Annual Report
2016
Exchange Listed Products
Alternative Asset Management
Private Resource Investments
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
27
28
29
34
March 1, 2017
Dear Shareholders,
During 2016, Sprott delivered improved financial results as our Assets Under Management (“AUM”) grew by nearly $2 billion and our adjusted
base EBITDA increased to $0.10 per share from $0.07 per share in 2015.
The key drivers of our improved results were the growth of our exchange listed products franchise and the performance of our actively managed
precious metals and alternative credit strategies which, together, drove the majority of the $21.4 million in gross performance fees earned by
the company during the year. We also benefited from strong performance from our proprietary investments, which contributed nearly $28 million
in gains during 2016.
Our outlook for precious metals remains positive. After a correction during the fourth quarter of 2016, gold and silver prices still posted yearly
gains of 8% and 15%, respectively, and both metals have resumed their upward trajectory in the early part of 2017. We continue to feel that
government debt and entitlement levels globally cannot be sustained by the productive output of the underlying economies, and that some form
of market turmoil or correction will be the inevitable conclusion. With this backdrop, we are seeing interest by large investors in increasing their
allocations to hard assets in general, and precious metals specifically, and we aspire to grow our business accordingly.
The asset management industry is going through a period of transformation as it adjusts to a changing regulatory landscape, pressure to reduce
fees and the continuing reallocation of investors’ assets from actively managed to passive products. We are confident that we can continue to
meet our clients’ needs in this environment by focusing on value-added investment strategies where we have a proven expertise and sustainable
competitive advantages.
We have started 2017 on positive footing with the Sprott Private Resource Lending LP receiving additional commitments, while the Sprott Energy
Opportunities Trust, the Sprott 2017 Flow-Through Limited Partnership and Sprott Resource Holdings Inc. all completed successful raises.
As we look to drive our future growth and profitability, we have expanded our sales and client relationship capabilities in the US, where we will
continue to grow our exchange listed strategies by building on our base of more than 100,000 predominantly US domiciled clients.
Our balance sheet remains strong with more than $300 million in investable capital and we will continue to evaluate opportunities to use our
financial strength to develop scale in core areas through acquisitions.
We have made good progress in reducing our SG&A expense ratio and we believe we can drive further efficiencies in this area.
Finally, on behalf of our employees and board of directors, I would like to welcome our newest board member Ron Dewhurst who joined the
board in January. Ron is a seasoned asset management executive with global experience in both retail and institutional channels and we look
forward to his contributions to the board.
Thank you for your continued support. We look forward to reporting to you on our progress throughout 2017.
Sincerely,
Peter Grosskopf
Chief Executive Officer
2
Management's Discussion and Analysis
Year ended December 31, 2016
FORWARD LOOKING STATEMENTS
Certain statements in this Management's Discussion & Analysis ("MD&A"), and in particular the "Business Highlights and Growth
Initiatives" and "Outlook" sections, 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) Sprott Inc.’s (the "Company", "we", "us", "our") outlook for precious metals and expectation that our gold and silver-related
investment strategies will be strong contributors in 2017; (ii) our belief that we are well positioned to meet our clients’ needs in the
changing regulatory environment; (iii) our commitment to growing our exchange listed offerings, while also building scale in alternative
active strategies, where we believe we have a strategic and competitive advantage; (iv) our belief that the new long-term incentive
compensation plan will better align executive compensation and incentives to that of our shareholders going forward; (v) our belief
that management fees and interest income will continue to be sufficient to satisfy ongoing operating needs and the Company's
belief that it holds sufficient cash and liquid securities to meet any other operating and capital requirements; and (vi) 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 impact of increasing competition in each business in which the Company operates will not be material; (ii) quality
management will be available; (iii) the effects of regulation and tax laws of governmental agencies will be consistent with the current
environment; and (iv) 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) poor investment performance; (iii) performance fee fluctuations; (iv)
changes in the investment management industry; (v) risks related to regulatory compliance; (vi) failure to deal appropriately with
conflicts of interest; (vii) failure to continue to retain and attract quality staff; (viii) competitive pressures; (ix) corporate growth may
be difficult to sustain and may place significant demands on existing administrative, operational and financial resources; (x) failure
to execute the Company’s succession plan; (xi) foreign exchange risk relating to the relative value of the U.S. dollar; (xii) litigation
risk; (xiii) employee errors or misconduct could result in regulatory sanctions or reputational harm; (xiv) failure to implement effective
information security policies, procedures and capabilities; (xv) failure to develop effective business resiliency plans; (xvi) failure to
obtain or maintain sufficient insurance coverage on favourable economic terms; (xvii) historical financial information is not necessarily
indicative of future performance; (xviii) the market price of common shares of the Company may fluctuate widely and rapidly; (xix)
risks relating to the Company's proprietary investments; (xx) risks relating to the Company's lending business; (xxi) those risks
described under the heading "Risk Factors" in the Company’s annual information form dated March 1, 2017; and (xxii) those risks
described under the headings "Managing Risk: Financial" and "Managing Risk: Non-Financial" 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.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
This MD&A of financial condition and results of operations, dated March 1, 2017, presents an analysis of the consolidated financial
condition of the Company and its subsidiaries as at December 31, 2016, compared with December 31, 2015, and the consolidated
results of operations for the three and twelve months ended December 31, 2016, compared with the three and twelve months ended
December 31, 2015. The Board of Directors approved this MD&A on March 1, 2017. All note references in this MD&A are to the
notes to the Company's December 31, 2016 annual audited consolidated financial statements ("annual financial statements"),
unless otherwise noted. The Company was incorporated under the Business Corporations Act (Ontario) on February 13, 2008.
PRESENTATION OF FINANCIAL INFORMATION
The annual financial statements, including the required comparative information, have been prepared in accordance with
International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). Financial
results, including related historical comparatives contained in this MD&A, unless otherwise specified herein, are based on 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 periods" refers to the quarter and year
ended December 31, 2015 as applicable.
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 managed by the Company through its various investment product
offerings, managed accounts and managed companies.
Assets Under Administration
Assets Under Administration ("AUA") refers to assets administered by us, which are beneficially owned by clients in the form of
client accounts at broker-dealer subsidiaries of the Company.
Investment Performance
Investment performance is a key driver of AUM. 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 management fees and the potential for performance
fees.
Net Sales
Sales, net of redemptions, is another key performance indicator as the amount of new assets being added to the total AUM of the
Company will lead to higher management fees and can potentially lead to increased performance fee generation given that AUM
is also the basis upon which performance fees and carried interests are calculated.
Selling, general and administrative ("SG&A") Expense Ratio
The SG&A Expense Ratio refers to total SG&A expenses as a percentage of adjusted base EBITDA relevant net revenues. The
Company uses this ratio to monitor and manage the impact of SG&A on adjusted base EBITDA. Relevant net revenues include all
net revenue items with the exception of: (1) gains (losses) on proprietary investments; (2) gains (losses) on foreign exchange; (3)
performance fees, net of performance fees paid to sub-advisors; and (4) income from energy assets.
5
EBITDA, Adjusted EBITDA and Adjusted base EBITDA
EBITDA in its most basic form is defined as earnings before interest expense, income taxes, depreciation and amortization. EBITDA
is a measure commonly used in the investment 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.
The following table outlines how our EBITDA measures are determined:
($ in thousands)
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2016
Dec. 31, 2015
3 months ended
12 months ended
Net income (loss) for the periods
Adjustments:
Interest expense
Provision for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
Impairment (reversal) of intangibles
Impairment of goodwill
(Gains) losses on proprietary investments
General loan loss provisions (recoveries) (1)
(Gains) losses on foreign exchange (2)
Non-cash and non-recurring stock-based
compensation
Other (3)
Adjusted EBITDA
Other adjustments:
Performance fees
Performance fee related expenses
Adjusted base EBITDA
754
5
775
1,836
3,370
—
—
8,030
(1,200)
(2,095)
850
2,492
11,447
(19,935)
13,203
4,715
(4,104)
—
(1,209)
1,602
(3,711)
—
3,204
1,128
1,200
(3,405)
372
3,317
2,105
(8,703)
6,393
(205)
31,538
5
6,305
7,421
45,269
3,006
—
(27,894)
(1,200)
3,498
3,589
5,378
31,646
(21,407)
13,821
24,060
(39,631)
84
8,653
6,396
(24,498)
12,073
31,709
9,820
1,200
(17,020)
(674)
6,399
19,009
(8,925)
6,478
16,562
(1) Adjusted base EBITDA includes specific loan loss provisions of $0.3 million on a three months ended basis (three months ended 2015 - $4.2 million) and
$0.9 million on a twelve months ended basis (twelve months ended 2015 - $8.0 million).
(2) (Gains) losses on foreign exchange include translation gains and losses relating to U.S. dollar denominated cash, receivables and loan balances.
(3) Other category includes transition expenses paid during the period. Transition expenses were $0.3 million on a three months ended basis (three months
ended 2015 - $1.1 million) and $0.5 million on a twelve months ended basis (twelve months ended 2015 - $1.6 million). Effective June 30, 2016, the Company
began incurring upfront placement fees in the Lending segment. These fees are amortized for EBITDA recognition purposes over the future benefits period.
This is contrary to our treatment on the statements of operation prepared using the principles of IFRS (specifically IAS 18). Management believes this IFRS
departure is necessary to: (1) more accurately reflect the economics of arrangements with placement agents, consultants, and key employees tasked with
asset accumulation; and (2) to ensure that future comparative periods post-IFRS 15 transition in 2018 are reported on a consistent basis with that impending
new standard.
6
BUSINESS OVERVIEW
We operate through three primary lines of business:
(1) Exchange Listed Products
(2) Alternative Asset Management
(3) Private Resource Investments
Exchange Listed Products
•
This business platform houses the Company's closed-end physical trusts and exchange traded funds ("ETFs"), both of
which are actively traded on public securities exchanges. Sprott Asset Management LP ("SAM") is both the principal
subsidiary and reportable segment through which these products are managed and distributed.
Alternative Asset Management
•
This business platform houses the Company's full suite of public mutual funds, alternative investment strategies and
managed accounts. In addition to the management and distribution of exchange listed products noted above, SAM also
manages this diversified products suite.
Private Resource Investments
•
This business platform houses the Company's private resource-focused asset management activities. Primary activities
include the management of: (1) U.S.-based fixed-term limited partnership vehicles, discretionary managed accounts and
private placement activities; (2) direct and indirect resource lending activities via the Company’s balance sheet and through
limited partnership structures; and (3) private equity style and direct asset investments through managed companies.
Specific reportable segments and principal subsidiaries in this line of business are highlighted below:
Global:
•
•
•
Lending:
Resource Capital Investment Corporation ("RCIC")
Sprott Asset Management USA Inc. ("SAM US")
Sprott Global Resource Investments Ltd. ("SGRIL")
•
Sprott Resource Lending Corp. ("SRLC")
Consulting:
•
•
•
Sprott Consulting LP ("SC"), manager of Sprott Resource Corp. ("SRC")
Toscana Energy Corporation ("TEC"); Toscana Capital Corporation ("TCC") (collectively, "Sprott Toscana")
Sprott Korea Corporation ("Sprott Korea")
For a detailed account of the underlying principal subsidiaries within our primary lines of business (as well as our corporate segment) refer to the Company's Annual Information
Form and Note 2 of the annual financial statements.
7
BUSINESS HIGHLIGHTS AND GROWTH INITIATIVES
Investment Performance
Strong precious metals pricing led to good market value appreciation across most of our funds until the fourth quarter when precious
metals prices began to soften. We experienced $0.8 billion in market value depreciation in the quarter but finished the year with
$0.7 billion in total market value gains.
Product and Business Line Expansion
Subsequent to the year end, SAM completed the closing of the Sprott 2017 Flow-Through Limited Partnership by issuing 2 million
units for gross proceeds of $50 million.
During the quarter, SAM completed the initial public offering of the Sprott Energy Opportunities Trust by issuing 4.6 million units for
gross proceeds of $46.2 million. Additionally, SAM completed the closing of the Sprott 2016 - II Flow-Through Limited Partnership
by issuing 1 million units for gross proceeds of $25 million.
During the second quarter SAM together with Sprott Physical Silver Trust ("PSLV"), completed a follow-on offering of 14.1 million
units for gross proceeds of $108 million. Additionally, the Company closed on private resource lending funds ("Private Resource
Lending LPs"), raising $370 million in fund commitments through to December 31, 2016.
During the first quarter, SAM together with Sprott Physical GoldTrust ("PHYS"), successfully completed its exchange offer to acquire
all of the outstanding units of the Central GoldTrust ("GTU") on a Net Asset Value ("NAV") to NAV exchange basis. At the time of
closing, the transaction added $1.1 billion to our total AUM and provided access to 20,000 new clients based largely in the U.S.
OUTLOOK
Despite weaker prices during the fourth quarter of 2016, precious metals performed well in fiscal 2016 with gold and silver delivering
one-year returns of approximately 8% and 15%, respectively. Our outlook for precious metals investments remains positive and
we expect our gold and silver-related investment strategies to be strong contributors once again in 2017. The asset management
industry is going through a period of change as it adjusts to a changing regulatory environment and the continuing reallocation of
investors’ assets from conventionally managed products to alternative and passive investment strategies. We believe we are well
positioned to meet our clients’ needs in this shifting landscape and we are committed to growing our exchange listed offerings,
while also building scale in alternative active strategies where we believe we have a strategic and competitive advantage.
8
SUMMARY FINANCIAL INFORMATION
($ in thousands)
SUMMARY INCOME STATEMENT
Management fees
Performance fees
less: Trailer fees
less: Sub-advisor fees
Net Fees
Commissions
Interest income
Gains (losses) on proprietary investments
Other income (loss)
Total Net Revenues
Compensation
Stock-based compensation
Placement and referral fees
Selling, general and administrative
Loan loss provisions (recoveries)
Amortization and impairment charges
Other expenses
Total Expenses
SG&A Expense Ratio
Net Income (Loss)
Net Income (Loss) per share (basic &
diluted)
Adjusted base EBITDA
Adjusted base EBITDA per share (basic &
diluted)
SUMMARY BALANCE SHEET
Total Assets
Total Liabilities
Cash
Net cash
Proprietary investments
less: obligations related to securities sold
short
Net proprietary investments
Loans receivable *
Investable Capital
ASSETS UNDER MANAGEMENT
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Q4
2015
Q3
2015
Q2
2015
Q1
2015
22,586
20,524
19,315
18,504
18,776
19,492
18,563
21,895
19,935
3,110
10,552
28,168
2,959
3,636
(8,030)
4,805
31,538
239
3,325
1,233
18,267
5,265
2,824
6,809
3,658
36,823
1,146
3,167
1,107
17,396
4,478
3,900
17,629
1,250
44,653
17,547
10,689
11,707
1,759
2,169
6,949
(911)
1,836
660
30,009
26%
754
0.00
4,715
0.02
1,388
497
7,386
114
1,844
502
22,420
27%
12,531
0.05
8,431
0.03
1,382
1,717
7,887
346
1,844
(284)
24,599
30%
16,946
0.07
5,753
0.02
440,024
79,710
123,955
431,149
66,336
100,704
428,209
67,059
111,252
123,561
147,545
100,053
166,126
108,577
152,059
87
3,016
999
15,387
1,133
3,950
11,486
(4,292)
27,664
9,231
1,858
145
7,263
192
4,903
2,215
25,807
32%
1,307
0.01
5,161
0.02
8,703
3,060
6,234
17,913
1,515
4,122
(1,128)
6,075
28,497
11,774
770
177
7,855
5,351
4,806
3,077
33,810
36%
94
3,222
934
14,714
1,940
3,953
(9,399)
10,955
22,163
7,886
773
193
7,371
3,866
41,615
3,209
64,913
33%
(4,104)
(49,190)
(0.02)
(205)
0.00
(0.20)
2,454
0.01
1
3,163
876
15,454
1,478
3,807
3,450
250
24,439
127
3,133
776
14,781
2,075
6,832
(2,742)
8,565
29,511
7,560
10,882
186
16
6,004
(131)
1,582
882
16,099
28%
6,726
0.03
7,136
0.02
247
27
5,806
132
2,175
1,497
20,766
24%
6,937
0.03
7,177
0.03
412,547
61,987
92,496
(1,093)
91,403
133,603
433,876
75,634
107,622
439,637
69,222
124,093
497,818
74,537
145,366
453,895
27,739
119,646
(459)
(1,097)
(4,411)
(1,893)
107,163
136,809
122,996
139,634
140,955
134,849
117,753
94,902
(29,810)
(36,782)
(38,641)
(31,653)
(40,191)
(42,992)
(37,944)
(10,792)
117,735
67,678
308,974
129,344
82,470
311,867
113,418
81,638
303,633
101,950
101,253
294,606
96,618
100,802
304,583
96,642
89,035
96,905
89,279
308,673
327,139
84,110
109,433
311,296
less: syndicate cash holdings
(394)
(651)
(2,675)
Exchange Listed Products
4,411,640
4,943,224
4,829,986
4,169,716
2,958,779
3,076,458
3,195,543
3,392,087
Alternative Asset Management
3,653,851
3,937,898
3,816,298
3,476,701
3,328,220
3,202,390
3,378,695
3,226,247
Private Resource Investments
1,182,492
1,207,598
1,154,718
1,153,099
1,139,030
1,155,249
1,226,548
1,199,055
Total Enterprise AUM
9,247,983
10,088,720
9,801,002
8,799,516
7,426,029
7,434,097
7,800,786
7,817,389
* In prior periods, the loan receivable balances included a long-term receivable recorded in other assets for Investable Capital calculation and reporting purposes. This item is
now excluded to better align with the on-balance sheet presentation. The balances were not material.
9
FINANCIAL HIGHLIGHTS
For the three and twelve months ended December 31, 2016
•
•
•
•
•
•
•
AUM was $9.2 billion, reflecting a decrease of $0.8 billion (8%) from September 30, 2016 and an increase of $1.8 billion
(25%) from December 31, 2015. The decrease in AUM quarter-over-quarter was due to market value depreciation
commensurate with the decline in precious metals prices in the fourth quarter. The increase in AUM on a twelve months
ended basis was due to a combination of the closure of the Central GoldTrust ("GTU") exchange offer in the first quarter,
a follow on offering of PSLV units in the second quarter and strong market value appreciation on a full year basis given
strong precious metals prices during the first nine months of the year. Average AUM on a three and twelve months ended
basis was $9.7 billion and $9.4 billion, respectively, which increased $2.2 billion (29%) and $1.7 billion (21%), respectively,
from the prior periods.
AUA was $2.6 billion, reflecting a decrease of $0.3 billion (10%) from September 30, 2016 and an increase of $0.6 billion
(30%) from December 31, 2015. The decrease on a three months ended basis and increase on the twelve months ended
basis was due to the market value variances noted above.
Total net revenues were $31.5 million on a three months ended basis and $140.7 million on a twelve months ended basis,
reflecting an increase of $3.0 million (11%) and $36.1 million (35%), respectively, from the prior periods.
Total expenses (excluding trailer fees and sub-advisor fees) were $30.0 million on a three months ended basis and $102.8
million on a twelve months ended basis, reflecting a decrease of $3.8 million (11%) and $32.7 million (24%), respectively,
from the prior periods.
Net income was $0.8 million ($0.00 per share) on a three months ended basis and $31.5 million ($0.13 per share) on a
twelve months ended basis, reflecting an increase of $4.9 million and $71.2 million, respectively, from the prior periods.
Adjusted base EBITDA was $4.7 million ($0.02 per share) on a three months ended basis and $24.1 million ($0.10 per
share) on a twelve months ended basis reflecting an increase of $4.9 million and $7.5 million, respectively, from the prior
periods.
Investable capital stood at $309.0 million, reflecting a decrease of $2.9 million from September 30, 2016 and an increase
of $4.4 million from December 31, 2015.
10
RESULTS OF OPERATIONS
For the three and twelve months ended December 31, 2016
Assets Under Management, Investment Performance and Net Sales
Breakdown of AUM by investment product type:
Product Type
Exchange Listed Products (1)
Alternative Asset Management:
Mutual Funds (1)
Alternative Investment Funds
Managed Accounts
Private Resource Investments:
Private Resource Lending Funds
Fixed-term limited partnerships
Managed Companies
Managed Accounts
Total Enterprise AUM
Dec. 31, 2016
Dec. 31, 2015
$ (in millions)
% AUM
$ (in millions)
% AUM
4,412
2,465
1,085
104
49
343
653
137
9,248
48%
27%
11%
1%
1%
4%
7%
1%
100%
2,959
2,400
892
35
—
335
701
104
7,426
40%
32%
12%
1%
—
5%
9%
1%
100%
Breakdown of AUM movements on a quarter-to-date basis by investment product type:
$ (in millions)
Sep. 30, 2016
AUM
Net Sales /
(Redemptions)
Net Market
Value Change
Transfers /
Acquisitions /
(Divestitures)
AUM
Dec. 31, 2016
Exchange Listed Products (1)
Alternative Asset Management:
Mutual Funds (1)
Alternative Investment Funds
Managed Accounts
Private Resource Investments:
Private Resource Lending Funds
Fixed Term Limited Partnerships
Managed Companies
Managed Accounts
Total Enterprise AUM
4,943
2,674
1,173
91
—
383
681
144
10,089
47
(67)
(49)
25
49
—
—
—
5
(616)
(104)
(39)
(12)
—
(40)
(28)
(7)
(846)
38
(38)
—
—
—
—
—
—
—
4,412
2,465
1,085
104
49
343
653
137
9,248
Breakdown of AUM movements on a year-to-date basis by investment product type:
$ (in millions)
Dec. 31, 2015
AUM
Net Sales /
(Redemptions)
Net Market
Value Change
Transfers /
Acquisitions /
(Divestitures)
AUM
Dec. 31, 2016
Exchange Listed Products (1)
Alternative Asset Management:
Mutual Funds (1)
Alternative Investment Funds
Managed Accounts
Private Resource Investments:
2,959
2,400
892
35
70
(126)
38
56
273
229
155
13
1,110
(38)
—
—
4,412
2,465
1,085
104
49
Private Resource Lending Funds
343
Fixed Term Limited Partnerships
653
Managed Companies
137
Managed Accounts
9,248
Total Enterprise AUM
(1) Prior to 2016, the "Bullion Funds" category combined Physical Trusts as well as Bullion Mutual Funds. Bullion Mutual Funds are now part of the "Mutual Funds" category while
—
335
701
104
7,426
—
—
—
—
1,072
—
8
(48)
33
663
49
—
—
—
87
the Physical Trusts have been combined with ETFs as part of the "Exchange Listed Products" category. Prior periods have been restated accordingly.
11
Revenues
Management fees net of trailers and sub-advisor fees were $17.7 million on a three months ended basis and $67.5 million on a
twelve months ended basis, reflecting an increase of $3.3 million (23%) and $8.3 million (14%), respectively, from the prior periods.
The increase was largely due to an increase in the average AUM of our exchange listed products and resource focused funds.
However, we also experienced good AUM growth in our alternative credit products. Gross management fees as a percentage of
average AUM were 1% on a three and twelve months ended basis, largely unchanged from the prior periods.
Gross performance fees were $19.9 million on a three months ended basis and $21.4 million on a twelve months ended basis,
reflecting an increase of $11.2 million and $12.5 million, respectively from the prior periods. Gross performance fees were primarily
generated in our resource and credit focused funds in the alternative asset management platform.
Commission revenues were $3.0 million on a three months ended basis and $13.8 million on a twelve months ended basis, reflecting
an increase of $1.4 million and $6.8 million, respectively, from the prior periods. The increase was due to improved client trading
and private placement activity, mostly in SGRIL and to a lesser extent in Sprott Private Wealth ("SPW").
Interest income was $3.6 million on a three months ended basis and $14.3 million on a twelve months ended basis, reflecting a
decrease of $0.5 million (12%) and $4.4 million (24%), respectively, from the prior periods. The decrease was due to lower average
loan balances in our Lending segment as we continue our effort to wind down on-balance sheet lending and build scale in our
private resource lending funds.
Returns on proprietary investments were negative $8.0 million on a three months ended basis and $27.9 million on a twelve months
ended basis, reflecting a decrease of $6.9 million and an increase of $37.7 million, respectively, from the prior periods. Losses in
the quarter were due to market value depreciation in our precious metals focused seeded fund and equity holdings. The gains on
a twelve months ended basis were due to the strong market value appreciation we encountered in the first nine months of the year
that was only partially offset by the softer fourth quarter environment for precious metals prices.
Other income was $4.8 million on a three months ended basis and $5.4 million on a twelve months ended basis, reflecting a decrease
of $1.3 million (21%) and $20.4 million (79%), respectively, from the prior periods. The decrease on a three and twelve months
ended basis was largely due to reduced foreign exchange gains (in the quarter) and foreign exchange losses (on a year-to-date
basis) compared to material foreign exchange gains last year.
12
Expenses
Changes in specific expense categories are described below:
Compensation
The table below summarizes the components of compensation:
($ in thousands)
Salaries
Discretionary bonus-cash component
Commissions
Director's fees
Transition expenses
Compensation (1)
3 months ended
12 months ended
2016
2015
2016
2015
7,700
7,257
2,087
220
283
17,547
6,396
2,411
1,488
396
1,083
11,774
29,412
12,996
5,491
799
476
49,174
23,860
7,608
4,059
960
1,615
38,102
(1) Discretionary bonus-equity of $1.2 million on a three months ended basis (December 31, 2015 - $0.4 million) and $3.0 million on a twelve months ended
(December 31, 2015 - $2.6 million) is included as part of stock-based compensation on the consolidated statements of operations.
Total reported compensation was $17.5 million on a three months ended basis and $49.2 million on a twelve months ended basis,
reflecting an increase of $5.8 million (49%) and $11.1 million (29%), respectively, from the prior periods. A significant portion of the
increase was due to higher salaries in the alternative asset management business as that platform added more headcount during
the year. Other contributors to the increase included: (1) higher bonus accruals on higher EBITDA and performance fee generation;
and (2) higher commissions expense on improved client trading and private placement activity, primarily in SGRIL.
Stock-based compensation
Reported stock-based compensation was $1.8 million on a three months ended basis and $6.4 million on a twelve months ended
basis, reflecting an increase of $1.0 million and $4.4 million, respectively, from the prior periods. The increase was largely due to
the amortization of stock-based compensation attributable to our new long-term incentive compensation plan adopted in the first
quarter of this year. The new plan includes a transition to long-term executive compensation through the use of time and performance-
based stock options. We believe this will better align executive compensation and incentives to that of our shareholders going
forward.
Placement and referral fees
Placement and referral fees (previously included in "other expenses" in the second quarter of this year) were $2.2 million on a three
months ended basis and $4.5 million on a twelve months ended basis, reflecting an increase of $2.0 million and $4.1 million,
respectively, from the prior periods. The increase was mainly due to ongoing placement fees pertaining to the start-up of our new
private resource lending funds earlier in the year.
Loan loss provisions (recoveries)
In the prior year, the Company had specific and general loan loss provisions of $8.0 million and $1.2 million, respectively. During
the quarter, the Company completed its quarterly assessment of credit risk in the portfolio. This led to the decision to reverse the
$1.2 million general loan loss provision. The Company also wrote off a prior period loan we had a specific provision against in order
to permanently remove it from our balance sheet. There were no credit loss events to provide for in fiscal 2016, however, given the
IFRS requirement to continue accruing non-cash interest on previously impaired loans via the effective interest rate method of
accounting, the Company was required to accrue such interest and then take a corresponding specific loan loss provision against
the accrued interest amount (the $0.8 million figure in the table below).
($ in thousands)
At December 31, 2015
Recovery of general loan loss provision
Loan write-off
Deferred Fees (net of FX)
At December 31, 2016
General Loan Loss
Provision
Specific Loan loss
provision
Total
1,200
(1,200)
—
—
—
8,017
—
(3,866)
842
4,993
9,217
(1,200)
(3,866)
842
4,993
13
Selling, general and administrative
SG&A expenses were $6.9 million on a three months ended basis and $29.5 million on a twelve months ended basis, reflecting a
decrease of $0.9 million (12%) on a three months ended basis and an increase of $2.4 million (9%) on a twelve months ended
basis. During the quarter we benefited from lower fund operating expenses ("fund opex"), professional fees, marketing and sales
expenses as we continued to see the benefits of our ongoing cost containment program. On a year-to-date basis, our cost containment
efforts helped to partially offset the higher investment spend in fund opex, marketing and sales incurred earlier in the year in the
alternative asset management business.
Amortization of intangibles
Amortization of intangibles was $1.6 million on a three months ended basis and $6.5 million on a twelve months ended basis,
reflecting an increase of $0.2 million (17%) and $1.0 million (17%), respectively, from the prior periods. The increase was mainly
due to a change in accounting estimate during the first quarter of this year involving certain exchange listed products (physical
trusts) previously classified as indefinite life intangibles, which are now being accounted for as finite life intangibles and amortized
over their estimated remaining useful life.
Impairment of goodwill and intangibles
The table below provides a break-down of impairment charges incurred:
($ in thousands)
Goodwill impairment
Carried interest impairment
Finite life management contract impairment
Indefinite life management contract impairment*
Impairment of goodwill and intangibles
*See Note 5 of the annual financial statements for further details.
3 months ended
12 months ended
2016
2015
2016
2015
—
—
—
—
—
3,204
—
—
—
3,204
—
—
—
3,006
3,006
31,709
2,333
398
9,342
43,782
Amortization of property and equipment
Amortization of property and equipment was $0.2 million on a three months ended basis and $0.9 million on a twelve months ended
basis, which remained largely unchanged from the prior periods.
Other expenses
Other expenses (excluding placement and referral fees, which are now presented on a separate "Placement and referral fees" line
on the consolidated statements of operations) were $0.7 million on a three months ended basis and $3.1 million on a twelve months
ended basis, reflecting a decrease of $2.4 million (79%) and $5.6 million (64%), respectively, from the prior periods. The decrease
was largely due to lower operating expenses and depletion charges incurred in certain seeded energy assets held as part of the
proprietary investment holdings of our private resource investments business.
14
Net Income and Adjusted base EBITDA
Net income was $0.8 million on a three months ended basis and $31.5 million on a twelve months ended basis, reflecting an increase
of $4.9 million and $71.2 million from the prior periods.
On a three months ended basis (excluding last year's impairment charges and provisions on goodwill and intangible assets), higher
net income was mainly due to: (1) higher net management and performance fees; (2) higher commissions; and (3) lower loan loss
provisions. These increases were only partially offset by higher losses on proprietary investments, higher compensation expense
and lower foreign exchange gains in the quarter. Our twelve months ended results were impacted in a similar way, however, higher
gains on proprietary investments increased net income and was only partially offset by foreign exchange losses.
Adjusted base EBITDA was $4.7 million on a three months ended basis and $24.1 million on a twelve months ended basis, reflecting
an increase of $4.9 million and $7.5 million, respectively, from the prior periods. Higher Adjusted base EBITDA in the quarter was
due to improved net management fees and commission income coupled with lower SG&A and lower specific loan loss provisions,
which more than offset lower interest income and higher compensation expense. Our twelve months ended results were impacted
in a similar way, however, the year-over-year increase in Adjusted base EBITDA was partially reduced by SG&A spend incurred
earlier in the year in our alternative asset management platform.
Balance Sheet
Cash and cash equivalents were $124.0 million, an increase of $16.3 million (15%) from December 31, 2015. The increase was
primarily due to net loan repayments and the sale of proprietary investments. These increases more than offset dividend payments
during the year.
Fees receivable were $26.1 million, reflecting an increase of $12.5 million (93%) from December 31, 2015. The increase was
primarily due to the timing of year-end management and performance fee receipts.
Loans receivable (both current and long-term) were $67.7 million, reflecting a decrease of $33.1 million (33%) from December 31,
2015. The decrease was due to our continued efforts to wind down our on-balance sheet lending and build scale in our new private
resource lending funds.
Proprietary investments were $147.5 million, reflecting an increase of $10.7 million (8%) from December 31, 2015. The increase
was mainly due to strong market value appreciation of our seeded fund and equity holdings, which more than offset the sale of
investments during the year.
Obligations related to securities sold short were $29.8 million, reflecting a decrease of $10.4 million (26%) from December 31,
2015. The Company is currently holding $29.7 million (December 31, 2015 - $38.5 million) of investment strategies that are
economically offset by these short positions.
Other assets (both current and long-term) were $12.9 million, reflecting a decrease of $11.3 million (47%) from December 31, 2015.
The decrease was primarily due to the first quarter reclassification of $11 million in deferred transaction costs related to the GTU
exchange offer to finite life intangible assets after the successful completion of the offer (see Note 7 of the annual financial statements).
Intangible assets were $23.1 million, reflecting an increase of $8.1 million (54%) from December 31, 2015. The increase was
primarily a result of the reclassification of deferred transaction costs described earlier. This was partially offset by impairment charges
taken in the first quarter of this year on an indefinite life management contract in SAM.
Goodwill was $25.7 million, reflecting a decrease of $0.8 million (3%) from December 31, 2015. The decrease was entirely due to
foreign exchange losses on translation of the Company's U.S. dollar denominated goodwill attributable to SAM.
Deferred income tax assets (net of deferred income tax liabilities) were $1.7 million, reflecting an increase of $6.7 million from
December 31, 2015. The net increase was mainly due to a reduction in transitional partnership income currently taxable in the year.
Accounts payable and accrued liabilities were $24.5 million, reflecting an increase of $1.7 million (7%) from December 31, 2015.
The increase was mainly due to higher accrued sub-advisor fees which more than offset the funding of the Employee Profit Sharing
Plan ("EPSP").
Compensation payable was $13.3 million, reflecting an increase of $8.9 million from December 31, 2015. The increase relates to
the timing of compensation accruals relative to payouts.
15
REPORTABLE SEGMENTS - BY LINES OF BUSINESS
SAM (Exchange Listed Products and Alternative Asset Management)
Summary Results of Operations:
($ in thousands)
SUMMARY
Total AUM
Total revenues
Total expenses
Income (loss) before income taxes
Adjusted base EBITDA
KEY REVENUE LINE ITEMS
Exchange Listed Products:
Management fees
Alternative Asset Management:
Management fees
Performance fees
less: trailer fees
less: sub-advisor fees
Net management and performance fees
Investment holdings and other:
Gains (losses) on proprietary investments
Other income (loss)
KEY EXPENSE LINE ITEMS
Compensation
Stock-based compensation
Selling, general and administrative
Impairment charges
SG&A Expense Ratio
n/m = not meaningful
Three and twelve months ended:
3 months ended
12 months ended
Dec. 31, 2016 Dec. 31, 2015 % Chg. Dec. 31, 2016 Dec. 31, 2015 % Chg.
8,065,491
40,784
32,594
8,190
3,829
6,286,999
25,897
23,654
2,243
759
28 %
58 %
38 %
n/m
n/m
8,065,491
108,777
83,641
25,136
16,243
6,286,999
72,395
64,328
8,067
10,684
28 %
50 %
30 %
n/m
52 %
4,659
3,102
50 %
17,957
13,121
37 %
14,145
19,935
3,602
10,553
19,925
439
1,602
11,246
902
3,981
—
25%
12,425
8,703
3,431
6,218
11,479
14 %
n/m
5 %
70 %
74 %
1,861
(162)
(76)%
n/m
7,458
587
4,594
—
39%
51 %
54 %
(13)%
n/m
54,432
21,407
14,612
13,891
47,336
11,108
3,851
27,636
2,845
16,652
3,006
29%
49,743
8,798
14,219
8,850
35,472
(2,725)
3,441
20,463
2,041
15,647
—
33%
9 %
n/m
3 %
57 %
33 %
n/m
12 %
35 %
39 %
6 %
n/m
Total revenues on a three and twelve months ended basis were $40.8 million and $108.8 million, reflecting an increase of $14.9 million and
$36.4 million, respectively, from the prior periods. The increases were mainly a result of:
• Management fees: Higher due to increased exchange listed AUM on the closure of the GTU exchange offer, follow on offering of PSLV
earlier in the year and improved average AUM from strong precious metals prices and increased sales of alternative credit products.
•
•
Performance fees: Due to a combination of strong precious metals prices and alternative credit product performance.
Gains on proprietary investments: Strong market value appreciation of our seeded investments during the first nine months of the year
that was only partially offset by the softer fourth quarter environment for precious metals prices.
Total expenses (excluding impairment charges on intangible assets) on a three and twelve months ended basis were $32.6 million and $80.6
million, reflecting an increase of $8.9 million and $16.3 million, respectively, from the prior periods.
•
The increase on a three months ended basis was mainly a result of:
Compensation: Higher salaries due to increased headcount, coupled with higher bonus accruals commensurate with higher
EBITDA and performance fee generation.
Our cost containment program led to reduced SG&A expenses, which helped to partially offset the increased compensation
spend described above.
•
The increase on a twelve months ended basis was mainly a result of:
Compensation: As previously described.
SG&A: Higher as the effects of our cost containment program were increasingly felt in the second half of the year.
Adjusted base EBITDA on a three and twelve months ended basis was $3.8 million and $16.2 million, reflecting an increase of $3.1 million and
$5.6 million, respectively, from the prior periods. The increase was mainly due to higher net management fees which more than offset the increase
in compensation (and SG&A on a full year basis).
16
GLOBAL (Private Resource Investments)
Summary Results of Operations:
($ in thousands)
SUMMARY
Total AUM
Total revenues
Total expenses
Income (loss) before income taxes
Adjusted base EBITDA
KEY REVENUE LINE ITEMS
Asset management and private placement activities:
Management fees
Commissions
Investment holdings and other:
Gains (losses) on proprietary investments
Other income (loss)
KEY EXPENSE LINE ITEMS
Compensation
Selling, general and administrative
Impairment of Goodwill
Impairment of Intangibles
SG&A Expense Ratio
n/m = not meaningful
Three and twelve months ended:
3 months ended
12 months ended
Dec. 31, 2016 Dec. 31, 2015 % Chg. Dec. 31, 2016 Dec. 31, 2015 % Chg.
480,678
3,459
4,052
(593)
1,203
438,230
2,615
3,475
(860)
364
1,904
2,004
(594)
119
1,941
1,052
—
—
25%
1,855
801
(159)
100
1,375
959
—
—
34%
10 %
32 %
17 %
31 %
n/m
3 %
n/m
n/m
19 %
41 %
10 %
n/m
n/m
480,678
18,092
16,517
1,575
4,601
438,230
9,282
44,912
(35,630)
10 %
95 %
(63)%
n/m
1,320
n/m
7,527
9,016
1,180
281
7,620
4,436
—
—
26%
7,436
3,775
(1,239)
(767)
5,784
3,546
28,505
2,731
33%
1 %
n/m
n/m
n/m
32 %
25 %
n/m
n/m
Total revenues on a three and twelve months ended basis were $3.5 million and $18.1 million, reflecting an increase of $0.8 million and $8.8
million, respectively, from the prior periods. The increases were mainly a result of:
•
•
Commissions: Higher commissions due to improved client trading and private placement activity in SGRIL.
Returns on proprietary investments: A softer fourth quarter environment for precious metals prices led to negative returns on a three
months ended basis, but only partially offset our full year's positive returns on seeded fixed-term limited partnership interests, public
equities and share purchase warrants.
Total expenses (excluding last year's impairment charges on goodwill and intangible assets) on a three and twelve months ended basis were
$4.1 million and $16.5 million, reflecting an increase of $0.6 million and $2.8 million, respectively from the prior periods. The increase was mainly
a result of:
•
•
Compensation: Higher due to increased commission expense on improved client trading and private placement activity in SGRIL.
SG&A: Higher due to increased trade execution costs from improved client trading activity.
Adjusted base EBITDA on a three and twelve months ended basis was $1.2 million and $4.6 million, reflecting an increase of $0.8 million and
$3.3 million, respectively, from the prior periods. The increase from the prior periods was due to higher net commission income, partially offset
by higher trade execution costs on increased trading activity.
17
LENDING (Private Resource Investments)
Summary Results of Operations:
($ in thousands)
SUMMARY
Total AUM (1)
Total revenues
Total expenses
Income (loss) before income taxes
Adjusted base EBITDA
KEY REVENUE LINE ITEMS
Private resource lending:
Management Fees
Interest income
Investment holdings and other:
Gains (losses) on proprietary investments
Other income (loss)
KEY EXPENSE LINE ITEMS
Compensation
Stock-based compensation
Selling, general and administrative
Placement and referral Fees
Loan loss provisions (recoveries)
SG&A Expense Ratio
n/m = not meaningful
3 months ended
12 months ended
Dec. 31, 2016 Dec. 31, 2015 % Chg. Dec. 31, 2016 Dec. 31, 2015 % Chg.
49,214
4,761
962
3,799
2,173
67
3,171
(599)
2,122
613
140
320
800
(911)
9%
—
4,764
4,231
533
1,053
n/m
n/m
(77)%
n/m
n/m
49,214
19,804
6,313
13,491
9,558
—
25,562
12,878
12,684
8,057
n/m
(23) %
(51) %
6 %
19 %
—
3,741
n/m
(15)%
67
12,489
—
17,017
n/m
(27) %
(2,086)
3,109
(1,521)
78
322
—
5,351
8%
71 %
32 %
n/m
80 %
n/m
n/m
n/m
7,106
142
2,794
402
937
2,439
(259)
6%
(2,876)
11,421
n/m
n/m
2,255
483
922
—
9,217
5 %
24 %
(17) %
2 %
n/m
n/m
(1) As at December 31, 2016, our Sprott Private Resource Lending LPs had $370 million in firm commitments, $50 million of which has been deployed.
Three and twelve months ended:
Total revenues on a three and twelve months ended basis were $4.8 million and $19.8 million, reflecting a slight decrease on a three months
ended basis and a decrease of $5.8 million on a twelve months ended basis. The decrease was largely a result of:
•
•
•
Interest income: Decreased due to lower average loan balances as we continue our efforts to wind down our on-balance sheet lending
and build scale in our new private resource lending funds.
Other income: Lower as a result of reduced foreign exchange gains in the quarter and foreign exchange losses on a full year basis.
These revenue declines were partially offset by market value appreciation of certain public equities and share purchase warrants.
Total expenses on a three and twelve months ended basis were $1.0 million and $6.3 million, reflecting a decrease of $3.3 million and $6.6
million, respectively, from the prior periods. The decrease in total expenses on a three and twelve months ended basis was mainly a result of:
•
•
Loan loss provisions (recoveries): Lower loan loss provisions due to the reversal of the general loan loss provision and the lack of any
new specific loan loss provisions this year.
The decrease in loan loss provisions was partially offset by placement fee expenses related to the start-up of our new private resource
lending funds.
Adjusted base EBITDA on a three and twelve months ended basis was $2.2 million and $9.6 million, which increased $1.1 million and $1.5
million, respectively, from the prior periods. The increase was due to lower specific loan loss provisions, partially offset by a decrease in interest
income and higher compensation expense.
18
CONSULTING (Private Resource Investments)
Summary Results of Operations:
($ in thousands)
SUMMARY
Total AUM (1)
Total revenues
Total expenses
Income (loss) before income taxes
Adjusted base EBITDA
KEY REVENUE LINE ITEMS
Consulting services to managed companies:
Management fees
Performance fees
Investment holdings and other:
Gains (losses) on proprietary investments
Other income (loss)
KEY EXPENSE LINE ITEMS
Compensation
Stock-based compensation
Selling, general and administrative
Other expenses
Impairment of intangibles
Impairment of goodwill
SG&A Expense Ratio
n/m = not meaningful
3 months ended
12 months ended
Dec. 31, 2016 Dec. 31, 2015 % Chg. Dec. 31, 2016 Dec. 31, 2015 % Chg.
652,600
1,269
1,591
(322)
700,800
(361)
6,770
(7,131)
(7) %
n/m
(77) %
96 %
652,600
5,717
6,450
(733)
700,800
6,348
22,784
(16,436)
(7) %
(10) %
(72) %
96 %
(90)
(62)
45 %
(62)
1,383
n/m
1,033
—
—
233
724
14
369
448
—
—
36%
1,042
—
n/m
—
(2,400)
993
n/m
(77) %
682
5
507
2,327
—
3,204
43%
6 %
n/m
(27) %
(81) %
n/m
n/m
4,009
—
—
1,698
2,463
50
1,565
2,214
—
—
38%
4,780
127
16 %
n/m
(2,400)
3,814
n/m
(56 )%
1,640
(1,101)
1,583
7,899
9,342
3,204
33%
50 %
n/m
1 %
(72) %
n/m
n/m
(1) Effective February 2016, certain management fees generated in the Consulting Segment are now earned on invested AUM rather than committed AUM.
Three and twelve months ended:
Total revenues on a three and twelve months ended basis were $1.3 million and $5.7 million, reflecting an increase of $1.6 million and a decrease
of $0.6 million, respectively, from the prior periods.
•
The increase on a three months ended basis was mainly a result of:
Return on proprietary investments: Increased due to there being no impairment charges on energy related assets in the
period.
The lack of impairment charges on energy related assets was partially offset by lower management fees and decline in
royalty income on seeded energy assets held.
•
The decrease on a twelve months ended basis was mainly a result of:
Management fees: Lower primarily due to a reduction in average AUM in SRC.
Other income: Lower due to a decline in royalty income on seeded energy related assets held.
These revenue declines were partially offset by the lack of impairment charges on proprietary investments during the year.
Total expenses (excluding last year's impairment charges on intangible assets) on a three and twelve months ended basis were $1.6 million
and $6.5 million, reflecting a decrease of $2.0 million and $3.8 million, respectively, from the prior periods. The decrease was mainly a result of:
•
•
Other expenses: Lower operating expenses and depletion charges on seeded energy assets.
On a twelve months ended basis the decrease noted above was partially offset by higher compensation (including stock-based) as
prior period results included cash and equity based earn-out expense reversals relating to Sprott Toscana (fully vested on June 30,
2015). (See Note 8 of the annual financial statements).
Adjusted base EBITDA on a three and twelve months ended basis was negative $0.1 million. This reflects a nominal decrease on a three month
ended basis and a decrease of $1.4 million on a twelve months ended basis. The decrease was mainly due to a combination of lower management
fees and the prior period cash based earn-out reversals previously described.
19
CORPORATE & OTHER
The Corporate segment provides treasury and shared services to the Company's subsidiaries. Principal subsidiaries in this business platform
include Sprott Inc. (non-consolidated; "SII") and SPW.
Summary Results of Operations:
($ in thousands)
Dec. 31, 2016 Dec. 31, 2015 % Chg. Dec. 31, 2016 Dec. 31, 2015 % Chg.
3 months ended
12 months ended
SUMMARY
Total revenues
Total expenses
Income (loss) before income taxes
Adjusted base EBITDA
KEY REVENUE LINE ITEMS
Shared services platform and SPW
Commission income
Trailer fee income
Interest income
Investment holdings and other:
Gains (losses) on proprietary investments
Other income (loss)
KEY EXPENSE LINE ITEMS
Compensation
Stock-based compensation
Selling, general and administrative
n/m = not meaningful
Three and twelve months ended:
(4,534)
5,011
(9,545)
(2,400)
955
564
432
(7,276)
704
3,023
703
1,227
5,277
5,375
(98)
(2,319)
n/m
(7) %
n/m
(4) %
16,969
18,595
(1,626)
(6,280)
14,263
13,926
337
19 %
34 %
n/m
(4,882)
(29) %
714
465
391
34 %
21 %
11 %
1,656
1,971
n/m
(64) %
3,780
100
1,473
(20) %
n/m
(17) %
4,819
2,333
1,701
8,500
(712)
8,661
3,090
5,895
3,233
2,045
1,576
49 %
14 %
8 %
(580)
7,734
n/m
n/m
7,960
553
5,338
9 %
n/m
10 %
Total revenues on a three and twelve months ended basis were negative $4.5 million and $17.0 million, reflecting a decrease of $9.8 million on
a three months ended basis and an increase of $2.7 million on a twelve months ended basis.
•
The decrease on a three months ended basis was mainly a result of:
Returns on proprietary investments: A softer fourth quarter environment for precious metals prices led to a decline in returns
on our precious metals focused seeded fund and equity holdings.
Other income: Reduced foreign exchange gains.
The increase on a twelve months ended basis was mainly a result of:
•
Commissions: Higher due to increased private placement activity in SPW.
Returns on proprietary investments: Gains due to the strong market value appreciation of our precious metals focused
seeded fund and equity holdings during the first nine months of the year.
These increases were partially offset by foreign exchange losses.
Total expenses on a three and twelve months ended basis were $5.0 million and $18.6 million, reflecting a decrease of $0.4 million on a three
months ended basis and and an increase of $4.7 million on a twelve months ended basis.
The decrease on a three months ended basis was mainly a result of:
•
Compensation: Lower due to lower transition costs related to employee exits.
This decline in compensation expense more than offset the higher amortization of stock-based compensation expense
attributable to the new long-term incentive compensation plan adopted in the first quarter of this year.
•
The increase on a twelve months ended basis was mainly a result of:
Compensation: Higher due to bonus accrual adjustments and higher commissions on improved private placement activity
in SPW that more than offset lower transition costs.
Stock-based compensation: Higher due to the amortization of stock-based compensation noted above.
SG&A: Slightly higher due to lower intercompany SG&A charges backs.
Adjusted base EBITDA on a three and twelve months ended basis was negative $2.4 million and negative $6.3 million, which was down $0.1
million in the quarter and down $1.4 million on a twelve months ended basis. The decrease was mainly due to higher compensation and lower
intercompany chargebacks on SG&A, partially offset by higher commission income in SPW.
20
Dividends
The following dividends were declared by the Company during the year ended December 31, 2016:
Record date
November 21, 2016 - regular dividend Q3 - 2016
August 23, 2016 - regular dividend Q2 - 2016
May 25, 2016 - regular dividend Q1 - 2016
March 22, 2016 - regular dividend Q4 - 2015
Dividends (1)
Payment Date
December 6, 2016
September 6, 2016
June 8, 2016
April 5, 2016
Cash dividend per
share ($)
Total dividend
amount ($ in
thousands)
0.03
0.03
0.03
0.03
7,454
7,454
7,454
7,384
29,746
(1) Subsequent to the year end, on March 1, 2017, a regular dividend of $0.03 per common share was declared for the quarter ended December 31,
2016. This dividend is payable on March 27, 2017 to shareholders of record at the close of business on March 10, 2017.
Capital Stock
Including the 5.3 million unvested common shares currently held in the EPSP Trust (December 31, 2015 - 4.5 million), total capital
stock issued and outstanding was 248.5 million (December 31, 2015 - 248.5 million).
Earnings per share for the current and prior periods have been calculated using the weighted average number of shares outstanding
during the respective periods. Basic and diluted earnings (loss) per share were $0.00 and $0.13 on a three and twelve months
ended ended basis compared to $(0.02) and $(0.16), in the prior periods. Diluted earnings (loss) per share reflects the dilutive effect
of in-the-money stock options, shares held in the EPSP Trust for the equity incentive plan, estimated earn-out shares being accrued
over the earn-out vesting period, and outstanding restricted stock units.
A total of 10.9 million stock options have been issued pursuant to our stock option plan, of which 4.1 million are exercisable.
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 and interest
income are generally collected monthly or quarterly, 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 an undrawn 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.
SPW and SAM are required to maintain a minimum amount of regulatory capital calculated in accordance with the rules of the
Investment Industry Regulatory Organization of Canada ("IIROC") and of the Ontario Securities Commission ("OSC"), respectively.
In addition, SGRIL is registered with the Financial Industry Regulatory Authority ("FINRA") in the United States and is required to
maintain a minimum amount of regulatory capital calculated in accordance with the rules of FINRA and the Securities Exchange
Commission.
Commitments
Besides the Company's long-term lease agreements, there may be commitments to provide loans arising from the Lending segment
or commitments to make investments in the proprietary investments portfolio of the Company. As at December 31, 2016, the
Company had no loan commitments arising from the Lending business (December 31, 2015 - $29.3 million) and $35.5 million of
investment purchase commitments in the proprietary investments portfolio (December 31, 2015 - $Nil).
21
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 are described below. The Company
based its assumptions and estimates on parameters available when the annual 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, however, 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
and asset lives. 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 energy 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 performance-based equity grants), the probability of a subsidiary or executive
attaining certain performance targets, the future stock price of the Company and the future employment of a senior employee.
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. 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 (both specific and collective loan loss assessments), 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. Management
exercises judgment to determine whether indicators of loan or debenture impairment exist (on either a specific or collective basis),
and if so, management must estimate the timing and amount of future cash flows from loans receivable and debentures.
22
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 or recoverable amount. 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 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 loan repayments are
notionally tied to a specific commodity spot price.
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 Lending 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 and proprietary investments 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. A decrease in commodity prices may
delay the development of the underlying security or business plans of the borrower and could adversely affect the value of the
Company's security against a resource loan or resource debenture. Additionally, the value of the Company's underlying security
in a resource loan or resource debenture can be negatively affected if the actual amount or quality of the commodity proves to
be less than originally estimated, or the ability to extract the commodity proves to be more difficult or more costly than originally
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.
23
Collectability of loans
Besides the above noted measures we take to manage credit risk, the Company will report on credit risk in the notes to the annual
financial statements and records loan loss provisions (both specific and general) to ensure the loans are recorded at their estimated
recoverable amount (i.e. net of impairment risk we believe to exist as at the balance sheet date and in accordance with IFRS).
Actual losses incurred in the loan portfolio could differ materially from our provisions.
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. These receivables are short-term in nature and any credit risk associated
with them is managed by dealing with counterparties that the Company believes to be creditworthy and by actively monitoring
credit exposure and the financial health of the counterparties.
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.
Additionally, the Company has access to a $35 million committed line of credit with its primary lender. 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 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 and through its broader treasury risk management program.
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 (e.g. dividend payments) 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 and through its broader
treasury risk management program. To meet any liquidity shortfalls, actions taken by the Company could include: syndicating a
portion of its loans; slowing its lending activities; cutting its dividend; drawing on available loan facilities; liquidating proprietary
investments; and/or issuing common shares.
Concentration risk
A significant portion of the Company's AUM as well as its proprietary investments and loans are focused on the natural resource
sector. In addition, from time-to-time, certain proprietary and loan positions may be concentrated to a material degree in a single
position or group of positions.
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. This includes 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, 2016, the Company's CEO and CFO concluded that the Company's DC&P and ICFR were properly designed and
were operating effectively. In addition, there were no material changes to ICFR during the year.
24
Managing Risk: Non-financial
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 funds managed by the Company. 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.
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 ("IRC") to whom all conflicts of interest matters must be referred
for review and approval. The Company established an IRC for its 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 IRC in carrying out its functions. The IRC 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.
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 U.S. Securities
and Exchange Commission ("SEC").
For a detailed account of the Company's risk management activities, refer to Note 13 in the annual financial statements
25
Consolidated Financial Statements
Year ended December 31, 2016
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, 2016. 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 and risk committee (the
"Audit & Risk Committee") annually. Among other things, the mandate of the Audit & Risk 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 & Risk 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.
KPMG LLP performed an independent audit of the consolidated financial statements, as outlined in the auditors' report
contained herein. KPMG LLP had, and has, full and unrestricted access to management of the Company, the Audit &
Risk 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 1, 2017
Kevin Hibbert
Chief Financial Officer and Corporate Secretary
27
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Sprott Inc.
We have audited the accompanying consolidated financial statements of Sprott Inc., which comprise the consolidated
balance sheet as at December 31, 2016, the consolidated statements of operations and comprehensive income (loss),
changes in shareholders' equity and cash flows for the year then ended, and notes, comprising 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 audit. We conducted
our audit 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 our 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, we 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 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 consolidated balance
sheet of Sprott Inc. as at December 31, 2016, and its consolidated financial performance and its consolidated cash flows
for the year then ended in accordance with International Financial Reporting Standards.
Comparative Information
The consolidated financial statements of Sprott Inc. as at and for the year ended December 31, 2015, were audited by
another auditor who expressed an unmodified opinion on those financial statements on March 10, 2016.
Chartered Professional Accountants, Licensed Public Accountants
March 1, 2017
Toronto, Canada
28
CONSOLIDATED BALANCE SHEETS
As at
($ in thousands of Canadian dollars)
Assets
Current
Cash and cash equivalents
Fees receivable
Loans receivable
Proprietary investments
Other assets
Income taxes recoverable
Total current assets
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 payable
Obligations related to securities sold short
Income taxes payable
Total current liabilities
Deferred income taxes
Total liabilities
Shareholders' equity
Capital stock
Contributed surplus
Deficit
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
Commitments and provisions
See accompanying notes
Eric Sprott
Director
James Roddy
Director
Dec. 31
2016
Dec. 31
2015
123,955
26,070
11,631
147,545
9,893
1,511
320,605
56,047
2,957
6,311
23,059
25,710
5,335
119,419
440,024
24,491
13,258
29,810
8,480
76,039
3,671
79,710
411,231
41,802
(126,264)
33,545
360,314
440,024
(Note 6)
(Note 3)
(Note 7)
(Note 6)
(Note 7)
(Note 4)
(Note 5)
(Note 5)
(Note 9)
(Note 3)
(Note 9)
(Note 8)
(Note 8)
(Note 15)
107,622
13,531
53,200
136,809
8,327
1,632
321,121
47,602
15,819
6,344
14,968
26,498
1,524
112,755
433,876
22,818
4,313
40,191
1,704
69,026
6,608
75,634
412,344
38,749
(128,056)
35,205
358,242
433,876
29
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands of Canadian dollars, except for per share amounts)
For the years ended
Dec. 31
2016
Dec. 31
2015
Revenues
Management fees
Performance fees
Commissions
Interest income
Gains (losses) on proprietary investments
Other Income
Total revenue
Expenses
Compensation
Stock-based compensation
Trailer fees
Sub-advisor fees
Placement and referral fees
Loan loss provisions (recoveries)
Selling, general and administrative
Amortization of intangibles
Impairment of intangibles
Impairment of goodwill
Amortization of property and equipment
Other expenses
Total expenses
Income (loss) before income taxes for the period
Provision for income taxes
Net income (loss) for the year
84,320
21,407
13,835
14,310
27,894
5,421
167,187
49,174
6,387
12,618
13,891
4,528
(259)
29,485
6,501
3,006
—
920
3,093
129,344
37,843
6,305
31,538
(Note 7)
(Note 8)
(Note 6)
(Note 5)
(Note 5)
(Note 5)
(Note 4)
(Note 7)
(Note 9)
Basic and diluted earnings (loss) per share
(Note 8)
$
0.13 $
See accompanying notes
75,335
8,925
7,008
18,714
(9,820)
25,845
126,007
38,102
1,976
12,547
8,876
404
9,217
27,036
5,550
12,073
31,709
846
8,649
156,985
(30,978)
8,653
(39,631)
(0.16)
30
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in thousands of Canadian dollars)
Net income (loss) for the year
Other comprehensive income (loss)
Items that may be reclassified subsequently to profit or loss
Foreign currency translation gain (loss) on foreign operations (taxes of $Nil)
Total other comprehensive income (loss)
Comprehensive income (loss)
See accompanying notes
For the years ended
Dec. 31
2016
Dec. 31
2015
31,538
(39,631)
(1,660)
(1,660)
14,805
14,805
29,878
(24,826)
31
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CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands of Canadian dollars)
Operating Activities
Net income (loss) for the year
Add (deduct) non-cash items:
Losses (gains) on proprietary investments
Stock-based compensation
Amortization of property, equipment and intangible assets
Impairment of intangible assets
Impairment of goodwill
Loan loss provisions
Deferred income taxes (recovery)
Current income tax expense
Other items
Income taxes paid
Changes in:
Fees receivable
Loans receivable
Accounts payable, accrued liabilities and compensation payable
Other assets
Cash provided by operating activities
Investing Activities
Purchase of proprietary investments
Sale of proprietary investments
Purchase of property and equipment
Deferred sales commissions paid
Costs related to an exchange offer
Internalization of performance fees
Purchase of intangible assets
Cash used in investing activities
Financing Activities
Acquisition of common shares for equity incentive plan
Loan payable (repayment)
Dividends paid
Cash used in financing activities
Effect of foreign exchange on cash balances
Net increase (decrease) in cash and cash equivalents during the year
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash and cash equivalents:
Cash
Short-term deposits
Supplementary disclosure of cash flow information
Amount of interest received during the year
See accompanying notes
For the years ended
Dec. 31
2016
Dec. 31
2015
31,538
(39,631)
(27,894)
6,387
7,421
3,006
—
(259)
(6,629)
12,934
(5,606)
(6,077)
(12,596)
33,574
11,606
10,322
57,727
(111,448)
123,564
(915)
(686)
—
—
(17,203)
(6,688)
(4,473)
—
(29,720)
(34,193)
(513)
16,333
107,622
123,955
116,695
7,260
123,955
9,820
1,976
6,396
12,073
31,709
9,217
2,400
6,253
(359)
(57)
(127)
13,153
(11,141)
(1,124)
40,558
(53,512)
59,325
(865)
(1,459)
(11,711)
3,475
(459)
(5,206)
(7,750)
(15,000)
(29,770)
(52,520)
4,016
(13,152)
120,774
107,622
103,373
4,249
107,622
5,398
8,685
33
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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 2J1.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance
These annual audited consolidated financial statements for the years ended December 31, 2016 and 2015 ("financial
statements") have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by
the International Accounting Standards Board ("IASB").
They have been authorized for issue by a resolution of the Board of Directors of the Company on March 1, 2017 and include
all subsequent events up to that date.
Basis of presentation
These 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
These 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 principal subsidiaries:
•
•
•
•
•
•
•
•
•
•
•
Sprott Asset Management LP ("SAM");
Sprott Private Wealth LP ("SPW");
Sprott Consulting LP ("SC");
Sprott Asia LP ("Sprott Asia");
Sprott Korea Corporation ("Sprott Korea");
Sprott U.S. Holdings Inc. ("SUSHI"), parent of: (i) Rule Investments Inc. (ii) Sprott Global Resource Investments
Ltd. ("SGRIL"); (iii) Sprott Asset Management USA Inc. ("SAM US"); and (iv) Resource Capital Investment
Corporation ("RCIC"). Collectively, the interests of SUSHI are referred to as "Global" 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").
34
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Investments in funds
Investments in 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 ("IAS 39") and 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,
exchange traded funds, 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. As at December 31, 2016, assets
under management in public mutual funds were $2.5 billion (December 31, 2015 - $2.4 billion); alternative investment
strategies were $1.1 billion (December 31, 2015 - $0.9 billion); exchange listed funds were $4.4 billion (December 31, 2015
- $3.0 billion); resource lending through our private resource lending funds were $49.2 million (December 31, 2015 - $Nil)
and fixed-term limited partnerships were $0.3 billion (December 31, 2015 - $0.3 billion). The Company had investments in
22 funds (December 31, 2015 - 20) with an average ownership interest of 11% (December 31, 2015 - 10%) across its total
fund universe. 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 when earned, which follows the expiry
of any claw-back periods.
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
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.
35
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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 statements of operations.
Energy sector investments
The Company has investments in gross overriding royalties and working interest properties. Interests in gross overriding
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 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 highly
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 gains (losses) on proprietary
investments in the consolidated statements of operations. 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 Held to Maturity ("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.
36
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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 - Specific loan loss provisions and impairment charges
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.
Impairment of resource loans - Collective loan loss assessments
In light of continued challenges in the global resources sector, effective October 1, 2015, management implemented a
collective loan loss assessment approach to further augment its loan loss provisioning process over resource loans.
Resource loans which are individually assessed and not determined to be impaired, are collectively assessed for impairment.
For the purposes of a collective evaluation of impairment, resource loans are grouped on the basis of similar risk
characteristics, taking into account loan type, industry, geographic location, collateral type, past due status and other relevant
factors, as necessary.
The collective impairment allowance is determined by reviewing factors including, but not limited to: (1) historical loss
experience, which takes into consideration historical probabilities of default and loss given default, in portfolios of similar
credit risk characteristics; and (2) management's judgment on the level of impairment losses based on historical experience
relative to the actual level as reported at the balance sheet date, taking into consideration the current portfolio credit quality
trends, business and economic and credit conditions, the impact of policy and process changes, and other supporting
factors. Future cash flows for a group of loans are collectively evaluated for impairment on the basis of the contractual cash
flows of the resource loans in the group and historical loss experience for resource loans with credit risk characteristics
similar to those in the group. Historical loss experience is adjusted based on the current observable data to reflect the
effects of current conditions that did not affect the period on which the historical loss experience is based. Collectively-
assessed impairment losses reduce the carrying amount of the aggregated resource loan position through an allowance
account and the amount of the loss is recognized in the Loan loss provision line of the consolidated statements of operations.
37
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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 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 gain or loss being included with gains (losses)
on proprietary investments. These financial instruments cannot be reclassified out of the FVTPL category while they are
held or issued.
38
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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.
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 indicators 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
39
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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 indicators 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 and goodwill
The purchase price of an acquisition accounted for under the acquisition method is allocated based on the fair values of
the net identifiable assets acquired. The excess of the purchase price over the fair values of such identifiable net assets is
recorded as goodwill.
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 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;
40
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
•
•
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.
option valuation model for stock options. Compensation
Compensation expense is determined using the
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 as of the grant date. 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. 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.
41
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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, however, 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 and asset lives. 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 energy 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 performance-based equity grants),
the probability of a subsidiary or executive attaining certain performance targets, the future stock price of the Company and
the future employment of a senior employee.
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. 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.
42
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Provisions, including provisions for loan losses and debentures
Due to the nature of provisions (both specific and collective loan loss assessments), 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 provisions recorded on the Company's financial
statements. With regard to loan loss provisions and debenture impairments, management exercises judgment to determine
whether indicators of loan or debenture impairment exist (on either a specific or collective basis), and if so, management
must estimate the timing and amount of future cash flows from loans receivable and debentures.
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.
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, 2018. The Company is evaluating the potential impact of this new standard
on the financial statements.
43
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
3.
PROPRIETARY INVESTMENTS AND OBLIGATIONS RELATED TO SECURITIES SOLD SHORT
Proprietary investments and obligations related to securities sold short consist of the following ($ in thousands):
Public equities and share purchase warrants
Mutual funds and alternative investment strategies*
Fixed income securities
Private holdings**
Total proprietary investments
Dec. 31, 2016
Dec. 31, 2015
42,067
83,327
2,802
19,349
147,545
12,961
106,814
2,520
14,514
136,809
Obligations related to securities sold short***
29,810
40,191
* Investments in mutual funds and alternative investment strategies are primarily managed by SAM or RCIC. As at December 31, 2016, the underlying
holdings in these mutual funds and alternative investment strategies primarily consisted of cash and short-term investments of $22.1 million
(December 31, 2015 - $9.0 million), equities of $58.6 million (December 31, 2015 - $43.9 million), short equity positions of $18.2 million (December 31,
2015 - $49.8 million), fixed income securities of $9.8 million (December 31, 2015 - $59.9 million), bullion of $Nil (December 31, 2015 - $3.0 million),
loans of $6.7 million (December 31, 2015 - $0.1 million) and derivatives of $0.5 million (December 31, 2015 - $0.2 million).
** Private holdings consist of the following investments: (1) private company investments classified as HFT and AFS. HFT investments have their
changes in fair value recorded in the consolidated statements of operations. AFS investments have their changes in fair value recorded as part of the
consolidated statements of comprehensive income until such time the asset is either disposed of, or is assessed as being impaired; (2) energy royalties
of $2.6 million (December 31, 2015 - $3.2 million) which are based on the estimated future cash flows and expected return from future royalty payments;
and (3) working interests in energy properties of $4.0 million (December 31, 2015 - $4.9 million) which are recorded at cost, net of depletion and/or
impairment charges. As at December 31, 2016, the Company assessed the carrying amount of its working interest in energy properties and its energy
royalties by considering changes in future prices, future costs and reserves and identified no indicators of impairment as at the end of the period.
*** On occasion, the Company may employ market-neutral investment strategies that involve an investment in our funds or other publicly listed entities
and related securities short sales to hedge market risk. Currently, these strategies have employed $29.7 million (December 31, 2015 - $38.5 million)
of long positions in investment strategies and $29.8 million (December 31, 2015 - $40.2 million) of short positions.
44
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
4.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following ($ in thousands):
Cost
At December 31, 2014
Additions
Net exchange differences
December 31, 2015
Additions
Net exchange differences
December 31, 2016
Accumulated amortization
At December 31, 2014
Charge for the year
Net exchange differences
December 31, 2015
Charge for the year
Net exchange differences
December 31, 2016
Net book value at:
December 31, 2015
December 31, 2016
Artwork
Furniture and
fixtures
Computer
hardware and
software
Leasehold
improvements
Total
2,045
—
—
2,045
577
—
2,622
—
—
—
—
—
—
—
2,045
2,622
2,989
217
90
3,296
5
(46)
3,255
(2,725)
(169)
(80)
(2,974)
(129)
19
(3,084)
322
171
2,156
179
77
2,412
253
(13)
2,652
(2,151)
(61)
(76)
(2,288)
(153)
24
(2,417)
124
235
7,882
469
64
8,415
80
(16)
8,479
(3,926)
(616)
(20)
(4,562)
(638)
4
(5,196)
3,853
3,283
15,072
865
231
16,168
915
(75)
17,008
(8,802)
(846)
(176)
(9,824)
(920)
47
(10,697)
6,344
6,311
45
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
5.
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 Dec. 31, 2014
Net additions and (disposals)
Net exchange differences
At Dec. 31, 2015
Net additions and (disposals)
Transfers*
Net exchange differences
At Dec. 31, 2016
Accumulated amortization and
impairment losses
At Dec. 31, 2014
Amortization charge for the year
Net impairment charge for the year
Net exchange differences
155,435
—
27,384
182,819
—
—
(5,070)
177,749
(105,008)
—
(31,709)
(19,604)
16,987
(3,129)
—
13,858
—
(1,510)
—
26,931
38,184
—
4,574
31,505
17,203
1,510
113
7,316
45,613
—
—
(847)
(1,355)
8,026
1,459
—
245,563
(1,557)
39,274
9,485
283,280
686
17,889
—
—
—
(7,272)
12,348
49,371
44,258
10,171
293,897
—
—
(9,342)
—
(16,411)
(36,068)
(5,459)
(162,946)
(3,712)
(398)
(2,888)
(168)
(2,333)
(7,044)
(1,670)
(5,550)
—
—
(43,782)
(29,536)
At Dec. 31, 2015
(156,321)
(9,342)
(23,409)
(45,613)
(7,129)
(241,814)
Amortization charge for the period
Net impairment charge for the period
Net exchange differences
—
—
4,282
—
(4,941)
(3,006)
—
—
556
—
—
1,355
(1,560)
—
—
(6,501)
(3,006)
6,193
At Dec. 31, 2016
Net book value at:
Dec. 31, 2015
Dec. 31, 2016
(152,039)
(12,348)
(27,794)
(44,258)
(8,689)
(245,128)
26,498
25,710
4,516
—
8,096
21,577
—
—
2,356
1,482
41,466
48,769
*During the first quarter, $1.5 million (2015: $Nil) of management contracts were reviewed and subsequently determined to have a change in estimated
remaining useful life. Consequently, these management contracts were prospectively reclassified to the finite life category and the Company began
amortizing the contracts over the remaining estimated useful life beginning in the first quarter.
46
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Impairment assessment of goodwill
The Company identified six cash generating units ("CGU"s) for goodwill impairment assessment and testing purposes:
SAM; Global; Lending; Corporate; Consulting; and SPW. Operating segments of the Company substantially align with the
CGUs. A full description of our segments can be found in Note 14. As at December 31, 2016, the Company had allocated
goodwill of $25.7 million (December 31, 2015 - $26.5 million) to the SAM CGU.
In the normal course, goodwill is tested for impairment once per annum, which for the Company is during the fourth quarter
of each year. During the impairment testing process, there were no indicators of goodwill impairment in the SAM CGU.
Impairment assessment of indefinite life fund management contracts
In March 31, 2016, the Company determined that the recoverable amount of an indefinite life fund management contract
within the SAM CGU was lower than its carrying value. Consequently, an impairment charge of $3.0 million was recorded
in the first quarter (December 31, 2015 - $Nil) on the Impairment of intangibles line of the consolidated statements of
operations. The recoverable amount of the contract was determined using a discounted cash flow value-in-use calculation
that discounted relevant cash flows at approximately 15% (pre-tax). As at December 31, 2016, the Company had indefinite
life fund management contracts (net of impairment and transfers described above) of $Nil within the SAM CGU
(December 31, 2015 - $4.5 million).
Impairment assessment of finite life fund management contracts
As at December 31, 2016, the Company had fixed-term limited partnerships within the Global CGU of $2.9 million
(December 31, 2015 - $8.1 million) and exchange listed funds within the SAM CGU of $18.7 million (December 31, 2015
- $Nil). There were no indicators of impairment as at December 31, 2016.
Impairment assessment of deferred sales commissions
As at December 31, 2016, the Company had deferred sales commissions of $1.5 million within the SAM CGU (December 31,
2015 - $2.4 million). There were no indicators of impairment as at December 31, 2016.
47
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
6.
LOANS RECEIVABLE
Components of loans receivable
Loans receivable (which currently consist of resource loans and resource debentures) are reported at their amortized cost
using the effective interest method, other than precious metal loans that are designated as FVTPL which are reported at
fair value and included in resource loans. Resource loans are reported net of any general or specific loan loss provisions
on the Loan loss provisions line of the consolidated statements of operations. Impairment of resource debentures are
reported as part of the Gains (losses) on proprietary investments line of the consolidated statements of operations. Total
carrying value consists of the following ($ in thousands):
Resource loans
Loan principal
Accrued interest*
Deferred revenue
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
Amortized cost, before impairments
Impairments
Carrying value of resource debentures receivable
Less: current portion
Total non-current resource debentures receivable
Total carrying value of loans receivable
Less: current portion
Dec. 31, 2016
Dec. 31, 2015
78,814
86
(6,229)
72,671
(4,993)
67,678
(11,631)
56,047
115,751
317
(7,058)
109,010
(9,217)
99,793
(52,191)
47,602
—
—
—
—
—
—
—
67,678
(11,631)
56,047
1,000
9
1,009
—
1,009
(1,009)
—
100,802
(53,200)
47,602
Total carrying value of non-current loans receivable
*Certain comparative information has been reclassified to conform with the financial statement presentation adopted in the current period.
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, 2016, 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. There were no credit loss events in the quarter, however, given the IFRS requirement to continue accruing non-
cash interest on previously impaired loans via the effective interest rate method of accounting, the Company is required to
accrue such interest and take a corresponding provision against the accrued interest amount. In this context, specific loan
loss provisions of $0.9 million were recorded on a year ended basis, compared to $8.0 million in the prior period.
During the quarter, the Company completed its quarterly assesement of credit risk in the portfolio. This led to the reversal
of the $1.2 million general loan loss provision.
48
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Interest income on impaired loans and debentures and the changes in loan loss provision and impairment are as follows
($ in thousands):
Interest on impaired loans and debentures
Loan loss provisions and impairments
Balance, beginning of the year
Recovery of resource debenture
Write-off of resource loans
Disposal of resource debenture
Disposal of real estate loans
General loan loss provision (recovery)
Specific loan loss provision on resource loan
Net exchange differences
Balance, end of period
Sector distribution of loan principal
For the years ended
Dec. 31, 2016
Dec. 31, 2015
941
266
9,217
—
(3,866)
—
—
(1,200)
941
(99)
4,993
3,001
(1,746)
—
(501)
(754)
1,200
8,017
—
9,217
The following table summarizes the distribution of all of the Company’s outstanding loan principal balances by sector:
Resource loans
Metals and mining
Energy and other
Total resource loans principal
Resource debentures
Energy and other
Total resource debentures principal
Total loan principal
Dec. 31, 2016
Dec. 31, 2015
Number of Loans
($ in thousands) Number of Loans
($ in thousands)
5
4
9
—
—
9
38,514
40,300
78,814
—
—
78,814
7
7
14
1
1
15
54,810
60,941
115,751
1,000
1,000
116,751
49
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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:
Dec. 31, 2016
Dec. 31, 2015
Number of Loans
($ in thousands) Number of Loans
($ in thousands)
Resource loans
Canada
United States of America
Mexico
Chile
Brazil
Peru
Romania
South Africa
Total resource loan principal
Resource debentures
Canada
Total resource debenture principal
Total loan principal
Priority of security charges
2
2
—
1
1
1
1
1
9
—
—
9
24,765
32,446
—
4,363
964
1,880
2,275
12,121
78,814
—
—
78,814
5
2
2
1
1
1
1
1
14
1
1
15
31,711
36,588
12,607
6,919
2,733
1,937
2,500
20,756
115,751
1,000
1,000
116,751
All of the Company's loans and debentures are senior secured (December 31, 2015 - 2 resource loans were second secured
but have been repaid).
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, 2016 and December 31, 2015, no loans were past due.
Loan commitments
As at December 31, 2016, the Company had no loan commitments (December 31, 2015 - $29.3 million).
50
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
7.
OTHER ASSETS, INCOME AND EXPENSES
Other Assets
Other assets (both current and long term) consist primarily of: (1) $2.8 million (December 31, 2015 - $4.0 million) in proceeds
receivable on the past sale of an investment; (2) receivables of $4.6 million (December 31, 2015 - $1.6 million) from funds
and managed companies for which the Company has incurred expenses on their behalf; (3) Prepaid expenses of $1.5
million (December 31, 2015 - $1.6 million); and (4) royalties and other income receivable of $1.0 million (December 31,
2015 - $0.8 million) on energy assets held in our proprietary investments.
Deferred costs of $11.0 million from December 31, 2015 were reclassified to the finite life fund management contracts
category within the SAM CGU subsequent to the successful closing of the exchange offer with Central GoldTrust on January
15, 2016.
A $3.5 million non-interest bearing related party demand note between the Company and Sprott Continental Holding Limited,
a company controlled by Eric Sprott, which was outstanding at December 31, 2015 was repaid in full in January 2016.
Other Income
Other income primarily includes: (1) foreign exchange losses of $3.5 million (December 31, 2015 - $17.0 million gain); (2)
royalty income on energy related assets held in proprietary investments of $1.8 million (December 31, 2015 - $3.9 million);
(3) income earned on other investments of $4.1 million (December 31, 2015 - $2.4 million); and (4) accretion income of
$1.6 million on a share receivable (December 31, 2015 - $Nil).
Other Expenses
Other expenses primarily include (1) costs related to energy assets including: (a) operating expenses of $1.2 million
(December 31, 2015 - $1.9 million); (b) depletion charges of $1.0 million (December 31, 2015 - $2.7 million); and (c)
impairement charges of $nil (December 31, 2015 - $3.3 million) and (2) non-recurring expenses of $0.9 million incurred in
our Global and SAM segments (December 31, 2015 - $Nil).
8.
SHAREHOLDERS' EQUITY
Capital stock and contributed surplus
The authorized and issued share capital of the Company consists of an unlimited number of common shares, without par
value.
At Dec. 31, 2014
Additional purchase consideration
Issuance of share capital on conversion of RSU
Acquired for equity incentive plan
Released on vesting of equity incentive plan
At Dec. 31, 2015
Issuance of share capital under dividend reinvestment program
Acquired for equity incentive plan
Released on vesting of equity incentive plan
At Dec. 31, 2016
Number of
shares
Stated value
($ in thousands)
246,021,326
414,668
136,064
1,400
(3,119,030)
956,845
243,996,605
10,262
(1,850,000)
1,033,426
543
4
(7,750)
4,879
412,344
26
(4,473)
3,334
243,190,293
411,231
51
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Contributed surplus consists of: stock option expense; earn-out shares expense; equity incentive plans' expense; and
additional purchase consideration.
At Dec. 31, 2014
Expensing of EPSP / EIP shares over the vesting period
Expensing of earn-out shares over the vesting period
Issuance of share capital on share-based consideration
Issuance of share capital on conversion of RSU
Released on vesting of common shares for equity incentive plan
At Dec. 31, 2015
Expensing of Sprott Inc. stock options over the vesting period
Expensing of EPSP / EIP shares over the vesting period
Released on vesting of common shares for equity incentive plan
At Dec. 31, 2016
Stock option plan
Stated value
($ in thousands)
42,199
3,122
(1,146)
(543)
(4)
(4,879)
38,749
2,477
3,910
(3,334)
41,802
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.
A total of 8,250,000 options were issued during the year ended December 31, 2016 (December 31, 2015 - Nil).
For valuing share option grants, the fair value method of accounting is used. The fair value of option grants is determined
using the Black-Scholes option-pricing model, which takes into account the exercise price of the option, the current share
price, the risk-free interest rate, the expected volatility of the share price over the life of the option and other relevant factors.
Compensation cost is recognized over the 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, 2014
Options exercisable, December 31, 2014
Options outstanding, December 31, 2015
Options exercisable, December 31, 2015
Options granted
Options granted
Options outstanding, December 31, 2016
Options exercisable, December 31, 2016
Number of options
(in thousands)
Weighted average
exercise price ($)
2,650
2,650
2,650
2,650
7,250
1,000
10,900
4,100
9.71
9.71
9.71
9.71
2.33
2.73
4.16
7.10
52
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Options outstanding and exercisable as at December 31, 2016 are as follows:
Exercise price ($)
10.00
4.85
6.60
2.33
2.73
2.33 to 10.00
Number of
outstanding options
(in thousands)
Weighted average
remaining
contractual life
(years)
Number of options
exercisable
(in thousands)
2,450
50
150
7,250
1,000
10,900
1.3
3.0
3.9
9.1
9.4
7.3
2,450
50
150
1,450
—
4,100
Equity incentive plan
For employees in Canada, the Trust has been established and the Company will fund the Trust with cash, which will be
used by the trustee to purchase: (1) on the open market, common shares of the Company that will be held in the Trust until
the awards vest and are distributed to eligible members; or (2) from treasury, common shares of the Company that will be
held in the Trust until the awards vest and are distributed to eligible employees; and (3) from time-to-time, purchases from
2176423 Ontario Ltd., a company controlled by Eric Sprott, pursuant to the terms and conditions of a previously announced
share transaction. For employees in the U.S. under the EIP plan, the Company will allot common shares of the Company
as either: (1) restricted stock; (2) unrestricted stock; or (3) restricted stock units ("RSUs"), the resulting common shares of
which will be issued from treasury.
A total of 258,389 RSUs were issued during the year ended December 31, 2016 (December 31, 2015 - Nil). The Trust
purchased 1.85 million common shares for the year ended ended December 31, 2016 (December 31, 2015 - 3.1 million).
Common shares held by the Trust, December 31, 2014
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2015
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2016
Number of common
shares
2,308,993
3,119,030
(956,845)
4,471,178
1,850,000
(1,033,426)
5,287,752
Earn-out shares
In connection with the acquisition of Sprott Toscana, up to an additional 0.1 million common shares of the Company were
issued with the achievement of certain earnings targets by Sprott Toscana. In accordance with IFRS 2 Share-based Payment
("IFRS 2"), 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 was charged to the consolidated statements of operation over the period of the service condition, being 3
years and was adjusted each reporting period to reflect the best available estimate of the number of equity instruments
expected to ultimately vest. Upon issuance of the common shares, the amount equal to the fair value of the shares at the
53
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
maturity date of the transaction, originally recorded against contributed surplus, was credited to capital stock. On August
18, 2015, 136,064 common shares of the Company were issued to employees of Sprott Toscana.
The table below provides a breakdown of the share-based compensation expense and the corresponding increase to
contributed surplus:
Earn-out shares
Stock option plan
EPSP / EIP
For the years ended
Dec. 31, 2016 Dec. 31, 2015
—
2,477
3,910
6,387
(1,146)
—
3,122
1,976
Basic and diluted earnings per share
The following table presents the calculation of basic and diluted earnings (loss) per common share:
Numerator ($ in thousands):
Net income (loss) - 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 unvested shares purchased by the Trust
Weighted average number of common shares - diluted
Net income (loss) per common share
Basic
Diluted
For the years ended
Dec. 31, 2016 Dec. 31, 2015
31,538
(39,631)
247,528
(4,167)
243,361
4,167
247,528
247,401
(2,149)
245,252
—
245,252
0.13
0.13
(0.16)
(0.16)
54
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Capital management
The Company's objectives when managing capital are:
•
•
•
•
•
to meet regulatory requirements and other contractual obligations;
to safeguard the Company's ability to continue as a going concern so that it can continue to provide returns for
shareholders;
to provide financial flexibility to fund possible acquisitions;
to provide adequate seed capital for the Company's new product offerings; and
to provide an adequate return to shareholders through growth in assets under management, growth in
management fees 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. As at December
31, 2016 and 2015, all entities were in compliance with their respective capital requirements.
55
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
9.
INCOME TAXES
The major components of income tax expense are as follows ($ in thousands):
Current income tax expense
Based on taxable income of the current period
Other
Deferred income tax expense (recovery)
Total deferred income tax expense
Total deferred income tax recovery
Income tax expense reported in the statements of operations
For the years ended
Dec. 31, 2016
Dec. 31, 2015
12,846
88
12,934
—
(6,629)
(6,629)
6,305
5,919
334
6,253
2,400
—
2,400
8,653
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):
Income before income taxes
Tax calculated at domestic tax rates applicable to profits in the respective
countries
Tax effects of:
For the years ended
Dec. 31, 2016
Dec. 31, 2015
37,843
(30,978)
10,251
(12,973)
Non-deductible stock-based compensation
Non-taxable capital (gains) and losses
Capital losses not benefited
Goodwill/Intangible impairment
Adjustments in respect of previous periods
Other temporary differences not benefited
Non-capital losses not previously benefited
Rate differences and other
—
519
2,216
12,154
645
10,046
(3,311)
(643)
8,653
Tax charge
The weighted average statutory tax rate was 27.1% (December 31, 2015 - 41.9%). This decrease was mainly due to increased profitability of our
Canadian operations, which are subject to a lower tax rate than the Global segment, which is U.S. based. The company has $37 million of unused
non-capital tax losses and $13 million of unused capital tax losses from prior years that begin to expire in 2033 and 2019, respectively. The benefit of
these capital and non-capital tax losses has not been recognized.
942
(2,704)
201
468
144
(480)
(2,800)
283
6,305
56
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are recognized
for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable.
The ability to realize the tax benefits of these losses is dependent upon a number of factors, including the future profitability
of operations in the jurisdictions in which the tax losses arose. The movement in significant components of the Company's
deferred income tax assets and liabilities is as follows ($ in thousands):
For the year ended December 31, 2016
Deferred income tax assets
Other stock-based compensation
Non-capital losses
Other
Total deferred income tax assets
Deferred income tax liabilities
Fund management contracts
Deferred sales commissions
Unrealized gains
Transitional partnership income
Proceeds receivable
Other
Total deferred income tax liabilities
Net deferred income tax assets (liabilities)
For the year ended December 31, 2015
Dec. 31, 2015
Recognized in
income
Recognized in
other
comprehensive
income
Dec. 31, 2016
3,721
190
282
4,193
3,700
624
4
3,680
1,396
(127)
9,277
(5,084)
502
363
289
1,154
(1,542)
(232)
182
(3,680)
(403)
200
(5,475)
6,629
—
—
—
—
(119)
—
—
—
—
—
(119)
119
4,223
553
571
5,347
2,039
392
186
—
993
73
3,683
1,664
Dec. 31, 2014
Recognized in
income
Recognized in
other
comprehensive
income
Dec. 31, 2015
Deferred income tax assets
Unrealized losses
Other stock-based compensation
Non-capital losses
Other
Total deferred income tax assets
Deferred income tax liabilities
Fund management contracts
Deferred sales commissions
Unrealized gains
Transitional partnership income
Proceeds receivable
Other
Total deferred income tax liabilities
Net deferred income tax assets (liabilities)
8,835
3,663
1,174
1,633
15,305
7,890
680
625
6,624
1,396
1,368
18,583
(3,278)
(10,179)
70
(984)
(1,302)
(12,395)
(4,879)
(56)
(621)
(2,944)
—
(1,495)
(9,995)
(2,400)
1,344
(12)
—
(49)
1,283
689
—
—
—
—
—
689
594
—
3,721
190
282
4,193
3,700
624
4
3,680
1,396
(127)
9,277
(5,084)
57
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
10.
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, 2016 and December 31, 2015 ($ in thousands).
Dec. 31, 2016
Level 1
Level 2
Level 3
Total
Public equities and share purchase warrants
Mutual funds and alternative investment strategies
Fixed income securities
Private holdings*
Obligations related to securities sold short
Total net recurring fair value measurements
36,842
44,774
—
—
(29,810)
51,806
5,225
38,554
1,538
—
—
45,317
—
—
1,264
15,395
—
16,659
42,067
83,328
2,802
15,395
(29,810)
113,782
Dec. 31, 2015
Level 1
Level 2
Level 3
Total
Public equities and share purchase warrants
Mutual funds and alternative investment strategies
Fixed income securities
Private holdings*
Obligations related to securities sold short
Total net recurring fair value measurements:
* Private holdings measured using fair value techniques include private company investments classified as HFT and foreclosed properties, which have
their changes in fair value recorded on the statements of operations; and private holdings and energy royalties classified as AFS investments, which
have their changes in fair value recorded as part of other comprehensive income.
12,961
106,814
2,520
9,652
(40,191)
91,756
9,758
66,599
—
—
(40,191)
36,166
3,203
40,215
1,254
—
—
44,672
—
—
1,266
9,652
—
10,918
58
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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 - Dec. 31, 2016
Dec. 31,
2015
Purchases and
reclassifications Settlements
Net
unrealized
gains
(losses)
included in
net income
Net realized
gains
(losses)
included in
net income
Net realized
gains
(losses)
included in
other
income
Net realized
gains
(losses)
included in
interest
income
Dec. 31,
2016
Private holdings
9,652
9,345
(4,898)
1,296
Fixed income securities
1,266
—
—
(2)
10,918
9,345
(4,898)
1,294
—
—
—
—
—
—
— 15,395
—
1,264
— 16,659
Changes in the fair value of Level 3 measurements - Dec. 31, 2015
Dec. 31,
2014
Purchases and
reclassifications Settlements
Net
unrealized
gains
(losses)
included in
net income
Net realized
gains
(losses)
included in
net income
Net realized
gains
(losses)
included in
other
income
Net realized
gains
(losses)
included in
interest
income
Dec. 31,
2015
Private holdings
Precious metal loans
9,280
5,662
Fixed income securities
981
4,385
(1,282)
(2,731)
—
286
(5,854)
—
—
(1)
15,923
4,671
(7,136)
(2,732)
—
377
—
377
—
248
—
248
—
9,652
(433)
—
—
1,266
(433)
10,918
During the year ended December 31, 2016, the Company transferred public equities of $1.0 million (Dec. 31, 2015 - $Nil) from Level
2 to Level 1 within the fair value hierarchy due to the release of trading restrictions by the issuer.
The following table presents the valuation techniques used by the Company in measuring Level 2 fair values:
Type
Valuation Technique
Public equities and share purchase warrants
Fair values are determined using pricing models which incorporate market-
observable inputs.
Mutual funds and alternative investment strategies
Fair values are based on the last available Net Asset Value.
Fixed income securities
Fair values are based on independent market data providers or third-party
broker quotes.
59
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Financial instruments not carried at fair value
For fees receivable, other assets, accounts payable and accrued liabilities and compensation payable, the carrying amount
represents a reasonable approximation of fair value due to their short term maturity.
Loans receivable and debentures had a carrying value of $67.7 million (Dec. 31, 2015 - $100.8 million) and a fair value of
$74.1 million (Dec. 31, 2015 - $100.2 million). Loans receivable and debentures lack an available trading market, are not
typically exchanged, and have been recorded at amortized cost less impairment. The fair value of resource loans and
debentures are measured based on changes in the market price of comparable bonds since the average date that the loans
were originated. The Company adjusts the fair value to take into account any significant changes in credit risks using
observable market inputs in determining counterparty credit risk. The fair value of loans are not necessarily representative
of the amounts realizable upon immediate settlement. The significant inputs used to disclose the fair value of loans and
debentures measured at amortized cost would fall under Level 3 of the fair value hierarchy.
11.
RELATED PARTY TRANSACTIONS
The remuneration of directors and other key management personnel of the Company for employment services rendered
are as follows ($ in thousands):
Fixed salaries and benefits
Variable incentive-based compensation
Termination benefits
Share-based compensation
For the years ended
Dec. 31, 2016 Dec. 31, 2015
4,560
5,583
—
8,511
18,654
5,234
3,822
1,083
1,380
11,519
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. DSU's issued in lieu of directors' fees and dividends vest immediately. There
were 137,300 DSUs issued during the year (December 31, 2015 - 226,393). DSU expense is included in "compensation
and benefits" line in the consolidated statements of operations and is recognized over the three-year vesting period with
an offset to accrued liabilities.
As at December 31, 2015, there was a receivable of a $3.5 million included in Other Assets. This non-interest bearing
related party demand note between the Company and Sprott Continental Holdings Limited, a company controlled by Eric
Sprott, was paid in full in January 2016.
On December 24, 2015, Sprott Inc. 2011 Employee Profit Sharing Trust purchased 1,643,192 shares for the total price of
$3.5 million from 2176432 Ontario Ltd., a company controlled by Eric Sprott. The fair value of the shares was based on the
price equal to the five-day weighted average trading price as of the day before the date of execution.
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 12 months and at 8% interest thereafter. On September 29, 2015, the Company
amended the agreement and reduced the facility amount to $18 million. As at December 31, 2015, the Company had $13.6
million loan receivable from SRC on the credit facility. This was subsequently increased to $17.5 million and fully repaid on
October 13, 2016.
60
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
12.
DIVIDENDS
The following dividends were declared by the Company during the year ended December 31, 2016:
Cash dividend
per share ($)
Total dividend
amount ($ in
thousands)
Record date
7,454
November 21, 2016 - regular dividend Q3 - 2016
7,454
August 23, 2016 - regular dividend Q2 - 2016
7,454
May 25, 2016 - regular dividend Q1 - 2016
7,384
March 22, 2016 - regular dividend Q4 - 2015
29,746
Dividends (1)
(1) Subsequent to the year end, on March 1, 2017, a regular dividend of $0.03 per common share was declared for the quarter ended December 31,
2016. This dividend is payable on March 27, 2017 to shareholders of record at the close of business on March 10, 2017.
Payment Date
December 6, 2016
September 6, 2016
June 8, 2016
April 5, 2016
0.03
0.03
0.03
0.03
61
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
13.
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 $5.6 million for the year (December 31, 2015 - $4.2 million). For more details about
the Company's proprietary investments, refer to Note 3.
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, 2016 and 2015 the Company did not hold any precious metal loans and was not exposed to
price risk as the fair value of these loans is dependent on future gold prices.
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, 2016 the
Company's loan portfolio consisted of both fixed-rate and floating-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, 2016, the Company had 8 fixed-rate resource-based loans and 1 floating-rate resource-based
loan (December 31, 2015 - 14 fixed-rate loans and 1 fixed-rate debenture) with an aggregate carrying value of
$67.7 million (December 31, 2015 - $100.8 million). The Company's 9 resource loans range in maturity dates from
less than 6 months to 3 years.
62
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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.
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, 2016, approximately $66.0 million (December 31, 2015 - $32.2 million) of total Canadian assets
were invested in proprietary investments priced in USD. A total of $50.9 million (December 31, 2015 - $55.6 million)
of cash, $4.5 million (December 31, 2015 -$0.4 million) of accounts receivable, $60.1 million (December 31, 2015
- $70.8 million) of loans receivable and $1.2 million (December 31, 2015 - $1.1 million) of other assets were
denominated in USD. As at December 31, 2016, 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 $7.5 million for the year (December 31, 2015 - $6.6 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.
As at December 31, 2016, the Company’s net exposure to on-balance sheet credit risk (net loans receivable) was
$67.7 million (December 31, 2015 - $100.8 million) and the Company had no exposure to off-balance sheet credit
risk (loan commitments) (December 31, 2015 - $29.3 million). As at December 31, 2016, the largest loan in the
Company’s loan portfolio was a resource loan with a carrying value of $21.9 million or 32.3% of the Company’s
loans receivable (December 31, 2015 - $22.6 million or 22.4% 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
63
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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.
Collectability of loans
Besides the above noted measures we take to manage credit risk, the Company will report on credit risk in the
notes to the annual financial statements and records loan loss provisions (both specific and general) to ensure
the loans are recorded at their estimated recoverable amount (i.e. net of impairment risk we believe to exist as at
the balance sheet date and in accordance with IFRS). Actual losses incurred in the loan portfolio could differ
materially from our provisions.
Proprietary investments
The Company incurs credit risk when entering into, settling and financing various proprietary transactions. As at
December 31, 2016 and 2015, 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, 2016 and 2015, 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. Additionally, the Company has access to a $35 million committed line of credit with
its primary lender. 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,
2016, the Company had $124.0 million or 28.2% (December 31, 2015 - $107.6 million or 24.8%) of its total assets
in cash and cash equivalents. In addition, approximately $82.5 million or 70.1% (December 31, 2015 - $66.2 million
or 68.5%) 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, 2016, the
Company had no loan funding commitments and $35.5 million in investment funding commitments (December 31,
2015 - $29.3 million and $nil respectively). 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.
64
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
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.
65
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
14.
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, 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;
Lending, which provides loans to companies in the mining and energy sectors;
Consulting, which includes the operations of SC, Sprott Toscana and Sprott Korea, 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), foreign exchange gains and losses, one time non-recurring
expenses, non-cash and non-recurring stock-based compensation and performance fees and performance fee related
expenses (adjusted base EBITDA).
Adjusted base EBITDA is not a measurement in accordance with IFRS and should not be considered as an alternative to
net income or any other measure of performance under IFRS.
Transfer pricing between operating segments is performed on an arm's length basis in a manner similar to transactions
with third parties.
The following tables present the operations of the Company's reportable segments ($ in thousands):
For the year ended December 31, 2016
SAM
Global
Lending
Consulting
Corporate
and Other
Adjustments
and
Eliminations Consolidated
Total revenue
Total expenses
Pre-tax Income (loss)
Adjusted base EBITDA
108,777
83,641
25,136
16,243
18,092
16,517
1,575
19,804
6,313
13,491
5,717
6,450
16,969
18,595
(733)
(1,626)
4,601
9,558
(62)
(6,280)
(2,172)
(2,172)
—
—
167,187
129,344
37,843
24,060
For the year ended December 31, 2015
Total revenue
Total expenses
Pre-tax Income (loss)
SAM
Global
Lending
Consulting
Corporate
and Other
72,395
64,328
8,067
9,282
44,912
(35,630)
25,562
12,878
12,684
6,348
22,784
(16,436)
14,263
13,926
337
Adjusted base EBITDA
10,684
1,320
8,057
1,383
(4,882)
Adjustments
and
Eliminations Consolidated
126,007
(1,843)
(1,843)
156,985
—
—
(30,978)
16,562
66
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
Inter-segment revenues and expenses are eliminated on consolidation and reflected in the Adjustments and Eliminations
column.
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
15.
COMMITMENTS AND PROVISIONS
For the years ended
Dec. 31, 2016
Dec. 31, 2015
149,095
18,092
167,187
116,725
9,282
126,007
Besides the Company's long-term lease agreement, there may be commitments to provide loans arising from the Lending
business or commitments to make investments in the proprietary investments portfolio of the Company. As at December 31,
2016, the Company had no loan commitments (December 31, 2015 - $29.3 million) and $35.5 million of investment purchase
commitments in the proprietary investments portfolio (December 31, 2015 - $Nil).
Future minimum annual rental payments under non-cancellable leases, including operating costs, are as follows
($ thousands):
2017
2018
2019
2020
2021
Thereafter
4,429
4,403
4,427
4,359
4,163
7,180
28,961
Contingent loss provisions are recorded when it is probable that the Company will incur a loss and the amount of the loss
can be reasonably estimated. The Company makes provisions based on current information and the probable resolution
of any such proceedings and claims. As at December 31, 2016, no provisions were recognized.
67
CORPORATE INFORMATION
Auditors
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto, ON M5H 2S5
Investor Relations
Shareholder requests may be directed to
Investor Relations by e-mail at ir@sprott.com
or via telephone at 416.203.2310
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 10, 2017, 12:00 PM
Baker & McKenzie LLP
Brookfield Place, Bay/Wellington Tower
181 Bay Street, Suite 2100
Toronto, Ontario
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
Sharon Ranson, Director
Rosemary Zigrossi, Director
Ronald Dewhurst, Director
Kevin Hibbert, Chief Financial Officer and
Corporate Secretary
Transfer Agent & Registrar
TMX Equity Transfer Services
200 University Avenue, Suite 300
Toronto, Ontario M5H 4H1
Toll Free: 1.866.393.4891
www.tmxequitytransferservices.com
Legal Counsel
Baker & McKenzie LLP
Brookfield Place, Suite 2100
181 Bay Street, P.O. Box 874
Toronto, Ontario, Canada M5J 2T3
28FEB201716364100
www.sprottinc.com