Table of Contents
Letter to Shareholders
Management's Discussion and Analysis
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
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4
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March 26, 2013
Dear Shareholders,
Letter to Shareholders
2012 was a challenging year for Sprott Inc. (“Sprott”). Although our economic forecasts proved to be largely accurate, precious metals equities traded
at increasingly depressed valuations over the year, while government stimulus pushed broader equity indices higher. As a result, several of our principal
equity strategies posted losses, which negatively impacted our financial results.
On the year, we generated $10.0 million in gross performance fees and our net income fell by 3.2%. Base EBITDA per share was $0.31 compared
to $0.41 in 2011. Our assets under management (“AUM”) increased to $9.9 billion as of December 31, 2012 from $9.1 billion the prior year. Net sales
for the year were $1.3 billion.
At Sprott, we have always been focused on delivering superior results to our investors over the long term. Despite our recent setbacks, we remain
confident in our positioning and the expertise of our investment team, and we believe that our investors' patience will be rewarded over time. However,
we are committed to driving immediate improvements in our results and have recently taken a number of steps towards this goal.
Earlier this year, we named John Wilson and Scott Colbourne co-Chief Investment Officers of Sprott Asset Management (“SAM”). Their mandate
is to direct the investment management functions of SAM and includes oversight of all portfolio management activities. They are focused on improving
our overall performance by optimizing idea sharing and risk management, while reinforcing our results-oriented culture. In addition to his roles as
Chief Executive Officer and Senior Portfolio Manager of SAM, Eric Sprott became Chief Investment Officer of Sprott Inc., where he is responsible
for guiding the overall positioning of the Sprott Group of Companies.
In our asset management business, we remain committed to the ongoing process of diversifying our investment capabilities and broadening our
product offerings. We are pleased with the success of our fixed-income product line which, since launching in 2010, is now approaching $1 billion in
assets. Our enhanced funds, managed by John Wilson, are performing well and we look forward to building their asset base further this year.
Strong investor demand for physical bullion drove the continued growth of our physical trusts in 2012, as we raised $1.6 billion through follow-on
offerings of the Sprott Physical Gold Trust and Sprott Physical Silver Trust. In December, we expanded our bullion product franchise with the $280
million initial public offering of the Sprott Physical Platinum and Palladium Trust. Physical products now represent close to $4.5 billion of our total
AUM and have played a significant role in increasing our brand recognition in the U.S. and internationally.
Another bright spot for the business in 2012 was the performance of our private equity and lending strategies, which accounted for the majority of
our performance fees on the year. In September of 2012, Sprott Resource Corp. marked five years in operation with a track record that placed it near
the top of all resource-focused private equity strategies over the same period. Sprott Resource Corp. now manages approximately $530 million in
assets.
In its second full year in operation, Sprott Resource Lending Corp. continued to expand its lending activities and proved that it has the ability to
provide strong counter-cyclical returns and is well positioned to continue growing its business in today's difficult resource markets.
During the year, we completed the acquisition of the Toscana Companies (now Sprott Toscana), a Calgary-based energy finance business that provides
us with a team focused on yield products in the energy sector. We also brought on a convertible bond arbitrage team through the acquisition of
Flatiron Capital Management Partners ("Flatiron"). Unfortunately, due to a number of factors, the transaction did not work out as we had expected
and we were forced to part ways with Flatiron's principals and wind up one of their core strategies.
At the time of writing, global equity markets continue to rally and have reached record highs during the first quarter. Given the continued headwinds
of slower than forecast economic growth and unsustainable levels of government debt, we remain skeptical that this rally will continue and are well-
positioned for an oversold market pullback. The political will is not present to deal convincingly with growing debt and entitlement issues, and the
central planners remain committed to printing money in an effort to stimulate the economy. In this environment, we continue to believe that a rebound
in precious metals and their related equities is long overdue.
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Looking ahead, we will be pursuing a number of key initiatives during the current year. Sprott has an extremely strong brand internationally and we
will seek to capitalize on this by establishing partnerships to manage capital for international clients. We are pleased with the early results of our efforts
in this area and recently signed agreements to launch new offshore products in partnership with two separate Chinese entities. We also recently
announced that we will be launching our first institutionally-focused hedge fund, which will draw on the combined resources of our entire investment
and technical teams and represents an important step in the evolution of our firm.
In closing, I would like to acknowledge that it has been a difficult period for our shareholders and clients and thank you for your loyalty and patience.
We will continue to focus on providing excellent investment returns and service to our clients, while carefully managing our resources to maximize
returns to our shareholders.
Sincerely,
Peter Grosskopf
Chief Executive Officer
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Management's Discussion and Analysis
Year ended December 31, 2012
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MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion & Analysis (“MD&A”) of financial condition and results of operations, dated March 26, 2013, presents an analysis
of the financial condition of Sprott Inc. (the “Company”) and its subsidiaries as of December 31, 2012 compared with December 31, 2011, and
results of operations for the year ended December 31, 2012, compared with the year ended December 31, 2011. The Board of Directors approved
this MD&A on March 26, 2013. All note references in this MD&A are to the notes to the Company's 2012 consolidated financial statements.
The Company was incorporated under the Business Corporations Act (Ontario) on February 13, 2008.
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 26, 2013 (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 26, 2013 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
The consolidated financial statements for the year ended December 31, 2012, including the required comparative information, have been prepared
in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (“IASB”).
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.
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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, alternative investment strategies, offshore funds and
bullion funds (the “Funds”), managed accounts (“Managed Accounts”), which include the accounts managed by Sprott Asset Management LP
(“SAM”), Resource Capital Investment Corporation ("RCIC") and Sprott Asset Management USA Inc. ("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 Sprott Private Wealth LP ("SPW") or Sprott Global Resource
Investments, Ltd. ("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 and impairment of intangible assets and non-cash stock-based compensation. Stock-based compensation relating to the Company's
Employee Profit Sharing Plan ("EPSP") is treated as a cash expense for the purposes of calculating EBITDA. We believe that EBITDA 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 the exclusion of: (i) 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, 2012 have an average remaining life of approximately 5 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.
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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 operating businesses, SAM, SPW, SC and Sprott U.S. Holdings Inc., the parent of the Global Companies which
comprises of GRIL, RCIC and SAM US. 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.
SAM offers discretionary portfolio management, SPW provides broker-dealer services and SC offers consulting services. 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 Toscana Energy Income Corporation ("TEIC").
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 and Resource Income Partners families of limited partnerships.
Effective February 4, 2011, the accounts of the Global Companies have been consolidated with those of the Company.
On July 3, 2012, the Company completed its acquisition of Toscana Capital Corporation (“TCC”) and Toscana Energy Corporation (“TEC”)
(collectively, the “Toscana Companies”). The Toscana Companies are based in Calgary. TCC manages the Toscana Financial Income Trust (“TFIT”),
a private mutual fund trust, which provides mezzanine debt financing to mid-sized private and public oil and gas companies. TEC manages Toscana
Energy Income Corporation ("TEIC") (formerly Toscana Resource Corporation), a public company, which is focused on investing in medium and
long-term oil and gas assets, unitized production interests and royalties along with acting as a technical advisor to and co-manager of the Energy
Income Fund limited partnerships.
Effective July 3, 2012, the accounts of the Toscana Companies have been consolidated with those of the Company.
On August 1, 2012, the Company completed the acquisition of Flatiron Capital Management Partners (“Flatiron”), an alternative investment manager
specializing in market-neutral strategies. Effective August 1, 2012, the accounts of Flatiron have been consolidated with those of the Company.
However, effective January 11, 2013, the Company and the Flatiron vendors entered into agreements to release the Company from the remaining
purchase price to be paid as contemplated by the acquisition on August 1, 2012 (see note 3, note 6, note 7 and note 17). For financial reporting
purposes, as of December 31, 2012, the Company wrote off its entire investment in Flatiron resulting in a net charge to the statement of income of
approximately $5.0 million before taxes ($3.6 million after taxes).
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, new and follow-on offerings of Funds managed by SAM 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 also 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.
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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. 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, 2012, we managed
approximately $9.9 billion in assets among our various Funds, Managed Accounts and Managed Companies. AUA in client assets totaled to approximately
$3.7 billion.
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 Alternative Investment Strategies and offshore
Funds. We have introduced a suite of income Funds that have lower Management Fees than equity mutual Funds, Alternative Strategies and Offshore
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 an Alternative Investment Strategy 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 which are 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. Beginning in 2012, a portion of the bonus pool may be paid in equity of the Company through the Company's EPSP
and Equity Incentive Plan ("EIP") (see note 8). 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.
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BUSINESS HIGHLIGHTS AND GROWTH INITIATIVES
Investment Performance
Most of the Funds managed by SAM experienced negative investment performance for the year. As a result, overall, net market depreciation of
all our AUM totaled to approximately $0.9 billion. However, strong net sales of our physical bullion funds totaled to nearly $1.9 billion, offset
partially by redemptions of $0.6 billion, in aggregate, from our other Funds and Managed Accounts. Acquisitions added approximately $0.4 billion
to our AUM.
Our Managed Companies performed well during 2012, attracting new AUM through acquisition and generating Performance Fees for 2012.
Overall, AUM increased by $0.8 billion (8.7%) to $9.9 billion at December 31, 2012 from $9.1 billion at December 31, 2011.
Product and Business Line Expansion
In 2012 and into 2013, we raised gross proceeds of $36 million in two new Funds; Sprott 2012 Flow-Through Limited Partnership and Sprott 2013
Flow-Through Limited Partnership. We also completed the tax-deferred transfer of the Sprott 2010 Flow-Through Limited Partnership's and Sprott
Flow-Through 2011 Limited Partnership's assets into the Sprott Resource Class of Sprott Corporate Class Inc.
During 2012, we completed three follow-on offerings of the Sprott Physical Silver Trust units, raising gross proceeds of US$848 million.
During 2012, we completed two follow-on offerings of the Sprott Physical Gold Trust units, raising gross proceeds of US$742 million
In February 2012, we launched a unique equities fund, Sprott Silver Equities Class.
In April 2012, we launched two new funds, Sprott Enhanced Equity Class and Sprott Enhanced Balanced Fund. John Wilson serves as lead manager
on both funds and Scott Colbourne and Michael Craig co-manage the Sprott Enhanced Balanced Fund.
In 2012 and into 2013, the Company announced that its subsidiary, Resource Capital Investment Corporation raised US$85 million in two new
fixed-term limited partnership for the purpose of participating in lending and equity arrangements to both public and private companies through
both secondary offerings and in the open market with emphasis on natural resource loans, equities and other securities.
In December 2012, we completed an initial public offering of the Sprott Physical Platinum and Palladium Trust units raising gross proceeds of US
$280 million.
We continue to develop new products and investment vehicles that will be available in 2013. The addition of these products may 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.
Hiring and Retention of Top Talent
In January 2012, John Wilson joined SAM as a Senior Portfolio Manager and is now managing the Sprott Opportunities Hedge Fund as well as the
Sprott Enhanced Equity Class and Sprott Enhanced Balanced Fund.
Also in January 2012, 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 uses his skills and industry experience to identify, analyze and monitor public and
private investment opportunities.
In November 2012, Jason Mayer joined SAM as a Portfolio Manager. Mr. Mayer, a Flow-Through Specialist, is co-managing Sprott Resource Class,
a tax-advantaged mutual fund that serves as the rollover vehicle for SAM's Flow-Through offerings.
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 EPSP for Canadian employees and an EIP for U.S. employees. 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 is paid by way
of the Company's common shares. The shares are available to the relevant employees over a specified vesting period.
Acquisition of the Toscana Companies
Effective July 3, 2012, the Company acquired all of the outstanding common shares of the Toscana Companies. The Company has acquired the
Toscana Companies because it is expected to provide expertise in creating and managing yield generating opportunities in the oil and gas sector
and in providing a presence in Western Canada. The Toscana Companies are a leader in providing growth capital to both public and private resource
companies and has a wide network of relationships in the energy sector.
As consideration, the Company paid $5.2 million cash and issued 1,564,500 common shares from treasury valued at $7.7 million, excluding costs,
for total consideration of $12.9 million. The common shares of the Company issued as consideration were valued at $4.92 per share using the
closing price of the Company's common shares on the TSX on July 3, 2012. In addition, the sellers will be eligible to earn up to an additional $5.3
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million in cash and common shares of the Company with the achievement of certain financial targets by the Toscana Companies over a period of
up to 3 years.
Acquisition of Flatiron
Efective August 1, 2012, the Company acquired all of the outstanding common shares of Flatiron. The Company acquired Flatiron because it was
expected to provide expertise in creating and managing convertible bond arbitrage strategies for retail investors in Canada.
As consideration, the Company paid $1.7 million cash, invested $4.9 million in a Fund on behalf of the Flatiron vendors and had an obligation to
issue common shares from treasury valued at $4.8 million, excluding costs, for total consideration of $11.4 million. In addition, the sellers were
eligible to earn up to an additional $4.5 million in common shares of the Company with the achievement of certain financial targets by Flatiron
over a period of up to 3 years.
Effective January 11, 2013, the Company and the Flatiron vendors entered into agreements to release the Company from the remaining purchase
price to be paid as contemplated by the acquisition on August 1, 2012 (see note 3, note 6, note 7 and note 17). For financial reporting purposes, as
of December 31, 2012, the Company wrote off its entire investment in Flatiron resulting in a net charge to the statement of income of approximately
$5.0 million before taxes ($3.6 million after taxes).
OUTLOOK
2012 was a challenging year for the Company as precious metals equities traded lower while many broader equity indices pushed higher. As a result,
several of our equity strategies recorded losses, negatively impacting our overall financial results. However, we believe that the growing and unsustainable
levels of government debt and continued money printing by central banks in an effort to stimulate their economies, coupled with supply and demand
fundamentals for gold and silver bullion, will lead to a long overdue rebound in the prices of precious metals and their related equities. Our resource-
focused funds will thrive in such an environment.
Many of our Funds have large performance deficits that we need to earn back before those funds are in a position to accrue performance fees. We
remain committed to our focus on delivering superior returns for our investors over time and to continue to diversify our investment capabilities and
broadening our product offering. We expect good sales growth from our “enhanced” Funds and for our fixed income Funds.
The companies managed by SC as well as the Global Companies continue to execute on their business plans and we anticipate continued growth and
profitability from all of those companies.
We are also seeing more opportunities to manage capital for global clients that involves investing our own capital alongside those clients. In order to
secure such mandates, we may need to make larger co-investments in our managed funds and companies than has historically been the case.
We continue to be focused on prudent expense management. We are constantly striving to find ways to manage our business as efficiently as possible
while remaining focused on delivering investment returns to our investors and providing high levels of client service.
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FINANCIAL HIGHLIGHTS
Financial highlights for the year ended December 31, 2012 are:
•
AUM at December 31, 2012 were $9.9 billion. This reflects an increase of approximately $0.8 billion from $9.1 billion of AUM at
December 31, 2011. Average AUM for 2012 was $9.6 billion compared to $9.8 billion in 2011, a decrease of 1.3%. Increases in AUM from
acquisitions of $0.4 billion combined with a decrease in the market value of $0.9 billion and net sales of $1.3 billion, resulted in an overall
increase of $0.8 billion in AUM for the year.
• Management fees as a percentage of AUM for the year ended December 31, 2012 were 1.2%, a decrease from 1.5% for the year ended
December 31, 2011 as the composition of the Company's AUM continued to change with lower fee products composing a greater percentage
of AUM for the periods ended December 31, 2012.
•
AUA at December 31, 2012 were $3.7 billion. This reflects a decrease of $0.7 billion from $4.4 billion of AUA at December 31, 2011.
• Management Fees for the year ended December 31, 2012 were $118.5 million, representing a decrease of $28.3 million (19.3%) over the
year ended December 31, 2011.
• Gross Performance Fees for the year ended December 31, 2012 were $10.0 million, representing an increase of $4.7 million (87.7%) over
the year ended December 31, 2011.
•
•
•
Base EBITDA for the year ended December 31, 2012 was $52.5 million, representing a decrease of $16.9 million or (24.4%) over the year
ended December 31, 2011.
EBITDA for the year ended December 31, 2012 was $59.6 million, representing a decrease of $4.9 million (7.5%) over the year ended
December 31, 2011.
Cash flow from operations for the year ended December 31, 2012 was $25.5 million ($0.15 per share) representing a decrease of $22.4
million from $47.9 million ($0.29 per share) for the year ended December 31, 2011.
• Net income for the year ended December 31, 2012 decreased by 3.2% to $32.0 million ($0.19 per share) from net income of $33.0 million
($0.20 per share) for the year ended December 31, 2011.
11
SUMMARY FINANCIAL INFORMATION
Key Performance Indicators
($ in thousands, except per share amounts)
2012
2011
2010
As at and for the year ended
December 31,
Assets Under Management
Assets Under Administration
Net Sales
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
9,931,151
3,676,149
1,308,033
59,612
52,480
25,518
0.35
0.31
0.15
9,137,226
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
Summary Balance Sheet
($ in thousands)
Total Assets
Total Liabilities
Shareholders' Equity
As at
December 31,
December 31,
December 31,
2012
2011
2010
375,250
57,541
317,709
400,536
99,095
301,441
342,767
128,505
214,262
12
Summary Income Statement and Reconciliation to EBITDA and Base EBITDA
($ in thousands, except per share amounts)
2012
2011
For the year ended
December 31,
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 performance 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
158,154
116,446
41,708
9,724
31,984
17,904
9,724
59,612
(2,266)
(4,866)
52,480
0.19
0.35
0.31
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 property and equipment, amortization and impairment of intangibles and non-cash stock-based compensation expense
other than stock-based compensation expense related to the EPSP.
Performance Fee related compensation is equal to 25% of Performance Fee revenue.
13
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 (used in) operating activities
Cash used in investing activities
Cash used in financing activities
Net increase (decrease) 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, 2012 compared to year ended December 31, 2011
Overall Performance
For the year ended
December 31,
2012
2011
31,984
40,786
(47,252)
25,518
(28,471)
(2,953)
(8,732)
(30,421)
(42,106)
119,506
77,400
0.15
0.15
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
AUM at December 31, 2012 of $9.9 billion represents an increase of 8.7% when compared with $9.1 billion at December 31, 2011. Net sales for the
year ended December 31, 2012 were $1.3 billion, together with the addition of acquired AUM of $0.4 billion and offset by a net market value
depreciation of $0.9 billion, resulted in increased AUM of $0.8 billion for the year. Average AUM for the year ended December 31, 2012 was $9.6
billion, compared with $9.8 billion in 2011.
Total revenues for year ended December 31, 2012 decreased by $3.1 million (1.9%) to $158.2 million, when compared with the year ended December 31,
2011. Management Fees for the year ended December 31, 2012 were $118.5 million, representing a decrease of $28.3 million (19.3%) over the year
ended December 31, 2011. Gross Performance Fees for the year ended December 31, 2012 were $10.0 million, compared to $5.3 million in the year
ended December 31, 2011. Commissions decreased by $0.7 million for the year ended December 31, 2012, when compared with the year ended
December 31, 2011. Unrealized and realized gains on proprietary investments totaled $2.3 million for the year ended December 31, 2012 compared
to unrealized and realized losses of $8.0 million for the year ended December 31, 2011, an increase of $10.3 million. Other income increased by $11.0
million for the year ended December 31, 2012, when compared with the year ended December 31, 2011.
14
Expenses totaled $116.4 million for the year ended December 31, 2012, which is a decrease of $0.8 million (0.7%), when compared with the year
ended December 31, 2011.
Net income of $32.0 million for the year ended December 31, 2012, decreased by $1.1 million (3.2%), when compared with net income of $33.0
million for the year ended December 31, 2011.
Assets Under Management, Investment Performance and Net Sales
The breakdown of AUM by investment product type as at December 31, 2012 and December 31, 2011 was as follows:
December 31, 2012
December 31, 2011
$ (in millions)
% of AUM
$ (in millions)
% of AUM
Product Type
Bullion Funds
Mutual Funds
Alternative Investment Strategies
Offshore Funds
Direct Management (Managed Companies)
Managed Accounts
Fixed Term Limited Partnerships
Total
4,920
1,991
1,410
190
802
190
428
9,931
49.6%
20.0%
14.2%
1.9%
8.1%
1.9%
4.3%
100%
2,971
2,497
1,717
566
700
288
398
9,137
The table below summarizes the changes in AUM for the relevant periods.
($ in millions)
AUM, beginning of year
Net sales
Business acquisitions
Market value depreciation of portfolios
AUM, end of year
For the year ended
December 31,
2012
2011
9,137
1,308
428
(942)
9,931
32.5%
27.3%
18.8%
6.2%
7.7%
3.2%
4.3%
100%
8,545
1,418
695
(1,521)
9,137
For the year ended December 31, 2012, the majority of our Mutual Funds, Alternative Investment Strategies, Fixed Term Limited Partnerships,
Managed Companies and Managed Accounts experienced negative performance resulting in an overall market value depreciation of our AUM, partially
offset by positive performance from our Bullion Funds.
Net sales for the year ended December 31, 2012 were $1.3 billion. The initial and follow-on offering of Sprott 2012 Flow-Through LP, the launch
of the Sprott Silver Equities Class, the Sprott Enhanced Equity Class, the Sprott Enhanced Balanced Fund and follow-on offerings of Sprott Physical
Gold Trust and Sprott Physical Silver Trust along with the initial public offering of Sprott Physical Platinum and Palladium Trust added approximately
$1.9 billion to sales for the year ended December 31, 2012. Collectively, our other Mutual Funds, Managed Accounts and Alternative Investment
Strategies experienced net redemptions of approximately $0.4 billion for the year ended December 31, 2012. Our Offshore Funds collectively, had
redemptions for the year ended December 31, 2012 of approximately $0.2 billion or 39.9% of offshore AUM at the beginning of the year. The launch
of Resource Income Partners Limited Partnership, our fixed term limited partnership, added $50 million to our AUM.
Acquisitions during the year added $0.4 billion to the Company's AUM.
15
Revenues
Total revenue decreased by $3.1 million or 1.9% from $161.3 million in the year ended December 31, 2011 to $158.2 million in the year ended
December 31, 2012.
Management Fees decreased by $28.3 million or 19.3% from $146.8 million in the year ended December 31, 2011 to $118.5 million in the year ended
December 31, 2012, even though average AUM decreased by approximately 1.3% over the same period. Management Fees as a percentage of average
AUM fell to 1.2% in the year ended December 31, 2012 from 1.5% in the year ended December 31, 2011. This decrease 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 approximately $1.5 billion to $4.9 billion for the year ended December 31, 2012, compared to $3.0 billion, for
the year ended December 31, 2011. The year ended December 31, 2012 includes Management Fees from RCIC and SAM US for the full year along
with additional management fees from Flatiron and Toscana Companies since their acquisition in the third quarter of 2012, whereas the year ended
December 31, 2011 only include Management Fees from RCIC and SAM US since the acquisition date of February 4, 2011. In 2012, the fee structure
for one of the Managed Companies was amended such that the compensation and benefits of certain employees would be paid directly by the Managed
Company rather than by SC. This resulted in a reduction to the Management Fees received by the Company by the amount of compensation and
benefits costs incurred by the Managed Company and an equivalent reduction to the compensation and benefits expense of the Company. There is
no impact to the Company's net income as a result of this amendment.
Gross Performance Fees were $10.0 million for the year ended December 31, 2012 versus $5.3 million for the year ended December 31, 2011. The
majority of the 2012 gross Performance Fees were generated by two Funds and two Managed Companies.
Commission revenue for the year ended December 31, 2012, was $13.5 million compared to $14.2 million for the year ended December 31, 2011.
During the year ended December 31, 2012, GRIL and SPW earned commissions primarily from the sale and purchase of stocks by its clients, private
placements and from sales of Sprott sponsored Funds and shares of Managed Companies to GRIL and SPW clients. During the year ended
December 31, 2011, commission revenue was mainly due to commissions generated by GRIL and to a lesser extent, SPW. The year ended December 31,
2012 included Commission revenue from GRIL for the full period whereas the year ended December 31, 2011 only included Commission revenue
since the acquisition date of February 4, 2011 (approximately eleven months).
Gains from our capital that is invested in our proprietary investments (realized and unrealized) for the year ended December 31, 2012 totaled $2.3
million, compared with losses of $8.0 million for the year ended December 31, 2011. During year ended December 31, 2012, sales of proprietary
investments resulted in net realized gains of $7.2 million while the market value of most of our remaining proprietary investments depreciated resulting
in a net unrealized loss of $4.9 million. During the year ended December 31, 2011, sales of proprietary investments resulted in a net realized gain of
$0.2 million and depreciation in the value of most of our remaining proprietary investments resulted in a net unrealized loss of $8.2 million.
Other income increased by approximately $11.0 million from approximately $2.9 million in the year ended December 31, 2011 to $13.9 million in the
year ended December 31, 2012. The main components of other income include interest income, redemption fee revenue, expense recovery from
managed companies and managed accounts, dividend income and foreign exchange gains and losses. For 2012 only, other income also includes
approximately $9.1 million mark-to-market adjustments relating to a portion of the acquisition consideration payable and to the contingent returnable
consideration asset (see note 3, note 6 and note 17) related to the Flatiron acquisition. Excluding the $9.1 million exclusive to 2012, the main contributor
to the increase in the year ended December 31, 2012 was the interest income generated by the secured notes receivable in our proprietary investments.
The year ended December 31, 2012 included interest income generated for the full year whereas the year ended December 31, 2011 only included
interest income for four months for a secured note receivable.
16
Expenses
Total expenses for the year ended December 31, 2012 were $116.4 million, a decrease of $0.8 million or 0.7% compared with $117.3 million for the
year ended December 31, 2011.
Changes in specific categories are described in the following discussion:
Compensation and Benefits
Compensation and benefits expense for the year ended December 31, 2012 amounted to $36.9 million, including contributions to the discretionary
employee bonus pool of $7.5 million. For the year ended December 31, 2012, a further $3.5 million relating to the equity component of the discretionary
employee bonus pool is included in stock-based compensation. For the year ended December 31, 2011, compensation and benefits expense was $48.7
million, with contributions to the discretionary employee bonus pool amounting to $21.6 million. There was no equity component of the discretionary
employee bonus pool in 2011. Excluding the discretionary employee bonus pool, compensation and benefits increased by $2.3 million from $27.1
million in 2011 to $29.4 million in 2012. This is primarily due to (i) the increase in headcount of the Company with the number of employees increasing
from 164 at December 31, 2011 to 196 at December 31, 2012 largely as a result of the acquisitions in 2012 and (ii) the costs associated with terminating
the employment agreements of the Flatiron vendors. The costs associated with the increase in headcount were partially offset by the amendment to
the fee structure for one of the Managed Companies. In 2012, the fee structure for one of the Managed Companies was amended such that the
compensation and benefits of certain employees would be paid directly by the Managed Company. This resulted in a reduction to the Management
Fees received by the Company by the amount of compensation and benefits costs incurred by the Managed Company and an equivalent reduction
to the compensation and benefits expense of the Company. There is no impact to the Company's net income as a result of this amendment. The
discretionary employee bonus pool decreased in 2012 compared to 2011 reflecting reduced year end bonus payments to certain employees pursuant
to our investment performance and overall corporate results for the year. Beginning in 2012, a portion of the discretionary employee bonus pool was
paid in equity of the Company through the Company's EPSP and EIP (see note 8). The shares are either issued from treasury or purchased in the
open market and are available to the relevant employees over a specified vesting period. The year ended December 31, 2012 included compensation
and benefits from the Global Companies for the full year along with additional compensation and benefits from Flatiron and Toscana Companies
since their acquisition in the third quarter of 2012, whereas the year ended December 31, 2011 only included compensation and benefits from Global
Companies since the acquisition date of February 4, 2011 (approximately eleven months).
Stock-based compensation
Stock-based compensation for the year ended December 31, 2012 was $11.1 million, an increase of $6.7 million, compared to $4.4 million, for the
year ended December 31, 2011. The increase in the stock-based compensation is due to (i) the inclusion of a portion of the discretionary employee
bonus pool that is equity-based that was not applicable in 2011, (ii) the expensing of earn-out shares (see note 8) for the year ended December 31,
2012 that was only applicable for the period February 4, 2011 to December 31, 2011 in the comparable period, and (iii) other stock-based compensation
relating to new hires in the year ended December 31, 2012 that was not applicable in the prior year.
Trailer Fees
Trailer fees are somewhat correlated with AUM and with Management Fees. For the year ended December 31, 2012 trailer fees were $19.0 million,
versus $25.7 million for the year ended December 31, 2011, a decrease of 26.0%. This decrease is a result of the reduction in trailer fee paying AUM
during 2012. Trailer fees as a percentage of Management Fees for the year ended December 31, 2012 have decreased to 16.1% from 17.5% from the
year ended December 31, 2011. This decline is a result of the reduction in trailer fee paying AUM, and to a lesser extent, due to the addition of AUM
of the Global Companies and Toscana Companies along with AUM of the Managed Companies and Managed Accounts 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.
General and Administrative
General and administrative expenses increased by $4.9 million (23.0%) to $26.2 million for the year ended December 31, 2012 when compared to the
the year ended December 31, 2011. 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, directors fees 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 for the
year ended December 31, 2012 is primarily due to increases in sub-advisory fees (including $2.6 million in sub-advisory fees relating to gross Performance
Fees earned for the year ended December 31, 2012) and fund operating expenses absorbed by SAM on behalf of certain Funds that it manages, in
particular, the Sprott Corporate Class Inc. along with increases in other professional fees as a result of acquisition related costs and increases in rent
as we took on additional leased space in 2012. Offsetting these increases is a reduction in several general and administrative expenses, particularly
marketing and general office expenses in the last two quarters of 2012 reflecting our efforts to reduce discretionary spending. The year ended
December 31, 2012 include general and administrative expenses from the Global Companies for the full year along with additional general and
administrative expenses from Flatiron and the Toscana Companies since their acquisition in the third quarter of 2012, whereas the year ended
December 31, 2011 only include general and administrative expenses from Global Companies since the acquisition date of February 4, 2011
(approximately eleven months).
17
Charitable Donations
The Company has a charitable donations program whereby 1% of the current 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 addition to donations under the program described
above, we make other corporate donations to selected causes. The donation expense for the year ended December 31, 2012 decreased by $0.4 million
from the corresponding year ended December 31, 2011 due to a combination of a decrease in the current year's pre-tax income and lower discretionary
corporate donations.
Amortization of Intangibles
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. Amortization expense increased by $0.6 million from $7.2 million for the year ended December 31, 2011 to $7.8 million
for the year ended December 31, 2012, mainly due to increased amortization of deferred sales commissions in 2012.
Impairment of goodwill and Intangibles
Impairment of goodwill and intangibles is composed of (i) those amounts in excess of the recoverable amount when compared to the carrying value
of fund management contracts and carried interests, net of any reversals and (ii) those amounts in excess of the recoverable amount when compared
to the carrying value of goodwill. For the year ended December 31, 2012, an impairment charge, net of reversals, of $4.8 million relating to fund
management contracts and carried interests was recognized compared to $7.7 million for the year ended December 31, 2011. In addition, goodwill
in the amount of $8.9 million was charged to earnings as a result of management's assessment of the value of goodwill resulting from the Flatiron
acquisition as at December 31, 2012 (see note 6) compared to $nil for the year ended December 31, 2011. The total impairment of goodwill and
intangibles for the year ended December 31, 2012 was $13.7 million, an increase of $6.0 million (77.9%) from the prior year's figure.
As a result of the acquisition of the Toscana Companies, indefinite life fund management contracts totaling $12.8 million were identified. These fund
management contracts are not amortized, but instead are reviewed for indicators of impairment. In the event that these fund management contracts
are impaired, an impairment loss will be charged against earnings in the period in which the impairment occurs. For the year ended December 31,
2012, management concluded that the recoverable amount of these fund management contracts exceeded the carrying value and no impairment
existed.
The underlying inputs and assumptions that determine the recoverable amounts of fund management contracts and carried interests are related to
the resource sector and commodity prices which can exhibit significant volatility. As a result, the recoverable amounts of both the fund management
contracts and carried interests may demonstrate significant fluctuations in value from quarter to quarter. Management will continue to monitor the
recoverable amount of these intangible assets on a quarterly basis and, if appropriate, may record impairment losses and/or reverse all or part of any
previously recorded impairment losses in future periods.
Amortization of property and equipment
Amortization expense of $1.1 million for the year ended December 31, 2012, was slightly lower than $1.2 million for the year ended December 31,
2011. This decrease was primarily a result of recent and prior leasehold improvements costs being amortized over a longer lease term as the Company
finalized new lease terms in 2012 for its current premises that were previously expiring in 2013.
18
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, 2012, EBITDA was $59.6 million compared with $64.5 million for the year ended December 31, 2011. EBITDA
decreased for the year ended December 31, 2012 when compared to the year ended December 31, 2011 mainly as a result of lower Management Fees
partially offset by higher realized and unrealized gains on proprietary investments. Basic and diluted EBITDA per share for the year ended December 31,
2012 was $0.35 compared to $0.38 for the year ended December 31, 2011. 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, 2012 Base EBITDA was $52.5 million compared with
$69.4 million in the year ended December 31, 2011, representing a decrease of $16.9 million (24.4%). Base EBITDA for 2012 decreased when
compared to 2011 largely due to lower 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, 2012, unrealized and
realized gains on proprietary investments were $2.3 million, compared to unrealized and realized losses of $8.0 million in the year ended December 31,
2011. In the year ended December 31, 2012, gross Performance Fees net of Performance Fee related compensation and other Performance Fee related
expenses were $4.9 million compared to $3.1 million in the year ended December 31, 2011. Base EBITDA per share for the year ended December 31,
2012 was $0.31 compared to $0.41 for the year ended December 31, 2011. 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, 2012 was $25.5 million, a decrease of $22.4 million from the $47.9
million reported in the year ended December 31, 2011. The primary contributor to this was the significant cash tax payment made by the Company
in the current year relating primarily to the Performance Fees realized in December 2010. The major 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, 2011, income
taxes of $21.7 million were paid and for the year ended December 31, 2012, income taxes of $47.3 million were paid. Cash Flow from Operations
per share for the year ended December 31, 2012 was $0.15 versus $0.29 for the year ended December 31, 2011. 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, 2012 was $41.7 million compared with a pre-tax income of $44.0 million for the year ended
December 31, 2011. The effective tax rate of 23.3% for the year ended December 31, 2012 was lower compared to 24.9% for the year ended
December 31, 2011, primarily as a result of the recognition of a $2.0 million tax refund received. The accounting for acquisitions has resulted in
significant deferred income tax liabilities relating to the identified intangible assets which are being drawn down over the same period in which the
associated intangible assets are being amortized. These deferred tax liabilities are not cash liabilities of the Company but are accounting items resulting
from the accounting for the acquisitions.
Net income for the year ended December 31, 2012 was $32.0 million compared to net income of $33.0 million for the year ended December 31,
2011. The decrease in 2012 as compared to 2011 reflects the net effect of the changes previously discussed in this MD&A. Basic and diluted earnings
per share for the year ended December 31, 2012 was $0.19 versus $0.20 for the year ended December 31, 2011.
Balance Sheet
Total assets at December 31, 2012 decreased by $25.3 million to $375.3 million. Cash and cash equivalents were $77.4 million, a decrease of $42.1
million from December 31, 2011 due to cash outflows primarily from income tax payments, funding of the EPSP, the payment of dividends, acquisitions
and bonus payments.
Proprietary investments are comprised of investments in various Funds that we manage, including those managed by RCIC, secured notes receivable,
equities and warrants, including an investment in SRLC and gold bullion. Proprietary investments are discussed in more detail in the Revenue section
of this MD&A.
Fees receivable at December 31, 2012 were $17.3 million, which is an increase of $7.1 million since December 31, 2011. The increase primarily relates
to outstanding Management Fees and Performance Fees relating to one Managed Company as this Managed Company is required to pay annual
Management Fees in arrears and Performance Fees at year end.
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.
19
Intangible assets as at December 31, 2012 of $45.3 million consist of finite and indefinite life intangible assets. Intangible assets with indefinite useful
lives relate to (i) costs incurred to create fund management contracts between SAM and certain Funds managed by SAM and (ii) fund management
contracts identified as a result of the acquisition of the Toscana Companies (see note 3). 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. Intangible assets increased by $5.3 million during 2012 primarily as a result of the
intangibles identified in the Toscana acquisition.
At December 31, 2012, we determined that the carrying value of carried interests was in excess of its recoverable value. As a result, an impairment
charge for the carried interests was recorded and together with previous impairment losses and impairment loss reversals, the net result was an
impairment charge of $3.7 million to the intangible assets for the year ended December 31, 2012 (2011 - $5.7 million). At December 31, 2012, we
also determined that the recoverable amount of the management contracts was in excess of its carrying value. As a result, an impairment charge
reversal for the management contracts was recorded and together with previous impairment losses and impairment loss reversals, the net result was
an impairment charge reversal of $1.8 million to the intangible assets for the year ended December 31, 2012 (2011 - $2.0 million).
As a result of the acquisition of the Toscana Companies during the year, indefinite life fund management contracts totaling $12.8 million were
identified. These fund management contracts are not amortized, but instead are reviewed for indicators of impairment. In the event that these fund
management contracts are impaired, an impairment loss will be charged against earnings in the period in which the impairment occurs. For the year
ended December 31, 2012, management concluded that the recoverable amount of these fund management contracts exceeded the carrying value
and no impairment existed.
As a result of the acquisition of Flatiron during the year, finite life fund management contracts totaling $3.0 million were identified. Management
concluded that as at December 31, 2012 these fund management contracts were fully impaired and the full amount was charged against earnings (see
note 6).
The underlying inputs and assumptions that determine the recoverable amounts of fund management contracts and carried interests are related to
the resource sector and commodity prices which can exhibit significant volatility. As a result, the recoverable amounts of both the finite life fund
management contracts and carried interests may demonstrate significant fluctuations in value from quarter to quarter. Management will continue to
monitor the recoverable amount of these intangible assets on a quarterly basis and, if appropriate, may record impairment losses and/or may reverse
all or part of any previously recorded 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, 2012 of $2.1 million were mostly unchanged from December 31, 2011. During the year ended December 31, 2012, $1.2 million in
commissions were paid for low load funds and were offset by amortization of $1.2 million.
The acquisition of the Global Companies in the first quarter of 2011 resulted in goodwill of $122.5 million at December 31, 2012. Included in
goodwill is $0.4 million 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. The acquisition of the Toscana Companies in the third quarter of 2012 resulted in
goodwill of $3.2 million at December 31, 2012. Goodwill is not amortized, but is subject to impairment tests on at least an annual basis. Management
performed its impairment test of goodwill during the fourth quarter of 2012 and concluded that the goodwill associated with the Flatiron acquisition
was fully impaired. As a result, $8.9 million was charged to earnings in 2012 (see note 6).
Accounts payable and accrued liabilities were $13.7 million at December 31, 2012, which is an increase of $3.3 million from December 31, 2011. The
increase is mainly a result of higher performance fees payable to a sub-advisor of the Company and higher fund operating expenses payable by SAM
on behalf of certain Funds that it manages at December 31, 2012 as compared to December 31, 2011.
Compensation and employee bonuses payable were $10.2 million at December 31, 2012 compared to $24.2 million at December 31, 2011. The decrease
from December 31, 2011 primarily reflects reduced year end bonus amounts payable to certain employees pursuant to our investment performance
and overall corporate results for the year. In addition, as previously noted in the "Compensation and Benefits" section earlier in this MD&A, a portion
of the discretionary employee bonus pool for 2012 was paid as equity of the Company and is not included in compensation and employee bonuses
payable and instead is recorded as an increase in contributed surplus.
As a result of the Flatiron acquisition, the Company recorded acquisition consideration payable which represents amounts payable to the Flatiron
vendors in August 2015. As at December 31, 2012, the acquisition consideration payable was $8.4 million which is composed of two parts. The first
part is an amount payable in the Company's common shares and the second part is an amount payable in the units of a Fund managed by the Company.
Both portions are marked-to-market with any adjustments relating to the Company's common shares charged to earnings and any adjustments relating
to the units of the Fund reflected in proprietary investments. As a result of the agreements entered into between the Company and the Flatiron
vendors on January 11, 2013, the Company will not be required to pay out the acquisition consideration payable. For accounting purposes, the
contingent returnable consideration asset has been marked-to-market to reflect this ($8.4 million) and has been netted against the acquisition
consideration payable on the consolidated balance sheets (see note 3 note 6, note 7 and note 17).
20
RESULTS OF OPERATIONS - REPORTABLE SEGMENTS
SAM Segment
The SAM segment provides asset management services to the Company's branded Funds and Managed Accounts and includes the operating results
of SAM. The results for the acquisition of Flatiron are included in the SAM segment.
Results of operations
($ in thousands)
Revenue
Management fees
Performance fees
Other
Total revenue
Expenses
General and administrative
Trailer fees
Amortization and impairment of intangibles, property and equipment
Total expenses
Income before income taxes for the period
EBITDA
Base EBITDA
Year ended December 31, 2012 compared to year ended December 31, 2011
Revenues
For the year ended
December 31, 2012
December 31, 2011
99,535
4,401
10,160
114,096
43,572
27,134
13,986
84,692
29,404
34,289
34,243
125,838
5,303
1,762
132,903
41,979
37,058
1,813
80,850
52,053
54,100
51,168
During the year ended December 31, 2012, total revenues decreased by $18.8 million (14.2%) from $132.9 million in the year ended December 31,
2011 to $114.1 million in the year ended December 31, 2012.
Revenues from Management Fees were $99.5 million for the year ended December 31, 2012, a decrease of 20.9% from the year ended December 31,
2011 mainly attributable to the the different composition of SAM's AUM and to the lower level of average AUM.
Revenues from gross Performance Fees were $4.4 million for the year ended December 31, 2012 versus $5.3 million for the year ended December 31,
2011.
Other revenues were $10.2 million for the year ended December 31, 2012, an increase of $8.4 million from the year ended December 31, 2011. The
largest components of other revenue are interest income, short term trading fees and early redemption fees. For 2012 only, other income also includes
approximately $9.1 million mark-to-market adjustments relating to a portion of the acquisition consideration payable and to the contingent returnable
consideration asset (see note 3, note 6, note 7 and note 17). Excluding the $9.1 million relating to 2012, other revenues decreased by $0.7 million
reflecting higher unrealized losses on proprietary investments in 2012 compared to 2011.
21
Expenses
Total expenses for the year ended December 31, 2012 were $84.7 million, an increase of $3.8 million or 4.8%, compared with $80.9 million for the
year ended December 31, 2011.
General and administrative (including compensation and benefits) expense for the year ended December 31, 2012 amounted to $43.6 million versus
$42.0 million for the year ended December 31, 2011. The largest components of the increase from the prior year relate to increases in sub-advisory
fees and fund operating expenses absorbed on behalf of certain Funds that SAM manages, in particular, the Sprott Corporate Class Inc. Funds. A
lower bonus pool accrual was offset by increases in salaries and stock-based compensation as a result of the hiring of two senior employees who
received common stock of the Company through the EPSP that vests over a three year period. For accounting purposes, although one third of the
common shares vest after the first year, nearly two thirds of the full three year expense is expensed in the first year.
Trailer fees for the year ended December 31, 2012 were $27.1 million versus $37.1 million, a decrease of 26.8% over 2011. The decrease was
attributable to the decrease in the average AUM of our mutual Funds and Alternative Investment Strategies which are the primary products to which
trailer fees relate.
Amortization of intangibles, property and equipment increased by $12.2 million for the year ended December 31, 2012 when compared to the year
ended December 31, 2011, primarily due to the goodwill and fund management contract write offs of approximately $11.8 million relating to the
Flatiron acquisition (see note 3, note 6 and note 17).
EBITDA and Base EBITDA
For the year ended December 31, 2012, EBITDA was $34.3 million compared with $54.1 million for the year ended December 31, 2011. The decrease
in EBITDA in 2012 when compared to 2011 is mainly a result of lower Management Fees earned in the current year.
For the year ended December 31, 2012, Base EBITDA was $34.2 million compared with $51.2 million in the year ended December 31, 2011. Base
EBITDA for 2012 decreased when compared to 2011 mainly due to lower Management Fees earned in the current year, and to a lesser extent, lower
net Performance Fees that were mostly offset by higher unrealized losses on proprietary investments.
Global Companies Segment
The Global Companies segment provides asset management services to the Company's Funds and Managed Accounts 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
(in $ thousands)
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 period
EBITDA
Base EBITDA
* for the period February 4, 2011 to December 31, 2011
For the year ended
December 31, 2012
December 31, 2011*
9,552
9,645
101
19,298
16,366
8,395
24,761
(5,463)
7,291
7,248
9,676
12,649
(2,288)
20,037
16,394
14,199
30,593
(10,556)
7,559
9,808
22
Year ended December 31, 2012 compared to the period February 4, 2011 to December 31, 2011 (the "Period")
Revenues
Total revenues decreased by $0.7 million (3.7%) from $20.0 million in the Period to $19.3 million in the year ended December 31, 2012. The decrease
is due primarily to a reduction in the volume of transactions that generate commission revenue partially offset by the absence of unrealized losses
on proprietary investments in 2012 compared to 2011.
Revenue from Management Fees was $9.6 million for the year ended December 31, 2012 compared to $9.7 million for the Period. The decrease is
due to lower Management Fees generated on a slightly lower level of average AUM at RCIC and SAM US.
Revenue from Commissions was $9.6 million for the year ended December 31, 2012, a decrease of $3.0 million when compared to $12.6 million in
the Period. 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. The decrease is
due to fewer transactions that generated commission revenue (primarily private placements) in the year ended December 31, 2012 compared to the
Period.
Gains from our capital that is invested in proprietary investments (realized and unrealized) make up the majority of the Other revenue category of
$0.1 million for the year ended December 31, 2012 compared to a loss of $2.3 million for the year ended December 31, 2011.
Expenses
Total expenses decreased by $5.8 million (19.1%) to $24.8 million in the year ended December 31, 2012 from $30.6 million in the corresponding
comparative period. The decrease is due primarily to a lower level of amortization and impairment losses in 2012 compared to eleven months of
expense reporting in the corresponding comparative period.
General and administrative (including compensation and benefits) expenses for the year ended December 31, 2012 were relatively unchanged at
$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 unique to its brokerage business.
Compensation and benefits (including stock-based compensation) decreased during 2012 primarily as a result of a lower bonus accrual and lower
variable compensation which is directly correlated to the lower commission revenue realized in the year ended December 31, 2012. This was mostly
offset by increases in marketing expenses and rent as the Global Companies moved to new premises in 2012.
Amortization expense, excluding the effect of impairment related losses and reversals, remained relatively unchanged at $6.4 million. However, the
current year also reflects impairment losses of fund management contracts and carried interests of $1.9 million compared to impairment losses of
$7.7 million for the year ended December 31, 2011. Total amortization and impairment expense is $8.4 million for the year ended December 31,
2012 compared to $14.2 million for the year ended December 31, 2011. This reflects a net change of $5.8 million (40.9%) from the prior year's
comparative figure. The underlying inputs and assumptions that determine the recoverable amounts of finite life fund management contracts and
carried interests for the Global Companies are related to the resource sector and commodity prices which can exhibit significant volatility. As a result,
the recoverable amounts of both the finite life fund management contracts and carried interests may demonstrate significant fluctuations in value
from quarter to quarter. Management will continue to monitor the recoverable amount of these intangible assets on a quarterly basis and, if
appropriate, may record impairment losses and/or reverse all or part of any previously recorded impairment losses in future periods.
EBITDA and Base EBITDA
For the year ended December 31, 2012, EBITDA was $7.3 million compared with $7.6 million for the Period. The decrease in EBITDA in 2012
when compared to 2011 is mainly a result of a reduction in the volume of transactions that generate commission revenue offset in large part by an
increase in unrealized gains on proprietary investments.
For the year ended December 31, 2012, Base EBITDA was $7.2 million compared with $9.8 million in the Period. Base EBITDA for 2012 decreased
when compared to 2011 mostly due to a reduction in the volume of transactions that generate commission revenue.
23
Corporate Segment
The Corporate segment provides treasury and shared services to the Company's business units and includes the operating results of Sprott Inc.
without the effect of consolidating its subsidiaries.
Results of operations
($ in thousands)
Revenue
Other
Total revenue
Expenses
General and administrative
Amortization of property and equipment
Total expenses
Income (loss) before income taxes for the period
EBITDA
Base EBITDA
For the year ended
December 31, 2012
December 31, 2011
5,367
5,367
4,941
116
5,057
310
525
(2,230)
(4,732)
(4,732)
3,710
70
3,780
(8,512)
(8,200)
(2,317)
Year ended December 31, 2012 compared to year ended December 31, 2011
Revenues
During the year ended December 31, 2012, total revenues increased by $10.1 million from negative $4.7 million in the year ended December 31,
2011 to $5.4 million in the year ended December 31, 2012.
Gains and losses from our capital that is invested in our proprietary investments (realized and unrealized) and interest income make up the majority
of Other revenue. For the year ended December 31, 2012, the Corporate segment recorded net realized and unrealized gains on proprietary investments
compared to net realized and unrealized losses recorded for the year ended December 31, 2011. In addition, the year ended December 31, 2012
included interest income generated for the full period whereas the year ended December 31, 2011 included interest income for four months for
secured notes receivable.
Expenses
Total expenses for the year ended December 31, 2012 were $5.1 million, an increase of $1.3 million (33.8%), compared with $3.8 million for the
year ended December 31, 2011.
General and administrative (including compensation and benefits) expenses increased by $1.2 million to $4.9 million for the year ended December 31,
2012 when compared to the year ended December 31, 2011. General and administrative expenses increased mostly due to the introduction of stock-
based compensation in 2012 and increased professional fees relating to the acquisitions.
EBITDA and Base EBITDA
For the year ended December 31, 2012, EBITDA was $0.5 million compared with negative $8.2 million for the year ended December 31, 2011.
EBITDA increased for the year ended December 31, 2012 when compared to the year ended December 31, 2011, mainly as a result of realized and
unrealized gains and interest income previously discussed.
Base EBITDA was negative $2.2 million for the year ended December 31, 2012 compared with negative $2.3 million in the year ended December 31,
2011, predominately as a result of higher other income in 2012 offset by an increase in acquisition related professional fees, and to a lesser extent,
compensation.
24
Other Segment
The Other segment includes the operations of SC and SPW, our consulting and private wealth businesses, respectively. The results for the acquisition
of the Toscana Companies are included in the Other segment.
Results of operations
($ in thousands)
Revenue
Management fees
Performance fees
Commissions
Other
Total revenue
Expenses
General and administrative
Amortization of property and equipment
Total expenses
Income before income taxes for the period
EBITDA
Base EBITDA
For the year ended
December 31, 2012
December 31, 2011
9,427
5,554
3,861
8,844
27,686
10,179
50
10,229
17,457
17,507
13,219
11,311
—
1,530
11,786
24,627
13,595
30
13,625
11,002
11,032
10,746
Year ended December 31, 2012 compared to year ended December 31, 2011
Revenues
During the year ended December 31, 2012, total revenues increased by $3.1 million (12.4%) from $24.6 million in the year ended December 31,
2011 to $27.7 million in the year ended December 31, 2012.
Revenues from Management Fees were $9.4 million for the year ended December 31, 2012 compared to $11.3 million in the year ended December 31,
2011. The decrease was mainly attributable to a change in the fee structure for one of the Managed Companies which was amended such that the
compensation and benefits of certain employees would be paid directly by the Managed Company rather than by SC. This resulted in a reduction
to the Management Fees received by the Company by the amount of compensation and benefits costs incurred by the Managed Company and an
equivalent reduction to the compensation and benefits expense of the Company (approximately $4.5 million in 2012). There is no impact to the
Company's net income as a result of this amendment.
Revenues from Performance Fees were $5.6 million for the year ended December 31, 2012 compared to $nil in the year ended December 31, 2011.
Performance Fees were generated by the Managed Companies for the year ended December 31, 2012.
Commission revenue for the year ended December 31, 2012, was $3.9 million compared to $1.5 million during the year ended December 31, 2011.
The increase in Commissions was mainly due to substantial commissions earned by SPW on the sale of units of Sprott Physical Silver Trust, Sprott
2012 Flow-Through Fund and other various private placements to its clients in the year ended December 31, 2012.
Trailer fee income received from SAM is the most significant component of Other revenue and decreased during the current year as a result of the
decrease in the average trailer paying AUA of SPW. This inter-company revenue received is eliminated upon consolidation.
25
Expenses
General and administrative (including compensation and benefits) expenses for the year ended December 31, 2012 were $10.2 million, a decrease
of $3.4 million from the prior year of $13.6 million. The largest components of the decrease from the prior year's comparative quarter relates to
compensation expense due to a change in the fee structure discussed above.
EBITDA and Base EBITDA
For the year ended December 31, 2012, EBITDA was $17.5 million compared with $11.0 million for the year ended December 31, 2011. The increase
in EBITDA in 2012 when compared to 2011 is mainly due to Performance Fees realized in 2012 combined with higher commission revenue offset
slightly by lower other income as compared to 2011.
For the year ended December 31, 2012, Base EBITDA was $13.2 million compared with $10.7 million for the year ended December 31, 2011. Base
EBITDA for 2012 increased when compared to 2011 primarily due to higher commission revenue in 2012 as compared to 2011 and to the incremental
contributions by the Toscana Companies in 2012.
26
SUMMARY OF QUARTERLY RESULTS
($ in thousands)
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sept-12
31-Dec-12
As at
As at
As at
As at
As at
As at
As at
As at
Assets Under Management
9,677,558
9,292,186
9,881,291
9,137,084
9,683.283
8,485,400
10,302,652
9,931,151
($ in thousands, except per share amounts)
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
31-Mar-12
30-Sept-12
31-Dec-12
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
35,547
37,228
40,350
33,700
32,986
28,084
28,202
29,242
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
76
5,722
4,241
1,365
17
2,057
(3,984)
1,267
93
2,424
3,798
1,257
9,769
3,303
(1,789)
10,024
39,515
39,293
44,331
38,113
44,390
27,441
35,774
50,549
10,566
7,489
10,358
4,625
16,943
736
11,008
3,297
17,400
14,606
17,389
15,078
20,400
6,424
14,301
18,486
16,911
18,141
18,285
16,050
16,121
10,407
10,435
15,553
Basic earnings per share
Diluted earnings per share
0.07
0.07
0.04
0.04
0.06
0.06
0.03
0.03
0.10
0.10
0.00
0.00
0.07
0.06
0.02
0.02
Performance Fees are typically earned on the last day of the fiscal year other than for the Funds that are managed by RCIC and a Managed Account.
As a result, quarters ending December 31 are significantly more variable than other quarters during the year.
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, 2012, management determined that the carrying value of the carried interests was in excess of its recoverable amount. As a result,
an impairment charge for the carried interests was recorded in the amount of $7.7 million ($4.6 million after tax). The underlying inputs and assumptions
that determine the recoverable amounts of the carried interests are related to the resource sector and commodity prices which can exhibit significant
volatility. As a result, the recoverable amounts of carried interests may demonstrate significant fluctuations in value from quarter to quarter. Management
will continue to monitor the recoverable amount of this and other intangible assets on a quarterly basis and, if appropriate, may record impairment
losses and/or reverse all or part of previously recorded impairment losses in future periods.
During the fourth quarter of 2012, management determined that the fund management contracts and goodwill associated with the Flatiron acquisition
were fully impaired. As a result, fund management contracts of $2.8 million ($2.1 million after tax) and goodwill of $8.9 million ($8.9 million after
tax) were charged against earnings in the fourth quarter of 2012.
The consolidated results shown in the table above include the results of Flatiron from the date of its acquisition on August 1, 2012, the results of
the Toscana Companies from the date of its acquisition on July 3, 2012 and the results of the Global Companies from the date of their acquisition
on February 4, 2011.
27
Dividends
On March 27, 2012, a dividend of $0.03 per common share was declared for the quarter ended December 31, 2011. This dividend was paid on April
20, 2012 to shareholders of record at the close of business on April 5, 2012.
On May 8, 2012, a dividend of $0.03 per common share was declared for the quarter ended March 31, 2012. This dividend was paid on June 1, 2012
to shareholders of record at the close of business on May 18, 2012.
On August 8, 2012, a dividend of $0.03 per common share was declared for the quarter ended June 30, 2012. This dividend was paid on September
4, 2012 to shareholders of record at the close of business on August 17, 2012.
On November 13, 2012, a dividend of $0.03 per common share was declared for the quarter ended September 30, 2012. This dividend was paid on
December 4, 2012 to shareholders of record at the close of business on November 22, 2012.
Unless indicated otherwise, all dividends on the shares of the Company will be designated as "eligible dividends" under the Income Tax Act (Canada).
Capital Stock
Capital stock at the end of 2011 was $208.4 million with 169.5 million common shares issued and outstanding. As at December 31, 2012, capital stock
had increased by $7.1 million to $215.5 million primarily as a result of the acquisition of the Toscana Companies which resulted in the issuance of
1.6 million common shares from treasury valued at $7.7 million. This was partially offset by the purchase of 1.8 million common shares for the EPSP.
The common shares held for the EPSP are treated as if the Company repurchased the shares for retirement. As at December 31, 2012, the Company
had 171.3 million 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 are
to be provided to employees of the Global Companies. In the first quarter of 2012, 177,500 of those common shares were issued. 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.
Pursuant to the Share Purchase agreement relating to the Toscana Companies acquisition, the sellers will be eligible to earn up to an additional 0.9
million common shares of the Company with the achievement of certain earnings targets by the Toscana Companies over a period not exceeding
three years from the acquisition date.
Earnings per share as at December 31, 2012 and December 31, 2011 have been calculated using the weighted average number of shares outstanding
during the respective periods. Basic and diluted earnings per share for the year ended December 31, 2012 was $0.19 versus $0.20 for the year ended
December 31, 2011. 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, the remaining 0.4 million common shares relating to the additional purchase consideration to be provided to employees of the
Global Companies and outstanding restricted stock units.
A total of 2,650,000 stock options have been issued pursuant to our incentive stock option plan. As at December 31, 2012, 2,583,333 of those stock
options were exercisable.
Subsequent to December 31, 2012, the Company issued 177,500 common shares pursuant to the Share Purchase agreement relating to the Global
Companies acquisition. In March 2013, the Company announced a private placement of 7.6 million common shares of the Company for net proceeds
of $24.5 million.
As at March 26, 2013, the Company had 179.0 million common shares outstanding.
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.
28
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, 2012 our previous revolving term credit facility with a Canadian chartered bank expired. However, during the quarter
ended September 30, 2012 we completed the negotiation of a similar credit facility with another Canadian chartered bank. The amount that may be
borrowed under this facility is $50 million. Amounts may be borrowed under the facility through prime rate loans, which bear interest at the bank's
prime rate, or bankers' acceptances, which bear interest at bankers' acceptance rates plus 1.375%. Amounts may also be borrowed in U.S. dollars
through base rate loans, which bear interest at the greater of the bank's reference rate for loans made by it in Canada in U.S. funds and the federal
funds effective rate plus 1.00%, or LIBOR loans which bear interest at LIBOR plus 1.375%.
Loans are made by the bank under a two year revolving credit facility, the term of which may be extended annually at the bank's option. If the bank
elects not to extend the term, all outstanding principal, interest and fees are due at the maturity date.
The credit facility is fully and unconditionally guaranteed by SAM, a wholly-owned subsidiary of the Company. 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, which require that the funded debt to EBITDA ratio remain below 2:1, the funded debt to SAM EBITDA
ratio remain below 1.5:1 and that the Company's AUM not fall below $7 billion, calculated on the last day of each calendar month. The Company
has not drawn on the credit facility as at December 31, 2012.
SPW is a member of IIROC and a registered investment dealer, 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, 2012, 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 ended December 31, 2012. In preparing the Company's audited consolidated financial
statements under IFRS, the Company is required to use the standards in effect as at December 31, 2012.
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 unaudited interim condensed consolidated financial statements.
As a result of the Company's acquisitions, 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 carried interests and fund management contracts with finite lives recognized in future periods.
Management monitors for indicators of impairment and impairment reversals on a regular basis and performs thorough valuations to verify the value
of the intangibles and goodwill should an indicator of impairment exist or an indicator of an impairment reversal exists.
29
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.
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.
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 to the audited consolidated financial statements.
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 26, 2013 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.
30
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, 2012 and concluded
that the controls have been properly designed and are operating effectively.
During the year ended December 31, 2012, the Company acquired the Flatiron and Toscana Companies which required the Company to develop
and implement additional internal controls over financial reporting to reflect (i) the fact that the Toscana Companies are located in Calgary, Alberta
and (ii) the goodwill and intangible assets identified as a result of the acquisitions. There were no other changes in the Company's internal control
over financial reporting that occurred during the year ended December 31, 2012 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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 our public mutual Funds and other 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.
31
Consolidated Financial Statements
Year ended December 31, 2012
32
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, 2012. 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 26, 2013
Steven Rostowsky
Chief Financial Officer
33
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, 2012 and 2011, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows
for the years then ended and a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards 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, 2012
and 2011 , and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Toronto, Canada
March 26, 2013
Chartered Accountants
Licensed Public Accountants
34
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
Intangible assets
Goodwill
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 17)
Eric Sprott
Director,
Chairman
James Roddy
Director,
Chair of Audit Committee
December 31,
December 31,
2012
2011
(Note 7)
(Note 4)
(Note 5)
(Note 6)
(Note 6)
(Note 9)
(Note 9)
(Note 8)
(Note 8)
77,400
17,301
3,919
98,620
76,724
7,260
45,253
125,740
21,653
276,630
375,250
13,712
10,242
8,168
32,122
25,419
57,541
215,474
42,808
58,609
818
317,709
375,250
119,506
10,199
2,800
132,505
78,484
5,126
39,925
125,730
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
35
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ in thousands of Canadian dollars, except for per share amounts)
2012
2011
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
Impairment of goodwill and intangibles
Amortization of property and equipment
Total expenses
Income before income taxes for the year
Provision for income taxes
Net income for the year
118,514
9,955
13,506
2,266
13,913
158,154
36,856
11,107
19,030
26,237
669
7,782
13,661
1,104
116,446
41,708
9,724
31,984
(Note 7)
(Note 6)
(Note 6)
(Note 5)
(Note 9)
Basic and diluted earnings per share
(Note 8) $
0.19 $
See accompanying notes
146,825
5,303
14,179
(7,986)
2,931
161,252
48,711
4,391
25,716
21,326
1,027
7,219
7,681
1,212
117,283
43,969
10,931
33,038
0.20
36
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31 ($ in thousands of Canadian dollars)
2012
2011
Net income for the year
Other comprehensive income (loss)
Foreign currency translation gain (loss) on foreign operations, before taxes
Total other comprehensive income (loss)
Comprehensive income
See accompanying notes
31,984
(4,315)
(4,315)
27,669
33,038
5,133
5,133
38,171
37
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Number of
Shares
Outstanding
Capital Stock
Contributed
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Equity
($ in thousands of Canadian dollars, other than number of shares)
At December 31, 2011
Business acquisition
Shares acquired for equity incentive plan
Foreign currency translation loss on foreign operations
Additional purchase consideration
Stock-based compensation
Deferred tax asset on stock-based compensation
Regular dividends paid
Net income
Balance, December 31, 2012
At December 31, 2010
Business acquisition
Shares acquired for equity incentive plan
Foreign currency translation gain on foreign operations
Additional purchase consideration
Stock-based compensation
Deferred tax asset on stock-based compensation
Regular dividends paid
Special dividend paid
Net income
169,082,077
208,413
(Note 3)
(Note 8)
(Note 3)
(Note 12)
1,564,500
(1,774,400)
—
177,500
—
—
—
—
7,698
(2,188)
—
1,551
—
—
—
—
40,857
—
(7,821)
—
(1,671)
11,107
336
—
—
169,049,677
215,474
42,808
150,000,000
19,467,500
(385,423)
40,105
168,783
(475)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
32,406
—
(2,199)
—
4,753
4,391
1,506
—
—
—
Balance, December 31, 2011
169,082,077
208,413
40,857
See accompanying notes
47,038
—
—
—
—
—
—
(20,413)
31,984
58,609
141,751
—
—
—
—
—
—
(19,751)
(108,000)
33,038
47,038
5,133
—
—
(4,315)
—
—
—
—
—
818
—
—
—
5,133
—
—
—
—
—
—
301,441
7,698
(10,009)
(4,315)
(120)
11,107
336
(20,413)
31,984
317,709
214,262
168,783
(2,674)
5,133
4,753
4,391
1,506
(19,751)
(108,000)
33,038
5,133
301,441
38
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ in thousands of Canadian dollars)
2012
2011
Operating Activities
Net income for the year
Add (deduct) non-cash items:
Unrealized and realized losses (gains) on proprietary investments
Stock-based compensation
Amortization of property and equipment
Amortization of intangible assets
Impairment of goodwill and intangible assets
Income taxes
Deferred income tax 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 (used in) operating activities
Investing Activities
Purchase of proprietary investments
Sale of proprietary investments
Purchase of property and equipment
Deferred sales commissions paid
Cash paid for the acquisition of Flatiron and Toscana Companies
Purchase of intangible assets
Cash acquired on acquisition
Cash used in investing activities
Financing Activities
Acquisition of common shares for equity incentive plan
Dividends paid
Cash used in financing activities
Net increase (decrease) 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
31,984
33,038
(2,266)
11,107
1,104
7,782
13,661
18,584
(8,860)
(326)
(47,252)
(6,675)
101
(7,848)
(13,956)
(93)
(2,953)
(36,598)
45,604
(3,127)
(1,208)
(13,030)
(1,609)
1,236
(8,732)
(10,008)
(20,413)
(30,421)
(42,106)
119,506
77,400
25,818
51,582
77,400
7,986
4,391
1,212
7,219
7,681
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
39
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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 Sprott Global Resource Investments, Ltd. (“GRIL”) (formerly Global Resource
Investments, Ltd.), 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.
On July 3, 2012, the Company completed its acquisition of Toscana Capital Corporation (“TCC”) and Toscana Energy Corporation (“TEC”)
(collectively, the “Toscana Companies”). The Toscana Companies are based in Calgary. TCC manages the Toscana Financial Income Trust
(“TFIT”), a private mutual fund trust, which provides mezzanine debt financing to mid-sized private and public oil & gas companies. TEC
manages Toscana Energy Income Corporation ("TEIC") (formerly Toscana Resource Corporation), a public company, which is focused on
investing in medium and long-term oil & gas assets, unitized production interests and royalties along with acting as a technical advisor to
and co-manager of the Energy Income Fund 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") applicable to the preparation of annual financial statements.
The consolidated financial statements of the Company for the year ended December 31, 2012 were authorized for issue by a resolution of
the Board of Directors on March 26, 2013.
Basis of presentation
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.
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. In addition, the
acquisitions of both Flatiron Capital Management Partners ("Flatiron") and the Toscana Companies completed in the third quarter of 2012
resulted in both being wholly-owned subsidiaries of the Company. 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 continues 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.
40
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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 which is predominantly on the last day of the fiscal year.
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.
Public equities and share purchase warrants are measured at fair value determined using quoted market prices.
Mutual funds and hedge funds are fair valued using the net asset value per unit of each fund.
Private equities are fair valued based upon the value of the Company's equity interests in the private companies determined from financial
information provided by management of the underlying companies, which may include operating results, subsequent rounds of financing
and other appropriate information. The values assigned are based on available information and do not necessarily represent amounts which
might reasonably be determined until the individual positions are liquidated.
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 classified
as HFT or designated fair value through income or loss.
Fees receivable are classified as loans and receivables.
Notes receivable are classified as HTM.
Contingent returnable consideration is classified as fair value through income or loss
Accounts payable and accrued liabilities, provisions and compensation and employee bonuses payable are classified as other
financial liabilities.
Acquisition consideration payable is classified as fair value through income or loss.
41
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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.
Offsetting of financial instruments
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 straight-line basis between 0 and 5 years. 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. When redemptions occur, the actual investment period is shorter than expected, and the unamortized deferred sales commission
related to the original investment in the funds is charged to net income and included in the amortization of deferred sales commissions.
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 net of reversals, 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 are
recognized in the consolidated statements of income in the expense category consistent with the function of the intangible asset.
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually and whenever there is an indication
that the asset may be impaired. 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 reporting date, intangible assets are assessed for (i) indicators of impairment, and (ii) indicators of impairment reversals. 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. Any gain resulting from an impairment reversal of intangible assets is recognized in the period the
impairment reversal is identified such that the increased carrying amount of the intangible asset shall not exceed the carrying amount that
would have been determined (net of amortization and impairment) had no impairment loss been recognized for the intangible asset in prior
periods.
42
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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 cash 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.
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 differences related to
the assets or liabilities reported for tax purposes are expected to reverse in the future. Deferred tax assets are recognized only when it is
probable that sufficient taxable profits 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 probable 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 deferred
stock units ("DSU") is determined based on the value of the Company's common shares at the time of grant. Compensation expense for
the earn-out shares is determined using appropriate valuation models (see note 8). Compensation expense for the Company's Employee
Profit Sharing Plan (the "Trust") is determined based on the value of the Company's common shares purchased by the Trust (see note 8).
The amount of compensation expense is recognized over the vesting period with a corresponding increase to contributed surplus other
than for the Company's DSUs where the corresponding increase is to liabilities. Stock options and common shares held by the Trust 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. On the withdrawal of vested common shares from the Trust, the contributed surplus previously recorded is credited to
cash. On the exercise of DSUs, the liability previously recorded is credited to cash.
43
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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, unvested shares purchased for
the Employee Profit Sharing Plan by the Trust and applicable acquisition consideration payable. The treasury stock method determines the
number of incremental common shares by assuming that the number of dilutive securities 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.
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 goodwill 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. Finite life intangible assets are reviewed
for impairment when changes in circumstances indicate that the carrying value may be impaired. Similarly, finite life intangible assets are
reviewed for impairment reversals when changes in circumstances indicate that the calculated recoverable amount is in excess of the carrying
value. The underlying inputs and assumptions that determine the recoverable amount of certain finite life intangible assets are related to the
resource sector and commodity prices which can exhibit significant volatility. As a result, the recoverable amount of these finite life intangible
assets may demonstrate significant fluctuations in value from quarter to quarter.
ii.
Fair value of financial instruments
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.
44
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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.
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 consolidated
financial statements. The Company has not yet determined whether to early adopt IFRS 9.
International Accounting Standard
Issue Date / Amendment Date
Effective Date
IFRS 10 - Consolidated Financial Statements
IFRS 12 - Disclosures of Interests in Other Entities
IFRS 13 - Fair Value Measurement
IFRS 9 - Financial Instruments
May 12, 2011
May 12, 2011
May 12, 2011
November 12, 2009
January 1, 2013
January 1, 2013
January 1, 2013
January 1, 2015
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 IFRS interpretations that are not yet effective that would be expected to have a material impact on the financial statements.
3. BUSINESS ACQUISITION
Toscana Companies
On July 3, 2012, the Company acquired all of the outstanding common shares of the Toscana Companies. As consideration, the Company
paid $5.2 million cash and issued 1,564,500 common shares from treasury valued at $7.7 million, excluding costs, for total consideration of
$12.9 million. The common shares of the Company issued as consideration were valued at $4.92 per share using the closing price of the
Company's common shares on the TSX on July 3, 2012. In addition, the sellers will be eligible to earn up to an additional $5.3 million in
cash and common shares of the Company with the achievement of certain financial targets by the Toscana Companies over a period of up
to 3 years.
The Company accounted for the acquisition using the acquisition method and the results of operations have been consolidated from the
date of the transaction.
45
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
Flatiron Capital Management Partners
On August 1, 2012, the Company acquired all of the outstanding common shares of Flatiron. As consideration, the Company paid $1.7
million cash, invested $4.9 million in a fund on behalf of the Flatiron vendors and had an obligation to issue common shares from treasury
valued at $4.8 million, excluding costs, for total consideration of $11.4 million. In addition, the seller was eligible to earn up to an additional
$4.5 million in common shares of the Company with the achievement of certain financial targets by Flatiron over a period of up to 3 years.
The Company accounted for the acquisition using the acquisition method and the results of operations have been consolidated from the
date of the transaction.
Details of the net assets acquired, at fair value, are as follows ($ in thousands):
Toscana Companies
Flatiron
July 3, 2012
August 1, 2012
Total
Net assets acquired
Cash and cash equivalents
Fees receivable and other assets
Finite life fund management contracts
Indefinite life fund management contracts
Contingent returnable consideration
Accounts payable and accrued liabilities
Deferred tax liabilities
Goodwill on acquisition
Consideration paid and payable
Cash consideration
Common shares
Acquisition consideration payable
Additional Disclosures
Revenues earned since acquisition date
Net income (loss) since acquisition date
339
193
—
12,817
—
(476)
(3,204)
3,204
12,873
5,175
7,698
—
12,873
1,774
578
997
583
2,997
—
200
(1,488)
(794)
8,935
11,430
1,740
—
9,690
11,430
421
(3,603)
1,336
776
2,997
12,817
200
(1,964)
(3,998)
12,139
24,303
6,915
7,698
9,690
24,303
2,195
(3,025)
The common shares of the Company issued for the Toscana Companies acquisition are held in escrow and will be released to the Toscana
Companies vendors between July 3, 2012 and July 3, 2015.
Fund management contracts were acquired as part of these business acquisitions and are recognized as intangible assets with finite and
indefinite lives. The goodwill acquired of $12.1 million, which is not tax deductible, relates to the expected synergies and/or intangible assets
that do not qualify for separate recognition. The acquisitions are expected to provide benefits across the organization through the sharing
of intellectual capital and the development of new products. Both acquisitions provide further diversification to the Company's product
line by introducing specialty income strategies to investors.
The acquisition consideration payable for the Flatiron acquisition included $4.9 million of units of the Sprott Strategic Yield Trust ("Trust")
which were purchased by the Company and are payable to the vendors on August 1, 2015, subject to a minimum AUM test relating to the
finite life fund management contracts acquired and future fund management contracts developed. The units of the Trust are included in
the Company's proprietary investments at fair value (see note 4).
The acquisition consideration payable for the Flatiron acquisition also reflects the Company's obligation to issue common shares of the
Company on August 1, 2015, subject to a minimum Assets Under Management ("AUM") test relating to the finite life fund management
contracts acquired and future fund management contracts developed.
46
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
The obligation by the Company to transfer the units of the Trust and to issue common shares of the Company to the Flatiron vendors is
reflected as acquisition consideration payable and is stated at fair value. Management has concluded that the Company will not be required
to (i) transfer the units of the Trust and (ii) issue common shares of the Company to the Flatiron vendors as it relates to the acquisition
consideration payable in connection with the acquisition of Flatiron (see below and see note 6, note 7 and note 17).
The contingent returnable consideration asset of $0.2 million that forms part of the acquisition price of Flatiron provides the Company
with the ability to reduce a portion of the remaining acquisition price (i.e. acquisition consideration payable) based on the expected AUM
of Flatiron on August 1, 2015. The fair value of the contingent returnable consideration asset can change to reflect the most recent information
available to management as it relates to the projected AUM of Flatiron with any changes to the value of the contingent returnable consideration
asset being reflected in other income on the consolidated statements of income.
In late 2012, management concluded that the finite life fund management contracts and goodwill associated with the Flatiron acquisition
were impaired. As a result, the Company recorded a full impairment for the value of both the finite life fund management contracts and
goodwill at that time. In addition, management concluded that the AUM of Flatiron at August 1, 2015 would be nominal and reflected this
conclusion by revaluing the contingent returnable consideration asset to equal the value of the acquisition consideration payable as at
December 31, 2012 and netted the contingent returnable consideration asset with the acquisition consideration payable (see note 6, note 7
and note 17).
Transaction costs associated with the acquisitions totaling approximately $0.4 million are included in general and administrative expenses
for the year.
For the periods of operations up to the acquisition dates for Flatiron and the Toscana Companies, both of Flatiron and the Toscana Companies
were private companies and as a result had transactions that were not representative of their current operations as wholly-owned subsidiaries
of the Company. As a result, it is not practical or meaningful to report what the Company's net income would have been if the acquisitions
of Flatiron and the Toscana Companies occurred on January 1, 2012.
Global Companies
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. On February 6, 2012, 177,500 of the committed additional
common shares were issued 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 of the Global Companies using the acquisition method and the results of operations have been
consolidated from the date of the transaction.
Fund management contracts and carried interests were acquired as part of this business acquisition and are recognized as intangible assets
with a finite life. Amortization is computed on a straight-line basis over the estimated useful lives of these assets, which is 7 years for both
fund management contracts and carried interests (approximately 5 years remaining). The goodwill acquired of $122.1 million, which is not
tax deductible, relates to the expected synergies and/or intangible assets that do not qualify for separate recognition.
4.
PROPRIETARY INVESTMENTS
Proprietary investments consist of the following ($ in thousands):
Gold bullion
Silver bullion
Public equities and share purchase warrants
Mutual funds and hedge funds
Private equities
Secured notes receivable
Total proprietary investments
December 31, 2012
December 31, 2011
8,548
—
17,979
29,126
4,949
16,122
76,724
13,305
9,776
22,101
14,936
2,400
15,966
78,484
47
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
As at December 31, 2012, investments in public equities and share purchase warrants consisted primarily of companies in the resource
sector. These investments include $13.6 million (December 31, 2011 - $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 mostly of investments in mutual funds and hedge funds managed by SAM or RCIC.
Investments in mutual funds and hedge funds include $4.5 million that may be payable to the Flatiron vendors as a result of the Flatiron
acquisition. Management does not expect to pay any of the $4.5 million in connection with the acquisition of Flatiron (see note 3, note 6
and note 17).
5.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following ($ in thousands):
Artwork
Furniture and
fixtures
Computer
hardware and
software
Leasehold
improvements
Total
Cost
At December 31, 2010
Business acquisition
Additions
Net exchange differences
December 31, 2011
Business acquisitions
Additions, net of disposals
December 31, 2012
Accumulated amortization
At December 31, 2010
Business acquisition
Charge for the period
Net exchange differences
December 31, 2011
Business acquisitions
Disposals
Charge for the period
Net exchange differences
December 31, 2012
Net Book Value at:
December 31, 2011
December 31, 2012
1,691
—
—
—
1,691
6
310
2,007
—
—
—
—
—
—
—
—
—
—
1,751
291
506
9
2,557
189
156
2,902
1,155
169
444
5
1,773
171
105
2,049
3,104
15
1,619
1
4,739
72
2,469
7,280
(1,346)
(1,061)
(1,589)
(250)
(280)
(3)
(150)
(237)
(10)
(12)
(695)
(1)
(1,879)
(1,458)
(2,297)
(120)
—
(291)
8
(161)
—
(311)
5
(45)
72
(502)
1
(2,282)
(1,925)
(2,771)
1,691
2,007
678
620
315
124
2,442
4,509
7,701
475
2,569
15
10,760
438
3,040
14,238
(3,996)
(412)
(1,212)
(14)
(5,634)
(326)
72
(1,104)
14
(6,978)
5,126
7,260
48
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following ($ in thousands):
Fund
management
contracts -
indefinite
life
Fund
management
contracts -
finite life
Goodwill
Carried
interests
Deferred
sales
commissions
Total
Cost
At December 31, 2010
Business acquisitions
Additions
Net exchange differences
December 31, 2011
Business acquisitions
Net additions
Net exchange differences
At December 31, 2012
—
1,370
—
—
122,129
—
3,601
125,730
12,140
—
(3,195)
—
—
—
1,370
12,817
140
—
20,399
28,821
—
602
21,001
2,997
—
(534)
—
850
29,671
—
1,469
(754)
134,675
14,327
23,464
30,386
Accumulated amortization and impairment
losses
At December 31, 2010
Amortization charge for the year
Impairment charge for the year
Net exchange differences
December 31, 2011
Amortization charge for the year
Net impairment charge for the year
Net exchange differences
At December 31, 2012
—
—
—
—
—
—
(8,935)
—
(8,935)
—
—
—
—
—
—
—
—
—
—
(2,665)
(2,048)
(76)
(4,789)
(2,922)
(999)
78
—
(3,765)
(5,633)
(94)
(9,492)
(3,615)
(3,727)
416
1,011
—
2,122
—
3,133
—
1,207
—
4,340
(180)
(789)
—
—
(969)
(1,245)
—
—
2,381
171,349
2,122
5,053
180,905
27,954
2,816
(4,483)
207,192
(180)
(7,219)
(7,681)
(170)
(15,250)
(7,782)
(13,661)
494
(8,632)
(16,418)
(2,214)
(36,199)
Net Book Value at:
December 31, 2011
December 31, 2012
Net Book Value
Intangibles
Goodwill
125,730
1,370
16,212
20,179
125,740
14,327
14,832
13,968
2,164
2,126
165,655
170,993
December 31, 2012
December 31, 2011
45,253
125,740
170,993
39,925
125,730
165,655
49
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
Included in net impairment charge for the year are impairment charge reversals of $1.8 million for finite life fund management contracts
(2011 - $nil) and $7.8 million for carried interests (2011 - $nil).
As a result of the acquisition of the Global Companies by the Company in 2011, intangible assets consisting of fund management contracts
with a finite life and carried interests were identified. Amortization is computed on a straight-line basis based on the estimated useful lives
of these assets, which is 7 years for both fund management contracts and carried interests (5 years remaining).
As a result of the acquisitions of Flatiron and the Toscana Companies in 2012, intangible assets consisting of fund management contracts
with finite and indefinite lives were identified. Amortization on the finite life fund management contracts is computed on a straight-line basis
based on the estimated useful lives of these assets, which is approximately 8 years.
The Company evaluates goodwill and indefinite life fund management contracts for impairment annually or more often if events or
circumstances indicate there may be impairment. These intangible assets would be impaired if the carrying value of a cash-generating unit
including the allocated intangible assets exceeds its recoverable amount determined as the greater of the estimated fair value less costs to
sell or value in use.
Cash-generating units
The Company has five cash-generating units ("CGU") for the purpose of assessing the carrying value of the allocated goodwill, being SAM,
Global Companies, Corporate and Other (includes two CGUs) operating segments as described in note 15.
i.
Impairment testing of goodwill
As at December 31, 2012, the Company had goodwill allocated across its CGUs as follows ($ in millions):
CGU
SAM
Global Companies
Corporate
SC
SPW
Allocated Goodwill
19.3
95.6
—
3.2
7.6
125.7
During fiscal 2012, $12.1 million of goodwill was identified as a result of the Flatiron and Toscana Companies acquisitions. Of
this amount, $3.2 million was allocated to the SC CGU and the remainder to the SAM CGU.
The recoverable amount of goodwill for each of the CGUs was calculated in the fourth quarter of fiscal 2012 at fair value less
costs to sell, using a valuation multiple applied to a measure of earnings, other than the Global Companies which used a discounted
cash flow valuation technique.
These methodologies are commonly used in the marketplace by independent equity research analysts.
The Global Companies' recoverable amount is valued at $111.2 million (2011 - $162.1 million) which is $15.6 million greater
(2011 - $18.9 million greater) than its carrying value.
The key assumptions adopted by management in its cash flows for determining the recoverable amount of the Global Companies'
goodwill are as follows:
i.
creation of approximately $100 million per year over the next 10 years of finite life funds, each with a fixed 10-year
term without the possibility of asset redemptions, consistent with current and historical asset raises and terms;
ii.
approximately 56% of existing finite life funds extend their respective terms for another 10 years;
iii.
annual rates of return for the finite life funds of 15.8%, consistent with historical returns of similar existing products;
iv.
v.
growth in assets under administration of approximately $65 million per year over the next 5 years with a terminal
growth rate of 6%;
annual rates of return of 10%, consistent with historical returns of existing broker client accounts, offset by a historical
redemption rate of 8%;
vi. discount rates ranging between 12.0% and 27.5%
Cash flow projections for the broker business use approved 3-year internal forecasts and extrapolate the next 2 years before
determining a terminal value. For the finite life funds, a 20-year cash flow projection is necessary as each fund launched has a
10-year life and a calculated terminal value under this set of facts would be misleading.
50
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
A decrease in the annual rate of return for the finite life funds by 3.9% to 12.9% would result in the Global Companies' recoverable
amount equaling its carrying value. It is not determinable the effect that this change would have on the other key assumptions,
if any.
The calculation of the recoverable amounts exceeded the carrying amount of goodwill for each of the identified CGUs.
Subsequent to the assessment during the fourth quarter of fiscal 2012, management concluded that there were indicators of
impairment that required management to reassess the recoverable amount of goodwill allocated to the SAM CGU. As a result,
the goodwill identified as part of the Flatiron acquisition (see note 3) of $8.9 million was determined to be fully impaired and
charged against income on the consolidated statements of income for the year ended December 31, 2012 (see note 3, note 7
and note 17).
ii.
Impairment testing of indefinite life fund management contracts
As at December 31, 2012 the Company had indefinite life fund management contracts within the SAM CGU of $1.5 million
(December 31, 2011 - $1.4 million) and within the SC CGU of $12.8 million (December 31, 2011 - $nil). These are contracts
for the management of exchange listed funds which have no expiry or termination provisions and for the fund management
contracts identified as a result of the acquisition of the Toscana Companies.
The recoverable amount of indefinite life intangibles for the SAM operating segment as at December 31, 2012 and December 31,
2011 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 recoverable amount of indefinite life intangibles for the Other operating segment as at December 31, 2012 and December 31,
2011 has been determined from a value in use calculation, by discounting, at 11.5% to 12.5%, a perpetuity based on the most
recent estimated pre-tax cash flows to the Company by the applicable underlying fee-producing products.
The calculation of the recoverable amounts exceeds the carrying amount of indefinite life fund management contracts as at
December 31, 2012 and December 31, 2011.
iii.
Impairment testing of finite life fund management contracts
As at December 31, 2012, the Company had finite life fund management contracts of $14.8 million within the Global Companies
CGU (December 31, 2011 - $16.2 million). 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, 2012 has been determined from a
value in use calculation, by discounting, at 13.5%, the most recent estimated net cash flows to the Company by these funds.
The calculated recoverable amount of these fund management contracts exceeds its carrying value, however under IFRS, no
upward adjustment has been made to the carrying value as to do so would value the fund management contracts in excess of
what the carrying value would have been in the absence of prior impairment losses. Management has assumed an annual return
rate of 15.8% for these funds to fair value these cash flows. A decrease in this rate of return by 5.4% to 10.4% would result in
the recoverable amount of these finite life fund management contracts equaling the carrying amount.
The underlying inputs and assumptions that determine the recoverable amount of the finite life fund management contracts for
the Global Companies CGU are related to the resource sector and commodity prices which can exhibit significant volatility. As
a result, the recoverable amount of these finite life fund management contracts may demonstrate significant fluctuations in value
from quarter to quarter.
The calculation of the recoverable amounts exceeds the carrying amount of finite life fund management contracts by
approximately $2.7 million as at December 31, 2012 (December 31, 2011 - nominal).
In 2012, finite life fund management contracts of $3.0 million were identified as part of the Flatiron acquisition (see note 3) and
allocated to the SAM CGU. Subsequent to the acquisition, management concluded that there were indicators of impairment that
required management to reassess the recoverable amount of finite life fund management contracts allocated to the SAM CGU.
As a result, the finite life fund management contracts identified as part of the Flatiron acquisition (see note 3) of $3.0 million
were determined to be fully impaired and charged against income on the consolidated statements of income for the year ended
December 31, 2012 (see note 3, note 7 and note 17).
51
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
iv.
Impairment testing of finite life carried interests
As at December 31, 2012, the Company had carried interests of $14.0 million within the Global Companies CGU (December 31,
2011 - $20.2 million). 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, 2012 has been determined from
a value in use calculation, by discounting, at 27.5%, the most recent estimated net cash flows to the Company by these funds.
The calculated recoverable amount of these carried interests led to a recognition of an impairment loss of $3.7 million for the
year ended December 31, 2012 (December 31, 2011 - $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 15.8% for these funds to fair value these cash flows.
The underlying inputs and assumptions that determine the recoverable amount of carried interests are related to the resource
sector and commodity prices which can exhibit significant volatility. As a result, the recoverable amount of carried interests may
demonstrate significant fluctuations in value from quarter to quarter.
The calculation of the recoverable amount exceeds the carrying value of carried interests by approximately $1.2 million as at
December 31, 2012 (December 31, 2011 - nominal).
7. OTHER ASSETS AND OTHER INCOME
Other assets consist of the following ($ in thousands):
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,
foreign exchange gains and losses, dividend income and redemption fee revenue. For 2012 only, other income also includes approximately
$9.1 million mark-to-market adjustments relating to a portion of the acquisition consideration payable and to the contingent returnable
consideration asset as part of the Flatiron acquisition (see note 3, note 6 and note 17).
52
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
8.
SHAREHOLDERS' EQUITY
a.
Capital stock and contributed surplus
The authorized and issued share capital of the Company consists of an unlimited number of common shares, without par value.
At December 31, 2010
Issuance of share capital on business acquisition (Note 3)
Acquired for equity incentive plan
At December 31, 2011
Additional purchase consideration (Note 3)
Issuance of share capital on business acquisition (Note 3)
Acquired for equity incentive plan
At December 31, 2012
Contributed surplus consists of the following:
i.
ii.
stock option expense;
equity incentive plans' expense;
iii.
earn-out shares expense; and
iv.
additional purchase consideration.
At December 31, 2010
Expensing of 2,650,000 Sprott Inc. stock options over the vesting period
Expensing of earn-out shares over the vesting period
Deferred tax asset on earn-out shares
Additional purchase consideration
Excess on repurchase of common shares for equity incentive plan *
At December 31, 2011
Expensing of 2,650,000 Sprott Inc. stock options over the vesting period
Expensing of EPSP / EIP shares over the vesting period
Expensing of earn-out shares over the vesting period
Deferred tax asset on earn-out shares
Issuance of shares relating to additional purchase consideration
Excess on repurchase of common shares for equity incentive plan *
At December 31, 2012
Number of shares
Stated value
($ in thousands)
150,000,000
19,467,500
(385,423)
169,082,077
177,500
1,564,500
(1,774,400)
169,049,677
40,105
168,783
(475)
208,413
1,551
7,698
(2,188)
215,474
Stated value
($ in thousands)
32,406
476
3,915
1,506
4,753
(2,199)
40,857
98
6,667
4,342
336
(1,671)
(7,821)
42,808
* 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.
53
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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 stock options issued during the year ended December 31, 2012 (nil - December 31, 2011).
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, 2010
Options exercisable, December 31, 2010
Options outstanding, December 31, 2011
Options exercisable, December 31, 2011
Options outstanding, December 31, 2012
Options exercisable, December 31, 2012
Number of options
(in thousands)
Weighted average
exercise price
($)
2,650
1,633
2,650
2,517
2,650
2,583
9.71
10.00
9.71
9.90
9.71
9.80
Options outstanding and exercisable as at December 31, 2012 are as follows:
Exercise price ($)
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
5.3
7.0
7.9
5.5
2,450
33
100
2,583
54
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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 4 thousand RSUs issued during the year ended December 31, 2012 (nil - December 31, 2011). The Trust purchased 1.8
million common shares for the year ended December 31, 2012 (0.4 million - December 31, 2011).
Common shares held by the Trust, December 31, 2010
Acquired
Released on vesting
Common shares held by the Trust, December 31, 2011
Acquired
Released on vesting
Common shares held by the Trust, December 31, 2012
Earn-out shares
Number of common
shares
—
385,423
—
385,423
1,774,400
—
2,159,823
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 required the Company to estimate the fair value of the potential share-based award on the business acquisition date. The
fair value determined 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.
In connection with the acquisition of the Toscana Companies (see note 3), up to an additional 0.9 million common shares of the Company
may be issued with the achievement of certain earnings targets by the Toscana Companies. In accordance with IFRS 2 Share-based Payment,
this potential award carries a service condition with a market performance condition of equal term. As a result, the accounting guidance
under IFRS 2 required the Company to initially estimate the number of equity instruments expected to ultimately vest and to assess the
fair value of the equity instrument on the grant date. The fair value for each equity instrument was determined to be $3.99 using an
acceptable valuation model that utilized several significant assumptions including the probability of future dividends, options pricing
and discounts for lock-up restrictions. In addition, the valuation model contemplated cash flow assumptions related to future AUM
levels and cumulative earnings. The fair value of this share-based award is being charged to the consolidated statements of income over
the period of the service condition, being 3 years and is adjusted each reporting period to reflect the best available estimate of the number
of equity instruments expected to ultimately vest.
55
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
In connection with the acquisition of Flatiron (see note 3), up to an additional 1.2 million common shares of the Company may be
issued with the achievement of certain earnings targets by Flatiron. In accordance with IFRS 2 Share-based Payment, this potential award
carries a service condition with a market performance condition of equal term. As a result, the accounting guidance under IFRS 2
required the Company to initially estimate the number of equity instruments expected to ultimately vest and to assess the fair value of
the equity instrument on the grant date. The fair value for each equity instrument was determined to be $3.82 using an acceptable
valuation model that utilized several significant assumptions including the probability of future dividends, options pricing and discounts
for lock-up restrictions. In addition, the valuation model contemplated cash flow assumptions related to future AUM levels and cumulative
earnings. The fair value of this share-based award is being charged to the consolidated statements of income over the period of the
service condition, being 3 years and is adjusted each reporting period to reflect the best available estimate of the number of equity
instruments expected to ultimately vest.
Management does not expect to issue any of the additional 1.2 million common shares in connection with the acquisition of Flatiron
(see note 3, note 6 and note 17).
Additional purchase consideration
In connection with the acquisition of the Global Companies (see note 3), an additional 532,500 common shares of the Company were
committed for issuance to employees of the Global Companies. The common shares were not considered compensation but formed
part of the business acquisition. This additional consideration was 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
will be credited to capital stock. On February 6, 2012, 177,500 common shares of the Company were issued to employees of the Global
Companies.
For the year ended December 31, 2012, the Company recorded share-based compensation expense of $11.1 million (2011 - $4.4 million)
with a corresponding increase to contributed surplus ($ in thousands).
Earn-out shares
Stock option plan
EPSP / EIP
For the year ended
December 31, 2012
December 31, 2011
4,342
98
6,667
11,107
3,915
476
—
4,391
56
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
b.
Basic and diluted earnings per share
The following table presents the calculation of basic and diluted earnings per common share:
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
Weighted average number of outstanding Restricted Stock Units
For the year ended
December 31, 2012
December 31, 2011
31,984
33,038
170,402
(1,683)
168,719
—
372
1,683
4
167,601
(36)
167,565
48
464
36
—
Weighted average number of common shares - diluted
170,778
168,113
Net income per common share
Basic
Diluted
$
$
0.19 $
0.19 $
0.20
0.20
* The determination of the weighted average number of common shares - diluted excludes 2.6 million shares related to stock options that were
anti-dilutive for the year ended December 31, 2012 respectively (2.45 million for the year ended December 31, 2011)
57
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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 26, 2013 *
Additional purchase consideration
Options to purchase shares
Earn-out shares **
Restricted Stock Units
178,964
178
2,650
8,936
3
190,730
*
178 thousand shares of additional purchase consideration and 1 thousand shares on the conversion of RSUs were issued on February 4, 2013.
On March 13, 2013, a further 7.6 million shares were issued pursuant to a private placement.
** Includes shares issuable as a result of the Global Companies and Toscana Companies acquisitions. No shares have been provided for as a result
of the Flatiron acquisition (see note 3, note 6 and note 17).
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 the US Securities and Exchange Commission, Flatiron is a registrant of the
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, 2012, all entities were in compliance with their respective capital requirements.
Effective January 15, 2013, Flatiron voluntarily surrendered its registrations with the OSC.
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.
Effective September 24, 2012, the Company entered into a new revolving credit facility with a Canadian chartered bank. The amount that
may be borrowed under this facility is $50 million. Amounts may be borrowed under the facility through prime rate loans, which bear interest
at the bank's prime rate, or bankers' acceptances, which bear interest at bankers' acceptance rates plus 1.375%. Amounts may also be borrowed
in U.S. dollars through base rate loans, which bear interest at the greater of the bank's reference rate for loans made by it in Canada in U.S.
funds and the federal funds effective rate plus 1.00%, or LIBOR loans which bear interest at LIBOR plus 1.375%.
Loans are made by the bank under a two year revolving credit facility, the term of which may be extended annually at the bank's option. If
the bank elects not to extend the term, all outstanding principal, interest and fees are due at the maturity date.
The credit facility is fully and unconditionally guaranteed by SAM, a wholly-owned subsidiary of the Company. 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, which require that the funded debt to Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") ratio remain below 2:1, the funded debt to SAM EBITDA ratio remain below 1.5:1 and that
the Company's AUM not fall below $7 billion, calculated on the last day of each calendar month. There can be no assurance that future
borrowings or equity financing will be available to the Company or available on acceptable terms.
The Company has not drawn on the credit facility as at December 31, 2012.
58
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
9.
INCOME TAXES
The major components of income tax expense are as follows ($ 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 statements of income
December 31, 2012
December 31, 2011
20,075
(1,491)
18,584
(9,105)
245
(8,860)
9,724
21,980
(912)
21,068
(10,098)
(39)
(10,137)
10,931
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, 2012
December 31, 2011
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) loss
Rate differences and other
Tax charge
41,708
10,270
1,144
(131)
(446)
(1,113)
9,724
43,969
10,105
1,130
786
(170)
(920)
10,931
During the year ended December 31, 2012, the Company recognized a tax refund relating to a prior year of approximately $2.0 million.
The weighted average applicable tax rate was 24.6% (2011 - 23.0%). The increase is caused by a change in the profitability of the Company's
subsidiaries in the respective countries because of the addition of the Global Companies resident in the US.
59
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The movement in significant components of the Company's deferred
income tax assets and liabilities is as follows ($ in thousands):
For the year ended December 31, 2012
At December
31, 2011
Recognized in
income
Recognized in
other
comprehensive
income
Recognized in
contributed
surplus
Business
acquisition
At December
31, 2012
Deferred income tax liabilities
Fund management contracts
Carried interests
Deferred sales commissions
Unrealized gains
Transitional partnership income *
Other
Total deferred income tax
liabilities
Deferred income tax assets
Unrealized losses
Additional purchase consideration
Earn-out shares
Other stock-based compensation
Other
6,947
8,223
562
1,257
10,563
—
(1,191)
(2,992)
2
(578)
(918)
(208)
(145)
(138)
—
—
—
—
27,552
(5,885)
(283)
14,684
1,936
1,528
—
618
1,092
(634)
—
1,769
748
2,975
8,860
(295)
(44)
(43)
—
(20)
(402)
(119)
—
—
—
—
—
—
—
—
—
314
—
—
314
314
4,035
—
—
—
—
—
9,646
5,093
564
679
9,645
(208)
4,035
25,419
—
—
—
—
—
—
15,481
1,258
1,799
1,769
1,346
21,653
(4,035)
(3,766)
Total deferred income tax assets
18,766
Net deferred income tax assets
(liabilities)
(8,786)
* The balance at December 31, 2011 has been adjusted by $10,563 to reflect the change in tax policy issued by the Ministry of Finance that eliminated the
Company's ability to defer tax payable on earnings of its operating limited partnerships. This amount was previously included in the Company's income
taxes payable at December 31, 2011.
60
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
For the year ended 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
At December
31, 2010
Recognized in
income
Recognized in
other
comprehensive
income
Recognized in
contributed
surplus
Business
acquisition
December 31,
2011
342
—
210
1,308
1,860
(1,921)
(3,829)
352
(51)
(5,449)
214
309
—
—
523
460
55
22
19
556
33
—
—
—
—
—
—
—
1,506
—
1,506
1,506
8,312
11,743
—
—
6,947
8,223
562
1,257
20,055
16,989
8,200
1,881
—
—
10,081
14,684
1,936
1,528
618
18,766
(9,974)
1,777
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
The Company has unused foreign accrual property losses of approximately $13.8 million (2011 - $19.1 million) which have not been
recognized and expire in 2015, as it is not probable that taxable profits will be available against which they can be utilized.
As at December 31, 2012, the Company had approximately $5.4 million of unused capital losses realized on the disposition of a subsidiary
by means of a dividend-in-kind and do not expire.
61
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
10. FINANCIAL INSTRUMENTS
IFRS 7 Financial Instruments: Disclosures as issued by the IASB requires disclosure of a three-level hierarchy for fair value measurement based
upon transparency of inputs to the valuation of an asset or liability as of the measurement date.
The following tables present the level within the fair value hierarchy for each of the financial assets and liabilities carried at fair value ($ in
thousands):
December 31, 2012
Level 1
Level 2
Level 3
Total
Financial instruments at fair value
Cash and cash equivalents
Public equities
Private equities
Common share purchase warrants
Mutual funds
Hedge funds
Contingent returnable consideration *
Acquisition consideration payable *
Total
77,400
17,179
—
—
16,009
—
3,918
(3,918)
110,588
—
261
—
539
—
13,117
4,456
(4,456)
13,917
—
—
4,949
—
—
—
—
—
4,949
77,400
17,440
4,949
539
16,009
13,117
8,374
(8,374)
129,454
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
* these amounts are netted on the consolidated balance sheets
The following tables provides a summary of changes in the fair value of Level 3 financial assets for the years ended December 31, 2012 and
2011 ($ in thousands):
Changes in the fair value of Level 3 financial instruments - 2012
December 31,
2011
Purchases
Settlements
Net unrealized
losses included
in net income
Net realized
gains and
losses included
in net income
December 31,
2012
Private equities
2,400
2,550
—
(1)
—
4,949
Changes in the fair value of Level 3 financial instruments - 2011
December 31,
2010
Purchases
Settlements
Net unrealized
gains included
in net income
Net realized
gains and
losses included
in net income
December 31,
2011
Private equities
1,881
49
—
470
—
2,400
62
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
During the year ended December 31, 2012, $0.2 million of financial assets was transferred from Level 2 to Level 1. This transfer represented
the expiry of the trading restriction on the common shares of certain proprietary investments.
Financial instruments not carried at fair value
For fees receivable, other assets, accounts payable and accrued liabilities and compensation and employee bonuses payable, the carrying
amount represents a reasonable approximation of fair value due to their short term nature.
Secured notes receivable are classified as held to maturity and carried at amortized cost as management has no intention of disposing these
financial instruments before maturity.
11. RELATED PARTY TRANSACTIONS
The remuneration of directors and other key management personnel of the Company for employment services rendered are as follows ($
in thousands):
Fixed salaries and benefits
Variable incentive-based compensation
Share-based compensation
For the year ended
December 31, 2012
December 31, 2011
3,597
10,179
1,123
14,899
4,511
15,587
243
20,341
On May 8, 2012, the Company adopted a deferred stock unit ("DSU") plan for the independent directors of the Company. The DSUs vest
annually over a three-year period and may only be settled in cash upon retirement. There were 225,000 DSUs issued at a price of $4.64 per
DSU during the year ended December 31, 2012 (nil - December 31, 2011). The resulting expense is included in general and administrative
costs and is recognized over the three-year vesting period with an offset to accrued liabilities.
12. DIVIDENDS
The following dividends were declared and payable by the Company during the year ended December 31, 2012:
Record date
April 5, 2012 - regular dividend Q4 - 2011
May 18, 2012 - regular dividend Q1 - 2012
August 17, 2012 - regular dividend Q2 - 2012
November 22, 2012 - regular dividend Q3 - 2012
Dividends paid
Payment Date
Cash dividend per
share ($) *
Total dividend
amount ($ in
thousands)
April 20, 2012
June 1, 2012
September 4, 2012
December 4, 2012
0.03
0.03
0.03
0.03
* Dividends have been designated as eligible dividends by the Company pursuant to the guidelines issued by the Canada Revenue Agency.
5,073
5,082
5,129
5,129
20,413
63
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
13. COMMITMENTS
Future minimum annual rental payments under non-cancellable leases, including operating costs, are as follows ($ thousands):
2013
2014
2015
2016
2017
Thereafter
3,673
3,753
3,767
4,021
4,036
23,771
43,021
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 $2.3 million for the year ended December 31, 2012 (December 31, 2011
- $1.7 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 $0.4 million for the year ended December 31, 2012 (December 31, 2011 - $1.0 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.
The Company, through its wholly-owned subsidiary, SAMGENPAR Ltd., has invested approximately $15.8 million in secured
notes bearing a weighted average interest rate of 9.45% 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 they are carried at HTM and
management intends and has the ability to hold these investments to maturity.
64
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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.
Excluding the impact of the Global Companies, as at December 31, 2012, approximately $16.1 million or 4.5% (December 31,
2011 - $26.7 million or 7.1%) of total assets were invested in proprietary investments priced in U.S. dollars (“USD”). Furthermore,
a total of $2.1 million (December 31, 2011 - $1.0 million) of cash, $0.2 million (December 31, 2011 -$0.5 million) of accounts
receivable and $0.4 million (December 31, 2011 - $0.2 million) of other assets were denominated in USD. As at December 31,
2012, 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 for the year ended December 31,
2012 would have amounted to approximately $0.8 million (December 31, 2011 - $1.2 million).
As it relates to the Global Companies impact on the Company, had the exchange rate as at December 31, 2012 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 $8.2 million, respectively.
(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, 2012, the Company's most
significant counterparty is National Bank Correspondent Network Inc. ("NBCN"), the carrying broker of SPW, which also acts as a
custodian for most of the Company's proprietary investments. NBCN 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,
2012, the Global Companies' most significant counterparty is RBC Capital Markets (“RBC Capital”), the carrying broker of GRIL
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, 2012, the Company had $77.4 million or 20.6% of its total assets in cash and cash equivalents. The majority of current
assets reflected on the consolidated balance sheets are highly liquid. Approximately $46.3 million or 60.3% 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.
65
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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.
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.
The results of Flatiron are included in the SAM segment. The results of the Toscana Companies are included in the Other segment.
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 of
(i) 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):
66
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
For the year ended
December 31, 2012
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 and impairment of
intangibles, property and equipment
Total expenses
Income (loss) before income taxes
for the period
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
99,535
4,401
—
10,160
114,096
43,572
27,134
13,986
84,692
9,552
—
9,645
101
19,298
16,366
—
8,395
24,761
—
—
—
5,367
5,367
4,941
—
116
5,057
9,427
5,554
3,861
8,844
27,686
10,179
—
50
—
—
—
(8,293)
(8,293)
(189)
(8,104)
—
10,229
(8,293)
29,404
(5,463)
310
17,457
—
29,404
4,885
34,289
(46)
34,243
(5,463)
12,754
7,291
(43)
7,248
310
215
525
(2,755)
(2,230)
17,457
50
17,507
(4,288)
13,219
—
—
—
—
—
118,514
9,955
13,506
16,179
158,154
74,869
19,030
22,547
116,446
41,708
9,724
31,984
41,708
17,904
59,612
(7,132)
52,480
67
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
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 and impairment 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
Inter-segment revenues are eliminated upon consolidation and reflected in the "Adjustments and Eliminations" column.
Included in Other revenue is trailer fee income of $8.1 million for the year ended December 31, 2012 (December 31, 2011 - $11.3 million)
which reflects substantially all of the Company's inter-segment revenue.
Included in Amortization and impairment of intangibles, property and equipment for the Global Companies segment are impairment losses
of $1.9 million on finite life intangible and carried interest assets for the year ended December 31, 2012 (December 31, 2011 - $7.7 million).
Included in Amortization and impairment of intangibles, property and equipment for the SAM segment are impairment losses of $11.8
million on finite life intangible and goodwill assets for the year ended December 31, 2012 (December 31, 2011 - $nil).
68
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
For geographic reporting purposes, transactions are primarily recorded in the location that corresponds with the entity's country of domicile
that generates the revenue. The following table presents the revenue of the Company by geographic location ($ in thousands):
For the year ended
Canada
United States
16. PROVISIONS
December 31, 2012 December 31, 2011
138,856
19,298
158,154
141,215
20,037
161,252
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.
17. EVENTS AFTER THE REPORTING PERIOD
(a) Flatiron
Effective January 11, 2013, the Company and the Flatiron vendors entered into agreements to release the Company from the remaining
purchase price to be paid as contemplated by the acquisition on August 1, 2012. The remaining purchase price is $8.4 million as at
December 31, 2012. The effect of these agreements along with management's assessment of the Flatiron business as at December 31,
2012 are as follows:
•
•
•
•
•
•
the acquisition consideration payable of $8.4 million reflects the fair value of the legal obligation by the Company to pay the
Flatiron vendors;
the contingent returnable consideration asset of $8.4 million reflects the fair value of management's best estimate as to the
amount the Company expects not to pay the Flatiron vendors;
the contingent returnable consideration asset of $8.4 million has been netted against the acquisition consideration payable of
$8.4 million on the consolidated balance sheets;
the effect of the fair value adjustments to the acquisition consideration payable and the contingent returnable consideration asset
resulted in other income of $9.1 million and is included in other income on the consolidated statements of income;
management's estimate as to the value of the goodwill has been written down to $nil with a charge of $8.9 million to the
consolidated statements of income; and,
management's estimate as to the value of the finite life fund management contracts has been written down to $nil with a charge
of $3.0 million to the consolidated statements of income.
There are no expected impacts to the consolidated statements of income for the three months ended March 31, 2013 as a result of the
agreements entered into by the Company and the Flatiron vendors effective January 11, 2013 (see note 3, note 6 and note 7).
(b) Cancellation of Management Services Agreement ("MSA")
On January 29, 2013, the Company announced that it had received notice by Sprott Power Corp. ("SPC") that effective July 31, 2013 the
MSA between SPC and Sprott Power Consulting Limited Partnership, a subsidiary of the Company, will be terminated. The loss of the
ongoing revenue from these operations is not material to the Company. The Company expects to receive a break fee of approximately
$8.5 million of which the Company is expected to retain approximately $2.8 million.
(c) Private Placement
On March 13, 2013, the Company completed a private placement of 7.6 million common shares at $3.30 per common share raising net
proceeds of $24.5 million for the Company. The common shares were issued to an institutional investor.
(b) Dividend
On March 26, 2013, a dividend of $0.03 per common share was declared for the quarter ended December 31, 2012.
69
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2012 and 2011
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended December 31 ($ in thousands of Canadian dollars, except for per share amounts)
2012
2011
Revenue
Management fees
Performance fees
Commissions
Unrealized and realized losses on proprietary investments
Other income
Total revenue
Expenses
Compensation and benefits
Stock-based compensation
Trailer fees
General and administrative
Donations
Amortization of intangibles
Impairment of goodwill and intangibles
Amortization of property and equipment
Total expenses
Income before income taxes for the period
Provision for (recovery of) income taxes
Net income for the period
Basic and diluted earnings per share
29,242
9,769
3,303
(1,789)
10,024
50,549
7,616
2,807
4,628
9,044
174
1,936
19,622
275
46,102
4,447
1,150
3,297
$
0.02 $
33,700
2,528
2,861
(1,963)
987
38,113
10,774
1,135
5,816
6,203
243
2,070
7,681
364
34,286
3,827
(798)
4,625
0.03
70