Sprott Inc. Annual Report 2014
25MAR201420550178
26MAR201401094189
Table of Contents
Letter to Shareholders
Management's Discussion and Analysis
Management's Responsibility for Financial Reporting
Independent Auditors' Report
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
2
3
32
33
34
39
1
March 5, 2015
Dear Shareholders,
In many ways, 2014 was a year of transition for Sprott. Although our assets under management (“AUM”) remained largely unchanged from the end
of 2013 at $7.0 billion, there were meaningful shifts within the composition of our AUM. These changes are reflective of our overall strategy of
growing both our global presence as leading resource investors and our diversified asset management platform in Canada.
On the resource side of the business, we continued to expand our passive product offerings with the successful launch of our first ETF, the Sprott
Gold Miners ETF (“SGDM”). We are pleased with the early results from this new product, which has already grown to more than $275 million in
assets. The SGDM was one of the 10 best ETF launches in the U.S. last year, despite its third quarter launch date and the difficult market for precious
metals investments. We expect to introduce our second ETF, the Sprott Junior Gold Miners ETF, during the second quarter of this year and will
continue to expand this product line in the future.
In Canada, for the first time, our diversified asset management business ended the year with the majority of its actively-managed AUM in non-resource
strategies. This shift was driven by the successful growth of our Enhanced products franchise, as well as the expansion of other areas such as our
specialty lending products.
As we have continued to transition to a team-based approach to investment management, we have made changes to our investment management
team both in Canada and the U.S. Most notably, Eric Sprott recently stepped back from his portfolio management duties to focus on his role as
Chairman of our Board of Directors. Mr. Sprott is our largest shareholder, one of the largest clients in our funds and will continue to act as an
ambassador representing the firm to clients and investors. We thank Mr. Sprott for his exceptional contributions as the founder of our business and
note that we will continue to honor many of his core contrarian philosophies.
In Canada, we added two new portfolio managers to manage the Canadian Equity Fund. We also appointed a new precious metals team to work with
our in-house technical experts to manage our existing gold and precious minerals fund and a new planned gold equity fund, within a rigorous framework.
We have also expanded our presence in the U.S. through an agreement to have veteran portfolio manager Whitney George join Sprott. Mr. George
is bringing two funds to our platform with a combined AUM of approximately $285 million. He will also play a key role in helping to market our
products to U.S. investors.
In recent years, we have built a platform and team to manage a much larger asset base. As such, one of our key priorities for 2015 is to build scale in
all of our products, including our institutional business. This will be achieved through the growth of both existing products and new offerings where
we have a sustainable competitive advantage. We believe we are well positioned as an independent asset manager with a deep pool of investment
talent capable of supporting organic growth. We will continue to protect our strong balance sheet, with its associated capabilities to seed new products
and pursue domestic and international growth opportunities. We are confident in our positioning and are committed to delivering strong results during
all market conditions.
Thank you for your continued support and we look forward to reporting to you on our progress in the quarters ahead.
Sincerely,
Peter Grosskopf
Chief Executive Officer
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion & Analysis (“MD&A”) of financial condition and results of operations, dated March 4, 2015, presents an analysis of
the consolidated financial condition of Sprott Inc. (the “Company”) and its subsidiaries as of December 31, 2014 compared with December 31, 2013,
and the consolidated results of operations for the three and twelve months ended December 31, 2014, compared with the three and twelve months
ended December 31, 2013. The Board of Directors approved this MD&A on March 4, 2015. All note references in this MD&A are to the notes to
the Company's 2014 annual consolidated financial statements ("annual financial statements"), unless otherwise noted.
The Company was incorporated under the Business Corporations Act (Ontario) on February 13, 2008.
FORWARD LOOKING STATEMENTS
Certain statements in this MD&A, and in particular the Outlook section, contain forward-looking information (collectively referred to herein as the
“Forward-Looking Statements”) within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", “continue”,
“estimate”, “may”, “will”, “project”, "should", "believe", "plans", “intends” and similar expressions are intended to identify Forward-Looking
Statements. In particular, but without limiting the forgoing, this MD&A contains Forward-Looking Statements pertaining to: (i) management’s
intentions and expectations with respect to the Company’s lending services and financing activities; (ii) expectations relating to the redeployment of
capital from maturing loans; (iii) the continued impact of management of investable capital on the Company’s overall results; (iv) the Company’s
overall strategy of growing its diversified asset management platform in Canada and its presence in resource fund management globally; (v) the
launching of additional resource-focused EFT’s; (vi) the Company’s belief that it is well positioned to grow AUM along a two-pronged strategy
involving: (a) the growth of existing Funds and Managed Companies; and (b) the introduction of new strategies where the Company identifies a
material addressable market opportunity and can develop a meaningfully differentiated investment strategy to address that opportunity; (vii) the
Company’s belief that management fees and interest income will continue to be sufficient to satisfy ongoing operational needs and the Company’s
belief that it holds sufficient cash and liquid securities to meet any other operating and capital requirements; and (viii) the declaration, payment and
designation of dividends.
Although the Company believes that the Forward-Looking Statements are reasonable, they are not guarantees of future results, performance or
achievements. A number of factors or assumptions have been used to develop the Forward-Looking Statements, including: (i) the price of precious
metals will increase; (ii) the resource sector will recover; (iii) the impact of increasing competition in each business in which the Company operates
will not be material; (iv) quality management will be available; (v) the effects of regulation and tax laws of governmental agencies will be consistent
with the current environment; and (vi) those assumptions disclosed herein under the heading “Significant Accounting Judgments and Estimates”.
Actual results, performance or achievements could vary materially from those expressed or implied by the Forward-Looking Statements should
assumptions underlying the Forward-Looking Statements prove incorrect or should one or more risks or other factors materialize, including: (i) difficult
market conditions; (ii) changes in the investment management industry; (iii) risks related to regulatory compliance; (iv) failure to deal appropriately
with conflicts of interest; (v) failure to continue to retain and attract quality staff; (vi) competitive pressures; (vii) corporate growth may be difficult
to sustain and may place significant demands on existing administrative, operational and financial resources; (viii) failure to execute the Company’s
succession plan; (ix) foreign exchange risk relating to the relative value of the U.S. dollar; (x) litigation risk; (xi) employee errors or misconduct could
result in regulatory sanctions or reputational harm; (xii) failure to implement effective information security policies, procedures and capabilities; (xiii)
failure to develop effective business resiliency plans; (xiv) failure to obtain or maintain sufficient insurance coverage on favourable economic terms;
(xv) historical financial information is not necessarily indicative of future performance; (xvi) the market price of common shares of the Company
may fluctuate widely and rapidly; (xvii) those risks described under the heading "Risk Factors" in the Company’s annual information form dated March
4, 2015; and (xviii) those risks described under the headings “Managing Risk - Financial” and “Managing Risk - Other” in this MD&A. In addition,
the payment of dividends is not guaranteed and the amount and timing of any dividends payable by the Company will be at the discretion of the
Board of Directors of the Company and will be established on the basis of the Company’s earnings, the satisfaction of solvency tests imposed by
applicable corporate law for the declaration and payment of dividends, and other relevant factors. The Forward-Looking Statements speak only as
of the date hereof, unless otherwise specifically noted, and the Company does not assume any obligation to publicly update any Forward-Looking
Statements, whether as a result of new information, future events or otherwise, except as may be expressly required by applicable Canadian securities
laws.
3
PRESENTATION OF FINANCIAL INFORMATION
These annual financial statements for the year ended December 31, 2014, including the required comparative information, have been prepared in
accordance with International Financial Reporting Standards ("IFRS").
Financial results, including related historical comparatives contained in this MD&A, unless otherwise specified herein, are based on the annual financial
statements. The Canadian dollar is the Company's functional and reporting currency for purposes of preparing the annual financial statements given
that the Company conducts most of its operations in that currency. Accordingly, all dollar references in this MD&A are in Canadian dollars, unless
otherwise specified. The use of the term "prior period" refers to the quarter-ended and year-to-date ended December 31, 2013 as applicable unless
stated otherwise.
KEY PERFORMANCE INDICATORS (NON-IFRS FINANCIAL MEASURES)
The Company measures the success of its 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 (loss) 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 ("AUM") refers to the total net assets of the Company's public mutual funds, alternative investment strategies 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”), and Toscana Capital Corporation (“TCC”) and Toscana Energy Corporation ("TEC")
(collectively, “Sprott Toscana”) on which management fees, performance fees and/or carried interests are calculated. The Company believes that
AUM is an important measure since it earns management fees, calculated as a percentage of AUM, and may earn performance fees or carried interests,
calculated as a percentage of: (i) Funds', Managed Accounts' and Managed Companies' excess AUM performance over a relevant benchmark; (ii) the
increase in net asset values of Funds over a predetermined hurdle, if any; or (iii) the net profit in Funds over the performance period. The Company
monitors the level of its AUM because it drives the amount of management fees it will earn. The amount of performance fees and carried interests
the Company earns is related to both investment performance and its AUM.
Assets Under Administration
Assets Under Administration ("AUA") refers to client assets held in accounts at Sprott Private Wealth LP ("SPW") or Sprott Global Resource
Investments, Ltd. ("SGRIL"). AUA is a measure used by management to assess the performance of these broker-dealer companies within the group.
Investment Performance (Market Value Appreciation (Depreciation) of Investment Portfolios)
Investment performance is a key driver of AUM. The Company's investment track record through varying economic conditions and market cycles
has been and will continue to be an important factor in its success. Growth in AUM resulting from positive investment performance increases the
value of the assets managed for clients and the Company, in turn, benefits from higher fees. Alternatively, poor absolute and/or relative investment
performance will likely lead to a reduction in AUM, and hence, 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.
4
EBITDA and Adjusted base EBITDA
EBITDA in its most basic form is defined as earnings before interest expense, income taxes, depreciation and amortization. The Company further
adjusts EBITDA ("adjusted base EBITDA") by eliminating the following items to derive a more meaningful measure of its core operations and cash
generating ability: (i) impairment charges or recoveries of prior period impairments on intangible assets and goodwill; (ii) gains and losses on proprietary
investments and loans (however, loan loss provisions on real estate loans and resource loans are not excluded from adjusted base EBITDA); (iii) non-
cash stock-based compensation; and (iv) performance fees and performance fee related expenses. See table below.
($ in thousands)
December 31, 2014 December 31, 2013 December 31, 2014 December 31, 2013
For the three months ended
For the year ended
Net income (loss) for the year
Adjustments:
Interest expense
Provision (recovery) for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
Impairment (reversal) of intangible assets
Impairment of goodwill
(Gains) and losses on proprietary investments and
loans
Non-cash stock based compensation
Other
Adjusted EBITDA
Less:
Performance fees
Performance fee related expenses
Adjusted base EBITDA
(363)
(90,111)
51
2,515
1,571
3,774
2,308
—
7,158
53
451
13,744
(9,493)
6,527
10,778
—
574
1,831
(87,706)
4,998
87,960
3,152
2,229
—
10,633
(6,613)
5,463
9,483
19,389
51
8,672
6,233
34,345
2,308
—
4,515
111
451
41,730
(10,693)
7,025
38,062
(81,261)
—
(4,801)
7,714
(78,348)
10,360
87,960
14,256
6,341
(5,457)
35,112
(8,994)
6,081
32,199
Stock-based compensation relating to the Company’s Employee Profit Sharing Plan (“EPSP”) is treated as a cash expense when calculating adjusted
EBITDA and adjusted base EBITDA. EBITDA and adjusted EBITDA include performance fees and performance fee related expenses, whereas
adjusted base EBITDA does not. Performance fees and performance fee related expenses do not typically form a material part of EBITDA and
adjusted EBITDA until the end of the fiscal year, which is when the majority of these fees and related expenses are earned and paid. The Company
believes that adjusted base EBITDA is the most relevant measure as it allows the Company to assess its ongoing business without the impact of
interest expense, income taxes, depreciation, amortization as well as other non-cash items and items that, while being cash, may be ancillary to the
Company’s core business operations or not be indicative of a run-rate cash flow from operations (such as performance fees and related expenses).
Adjusted base EBITDA is a useful indicator of the Company's ability to pay sustainable dividends and invest in the business and continuing operations.
The above terminology differs from what was used prior to the first quarter of 2014 in order to comply with the December 11, 2013 guidance provided
by the Ontario Securities Commission ("OSC") under "Staff Notice" 52-722 Report on Staff's Review of Non-GAAP Financial Measures and Additional
GAAP Measures.
EBITDA in various forms 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, amortization techniques and income tax rates between
companies in the same industry. While other companies, investors or investment analysts may not utilize the same method of calculating EBITDA
(or adjustments thereto), the Company believes its adjusted base EBITDA metric, in particular, results in a better comparison of the Company's
underlying operations against its peers.
Neither EBITDA, adjusted EBITDA or adjusted base EBITDA have standardized meaning under IFRS. Consequently, they should not be considered
in isolation, nor should they be used in substitute for, measures of performance prepared in accordance with IFRS.
5
OVERVIEW
Operating Segments Overview
The Company operates primarily through five operating segments: SAM; Global Companies; SRLC; Consulting; Corporate & Other. The Company
is primarily an independent asset management company dedicated to achieving superior returns for its clients over the long term. The Company's
business model is based foremost on delivering excellence in investment management services to its clients. Each operating segment is described in
greater detail below:
SAM
SAM offers discretionary portfolio management as well as asset management services to the Company's branded Funds and Managed Accounts. The
majority of the Company's revenues are earned through SAM in the form of management fees and performance fees. SAM is registered with the
OSC as an investment fund manager ("IFM"), portfolio manager (“PM”) and exempt market dealer (“EMD”). SAM is also registered with the U.S.
Securities and Exchange Commission ("SEC") as a registered investment advisor.
Global Companies
Sprott U.S. Holdings Inc. is the parent of the Global Companies (SGRIL; SAM US; RCIC). SGRIL is a California-based limited partnership that
operates as a securities broker-dealer and is registered with the Financial Industry Regulatory Authority (“FINRA”). SGRIL earns commissions and
other fees from the sale and purchase of stocks by its clients, new and follow-on offerings of limited partnerships managed by RCIC and from the
sale of private placements to its clients. SAM US is registered with the SEC and provides discretionary investment management services. SAM US
earns revenue from the management of Managed Accounts. RCIC is the general partner and discretionary asset manager to the Exploration Capital
Partners and Resource Income Partners families of limited partnerships. RCIC earns revenue in the form of management fees and carried interests
from Funds it manages.
SRLC
SRLC is a lender to companies in the mining and energy sectors with a focus on later-stage resource property developers or early stage commodity
or power producers. Through this business, the Company provides lending services in addition to its core business of asset management. It is
management's intention to continue providing these services either as a part of the Company's invested capital and/or as professional services to
new AUM expected to be raised in future lending vehicles to be managed by the Company. Management may also redeploy capital from maturing
loans into other ventures of the Company, either for acquisitions, seeding of new products or organic expansion. SRLC earns revenue in the form
of interest income and other fees on its lending activities as well as realizing on the upside potential of bonus arrangements with resource borrowers
which are generally tied to the revenue or the value of the common shares of the borrower.
Consulting
The Consulting segment includes the operations of SC, Sprott Toscana and Sprott Korea Corporation, the consulting businesses of the Company.
SC is the consulting business through which the Company manages the majority of its private equity strategies. These strategies are primarily executed
through Managed Companies. Through this business, the Company is able to provide investors with access to counter-cyclical merchant banking and
private equity style investments. SC currently provides its consulting services to Sprott Resource Corporation ("SRC"). SC earns the majority of its
revenues through management fees and performance fees from SRC.
Sprott Toscana is based in Calgary, Alberta and operates through two wholly-owned subsidiaries: TEC and TCC. TEC manages the Toscana Energy
Income Corporation ("TEIC"), a public company focused on investing in medium and long-term energy assets, unitized production interests and
royalties along with acting as a technical advisor and co-manager of the Energy Income Fund limited partnerships. TCC previously managed the
Toscana Financial Income Trust ("TFIT") until the wind-up of TFIT on June 26, 2014. TFIT was a private mutual fund trust that provided mezzanine
debt financing to mid-sized private and public energy companies. These financing activities will continue via SRLC going forward. The majority of
Sprott Toscana's management and performance fees continue to be earned through TEIC.
Sprott Korea Corporation co-manages a 10-year private equity fund for South Korea's National Pension Service alongside Woori Asset Management,
the asset manager of Korea's largest bank, Woori Financial Group. Revenues and expenses attributable to this activity are captured as part of the
Consulting segment.
Corporate and Other
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 certain subsidiaries. The Other segment includes the activities of SPW, the private wealth business of the Company.
SPW provides broker-dealer services that serve as a unique distribution channel for the delivery of the Company's Funds and other investment
opportunities to private clients. SPW also serves as a platform to brand and grow the Company's wealth management business. SPW earns most of
its revenues via intercompany trailer fee payments from SAM (intercompany fees are eliminated on consolidation) and from commissions earned on
new and follow-on offerings of Funds managed by SAM, through various private placements and other transactional services. SPW is an investment
dealer and a member of the Investment Industry Regulatory Organization of Canada (“IIROC”).
6
Significant Sources of Revenue
Significant sources of revenue for the Company include: management fees, performance fees, commission income, interest income, unrealized and
realized gains (losses) on proprietary investments and loans:
Management fees
Management fees earned from the management of Funds, Managed Accounts and Managed Companies are the Company's primary source of revenues.
Management fees are calculated as a percentage of AUM. Management fees are less variable and more predictable than performance fees and carried
interests (discussed below). Management fees are generally closely correlated with changes in AUM and are recorded in the financial statements when
earned. However, the rate of change in management fees may not mirror the rate of change in AUM as different fund products and multi-series or
multi-class structures within the total AUM mix often have management fees that differ materially from one another. In addition, the Company has
a substantial amount of its total AUM in bullion funds that have the lowest rate of management fees within the Company's suite of fund products.
Fees for managing the various Managed Accounts and Managed Companies are negotiated on a case-by-case basis. Therefore, the weighting of AUM
among the various Funds, Managed Accounts and Managed Companies can materially impact management fees as a percentage of AUM.
Performance fees
Performance fees are calculated as a percentage of the return earned in Funds, Managed Accounts and Managed Companies. Carried interests are
calculated as a percentage of profits earned by monetizing events in Funds managed by RCIC. Accordingly, growth in fees is based on both the growth
in AUM and the absolute or relative return, as applicable, earned by Funds, Managed Accounts and Managed Companies. The majority of performance
fees are determined as of December 31 each year. However, performance fees are accrued in the relevant underlying 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 in the financial statements of SAM for the applicable month. At SC, performance fee generation is 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 the Fund in
question. Carried interests are usually realized towards the end of the term of a Fund and can be significant when realized. Carried interests are only
recorded in the financial statements when realized.
Commission income
Commission income is specific to SPW and SGRIL and is generated from the trading of securities by clients and other transactional services provided
to clients including the sale of new and follow-on offerings of products or companies managed by SAM, RCIC or SC. Commission income is recorded
in the financial statements in the month in which the service is rendered.
Interest income
Interest income is most applicable to SRLC. SRLC provides financing in various forms such as: (i) term and bridge loans whereby interest payments
are determined through a prescribed interest rate. These loans may also be subject to additional fees in the form of cash and/or securities of the
borrower. Terms generally range from 12 to 48 months and the loans are typically used for production expansion, working capital, construction,
acquisitions and general corporate purposes; (ii) precious metals loans which generally follow the same terms, structure and purposes as term and
bridge loans, however loan interest and/or principal payments are based on predetermined units of measurement of a stated precious metal; and (iii)
other credit facilities, including convertible debt and standby lines of credit. In most cases, loans are secured by first or second priority charges against
the underlying mineral rights and related assets of the borrower. For certain qualified borrowers, SRLC may provide a credit facility without having
direct charges on collateral. SRLC generally aims to provide loans where the loan does not exceed 50% of the security value. Additional security such
as guarantees, general security agreements and assignments of contracts or sale agreements may also be taken.
Unrealized and realized gains (losses) on proprietary investments and loans
Management of invested capital continues to be an important activity for the Company and will continue to have a significant impact on the Company's
overall results. Gains and losses on proprietary investments and loans arise from investments of the Company's own capital in Funds it manages as
well as loans, investments in public and private securities and other products.
Operating Expenses
The most significant expenses of the Company are compensation and benefits (including stock-based compensation), trailer fees and general and
administrative costs:
Compensation benefits
Employees are paid either a base salary and/or commissions, such commissions being 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. A portion of the bonus pool may be paid in equity of the Company through the Company's
EPSP or Equity Incentive Plan ("EIP").
7
Trailer fees
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) based
on a percentage of the value of the assets held in the respective Fund by the dealer's clients.
General and administrative expenses
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 and professional fees, insurance, trading costs, donations, directors fees as well as other costs such as
quote and news services, printing and systems maintenance.
BUSINESS HIGHLIGHTS AND GROWTH INITIATIVES
Investment Performance
After a good first quarter and a solid second quarter, the investment performance of most Funds and Managed Accounts turned decidedly negative
in the third and the fourth quarters as precious metals and energy prices fell significantly. This resulted in much of the good gains in the first half of
the year dissipating by year-end. Overall, market value depreciation was approximately $112 million across the Company's various Fund and Managed
Company portfolios in 2014.
Product and Business Line Expansion
In the first half of 2014, the Company completed the acquisition of three fund management contracts from Arrow Capital Management Inc.: Exemplar
Global Infrastructure Fund; Exemplar Timber Fund; and Exemplar Global Agriculture Fund. The Company then entered into an exclusive sub-
advisory agreement with Capital Innovations, LLC, the existing sub-advisor to these funds. This initiative diversified the Company's existing product
line and improved its ability to offer Canadian investors a broader range of investment strategies.
During the second half of 2014, the Company launched three new fund strategies: (i) The Sprott Real Asset Class is a one-fund investment solution
that provides access to listed infrastructure, timber and agriculture stocks through a portfolio of mutual funds and direct investments in REITs, ETFs
and equity securities; (ii) The Sprott Gold Miners Exchange Traded Funds (NYSE: SGDM) provides investors with exposure to large and mid-sized gold
companies listed on major North American exchanges in a manner that potentially outperforms purely passive representations of the gold and silver
mining industry; and (iii) the Sprott Bridging Income Fund LP, which has the objective of acquiring and maintaining a diversified portfolio of asset-based
investments and factoring investments that achieve superior risk-adjusted returns with minimal volatility and low correlation to most traditional asset
classes.
OUTLOOK
Although AUM at the end of 2014 was largely unchanged from the end of 2013, shifts within the various Fund and Managed Company categories
were meaningful and reflective of the Company’s overall strategy of growing its diversified asset management platform in Canada and its presence
in resource fund management globally. Actively managed, non-resource focused funds managed by SAM had AUM of $1.5 billion at December 31,
2014, while actively managed resource-focused funds had AUM of $1.1 billion.
As previously noted, the Company launched the Sprott Gold Miners ETF, its first “smart beta” ETF. This ETF had AUM of over $130 million at
December 31, 2014 and has continued to grow steadily since then. Building on the Company’s established precious metals physical trusts and the
early success of this ETF, the Company intends to launch additional resource-focused ETF’s.
The Company is well positioned to grow AUM along a two-pronged strategy involving: (i) the growth of existing Funds and Managed Companies;
and (ii) the introduction of new strategies where the Company identifies a material addressable market opportunity and can develop a meaningfully
differentiated investment strategy to address that opportunity.
8
FINANCIAL HIGHLIGHTS
For the three and twelve months ended December 31, 2014
•
•
•
•
AUM as at December 31, 2014 was $7.0 billion, which was largely flat to December 31, 2013, and a decrease of $0.3 billion (4.6%) from
September 30, 2014. Average AUM for the three and twelve months ended December 31, 2014 was $7.1 billion and $7.5 billion, respectively,
reflecting a decrease of $0.1 billion (1.2%) and $0.5 billion (6.5%), respectively, from average AUM levels in the prior periods.
AUA as at December 31, 2014 was $1.9 billion, reflecting a decrease of $0.2 billion (10.4%) on a three months ended basis and $0.4 billion
(17.0%) from last year on a year ended basis.
Total revenues were $32.7 million on a three months ended basis and $124.0 million on a year ended basis, reflecting an increase of $2.6
million (8.7%) and $9.6 million (8.4%), respectively, from the prior periods.
Total expenses were $30.5 million on a three months ended basis and $95.9 million on a year ended basis, reflecting a decrease of $89.1
million (74.5%) and $104.5 million (52.1%), respectively, from the prior periods.
• Net loss was $0.4 million on a three months ended basis and net income was $19.4 million ($0.08 per share) on a year ended basis, reflecting
an increase of $89.7 million (99.6%) and $100.7 million (123.9%), respectively, from the prior periods.
•
•
•
Adjusted EBITDA was $13.7 million on a three months ended basis and $41.7 million on a year ended basis, reflecting an increase of $3.1
million (29.3%) and $6.6 million (18.8%), respectively, from the prior periods.
Adjusted base EBITDA was $10.8 million on a three months ended basis and $38.1 million on a year ended basis, reflecting an increase of
$1.3 million (13.7%) and $5.9 million (18.2%), respectively, from the prior periods.
Invested capital stood at $359.7 million, reflecting a $42.0 million (13.2%) increase from December 31, 2013. The increase was mainly due
to: (i) reinvestment of earnings into proprietary investments and the loan portfolio; (ii) an increase in syndicate payables on new loan
originations; and (iii) a $15.0 million credit facility draw to fund anticipated future proprietary investments. The annual return on invested
capital (excluding cash, real estate loans, and lines of credit) was 10.2% and on investable capital (excluding only real estate loans and lines
of credit) was 6.6%.
SUMMARY FINANCIAL INFORMATION
For the three and twelve months ended December 31, 2014
Key Performance Indicators
As at and for the three months
ended
As at and for the twelve
months ended
December 31
December 31
($ in thousands, except per share amounts)
2014
2013
2014
2013
Assets Under Management
Assets Under Administration
Net Sales (Redemptions)
EBITDA
EBITDA Per Share - basic and fully diluted
Adjusted EBITDA
Adjusted base EBITDA
Adjusted base EBITDA Per Share - basic and fully diluted
Summary Balance Sheets
($ in thousands)
Total Assets
Total Liabilities
Shareholders' Equity
7,027,390
1,945,750
(53,979)
3,774
0.02
13,744
10,778
0.04
6,966,524
2,344,545
6,223
(87,706)
(0.36)
10,633
9,483
0.04
7,027,390
1,945,750
203,295
34,345
0.14
41,730
38,062
0.15
As at
6,966,524
2,344,545
(386,905)
(78,348)
(0.38)
35,112
32,199
0.16
December 31 December 31 December 31
2014
2013
2012
481,277
62,665
418,612
455,720
35,422
420,298
362,492
44,783
317,709
9
Summary Statements of Operations and Reconciliation to Adjusted Base
EBITDA
For the three months ended
For the year ended
December 31
December 31
($ in thousands, except per share amounts)
2014
2013
2014
2013
2012
Management fees
Performance fees
Commissions
Interest income
Unrealized and realized gains (losses) on proprietary investments and
loans
Other income
Total revenue
Compensation and benefits
Stock-based compensation
Trailer fees
General and administrative
Amortization of intangibles
Impairment of intangibles
Impairment of goodwill
Amortization of property and equipment
Total expenses
Income (loss) before income taxes
Provision (recovery) for income taxes
Net income (loss)
Adjustments:
Interest expense
Provision (recovery) for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
Impairment (reversal) of intangible assets
Impairment of goodwill
(Gains) and losses on proprietary investments and loans
Non-cash stock based compensation
Other
18,674
9,493
1,400
5,687
(7,292)
4,702
32,664
10,016
910
2,928
12,779
1,382
2,308
—
189
30,512
2,152
2,515
(363)
51
2,515
1,571
3,774
2,308
—
7,158
53
451
17,792
6,613
1,191
4,815
(3,286)
2,923
30,048
9,322
2,842
2,781
9,851
1,617
4,998
87,960
214
119,585
(89,537)
574
(90,111)
—
574
1,831
78,435
10,693
7,837
20,184
(4,583)
11,416
84,698
8,994
6,220
9,844
(14,478)
19,094
118,514
9,955
13,506
2,691
2,266
11,222
123,982
114,372
158,154
38,881
3,373
12,520
32,606
5,455
2,308
—
778
95,921
28,061
8,672
19,389
51
8,672
6,233
44,759
10,264
11,898
27,479
6,788
10,360
87,960
926
200,434
(86,062)
(4,801)
(81,261)
—
(4,801)
7,714
36,856
11,107
19,030
26,906
7,782
4,726
8,935
1,104
116,446
41,708
9,724
31,984
—
9,724
8,886
(87,706)
34,345
(78,348)
50,594
4,998
87,960
3,152
2,229
—
2,308
—
4,515
111
451
Adjusted EBITDA
13,744
10,633
41,730
Less:
Performance fees
Performance fee related expenses
Adjusted base EBITDA
Dividends declared
Earnings (Loss) Per Share - basic and diluted
EBITDA (Loss) Per Share - basic and diluted
Adjusted EBITDA Per Share - basic and diluted
Adjusted base EBITDA Per Share - basic and diluted
(9,493)
6,527
10,778
0.03
0.00
0.02
0.05
0.04
(6,613)
5,463
9,483
0.03
(0.37)
(0.36)
0.04
0.04
(10,693)
7,025
38,062
0.12
0.08
0.14
0.17
0.15
10,360
87,960
14,256
6,341
(5,457)
35,112
(8,994)
6,081
32,199
0.12
(0.39)
(0.38)
0.17
0.16
4,726
8,935
(2,266)
4,440
—
66,429
(9,955)
5,090
61,564
0.12
0.19
0.30
0.39
0.36
10
RESULTS OF OPERATIONS
For the three and twelve months ended December 31, 2014
Assets Under Management, Investment Performance and Net Sales
The majority of the Company's Funds and Managed Accounts experienced negative performance and net redemptions during the quarter. AUM as
at December 31, 2014 was $7.0 billion, reflecting a decrease of $0.3 billion (4.6%) from September 30, 2014. On a full year basis, AUM growth was
largely flat as net sales growth (primarily in mutual fund products and Managed Companies) was largely offset by bullion and alternative investment
strategy redemptions, market depreciation and product and business divestitures during the year. Average AUM for the three and twelve months ended
December 31, 2014, was $7.1 billion and $7.5 billion, respectively, reflecting a decrease of $0.1 billion (1.2%) and $0.5 billion (6.5%), respectively,
from average AUM levels in the prior periods.
Breakdown of AUM by investment product type:
Product Type
Bullion Funds
Mutual Funds
Alternative Investment Strategies
Managed Companies
Managed Accounts
Fixed Term Limited Partnerships
Total
December 31, 2014
December 31, 2013
$ (in millions)
% of AUM
$ (in millions)
% of AUM
3,185
1,838
783
770
111
340
7,027
45.3%
26.2%
11.1%
11.0%
1.6%
4.8%
100%
3,542
1,483
938
521
122
361
6,967
50.7%
21.3%
13.5%
7.6%
1.7%
5.2%
100%
Breakdown of AUM movements on a three months ended basis by investment product type:
$ (in millions)
Bullion Funds
Mutual Funds
Alternative Investment Strategies
Managed Companies
Managed Accounts
Fixed Term Limited Partnerships
Total
AUM
September 30, 2014
Net Sales /
(Redemptions)
Net Market
Value Change
Acquisitions /
(Divestitures)
AUM
December 31, 2014
3,283
1,864
823
911
121
361
7,363
(89)
65
(30)
—
—
—
(54)
(9)
(91)
(10)
(141)
(10)
(21)
(282)
—
—
—
—
—
—
—
3,185
1,838
783
770
111
340
7,027
Breakdown of AUM movements on a twelve months ended basis by investment product type:
$ (in millions)
Bullion Funds
Mutual Funds
Alternative Investment Strategies
Managed Companies
Managed Accounts
Fixed Term Limited Partnerships
Total
AUM
December 31, 2013
Net Sales /
(Redemptions)
Net Market
Value Change
Acquisitions /
(Divestitures)
AUM
December 31, 2014
3,542
1,483
938
521
122
361
6,967
(384)
289
(147)
415
3
27
203
27
13
27
(117)
(14)
(48)
(112)
—
53
(35)
(49)
—
—
(31)
3,185
1,838
783
770
111
340
7,027
11
Revenues
Management fees were $18.7 million on a three months ended basis and $78.4 million on a year ended basis, reflecting an increase of $0.9 million
(5.0%) and a decrease of $6.3 million (7.4%), respectively, from the prior periods. The increase on a three months ended basis was due to an increase
in the average AUM of mutual funds and Managed Companies compared to the prior period. The decrease on a year ended basis was largely due to
a decline in overall average AUM year-over-year. Management fees as a percentage of average AUM was 1.0% on a three months ended basis, which
was unchanged from the prior period. On a year ended basis, the percentage was 0.9%, which was down 0.1% from the prior period. Management
fees include fees earned from precious metal physical trusts which amounted to $3.0 million on a three months ended basis and $12.8 million on a
year ended basis, reflecting a decrease of $0.5 million (13.4%), and $2.3 million (15.2%), respectively, from the prior periods.
Performance fees were $9.5 million on a three months ended basis and $10.7 million on a year ended basis, reflecting an increase of $2.9 million
(43.6%) and $1.7 million (18.9%), respectively, from the prior periods. Last year, performance fees were mainly attributable to certain SAM Funds,
Sprott Toscana, SRLC and Carried Interests from RCIC. This year, performance fees were mostly attributable to performance fees received from an
alternative investment strategies fund in SAM and Sprott Toscana.
Commission revenues were $1.4 million on a three months ended basis and $7.8 million on a year ended basis, reflecting an increase of $0.2 million
(17.5%) and $1.6 million (26.0%) from the prior periods. The increase was due to increased private placement activity in SGRIL and SPW.
Interest income was $5.7 million on a three months ended basis and $20.2 million on a year ended basis, reflecting an increase of $0.9 million (18.1%)
and $10.3 million (105.0%), respectively, from the prior periods. Interest income is generated primarily by SRLC which was acquired (and its results
consolidated), by the Company in the third quarter of last year. Prior to the acquisition, the Company's lending activities were conducted through
SRLC as a Managed Company, thereby generating management fee income for the Company rather than interest income.
Losses on proprietary investments and loans were $7.3 million on a three months ended basis, reflecting an increase in losses of $4.0 million from
the prior period. Increased losses were due to market value depreciation in public equities and share purchase warrants held as part of proprietary
investments. On a year ended basis, losses on proprietary investments and loans were $4.6 million, reflecting a decrease in losses of $9.9 million from
the prior period. Lower losses on a year ended basis was primarily the result of improved market performance in certain seeded alternative investment
funds, which partially offset market depreciation occurring in public equities and share purchase warrants described above.
Other income was $4.7 million on a three months ended basis and $11.4 million on a year ended basis, reflecting an increase of $1.8 million (60.9%)
and a decrease of $7.7 million (40.2% ), respectively, from the prior periods. The increase on a three months ended basis was largely due to increased
foreign exchange gains on U.S. dollar denominated cash deposits, receivables and loans. The decrease on a year ended basis was primarily a result of
lower non-recurring and one-time items such as break-fees on management contract terminations and the non-recurring gain on bargain purchase
of SRLC. Lower year-over-year non-recurring and one-time items were only partially offset by stronger year-over-year foreign exchange gains as
described above.
12
Expenses
Changes in specific expense categories are described below:
Compensation and benefits
The table below summarizes the components of compensation and benefits:
($ in thousands)
Salaries and benefits
Discretionary bonus-cash component
Discretionary bonus-equity component (1)
Commissions
Transition expenses
Other compensation expense (2)
For the three months ended
For the year ended
December 31
December 31
2014
2013
2014
2013
6,269
2,268
650
859
620
—
10,666
6,127
2,345
310
1,149
(236)
(63)
9,632
24,289
26,057
9,807
2,480
3,199
823
763
8,643
2,368
3,116
2,464
4,479
41,361
47,127
(1)
(2)
Discretionary bonus-equity is included in stock-based compensation on the Company's consolidated statements of operations.
Other compensation expense relates to the $1.5 million break-fee received on termination of the TFIT management contract (2013 - one-time
compensation expense relates to $7.5 million break-fee received on termination of a management contract).
Total compensation and benefits were $10.0 million on a three months ended basis and $38.9 million on a year ended basis, reflecting an increase of
$0.7 million (7.4%) and a decrease of $5.9 million (13.1%), respectively, from the prior periods. The increase on a three months ended basis was
primarily a result of transition accruals relating to employee exits and increases in discretionary bonus due to increased adjusted EBITDA over the
period. The decrease on a year ended basis was primarily a result of: (i) lower year-over-year compensation expense relating to break-fees received
on management contract terminations; (ii) lower year-over-year transition expenses relating to employee exits; and (iii) a change in compensation
arrangement for a Company executive in the first quarter of 2014. These decreases were only partially offset by an increase in discretionary bonus
which was in line with the increase in year-over-year adjusted EBITDA of the Company.
Stock-based compensation
Stock-based compensation was $0.9 million on a three months ended basis and $3.4 million on a year ended basis, reflecting a decrease of $1.9 million
(68.0%) and $6.9 million (67.1%), respectively, from the prior periods. The decline was the result of the following: (i) a reduction in the expensing of
earn-out shares for Sprott Toscana as the Company approaches the end of the vesting period; (ii) a reduction in the expensing of earn-out shares for
Global Companies as earn-out shares were fully amortized by February 3, 2014; and (iii) a reduction in stock-based compensation relating to employees
hired in prior periods which is accounted for on a graded vesting schedule.
Trailer fees
Trailer fees were $2.9 million on a three months ended basis and $12.5 million on a year ended basis, reflecting an increase of $0.1 million (5.3%) and
$0.6 million (5.2%), respectively, from the prior periods. On a three months and year ended basis, there was a drop in trailer fee paying AUM, however,
that decline was more than offset by a decline in the amount of trailers being paid intercompany to SPW.
General and administrative
General and administrative expenses were $12.8 million on a three months ended basis and $32.6 million on a year ended basis, reflecting an increase
of $2.9 million (29.7%) and $5.1 million (18.7%), respectively, from the prior periods. These increases were primarily the result of an increase in sub-
advisory fees, fund start-up and marketing costs. A substantial portion of general and administrative expense increases were a result of additional
sub-advised product offerings of the Company such as the Sprott Real Asset Class and Sprott Bridging LP Funds that were launched earlier this year.
There were also higher sub advisor performance fees paid due to an alternative investment fund earning higher performance fees for the year. These
increases were partially offset by decreases in professional services fees and regulatory fees.
Amortization of intangibles
Amortization of intangibles was $1.4 million on a three months ended basis and $5.5 million on a year ended basis, reflecting a decrease of $0.2
million (14.5%) and $1.3 million (19.6%), respectively, from the prior periods. The decrease was mainly the result of lower amortization of carried
interests as a result of prior period write-downs of carried interest in the Global Companies' operating segment. Amortization of intangibles consists
of: (i) the amortization of deferred sales commissions; and (ii) the amortization of finite life fund management contracts and carried interests.
13
Impairment (reversals) of goodwill and intangibles
For the three months and year ended December 31, 2014, there was no impairment of goodwill (December 31, 2013 - $88 million) and no impairment
of management contracts (December 31, 2013 - $Nil). For the three months and year ended, December 31, 2014, an impairment charge of $2.3
million was recognized for carried interests, compared to impairment charges of $5.0 million and $10.4 million, respectively, in the three month and
year ended comparative periods.
The underlying inputs and assumptions that determine the recoverable amounts of goodwill, fund management contracts and carried interests are
related to the resource sector and commodity prices which can exhibit significant volatility. As a result, recoverable amounts may demonstrate significant
fluctuations in value over the year. Management will continue to monitor the recoverable amount of these intangible assets on a quarterly basis, and
if appropriate, may record future impairment losses or reversals.
Amortization of property and equipment
Amortization of property and equipment for the three months and year ended, December 31, 2014, was $0.2 million and $0.8 million, respectively,
compared to $0.2 million and $0.9 million in the prior periods.
Net Income (loss) and Adjusted base EBITDA
Net loss was $0.4 million on a three months ended basis and net income was $19.4 million on a year ended basis, reflecting improved performance
of $89.7 million (99.6%) and $100.7 million (123.9%), respectively from the prior periods.
Excluding prior year impairment charges on intangible assets and goodwill, lower net losses on a three months ended basis was due to: (i) higher
management fees as well as higher performance fees; (ii) foreign exchange gains on U.S. dollar denominated cash deposits, receivables and loans; and
(iii) higher commission and interest income. These improvements more than offset an increase in proprietary investment losses over the period along
with increases in general and administrative expenses (primarily sub advisor related, and to a lesser extent, higher marketing and fund start-up costs).
Excluding prior year impairment charges on intangible assets and goodwill, net income on a year ended basis (compared to losses in the prior year)
was due to: (i) higher performance fees, commission and interest income previously described, coupled with lower proprietary investment losses on
a full year basis. This improved full year performance more than offset lower management fees and higher general and administrative expenses over
the year.
Adjusted base EBITDA was $10.8 million on a three months ended basis and $38.1 million on a year ended basis, reflecting an increase of $1.3 million
(13.7%) and $5.9 million (18.2%), respectively, from the prior periods. This improved performance was largely the result of stronger commission
and interest income as well as foreign exchange gains on U.S. dollar denominated cash deposits, receivables and loans and lower compensation expenses,
which more than offset lower management fees and increases in general and administrative expenses.
14
Balance Sheet
Cash and cash equivalents were $120.8 million, an increase of $5.1 million (4.4%) from December 31, 2013. The increase was primarily due to: (i) a
draw down on the credit facility to fund anticipated future proprietary investments; (ii) an increase in syndicate payables on new loan originations;
and (iii) the generation and retention of operating cash flows in the normal course. These increases were only partially offset by the payment of
quarterly dividends throughout the year.
Fees receivable were $13.2 million, reflecting a decrease of $0.6 million (4.5%) from December 31, 2013. The decrease was primarily due to the timing
of year-end management fee receipts in 2014.
Other assets were $11.1 million, reflecting a decrease of $9.6 million (46.4%) from December 31, 2013. The decrease was primarily due to the current
period collection of a prior period receivable relating to the redemption of units of a Fund held in proprietary investments.
Proprietary investments were $112.6 million, reflecting an increase of $18.3 million (19.4%) from December 31, 2013. The increase was due to: (i)
additional investments made in the equity securities of a Managed Company; (ii) investments made in certain fixed income products; (iii) bonus shares
received on origination of a new loan in SRLC; and (iv) additional investments made in certain private holdings. These increases were partially offset
by the sale or redemption of certain investments and general market value depreciation.
Loans receivable were $121.9 million, reflecting an increase of $17.7 million (16.9%) from December 31, 2013. The increase was primarily due to an
increase in new loan originations as well as SRLC's purchase of loans from TFIT pursuant to its unwind in the second quarter of this year, partially
offset by repayments of loans in existence at December 31, 2013.
Intangible assets were $32.2 million, reflecting a decrease of $0.4 million (1.2%) from December 31, 2013. The decrease was primarily a result of an
impairment charge on carried interests in RCIC, coupled with normal course amortization charges, which more than offset the carrying value increase
relating to the purchase of funds from Arrow Capital Management Inc. during the first quarter of the year.
Goodwill was $50.4 million, reflecting an increase of $4.0 million (8.7%) from December 31, 2013. The increase was due entirely to foreign exchange
gains on translation of the Company's U.S. dollar denominated goodwill.
Deferred income tax assets (net of deferred income tax liabilities) were negative $3.3 million ($5.2 million - December 31, 2013). The net decrease
was due primarily to the utilization of non-capital losses during the year.
Accounts payable and accrued liabilities were $28.3 million, reflecting an increase of $15.2 million (115.5%) from December 31, 2013. The increase
was the result of higher syndicate fees and sub-advisor fees payable only partially offset by lower harmonized sales tax payable at December 31, 2014.
Compensation and employee bonuses payable as at December 31, 2014 were $9.3 million, reflecting a decrease of $0.6 million (6.5%) from December
31, 2013. The decrease was the result of lower outstanding bonus payables and the timing of 2013 compensation payables. This decrease was partially
offset by higher fourth quarter restructuring accruals.
Loan payable was $15 million as at December 31, 2014 (December 31, 2013 - $Nil). During the fourth quarter of 2014, the Company drew down on
its credit facility in anticipation of certain future proprietary investments.
15
RESULTS OF OPERATIONS - REPORTABLE SEGMENTS
SAM Segment
The SAM segment provides asset management services to the Company's branded Funds and Managed Accounts.
Results of operations:
($ in thousands)
Revenue
Management fees
Performance fees
Interest income
Other
Total revenue
Expenses
General and administrative
Trailer fees
Amortization and impairment of intangibles, property
and equipment
Total expenses
Income before income taxes
Adjustments:
Interest expense
Provision (recovery) for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
Impairment (reversal) of intangible assets
Impairment of goodwill
(Gains) and losses on proprietary investments and
loans
Non-cash stock based compensation
Adjusted EBITDA
Less:
Performance fees
Performance fee related expenses
Adjusted base EBITDA
For the three months ended
For the year ended
December 31, 2014 December 31, 2013 December 31, 2014 December 31, 2013
14,598
9,296
4
544
24,442
16,385
3,277
571
20,233
4,209
—
—
571
4,780
—
—
(272)
—
4,508
(9,296)
6,477
1,689
14,709
6,410
19
(170)
20,968
9,763
3,472
608
13,843
7,125
—
—
608
7,733
—
—
1,012
—
8,745
(6,410)
5,412
7,747
61,470
9,726
70
3,149
74,415
42,395
14,541
2,335
59,271
15,144
—
—
2,335
17,479
—
—
(1,430)
—
16,049
(9,726)
6,783
13,106
66,537
6,446
199
(2,952)
70,230
38,864
15,908
2,296
57,068
13,162
—
—
2,296
15,458
—
—
4,543
—
20,001
(6,446)
5,444
18,999
16
For the three and twelve months ended December 31, 2014
Revenues
Management fees were $14.6 million on a three months ended basis and $61.5 million on a year ended basis, reflecting a decrease of $0.1 million
(0.8%) and a decrease of $5.1 million (7.6%), respectively, from the prior periods. The declines were consistent with lower average AUM over the
periods.
Performance fees were $9.3 million on a three months ended basis and $9.7 million on a year ended basis, reflecting an increase of $2.9 million (45.0%)
and $3.3 million (50.9%), respectively, from the prior periods. The increases were a result of higher year-end performance fees earned from an
alternative investment strategies fund.
Interest income continues to be nominal and primarily generated from treasury bills and cash deposits with banks and brokerages.
Other revenues were $0.5 million on a three months ended basis and $3.1 million on a year ended basis, reflecting an increase of $0.7 million (420.0%)
and an increase of $6.1 million (206.7%), respectively, from the prior periods. The increase on a three months and year ended basis was a result of
gains on proprietary investments compared to losses in the prior periods, coupled with higher year-over-year foreign exchange gains on U.S. dollar
denominated cash deposits and receivables.
Expenses
General and administrative expenses (which include compensation and benefits expenses) were $16.4 million on a three months ended basis and
$42.4 million on a year ended basis, reflecting an increase of $6.6 million (67.8%) and $3.5 million (9.1%), respectively, from the prior periods. The
increase on a three months and year ended basis was primarily the result of: (i) higher discretionary bonus and transition payment accruals on employee
departures in the current period; (ii) an increase in rent and marketing costs; and (iii) a substantial increase in sub-advisory fees as a result of additional
sub-advised product offerings of the Company such as the Sprott Real Assets Class and Sprott Bridging LP Funds which were launched earlier this year.
There were also higher sub-advisor performance fees paid due to an alternative investment fund earning higher performance fees for the year. These
increases were only partially offset by lower stock-based compensation expense and lower cash-based compensation expenses as a result of a change
in compensation arrangement for a Company executive during the current period.
Trailer fees were $3.3 million on a three months ended basis and $14.5 million on a year ended basis, reflecting a decrease of $0.2 million (5.6%) and
a decrease of $1.4 million (8.6%), respectively, from the prior periods. The declines on a three month and year ended basis were the result of a decrease
in average trailer fee paying AUM over the periods.
Amortization and impairment was $0.6 million on a three months ended basis and $2.3 million on a year ended basis, which was largely unchanged
from the prior periods.
Adjusted base EBITDA
Adjusted base EBITDA was $1.7 million and $13.1 million, reflecting a decrease of $6.1 million (78.2%) and $5.9 million (31.0%), respectively, from
the prior periods. The decrease on a three months ended basis was mainly due to higher compensation and benefits expense coupled with higher fund
subsidies and sub-advisor costs. The decrease on a year ended basis was due to lower management fees net of trailers, higher compensation and
benefits expenses and higher rent and marketing costs.
17
Global Companies Segment
The Global Companies segment provides asset management services to the Company's Funds and Managed Accounts in the U.S. and also provides
securities trading services to its clients. This segment includes the operating results of SGRIL, RCIC and SAM USA.
For the three months ended
For the year ended
December 31, 2014 December 31, 2013 December 31, 2014 December 31, 2013
Results of operations:
(in $ thousands)
Revenue
Management fees
Performance fees
Commissions
Interest income
Other
Total revenue
Expenses
General and administrative
Amortization and impairment of intangibles, property
and equipment
Impairment of goodwill
Total expenses
1,709
—
1,243
28
(1,546)
1,434
2,514
3,295
—
5,809
2,184
—
1,094
10
(286)
3,002
3,440
6,197
87,960
97,597
Income (loss) before income taxes
(4,375)
(94,595)
Adjustments:
Interest expense
Provision (recovery) for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
Impairment (reversal) of intangible assets
Impairment of goodwill
(Gains) and losses on proprietary investments and
loans
Non-cash stock based compensation
Adjusted EBITDA
Less:
Performance fees
Performance fee related expenses
Adjusted base EBITDA
—
—
987
(3,388)
2,308
—
1,712
—
632
—
—
632
—
—
1,199
(93,396)
4,998
87,960
284
1,091
937
—
—
937
8,632
—
6,342
66
(1,836)
13,204
11,327
6,136
—
17,463
(4,259)
—
—
3,828
(431)
2,308
—
1,971
403
4,251
—
—
4,251
9,359
302
5,081
56
(1,095)
13,703
14,533
15,674
87,960
118,167
(104,464)
—
—
5,314
(99,150)
10,360
87,960
1,124
4,330
4,624
(302)
75
4,397
18
For the three and twelve months ended December 31, 2014
Revenues
Management fees were $1.7 million on a three months ended basis and $8.6 million on a year ended basis, which decreased by $0.5 million (21.7%)
and $0.7 million (7.8%), respectively, from the prior periods. The decreases were a result of lower average AUM in RCIC.
Commission revenues were $1.2 million on a three months ended basis and $6.3 million on a year ended basis, reflecting an increase of $0.1 million
(13.6%) and $1.3 million (25.2%), respectively, from the prior periods. Improved commission income was the result of more private placement activity
in SGRIL.
Interest income continues to be nominal and primarily generated from cash deposits with banks and brokerages.
Other revenue was negative $1.5 million on a three months ended basis and negative $1.8 million on a year ended basis, reflecting a decrease of $1.3
million (440.6%) and $0.7 million (67.7%), respectively, from the prior periods. The decreases were due to higher losses on proprietary investments.
Expenses
General and administrative expenses (which include compensation and benefits expenses) were $2.5 million on a three months ended basis and $11.3
million on a year ended basis, reflecting a decrease of $0.9 million (26.9% ) and $3.2 million (22.1%), respectively, from the prior periods. The decreases
were mainly due to a reduction in stock-based compensation as a result of earn-out shares fully vesting during the first quarter of 2014. The decrease
was partially offset by an increase in non-stock based employee compensation and benefits, specifically commission expense, which increased
commensurately with the increase in commission revenues over the periods.
Amortization and impairment was $3.3 million on a three months ended basis and $6.1 million on a year ended basis, reflecting a decrease of $2.9
million (46.8%) and $9.5 million (60.9%), respectively, from the prior periods. The decreases were mainly due to a reduction in carried interest
amortization as prior period write-downs of carried interests resulted in lower balances to amortize in the current period. The recoverable amount
of goodwill and fund management contracts aligned with their respective carrying values during 2014, consequently, no impairment charge or
impairment charge reversals were recognized. However, the recoverable amount of carried interests was lower than their carrying value, consequently,
an impairment charge of $2.3 million (2013- $10.4 million) was recognized in 2014.
The underlying inputs and assumptions that determine the recoverable amounts of goodwill, 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 intangible assets may demonstrate significant fluctuations in value over the year. Management will continue to monitor the recoverable
amount of these intangible assets on a quarterly basis, and if appropriate, record future impairment losses or reversals.
Adjusted base EBITDA
Adjusted base EBITDA was $0.6 million on a three months ended basis and $4.3 million on a year ended basis, which decreased by $0.3 million
(32.6%) and $0.1 million (3.3%), respectively, from the prior periods. The decreases were primarily due to declines in average AUM in RCIC and an
increase in cash operating expenses which were only partially offset by stronger commission income in SGRIL.
19
SRLC
The SRLC segment provides loans to companies in the mining and energy sectors. SRLC was acquired by the Company on July 23, 2013. SRLC's
operations are presented for the three months and year ended December 31, 2014 with partial period comparative information, as applicable.
For the three months ended
For the year ended
December 31, 2014
December 31, 2013
December 31, 2014 December 31, 2013 (1)
Results of operations:
($ in thousands)
Revenue
Interest income
Other
Total revenue
Expenses
General and administrative
Amortization property and equipment
Total expenses
Income before income taxes
Adjustments:
Interest expense
Provision (recovery) for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
Impairment (reversal) of intangible assets
Impairment of goodwill
(Gains) and losses on proprietary investments
and loans
Non-cash stock based compensation
Other
Adjusted EBITDA
Less:
Performance fees
Performance fee related expenses
Adjusted base EBITDA
(1)
for the period July 23, 2013 to December 31, 2013
5,012
(2,047)
2,965
(833)
—
(833)
3,798
—
—
—
3,798
—
—
3,719
—
—
7,517
—
—
7,517
4,179
88
4,267
1,007
1
1,008
3,259
—
—
1
3,260
—
—
1,549
—
—
4,809
—
—
4,809
17,830
249
18,079
5,250
—
5,250
12,829
—
—
—
7,215
5,978
13,193
2,552
2
2,554
10,639
—
—
2
12,829
10,641
—
—
4,220
—
—
17,049
—
—
17,049
—
—
1,505
—
(5,457)
6,689
—
—
6,689
20
For the three and twelve months ended December 31, 2014
Revenues
Interest income was $5.0 million on a three months ended basis and $17.8 million on a year ended basis, reflecting an increase of $0.8 million (19.9%)
and $10.6 million (147.1%), respectively, from the prior periods. The increases were due to an increase in average loan balances year-over-year along
with the benefit of a full three and twelve months of interest income reported in 2014 compared to three and five months of interest income reported
in the prior periods since the acquisition of SRLC closed on July 23, 2013.
Other revenues were negative $2.0 million on a three months ended basis and $0.2 million on a year ended basis reflecting a decrease of $2.1 million
and $5.7 million (95.8%), respectively, from the prior periods. The decrease on a three month ended basis was mainly due to higher proprietary
investment losses on equity and warrants received during the loan origination process. The decrease on a year ended basis was largely due to the gain
on bargain purchase of $5.5 million related to the acquisition of SRLC last year, as well as higher proprietary investment losses previously described.
The decreases were only partially offset by foreign exchange gains in the current period on U.S. dollar denominated cash deposits, receivables and
loans.
Expenses
General and administrative expenses (which includes compensation and benefits expenses) were negative $0.8 million on a three months ended basis
and $5.3 million on a year ended basis, reflecting a decrease of $1.8 million (182.7%) and an increase of $2.7 million (105.7%), respectively, from the
prior periods. The decrease on a three month ended basis was mainly due to a reduction in discretionary bonus. The increase on a year ended basis
was due to a full twelve months of expenses being reported in 2014 compared to only five months of expenses being reported last year due to the
timing of SRLC's acquisition.
Adjusted base EBITDA
Adjusted base EBITDA was $7.5 million on a three months ended basis and $17.0 million on a year ended basis, reflecting an increase of $2.7 million
(56.3%) and $10.4 million (154.9%), respectively, from the prior periods. The increase on a three months ended basis was mainly due to a combination
of higher quarterly interest income and lower discretionary bonus in the period. The increase on a year ended basis was due to higher interest income
as a result of higher average loan balances year-over-year coupled with the full year consolidation impact of last year's acquisition.
21
Consulting Segment
The Consulting segment includes the operations of SC, Sprott Toscana, and Sprott Korea Corporation, the consulting businesses of the Company.
Results of operations:
($ in thousands)
Revenue
Management fees
Performance fees
Interest income
Other
Total revenue
Expenses
General and administrative
Trailer fees
Amortization of property and equipment
Total expenses
Income before income taxes
Adjustments:
Interest expense
Provision (recovery) for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
Impairment (reversal) of intangible assets
Impairment of goodwill
(Gains) and losses on proprietary investments and
loans
Non-cash stock based compensation
Other
Adjusted EBITDA
Less:
Performance fees
Performance fee related expenses
Adjusted base EBITDA
For the three months ended
For the year ended
December 31, 2014 December 31, 2013 December 31, 2014 December 31, 2013
2,311
197
5
335
2,848
1,453
60
8
1,521
1,327
—
—
8
1,335
—
—
—
53
—
1,388
(197)
50
1,241
802
203
2
247
1,254
1,877
—
10
1,887
(633)
—
—
10
(623)
—
—
36
1,134
—
547
(203)
51
395
8,103
967
43
2,162
11,275
4,699
107
43
4,849
6,426
—
—
43
6,469
—
—
—
(292)
—
6,177
(967)
242
5,452
8,632
2,246
30
7,596
18,504
11,484
—
37
11,521
6,983
—
—
37
7,020
—
—
556
1,981
—
9,557
(2,246)
562
7,873
22
For the three and twelve months ended December 31, 2014
Revenues
Management fees were $2.3 million on a three months ended basis and $8.1 million on a year ended basis, reflecting an increase of $1.5 million
(188.2%) and a decrease $0.5 million (6.1%), respectively, from the prior periods. The increase on the three months ended basis was mainly due to
higher management fees from SRC in the current quarter. The decrease on a year ended basis was due to the unwind of TFIT in the second quarter
of 2014 and the prior year acquisition by the Company of SRLC. The SRLC acquisition led to SRLC's transition from being a Managed Company
with fees charged on AUM in the Consulting Segment, to a wholly-owned subsidiary of the Company with its loan assets now directly on the Company's
balance sheet generating interest income within its own "SRLC segment".
Performance fees were $0.2 million on a three months ended basis and $1.0 million on a year ended basis, which were virtually unchanged on a three
months ended basis and decreased by $1.3 million (56.9%) on a year ended basis. Performance fees earned in the current period relate to Sprott
Toscana. In the prior periods, the majority of performance fees recognized were a result of fees recorded in the first quarter of 2013 relating to SRC
and to a lesser extent from Sprott Toscana and SRLC.
Interest income continues to be nominal and primarily generated from cash deposits with banks and brokerages.
Other revenues were $0.3 million on a three months ended basis and $2.2 million on a year ended basis, reflecting an increase of $0.1 million and a
decrease of $5.4 million (71.5%), respectively, from the prior periods. The increase on the three months ended basis was nominal. The decrease on
a year ended basis was due to lower break-fee revenues year-over-year on terminated management contracts, which was only partially offset by improved
proprietary investments performance.
Expenses
General and administrative expenses (which include compensation and benefits expenses) were $1.5 million on a three months ended basis and $4.7
million on a year ended basis, reflecting a decrease of $0.4 million (22.6%) and $6.8 million (59.1%), respectively, from the prior periods. The decreases
were mainly due to: (i) a reduction in current period earn-out share expenses related to Sprott Toscana as the Company reaches the end of the vesting
period; and (ii) lower break-fee payouts year-over-year.
Trailer fees were nominal. Trailer fees are now being paid on management fees from Sprott Korea Corporation as this business continues to develop
over time.
Depreciation and amortization was nominal on both a three month and year ended basis.
Adjusted base EBITDA
Adjusted base EBITDA was $1.2 million on a three months ended basis and $5.5 million on a year ended basis, reflecting an increase of $0.8 million
(214.2%) and a decrease of $2.4 million (30.8%), respectively, from the prior periods. The increase on the three months ended basis was due to higher
management fees partially offset by higher compensation and benefits expenses. The decrease on a year ended basis was due to a combination of
lower break-fee revenue and lower management fees relating to the unwind of TFIT and consolidation of SRLC as previously described.
23
Corporate and Other Segment
The Corporate segment provides treasury and shared services to the Company's business units and includes the operating results of Sprott Inc. without
the effect of consolidating certain subsidiaries. The Other segment includes the activities of SPW, the private wealth business of the Company.
Results of operations:
($ in thousands)
Revenue
Management fees
Performance fees
Commissions
Interest income
Trailer fee income
Other
Total revenue
Expenses
General and administrative
Amortization of property and equipment
Total expenses
Income (loss) before income taxes
Adjustments:
Interest expense
Provision (recovery) for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
Impairment (reversal) of intangible assets
Impairment of goodwill
(Gains) and losses on proprietary investments and
loans
Non-cash stock based compensation
Other
Adjusted EBITDA
Less:
Performance fees
Performance fee related expenses
Adjusted base EBITDA
For the three months ended
For the year ended
December 31, 2014 December 31, 2013 December 31, 2014 December 31, 2013
56
—
157
677
489
(65)
1,314
4,116
5
4,121
(2,807)
51
—
5
92
—
97
605
759
(176)
1,377
6,057
13
6,070
(4,693)
—
—
13
230
—
1,495
2,223
2,472
3,053
9,473
11,525
27
11,552
(2,079)
51
—
27
170
—
1,139
2,344
4,223
(4,791)
3,085
15,402
65
15,467
(12,382)
—
—
65
(2,751)
(4,680)
(2,001)
(12,317)
—
—
1,999
—
451
(301)
—
—
(301)
—
—
271
4
—
(4,405)
—
—
—
—
(246)
—
451
(1,796)
—
—
—
—
6,528
30
—
(5,759)
—
—
(4,405)
(1,796)
(5,759)
24
For the three and twelve months ended December 31, 2014
Revenues
Management fees on a three month and year ended basis continue to be nominal.
Commission revenues were $0.2 million on a three months ended basis and $1.5 million on a year ended basis, reflecting an increase of $0.1 million
(61.9%) and $0.4 million (31.3%), respectively, from the prior periods. The increases were the result of more private placement activity in SPW.
Interest income was $0.7 million on a three months ended basis and $2.2 million on a year ended basis, reflecting an increase of $0.1 million (11.9%)
and a decrease of $0.1 million (5.2%), respectively, from the prior periods. The increase on a three months ended basis was primarily due to higher
interest earned on SPW brokerage accounts. The decrease on a year ended basis was primarily due to lower interest income from loans receivable in
Corporate, which was partially offset by higher interest earned on SPW brokerage accounts coupled with interest earning cash deposits with banks
and brokerage.
Trailer fee income was $0.5 million on a three months ended basis and $2.5 million on a year ended basis, reflecting a decrease of $0.3 million (35.6%)
and $1.8 million (41.5%), respectively, from the prior periods. The decreases were due to a decline in the average trailer paying AUA of SPW. Trailer
fee income received by SPW from the SAM segment is an intercompany revenue, and as such, is eliminated on consolidation against the related trailer
fee expense in SAM.
Other income was nominal on a three months ended basis and $3.1 million on a year ended basis, reflecting an increase of $0.1 million and $7.8
million (163.7%), respectively, from the prior periods. The increase on a three months ended basis was due to higher proprietary investments income
and higher foreign exchange gains in the current period which were only partially offset by proprietary investment losses. The increase on a year ended
basis was due to: (i) gains on proprietary investments; (ii) foreign exchange gains; and (iii) income from proprietary investments. These increases more
than offset the revenue earned on the early redemption of a loan receivable in the prior period.
Expenses
General and administrative expenses (which include compensation and benefits expenses) were $4.1 million on a three months ended basis and $11.5
million on a year ended basis, reflecting a decrease of $1.9 million (32.0%) and $3.9 million (25.2%), respectively, from the prior periods. The decreases
were mainly due to prior period transition expenses associated with the departure of a Company executive.
Depreciation and amortization was nominal on both a three month and year ended basis.
Adjusted base EBITDA
Adjusted base EBITDA was negative $0.3 million on a three months ended basis and negative $1.8 million on a year ended basis, reflecting an increase
of $4.1 million (93.2%) and $4.0 million (68.8%), respectively, from the prior periods. The increases were due to a reduction in compensation and
benefits expenses coupled with increased foreign exchange gains, partially offset by lower trailer fee income.
25
SUMMARY OF QUARTERLY RESULTS
($ in thousands)
31-Mar-13
30-Jun-13
30-Sept-13
31-Dec-13 31-Mar-14 30-Jun-14 30-Sept-14
31-Dec-14
As at
As at
As at
As at
As at
As at
As at
As at
Assets Under Management
9,109,795
7,146,770
7,335,625
6,966,524
7,694,545
7,842,005
7,363,019
7,027,390
($ in thousands, except per share amounts)
31-Mar-13
30-Jun-13
30-Sept-13
31-Dec-13 31-Mar-14 30-Jun-14 30-Sept-14
31-Dec-14
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
Interest income
Unrealized and realized gains (losses) on proprietary
investments and loans
Other income
Total revenue
Net income (loss)
EBITDA
25,951
21,458
19,497
17,792
19,372
20,116
20,273
18,674
1,348
1,936
759
141
1,616
968
(3,049)
(9,466)
892
1,477
3,306
1,323
6,613
1,191
4,815
270
1,924
5,354
(3,286)
4,350
460
2,500
3,816
2,650
470
2,013
5,327
9,493
1,400
5,687
(4,291)
(7,292)
616
1,854
13,697
2,923
1,601
809
4,304
4,702
27,561
16,571
40,192
30,048
32,871
30,351
28,096
32,664
2,090
(6,710)
13,470
(90,111)
10,239
5,864
(8,071)
11,565
(87,706)
13,236
5,011
9,225
6,816
0.02
0.04
0.03
4,502
8,110
(363)
3,774
11,409
10,778
0.02
0.03
0.05
0.00
0.02
0.04
Adjusted base EBITDA
9,344
7,982
5,944
9,483
9,060
Basic and diluted earnings (loss) per share
Basic and diluted EBITDA per share
Basic and diluted adjusted base EBITDA per share
0.01
0.03
0.05
(0.04)
(0.05)
0.04
0.06
0.05
0.03
(0.37)
(0.36)
0.04
0.04
0.05
0.04
Dividends
On March 4, 2015, a dividend of $0.03 per common share was declared for the quarter ended December 31, 2014. This dividend is payable on March
30, 2015 to shareholders of record at the close of business on March 16, 2015.
On November 11, 2014, a dividend of $0.03 per common share was declared for the quarter ended September 30, 2014. This dividend was paid on
December 8, 2014 to shareholders of record at the close of business on November 21, 2014.
On August 6, 2014, a dividend of $0.03 per common share was declared for the quarter ended June 30, 2014. This dividend was paid on September
3, 2014 to shareholders of record at the close of business on August 18, 2014.
On May 14, 2014, a dividend of $0.03 per common share was declared for the quarter ended March 31, 2014. This dividend was paid on June 6, 2014
to shareholders of record at the close of business on May 23, 2014.
26
Capital Stock
Including 2.3 million common shares currently held in the EPSP Trust (December 31, 2013 - 2.0 million), which are eliminated on consolidation
under IFRS, total capital stock issued and outstanding was 248.3 million (December 31, 2013 - 247.9 million). On February 4, 2015, the Company
issued 1,400 shares pursuant to the terms and conditions of the 2011 Equity Incentive Plan for U.S. service providers.
The 0.4 million increase in common shares was largely due to: (i) the issuance of 0.2 million common shares from treasury to partially fund the
acquisition of fund management contracts from Arrow Capital Management Inc. in the first quarter of this year; and (ii) the issuance of 0.2 million
common shares from treasury in accordance with the share purchase agreement relating to the Global Companies acquisition.
Earnings per share for the three months and years ended December 31, 2014 and December 31, 2013 have been calculated using the weighted average
number of shares outstanding during the respective periods. Basic and diluted earnings (loss) per share for the three months and year ended
December 31, 2014 were $0.00 and $0.08 compared to $(0.37) and $(0.39), respectively, for the prior periods. Diluted earnings per share reflects the
dilutive effect of in-the-money stock options, shares held for the equity incentive plan, estimated earn-out shares being accrued over the Sprott Toscana
earn-out vesting period, and outstanding restricted stock units.
A total of 2,650,000 stock options have been issued pursuant to our stock option plan, all of which are exercisable, however none of these options
are in the money.
Liquidity and Capital Resources
Management fees and interest income 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 by the Company. Management fees are collected monthly or quarterly and interest income
collected monthly, which aids the Company's ability to manage cash flow. The Company believes that management fees and interest income will
continue to be sufficient to satisfy ongoing operating needs, including expenditures on corporate infrastructure, business development and information
systems. In addition, the Company holds sufficient cash and liquid securities to meet any other operating and capital requirements, if any, including
its contractual commitments. The nature of the Company's operations ensures that the largest outflows, such as trailer fees and monthly compensation,
are correlated with cash inflows such as management fees and interest income.
The Company has a credit facility with a major Canadian chartered bank in the amount of $35 million. Amounts may be borrowed under the facility
through prime rate loans, or bankers' acceptances. Amounts may also be borrowed in U.S. dollars through base rate loans.
The Company drew $15 million on the credit facility as at December 31, 2014 (December, 31, 2013 - $Nil) in order to fund future anticipated proprietary
investments.
SPW and SAM are required to maintain a minimum amount of regulatory capital calculated in accordance with the rules of IIROC and of the OSC,
respectively. In addition, SGRIL 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.
Commitments
Besides the Company's long-term lease agreement, it does not typically have material off-balance sheet contractual arrangements and obligations.
Occasionally however, there may be commitments to provide loans arising from the SRLC business segment or commitments to make investments
in the proprietary investments portfolio of the Company. As at December 31, 2014, the Company had $46.0 million of such loan commitments arising
from SRLC (December 31, 2013 - $1.9 million) and $0.8 million of investment purchase commitments in the proprietary investments portfolio
(December 31, 2013 - $Nil). For additional information on the Company's commitments, see Note 17 of the annual financial statements.
27
Significant Accounting Judgments and Estimates
The annual financial statements have been prepared in accordance with IFRS standards in effect as at December 31, 2014.
Compliance with IFRS requires the Company to exercise judgment, 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. Significant accounting judgments and estimates are described below.
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 these 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 and estimates as they occur.
Impairment of goodwill and intangible assets
All indefinite life intangible assets and goodwill are assessed for impairment. Finite life intangibles are only tested for impairment to the extent
indications of impairment exist at time of a quarterly assessment. In the case of goodwill and indefinite life intangibles, an annual test for impairment
augments the quarterly impairment indicator assessments. 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 estimates of future performance and fair value change.
Impairment of energy sector assets
By their nature, estimates of discovered and probable energy reserves, as they pertain to royalties and working interests, including the estimates of
future prices, costs, related future cash flows and the selection of a post-tax discount rate relevant to the assets in question are all subject to measurement
uncertainty.
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 valuation techniques and models. Model inputs are taken from observable markets where possible, but where this is not feasible,
unobservable inputs may be used. The use of unobservable inputs can involve significant judgment and materially affect the reported fair value of
financial instruments.
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 (in the case of options grants) the expected life of the option, volatility, and dividend yields, (and in the case of earn-out shares), the
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.
Deferred tax assets
Deferred tax assets are recognized for unused tax losses to the extent it is probable that sufficient taxable profit will be generated in order to utilize
the losses. 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 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: (i) changes in tax laws and regulations, both
domestic and foreign; (ii) an amendment to the calculation of partnership income allocation; or (iii) a change in foreign affiliate rules. Significant
management judgment is required to determine the amount of deferred tax assets that can be recognized based on the likely timing and the level of
future taxable profits together with future tax planning strategies.
Provisions, including provisions for loan losses and debentures
Due to the nature of provisions, a considerable part of their determination is based on estimates and judgments, including assumptions concerning
the likelihood of future events occurring. The actual outcome of these uncertain events may be materially different from the initial provision in the
Company's financial statements. With regard to loan losses and debenture impairments, management exercises judgment to determine whether
indicators of loan or debenture impairment exist, and if so, management must estimate the timing and amount of future cash flows from loans
receivable and debentures.
28
Investments in other entities
IFRS 10 Consolidated Financial Statements ("IFRS 10") and IAS 28 Investments in Associates and Joint Ventures ("IAS 28") provide for the use of
judgment in determining whether an investee should be included within the consolidated financial statements of the Company and on what basis
(subsidiary, joint venture or associate). Significant judgment is applied in evaluating facts and circumstances relevant to the Company and investee,
including: (i) the extent of the Company's direct and indirect interests in the investee; (ii) the level of compensation to be received from the investee
for management and other services provided to it; (iii) kick out rights available to other investors in the investee; and (iv) other indicators of the extent
of power that the Company has over the investee.
Managing Risk - Financial
Market risk
The Company separates market risk into three categories: price risk, interest rate risk and foreign currency 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. The
Company's revenues are also exposed to price risk since management fees, performance fees and carried interests are correlated with AUM, which
fluctuates with changes in the market values of the assets in the Funds and Managed Accounts managed by the Company. Commodity price risk
refers to uncertainty of future market values caused by fluctuation in the price of commodity. The Company may, from time to time: (i) hold certain
investments linked to the market prices of precious metals or energy assets; and (ii) enter into certain precious metal loans, where the repayment is
notionally tied to a specific commodity spot price at the time of the loan and downward changes to the price of the commodity can reduce the value
of the loan and the amounts ultimately repaid to the Company.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will adversely affect the value of, or cash flows from, financial instrument
assets. The Company’s earnings, particularly through its SRLC segment are exposed to volatility as a result of sudden changes in interest rates.
Foreign currency risk
Foreign currency risk arises from foreign exchange rate movements that could negatively impact either the carrying value of financial assets and
liabilities or the related cash flows when translating those balances into Canadian dollars. The Company's primary foreign currency is the United States
dollar ("USD"). The Company may employ certain hedging strategies to mitigate foreign currency risk.
Credit risk
Credit risk is the risk that a borrower will not honor its commitments and a loss to the Company may result. Credit risk generally arises in the Company's
loans receivable, proprietary investments and other areas.
Loans receivable
The Company incurs credit risk primarily in the loan portfolio of SRLC. In addition to the relative default probability of SRLC borrowers, credit risk
is also dependent on loss given default, which can increase credit risk if the values of the underlying assets securing the Company's loans decline to
levels approaching or below the loan amounts. Any decrease in real estate values or commodity or energy prices may delay the development of the
underlying security or business plans of the borrower and will adversely affect the value of the Company's security. Additionally, the value of the
Company's underlying security in a resource loan and resource debenture can be negatively affected if the actual amount or quality of the commodity
proves to be less than that estimated, or the ability to extract the commodity proves to be more difficult or more costly than estimated. During the
resource loan and resource debenture origination process, management takes into account a number of factors and is committed to several processes
to ensure that this risk is appropriately mitigated. These include:
•
•
•
•
•
•
•
emphasis on first priority and/or secured financings;
the investigation of the creditworthiness of borrowers;
the employment of qualified and experienced loan professionals;
a review of the sufficiency of the borrower’s business plans including plans that will enhance the value of the underlying security;
frequent and documented status updates on business plans;
the engagement of qualified independent advisors (e.g. lawyers, engineers and geologists) to protect Company interests; and
legal reviews that are performed to ensure that all due diligence requirements are met prior to funding.
29
Proprietary investments
The Company incurs credit risk when entering into, settling and financing various proprietary transactions.
Other
The majority of accounts receivable relate to management and performance fees receivable from the Funds, Managed Accounts and Managed
Companies managed by the Company. Credit risk is managed in this regard by dealing with counterparties that the Company believes to be creditworthy
and by actively monitoring credit exposure and the financial health of the counterparties.
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 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's exposure to liquidity risk as it relates to loans receivable arise from fluctuations in cash flows from making loan advances and receiving
loan repayments. The Company manages its loan commitment liquidity risk through the ongoing monitoring of scheduled loan fundings and
repayments.
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 team is responsible for reviewing 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. To meet any liquidity shortfalls, actions taken by the Company could include: syndicating a portion of its
loans; slowing its lending activities; drawing on available loan facilities; liquidating proprietary investments; and/or issuing common shares.
Concentration risk
The majority of the Company's AUM as well as its proprietary investments and loans are focused on the natural resource sector.
Managing Risk - Other
Confidentiality of Information
Confidentiality is essential to the success of the Company's business, and it strives 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. The Company keeps the affairs of its clients
confidential and does not disclose the identities of clients (absent expressed client consent to do so). If a prospective client requests a reference, the
Company will not provide the name of an existing client before receiving permission from that client to do so.
Conflicts of Interest
The Company established a number of policies with respect to employee personal trading. Employees may not trade any of the securities held or
being considered for investment by any of the Company's 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 employees must comply with the Company's Code of Ethics.
The code establishes strict rules for professional conduct including the management of conflicts of interest.
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 the Company's 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 evaluate quarterly the DC&P and ICFR. As at December 31, 2014, the
Company's CEO and CFO concluded that the Company's DC&P and ICFR were properly designed and were operating effectively.
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 and approval. The Company established an
independent review committee for public Funds. As required by NI 81-107, the Company established written policies and procedures for dealing with
conflict of interest matters and maintains records in respect of these matters and provides 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 the Company and to the holders of interests in public mutual Funds in respect of its functions.
30
Insurance
The Company maintains appropriate insurance coverage for general business and liability risks as well as insurance coverage required by regulation.
Insurance coverage is reviewed periodically to ensure continued adequacy.
Internal Controls and Procedures
Several of the Company's subsidiaries operate in regulated environments and are subject to business conduct rules and other rules and regulations.
The Company has internal control policies related to 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.
Additional information relating to the Company, including the Company's Annual Information Form is available on SEDAR at www.sedar.com.
31
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, 2014. 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 4, 2015
Steven Rostowsky
Chief Financial Officer
32
INDEPENDENT AUDITORS' REPORT
To the shareholders of Sprott Inc.
We have audited the accompanying consolidated financial statements of Sprott Inc. (the “Company”), which comprise the consolidated balance
sheets as at December 31, 2014 and 2013, and the consolidated statements of operations, comprehensive income (loss), 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 the Company as at December 31,
2014 and 2013, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Toronto, Canada
March 4, 2015
Chartered Professional Accountants
Licensed Public Accountants
33
CONSOLIDATED BALANCE SHEETS
As at
($ in thousands of Canadian dollars)
Assets
Current
Cash and cash equivalents
Fees receivable
Loans receivable
Other assets
Income taxes recoverable
Total current assets
Proprietary investments
Loans receivable
Other assets
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
Loan payable
Total current liabilities
Deferred income taxes
Total liabilities
Shareholders' equity
Capital stock
Contributed surplus
Retained earnings (deficit)
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
Commitments
See accompanying notes
Eric Sprott
Director
December 31
2014
December 31
2013
120,774
13,176
51,317
6,975
6,133
198,375
112,592
70,592
4,108
6,270
32,190
50,427
6,723
282,902
481,277
28,340
9,324
15,000
52,664
10,001
62,665
414,668
42,199
(58,655)
20,400
418,612
481,277
(Note 7)
(Notes 3 & 8)
(Note 4)
(Note 7)
(Note 8)
(Note 5)
(Note 6)
(Note 6)
(Note 11)
(Note 9)
(Note 11)
(Note 10)
(Note 10)
(Note 17)
James Roddy
Director
115,670
13,793
54,402
17,071
3,545
204,481
94,268
49,850
3,613
7,010
32,597
46,378
17,523
251,239
455,720
13,151
9,973
—
23,124
12,298
35,422
410,420
45,664
(48,244)
12,458
420,298
455,720
34
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands of Canadian dollars, except for per share amounts)
Revenue
Management fees
Performance fees
Commissions
Interest income
Unrealized and realized gains (losses) on proprietary investments and loans
Other income
Total revenue
Expenses
Compensation and benefits
Stock-based compensation
Trailer fees
General and administrative
Amortization of intangibles
Impairment of intangibles
Impairment of goodwill
Amortization of property and equipment
Total expenses
Income (loss) before income taxes for the year
Provision (recovery) for income taxes
Net income (loss) for the year
For the year ended
December 31 December 31
2014
2013
78,435
10,693
7,837
20,184
(4,583)
11,416
84,698
8,994
6,220
9,844
(14,478)
19,094
123,982
114,372
38,881
3,373
12,520
32,606
5,455
2,308
—
778
95,921
28,061
8,672
19,389
44,759
10,264
11,898
27,479
6,788
10,360
87,960
926
200,434
(86,062)
(4,801)
(81,261)
(Notes 3 & 8)
(Note 13)
(Notes 10 & 13)
(Note 13)
(Note 6)
(Note 6)
(Note 6)
(Note 5)
(Note 11)
Basic and diluted earnings (loss) per share
(Note 10)
$
0.08 $
(0.39)
See accompanying notes
35
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in thousands of Canadian dollars)
Net income (loss) for the year
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Foreign currency translation gain (loss) on foreign operations (taxes of $Nil)
Total other comprehensive income
Comprehensive income (loss)
See accompanying notes
For the year ended
December 31 December 31
2014
2013
19,389
(81,261)
7,942
7,942
11,640
11,640
27,331
(69,621)
36
)
1
0
0
,
3
(
8
9
2
,
0
2
4
7
—
)
0
9
3
(
2
4
9
,
7
4
9
7
3
7
3
,
3
)
0
0
8
,
9
2
(
9
8
3
,
9
1
—
—
2
4
9
,
7
—
—
—
—
—
—
2
1
6
,
8
1
4
0
0
4
,
0
2
9
0
7
7
1
3
,
1
0
2
6
6
1
,
)
5
5
2
1
(
,
7
0
4
6
1
1
,
)
4
4
1
(
4
6
2
0
1
,
)
4
0
9
1
(
,
3
3
6
4
2
,
)
2
9
5
5
2
(
,
)
1
6
2
1
8
(
,
8
1
8
—
—
—
0
4
6
1
1
,
—
—
—
—
—
—
7
3
8
9
2
0
2
4
,
8
5
4
2
1
,
8
5
4
,
2
1
)
4
4
2
,
8
4
(
l
a
t
o
T
y
t
i
u
q
E
d
e
t
a
l
u
m
u
c
c
A
r
e
h
t
O
e
v
i
s
n
e
h
e
r
p
m
o
C
e
m
o
c
n
I
d
e
n
i
a
t
e
R
s
g
n
i
n
r
a
E
)
t
i
c
i
f
e
D
(
d
e
t
u
b
i
r
t
n
o
C
l
s
u
p
r
u
S
f
o
r
e
b
m
u
N
s
e
r
a
h
S
k
c
o
t
S
l
a
t
i
p
a
C
g
n
i
d
n
a
t
s
t
u
O
)
s
e
r
a
h
s
f
o
r
e
b
m
u
n
n
a
h
t
r
e
h
t
o
,
s
r
a
l
l
o
d
n
a
i
d
a
n
a
C
f
o
s
d
n
a
s
u
o
h
t
n
i
$
(
Y
T
I
U
Q
E
'
S
R
E
D
L
O
H
E
R
A
H
S
N
I
S
E
G
N
A
H
C
F
O
S
T
N
E
M
E
T
A
T
S
D
E
T
A
D
I
L
O
S
N
O
C
—
—
—
—
—
—
—
)
0
0
8
,
9
2
(
9
8
3
,
9
1
)
5
5
6
,
8
5
(
9
0
6
8
5
,
—
—
—
—
—
—
—
—
)
2
9
5
5
2
(
,
)
1
6
2
1
8
(
,
)
4
4
2
8
4
(
,
4
6
6
,
5
4
)
5
1
3
,
1
(
)
8
0
9
,
3
(
—
—
)
3
1
6
,
1
(
3
7
3
,
3
)
2
(
—
—
)
6
8
6
,
1
(
5
1
9
,
3
0
2
4
,
0
1
4
—
—
3
2
2
,
1
—
6
9
7
—
—
5
0
2
,
2
7
6
)
0
0
0
,
0
0
0
,
1
(
7
5
8
,
5
4
9
,
5
4
2
—
—
—
—
—
0
0
5
,
7
7
1
4
6
7
,
5
2
2
)
0
1
e
t
o
N
(
)
0
1
e
t
o
N
(
)
0
1
e
t
o
N
(
)
0
1
e
t
o
N
(
)
4
1
e
t
o
N
(
9
9
1
,
2
4
8
6
6
,
4
1
4
6
2
3
,
1
2
0
,
6
4
2
8
0
8
2
4
,
—
)
8
5
5
(
—
)
7
0
7
3
(
,
)
4
3
2
1
(
,
4
6
2
0
1
,
)
4
0
9
1
(
,
)
5
(
—
—
4
7
4
5
1
2
,
1
0
2
6
6
1
,
)
7
9
6
(
4
1
7
3
,
—
0
9
0
1
,
—
—
—
—
8
3
6
4
2
,
4
6
6
5
4
,
0
2
4
0
1
4
,
)
0
0
5
8
4
4
(
,
5
2
1
7
2
6
,
—
0
0
5
7
7
1
,
—
—
,
9
5
1
7
7
5
7
,
—
—
,
7
7
6
9
4
0
9
6
1
,
,
6
9
8
2
6
9
8
6
,
,
7
5
8
5
4
9
5
4
2
,
s
n
o
i
t
a
r
e
p
o
n
g
i
e
r
o
f
n
o
n
i
a
g
n
o
i
t
a
l
s
n
a
r
t
y
c
n
e
r
r
u
c
n
g
i
e
r
o
F
n
a
l
p
e
v
i
t
n
e
c
n
i
y
t
i
u
q
e
f
o
g
n
i
t
s
e
v
n
o
d
e
s
a
e
l
e
r
s
e
r
a
h
S
s
e
i
t
i
r
u
c
e
s
e
l
a
s
r
o
f
e
l
b
a
l
i
a
v
a
n
o
n
i
a
g
d
e
z
i
l
a
e
r
n
u
t
e
N
n
a
l
p
e
v
i
t
n
e
c
n
i
y
t
i
u
q
e
r
o
f
d
e
r
i
u
q
c
a
s
e
r
a
h
S
3
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
A
n
o
i
t
a
r
e
d
i
s
n
o
c
e
s
a
h
c
r
u
p
l
a
n
o
i
t
i
d
d
A
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
k
c
o
t
S
y
r
u
s
a
e
r
t
m
o
r
f
d
e
u
s
s
i
s
e
r
a
h
S
s
n
o
i
t
a
r
e
p
o
n
g
i
e
r
o
f
n
o
n
i
a
g
n
o
i
t
a
l
s
n
a
r
t
y
c
n
e
r
r
u
c
n
g
i
e
r
o
F
n
a
l
p
e
v
i
t
n
e
c
n
i
y
t
i
u
q
e
f
o
g
n
i
t
s
e
v
n
o
d
e
s
a
e
l
e
r
s
e
r
a
h
S
n
a
l
p
e
v
i
t
n
e
c
n
i
y
t
i
u
q
e
r
o
f
d
e
r
i
u
q
c
a
s
e
r
a
h
S
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
k
c
o
t
s
n
o
t
e
s
s
a
x
a
t
d
e
r
r
e
f
e
D
y
r
u
s
a
e
r
t
m
o
r
f
d
e
u
s
s
i
s
e
r
a
h
S
n
o
i
t
a
r
e
d
i
s
n
o
c
e
s
a
h
c
r
u
p
l
a
n
o
i
t
i
d
d
A
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
k
c
o
t
S
4
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
e
c
n
a
l
a
B
e
m
o
c
n
i
t
e
N
2
1
0
2
,
1
3
r
e
b
m
e
c
e
D
t
A
n
o
i
t
i
s
i
u
q
c
a
s
s
e
n
i
s
u
B
3
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
e
c
n
a
l
a
B
s
e
t
o
n
g
n
i
y
n
a
p
m
o
c
c
a
e
e
S
s
s
o
l
t
e
N
d
e
r
a
l
c
e
d
s
d
n
e
d
v
D
i
i
d
e
r
a
l
c
e
d
s
d
n
e
d
v
D
i
i
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31 ($ in thousands of Canadian dollars)
2014
2013
Operating Activities
Net income (loss) for the year
Add (deduct) non-cash items:
Losses on proprietary investments and loans receivable
Stock-based compensation
Amortization of property, equipment and intangible assets
Impairment of intangible assets
Impairment of goodwill
Gain on bargain purchase
Deferred income taxes (recovery)
Current income tax expense (recovery)
Other items
Income taxes paid
Changes in:
Fees receivable and other assets
Loans receivable
Accounts payable, accrued liabilities, compensation and employee bonuses payable
Cash provided by operating activities
Investing Activities
Purchase of proprietary investments
Sale of proprietary investments
Purchase of property and equipment
Deferred sales commissions paid
Cash paid for acquisitions
Cash acquired on acquisition
Purchase of intangible assets
Cash provided by (used in) investing activities
Financing Activities
Acquisition of common shares for equity incentive plan
Shares issued from treasury
Loan payable
Dividends paid
Cash used in financing activities
Effect of foreign exchange on cash balances
Net increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash and cash equivalents:
Cash
Short-term deposits
See accompanying notes
19,389
4,583
3,373
6,233
2,308
—
—
8,674
(132)
(9,155)
(2,060)
10,062
(20,397)
14,693
37,571
(62,924)
51,928
(13)
(1,716)
—
—
(3,544)
(16,269)
(3,001)
—
15,000
(29,800)
(17,801)
1,603
5,104
115,670
120,774
115,028
5,746
120,774
(81,261)
14,478
10,264
7,714
10,360
87,960
(5,457)
(8,806)
4,005
(8,447)
(15,605)
(8,699)
19,884
(22,731)
3,659
(62,925)
34,858
(635)
(1,969)
(20,806)
88,307
(828)
36,002
(1,255)
24,500
—
(25,592)
(2,347)
956
38,270
77,400
115,670
95,941
19,729
115,670
38
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
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.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance
These audited consolidated financial statements for the years ended December 31, 2014 and 2013 ("financial statements") have been prepared
in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
These financial statements were authorized for issue by a resolution of the Board of Directors of the Company on March 4, 2015.
Basis of presentation
The financial statements have been prepared on a going concern basis and on a historical cost basis, except for financial assets and financial
liabilities classified as held-for-trading ("HFT"), designated as fair value through profit or loss ("FVTPL"), or available-for-sale ("AFS"), all
of which have been measured at fair value. The financial statements are presented in Canadian dollars and all values are rounded to the
nearest thousand ($000), except when indicated otherwise.
Principles of consolidation
The financial statements of the Company are prepared on a consolidated basis so as to include the accounts of all limited partnerships and
corporations the Company is deemed to control under IFRS. Controlled limited partnerships and corporations ("subsidiaries") are consolidated
from the date the Company obtains control. All intercompany balances with subsidiaries are eliminated upon consolidation. Subsidiary
financial statements are prepared over the same reporting period as the Company's and are based on accounting policies consistent with that
of the Company.
Control exists if the Company has power over the entity, exposure or rights to variable returns from its involvement with the entity and the
ability to use its power over the entity to affect the amount of returns the Company receives. In many, but not all, instances control will exist
when the Company owns more than one half of the voting rights of a corporation, or is the sole limited and general partner of a limited
partnership.
The Company currently controls the following subsidiaries:
•
•
•
•
•
•
•
•
•
•
Sprott Asset Management LP ("SAM");
Sprott Private Wealth LP ("SPW");
Sprott Consulting LP ("SC");
Sprott Asia LP ("Sprott Asia");
Sprott U.S. Holdings Inc., parent company of: (i) Rule Investments Inc. (the parent of Sprott Global Resource Investments Ltd.
(“SGRIL”)); (ii) Sprott Asset Management USA Inc. (“SAM US”); and (iii) Resource Capital Investment Corporation (“RCIC”).
Collectively, the interests of Sprott U.S. Holdings Inc. are referred to as the “Global Companies” in these financial statements;
Sprott Resource Lending Corp. ("SRLC");
Toscana Energy Corporation ("TEC") and Toscana Capital Corporation ("TCC") (Collectively, "Sprott Toscana");
Sprott Genpar Ltd.;
SAMGENPAR Ltd.; and
Sprott Inc. 2011 Employee Profit Sharing Plan Trust (the “Trust”).
39
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Investments in funds
Investments in funds ("Fund" or "Funds") managed by the Company and included in proprietary investments, are assessed to determine
whether the Company has control, joint control or significant influence. This determination includes consideration of all facts and
circumstances relevant to a Fund, including the extent of the Company's direct and indirect interests in a Fund, the level of compensation
to be received from a Fund for management and other services provided to it, kick out rights available to other investors and other indicators
of power the Company has over a Fund. If a Fund is determined to be controlled, it will be consolidated by the Company. If a Fund is
determined to be subject to significant influence, the Company may designate the investment at fair value through profit or loss in accordance
with IAS 39 Financial Instruments: Recognition and Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures.
The Company manages a range of Funds that take the form of public mutual funds, alternative investment strategies, bullion funds and
fixed-term limited partnerships, all of which, meet the definition of structured entities under IFRS. The principal place of business of the
Funds is Toronto, Ontario, which is where the ultimate manager of all the Funds resides. As at December 31, 2014, assets under management
in public mutual funds was $1.8 billion (December 31, 2013 - $1.5 billion); alternative investment strategies was $0.8 billion (December 31,
2013 - $0.9 billion); bullion funds was $3.2 billion (December 31, 2013 - $3.5 billion); and fixed-term limited partnerships was $0.3 billion
(December 31, 2013 - $0.4 billion). The Company had investments in 22 Funds (December 31, 2013 - 37) with an average ownership interest
of 8.95% (December 31, 2013 - 7.6%). The Company provides no guarantees against the risk of financial loss to the investors of these
investment funds.
Recognition of income
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.
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, and presented as
performance fees, are recorded on an accrual basis following the disposition of underlying portfolio investments.
Trailer fee income and commission income are recognized on an accrual basis over the period during which the related service is rendered.
Interest income is recognized on an accrual basis using the effective interest method. Under the effective interest method, the interest rate
realized is not necessarily the same as the stated rate in the loan or debenture documents. The effective interest rate is the rate required to
discount the future value of all loan or debenture cash flows to their present value and is adjusted for the receipt of cash and non-cash items
in connection with the loan.
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
Investments in gold bullion are measured at fair value determined by reference to published price quotations, with unrealized and realized
gains and losses recorded in income in accordance with IAS 40 Investment Property (IAS 40) fair value model. Investment transactions in
physical gold bullion are accounted for on the business day following the date the order to buy or sell is executed.
Public equities, share purchase warrants and fixed income securities are measured at fair value and are accounted for on a trade-date basis.
Mutual fund and alternative investment strategy investments are valued using the net asset value per unit of the fund, which represents the
underlying net assets at fair values determined using closing market prices. These investments are generally made in the process of launching
a new fund and are redeemed (if open-end) or sold (if closed-end) as third party investors subscribe. The balance represents the Company's
maximum exposure to loss associated with the investments.
Private holdings include the following:
Private company investments
Private company investments are classified as HFT and carried at fair value based on the value of the Company's interests in the private
companies determined from financial information provided by management of the private companies, which may include operating results,
subsequent rounds of financing and other appropriate information. Any change in fair value is recognized on the consolidated statement
of operations.
Energy sector investments
The Company has investments in override royalties and working interest properties. Interests in override royalties are accounted for as AFS
investments, and thus, are fair valued through other comprehensive income, which is based on estimated future cash flows and expected
return from future royalty payments. Working interest properties are accounted for in accordance with IAS 16 Property, Plant and Equipment.
The initial cost of working interest assets consist of purchase price or construction costs, any costs directly attributable to bringing the asset
40
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
into operation, including directly attributable general and administrative expenses, the initial estimate of the decommissioning obligation
and, for qualifying assets, borrowing costs. All of these costs are initially capitalized as part of proprietary investments on the Company's
balance sheets and are net of accumulated depletion and impairment charges, if any. When a development project moves into the production
stage, the capitalization of certain construction/development costs ceases and costs are regarded as part of inventory or expensed, except
for costs that qualify for capitalization relating to energy property asset additions, improvements, or new developments. Working interests
at the development and production stage are depleted on a units-of-production basis over total proved developed and undeveloped energy
reserves, as appropriate. The Company does not have oil and gas working interests in the exploration and evaluation stage.
Foreclosed properties
Foreclosed properties held for sale include properties for which the Company is entitled, through court order, to take title or to enforce the
sale, unconditionally. In accordance with IFRS 5 Non-current Assets held For Sale and Discontinued Operations, foreclosed properties held for sale
that are in saleable condition and for which a sale is considered probable are classified as held for sale and are initially measured at the lower
of carrying value or fair value less estimated costs to sell. Subsequent changes in carrying values of foreclosed properties are reported within
unrealized and realized gains (losses) on proprietary investments and loans receivable. Amortization is not recorded on foreclosed properties
held for sale. An extension of the period required to complete the sale would not preclude the properties from being classified as held for
sale when the delay is caused by events or circumstances beyond the Company's control and there is sufficient evidence that the Company
remains committed to its plan to sell the asset. The Company uses management's best estimate to determine the fair value of foreclosed
properties, which involves engaging realtors, valuation experts and other professionals as deemed necessary to obtain independent property
appraisals and assessments of market conditions. Costs to sell include property taxes and realtor commissions.
Loans receivable
Precious metal loans
Precious metal loans are initially measured at fair value. After initial measurement, precious metal loans are designated as FVTPL or classified
as HTM. All funds advanced to a borrower are first allocated to the value of any shares, warrants, commitment fees, etc. and are recognized
as part of proprietary investments on the Company's balance sheet. The remaining funds are recognized as loan principal on the balance
sheet. At each reporting period, precious metal loans designated as FVTPL are fair valued using published futures contract prices for precious
metals and discount rates to reflect the time value of money. Discount rates are reviewed at each reporting period and adjusted as necessary
for changes in credit risk of the borrower, or for changes in relevant market conditions. To assess market changes, the Company reviews
yields to maturity for a group of comparable loans or borrowings trading in the market based on similar characteristics such as term to
maturity, security rankings and business risks.
Resource loans and debentures
Resource loans and debentures are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
They are initially measured at fair value. After initial measurement, they are subsequently measured at amortized cost using the effective
interest method, less impairment, if any.
Fees received for originating loans are considered an integral part of the yield earned on the loan and are recognized in interest income over
the term of the loan using the effective interest method. Fees received may include cash payments and/or securities in the borrower.
Impairment of resource loans and debentures
Loans and debentures invested in by the Company are considered to be impaired when there is objective evidence that, as a result of one
or more events that have occurred after the initial recognition of the loan or debenture, the estimated future cash flows have been affected.
At each reporting date, management assesses whether there are indicators that specific loan loss provisions (or impairment charges in the
case of debentures) are required based on factors that may include economic and market trends, the impairment status of loans or debentures,
the quoted credit rating of the borrower, market value of the asset, and appraisals, if any, of the security underlying the loan or debenture.
If these factors indicate that the carrying value may not be recoverable, or the repayment of contractual amounts due may be delayed,
management compares the carrying value with the discounted present values of estimated future cash flows which are discounted using the
original effective interest rate on the loan or debenture. To the extent that discounted estimated future cash flows are less than the carrying
value, a specific loan loss provision (or impairment charge in the case of a debenture) is recorded. Any subsequent recognition of interest
income for which a specific loan loss provision or impairment charge exists, is calculated at the discount rate used in determining the provision
or impairment charge, which may differ from the contractual rate of interest.
Should the cash flow assumptions used to determine the original specific loan loss provision or impairment charge change, the specific loan
loss provision or impairment charge may be reversed. A specific loan loss provision or impairment charge is reversed only to the extent that
the revised carrying value does not exceed its amortized cost that would have been recorded had no specific loan loss provision or impairment
charge been recognized.
41
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Financial instruments
Financial instrument assets held by the Company are classified as HFT, designated as FVTPL, AFS, HTM or as loans and receivables. Financial
instrument liabilities may be classified as either HFT or other. All financial instruments held by the Company are initially measured at fair
value. After initial recognition, financial instruments classified as HFT, AFS or those designated as FVTPL are measured at fair value using
quoted market prices in active markets where available or through the use of valuation techniques as appropriate. Precious metal loans are
designated as FVTPL or classified as HTM. Changes in fair value of the Company's financial instruments are reflected in net income, with
the exception of: (i) financial instruments classified as HTM, loans and receivables and other financial liabilities, which are all measured at
amortized cost using the effective interest rate method; and (ii) AFS investments that have their changes in fair value recorded in other
comprehensive income. Transaction costs related to financial assets classified as HFT or designated as FVTPL 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, AFS 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 have occurred after 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 are classified as HFT;
Fees receivable, proceeds receivable (part of other assets) and loans receivable (other than precious metal loans) are classified as
loans and receivables;
Precious metal loans are designated as FVTPL or classified as HTM;
Proprietary investments in financial instruments are classified as follows: (i) public equities and share purchase warrants are
classified as HFT; (ii) mutual funds and alternative investment strategies are classified as HFT; (iii) fixed income securities are
classified as HFT; (iv) private holdings are classified as HFT or AFS; and
Accounts payable and accrued liabilities, loan payable and compensation and employee bonuses payable are classified as other
financial liabilities.
Fair value option
A financial instrument can be designated as FVTPL (the fair value option) on its initial recognition even if the financial instrument was not
acquired or incurred principally for the purpose of selling or repurchasing it in the near term. An instrument that is designated as FVTPL
must have a reliably measurable fair value and satisfy one of the following criteria: (i) it eliminates or significantly reduces a measurement or
recognition inconsistency that would otherwise arise from measuring assets or liabilities, or recognizing gains and losses on them on a different
basis; (ii) it belongs to a group of financial assets or financial liabilities or both that are managed, evaluated, and reported to senior management
on a fair value basis in accordance with the Company's documented investment or risk management strategy, and information about the
group is provided internally on that basis to the Company's key management personnel; or (iii) there is an embedded derivative in the financial
or non-financial host contract and the embedded derivative can significantly modify the cash flows required under the contract.
Financial instruments designated as FVTPL are recorded at fair value with any unrealized gain or loss being included with unrealized and
realized gains (losses) on proprietary investments and loans. These financial instruments cannot be reclassified out of the FVTPL category
while they are held or issued. Certain of the Company's precious metal loans are currently designated as FVTPL.
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; and
Level 3:
valuation techniques with significant unobservable market inputs.
The Company will transfer financial instruments into or out of levels in the fair value hierarchy to the extent the instrument no longer satisfies
the criteria for inclusion in the category in question. Level 3 valuations are prepared by the Company and reviewed and approved by
management at each reporting date. Valuation results, including the appropriateness of model inputs, are compared to actual market
transactions to the extent readily available. Valuations of level 3 assets are also discussed with the Audit Committee as deemed necessary by
the Company.
42
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Available-for-sale investments
AFS investments are measured at fair value. Unrealized gains and losses arising from changes in fair value are included in other comprehensive
income. When an AFS investment is sold, the cumulative gain or loss recorded in other comprehensive income is recycled into net income.
At each reporting date, and more frequently when conditions warrant, the Company evaluates AFS investments to determine whether there
is any objective evidence of impairment. If an AFS investment is impaired, the cumulative unrealized loss previously recognized in other
comprehensive income is removed from equity and recognized in net income. Subsequent to impairment, further declines in fair value are
recorded in net income, while increases in fair value are recognized in other comprehensive income until the AFS investment is sold.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount reported on the consolidated balance sheets if, and only if, there is a
currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets
and settle the liabilities simultaneously.
Property and equipment
Property and equipment are recorded at cost and are amortized on a declining balance basis over the expected useful life which ranges from
1 to 5 years. Leasehold improvements are amortized on a straight-line basis over the term of the lease. Artwork is not amortized since it
does not have a determinable useful life. The residual values, useful life and methods of amortization for property and equipment are reviewed
at each reporting date and adjusted prospectively, if necessary.
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 an intangible asset is either finite or indefinite. Intangible assets other than goodwill are recognized when they are separable
or arise from contractual or other legal rights, and have fair values that can be reliably measured.
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment at each reporting date, or more
frequently if changes in circumstances indicate that the carrying value may be impaired. Intangible assets with finite lives are only tested for
impairment if indicators of impairment exist at the time of an impairment assessment. The amortization period and the amortization method
for an intangible asset with a finite useful life is reviewed at each reporting date. 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 operations.
Intangible assets with indefinite useful lives are not amortized, but are assessed for impairment at each reporting date, or more frequently if
changes in circumstances indicate that the carrying value may be impaired. In addition to impairment indicator assessments, indefinite life
intangibles must be tested annually for impairment. The indefinite life of an intangible asset is reviewed annually to determine whether the
indefinite life continues to be supportable. If no longer supportable, changes in useful life from indefinite to finite are made prospectively.
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 but cannot 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.
Business combinations, goodwill and gain on bargain purchase
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 fair values of such identifiable net assets is recorded as goodwill. A gain on bargain
purchase occurs where the purchase price is less than the fair values of net identifiable assets acquired. Gain on bargain purchase is recognized
in the consolidated statements of operations on the date of acquisition and included in other income. 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 rather, is assessed for impairment indicators
at each reporting date, or more frequently if changes in circumstances indicate that the carrying value may be impaired. In addition to quarterly
impairment indicator assessments, goodwill must be tested annually for impairment. For the purpose of impairment testing, goodwill is
allocated to each of the Company's cash generating units (CGUs) that are expected to benefit from the acquisition. The recoverable amount
of a CGU is compared to its carrying value plus any goodwill allocated to the CGU. If the recoverable amount of a CGU is less than its
carrying value plus allocated goodwill, an impairment charge is recognized, first against the carrying value of the goodwill, with any remaining
43
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
difference being applied against the carrying value of assets contained in the impacted CGUs. Impairment losses on goodwill are recorded
in the consolidated statements of operations and cannot be subsequently reversed.
Income taxes
Income tax is comprised of current and deferred tax.
Income tax is recognized in the consolidated statements of operations except to the extent that it relates to items recognized directly in other
comprehensive income or elsewhere in equity, in which case, the related taxes are also recognized in the consolidated statements of
comprehensive income (loss) or elsewhere in 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 ventures or joint operations to the extent
they are controlled by the Company and they will not reverse in the foreseeable future;
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 payment 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. 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 earn-out shares
is determined using appropriate valuation models. Compensation expense for the Trust is determined based on the value of the Company's
common shares purchased by the Trust. 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 vesting of common shares in the Trust, the contributed surplus previously recorded is credited
to capital stock. On the exercise of DSUs, the liability previously recorded is credited to cash.
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 period.
The Company applies the treasury stock method to determine the dilutive impact, if any, of stock options and unvested shares purchased
for the Trust. 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
Accounts 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 the functional currency of the Company. The Canadian dollar is also the functional currency of
all its subsidiaries, with the exception of Global Companies, which uses the U.S. dollar as its functional currency. Accordingly, the assets and
liabilities of Global Companies are translated into Canadian dollars using the rate in effect on the date of the consolidated balance sheets.
44
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
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 Global Companies, 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 these 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 and estimates as they occur.
Impairment of goodwill and intangible assets
All indefinite life intangible assets and goodwill are assessed for impairment. Finite life intangibles are only tested for impairment to the
extent indications of impairment exist at time of a quarterly assessment. In the case of goodwill and indefinite life intangibles, an annual
test for impairment augments the quarterly impairment indicator assessments. 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 estimates of future performance and fair value change.
Impairment of energy sector assets
By their nature, estimates of discovered and probable energy reserves, as they pertain to royalties and working interests, including the estimates
of future prices, costs, related future cash flows and the selection of a post-tax discount rate relevant to the assets in question are all subject
to measurement uncertainty.
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 valuation techniques and models. Model inputs are taken from observable markets where possible, but
where this is not feasible, unobservable inputs may be used. The use of unobservable inputs can involve significant judgment and materially
affect the reported fair value of financial instruments.
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 (in the case of options grants) the expected life of the option, volatility, and dividend yields, (and in
the case of earn-out shares), the 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.
Deferred tax assets
Deferred tax assets are recognized for unused tax losses to the extent it is probable that sufficient taxable profit will be generated in order
to utilize the losses. 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 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: (i) changes in tax
laws and regulations, both domestic and foreign; (ii) an amendment to the calculation of partnership income allocation; or (iii) a change in
foreign affiliate rules. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized
based on the likely timing and the level of future taxable profits together with future tax planning strategies.
Provisions, including provisions for loan losses and debentures
Due to the nature of provisions, a considerable part of their determination is based on estimates and judgments, including assumptions
concerning the likelihood of future events occurring. The actual outcome of these uncertain events may be materially different from the
initial provision in the Company's financial statements. With regard to loan losses and debenture impairments, management exercises judgment
to determine whether indicators of loan or debenture impairment exist, and if so, management must estimate the timing and amount of
future cash flows from loans receivable and debentures.
45
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Investments in other entities
IFRS 10 Consolidated Financial Statements ("IFRS 10") and IAS 28 Investments in Associates and Joint Ventures ("IAS 28") provide for the use of
judgment in determining whether an investee should be included within the consolidated financial statements of the Company and on what
basis (subsidiary, joint venture or associate). Significant judgment is applied in evaluating facts and circumstances relevant to the Company
and investee, including: (i) the extent of the Company's direct and indirect interests in the investee; (ii) the level of compensation to be
received from the investee for management and other services provided to it; (iii) kick out rights available to other investors in the investee;
and (iv) other indicators of the extent of power that the Company has over the investee.
Accounting policies adopted January 1, 2014
Amendments to IAS 32, Financial Instruments: Presentation ("IAS 32")
The amendments to IAS 32 clarify the criteria that should be considered in determining whether an entity has a legally enforceable right of
set off in respect of its financial instruments. Amendments to IAS 32 were applicable to annual periods beginning on or after January 1,
2014, with retrospective application required. The adoption of amendments to IAS 32 did not have a material impact on the Company's
financial statements.
IFRIC 21, Levies ("IFRIC 21")
IFRIC 21 provides guidance on when to recognize a liability to pay a levy imposed by the government that is accounted for in accordance
with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 was effective for annual periods beginning on or after January 1,
2014 and was applied retrospectively. The adoption of IFRIC 21 did not have a material impact on the Company's financial statements.
Future changes in accounting policies
IFRS 9, Financial Instruments (“IFRS 9”)
IFRS 9 was issued by the IASB on July 24, 2014 and will replace IAS 39 Financial instruments: Recognition and Measurement. IFRS 9 requires
financial instrument classification and related measurement practices to be based primarily on an entity’s business model objectives when
managing those financial assets and on the extent to which contractual cash flows exist within the financial assets. The standard also introduces
a new expected loss impairment model. IFRS 9 is effective for annual periods beginning on or after January 1, 2018. The Company is
evaluating the potential impact of this new standard on the financial statements.
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15 establishes a five-step model that will apply to revenue earned from a contract with a customer, regardless of the type of revenue
transaction or the industry. IFRS 15 will also apply to the recognition and measurement of gains and losses on the sale of certain non-
financial assets that are not an output of the entity’s ordinary activities. IFRS 15 is effective for annual periods beginning on or after January
1, 2017. The Company is evaluating the potential impact of this new standard on the financial statements.
46
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
3.
BUSINESS ACQUISITION
SRLC
On July 23, 2013, the Company acquired all of the outstanding common shares of SRLC that it did not already own. As consideration, the
Company paid $20.8 million cash and issued 69.0 million common shares from treasury valued at $166.2 million, excluding costs for total
consideration of $187.0 million. For accounting purposes and as a result of the Company's prior equity ownership in SRLC, the total purchase
price is $198.9 million. The common shares of the Company issued as consideration were valued at $2.41 per share using the closing price
of the Company's common shares on July 23, 2013. The Company accounted for the acquisition using the acquisition method and the results
of operations have been consolidated from the date of the transaction.
Details of the net assets acquired, at fair value, are as follows ($ in thousands):
Net assets acquired
Cash and cash equivalents
Fees receivable and other assets
Proprietary investments
Loans receivable
Property and equipment
Deferred tax assets
Accounts payable and accrued liabilities
Deferred tax liabilities
Consideration paid
Cash consideration
Common shares - newly issued
Common shares - prior ownership
Gain on bargain purchase
July 23, 2013
88,307
4,568
23,573
108,015
40
2,958
(21,912)
(1,145)
204,404
20,806
166,201
11,940
198,947
5,457
A gain on bargain purchase of $5.5 million was recognized upon acquisition as a result of the consideration paid being less than the fair
value of net identifiable assets acquired. The gain on bargain purchase was included in other income in the consolidated statements of
operations for the year ended December 31, 2013.
The Company's revenues and net loss would have been approximately $102.1 million and $94.8 million for the year ended December 31,
2013, should the acquisition have happened on January 1, 2013.
Included in general and administrative expenses for the year ended December 31, 2013, was $1.2 million of costs relating to the acquisition
of SRLC
47
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
4.
PROPRIETARY INVESTMENTS
Proprietary investments consist of the following ($ in thousands):
Gold bullion
Public equities and share purchase warrants
Mutual funds and alternative investment strategies*
Fixed income securities
Private holdings**
Total proprietary investments
December 31, 2014 December 31, 2013
4,843
10,705
71,858
8,590
16,596
112,592
6,532
4,097
69,429
7,223
6,987
94,268
*Investments in mutual funds and alternative investment strategies are primarily managed by SAM or RCIC. As at December 31, 2014, the
underlying investments related to the Company’s investments in mutual funds and alternative investment strategies primarily consisted of
cash and short-term investments of $13.5 million (December 31, 2013 - $25.6 million), equities of $32.1 million (December 31, 2013 - $23.0
million), short equity positions of $111.4 million (December 31, 2013 - $70.0 million), fixed income securities of $125.6 million (December
31, 2013 - $86.4 million), bullion of $3.8 million (December 31, 2013 - $4.0 million), loans of $3.3 million (December 31, 2013 - $Nil) and
derivatives of $4.4 million (December 31, 2013 - $Nil).
**Private holdings consist of the following investments: (i) private company investments classified as HFT, which have their changes in fair
value recorded on the statements of operations; (ii) energy royalties of $6.1 million (December 31, 2013 - $Nil) classified as AFS investments,
which have their changes in fair value recorded as part of other comprehensive income, which is based on the estimated future cash flows
and expected return from future royalty payments; (iii) working interests in energy properties of $7.3 million (December 31, 2013 - $Nil)
which are recorded at cost, net of depletion and/or impairment charges. At December 31, 2014, the Company assessed the carrying amount
of its working interest in energy properties by considering changes in future prices, future costs and reserves. The Company determined
none were impaired as at year end; and (iv) foreclosed properties, which are recorded at the lower of carrying value or fair value less estimated
costs to sell on the consolidated statements of operations. As at December 13, 2014, all foreclosed property investments have been sold.
48
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
5.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following ($ in thousands):
Artwork
Furniture and
fixtures
Computer
hardware and
software
Leasehold
improvements
Total
Cost
At December 31, 2012
Business acquisition
Additions, net of disposals
December 31, 2013
Additions
Net exchange differences
December 31, 2014
Accumulated amortization
At December 31, 2012
Charge for the year
Net exchange differences
December 31, 2013
Charge for the year
Net exchange differences
December 31, 2014
Net book value at:
December 31, 2013
December 31, 2014
2,007
38
—
2,045
—
—
2,045
—
—
—
—
—
—
—
2,045
2,045
2,902
—
34
2,936
13
40
2,989
(2,282)
(240)
(19)
(2,541)
(150)
(34)
(2,725)
395
264
2,049
2
71
2,122
—
34
2,156
(1,925)
(131)
(23)
(2,079)
(38)
(34)
(2,151)
43
5
7,280
—
576
7,856
—
26
7,882
(2,771)
(555)
(3)
(3,329)
(590)
(7)
(3,926)
4,527
3,956
14,238
40
681
14,959
13
100
15,072
(6,978)
(926)
(45)
(7,949)
(778)
(75)
(8,802)
7,010
6,270
49
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
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, 2012
Net additions
Net exchange differences
December 31, 2013
Net additions
Net exchange differences
At December 31, 2014
Accumulated amortization and impairment
losses
At December 31, 2012
Amortization charge for the year
Net impairment charge for the year
Net exchange differences
December 31, 2013
Amortization charge for the year
Net impairment charge for the year
Net exchange differences
At December 31, 2014
Net book value at:
December 31, 2013
December 31, 2014
134,675
14,327
23,464
—
—
14,327
2,660
—
16,987
—
1,415
24,879
—
2,052
26,931
30,386
828
2,130
33,344
1,676
3,164
38,184
4,340
1,970
—
6,310
1,716
—
8,026
(2,214)
(1,565)
—
—
(3,779)
(1,680)
—
—
207,192
2,798
12,019
222,009
6,052
17,502
245,563
(36,199)
(6,788)
(98,320)
(1,727)
(143,034)
(5,455)
(2,308)
(12,149)
(8,632)
(3,025)
—
(485)
(16,418)
(2,198)
(10,360)
(1,366)
(12,142)
(30,342)
(3,245)
—
(1,024)
(530)
(2,308)
(2,888)
—
—
—
—
—
—
—
—
—
(16,411)
(36,068)
(5,459)
(162,946)
—
8,474
143,149
—
12,286
155,435
(8,935)
—
(87,960)
124
(96,771)
—
—
(8,237)
(105,008)
46,378
14,327
12,737
50,427
16,987
10,520
3,002
2,116
2,531
2,567
78,975
82,617
50
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Impairment assessment of goodwill
The Company identified six CGUs for goodwill impairment assessment and testing purposes: SAM; Global Companies; SRLC; Corporate;
SC; and SPW. Operating segments of the Company are a separate but related concept under IFRS and are described in Note 16.
As at December 31, 2014, the Company allocated goodwill across the CGUs as follows ($ in thousands):
CGU
SAM
Global Companies
SRLC
Corporate
SC
SPW
Allocated Goodwill
December 31, 2014
December 31, 2013
22,300
24,927
—
—
3,200
—
50,427
20,400
22,778
—
—
3,200
—
46,378
The recoverable amount of the Global companies CGU was determined using a discounted cash flow (DCF) technique. Key inputs and
assumptions included: (i) steady top-up and replacement of expiring limited partnership contracts; (ii) internal growth rate assumptions on
AUM/AUA, as appropriate, ranging from 3% to 7.5% depending on the business; (iii) discount rates ranging from 13.5% to 20% (pre-tax)
depending on the business and income stream; (iv) terminal return of 3.63%. The recoverable amounts of the SAM and SC CGUs were
calculated at fair value less cost to sell using a valuation multiple applied to a measure of earnings.
Goodwill is tested for impairment at least annually, which for the Company is during the fourth quarter of each year. None of the CGUs
were determined to be impaired in 2014. For the year ended December 31, 2013, an impairment charge of $88.0 million was recognized.
Impairment assessment of indefinite life fund management contracts
The recoverable amount of indefinite life fund management contracts within the SAM CGU was determined using a DCF value-in-use
technique ("VIU") calculation by discounting at 13.3% (pre-tax), 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 fund management contracts within the SC CGU
was calculated using a DCF model by discounting at 13.3% (pre-tax), the estimated pre-tax cash flows to the Company.
As at December 31, 2014, the Company had indefinite life fund management contracts within the SAM CGU of $4.2 million (December 31,
2013 - $1.5 million) and within the SC CGU of $12.8 million (December 31, 2013 - $12.8 million). The Company determined none were
impaired in both years.
Impairment assessment of finite life fund management contracts
The recoverable amount of finite life fund management contracts within the Global companies CGU was determined using a VIU calculation
by discounting at 13.5% (pre-tax), the most recent pre-tax net cash flows to the Company by these funds.
As at December 31, 2014, the Company had finite life fund management contracts of $10.5 million within the Global Companies CGU
(December 31, 2013 - $12.7 million). The Company determined none were impaired in both years.
Impairment assessment of carried interests
The recoverable amount of carried interests within the Global companies CGU was determined using a VIU calculation by discounting at
20% (pre-tax), the most recent expected future net cash flows (pre-tax) to the Company from fixed-term limited partnerships. At the time
of testing, the Company determined that the recoverable amount of carried interests was lower than the carrying value. Consequently, for
the year ended December 31, 2014, an impairment charge of $2.3 million (December 31, 2013 - $10.4 million) was recognized.
As at December 31, 2014, the Company had carried interests (net of impairment described above) of $2.1 million within the Global Companies
CGU (December 31, 2013 - $3.0 million).
Impairment assessment of deferred sales commissions
As at December 31, 2014, the Company had deferred sales commissions of $2.6 million within the SAM CGU (December 31, 2013 - $2.5
million). There were no indicators of impairment for the period.
51
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
7.
LOANS RECEIVABLE
Components of loans receivable
Loans receivable are reported along with debentures at their amortized cost using the effective interest method, other than precious metal
loans that are designated as FVTPL which are reported at fair value and included in resource loans. The total carrying value consists of the
following ($ in thousands):
December 31, 2014
December 31, 2013
Resource loans *
Loan principal
Accrued interest
Deferred revenue
Mark-to-market
Amortized cost, before loan loss provisions
Loan loss provisions
Carrying value of resource loans receivable
Less: current portion
Total non-current resource loans receivable
Resource debentures
Debenture principal
Accrued interest
Deferred revenue
Amortized cost, before impairments
Impairments
Carrying value of resource debentures receivable
Less: current portion
Total non-current resource debentures receivable
Real estate loans
Loan principal
Accrued interest
Amortized cost, before loan loss provision
Loan loss provision
Carrying value of real estate loans receivable
Less: current portion
Total non-current real estate loans receivable
Total carrying value of loans receivable
Less: current portion
Total carrying value of non-current loans receivable
118,079
132
(6,711)
608
112,108
—
112,108
(46,928)
65,180
7,500
259
(100)
7,659
(2,247)
5,412
—
5,412
4,389
754
5,143
(754)
4,389
(4,389)
—
121,909
(51,317)
70,592
96,423
50
(3,919)
1,035
93,589
—
93,589
(50,013)
43,576
6,500
12
(238)
6,274
—
6,274
—
6,274
4,389
222
4,611
(222)
4,389
(4,389)
—
104,252
(54,402)
49,850
*As at December 31, 2014, $4.8 million (December 31, 2013 - $11.7 million) of precious metal loan principal was designated as FVTPL while the remaining
$0.8 million (December, 31, 2013 - $3.0 million) was classified as HTM.
52
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Impaired loans, debentures and loan loss provisions
When a loan or debenture is classified as impaired, the original expected timing and amount of future cash flows may be revised to reflect
new circumstances. These revised cash flows are discounted using the original effective interest rate to determine the net realizable value of
the loan or debenture. Interest income is thereafter recognized on this net realizable value using the effective interest rate. Additional changes
to the amount or timing of future cash flows could result in further losses, or the reversal of previous losses, which would also impact the
amount of subsequent interest income recognized.
As at December 31, 2014, the Company performed a comprehensive review of each loan and debenture measured at amortized cost in its
portfolio to determine the requirement for specific loan loss provisions and debenture impairment charges. The carrying values of the
Company’s impaired loan and debenture are as follows:
December 31, 2014
December 31, 2013
Number of Loans
($ in thousands) Number of Loans
($ in thousands)
Resource debenture
Amortized cost, before impairments
Impairments
Total carrying value of impaired debenture
Real estate loan
Amortized cost, before loan loss provision
Loan loss provision
Total carrying value of real estate loan, net of loan
loss provision
Total carrying value of impaired debenture and
real estate loan, net of loan loss provisions
1
—
1
1
—
1
2
5,400
(2,247)
3,153
5,143
(754)
4,389
7,542
—
—
—
1
—
1
1
—
—
—
4,611
(222)
4,389
4,389
Interest income on the Company’s impaired real estate loan and debenture and the changes in loan loss provision and impairment are as
follows ($ in thousands):
For the year ended
December 31, 2014 December 31, 2013
Interest on impaired loan and debenture
Loan loss provision on real estate loan and impairment on resource debenture
Balance, beginning of year
Loan loss provision on real estate loan
Impairment on resource debenture
Balance, end of year
1,000
222
532
2,247
3,001
222
—
222
—
222
53
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Sector distribution of loan principal
The following table summarizes the distribution of all of the Company’s outstanding loan principal balances by sector:
December 31, 2014
December 31, 2013
Number of Loans
($ in thousands) Number of Loans
($ in thousands)
Resource loans
Metals and mining *
Energy and other
Total resource loans principal
Resource debentures
Energy and other
Total resource debentures principal
Real estate loan
Land under development
Total real estate loan principal
Total loan principal
9
5
14
2
2
1
1
17
71,957
46,122
118,079
7,500
7,500
4,389
4,389
129,968
11
3
14
2
2
1
1
17
90,564
5,859
96,423
6,500
6,500
4,389
4,389
107,312
*As at December 31, 2014, $4.8 million (December 31, 2013 - $11.7 million) of precious metal loan principal was designated as FVTPL while the remaining
$0.8 million (December, 31, 2013 - $3.0 million) was classified as HTM.
Geographic distribution of loan principal
The following table summarizes the distribution of all of the Company’s outstanding loan principal balances by geographic location of
the underlying security:
December 31, 2014
December 31, 2013
Number of Loans
($ in thousands) Number of Loans
($ in thousands)
Resource loans
Canada *
United States of America
Mexico
Australia
Chile *
Brazil
Total resource loan principal
Resource debentures
Canada
United States of America
Total resource debenture principal
Real estate loans
Canada
Total real estate loan principal
Total loan principal
8
1
1
1
2
1
14
1
1
2
1
1
17
80,496
4,066
13,000
7,083
8,845
4,589
118,079
2,000
5,500
7,500
4,389
4,389
129,968
8
2
1
2
1
—
14
1
1
2
1
1
17
40,145
19,331
17,800
14,872
4,275
—
96,423
1,000
5,500
6,500
4,389
4,389
107,312
*As at December 31, 2014, $4.8 million (December 31, 2013 - $11.7 million) of precious metal loan principal was designated as FVTPL while the remaining
$0.8 million (December, 31, 2013 - $3.0 million) was classified as HTM.
54
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Priority of security charges
All of the Company's loans and debentures are senior secured with the exception of two resource loans, which have a carrying value of
$15.4 million and are second secured.
Past due loans that are not impaired
Loans are considered past due once the borrower has failed to make payments within 30 days of the contractual due date. As at December
31, 2014 and 2013 all past due loans were considered impaired.
Loan commitments
As at December 31, 2014, the Company had $46.0 million in loan commitments (December 31, 2013 - $1.9 million).
8.
OTHER ASSETS AND OTHER INCOME
Other assets
Other assets consist primarily of proceeds receivable from the sale of a Sprott fund in 2013, a receivable from a related party (see Note 13),
proceeds receivable on the sale of an investment by SRLC, prepaid expenses of the Company and receivables from the Funds and managed
companies managed by the Company for which the Company has incurred expenses on their behalf ($ in thousands).
Prepaid expenses and other receivables
Due from broker
Proceeds receivable
Total other assets
Included in long-term other assets
Included in current other assets
Other income
December 31, 2014
December 31, 2013
7,092
—
3,991
11,083
4,108
6,975
3,710
13,478
3,496
20,684
3,613
17,071
Other income consists primarily of foreign exchange gains and losses, dividend income, royalties, syndication fees and redemption fee revenue
on a recurring basis.
For the year ended December 31, 2014, other income primarily included the one-time inclusion of a $1.5 million break-fee on the termination
of a management services agreement with a managed company. For the year ended December 31, 2013, other income primarily includes the
one-time inclusions of: (i) the gain on bargain purchase of $5.5 million resulting from the acquisition of SRLC; and (ii) a break-fee of $7.5
million for the termination of the management services agreement with a managed company.
9.
LOAN PAYABLE
The Company has a revolving credit facility with a Canadian chartered bank (the "Bank"). The amount that may be borrowed under this
facility is $35 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 terms 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
continues to be in compliance with all financial covenants of the credit facility, which require that the funded debt-to-Earnings Before Interest,
Taxes, Depreciation and Amortization (EBITDA) ratio be less than or equal to 2:1, the funded debt-to-SAM EBITDA ratio be less than or
equal to 1.5:1 and that the Company's AUM not fall below $5.5 billion, calculated on the last day of each fiscal quarter.
The Company drew $15 million on the credit facility as at December 31, 2014 (December, 31, 2013 - $Nil), which is due in March 2015.
55
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
10.
SHAREHOLDERS' EQUITY
Capital stock and contributed surplus
The authorized and issued share capital of the Company consists of an unlimited number of common shares, without par value.
At December 31, 2012
Additional purchase consideration
Issuance of share capital from private placement, net of costs and taxes
Issuance of share capital on conversion of RSU
Issuance of share capital on business acquisition
Acquired for equity incentive plan
Released on vesting of equity incentive plan
At December 31, 2013
Additional purchase consideration
Issuance of share capital on purchase of management contracts
Issuance of share capital on conversion of RSU
Acquired for equity incentive plan
Released on vesting of equity incentive plan
At December 31, 2014
Number of shares
Stated value
($ in thousands)
169,049,677
177,500
7,575,758
1,401
68,962,896
(448,500)
627,125
245,945,857
177,500
224,363
1,401
(1,000,000)
672,205
246,021,326
215,474
1,090
24,632
6
166,201
(697)
3,714
410,420
1,223
792
4
(1,686)
3,915
414,668
Contributed surplus consists of: stock option expense; earn-out shares expense; equity incentive plans' expense; and additional purchase
consideration.
At December 31, 2012
Expensing of 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
Write-down of deferred tax asset on earn-out shares
Issuance of shares relating to additional purchase consideration
Issuance of share capital on conversion of RSU
Excess on repurchase of common shares for equity incentive plan *
Released on vesting of common shares for equity incentive plan
At December 31, 2013
Expensing of EPSP / EIP shares over the vesting period
Expensing of earn-out shares over the vesting period
Issuance of shares relating to additional purchase consideration
Issuance of share capital on conversion of RSU
Excess on repurchase of common shares for equity incentive plan *
Released on vesting of common shares for equity incentive plan
At December 31, 2014
Stated value
($ in thousands)
42,808
30
3,922
6,312
(1,904)
(1,234)
(5)
(558)
(3,707)
45,664
3,262
111
(1,613)
(2)
(1,315)
(3,908)
42,199
* 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.
56
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stock option plan
The Company has an option plan (the “Plan”) intended to provide incentives to directors, officers, employees and consultants of the Company
and its wholly-owned subsidiaries. The aggregate number of shares issuable upon the exercise of all options granted under the Plan and
under all other stock-based compensation arrangements including the Trust and Equity Incentive Plan ("EIP") cannot exceed 10% of the
issued and outstanding shares of the Company as at the date of grant. The options may be granted at a price that is not less than the market
price of the Company's common shares at the time of grant. The options vest annually over a three-year period and may be exercised during
a period not to exceed 10 years from the date of grant.
There were no stock options issued during the year ended December 31, 2014 (December 31, 2013 - $Nil).
For valuing share option grants, the fair value method of accounting is used. The fair value of option grants is determined using the Black-
Scholes option-pricing model, which takes into account the exercise price of the option, the current share price, the risk-free interest rate,
the expected volatility of the share price over the life of the option and other relevant factors. Compensation expense is recognized over
the three-year vesting period, assuming an estimated forfeiture rate, with an offset to contributed surplus. When exercised, amounts originally
recorded against contributed surplus as well as any consideration paid by the option holder is credited to capital stock.
A summary of the changes in the Plan is as follows:
Options outstanding, December 31, 2012
Options exercisable, December 31, 2012
Options outstanding, December 31, 2013
Options exercisable, December 31, 2013
Options outstanding, December 31, 2014
Options exercisable, December 31, 2014
Options outstanding and exercisable as at December 31, 2014 are as follows:
Number of options
(in thousands)
Weighted average
exercise price
($)
2,650
2,583
2,650
2,650
2,650
2,650
9.71
9.80
9.71
9.71
9.71
9.71
Exercise price ($)
10.00
4.85
6.60
4.85 to 10.00
Equity incentive plan
Number of outstanding
options
(in thousands)
Weighted average
remaining contractual life
(years)
Number of options
exercisable
(in thousands)
2,450
50
150
2,650
3.3
5.0
5.9
3.5
2,450
50
150
2,650
For employees in Canada, the Trust has been established and the Company will fund the Trust with cash, which will be used by the trustee
to purchase: (i) on the open market, common shares of the Company that will be held in the Trust until the awards vest and are distributed
to eligible members; or (ii) from treasury, common shares of the Company that will be held in the Trust until the awards vest and are
distributed to eligible employees. For employees in the U.S. under the EIP plan, the Company will allot common shares of the Company as
either: (i) restricted stock; (ii) unrestricted stock; or (iii) restricted stock units (“RSUs”), the resulting common shares of which will be issued
from treasury.
There were no RSUs issued during the year ended December 31, 2014 (December 31, 2013 - $Nil). The Trust purchased 1.0 million common
shares for the year ended December 31, 2014 (December 31, 2013 - 0.4 million).
57
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Common shares held by the Trust, December 31, 2012
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2013
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2014
Earn-out shares
Number of common shares
2,159,823
448,500
(627,125)
1,981,198
1,000,000
(672,205)
2,308,993
In connection with the acquisition of the Global Companies in 2011, 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 ("IFRS 2"),
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 has been charged to the consolidated statements of operations equally over the period of the service condition, being
3 years, which ended February 4, 2014.
In connection with the acquisition of Sprott Toscana in 2012, up to an additional 0.9 million common shares of the Company may be issued
with the achievement of certain earnings targets by Sprott Toscana. 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 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 operations 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.
Additional purchase consideration
In connection with the acquisition of the Global Companies in 2011, 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, February 4, 2013 and February 4, 2014, 177,500 common shares of the Company were issued to employees of
the Global Companies.
For the year ended December 31, 2014, the Company recorded share-based compensation expense of $3.4 million, respectively, (December
31, 2013 - $10.3 million) with a corresponding increase to contributed surplus ($ in thousands).
Earn-out shares
Stock option plan
EPSP / EIP
For the year ended
December 31,
2014
December 31,
2013
111
—
3,262
3,373
6,312
30
3,922
10,264
58
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Basic and diluted earnings (loss) per share
The following table presents the calculation of basic and diluted earnings (loss) 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 additional purchase consideration
Weighted average number of unvested shares purchased by the Trust
Weighted average number of outstanding RSU
Weighted average number of shares issuable under acquisition consideration payable
Weighted average number of common shares - diluted
Net income (loss) per common share
Basic
Diluted
Capital management
The Company's objectives when managing capital are:
For the year ended
December 31,
2014
December 31,
2013
19,389
(81,261)
248,265
(1,757)
246,508
17
1,757
2
515
248,799
207,872
(1,742)
206,130
—
—
—
—
206,130
$
$
0.08 $
0.08 $
(0.39)
(0.39)
•
•
•
•
•
to meet regulatory requirements and other contractual obligations;
to safeguard the Company's ability to continue as a going concern so that it can continue to provide returns for shareholders;
to provide financial flexibility to fund possible acquisitions;
to provide adequate seed capital for the Company's new product offerings; and
to provide an adequate return to shareholders through growth in assets under management, growth in management fees and
performance fees and return on the Company's invested capital that will result in dividend payments to shareholders.
The Company's capital is comprised of equity, including capital stock, contributed surplus, retained earnings (deficit) and accumulated other
comprehensive income (loss). 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 U.S. Securities and Exchange Commission ("SEC"), SAM US is registered
with the SEC and SGRIL is a member of the Financial Industry Regulatory Authority (“FINRA”). As a result, all of these entities are required
to maintain a minimum level of regulatory capital. To ensure compliance, management monitors regulatory and working capital on a regular
basis. For the year ended December 31, 2014 and 2013, all entities were in compliance with their respective capital requirements.
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.
59
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
11.
INCOME TAXES
The major components of income tax expense are as follows ($ in thousands):
For the year ended
December 31, 2014
December 31, 2013
Current income tax expense (recovery)
Based on taxable income of the current year
Adjustments in respect of previous years
Deferred income tax expense (recovery)
Origination and reversal of temporary differences
Adjustments in respect of tax rate change and previous years
Income tax expense (recovery) reported in the statements of operations
380
(512)
(132)
9,089
(285)
8,804
8,672
5,196
(1,191)
4,005
(9,185)
379
(8,806)
(4,801)
Taxes calculated on Company earnings differs from the theoretical amount that would arise using the weighted average tax rate applicable
to earnings of the Company as follows ($ in thousands):
For the year ended
December 31, 2014
December 31, 2013
Income before income taxes
Tax calculated at domestic tax rates applicable to profits and (losses) in the
respective countries
Tax effects of:
Non-deductible stock-based compensation
Non-taxable capital (gains) and losses
Capital losses not benefited
Goodwill impairment
Other temporary differences not benefited
Non-capital losses not previously benefited
Rate differences and other
Tax charge (recovery)
28,061
6,850
104
(520)
3,068
—
1,264
(1,461)
(633)
8,672
(86,062)
(36,729)
965
1,610
—
35,038
2,034
(7,259)
(460)
(4,801)
The weighted average applicable tax rate was 24.4% (2013 - 42.7%). The change was caused primarily by an increase in the profitability of subsidiaries
resident in Canada that are taxable at lower rates than the Company's U.S. subsidiaries.
60
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred tax assets are recognized for tax loss carry-forwards to the
extent that the realization of the related tax benefit through future taxable profits is probable. The ability to realize the tax benefits of these
losses is dependent upon a number of factors, including the future profitability of operations in the jurisdictions in which the tax losses
arose. The movement in significant components of the Company's deferred income tax assets and liabilities is as follows ($ in thousands):
For the year ended December 31, 2014
At December
31, 2013
Recognized in
income
Recognized in
other
comprehensive
income
Recognized in
equity
Business
acquisition
At December
31, 2014
Deferred income tax assets
Prepaid taxes and unrealized losses
14,537
(7,294)
1,592
Additional purchase consideration
Other stock-based compensation
Non-capital losses
Other
Total deferred income tax assets
Deferred income tax liabilities
Fund management contracts
Carried interests
Deferred sales commissions
Unrealized gains
Transitional partnership income
Proceeds receivable
Other
672
2,802
7,709
449
26,169
8,793
335
671
(241)
9,645
1,223
518
—
865
(6,502)
1,219
(11,712)
(1,322)
(349)
9
878
(3,021)
173
724
Total deferred income tax liabilities
20,944
(2,908)
28
(4)
(33)
(8)
1,575
419
14
—
(12)
—
—
126
547
—
(700)
—
—
(27)
(727)
—
—
—
—
—
—
—
—
Net deferred income tax assets
(liabilities)
5,225
(8,804)
1,028
(727)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,835
—
3,663
1,174
1,633
15,305
7,890
—
680
625
6,624
1,396
1,368
18,583
(3,278)
61
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
For the year ended December 31, 2013
At December
31, 2012
Recognized in
income
Recognized in
other
comprehensive
income
Recognized in
equity
Business
acquisition
December 31,
2013
Deferred income tax assets
Unrealized losses
15,481
(2,012)
1,068
Additional purchase consideration
Earn-out shares
Other stock-based compensation
Non-capital losses
Other
Total deferred income tax assets
Deferred income tax liabilities
Fund management contracts
Carried interests
Deferred sales commissions
Unrealized gains
Transitional partnership income
Proceeds receivable
Other
1,258
1,799
1,769
—
1,346
21,653
9,646
5,093
564
679
9,645
—
(208)
—
—
1,032
4,751
(905)
2,866
(1,232)
(4,948)
107
(917)
—
78
972
Total deferred income tax liabilities
25,419
(5,940)
Net deferred income tax assets
(liabilities)
(3,766)
8,806
48
56
1
—
114
1,287
379
190
—
(3)
—
—
(246)
320
967
—
(634)
(1,855)
—
—
(106)
(2,595)
—
—
—
—
—
—
—
—
(2,595)
—
—
—
—
2,958
—
2,958
—
—
—
—
—
1,145
—
1,145
1,813
14,537
672
—
2,802
7,709
449
26,169
8,793
335
671
(241)
9,645
1,223
518
20,944
5,225
62
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
12.
FAIR VALUE MEASUREMENTS
The following tables present the Company's recurring fair value measurements within the fair value hierarchy. The Company did not have
non-recurring fair value measurements as at December 31, 2014 and 2013 ($ in thousands).
December 31, 2014
Level 1
Level 2
Level 3
Total
Recurring measurements:
Cash and cash equivalents
Precious metal loans
Gold bullion
Public equities and share purchase warrants
Mutual funds and alternative investment strategies
Fixed income securities
Private holdings*
Total recurring fair value measurements
120,774
—
4,843
8,363
18,324
—
—
152,304
—
—
—
2,342
53,534
7,609
—
63,485
—
5,662
—
—
—
981
9,280
15,923
120,774
5,662
4,843
10,705
71,858
8,590
9,280
231,712
December 31, 2013
Level 1
Level 2
Level 3
Total
Recurring measurements:
Cash and cash equivalents
Precious metal loans
Gold bullion
Public equities and share purchase warrants
Mutual funds and alternative investment strategies
Fixed income securities
Private holdings*
Total recurring fair value measurements:
115,670
—
6,532
3,503
16,132
—
—
141,837
—
—
—
594
53,296
7,223
—
61,113
—
11,658
—
—
—
—
5,353
17,011
115,670
11,658
6,532
4,097
69,428
7,223
5,353
219,961
*Private holdings measured using fair value techniques include: (i) private company investments classified as HFT, which have their changes in fair value
recorded on the statements of operations; and (ii) energy royalties classified as AFS investments, which have their changes in fair value recorded as part of
other comprehensive income.
The following tables provides a summary of changes in the fair value of Level 3 financial assets ($ in thousands):
Changes in the fair value of Level 3 measurements - December 31, 2014
Net realized
gains
(losses)
included in
other
income
Net
unrealized
gains
(losses)
included in
net income
Net realized
gains
(losses)
included in
net income
Net
unrealized
gains
included in
OCI
Purchases and
reclassifications Settlements
Net realized
gains
(losses)
included in
interest
income
December
31, 2014
December
31, 2013
Private
holdings
Precious
metal
loans
5,353
8,996
(7,768)
(120)
11,658
17,011
3,435
12,431
(11,854)
(19,622)
126
6
—
—
—
2,812
(119)
2,693
7
515
522
—
9,280
1,901
1,901
5,662
14,942
63
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Changes in the fair value of Level 3 measurements - December 31, 2013
Net realized
gains
(losses)
included in
other
income
Net
unrealized
gains
(losses)
included in
net income
Net realized
gains
(losses)
included in
net income
Net
unrealized
gains
included in
OCI
Purchases and
reclassifications Settlements
Net realized
gains
(losses)
included in
interest
income
December
31, 2013
9,216
(8,277)
(1,165)
13,018
22,234
(2,317)
(10,594)
585
(580)
—
—
—
630
—
630
—
237
237
—
5,353
135
135
11,658
17,011
Private
holdings
Precious
metal
loans
December
31, 2012
4,949
—
4,949
During the year ended December 31, 2014, $0.1 million (December 31, 2013, $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.
Loans receivable and debentures (excluding precious metal loans that were designated as FVTPL) had a carrying value of $116.2 million
and a fair value of $120.0 million. Loans receivable and debentures lack an available trading market, are not typically exchanged, and have
been recorded at amortized cost. The fair value of resource loans and debentures are measured based on changes in the market price of
comparable bonds since the average date that the loans were originated. The Company adjusts the fair value to take into account any significant
changes in credit risks using observable market inputs in determining counterparty credit risk. The fair value of loans are not necessarily
representative of the amounts realizable upon immediate settlement. The valuation techniques used for amortized cost loans and debentures
for which a fair value has been disclosed would fall under Level 3 of the fair value hierarchy.
64
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
13.
RELATED PARTY TRANSACTIONS
The remuneration of directors and other key management personnel of the Company for employment services rendered are as follows ($
in thousands):
Fixed salaries and benefits
Variable incentive-based compensation
Termination benefits
Share-based compensation
For the year ended
December 31,
2014
December 31,
2013
4,445
4,700
—
1,255
10,400
5,794
4,302
2,700
925
13,721
The deferred stock unit ("DSU") plan for independent directors of the Company vests annually over a three-year period and may only be
settled in cash upon retirement. There were 287,681 DSUs issued during the year (December 31, 2013 - $Nil). DSU expense is included in
general and administrative costs and is recognized over the three-year vesting period with an offset to accrued liabilities.
Included in other assets is a receivable of $3.5 million (December 31, 2013- $Nil) from a related party pertaining to the receipt of shares
under the terms and conditions of a subscription receipt.
On November 11, 2014, the Company entered into an agreement to provide a loan facility to Sprott Resource Corp ("SRC") in the amount
of $20 million at 7% for the first year and at 8% interest thereafter. SRC drew $10 million on the credit facility as at December 31, 2014
(December, 31, 2014 - $Nil). The loan is to be repaid on May 11, 2016. The Company has a management services agreement with SRC
through SC whereby SC provides its consulting services to SRC and earns revenue through management fees and performance fees from
SRC.
14.
DIVIDENDS
The following dividends were declared and paid by the Company during the year ended December 31, 2014:
Record date
November 21, 2014 - regular dividend Q3 - 2014
August 18, 2014 - regular dividend Q2 - 2014
May 23, 2014 - regular dividend Q1 - 2014
April 8, 2014 - regular dividend Q4 - 2013
Dividends paid
Payment Date
Cash dividend per
share ($)
Total dividend
amount ($ in
thousands)
December 8, 2014
September 3, 2014
June 6, 2014
April 23, 2014
0.03
0.03
0.03
0.03
7,450
7,450
7,450
7,450
29,800
65
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
15.
RISK MANAGEMENT ACTIVITIES
The Company's exposure to market, credit, liquidity and concentration risk is described 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 an asset. The Company's
financial instruments are classified as HFT, designated as FVTPL, HTM, AFS, or as loans and receivables. Therefore, certain 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. The Company manages market risk through regular monitoring
of its proprietary investments and loans receivable. The Company separates market risk into three categories: price risk, interest rate
risk and foreign currency 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. If the market values of proprietary investments classified as HFT increased or decreased by 5%, with all other
variables held constant, this would have resulted in an increase or decrease in net income of approximately $4.7 million for the
year (December 31, 2013 - $3.8 million). For more details about the Company's proprietary investments, refer to Note 4.
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, Sprott Toscana, RCIC and SAM US.
Commodity price risk refers to uncertainty of future market values caused by a fluctuation in the price of a commodity. The
Company may, from time to time: (i) hold certain investments linked to the market prices of precious metals or energy assets; and
(ii) enter into certain precious metal loans, where the repayment is notionally tied to a specific commodity spot price at the time
of the loan and downward changes to the price of the commodity can reduce the value of the loan and the amounts ultimately
repaid to the Company.
As at December 31, 2014, the Company held precious metal loans with a carrying value of $5.7 million (December 31, 2013 -
$11.7 million). The fair value of these loans is dependent on future gold prices. A 5% increase or decrease in the future price of
gold, with all other variables held constant, would have resulted in an increase or decrease in net income of approximately $0.2
million for the year (December 31, 2013 - $0.6 million). As a mitigating factor, the Company may from time-to-time, implement
certain hedging strategies such as imposing a minimum internal rate of return on a precious metal loan or fixing the loan payments
at a predetermined price of gold over the full term of the loan.
As at December 31, 2014, the Company held gold bullion with a carrying value of $4.8 million (December 31, 2013 - $6.5 million).
If the market value of gold bullion increased or decreased by 5%, with all other variables held constant, this would have resulted
in an increase or decrease in net income of approximately $0.2 million for the year (December 31, 2013 - $0.3 million).
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will adversely affect the value of, or cash flows from,
financial instrument assets. The Company’s earnings, particularly through its SRLC segment are exposed to volatility as a result
of sudden changes in interest rates. As a mitigating factor, the Company from time-to-time sets minimum interest rates or an
interest rate floor in its variable rate loans. As at December 31, 2014 the Company's loan portfolio consisted only of fixed-rate
loans. The Company is also exposed to changes in the value of a loan when that loan’s interest rate is at a rate other than current
market rates.
As at December 31, 2014, the Company had 14 fixed-rate resource-based loans, 2 fixed-rate resource-based debentures and 1 fixed
rate real estate loan with an aggregate carrying value of $121.9 million (December 31, 2013 - $104.3 million). The Company's 14
resource loans and 2 fixed-rate resource debentures range in maturity dates from less than 6 months to 4 years and the Company
has one real estate loan that is considered non-performing and one debenture that is partially impaired.
66
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
The carrying amounts of the Company's assets and liabilities in the following table are presented based on the earlier of contractual
repricing and maturity dates as at December 31, 2014 ($ in thousands):
December 31, 2014
Floating
Rate
Within 6
Months
6 to 12
Months
1 to 3 years
Over 3
years
Non-
Interest
Sensitive
Total
Total assets
120,774
29,066
13,930
40,318
42,796
234,393
481,277
Total liabilities and equity
(15,000)
—
—
—
—
(466,277)
(481,277)
Difference
105,774
29,066
13,930
40,318
42,796
(231,884)
Cumulative difference
105,774
134,840
148,770
189,088
231,884
Cumulative difference as a
percentage of total assets
Foreign currency risk
22.0%
28.0%
30.9%
39.3%
48.2%
—
—
—
—
—
Foreign currency risk arises from foreign exchange rate movements that could negatively impact either the carrying value of
financial assets and liabilities or the related cash flows when translating those balances into Canadian dollars. The Company's
primary foreign currency is the United States dollar ("USD"). The Company may employ certain hedging strategies to mitigate
foreign currency risk.
The Global Companies' assets are all denominated in USD with their translation impact being reported as part of other
comprehensive income in the financial statements. Excluding the impact of the Global Companies, as at December 31, 2014,
approximately $38.9 million (December 31, 2013 - $46.8 million) of total Canadian assets were invested in proprietary investments
priced in USD. A total of $55.5 million (December 31, 2013 - $17.4 million) of cash, $1.6 million (December 31, 2013 -$1.4 million)
of accounts receivable, $36.5 million (December 31, 2013 - $5.8 million) of loans receivable and $0.7 million (December 31, 2013
- $0.6 million) of other assets were denominated in USD. As at December 31, 2014, if the exchange rate between USD and the
Canadian dollar increased or decreased by 5%, with all other variables held constant, the increase or decrease in net income would
have been approximately $5.4 million for the year (December 31, 2013 - $3.0 million).
(b) Credit risk
Credit risk is the risk that a borrower will not honour its commitments and a loss to the Company may result.
Loans receivable
The Company incurs credit risk primarily in the loan portfolio of SRLC. In addition to the relative default probability of SRLC
borrowers, credit risk is also dependent on loss given default, which can increase credit risk if the values of the underlying assets
securing the Company's loans decline to levels approaching or below the loan amounts. A decrease in real estate values or commodity
or energy prices may delay the development of the underlying security or business plans of the borrower and will adversely affect
the value of the Company's security. Additionally, the value of the Company's underlying security in a resource loan and resource
debenture can be negatively affected if the actual amount or quality of the commodity proves to be less than that estimated, or
the ability to extract the commodity proves to be more difficult or more costly than estimated. During the resource loan and
resource debenture origination process, management takes into account a number of factors and is committed to several processes
to ensure that this risk is appropriately mitigated. These include:
•
•
•
•
•
•
emphasis on first priority and/or secured financings;
the investigation of the creditworthiness of borrowers;
the employment of qualified and experienced loan professionals;
a review of the sufficiency of the borrower’s business plans including plans that will enhance the value of the
underlying security;
frequent and documented status updates provided on business plans;
engagement of qualified independent advisors (e.g. lawyers, engineers and geologists) to protect Company interests;
legal reviews that are performed to ensure that all due diligence requirements are met prior to funding.
67
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
As at December 31, 2014, the Company’s net exposure to on-balance sheet credit risk (net loans receivable) was $121.9 million
(December 31, 2013 - $104.3 million) and the Company had a $46.0 million exposure to off-balance sheet credit risk (loan
commitments) (December 31, 2013 - $1.9 million). As at December 31, 2014, the largest loan in the Company’s loan portfolio was
a resource loan with a carrying value of $19.9 million or 16.3% of the Company’s loans receivable (December 31, 2013 - $17.5
million or 16.8% of the Company’s loans receivable). The Company will syndicate loans in certain circumstances if it wishes to
reduce its exposure to a borrower or comply with loan exposure maximums. The Company reviews its policies regarding its lending
limits on an ongoing basis. For precious metal loans, the Company performs the same due diligence procedures as it would for
its resource loans and resource debentures.
Proprietary investments
The Company incurs credit risk when entering into, settling and financing various proprietary transactions. As at December 31,
2014, the Company's most significant proprietary investments counterparty was 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 IIROC; as a result, it is required to maintain minimum levels of
regulatory capital at all times.
Other
The majority of accounts receivable relate to management and performance fees receivable from the Funds, managed accounts
and managed companies managed by the Company. Credit risk is managed in this regard 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 Global Companies incur credit risk when entering into, settling and financing various proprietary transactions. As at
December 31, 2014, the Global Companies' most significant counterparty was RBC Capital Markets LLC (“RBCCM”), the carrying
broker of SGRIL and custodian of the net assets of the Funds managed by RCIC. RBCCM is registered as a broker-dealer and
registered investment advisor subject to regulation by 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 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. As at December 31, 2014, the Company had $120.8 million or
25.1% (December 31, 2013 - 115.7 million or 25.4%) of its total assets in cash and cash equivalents. In addition, approximately
$81.3 million or 72.2% (December 31, 2013 - $45.6 million or 48.8%) of proprietary investments held by the Company are readily
marketable and are recorded at their fair value.
The Company's exposure to liquidity risk as it relates to loans receivable arises from fluctuations in cash flows from making loan
advances and receiving loan repayments. The Company manages its loan commitment liquidity risk through the ongoing monitoring
of scheduled loan fundings and repayments. As at December 31, 2014, the Company had $46.0 million in funding commitments
(December 31, 2013 - $1.9 million). 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 team is responsible for reviewing 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. To meet any liquidity shortfalls, actions taken by the
Company could include: syndicating a portion of its loans; slowing its lending activities; drawing on available loan facilities;
liquidating proprietary investments and/or issuing common shares.
(d) Concentration risk
The majority of the Company's AUM, as well as its proprietary investments and loans receivables are focused on the natural
resource sector.
68
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
16.
SEGMENTED INFORMATION
For management purposes, the Company is organized into business units based on its products, services and geographical location and has
five reportable segments as follows:
•
•
•
•
•
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 U.S.
and also provides securities trading services to its clients;
SRLC, which provides loans to companies in the mining and energy sectors;
The Consulting segment includes the operations of SC, Sprott Toscana and Sprott Korea Corporation, the consulting businesses of
the Company; and
Corporate and Other. 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 certain subsidiaries. The Other segment includes the activities
of SPW, the private wealth business of the Company.
Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation
and performance assessment. Segment performance is evaluated based on earnings before interest expense, income taxes, amortization and
impairment of intangible assets and goodwill, gains and losses on proprietary investments (as if such gains and losses had not occurred),
non-cash stock-based compensation and performance fees and performance fee related expenses (adjusted base EBITDA). Income taxes
are managed on a consolidated basis and are not allocated to operating segments.
Transfer pricing between operating segments is performed on an arm's length basis in a manner similar to transactions with third parties.
Adjusted base EBITDA is not a measurement in accordance with IFRS and should not be considered as an alternative to net income or any
other measure of performance under IFRS.
69
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
The following tables present the operations of the Company's reportable segments ($ in thousands):
For the year ended
December 31, 2014
SAM
Global
Companies
SRLC
Consulting
Corporate
and Other
Adjustments
and
Eliminations Consolidated
Revenue
Management fees
Performance fees
Commissions
Interest income
Trailer fee income
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 (loss) for the
year
Adjustments:
Interest expense
Provision (recovery) for
income taxes
Depreciation and
amortization
EBITDA
Other adjustments:
Impairment (reversal) of
intangible assets
Impairment of goodwill
(Gains) and losses on
proprietary investments and
loans
Non-cash stock based
compensation
Other
Adjusted EBITDA
Less:
Performance fees
Performance fee related
expenses
Adjusted base EBITDA
61,470
9,726
—
70
—
3,149
74,415
42,395
14,541
2,335
59,271
15,144
—
—
—
2,335
17,479
—
—
(1,430)
—
—
16,049
(9,726)
6,783
13,106
8,632
—
6,342
66
—
(1,836)
13,204
11,327
—
6,136
17,463
—
—
—
17,830
—
249
18,079
5,250
—
—
5,250
(4,259)
12,829
—
—
—
3,828
(431)
2,308
—
1,971
403
—
4,251
—
—
—
—
—
—
—
—
4,220
—
—
17,049
—
—
4,251
17,049
8,103
967
—
43
—
2,162
11,275
4,699
107
43
4,849
6,426
—
—
—
43
230
—
1,495
2,223
2,472
3,053
9,473
11,525
—
27
11,552
(2,079)
—
51
—
27
—
—
—
(292)
—
6,177
(967)
242
5,452
—
—
(246)
—
451
(1,796)
—
—
(1,796)
12,829
6,469
(2,001)
—
—
—
(48)
(2,128)
(288)
78,435
10,693
7,837
20,184
344
6,489
(2,464)
123,982
(336)
(2,128)
—
(2,464)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
74,860
12,520
8,541
95,921
28,061
8,672
19,389
51
8,672
6,233
34,345
2,308
—
4,515
111
451
41,730
(10,693)
7,025
38,062
70
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
For the year ended
December 31, 2013
Revenue
Management fees
Performance fees
Commissions
Interest income
Trailer fee income
Other
Total revenue
Expenses
General and administrative
Trailer fees
Amortization and impairment
of intangibles, property and
equipment
Impairment of goodwill
Total expenses
Income (loss) before income
taxes for the year
Provision for income taxes
Net income (loss) for the
year
Adjustments:
Interest expense
Provision (recovery) for
income taxes
Depreciation and
amortization
EBITDA
Other adjustments:
Impairment (reversal) of
intangible assets
Impairment of goodwill
(Gains) and losses on
proprietary investments and
loans
Non-cash stock based
compensation
Other
Adjusted EBITDA
Less:
SAM
Global
Companies
SRLC
Consulting
Corporate
and Other
Adjustments
and
Eliminations Consolidated
66,537
6,446
—
199
—
(2,952)
70,230
38,864
15,908
2,296
—
57,068
9,359
302
5,081
56
—
(1,095)
13,703
14,533
—
15,674
87,960
118,167
—
—
—
7,215
—
5,978
13,193
2,552
—
2
—
8,632
2,246
—
30
—
7,596
18,504
170
—
1,139
2,344
4,223
(4,791)
3,085
11,484
15,402
—
37
—
—
65
—
—
—
—
—
(4,010)
(333)
(4,343)
(333)
(4,010)
—
—
84,698
8,994
6,220
9,844
213
4,403
114,372
82,502
11,898
18,074
87,960
2,554
11,521
15,467
(4,343)
200,434
13,162
(104,464)
10,639
6,983
(12,382)
—
—
—
—
2,296
15,458
—
—
—
—
5,314
—
—
—
—
2
—
—
—
—
37
—
—
—
—
65
(99,150)
10,641
7,020
(12,317)
—
—
10,360
87,960
—
—
—
—
—
—
4,543
—
—
20,001
1,124
4,330
—
4,624
1,505
556
6,528
—
(5,457)
6,689
—
—
6,689
1,981
—
9,557
(2,246)
562
7,873
30
—
(5,759)
—
—
(5,759)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(86,062)
(4,801)
(81,261)
—
(4,801)
7,714
(78,348)
10,360
87,960
14,256
6,341
(5,457)
35,112
(8,994)
6,081
32,199
71
Performance fees
(6,446)
(302)
Performance fee related
expenses
Adjusted base EBITDA
5,444
18,999
75
4,397
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Inter-segment revenues and expenses are eliminated on consolidation and reflected in the "Adjustments and Eliminations" column.
General and administrative expenses include compensation and benefits and stock-based compensation.
For geographic reporting purposes, transactions are primarily recorded in the location that corresponds with the underlying subsidiary's
country of domicile that generates the revenue. The following table presents the revenue of the Company by geographic location ($ in
thousands):
Canada
United States
17.
COMMITMENTS
For the year ended
December 31,
2014
December 31,
2013
110,778
13,204
123,982
100,669
13,703
114,372
Besides the Company's long-term lease agreement, it does not typically have material off-balance sheet contractual arrangements and
obligations. Occasionally however, there may be commitments to provide loans arising from the SRLC business segment or commitments
to make investments in the proprietary investments portfolio of the Company. As at December 31, 2014, the Company had $46.0 million
of such loan commitments (December 31, 2013 - $1.9 million) and $0.8 million of purchase commitments in the proprietary investments
portfolio (December 31, 2013 - $Nil).
Future minimum annual payments under non-cancellable leases, including operating costs, are as follows ($ in thousands):
2015
2016
2017
2018
2019
Thereafter
18.
EVENTS AFTER THE REPORTING PERIOD
On March 4, 2015, a dividend of $0.03 per common share was declared for the three months ended December 31, 2014.
4,021
4,278
4,300
4,277
4,299
15,331
36,506
72
CORPORATE INFORMATION
Head Office
Sprott Inc.
Royal Bank Plaza, South Tower
200 Bay Street
Suite 2700, P.O. Box 27
Toronto, Ontario M5J 2J1
Telephone: 416.362.7172
Toll Free: 1.888.362.7172
Directors & Officers
Eric S. Sprott, Chairman
Peter Grosskopf, Chief Executive Officer and Director
Jack C. Lee, Lead Director
Rick Rule, Director
James T. Roddy, Director
Marc Faber, Director
Paul Stephens, Director
Sharon Ranson, Director
Rosemary Zigrossi, Director
Steven Rostowsky, Chief Financial Officer and
Corporate Secretary
Transfer Agent & Registrar
Equity Transfer & Trust Company
200 University Avenue, Suite 400
Toronto, Ontario M5H 4H1
Toll Free: 1.866.393.4891
www.equitytransfer.com
Legal Counsel
Baker & McKenzie LLP
Brookfield Place, Suite 2100
181 Bay Street, P.O. Box 874
Toronto, Ontario, Canada M5J 2T3
Auditors
Ernst & Young LLP
Ernst & Young Tower
P.O. Box 251, 222 Bay Street
Toronto-Dominion Centre
Toronto, Ontario M5K 1J7
Investor Relations
Shareholder requests may be directed to
Investor Relations by e-mail at ir@sprott.com
or via telephone at 416.203.2310
or toll free at 1.877.403.2310
Stock Information
Sprott Inc. common shares are traded on the
Toronto Stock Exchange under the symbol ‘‘SII’’
Annual General Meeting
Wednesday, May 13, 2015, 11:00AM
Baker & McKenzie LLP
Brookfield Place, Bay / Wellington Tower
181 Bay Street, Suite 2100
Toronto, Ontario
25MAR201420550178
www.sprottinc.com