
During the year ended December 31, 2011, total revenues decreased by $165.4 million (55.5%) from $298.3 million in the year ended December 31,
2010 to $132.9 million in the year ended December 31, 2011.
Revenues from Management Fees were $125.8 million for the year ended December 31, 2011, an increase of 28.9% from the year ended December 31,
2010. The increase was mainly attributable to 56.9% increase in the average AUM from 2010.
Revenues from gross Performance Fees were $5.3 million for the year ended December 31, 2011 versus $200.1 million for the year ended December 31,
2010. The decline was due to negative performance in most of our funds in 2011.
Other revenues were $1.8 million for the year ended December 31, 2011, an increase of $1.1 million from the year ended December 31, 2010. The
largest components of other revenue are interest income and early redemption fees.
Expenses
Total expenses for the year ended December 31, 2011 were $80.9 million a decrease of $34.7 million or 30.0%, compared with $115.5 million for the
year ended December 31, 2010.
General and administrative (including compensation and benefits) expense for the year ended December 31, 2011 amounted to $42.0 million versus
$83.7 million for the year ended December 31, 2010. The largest component of the decrease from the prior year relates to the discretionary employee
bonus pool. This was partially offset by increases in various other expenses resulting from the net increase in headcount during the year. Increases in
2011 were also experienced in sub-advisory fees, marketing, trading costs and Fund expenses due to the business expansion resulting from the launch
of new Funds. Excluding the discretionary employee bonus pool, compensation and benefits for the year ended December 31, 2011 decreased by
$2.6 million from the year ended December 31, 2010, primarily as a result of the formal establishment of a shared services group of employees at
Corporate that were transferred from SAM.
Trailer fees for the year ended December 31, 2011 were $37.1 million versus $30.9 million, an increase of 20.1% over the corresponding period of
2010. The increase was attributable to the increase in the average AUM of our mutual Funds and domestic hedge Funds which are the primary
products to which trailer fees relate.
Amortization of intangibles increased by $0.9 million for the year ended December 31, 2011 when compared to the year ended December 31, 2010,
mostly due to an increase in the payout of deferred sales commissions resulting in higher amortization and nominal increases to the amortization of
property and equipment during the year ended December 31, 2011 when compared to the year ended December 31, 2010.
EBITDA and Base EBITDA
For the year ended December 31, 2011, EBITDA was $54.1 million compared with $184.8 million for the year ended December 31, 2010. The decrease
in EBITDA in 2011 when compared to 2010 is mainly a result of lower Performance Fees reported in the current year.
For the year ended December 31, 2011, Base EBITDA was $51.2 million compared with $34.6 million in the year ended December 31, 2010. Base
EBITDA for 2011 increased when compared to 2010 mostly due to higher Management Fees generated on a higher level of average AUM in the
current year.
19
Global Companies Segment
The Global Companies segment provides asset management services to the Company's branded Funds in the US and also provides securities trading
services to its clients and includes the operating results of GRIL, RCIC and SAM USA.
Results of operations - Global Companies Segment
For the 11 months ended December 31 (in $ thousands)
2011
2010
Revenue
Management fees
Commissions
Other
Total revenue
Expenses
General and administrative
Amortization of intangibles, property and equipment
Total expenses
Loss before income taxes for the year
EBITDA
Base EBITDA
Year ended December 31, 2011
Revenues
9,676
12,649
(2,288)
20,037
16,394
14,199
30,593
(10,556)
7,559
9,808
—
—
—
—
—
—
—
—
—
—
The acquisition of the Global Companies added $20.0 million in total revenues for the 11 months ended December 31, 2011.
Revenues from Management Fees were $9.7 million for the 11 months ended December 31, 2011 on average AUM of $524.3 million.
Revenue from Commissions were $12.6 million for the 11 months ended December 31, 2011. These commissions were generated by GRIL from the
trading of securities by clients and from the sale to clients of new and follow-on offerings of products or shares of companies managed by SAM, or
SC, and through private placements of unrelated companies.
Losses from our capital that is invested in our proprietary investments (realized and unrealized) make up the majority of the Other revenue category
of negative $2.3 million for the 11 months ended December 31, 2011.
Expenses
The acquisition of the Global Companies added $30.6 million in total expenses for the 11 months ended December 31, 2011.
General and administrative (including compensation and benefits) expenses for the 11 months ended December 31, 2011 were $16.4 million. The
largest component of general and administrative is compensation and benefits followed by stock-based compensation relating to earn-out shares (see
note 8) with other significant expenses consisting of rent, professional fees and expenses relating to its brokerage business.
Amortization of intangibles, property and equipment of $14.2 million relates primarily to those intangible assets identified as part of the acquisition
of the Global Companies. At December 31, 2011, management determined that the carrying value of the fund management contracts and carried
interests were in excess of their respective recoverable amounts. As a result, an impairment charge was recorded in the amount of $7.7 million ($4.6
million after tax). Management will continue to monitor the recoverable amount of these intangible assets on a quarterly basis and, if appropriate,
may reverse all or part of these impairment losses in future periods. The intangible assets are amortized on a straight-line basis over 7 years.
EBITDA and Base EBITDA
For the 11 months ended December 31, 2011, acquisition of Global Companies contributed $7.6 million to EBITDA and $9.8 million to Base
EBITDA.
20
Corporate Segment
The Corporate segment provides treasury and common shared services to the Company's business units and includes the operating results of Sprott
Inc. without the effect of consolidating its subsidiaries.
Results of operations - Cor porate Segment
For the year ended December 31 ($ in thousands)
2011
2010
Revenue
Other
Total revenue
Expenses
General and administrative
Amortization of property and equipment
Total expenses
Loss before income taxes for the year
EBITDA
Base EBITDA
(4,732)
(4,732)
3,710
70
3,780
(8,512)
(8,200)
(2,317)
13,057
13,057
29,400
—
29,400
(16,343)
9,578
687
Year ended December 31, 2011 compared to year ended December 31, 2010
Revenues
During the year ended December 31, 2011, total revenues decreased by $17.8 million from $13.1 million in the year ended December 31, 2010 to
negative $4.7 million in the year ended December 31, 2011.
Losses from our capital that is invested in our proprietary investments (realized and unrealized) offset partially by interest income make up the majority
of Other revenue. For the year ended December 31, 2011, the Corporate segment recorded net realized and unrealized losses on proprietary investments
compared to net realized and unrealized gains recorded for the year ended December 31, 2010.
Expenses
Total expenses for the year ended December 31, 2011 were $3.8 million, a decrease of $25.6 million or 87.1%, compared with $29.4 million for the
year ended December 31, 2010.
General and administrative (including compensation and benefits) expenses decreased by $25.7 million to $3.7 million for the year ended December 31,
2011 when compared to the year ended December 31, 2010. Included in this expense category is stock-based compensation. In 2010, a share incentive
program was personally funded by Mr. Sprott for the benefit of the Company's new Chief Executive Officer and the Company's President for $25.7
million. In addition, and despite an increase in the level of business activities, general and administrative expenses declined (excluding the effect of
stock-based compensation) mostly due to the recovery of general and administrative costs from the other reporting segments in 2011. General and
administrative costs were not recovered from the other reporting segments in 2010.
EBITDA and Base EBITDA
For the year ended December 31, 2011, EBITDA was negative $8.2 million compared with positive $9.6 million for the year ended December 31,
2010. EBITDA decreased for the year ended December 31, 2011 when compared to the year ended December 31, 2010, mainly as a result of realized
and unrealized losses previously discussed. Base EBITDA was negative $2.3 million for the year ended December 31, 2011 compared with positive
$0.7 million in the year ended December 31, 2010, predominately as a result of the formal establishment of a shared services group of employees
during 2011 that did not exist in 2010.
21
Other Segment
The Other segment includes the operations of SC and SPW, our consulting and private wealth businesses, respectively.
Results of operations - Other Segment
For the year ended December 31 ($ in thousands)
2011
2010
Revenue
Management fees
Commissions
Other
Total revenue
Expenses
General and administrative
Trailer fees
Amortization of property and equipment
Total expenses
Income before income taxes for the year
EBITDA
Base EBITDA
11,311
1,530
11,786
24,627
13,595
—
30
13,625
11,002
11,032
10,746
6,025
6,211
9,112
21,348
13,215
40
(1)
13,254
8,094
8,093
8,113
Year ended December 31, 2011 compared to year ended December 31, 2010
Revenues
During the year ended December 31, 2011, total revenues increased by $3.3 million from $21.3 million in the year ended December 31, 2010 to $24.6
million in the year ended December 31, 2011.
Revenues from Management Fees were $11.3 million for the year ended December 31, 2011, an increase of 87.7% from the year ended December 31,
2010. The increase was mainly attributable to a 69.9% increase in the average AUM on which management fees are earned and the recognition of
Management Fees from SRLC that included 4 months of revenue from fiscal 2011.
Commission revenue for the year ended December 31, 2011, was $1.5 million compared to $6.2 million during the year ended December 31, 2010.
The decline in Commissions was mainly due to substantial commissions earned by SPW on the sale of units of Sprott Physical Gold Trust and Sprott
Physical Silver Trust to its clients in 2010.
Trailer fee income received from SAM is the significant component of Other revenue and increased during the current year as a result of the increase
in the average trailer paying AUA of SPW. This inter-company revenue received is eliminated upon consolidation.
Expenses
General and administrative (including compensation and benefits) expenses for the year ended December 31, 2011 were $13.6 million, a slight increase
from the prior year of $13.2 million. The largest component of general and administrative is compensation and benefits which decreased in the current
year but was offset by increases in costs attributable to shared services charged previously explained under the Corporate segment.
EBITDA and Base EBITDA
For the year ended December 31, 2011, EBITDA was $11.0 million compared with $8.1 million for the year ended December 31, 2010. The increase
in EBITDA in 2011 when compared to 2010 is mainly a result of higher Management Fees and trailer fee income partially offset by lower Commission
revenue.
For the year ended December 31, 2011, Base EBITDA was $10.7 million compared with $8.1 million for the year ended December 31, 2010. Base
EBITDA for 2011 increased when compared to 2010 for the same reasons indicated in the previous paragraph.
22
SUMMARY OF QUARTERLY RESULTS
($ in thousands)
31-Mar-10
30-Jun-10
30-Sep-10
31-Dec-10
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
As at
As at
As at
As at
As at
As at
As at
As at
Assets Under Management
5,155,224
5,546,430
6,513,445
8,545,276
9,677,558
9,292,186
9,881,291
9,137,084
($ in thousands, except per share amounts)
31-Mar-10
30-Jun-10
30-Sep-10
31-Dec-10
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
3 Months
ended
3 Months
ended
3 Months
ended
3 Months
ended
3 Months
ended
3 Months
ended
3 Months
ended
3 Months
ended
Income Statement Information
Revenue
Management fees
Performance fees
Commissions
Unrealized and realized gain (loss) on
proprietary investments
Other income
Total revenue
Net income
EBITDA
Base EBITDA
23,248
24,212
24,692
—
2,577
(427)
334
196
432
949
812
719
326
2,852
501
31,534
199,139
2,876
5,639
2,890
35,547
37,228
40,350
33,700
170
3,027
362
409
615
4,864
1,990
3,427
2,528
2,861
(3,996)
(2,389)
(1,963)
582
953
987
25,732
26,601
29,090
242,078
39,515
39,293
44,331
38,113
6,427
9,913
7,766
9,954
108,554
10,566
7,489
10,358
11,381
13,746
167,397
17,400
14,606
17,389
10,340
10,285
10,355
12,404
16,911
18,141
18,285
4,625
15,078
16,050
0.03
Basic and diluted earnings per share
0.04
0.05
0.07
0.72
0.07
0.04
0.06
Performance Fees are earned on the last day of the fiscal year other than for the Funds that are managed by RCIC and a Managed Account that was
opened during 2011. As a result, quarters ending December 31 are significantly more variable than other quarters during the year.
In the fourth quarter of 2011, Performance Fees in the amount of $2.5 million were accrued. In the fourth quarter of 2010, total Performance Fees
of $199.1 million were recorded. Of the $2.5 million (2010 - $199.1 million), $2.5 million (2010 - $192.8 million) of Performance Fees were generated
from Funds, $nil (2010 - $6.3 million) from Managed Accounts and $nil (2010 - $nil) from Managed Companies.
There is generally no other seasonality to our earnings and the trends in fees and expenses relate primarily to the level of our AUM.
At December 31, 2011, management determined that the carrying value of the fund management contracts and carried interests were in excess of
their respective recoverable amounts. As a result, an impairment charge was recorded in the amount of $7.7 million ($4.6 million after tax). Management
will continue to monitor the recoverable amount of these intangible assets on a quarterly basis and, if appropriate, may reverse all or part of these
impairment losses in future periods.
The fourth quarter of 2011 saw AUM decrease by $744 million from $9,881 million at September 30, 2011 to $9,137 million at December 31, 2011.
The decrease reflects a combination of net redemptions of $59 million and net market value depreciation of $685 million primarily from the Company's
Funds and Managed Accounts.
Pursuant to the acquisition of the Global Companies as explained in greater detail earlier in this MD&A, on February 4, 2011, the Company issued
19,467,500 common shares from treasury (see note 3 to the audited consolidated financial statements) increasing the number of common shares
outstanding of the Company to 169,467,500. Prior to this, the Company had 150,000,000 issued and outstanding common shares. The consolidated
results shown in the table above include the results of the Global Companies from the date of that acquisition.
23
Dividends
On January 10, 2011, a special dividend in the amount of $0.60 per common share was declared. The special dividend related to Performance Fees
received for 2010 and was paid on February 3, 2011 to shareholders of record at the close of business on January 19, 2011.
On March 22, 2011, the Company declared a second special dividend of $0.12 per common share related to Performance Fees received for 2010.
This second special dividend was paid April 15, 2011 to shareholders of record at the close of business on March 31, 2011.
On March 22, 2011, the Company declared a regular dividend of $0.03 per common share for the quarter ended December 31, 2010. This dividend
was paid on April 15, 2011 to shareholders of record at the close of business on March 31, 2011.
The shares issued from treasury on February 4, 2011 as a result of the acquisition of the Global Companies were not eligible to receive any of the
aforementioned dividends.
On June 1, 2011, a dividend of $0.03 per common share was declared for the quarter ended March 31, 2011. This dividend was paid on June 27, 2011
to shareholders of record at the close of business on June 10, 2011.
On August 9, 2011, a dividend of $0.03 per common share was declared for the quarter ended June 30, 2011. This dividend was paid on September
2, 2011 to shareholders of record at the close of business on August 18, 2011.
On November 8, 2011, a dividend of $0.03 per common share was declared for the quarter ended September 30, 2011. This dividend was paid on
December 2, 2011 to shareholders of record at the close of business on November 17, 2011.
Capital Stock
The capital stock at the end of 2010 was $40.1 million with 150,000,000 common shares issued and outstanding. As at December 31, 2011, capital
stock had increased by $168.3 million to $208.4 million as a result of the issuance of 19,467,500 common shares in connection with the acquisition
of the Global Companies on February 4, 2011 and the purchase of 385,423 common shares by the Trust for the EPSP. As at December 31, 2011,
the Company had 169,467,500 common shares issued and outstanding.
Pursuant to the Share Purchase agreement relating to the Global Companies acquisition, an additional 532,500 common shares of the Company will
be provided to employees of the Global Companies. In addition, the seller and certain current and future employees will be eligible to earn up to an
additional 8 million common shares of the Company with the achievement of certain earnings targets by the Global Companies over a period not
exceeding five years from the date of the acquisition of the Global Companies.
Earnings per share as at December 31, 2011 and December 31, 2010 have been calculated using the weighted average number of shares outstanding
during the respective periods. Basic and diluted earnings per share were $0.20 for the year ended December 31, 2011 and $0.88 for the year ended
December 31, 2010. For the current year, diluted earnings per share reflects the dilutive effect of in-the-money stock options, shares held for the
equity incentive plan and the additional 532,500 common shares to be issued by the Company to certain current and future employees of the Global
Companies.
A total of 2,650,000 stock options have been issued pursuant to our incentive stock option plan. In the first quarter of 2010, 100,000 options were
canceled and 50,000 new options were granted. In the fourth quarter of 2010, 150,000 new options were granted, bringing the stock option balance
to 2,650,000 options outstanding. As at December 31, 2011, 2,516,667 of those stock options were exercisable.
24
Liquidity and Capital Resources
Management Fees can be projected and forecasted with a higher degree of certainty than Performance Fees and Carried Interests, and are therefore
used as a base for budgeting and planning in our business. Management Fees are collected monthly or quarterly, which assists our ability to manage
cash flow. We believe that Management Fees will continue to be sufficient to satisfy our ongoing operational needs, including expenditure on our
corporate infrastructure, business development and information systems. The nature of our operations ensures that the largest outflows, such as
trailer fees and monthly compensation, are correlated with cash inflows, in the form of Management Fees. Fixed costs, such as rent, base payroll and
general and administrative expenses are managed to comprise a relatively low percentage of monthly Management Fees.
We do not have off-balance sheet contractual arrangements and no material contractual obligations other than our long-term lease agreement. During
the quarter ended March 31, 2011 we established a revolving term credit facility with a Canadian chartered bank in the amount of $50 million. As at
December 31, 2011, the Company had not drawn down any part of this credit facility.
SPW is a member of IIROC and a registered investment dealer and SAM is an OSC registrant in the category of IFM, PM and EMD, and as such
each of SPW and SAM is required to maintain a minimum amount of regulatory capital calculated in accordance with the rules of IIROC and of the
OSC, respectively. In addition, GRIL is registered with FINRA in the United States and is required to maintain a minimum amount of regulatory
capital calculated in accordance with the rules of FINRA. During the year ended December 31, 2011, SAM, SPW and GRIL were in compliance with
specified capital requirements.
Critical Accounting Estimates
These audited consolidated financial statements were prepared in accordance with IFRS, using the accounting policies the Company adopted in its
audited consolidated financial statements as at and for the year ending December 31, 2011. In preparing the Company's first annual financial statements
under IFRS, the Company is required to use the standards in effect as at December 31, 2011.
The preparation of the financial statements in conformity with IFRS requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results may vary from the current estimates. Items that require the use of estimates and assumptions
include income taxes, share-based payments and the valuation of goodwill, intangible assets and certain proprietary investments.
A portion of Performance Fee revenue is earned by a wholly-owned subsidiary that acts as the general partner to the domestic limited partnerships
managed by us. For income tax purposes, as at the end of each income tax year these Performance Fees are an allocation of partnership income and,
for the purposes of calculating taxable income, consists of capital gains and/or losses, interest income, dividend income, carrying charges and other
types of income and expenses allocated to the general partner. We work with third party advisors to calculate allocations of partnership income,
however, such allocations involve a certain degree of estimation. Income tax estimates could change as a result of change in taxation laws and
regulations, both domestic and foreign, an amendment to the calculation of allocation of partnership income and/or a change in foreign affiliate
rules.
Stock-based compensation expense is estimated based on the value of the option on its grant date. Management adopted a fair value-based valuation
methodology as required by IFRS that will best determine the value of options and the cost over the vesting period of the option. The valuation
model utilizes multiple observable market inputs including interest rates, however the model requires judgment and assumptions be applied in
determining certain inputs including expected volatility and expected option life. Management reviews all inputs on a regular basis to ensure consistency
of application and reasonableness. Details regarding stock options granted, including key inputs and assumptions are contained in note 8 to the
Company's audited consolidated financial statements.
As a result of the acquisition of the Global Companies in 2011, finite life intangible assets and goodwill were identified. The values associated with
goodwill and intangibles involve estimates and assumptions, including those with respect to future cash inflows and outflows, discount rates, asset
lives and the future stock price of the Company. These estimates require significant judgment regarding market growth rates, fund flow assumptions,
expected margins and costs which could affect the Company's future results if the current estimates of future performance and fair value change.
These determinations also affect the amount of amortization expense on fund management contracts with finite lives recognized in future periods.
Management monitors for indicators of impairment on a regular basis and performs thorough valuations to verify the value of the intangibles and
goodwill should an indicator of impairment exist.
The Company's proprietary investments are designated as fair value through profit or loss. Some of these investments are generally not traded in an
active market. Management monitors all proprietary investments on a regular basis and makes all reasonable efforts to obtain publicly available
information related to such investments. However, since the amount of information for investments that are not publicly traded is often limited, fair
value of these investments could subsequently prove to differ from amounts at which they are carried on the balance sheet.
25
Certain fees recoverable from Funds or third parties relate to new investment products and are contingent upon a successful completion of such
product launches. Management evaluates such assets on a regular basis and only capitalizes the portion of the recoverable that is more likely than not
to be recovered.
We review all estimates periodically and, as adjustments become necessary, they are reported in income in the period in which they become known.
Adoption of International Financial Reporting Standards
The Company adopted IFRS effective January 1, 2011 with a transition date of January 1, 2010. The adoption of IFRS has not had a material impact
on the Company's operations, strategic decisions and cash flow. The Company's IFRS accounting policies are provided in note 2 to the consolidated
financial statements for the year ended December 31, 2011. In addition, note 16 to these consolidated financial statements presents reconciliations
between the Company's 2010 Canadian GAAP results and the 2010 IFRS results and explanation of the adjustments to transition to IFRS.
Highlights of the Impact of IFRS
The following adjustments were made to the financial statements as a result of transition to IFRS:
•
•
The value of proprietary investments have increased by $254 thousand as at January 1, 2010 and by $730 thousand as at December 31,
2010, as a result of re-designating financial assets classified as available-for-sale under Canadian GAAP to fair value through profit or loss
under IAS 39. The impact of this adjustment was not material to the opening balance sheet but has increased the net income for the year
ended December 31, 2010 by $417 thousand.
For equity instruments, such as stock options, the timing of expense recognition differs between Canadian GAAP and IFRS. While the
total stock option expense calculation is similar under the two sets of standards, under IFRS, the expense is recognized on a graded vesting
schedule as compared with straight line vesting under Canadian GAAP. This results in a larger portion of the expense being recognized
earlier in the vesting period. An adjustment of $1.6 million was recorded as at January 1, 2010 to account for the difference which had no
impact to the Company. This adjustment was a reclassification between contributed surplus and opening retained earnings on January 1,
2010. For the year ended December 31, 2010, the transition to IFRS resulted in an increase of $1.1 million to net income.
As a result of the above mentioned adjustments, net income for the year ended December 31, 2010 increased by $1.5 million to $132.7 million under
IFRS from $131.2 million under Canadian GAAP. The change in net income increased the earnings per share by $0.01 to $0.88 under IFRS from
$0.87 under Canadian GAAP.
EBITDA for the year ended December 31, 2010 increased by $0.5 million from $201.9 million under Canadian GAAP to $202.4 million under IFRS.
Base EBITDA remained consistent at $43.4 million under Canadian GAAP and IFRS. EBITDA per share for the year ended December 31, 2010
remained consistent at $1.35 under Canadian GAAP and IFRS. Base EBITDA per share for the year ended December 31, 2010 remained consistent
at $0.29 under Canadian GAAP and IFRS.
Impact of IFRS on earnings volatility
In the periods where the company issues stock-based compensation to its employees and directors, the Company's earnings will fluctuate as the timing
of the expense recognition differs between Canadian GAAP and IFRS. While the total stock option expense calculation is similar under the two sets
of standards, under IFRS, the expense is recognized on a graded vesting schedule as compared with straight line vesting under Canadian GAAP.
In the periods where the Company faces an increase in legal claims or litigation, the Company's earnings will become more volatile. This is primarily
as a result of recording changes to contingent liabilities each quarter, where IFRS has a lower probability threshold for recording a provision than
under Canadian GAAP.
Alternative and policy choices under IFRS
A summary of the Company's significant accounting policies under IFRS are provided in note 2 to the audited consolidated financial statements.
These policies have been retrospectively and consistently applied except where specific exemptions permitted an alternative treatment upon transition
to IFRS in accordance with IFRS 1 as disclosed in note 16 to the audited consolidated financial statements.
Exemptions applied
IFRS 1 First-Time Adoption of International Financial Reporting Standards allows first-time adopters certain exemptions from the general requirement to
apply IFRS as effective for December 31, 2011 year ends retrospectively.
26
The Company has applied the following exemptions:
•
•
•
IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries or of interests in associates and joint ventures that occurred
before January 1, 2010.
IFRS 2 Share-based Payment has not been applied to equity instruments that were granted on or before November 7, 2002, nor has it been
applied to equity instruments granted after November 7, 2002 that vested before January 1, 2010.
IAS 39 Financial Instruments: Recognition and Measurement - The Company has re-designated financial assets classified as available-for-sale under
Canadian GAAP as fair value through profit or loss under IAS 39. These financial assets are managed and their performance is evaluated on
a fair value basis, in accordance with a documented investment strategy.
Related Party Transactions
In September 2010, Mr. Sprott, Chairman of the Company, personally funded a share incentive program through his personal holding company. The
program provided Mr. Grosskopf, the CEO of the Company and Mr. Bambrough, the President of the Company, with a total of 8 million common
shares of the Company. This arrangement did not result in the issuance of common shares from the treasury of the Company. See note 8 of the
Company's audited consolidated financial statements for additional information.
Managing Risk
There are certain risks inherent in the activities of the Company, including risks related to general market conditions; changes in the financial markets;
failure to retain and attract qualified staff; poor investment performance; changes in the investment management industry; competitive pressures;
failure to manage risks; rapid growth; regulatory compliance; public company reporting and other regulatory obligations; historical financial information
not necessarily indicative of future performance; failure to execute our succession plan; conflicts of interest; litigation risk; employee errors or
misconduct; effectiveness of information security policies, procedures and capabilities; failure to develop effective business continuity plans; entering
new lines of business; fluctuations in Performance Fees and Carried Interests; rapid growth or decline in our AUM and AUA; insufficient insurance
coverage; possible volatility of the share price; and control by a principal shareholder. A full description of the Company's risks are discussed in the
Company's Annual Information Form dated March 27, 2012 and is available on SEDAR.
We have processes and procedures in place to monitor and mitigate these risks to the extent reasonable and practicable within the framework of our
overall strategic objectives of delivering excellence in investment performance.
Certain key risks are managed as described below:
Market Risk
We monitor, evaluate and manage the principal risks associated with the conduct of our business. These risks include external market risks to which
all investors are subject and internal risk resulting from the nature of our business. In SAM, RCIC and SAM US, at the investment product level, we
manage risk through the selection, weighting and monitoring of individual investments based on stated investment objectives and strategies. At SPW
and GRIL, we manage risk at the asset allocation level, by focusing on mitigating risk through the appropriate selection and weighting of portfolio
investments for each client to reflect their suitability and risk tolerance.
Internal Controls and Procedures
SAM, SPW, GRIL and SAM US operate in regulated environments and are subject to business conduct rules and other rules and regulations. We have
internal control policies related to our business conduct. They include controls required to ensure compliance with the rules and regulations of relevant
regulatory bodies including the OSC, IIROC, FINRA and the SEC.
Disclosure Controls and Procedures (“DC&P”) and Internal Control over Financial Reporting (“ICFR”)
Management is responsible for the design and operational effectiveness of DC&P and ICFR in order to provide reasonable assurance regarding
the disclosure of material information relating to the Company and information required to be disclosed in our annual filings, interim filings and
other reports filed under securities legislation, as well as the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with IFRS.
Consistent with National Instrument 52-109, the Company's CEO and CFO have evaluated the DC&P and ICFR as of December 31, 2011 and concluded
that the controls have been properly designed and are operating effectively.
During 2011, the Company acquired the Global Companies which required the Company to develop and implement additional internal controls over
financial reporting to reflect (i) the location of the Global Companies in California and (ii) the goodwill and intangible assets identified as a result of
the acquisition. There were no other changes in the Company's internal control over financial reporting that occurred during fiscal 2011 that has
materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
27
Conflicts of Interest
Internally, we have established a number of policies with respect to our employees' personal trading. Employees may not trade any of the securities
held or being considered for investment by any of our Funds without prior approval. In addition, employees must receive prior approval before they
are permitted to buy or sell securities. Speculative trading is strongly discouraged. While employees are permitted to have investments managed by
third parties on a discretionary basis, they generally choose to invest in the Funds. All of our employees must comply with our Code of Ethics. This
Code establishes strict rules for professional conduct and management of conflicts of interest.
Independent Review Committee
National Instrument 81-107 - Independent Review Committee for Investment Funds (“NI 81-107”) requires all publicly offered investment funds to establish
an independent review committee to whom all conflicts of interest matters must be referred for review or approval. We have established one independent
review committee for all of our public mutual Funds. As required by NI 81-107, we have established written policies and procedures for dealing with
conflict of interest matters, and we maintain records in respect of these matters and provide assistance to the independent review committee in
carrying out its functions. The independent review committee is comprised of three independent members, and is subject to requirements to conduct
regular assessments and provide reports to us and to the holders of interests in our public mutual Funds in respect of its functions.
Confidentiality of Information
We believe that confidentiality is essential to the success of our business, and we strive to consistently maintain the highest standards of trust, integrity
and professionalism. Account information is kept under strict control in compliance with all applicable laws, and physical, procedural, and electronic
safeguards are maintained in order to protect this information from access by unauthorized parties. We keep the affairs of our clients confidential
and do not disclose the identities of our clients (absent express client consent to do so). If a prospective client requests a reference, we will not furnish
the name of an existing client before receiving permission from that client to reveal their business relationship with us.
Insurance
We maintain appropriate insurance coverage for general business and liability risks as well insurance coverage required by regulation. We review our
insurance coverage periodically to ensure continued adequacy.
Additional information relating to the Company, including the Company's Annual Information Form is available on SEDAR at www.sedar.com.
28
Consolidated Financial Statements
Year-ended December 31, 2011
29
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements, which consolidate the financial results of Sprott Inc. (the "Company"), were prepared by
management, who are responsible for the integrity and fairness of all information presented in the consolidated financial statements and management's
discussion and analysis ("MD&A") for the year ended December 31, 2011. The consolidated financial statements were prepared by management in
accordance with International Financial Reporting Standards. Financial information presented in the MD&A is consistent with that in the consolidated
financial statements.
In management's opinion, the consolidated financial statements have been properly prepared within reasonable limits of materiality and within the
framework of the significant accounting policies summarized in note 2 of the consolidated financial statements. Management maintains a system of
internal controls to meet its responsibilities for the integrity of the consolidated financial statements.
The board of directors (the "Board of Directors") of the Company appoints the Company's audit committee (the "Audit Committee") annually.
Among other things, the mandate of the Audit Committee includes the review of the consolidated financial statements of the Company on a quarterly
basis and the recommendation to the Board of Directors for approval. The Audit Committee has access to management and the auditors to review
their activities and to discuss the external audit program, internal controls, accounting policies and financial reporting matters.
Ernst & Young LLP performed an independent audit of the consolidated financial statements, as outlined in the auditors' report contained herein.
Ernst & Young LLP had, and has, full and unrestricted access to management of the Company, the Audit Committee and the Board of Directors to
discuss their audit and related findings and have the right to request a meeting in the absence of management at any time.
Peter Grosskopf
Chief Executive Officer
March 27, 2012
Steven Rostowsky
Chief Financial Officer
30
INDEPENDENT AUDITORS' REPORT
To the shareholders of Sprott Inc.
We have audited the accompanying consolidated financial statements of Sprott Inc. (“Sprott”), which comprise the consolidated balance sheets as at
December 31, 2011 and 2010 and January 1, 2010, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity
and cash flows for the years ended December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines
is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Sprott as at December 31, 2011
and 2010 and January 1, 2010, and its financial performance and its cash flows for the years ended December 31, 2011 and 2010 in accordance with
International Financial Reporting Standards.
Toronto, Canada
March 27, 2012
Chartered Accountants
Licensed Public Accountants
31
CONSOLIDATED BALANCE SHEETS
As at
($ in thousands of Canadian dollars)
Assets
Current
Cash and cash equivalents
Fees receivable
Other assets
Total current assets
Proprietary investments
Property and equipment, net
Goodwill and intangibles
Deferred income taxes
Total assets
Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities
Compensation and employee bonuses payable
Income taxes payable
Total current liabilities
Deferred income taxes
Total liabilities
Shareholders' equity
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes
Events after the reporting period (Note 18)
On behalf of the Board
December 31,
December 31,
January 1,
2011
2010
2010
(Note 7)
(Note 4)
(Note 5)
(Note 6)
(Note 9)
(Note 9)
(Note 8)
(Note 8)
119,506
10,199
2,800
132,505
78,484
5,126
165,655
18,766
268,031
400,536
10,404
24,199
47,503
82,106
16,989
99,095
208,413
40,857
47,038
5,133
301,441
400,536
81,209
209,078
2,025
292,312
42,614
3,705
2,201
1,935
50,455
342,767
17,010
61,644
47,991
126,645
1,860
128,505
40,105
32,406
141,751
—
214,262
342,767
49,010
12,751
2,248
64,009
28,257
4,298
94
1,289
33,938
97,947
4,546
9,192
7,323
21,061
524
21,585
40,105
5,457
30,800
—
76,362
97,947
32
Eric Sprott
Director,
Chairman
James Roddy
Director,
Chair of A udit Committee
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in thousands of Canadian dollars, except for per share amounts)
2011
2010
Revenue
Management fees
Performance fees
Commissions
Unrealized and realized gains (losses) on proprietary investments
Other income
Total revenue
Expenses
Compensation and benefits
Stock-based compensation
Trailer fees
General and administrative
Donations
Amortization of intangibles
Amortization of property and equipment
Total expenses
Income before income taxes for the year
Provision for income taxes
Net income for the year
Basic earnings per share
Diluted earnings per share
See accompanying notes
(Note 7)
(Note 6)
(Note 9)
146,825
5,303
14,179
(7,986)
2,931
103,686
200,054
6,211
9,013
4,537
161,252
323,501
48,711
4,391
25,716
21,326
1,027
14,900
1,212
117,283
43,969
10,931
33,038
$
$
0.20 $
0.20 $
83,664
26,949
21,649
13,369
2,382
176
757
148,946
174,555
41,854
132,701
0.88
0.88
33
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 ($ in thousands of Canadian dollars)
2011
2010
Net income for the year
Other comprehensive income
Foreign currency translation gain on foreign operations, before taxes
Total other comprehensive income
Comprehensive income
See accompanying notes
33,038
132,701
5,133
5,133
38,171
—
—
132,701
34
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ in thousands of Canadian dollars, other than number of shares)
At January 1, 2011
Business acquisition
Shares held for equity incentive plan
Foreign currency translation gain on foreign operations
Additional purchase consideration
Stock-based compensation
Deferred tax asset on stock-based compensation
Special dividends paid
Regular dividends paid
Net income
Number of
Shares
Outstanding
Capital Stock
Contributed
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Equity
(Note 3)
(Note 8)
(Note 3)
150,000,000
19,467,500
(385,423)
40,105
168,783
(475)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
32,406
—
(2,199)
—
4,753
4,391
1,506
—
—
—
141,751
—
—
—
—
—
—
(108,000)
(19,751)
33,038
—
—
—
5,133
—
—
—
—
—
—
214,262
168,783
(2,674)
5,133
4,753
4,391
1,506
(108,000)
(19,751)
33,038
Balance, December 31, 2011
169,082,077
208,413
40,857
47,038
5,133
301,441
At January 1, 2010
Stock-based compensation
Share incentive program
Regular dividends paid
Special dividend paid
Net income
150,000,000
40,105
—
—
—
—
—
—
—
—
—
—
5,457
1,242
25,707
—
—
—
30,800
—
—
(15,750)
(6,000)
132,701
Balance, December 31, 2010
150,000,000
40,105
32,406
141,751
See accompanying notes
—
—
—
—
—
—
—
76,362
1,242
25,707
(15,750)
(6,000)
132,701
214,262
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ in thousands of Canadian dollars)
2011
2010
Operating Activities
Net income for the year
Add (deduct) non-cash items:
Unrealized and realized (gains) losses on proprietary investments
Stock-based compensation
Amortization of property and equipment
Amortization of intangible assets
Income taxes
Deferred income taxes (recovery)
Other items
Income taxes paid
Changes in:
Fees receivable
Other assets
Accounts payable and accrued liabilities
Compensation and employee bonuses payable
Effect of foreign exchange on cash balances
Cash provided by operating activities
Investing Activities
Purchase of proprietary investments
Sale of proprietary investments
Purchase of property and equipment
Deferred sales commissions paid
Indefinite life fund management contracts
Cash acquired on acquisition
Cash used in investing activities
Financing Activities
Acquisition of common shares for long-term incentive plan
Dividends paid
Cash used in financing activities
Net increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash and cash equivalents:
Cash
Short-term deposits
See accompanying notes
33,038
132,701
7,986
4,391
1,212
14,900
21,068
(10,137)
(2,831)
(21,722)
201,630
(1,322)
(8,077)
(37,912)
364
202,588
(38,377)
2,785
(2,569)
(2,122)
—
6,417
(33,866)
(2,674)
(127,751)
(130,425)
38,297
81,209
119,506
26,038
93,468
119,506
(9,013)
26,949
757
176
41,164
690
(654)
(497)
(196,327)
223
12,464
52,452
—
61,085
(25,432)
20,743
(164)
(913)
(1,370)
(7,136)
—
(21,750)
(21,750)
32,199
49,010
81,209
15,341
65,868
81,209
36
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
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 2700, Toronto, Ontario, M5J 2J2.
On February 4, 2011, the Company completed an acquisition, through its wholly-owned subsidiary Sprott U.S. Holdings Inc., of all of the
outstanding stock of Rule Investments, Inc. (the owner of Global Resource Investments, Ltd. (“GRIL”), Sprott Asset Management USA
Inc. (“SAM US”) (formerly Terra Resource Investment Management, Inc.) and Resource Capital Investment Corporation (“RCIC”)
(collectively, the “Global Companies”)). GRIL is a California limited partnership that operates as a securities broker-dealer and SAM US
provides discretionary investment management services. RCIC is the general partner and discretionary asset manager to the Exploration
Capital Partners family of limited partnerships.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as
issued by the International Accounting Standards Board ("IASB"). As these are the first financial statements presented in accordance with
IFRS, disclosures are in note 16 to describe how the Company adopted IFRS as required by IFRS 1 - First-Time Adoption of IFRS.
The consolidated financial statements of the Company for the year ended December 31, 2011 were authorized for issue by a resolution of
the Board of Directors on March 27, 2012.
Basis of pr esentation
These consolidated financial statements have been prepared on a historical cost basis, except for financial assets and financial liabilities
designated as held for trading or held at fair value through profit or loss both of which have been measured at fair value. The consolidated
financial statements are presented in Canadian dollars and all values are rounded to the nearest thousand ($000), except when otherwise
indicated.
Principles of consolidation
These consolidated financial statements comprise those of the Company and its subsidiaries as well as three limited partnerships in which
the Company is the sole limited partner as at January 1, 2010.
The three limited partnerships are Sprott Asset Management LP ("SAM"), Sprott Private Wealth LP ("SPW") and Sprott Consulting LP
("SC") while material wholly-owned subsidiaries are Sprott U.S. Holdings Inc., Sprott Genpar Ltd. and SAMGENPAR Ltd. These are entities
over which the Company has control, where control is defined as the power to govern the financial and operating policies of an entity so as
to obtain significant benefits from its activities. Generally, control is presumed to exist when the Company owns more than one half of the
voting rights of an entity. The Company does not control any entities for which it owns less than one half of the voting rights of an entity,
other than the Sprott Inc. 2011 Employee Profit Sharing Plan Trust (the “Trust”), which the Company is deemed to control.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be
consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period
as the Company, using consistent accounting policies. All intercompany balances, income and expenses and unrealized gains and losses
resulting from intercompany transactions and dividends are eliminated in full.
Recognition of income
The Company earns management fees from the funds, managed accounts and companies that it manages. The management fees are recognized
on an accrual basis over the period during which the related services are rendered and are collected monthly, quarterly or annually.
The Company also earns performance fees, calculated for each relevant fund, managed account and/or managed company as a percentage
of: (i) the fund's/managed account's excess performance over the relevant benchmark; (ii) the increase in net asset values over a predetermined
hurdle, if any; or (iii) the net profit in the fund over the performance period. Performance fee revenue is recognized when earned, according
to agreements in the underlying funds, managed accounts and managed companies.
37
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Fees arising from carried interest entitlements are recorded on an accrual basis following disposition of underlying portfolio investments.
The Company, through SPW and GRIL primarily earns trailer fee income, fees and commissions from the sale of new and follow-on offerings
of products managed by the Company, through advisory services, through private placements to clients of SPW and GRIL and, particularly
with respect to GRIL, from trading in stocks by clients of GRIL. Trailer fee income and commission income are recognized on an accrual
basis over the period during which the related service is rendered.
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit with banks and with carrying brokers, which are not subject to restrictions, and short-
term interest bearing notes and treasury bills with a term to maturity of less than three months from the date of purchase.
Proprietary investments
Securities transactions and related revenue and expenses are accounted for on a trade-date basis.
Precious metal bullion
Precious metal bullion includes investments in gold and silver bullion. Investments in gold and silver bullion are measured at fair value
determined by reference to published price quotations, with unrealized and realized gains and losses recorded in income based on the IAS
40 Investment Property fair value model as IAS 40 is the most relevant standard to apply. Investment transactions in physical gold and silver
bullion are accounted for on the business day following the date the order to buy or sell is executed.
Financial instruments
Financial assets may be classified as held-for-trading (“HFT”), designated at fair value through income or loss, held-to-maturity (“HTM”)
or loans and receivables. Financial liabilities may be classified as either HFT or other. All financial instruments are initially measured at fair
value. After initial recognition, financial instruments classified as HFT or those designated as fair value through income or loss are measured
at fair value using quoted market prices in an active market. Changes in fair value of financial instruments are reflected in net income. All
other financial instruments, which include those classified as HTM investments, loans and receivables and other financial liabilities, are
measured at amortized cost using the effective interest rate method. Transaction costs related to financial assets at fair value through profit
or loss are expensed as incurred.
The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets
classified as loans and receivables or HTM is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only
if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an
incurred 'loss event') and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial
assets and it can be reliably estimated.
Financial instruments included in the Company's accounts have the following classifications:
•
•
•
Cash and cash equivalents and all proprietary investments (excluding notes receivable, gold and silver bullion) are designated
as HFT or fair value through income or loss.
Fees receivable and notes receivable are classified as loans and receivables.
Accounts payable and accrued liabilities, provisions and compensation and employee bonuses payable are classified as other
financial liabilities.
Fair value hierarchy
All financial instruments recognized at fair value in the consolidated balance sheets are classified into three fair value hierarchy levels as
follows:
Level 1:
valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities;
Level 2:
valuation techniques based on inputs that are quoted prices of similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; inputs other than quoted prices used in a valuation model
that are observable for that instrument; and inputs that are derived from or corroborated by observable market data by
correlation or other means;
Level 3:
valuation techniques with significant unobservable market inputs.
38
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Offsetting of financial instr uments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheets if, and only if, there is a
currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets
and settle the liabilities simultaneously.
Property and equipment
Property and equipment are recorded at cost and are amortized on a declining balance basis at rates ranging from 0% to 100% per annum.
Leasehold improvements are amortized on a straight-line basis over the term of the respective lease. The artwork is not amortized since it
does not have a determinable useful life.
Assets' residual values, useful lives and methods of amortization are reviewed at each reporting date, and adjusted prospectively if appropriate.
Deferred sales commissions
Sales commissions paid on the sale of mutual fund securities are recorded at cost and amortized on a straight-line basis over a maximum of
three years. Unamortized deferred sales commissions are written down to the extent that the carrying value exceeds the expected future
revenue on an undiscounted basis.
Intangible assets
The useful life of intangible assets is assessed as either finite or indefinite. Following the initial recognition, intangible assets are carried at
cost less any accumulated amortization and accumulated impairment losses, if any.
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication
that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful
life is reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of
future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are
treated as changes in accounting estimates. The amortization expense and any impairment losses on intangible assets with finite lives is
recognized in the consolidated statements of income in the expense category consistent with the function of the intangible asset.
The costs incurred to create fund management contracts between SAM and certain of the funds managed by SAM are recognized as intangible
assets with an indefinite life. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually. The
assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in
useful life from indefinite to finite is made on a prospective basis.
At each balance sheet date, finite life intangible assets are assessed for indicators of impairment. If indicators are present, these assets are
subject to an impairment review. Any loss resulting from impairment of intangible assets is expensed in the period the impairment is identified.
Business combinations and goodwill
The purchase price of an acquisition accounted for under the acquisition method is allocated based on the fair values of the net identifiable
assets acquired. The excess of the purchase price over the values of such assets, including identifiable intangible assets, is recorded as goodwill.
Acquisition costs incurred are expensed and included in general and administrative expenses.
Goodwill, which is measured at cost less any accumulated impairment losses, is not amortized, but is subject to impairment tests on at least
an annual basis. For the purpose of impairment testing, goodwill acquired in a business acquisition is allocated to each of the Company's
cash generating units that are expected to benefit from the acquisition. Goodwill is assessed for impairment annually or more frequently if
events or circumstances suggest that there may be impairment. If any impairment is indicated, then it is quantified by comparing the
recoverable amount of the gash generating unit to which goodwill is allocated to its carrying value including the allocated goodwill. If the
recoverable amount is less than its carrying value, an impairment loss is recognized in the consolidated statement of income in the period
in which it occurs. Impairment losses on goodwill cannot be subsequently reversed. Goodwill is allocated to the appropriate cash-generating
unit for the purpose of impairment testing.
Income taxes
Income tax is comprised of current and deferred tax. Income tax is recognized in the Consolidated Statement of Income except to the extent
that it relates to items recognized in other comprehensive income or directly in equity, in which case the related taxes are also recognized in
other comprehensive income or directly in equity respectively as part of a purchase transaction or to the extent it relates to items directly in
other comprehensive income, or equity.
39
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Deferred taxes are recognized using the liability method for temporary differences that exist between the carrying amounts of assets and
liabilities in the Consolidated Balance Sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax assets
and liabilities are determined based on the enacted or substantively enacted tax rates that are expected to apply when the assets or liabilities
are reported for tax purposes such differences are expected to reverse in the future. Deferred tax assets are recognized only when it is probable
that there are sufficient taxable profit will be available or taxable temporary differences reversing in future periods against which deductible
temporary differences may be utilized.
Deferred taxes liabilities are not recognized on the following temporary differences:
•
•
•
Temporary differences on the initial recognition of assets and liabilities in a transaction that is not a business combination
and that affects neither accounting nor taxable profit or loss;
Taxable temporary differences related to investments in subsidiaries, associates or joint to the extent they are controlled by
the Company and they will not reverse in the foreseeable future; and
Taxable temporary differences arising on the initial recognition of goodwill.
The Company records a provision for uncertain tax positions if it is probably that the Company will have to make a payable to tax authorities
upon their examination of a tax position. This provision is measured at the Company's best estimate of the amount expected to be paid.
Provisions are reversed to income in the period in which management assesses they are no longer required or determined by statute.
The measurement of tax assets and liabilities requires an assessment of the potential tax consequences of items that can only be resolved
through agreement with the tax authorities. While the ultimate outcome of such tax audits and discussions cannot be determined with
certainty, management estimates the level of provisions required for both current and deferred taxes.
Share-based payments
The Company uses the fair value method to account for equity settled share-based payments with employees and directors. Compensation
expense is determined using the Blac
holes option valuation model for stock options. Compensation expense for the share incentive
program is determined based on the fair value of the benefit conferred on the employee (see note 8). Compensation expense for the earn-
out shares is determined using an appropriate valuation model (see note 8). The amount of compensation expense is recognized over the
vesting period with a corresponding increase to contributed surplus. Stock options vest in installments which require a graded vesting
methodology to account for these share-based awards. On the exercise of stock options for shares, the contributed surplus previously
recorded with respect to the exercised options and the consideration paid is credited to capital stock. On the issuance of the earn-out shares,
the contributed surplus previously recorded with respect to the issued earn-out shares is credited to capital stock.
Earnings per share
Basic and diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding
during the year.
The Company applies the treasury stock method to determine the dilutive impact, if any, of stock options and unvested shares purchased
for the Employee Profit Sharing Plan by the Trust. The treasury stock method determines the number of incremental common shares by
assuming that the number of shares the Company has granted to employees have been issued.
Foreign currency translation
Items in the financial statements of the Company's subsidiaries are measured using their functional currency, being the currency of the
primary economic environment in which the entity operates. The Company's performance is evaluated and its liquidity is managed in Canadian
dollars. Therefore, the Canadian dollar is considered as the currency that most faithfully represents the economic effects of the underlying
transactions, events and conditions. The functional currency of the Company and all its subsidiaries, with the exception of Sprott U.S.
Holdings Inc. and the Global Companies, is the Canadian dollar. The functional currency of Sprott U.S. Holdings Inc. and the Global
Companies is the US dollar, and accordingly, assets and liabilities of Sprott U.S. Holdings Inc. and the Global Companies are translated into
Canadian dollars using the rate in effect on the dates of the consolidated balance sheets. Revenue and expenses are translated at the average
rate over the reporting period. Foreign currency translation gains and losses arising from the Company's translation of its net investment in
Sprott U.S. Holdings Inc., including goodwill and the identified intangible assets, are included in accumulated other comprehensive income
or loss as a separate component within shareholders' equity until there has been a realized reduction in the value of the underlying investment.
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to management. Management is responsible
for allocating resources and assessing performance of the operating segments to make strategic decisions.
40
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Significant accounting judgments and estimates
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk
of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The
Company based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing
circumstances and assumptions about future developments may change due to market changes or circumstances arising beyond the control
of the Company. Such changes are reflected in the assumptions when they occur.
i.
Impairment of g oodwill and intangible assets
Goodwill and indefinite life intangible assets are reviewed for impairment annually or more frequently if changes in circumstances indicate
that the carrying value may be impaired. The values associated with goodwill and intangibles involve estimates and assumptions, including
those with respect to future cash inflows and outflows, discount rates, asset lives and the future stock price of the Company. These estimates
require significant judgment regarding market growth rates, fund flow assumptions, expected margins and costs which could affect the
Company's future results if the current estimates of future performance and fair value change. These determinations also affect the amount
of amortization expense on fund management contracts with finite lives recognized in future periods.
ii.
Fair value of financial instr uments
When the fair value of financial assets and financial liabilities recorded in the consolidated balance sheets cannot be derived from active
markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models
are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values.
The judgments include considerations of liquidity and model inputs such as volatility. Changes in assumptions about these factors could
affect the reported fair value of financial instruments. The valuation of financial instruments is described in more detail in note 10.
iii. Share-based payments
The Company measures the cost of share-based payments to employees by reference to the fair value of the equity instruments at the date
on which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation model for a
grant of equity instruments, which is dependent on the terms and conditions of the grant. This also requires determining the most appropriate
inputs to the valuation model including the expected life of the option, volatility, dividend yield, probability of a subsidiary attaining certain
earnings targets, the future stock price of the Company and the future employment of a senior employee and making assumptions about
them.
iv. Deferred tax assets
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which
the losses can be utilized. In addition, taxable income is subject to estimation as a portion of performance fee revenue is an allocation of
partnership income. This allocation consists of capital gains and/or losses, interest income, dividend income, carrying charges and other
types of income and expenses. Such allocations involve a certain degree of estimation and income tax estimates could change as a result of
changes in taxation laws and regulations, both domestic and foreign, an amendment to the calculation of allocation of partnership income
and/or a change in foreign affiliate rules. Significant management judgment is required to determine the amount of deferred tax assets that
can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.
v.
Provisions
Due to the nature of provisions, a considerable part of their determination is based on estimates and judgments, including assumptions
concerning the future. The actual outcome of these uncertain factors may be materially different from the estimates, causing differences
with the estimated provisions.
41
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Future changes in accounting policies
The Company is currently evaluating the impact the following new standards issued or amended by the IASB will have on its financial
statements. The Company has not yet determined whether to early adopt any of the new or amended standards.
International Accounting Standard
Issue Date / Amendment Date
Effective Date
IAS 1 - Presentation of Financial Statements
IFRS 10 - Consolidated Financial Statements
IFRS 12 - Disclosures of Interests in Other Entities
IFRS 13 - Fair Value Measurement
IFRS 9 - Financial Instruments
June 16, 2011
May 12, 2011
May 12, 2011
May 12, 2011
November 12, 2009
July 1, 2012
January 1, 2013
January 1, 2013
January 1, 2013
January 1, 2015
IAS 1, Presentation of Financial Statements, was amended to require entities to group together items within other comprehensive income (loss)
that may be reclassified to net income (loss).
IFRS 10, Consolidated Financial Statements ("IFRS 10"), replaces the consolidation requirements in SIC-12, Consolidation - Special Purpose Entities
and IAS 27, Consolidated and Separate Financial Statements. IFRS 10 builds on existing principles by identifying the concept of control as the
determining factor in whether an entity should be included within the consolidated financial statements of the parent company.
IFRS 12, Disclosures of Interests in Other Entities, establishes disclosure requirements for interests in other entities, including subsidiaries, joint
arrangements, associates and unconsolidated structured entities. The standard carries forward existing disclosures and also introduces
significant additional disclosure requirements that address the nature of, and risks associated with, an entity's interest in other entities.
IFRS 13, Fair Value Measurements, establishes the definition of fair value and sets out a single IFRS framework for measuring fair value and
the required disclosures.
IFRS 9, Financial Instruments (“IFRS 9”), will replace IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 uses a single
approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules presently in IAS 39.
The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual
cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple
impairment methods in IAS 39.
There are no other IFRSs interpretations that are not yet effective that would be expected to have a material impact on the financial statements.
3. BUSINESS ACQUISITION
On February 4, 2011, the Company acquired all of the outstanding stock of Rule Investments, Inc. (the owner of GRIL), SAM US and
RCIC. The purchase price was satisfied by the issue of 19,467,500 common shares of the Company with a value of $8.67 per share, being
the closing price of the Company's shares on the TSX on February 4, 2011 and a commitment to issue an additional 532,500 common shares
of the Company which will be provided to employees of the Global Companies. In addition, the seller and certain current and future
employees will be eligible to earn up to an additional 8 million common shares of the Company with the achievement of certain earnings
targets by the Global Companies.
The Company accounted for the acquisition using the acquisition method and the results of operations have been consolidated from the
date of the transaction.
42
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Details of the net assets acquired, at fair value, are as follows ($ in thousands):
Cash and cash equivalents
Fees receivable and other assets
Proprietary investments
Deferred tax assets
Fund management contracts and carried interests
Accounts payable and accrued liabilities
Compensation and employee bonuses payable
Other long-term liabilities
Deferred tax liabilities
Goodwill on acquisition
Purchase consideration
Purchase consideration transferred
Additional purchase consideration (note 8)
Purchase consideration
February 4, 2011
6,417
11,470
5,337
10,081
49,220
(449)
(981)
(9,769)
(20,055)
122,129
173,400
168,783
4,617
173,400
The fund management contracts and carried interests acquired are recognized as intangible assets with a finite life. Amortization is computed
on a straight-line basis based on the estimated useful lives of these assets, which is 7 years for both fund management contracts and carried
interests. The goodwill acquired of $122.1 million, which is not tax deductible, relates to the expected synergies and/or intangible assets that
do not qualify for separate recognition. The acquisition is expected to provide benefits across the organization and throughout the Global
Companies through the sharing of intellectual capital, the development of new products and by leveraging the Company's products and
brands in the United States and internationally. The additional purchase consideration refers to the additional 532,500 common shares of
the Company to be provided to employees of the Global Companies. As part of the acquisition, the Company assumed operating leases for
premises totaling $0.5 million expiring in 2012.
Predominantly all transaction costs associated with the acquisition were expensed in the prior year.
For the period January 1, 2011 to February 4, 2011, prior to the acquisition date, the Global Companies held excess net assets of the prior
owner which were not purchased by the Company. The effects of the transactions relating to these excess net assets on the reported operations
of the Global Companies for the period January 1, 2011 to February 4, 2011 is not representative of the operations of the Global Companies
beginning on February 4, 2011. As a result, it is not practical or meaningful to report what the Company's net income would have been if
the acquisition of the Global Companies occurred on January 1, 2011.
43
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
4.
PROPRIETARY INVESTMENTS
Proprietary investments consist of the following ($ in thousands):
December 31, 2011
December 31, 2010
January 1, 2010
Gold bullion
Silver bullion
Public equities and share purchase warrants
Mutual funds and hedge funds
Private equities
Secured notes receivable
Total proprietary investments
13,305
9,776
22,101
14,936
2,400
15,966
78,484
7,931
6,788
21,387
4,627
1,881
—
42,614
6,435
—
4,674
831
1,979
14,338
28,257
As at December 31, 2011, investments in public equities and share purchase warrants consisted primarily of companies in the resource sector.
These investments include $12.6 million in common shares of Sprott Resource Lending Corp., a public company listed on the TSX and
NYSE Amex that is managed by a subsidiary of SC under a management services agreement.
Investments in mutual funds and hedge funds consist entirely of investments in mutual funds and hedge funds managed by SAM or RCIC.
44
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
5.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following ($ in thousands):
Cost
At January 1, 2010
Additions
At December 31, 2010
Business acquisition
Additions
Net exchange differences
At December 31, 2011
Accumulated amortization
At January 1, 2010
Charge for the period
At December 31, 2010
Business acquisition
Charge for the period
Net exchange differences
At December 31, 2011
Net Book Value at:
January 1, 2010
December 31, 2010
December 31, 2011
Artwork
Furniture and
fixtures
Computer
hardware and
software
Leasehold
improvements
Total
1,691
—
1,691
—
—
—
1,691
—
—
—
—
—
—
—
1,691
1,691
1,691
1,739
12
1,751
291
506
9
2,557
(1,077)
(269)
(1,346)
(250)
(280)
(3)
1,039
116
1,155
169
444
5
1,773
(1,016)
(45)
(1,061)
(150)
(237)
(10)
3,068
36
3,104
15
1,619
1
4,739
(1,146)
(443)
(1,589)
(12)
(695)
(1)
(1,879)
(1,458)
(2,297)
662
405
678
23
94
315
1,922
1,515
2,442
7,537
164
7,701
475
2,569
15
10,760
(3,239)
(757)
(3,996)
(412)
(1,212)
(14)
(5,634)
4,298
3,705
5,126
45
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
6. GOODWILL AND INTANGIBLES
Goodwill and intangibles consist of the following ($ in thousands):
Fund
management
contracts -
indefinite life
Fund
management
contracts -
finite life
Goodwill
Carried
interests
Deferred
sales
commissions
Total
—
—
—
122,129
—
3,601
—
1,370
1,370
—
—
—
—
—
—
—
—
—
20,399
28,821
—
602
—
850
125,730
1,370
21,001
29,671
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,370
—
—
—
(4,713)
(76)
(4,789)
—
—
—
—
—
(9,398)
(94)
(9,492)
—
—
98
913
1,011
—
2,122
—
3,133
(4)
(176)
(180)
(789)
—
(969)
94
831
98
2,283
2,381
171,349
2,122
5,053
180,905
(4)
(176)
(180)
(14,900)
(170)
(15,250)
94
2,201
Cost
At January 1, 2010
Additions
At December 31, 2010
Business acquisition
Additions
Net exchange differences
At December 31, 2011
Accumulated amortization and
impairment losses
At January 1, 2010
Charge for the period
At December 31, 2010
Charge for the period
Net exchange differences
At December 31, 2011
Net Book Value at:
January 1, 2010
December 31, 2010
December 31, 2011
125,730
1,370
16,212
20,179
2,164
165,655
As a result of the acquisition of the Global Companies by the Company on February 4, 2011, intangible assets consisting of fund management
contracts with a finite life and carried interests were identified. Amortization is computed on a straight-line basis based on the estimated
useful lives of these assets, which is 7 years for both fund management contracts and carried interests.
46
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
The Company evaluates goodwill and indefinite life fund management contracts for impairment annually or more often if events or
circumstances indicate there may be impairment. These intangible assets would be impaired if the carrying value of a cash-generating unit
including the allocated intangible assets exceeds its recoverable amount determined as the greater of the estimated fair value less costs to
sell or value in use.
i. Cash-generating units
The Company has five cash-generating units ("CGU") for the purpose of assessing the carrying value of the allocated goodwill,
being SAM, Global Companies, Corporate and Other (includes two CGUs) operating segments as described in note 15.
ii.
Impairment testing of goodwill
As at December 31, 2011, the Company had goodwill allocated across its CGUs as follows ($ in millions):
CGU
SAM
Global Companies
Corporate
SC
SPW
Allocated Goodwill
19.2
95.3
—
—
7.6
122.1
The recoverable amount of goodwill for each of the five CGUs as at December 31, 2011 has been calculated at fair value less
costs to sell, using a valuation multiple applied to a measure of earnings.
These methodologies are commonly used in the marketplace by independent equity research analysts.
The Global Companies' recoverable amount is valued at $162.1 million which is $18.9 million greater than its carrying value.
Management has applied an estimated earnings multiple of 14.1 to fair value these earnings. A decrease in this earnings multiple
by 1.6 to 12.5 would result in the recoverable amount of the Global Companies CGU equaling the carrying amount of the Global
Companies CGU.
The calculation of the recoverable amounts exceeds the carrying amount of goodwill for each of the identified CGUs. Recent
equity market performance, recent market transactions and the Company's current market capitalization provide additional
evidence that the recoverable amount of goodwill is in excess of the carrying amount.
iii.
Impairment testing of indefinite life fund management contracts
As at December 31, 2011 and December 31, 2010, the Company had indefinite life fund management contracts within the SAM
CGU of $1.4 million. These are contracts for the management of exchange listed funds which have no expiry or termination
provisions. The recoverable amount of indefinite life intangibles for the SAM operating segment as at December 31, 2011 and
December 31, 2010 has been determined from a value in use calculation, by discounting, at 10%, a perpetuity based on the most
recent estimated pre-tax cash flows to the Company by the applicable exchange listed funds.
The calculation of the recoverable amounts exceeds the carrying amount of indefinite life fund management contracts as at
December 31, 2011 and December 31, 2010. Recent equity market performance provides additional evidence that the recoverable
amount of indefinite life fund management contracts is in excess of the carrying amount.
47
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
iv.
Impairment testing of finite life fund management contracts
As at December 31, 2011, the Company had finite life fund management contracts of $16.2 million within the Global Companies
CGU. These are contracts for the management of funds that have a fixed termination date. The recoverable amount of these
finite life fund management contracts as at December 31, 2011 has been determined from a value in use calculation, by discounting,
at 15%, the most recent estimated net cash flows to the Company by these funds.
The calculated recoverable amount of these finite life fund management contracts required management to recognize an
impairment loss of $2.0 million as the calculated recoverable amount resulted in a value greater than its carrying value. Management
has assumed an annual rate of return of 24% for these funds to fair value these cash flows. A decrease in this rate of return by
1.5% to 22.5% would result in the recoverable amount of these finite life fund management contracts equaling the carrying
amount.
The calculation of the recoverable amounts exceeds the carrying amount of finite life fund management contracts as at
December 31, 2011.
v.
Impairment testing of finite life carried interests
As at December 31, 2011, the Company had carried interests of $20.2 million within the Global Companies CGU. These are
rights to participate in the profits of the funds managed by the Global Companies that have a fixed termination date. The
recoverable amount of these carried interests as at December 31, 2011 has been determined from a value in use calculation, by
discounting, at 35%, the most recent estimated net cash flows to the Company by these funds.
The calculated recoverable amount of these carried interests required management to recognize an impairment loss of $5.7
million as the calculated recoverable amount resulted in a value greater than its carrying value. Management has assumed an
annual return rate of 24% for these funds to fair value these cash flows. A decrease in this rate of return by 0.5% to 23.5% would
result in the recoverable amount of these carried interests equaling the carrying amount.
The calculation of the recoverable amounts exceeds the carrying amount of carried interests as at December 31, 2011.
7. OTHER ASSETS AND OTHER INCOME
Other assets consist primarily of prepaid expenses of the Company and receivables from our funds and managed companies for which the
Company has incurred expenses on their behalf.
Other income consists primarily of interest income on cash and cash equivalent balances, income generated by our secured notes receivable
and redemption fee revenue.
48
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
8.
SHAREHOLDERS' EQUITY
a.
Capital stock and contributed surplus
The authorized and issued share capital of the Company consists of an unlimited number of common shares, without par value.
At January 1, 2010 and December 31, 2010
Issuance of share capital on business acquisition (Note 3)
Held for equity incentive plan
At December 31, 2011
Contributed surplus consists of the following:
i.
ii.
stock option expense;
equity incentive plans' expense;
iii.
share incentive program expense;
iv.
earn-out shares expense; and
v.
additional purchase consideration.
At January 1, 2010
Expensing of 2,550,000 Sprott Inc. stock options over the vesting period
Expensing of share incentive program
At December 31, 2010
Expensing of 2,650,000 Sprott Inc. stock options over the vesting period
Expensing of earn-out shares over the vesting period
Deferred tax asset on earn-out shares
Additional purchase consideration
Excess on repurchase of common shares for equity incentive plan *
At December 31, 2011
Number of shares
Stated value
($ in thousands)
150,000,000
19,467,500
(385,423)
169,082,077
40,105
168,783
(475)
208,413
Stated value
($ in thousands)
5,457
1,242
25,707
32,406
476
3,915
1,506
4,753
(2,199)
40,857
* The excess on repurchase of common shares represents amounts paid to shareholders by the Company on repurchase of their shares in excess of the book
value of those shares at the time of repurchase.
49
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Stock option plan and share incentive program
Stock option plan
On June 2, 2011, the Company adopted an amended and restated option plan (the “Plan”) 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 securities based compensation arrangements (including the EPSP and the EIP
as defined below) shall not exceed 10% of the issued and outstanding shares of the Company as at the date of such 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 the 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 options issued during the year ended December 31, 2011 (200 thousand - December 31, 2010).
For valuing share option grants, the fair value method of accounting is used. The fair value of option grants is estimated using the Black-
Scholes option-pricing model. Compensation expense is recognized over the three-year 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:
Options outstanding, December 31, 2009
Options exercisable, December 31, 2009
Options granted
Options cancelled
Options outstanding, December 31, 2010
Options exercisable, December 31, 2010
Options outstanding, December 31, 2011
Options exercisable, December 31, 2011
Number of options
(in thousands)
Weighted average
exercise price
($)
2,550
850
200
(100)
2,650
1,633
2,650
2,517
9.96
9.96
6.16
9.06
9.71
10.00
9.71
9.90
Options outstanding and exercisable as at December 31, 2011 are as follows:
Exercise price ($)
10.00
4.85
6.60
4.85 to 10.00
Number of
outstanding options
(in thousands)
Weighted average
remaining
contractual life
(years)
Number of options
exercisable
(in thousands)
2,450
50
150
2,650
6.4
8.0
8.9
6.5
2,450
17
50
2,517
50
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Equity incentive plan
On June 2, 2011, the Company adopted an Employee Profit Sharing Plan (“EPSP”) for Canadian employees and an Equity Incentive
Plan (“EIP”) for its US employees. For employees in Canada, an employee benefit trust (the “Trust”) has been established and the
Company will fund the Trust with cash, which will be used by the trustee to purchase (a) on the open market, common shares of the
Company that will be held in a trust by the trustee until the awards vest and are distributed to eligible members or (b) from treasury,
common shares of the Company that will be held in trust by the trustee until the awards vest and are distributed to eligible members.
For employees in the US, the Company will allot common shares of the Company as either (i) restricted stock, (ii) unrestricted stock or
(iii) restricted stock units (“RSUs”), the resulting common shares of which will be issued from treasury.
There were no restricted stock, unrestricted stock or RSUs issued during the year ended December 31, 2011 (nil- December 31, 2010).
The Trust purchased 385.4 thousand common shares for the year ended December 31, 2011 (nil-December 31, 2010).
Common shares held by the Trust, January 1, 2011
Acquired
Released on vesting
Common shares held by the Trust, December 31, 2011
Share incentive program
Number of common
shares
—
385,423
—
385,423
In September 2010, Eric Sprott, Chairman of the Company, personally funded a share incentive program through his personal holding
company (“Holdco”). The program provided the Company's new Chief Executive Officer and the Company's President (together, the
“Executives”) with a total of 8 million common shares (the “Shares”) of the Company. This arrangement did not result in the issuance
of shares from the treasury of the Company.
In accordance with IFRS 2 Share-based Payment, this transaction was considered a share-based payment expense of the Company for the
year ended December 31, 2010 and recorded as an offset to contributed surplus to reflect the capital contribution made by Holdco. Total
shareholders' equity of the Company was unaffected. The transaction was valued at $25.7 million reflecting the maximum benefit conferred
to the Executives as a result of the arrangement and was fully expensed in the year ended December 31, 2010 with a corresponding
increase to contributed surplus. The Shares are freely tradable and carry no restrictions.
Earn-out shares
In connection with the acquisition of the Global Companies (see note 3), up to an additional 8 million common shares of the Company
may be issued with the achievement of certain earnings targets by the Global Companies. In accordance with IFRS 2 Share-based Payment,
this potential award carries a service condition without a performance condition of equal term. As a result, the accounting guidance
under IFRS 2 requires the Company to estimate the fair value of the potential share-based award on the business acquisition date. The
fair value settled upon by the Company of $13.0 million was determined using an acceptable valuation model that utilized several significant
assumptions including the probability of continued employment of a senior employee on or after February 4, 2014, the stock price of
the Company on February 4, 2016 and the cumulative earnings of the Global Companies for the five year period ending February 4,
2016. The fair value of this share-based award is being charged to the consolidated statements of income equally over the period of the
service condition, being 3 years and can only be adjusted upon forfeiture of the share-based award. Forfeiture can only happen if the
Company does not employ the senior employee on February 4, 2014.
Additional purchase consideration
In connection with the acquisition of the Global Companies (see note 3), an additional 532,500 common shares of the Company have
been committed for issuance to employees of the Global Companies. The common shares are not considered compensation but form
part of the business acquisition. This additional consideration is recorded at fair value based on the market price of the Company's
common shares as at February 4, 2011. Upon issuance of the common shares, the amount originally recorded against contributed surplus
is credited to capital stock. On February 6, 2012, 177,500 common shares of the Company were issued to employees of the Global
Companies.
51
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
For the year ended December 31, 2011, the Company recorded share-based compensation expense of $4.4 million in aggregate (2010 - $26.9
million), with a corresponding increase to contributed surplus. Of the $4.4 million compensation expense, $3.9 million (2010 - $nil) relates
to the earn-out shares, $0.5 million (2010 - $1.2 million) to the stock option plan and $nil (2010 - $25.7 million) to the share incentive program.
b.
Basic and diluted earnings per share
The following table presents the calculation of basic and diluted earnings per common share:
For the year ended
December 31, 2011
December 31, 2010
Numerator ($ in thousands):
Net income - basic and diluted
Denominator (Number of shares in thousands):
Weighted average number of common shares
Weighted average number of unvested shares purchased by the Trust
Weighted average number of common shares - basic
Weighted average number of dilutive stock options *
Weighted average number of additional purchase consideration
Weighted average number of unvested shares purchased by the Trust
33,038
132,701
167,601
(36)
167,565
48
464
36
150,000
—
150,000
—
—
—
Weighted average number of common shares - diluted
168,113
150,000
Net income per common share
Basic
Diluted
$
$
0.20 $
0.20 $
0.88
0.88
* The determination of the weighted average number of common shares - diluted excludes 2,450 thousand shares related to stock options that
were anti-dilutive for the year ended December 31, 2011 (2,500 thousand for the year ended December 31, 2010)
c. Maximum share dilution
The following table presents the maximum number of common shares that would be outstanding if all options were exercised and all earn-
out shares were issued (in thousands):
Shares outstanding at March 27, 2012 *
Additional purchase consideration
Options to purchase shares
Earn-out shares
* 178 thousand shares of additional purchase consideration were issued on February 6, 2012.
169,645
355
2,650
8,000
180,650
52
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
d.
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 the growth in assets under management and growth in management fees
and performance fees that will result in dividend payments to shareholders.
The Company's capital is comprised of equity, including capital stock, contributed surplus, retained earnings and accumulated other
comprehensive income (loss). SPW is a member of the Investment Industry Regulatory Organization of Canada (“IIROC”), SAM is a
registrant of the Ontario Securities Commission (“OSC”) and GRIL 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, senior management
monitors regulatory and working capital on a regular basis. For the year ended December 31, 2011, all entities were in compliance with their
respective capital requirements.
In February 2011, the Company established a revolving term credit facility (“Credit Facility”) with a Canadian chartered bank in the amount
of $50 million. The Company is able to draw down on the Credit Facility by way of demand indebtedness with interest based either on the
bank's prime rate or bankers' acceptances. As at December 31, 2011, the Company had not accessed this Credit Facility. The Credit Facility
is guaranteed by SAM and is secured by a general security agreement with SAM. The Credit Facility contains a number of financial covenants
that require the Company to meet certain financial ratios and financial condition tests. The Company is within its financial covenants with
respect to its Credit Facility.
In the normal course of business, the Company, through its limited partnerships and wholly-owned subsidiaries, generates adequate operating
cash flow and has limited capital requirements.
The Company may adjust its capital levels in light of changes in business-specific circumstances as well as overall economic conditions.
9.
INCOME TAXES
The major components of income tax expense is as follows ($ in thousands):
For the year ended
Current income tax expense
Based on taxable income of the current year
Adjustments in respect of previous years
Deferred income tax expense
Origination and reversal of temporary differences
Impact of change in tax rates
Income tax expense reported in the income statement
December 31, 2011
December 31, 2010
21,980
(912)
21,068
(10,098)
(39)
(10,137)
10,931
41,147
17
41,164
561
129
690
41,854
53
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
The tax on the Company's earnings before tax 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 year ended
December 31, 2011
December 31, 2010
Income before income taxes
Tax calculated at domestic tax rates applicable to profits in the respective
countries
Tax effects of:
Non-taxable stock-based compensation
Non-taxable portion of capital gains and unrealized gains
Non-taxable foreign affiliate income
Adjustments in respect of previous years
Rate differences and other
Tax charge
43,969
10,105
1,130
786
(170)
(912)
(8)
10,931
174,555
49,609
7,659
(12,301)
(2,130)
17
(1,000)
41,854
The weighted average applicable tax rate was 22.98% (2010 - 28.42%). The decrease is caused by a change in the profitability of the Company's
subsidiaries in the respective countries because of the addition of the Global Companies resident in the US.
54
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
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. The movement in significant components of the Company's deferred
income tax assets and liabilities is as follows ($ in thousands):
Year ended December 31, 2011
At January 1,
2011
Recognized in
income
Recognized in
other
comprehensive
income
Recognized in
contributed
surplus
Business
acquisition
At December
31, 2011
Deferred income tax liabilities
Fund management contracts
Carried interests
Deferred sales commissions
Unrealized gains
Total deferred income tax
liabilities
Deferred income tax assets
342
—
210
1,308
1,860
(1,921)
(3,829)
352
(51)
(5,449)
Unrealized losses
1,935
4,089
Additional purchase consideration
Earn-out shares
Other
—
—
—
—
—
599
Total deferred income tax assets
1,935
4,688
Net deferred income tax assets
(liabilities)
75
10,137
214
309
—
—
523
460
55
22
19
556
33
—
—
—
—
—
—
—
1,506
—
1,506
1,506
8,312
11,743
—
—
6,948
8,223
562
1,257
20,055
16,989
8,200
1,881
—
—
14,684
1,936
1,528
617
10,081
18,766
(9,974)
1,776
55
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Year ended December 31, 2010
Deferred income tax liabilities
Fund management contracts
Deferred sales commissions
Unrealized gains
Total deferred income tax liabilities
Deferred income tax assets
Unrealized losses
Other
Total deferred income tax assets
Net deferred income tax assets (liabilities)
At January 1, 2010
Recognized in income At December 31, 2010
—
—
524
524
1,260
29
1,289
765
342
210
784
1,336
675
(29)
646
(690)
342
210
1,308
1,860
1,935
—
1,935
75
The Company has unused foreign accrual property losses of approximately $19.1 million which have not been recognized and expire between
2012 and 2015, as it is not probable that taxable profits will be available against which they can be utilized.
As at December 31, 2011, the Company had approximately $5.4 million of unused capital losses realized on the disposition of a subsidiary
by means of a dividend-in-kind and do not expire.
The Company did not record a deferred tax liability with respect to cumulative translation gains of $5.1 million as at December 31, 2011.
The Company does not recognize deferred taxes when it can control the timing of the reversal of the temporary differences and when it is
probable that it will not reverse in the foreseeable future.
56
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
10. FINANCIAL INSTRUMENTS
IFRS 7 Financial Instruments: Disclosures as issued by the IASB requires disclosure of a three-level hierarchy for fair value measurement based
upon transparency of inputs to the valuation of an asset or liability as of the measurement date.
The following tables present the level within the fair value hierarchy for each of the financial assets and liabilities carried at fair value ($ in
thousands):
Financial instruments at fair value
December 31, 2011
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
Public equities
Private equities
Common share purchase warrants
Mutual funds
Hedge funds
Total
119,506
17,149
—
—
6,061
—
142,716
—
259
—
4,693
—
8,875
13,827
—
—
2,400
—
—
—
119,506
17,408
2,400
4,693
6,061
8,875
2,400
158,943
Financial instruments at fair value
December 31, 2010
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
Public equities
Private equities
Common share purchase warrants
Mutual funds
Hedge funds
Total
81,209
1,906
—
—
1,950
—
85,065
—
15,894
—
3,587
—
2,677
22,158
—
—
1,881
—
—
—
81,209
17,800
1,881
3,587
1,950
2,677
1,881
109,104
Financial instruments at fair value
January 1, 2010
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
Public equities
Private equities
Common share purchase warrants
Mutual funds
Hedge funds
Total
49,010
1,440
—
—
503
—
50,953
—
1,444
—
1,790
—
328
3,562
—
—
1,979
—
—
—
49,010
2,884
1,979
1,790
503
328
1,979
56,494
57
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
During the year ended December 31, 2011, $15.4 million was transferred from Level 2 to Level 1. This transfer represented the expiry on
January 7, 2011 of the trading restriction on the common shares of Sprott Resource Lending Corp.
Financial instruments not carried at fair value
For fees receivable, secured notes receivable, other assets, accounts payable and accrued liabilities and compensation and employee bonuses
payable, the carrying amount represents a reasonable approximation of fair value due to their short term nature.
11. RELATED PARTY TRANSACTIONS
Share incentive program
In September 2010, Eric Sprott, Chairman of the Company, personally funded a share incentive program through Holdco. The program
provided the Executives with a total of 8 million common shares of the Company. This arrangement did not result in the issuance of common
shares from the treasury of the Company (see note 8).
The remuneration of directors and other key management personnel of the Company for employment services rendered are as follows ($
in thousands):
For the year ended
December 31, 2011
December 31, 2010
Fixed salaries and benefits
Variable incentive-based compensation
Share-based compensation
4,511
15,587
243
20,341
3,369
34,960
25,921
64,250
12. DIVIDENDS
The following dividends were declared and paid by the Company during the year ended December 31, 2011:
Record date
January 19, 2011 - special dividend
March 31, 2011 - special dividend *
March 31, 2011 - regular dividend Q4 - 2010 *
June 10, 2011 - regular dividend Q1- 2011
August 18, 2011 - regular dividend Q2- 2011
November 17, 2011- regular dividend Q3- 2011
Dividends paid
Payment Date
Cash dividend per
share ($)
Total dividend
amount ($ in
thousands)
February 3, 2011
April 15, 2011
April 15, 2011
June 27, 2011
September 2, 2011
December 2, 2011
0.60
0.12
0.03
0.03
0.03
0.03
90,000
18,000
4,500
5,084
5,084
5,083
127,751
* The shares issued from treasury on February 4, 2011 as a result of the acquisition of the Global Companies w ere not eligible to receive
this dividend.
58
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
13. COMMITMENTS
Future minimum annual rental payments under non-cancellable leases, including operating costs, are as follows ($ thousands):
2012
2013
2014
2015
2016
Thereafter
3,531
3,673
3,753
3,767
4,021
27,807
46,552
14. RISK MANAGEMENT ACTIVITIES
The Company's financial instruments present a number of specific risks as identified below.
(a) Market risk
Market risk refers to the risk that a change in the level of one or more of market prices, interest rates, foreign exchange rates, indices,
volatilities, correlations or other market factors, such as liquidity, will result in a change in the fair value of a financial instrument. The
Company's financial instruments are designated as held for trading, fair value through profit or loss, held-to-maturity or loans and
receivables. Therefore, changes in fair value or permanent impairment, if any, affect reported earnings as they occur. The maximum
risk resulting from financial instruments is determined by the fair value of the financial instruments classified as held for trading and
available for sale and for those classified as held-to-maturity or loans and receivables at amortized cost. The Company manages market
risk by regular monitoring of its proprietary investments.
The Company separates market risk into three categories: price risk, interest rate risk and foreign exchange risk.
Price risk
Price risk arises from the possibility that changes in the price of the Company's proprietary investments will result in changes in
carrying value. For more details about the Company's proprietary investments, refer to note 4.
If the market values of proprietary investments that are held for trading increased by 5%, with all other variables held constant ,
this would have increased net income by approximately $1.7 million (December 31, 2010 - $1.2 million); conversely, if the value
of proprietary investments decreased by 5%, this would have decreased net income by the same amount.
If the market value of gold and silver bullion increased by 5%, with all other variables held constant, this would have increased
net income by approximately $1.0 million (December 31, 2010 - $0.6 million); conversely, if the value of gold and silver bullion
decreased by 5%, this would have decreased net income by the same amount.
The Company's revenues are also exposed to price risk since management fees, performance fees and carried interests are correlated
with assets under management, which fluctuates with changes in the market values of the assets in the funds and managed accounts
managed by SAM, SC, RCIC and SAM US. Assets under management refer to the total net assets of Sprott funds and managed
accounts, on which management fees, performance fees and carried interests are calculated.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. The Company
does not hedge its exposure to interest rate risk as such risk is minimal. As part of its cash management program, the Company
primarily invests in short-term debt securities issued by the Government of Canada with maturities of less than three months.
During 2011, the Company, through its wholly-owned subsidiary, SAMGENPAR Ltd., invested approximately $15.8 million in
two secured notes bearing a weighted average interest rate of 8.90% per annum and secured against the assets of the issuers. There
is no interest rate risk that could immediately affect earnings associated with these investments as it is carried at amortized cost
and management intends to hold the investment to maturity.
59
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Foreign exchange risk
Foreign exchange risk arises from the possibility that changes in the price of foreign currencies will result in changes in carrying
value. The Company holds assets denominated in currencies other than the Canadian dollar. The Global Companies' assets are
all denominated in USD. The Company is therefore exposed to currency risk, as the value of investments denominated in other
currencies and its net investment in the Global Companies will fluctuate due to changes in exchange rates. The Company does
not enter into currency hedging transactions.
As at December 31, 2011, approximately $26.2 million or 6.7% (2010 - $15.6 million or 4.5%) of total assets was invested in
proprietary investments priced in U.S. dollars (“USD”). Furthermore, a total of $1.0 million (2010 - $1.2 million) of cash, $0.5
million (2010 - $51.0 million) of accounts receivable and $0.2 million (2010 - $0.2 million) of other assets were denominated in
USD. As at December 31, 2011, had the exchange rate between the USD and the Canadian dollar increased or decreased by 5%
(relative to the Canadian dollar), with all other variables held constant, the increase or decrease, respectively, in net income would
have amounted to approximately $1.2 million (2010 - $2.5 million).
As at December 31, 2011, had the exchange rate between the USD and the Canadian dollar increased or decreased by 5% (relative
to the Canadian dollar), with all other variables held constant, the increase or decrease, respectively, in net income and other
comprehensive income would have amounted to a nominal amount and approximately $8.5 million respectively as a result of the
Global Companies impact on the Company.
(b) Credit risk
Credit risk arises from the potential that counterparties will fail to satisfy their obligations as they come due. The Company incurs
credit risk when entering into, settling and financing various proprietary transactions. As at December 31, 2011, the Company's most
significant counterparty is Penson Financial Services Canada Inc. ("Penson"), the carrying broker of SPW, which also acts as a custodian
for most of the Company's proprietary investments. Penson is registered as an investment dealer subject to regulation by the IIROC;
as a result, it is required to maintain minimal levels of regulatory capital at all times.
The Company's main exposure to credit risk relates to the secured notes receivable, as disclosed in note 4. The credit risk is managed
by the terms of agreement, in particular, the notes are secured and the issuer is subject to a number of financial covenants, which are
monitored on a regular basis.
Credit risk is also managed by dealing with counterparties that the Company believes to be creditworthy and by actively monitoring
credit exposure and the financial health of the counterparties. The majority of accounts receivable relate to management and
performance fees receivable from the funds, managed accounts and managed companies managed by the Company.
The Global Companies incur credit risk when entering into, settling and financing various proprietary transactions. As at December 31,
2011, the Global Companies' most significant counterparty is RBC Capital Markets (“RBC Capital”), the carrying broker of Global
and custodian of the net assets of the funds managed by RCIC. RBC Capital is registered as a broker dealer and registered investment
advisor subject to regulation by the FINRA and the SEC; as a result, it is required to maintain minimal levels of regulatory capital at
all times.
(c)
Liquidity risk
Liquidity risk is the risk that the Company cannot meet a demand for cash or fund its obligations as they come due. The Company's
exposure to liquidity risk is minimal as it maintains sufficient levels of liquid assets to meet its obligations as they come due. As at
December 31, 2011, the Company had $119.5 million or 29.8% of its total assets in cash and cash equivalents. The majority of current
assets reflected on the consolidated balance sheets are highly liquid. Approximately $57.6 million or 73.3% of proprietary investments
held by the Company are readily marketable and are recorded at their fair value. Financial liabilities, including accounts payable and
accrued liabilities and compensation and employee bonuses payable, are short-term in nature and are generally due within a year. The
Company's management is responsible for reviewing liquidity resources to ensure funds are readily available to meet its financial
obligations as they come due, as well as ensuring adequate funds exist to support business strategies and operations growth. The
Company manages liquidity risk by monitoring cash balances on a daily basis.
15. SEGMENTED INFORMATION
For management purposes the Company is organized into business units based on its products, services and geographical location and has
four reportable segments, as follows:
a.
b.
SAM, which provides asset management services to the Company's branded Funds and Managed Accounts.
Global Companies, which provides asset management services to the Company's branded Funds and Managed Accounts in the US
and also provides securities trading services to its clients.
60
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
c.
Corporate, which provides treasury and common shared services to the Company's business units.
d. Other, which includes its consulting business through SC and its private wealth business through SPW.
Due to their relatively small size, two operating segments have been aggregated to form the Other reportable segment as described in point
(d) above.
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 (i) earnings before interest expense, income taxes, amortization
and stock-based non-cash compensation ("EBITDA") and (ii) Base EBITDA which refers to EBITDA after adjusting for the exclusion (i)
of gains (losses) on our proprietary investments as if such gains (losses) had not been incurred and (ii) performance fees, performance fee
related compensation and other performance fee related expenses. Income taxes are managed on a consolidated basis and are not allocated
to operating segments.
Transfer prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties.
EBITDA and Base EBITDA are not measurements in accordance with IFRS and should not be considered as an alternative to net income
or any other measure of performance under IFRS.
The following tables present the operations of the Company's reportable segments ($ in thousands):
For the year ended
December 31, 2011
SAM
Global
Companies
Corporate
Other
Eliminations Consolidated
Adjustments
and
Revenue
Management fees
Performance fees
Commissions
Other
Total revenue
Expenses
General and administrative
Trailer fees
Amortization of intangibles, property
and equipment
Total expenses
Income (loss) before income taxes
for the year
Provision for income taxes
Net income for the year
Income (loss) before income taxes
for the year, from above
EBITDA adjustments
EBITDA
Base EBITDA adjustments
Base EBITDA
125,838
5,303
—
1,762
132,903
41,979
37,058
1,813
80,850
9,676
—
12,649
(2,288)
20,037
16,394
—
14,199
30,593
—
—
—
(4,732)
(4,732)
11,311
—
1,530
11,786
24,627
3,710
13,595
—
70
—
30
—
—
—
(11,583)
(11,583)
(223)
(11,342)
—
3,780
13,625
(11,565)
52,053
(10,556)
(8,512)
11,002
(18)
52,053
2,047
54,100
(2,932)
51,168
(10,556)
18,115
7,559
2,249
9,808
(8,512)
312
(8,200)
5,883
(2,317)
11,002
30
11,032
(286)
10,746
(18)
—
(18)
—
(18)
146,825
5,303
14,179
(5,055)
161,252
75,455
25,716
16,112
117,283
43,969
10,931
33,038
43,969
20,504
64,473
4,914
69,387
61
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
For the year ended
December 31, 2010
SAM
Global
Companies
Corporate
Other
Eliminations Consolidated
Adjustments
and
Revenue
Management fees
Performance fees
Commissions
Other
Total revenue
Expenses
General and administrative
Trailer fees
Amortization of intangibles, property
and equipment
Total expenses
Income (loss) before income taxes
for the year
Provision for income taxes
Net income for the year
Income (loss) before income taxes
for the year, from above
EBITDA adjustments
EBITDA
Base EBITDA adjustments
Base EBITDA
97,661
200,054
—
629
298,344
83,749
30,857
934
115,540
182,804
182,804
1,963
184,767
(150,182)
34,585
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13,057
13,057
6,025
—
6,211
9,112
21,348
—
—
—
(9,248)
(9,248)
103,686
200,054
6,211
13,550
323,501
29,400
13,215
—
—
40
(1)
—
(9,248)
126,364
21,649
—
933
29,400
13,254
(9,248)
148,946
(16,343)
8,094
—
(16,343)
25,921
9,578
(8,891)
687
8,094
(1)
8,093
20
8,113
—
—
—
—
—
174,555
41,854
132,701
174,555
27,883
202,438
(159,053)
43,385
Inter-segment revenues are eliminated upon consolidation and reflected in the "Adjustments and Eliminations" column.
Included in Other revenue for the year ended December 31, 2011 is trailer fee income totaling $11.3 million (December 31, 2010 - $9.2
million) which reflects substantially all of the Company's inter-segment revenue.
Included in Amortization of intangibles, property and equipment for the Global Companies segment for the year ended December 31, 2011
are impairment losses on finite life intangible assets totaling $7.7 million (December 31, 2010 - $nil).
For geographic reporting purposes, transactions are primarily recorded in the location that corresponds with the entity's country of domicile
that generates the revenue. The following table presents the revenue of the Company by geographic location ($ in thousands):
For the year ended
Canada
United States
December 31, 2011
December 31, 2010
141,215
20,037
161,252
323,501
—
323,501
62
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
16. TRANSITION TO IFRS
The Company adopted IFRS effective January 1, 2011. Prior to the adoption of IFRS the Company prepared its consolidated financial
statements in accordance with previous Canadian GAAP. The Company's consolidated financial statements for the year ended December 31,
2011 are its first annual consolidated financial statements that comply with IFRS. The Company's transition date is January 1, 2010 (“Transition
Date”) and the Company has prepared its IFRS opening consolidated balance sheet at that date. These consolidated financial statements
have been prepared in accordance with the accounting policies described in note 2. In preparing the Company's first annual consolidated
financial statements under IFRS, the Company has used the standards in effect as at December 31, 2011.
In preparing these consolidated financial statements, the Company has adjusted certain previously reported amounts prepared in accordance
with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has impacted the Company's consolidated
financial statements is set out in the following notes.
Initial elections on first-time adoption of IFRS
As a general rule, IFRS requires full retrospective application of applicable accounting standards. IFRS 1 First-Time Adoption of International
Financial Reporting Standards (“IFRS 1”) does, however, provide entities adopting IFRS for the first time with a number of optional exemptions
and mandatory exceptions to this general requirement.
Elected exemptions from full retrospective application
•
•
•
IFRS 1 provides the option to apply IFRS 3 Business Combinations, retrospectively or prospectively from the Transition Date.
The retrospective basis would require restatement of all business combinations that occurred prior to the Transition Date.
The Company elected not to retrospectively apply IFRS 3 to business combinations that occurred prior to its Transition
Date.
IFRS 2 Share-based Payments, encourages application of its provisions to equity instruments granted on or before November
7, 2002, but permits the application only to equity instruments granted after November 7, 2002 that had not vested by the
Transition Date. The Company did not apply IFRS 2 Share-based Payments to equity instruments that were granted on or
before November 7, 2002, nor has it been applied to equity instruments granted after November 7, 2002 that vested before
January 1, 2010.
The Company has re-designated financial assets designated as available-for-sale under previous Canadian GAAP as fair
value through profit or loss under IAS 39 Financial Instruments: Recognition and Measurement at the Transition Date. These
financial assets are managed and their performance is evaluated on a fair value basis, in accordance with a documented
investment strategy.
Mandatory exceptions to full retrospective application
In accordance with the mandatory exceptions to retrospective restatement under IFRS 1, hindsight was not used to create or revise estimates
at the Transition Date and, accordingly, the estimates previously made by the Company under Canadian GAAP are consistent with their
application under IFRS, except where necessary to reflect any difference in accounting policies.
First IFRS financial statements
The first date at which IFRS was applied was January 1, 2010. In accordance with IFRS, the Company has:
•
•
•
•
provided comparative financial information;
applied the same accounting policies throughout all periods presented;
retrospectively applied all effective IFRS standards as of January 1, 2011, as required; and
applied certain optional exemptions and certain mandatory exceptions as applicable for first time IFRS adopters.
63
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
Reconciliations of Canadian GAAP to IFRS
IFRS employs a conceptual framework that is similar to Canadian GAAP. However, significant differences exist in certain matters of
recognition, measurement and disclosure. IFRS 1 requires an entity to reconcile equity, comprehensive income and cash flows for prior
periods. These reconciliations along with the explanation of the differences are presented as follows:
Reconciliation of equity as r eported under Canadian GAAP to IFRS ($ in thousands):
As at
December 31, 2010
January 1, 2010
Shareholders' equity under Canadian GAAP
Differences increasing reported shareholders' equity:
(i) Proprietary investments re-designation, net of income taxes
(ii) Share-based payments
Shareholders' equity under IFRS
213,623
639
—
214,262
76,140
222
—
76,362
Reconciliation of net income and comprehensive income as reported under Canadian GAAP to IFRS ($ in thousands):
For the year ended
December 31, 2010
Net income and comprehensive income under Canadian GAAP
Differences increasing reported net income and comprehensive income
(i) Proprietary investments re-designation, net of income taxes
(ii) Share-based payments
Net income and comprehensive income under IFRS
Reconciliation of cash flow acti vities as reported under Canadian GAAP to IFRS:
131,232
417
1,052
132,701
The transition from Canadian GAAP to IFRS has not had a significant impact on the presentation of the Company's consolidated statement
of cash flows for the year ended December 31, 2010. Adjustments include changes in share-based payments and unrealized and realized
gains on proprietary investments balances in non-cash operating items as a result of the transition adjustments described in note 16.
Notes to the reconciliations
i.
ii.
The Company has elected to re-designate certain financial assets that were classified as available-for-sale securities under
Canadian GAAP to fair value through income or loss under IFRS. The re-designated financial assets had been carried at
cost less impairment under Canadian GAAP. Changes in fair value subsequent to the Transition Date are reflected in the
consolidated statements of income.
IFRS requires the use of a graded vesting method to account for share-based awards that vest in installments over the vesting
period as opposed to straight-line recognition applied under Canadian GAAP, resulting in accelerated compensation expense.
An estimate of the number of awards expected to be vested at each balance sheet date is also required under IFRS instead
of recognizing any forfeitures as they occur as required under Canadian GAAP. This difference in measurement resulted
in a net reclassification between contributed surplus and retained earnings and an increase to net income resulting from the
transition to accelerated share-based payments expense recognition.
64
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
17. PROVISIONS
The Company is engaged in litigation arising in the ordinary course of business relating to claims for additional compensation by former
employees. The Company has made provisions based on current information and the probable resolution of any such proceedings and
claims.
18. EVENTS AFTER THE REPORTING PERIOD
On February 29, 2012, the Company announced the signing of a letter of intent reflecting an agreement in principle to acquire Toscana
Capital Corporation and Toscana Energy Corporation (collectively, the "Toscana Companies"). Upon closing of the proposed transaction,
the Company will pay approximately $14 million in cash and common shares of the Company in consideration for the acquisition of the
Toscana Companies, with the possibility of up to an additional approximately $5.25 million in common shares of the Company to be issued
as additional consideration in three years upon the attainment of certain financial performance hurdles.
On March 27, 2012, a dividend of $0.03 per common share was declared for the quarter ended December 31, 2011.
65
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31 ($ in thousands of Canadian dollars, except for per share amounts)
2011
2010
Revenue
Management fees
Performance fees
Commissions
Unrealized and realized gains (losses) on proprietary investments
Other income
Total revenue
Expenses
Compensation and benefits
Stock-based compensation
Trailer fees
General and administrative
Donations
Amortization of intangibles
Amortization of property and equipment
Total expenses
Income before income taxes for the period
Provision for income taxes
Net income for the period
Basic earnings per share
Diluted earnings per share
33,700
2,528
2,861
(1,963)
987
38,113
10,774
1,135
5,816
6,203
243
9,751
364
34,286
3,827
(798)
4,625
0.03 $
0.03 $
$
$
31,534
199,139
2,876
5,639
2,890
242,078
61,515
25,944
6,337
5,249
1,580
74
206
100,905
141,173
32,619
108,554
0.72
0.72
66