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www.sprott.com
2017 Annual Report
Contrarian. Innovative. Aligned.
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
28
29
30
35
March 1, 2018
Dear Shareholders,
In 2017, Sprott accomplished much and enjoyed the best year in recent memory. Over the course of the year, we
completed the repositioning of the Company to focus on our historical strengths in precious metal and real asset
investments. We sold our Canadian diversified assets for $46 million, completed a total capital raise of US$640 million
in our inaugural Private Resource Lending LPs, successfully launched our resource-focused merchant bank and
completed the strategic acquisition of Central Fund of Canada (“CFCL”) in a transaction that added $4.3 billion in
assets to our physical bullion franchise after year-end.
As we have refocused the business to our core strengths, we have also delivered steadily improving financial results. Over
the past three years, we have shifted our asset base to higher EBITDA margin products, causing our EBITDA to more
than double from $16.6 million in 2015 to $40.2 million in 2017. We continue to grow our asset base both organically
and through strategic acquisitions and our Assets Under Management (“AUM”) currently stand at approximately $11.5
billion, 90% of which is concentrated in precious metal and natural resource investments.
Looking ahead, one of our priorities for 2018 is to build scale in all of our businesses, including our institutional
strategies. During the fundraising process for our first private lending LPs, we established strong relationships with
leading global institutions and endowments. We will seek to build on the success of our inaugural fund launches by
expanding these relationships and introducing our resource investment strategies to the growing ranks of institutions
seeking real asset alternatives with low correlation to the broader financial markets. Also, with the addition of CFCL
(now re-named Sprott Physical Gold and Silver Trust) we have more than 150,000 mostly retail investors who have
entrusted Sprott to manage their precious metal and resource investments.
During 2017, we closely watched the rise of cryptocurrencies and share the desire of their users to seek alternatives to
central bank-controlled currencies. While we remain skeptical of the long term viability of cryptocurrencies, we are
convinced that blockchain technology is ideally suited to the digitization of physical gold and that this conversion will
be the single most important development within the gold universe in decades.
One way in which we have chosen to participate in the digitization of gold is through our investment
in Tradewind. Tradewind is a financial technology company launching a new digital gold platform that combines the
world-class exchange technology of IEX Group with a tailored blockchain application offering secure physical vaulting
with significant advances in the trading, settlement, and ownership of physical gold. Sprott will also be involved with
the distribution of digital precious metals directly to clients.
We remain steadfast in our conviction that gold and other resource investments will provide a valuable form of insurance
from the gyrations and corrections of other markets as investors digest a normalization of interest rates and the likely
re-emergence of inflation. Our mission is to build the world’s preeminent specialist firm in precious metals and related
areas. We believe that this is a great time to be in our position as both institutional and retail investor interest in resource
investments continues to rise. Our focus this year will therefore be to generate profitable growth in each of
our operating segments, while selectively evaluating opportunities to cement our leadership position through
complementary acquisitions and strategic partnerships.
Thank you for your continued support. We look forward to reporting to you on our progress in the months ahead.
Sincerely,
Peter Grosskopf
Chief Executive Officer
2
Management's Discussion and Analysis
Year ended December 31, 2017
3
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) expectations regarding the Sprott-Ceres joint venture;
(ii) our view on gold and silver and our expectations regarding investor demand for certain strategies; (iii) expectations regarding building scale
in our Private Resources business; (iv) our belief that management fees and interest income will continue to be sufficient to satisfy ongoing
operating needs and that we hold sufficient cash and liquid securities to meet any other operating and capital requirements; and (v) 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)
failure to continue to retain and attract quality staff; (iv) employee errors or misconduct could result in regulatory sanctions or reputational harm;
(v) performance fee fluctuations; (vi) changes in the investment management industry; (vii) failure to implement effective information security
policies, procedures and capabilities; (viii) lack of investment opportunities; (ix) risks related to regulatory compliance; (x) failure to manage risks
appropriately; (xi) failure to deal appropriately with conflicts of interest; (xii) competitive pressures; (xiii) corporate growth may be difficult to
sustain and may place significant demands on existing administrative, operational and financial resources; (xiv) failure to successfully implement
succession planning; (xv) foreign exchange risk relating to the relative value of the U.S. dollar; (xvi) litigation risk; (xvii) failure to develop effective
business resiliency plans; (xviii) failure to obtain or maintain sufficient insurance coverage on favourable economic terms; (xix) historical financial
information is not necessarily indicative of future performance; (xx) the market price of common shares of the Company may fluctuate widely
and rapidly; (xxi) risks relating to the Company’s investment products; (xxii) risks relating to the Company's proprietary investments; (xxiii) risks
relating to the Company's lending business; (xxiv) risks relating to the Company’s merchant bank and advisory business; (xxv) those risks described
under the heading "Risk Factors" in the Company’s annual information form dated March 2, 2018; and (xxvi) 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This MD&A of financial condition and results of operations, dated March 1, 2018, presents an analysis of the consolidated financial condition
of the Company and its subsidiaries as at December 31, 2017, compared with December 31, 2016, and the consolidated results of operations
for the three and twelve months ended December 31, 2017, compared with the three and twelve months ended December 31, 2016. The Board
of Directors approved this MD&A on March 1, 2018. All note references in this MD&A are to the notes to the Company's December 31, 2017
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 period" refers to the three months ended December 31, 2016 as applicable.
4
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.
Net Sales
Sales, net of redemptions, is another key performance indicator as the amount of new net 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.
Net Fees
Management and performance fees, net of performance fee payouts, trailer fees and sub-advisor fees, is a key revenue indicator
as it represents the net revenue contribution after directly associated costs that we generate from our AUM.
Net Commissions
Commissions, net of commission expenses, is an increasingly significant performance measure for the Company given the ongoing
growth of our merchant banking and advisory business.
EBITDA relevant Net Revenues
EBITDA relevant Net Revenues include revenue items with the exception of: (1) gains (losses) on proprietary investments, (2) gains
(losses) on foreign exchange, (3) performance fees, net of performance fee payouts, (4) income from energy assets, and (5) other
non-recurring revenues. EBITDA relevant Net Revenues are used in this MD&A for certain key ratio calculations.
Selling, general and administrative ("SG&A") Expense Ratio
The SG&A Expense Ratio refers to total SG&A expenses as a percentage of EBITDA relevant Net Revenues. The Company uses this
ratio to monitor and manage the impact of SG&A on adjusted base EBITDA.
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)
Net income (loss) for the periods
Adjustments:
Interest expense
Provision for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
Impairment (reversal) of intangibles
(Gains) losses on proprietary investments
General loan loss provisions (recoveries)
(Gains) losses on foreign exchange
Non-cash stock-based compensation
Net proceeds from Sale Transaction (1)
Unamortized Placement Fees (2)
Other (3)
Adjusted EBITDA
Other adjustments:
Performance fees
Performance fee related expenses
Adjusted base EBITDA
3 months ended
12 months ended
Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2016
2,519
754
37,532
31,538
22
(1,234)
1,386
2,693
—
63
—
(340)
1,275
915
349
3,886
8,841
(3,584)
2,267
7,524
5
775
1,836
3,370
—
8,030
(1,200)
(2,095)
850
—
2,009
483
11,447
(19,935)
13,203
4,715
201
5,774
6,427
49,934
—
5,189
—
7,412
1,662
(31,691)
5,057
4,788
42,351
(4,676)
2,489
40,164
5
6,305
7,421
45,269
3,006
(27,894)
(1,200)
3,498
3,589
—
3,572
1,806
31,646
(21,407)
13,821
24,060
(1) See Note 7 of the annual financial statements for further details.
(2) Unamortized upfront placement fees, primarily in the Lending segment were previously included as part of Other.
(3) Other consists of: (1) one-time severance accruals of $2.2 million on a three months ended basis (3 months ended December 31, 2016 - $0.3 million) and
$2.5 million on a twelve months ended basis (12 months ended December 31, 2016 - $0.5 million); and (2) Other Expenses (see Note 7 of the annual
financial statements for further details).
6
BUSINESS OVERVIEW
Our operating segments are as follows:
* These operating segments collectively form our "Private Resource Investments" Platform
Exchange Listed Products
•
The Company's closed-end physical trusts and exchange traded funds ("ETFs").
Alternative Asset Management
•
The Company's full suite of public mutual funds (including our Canadian diversified fund assets), alternative investment
strategies and sub-advised products. On August 1, 2017, the Company completed the sale of the majority of this business'
AUM to a management led group.
Global
•
The Company's U.S operations, including: (1) fixed-term limited partnership vehicles; (2) discretionary managed accounts;
and (3) U.S.-based broker-dealer.
Lending
•
The Company's lending activities occur through a combination of limited partnership vehicles ("lending LPs") as well as
through direct lending activities using the Company's balance sheet. Balance sheet lending continues to wind-down as
we grow the AUM in our suite of lending LPs.
Consulting
•
The Company's private equity and debt style investment management activities.
Merchant Banking & Advisory Services
•
The Company's Canadian merchant banking and advisory services activities through Sprott Capital Partners ("SCP"), a
division of Sprott Private Wealth LP ("SPW"). Effective Q1 2017, we now report the results of our Canadian broker-dealer
operations separately from the Corporate segment. This was necessary due to the increased materiality of this business
as we build scale in SCP.
Corporate
•
Provides the Company's various operating segments with capital, balance sheet management and other enterprise shared
services. As noted above, this segment is now reported separately from the results of SCP and SPW.
For a detailed account of the underlying principal subsidiaries within our business segments, refer to the Company's Annual Information Form and Note 2 of the annual audited
financial statements.
7
BUSINESS HIGHLIGHTS AND GROWTH INITIATIVES
Investment Performance
Market value appreciation was $167 million in the quarter and $103 million year-to-date. Most of this performance was in our
Physical Trusts due to improved precious metals prices at the beginning and end of the year.
Product and Business Line Expansion
• On June 29, 2017, the Company participated in a secondary offering of Sprott Inc. shares, whereby it purchased 12.5
million shares directly from Mr. Eric Sprott, which included: (1) 5 million shares being purchased for cancellation; and (2)
7.5 million shares being purchased for the seeding of a re-initiated long-term incentive plan ("LTIP") to replace the previous
2016 LTIP. See page 12 of this MD&A for further details.
• As part of the strategic refocusing of the company to our precious metals and real assets core competencies, on August
1, 2017, the Company completed the sale of its non-core Canadian diversified funds business. Subsequent to year-end,
on January 29th, the Company completed the sale of its non-core private wealth client business (collectively, the "Sale
Transaction").
• On October 5, 2017, the Company announced a joint venture with Ceres Partners LLC. Ceres is an experienced farmland
manager that is focused exclusively on food and agriculture. The Sprott-Ceres joint venture will be focused on making
investments to acquire and actively lease farmland in North America and exploring related opportunities.
• With strong equity financing and advisory mandates in its first full year of operations, SCP's contribution to the Company
has gotten off to a strong start.
•
Subsequent to year-end, on January 16th, 2018, the Company successfully closed on the acquisition of Central Fund of
Canada Limited ("CFCL") for $120 million, plus a contingent earn-out. This transaction increased total company AUM
after the year-end by $4.3 billion.
OUTLOOK
During 2017, we took steps to reposition our business and increase our focus on precious metals and real assets investments. After
giving effect to the Sale Transaction and CFCL, more than 90% of our AUM will be concentrated in precious metals investments,
consistent with our renewed focus on our core competencies. Our view on gold and silver remains constructive and we expect
investor demand for these strategies to remain strong. In 2018, we expect to continue building scale in our Private Resource
businesses following the successful US$640 million total raise in our first Private Resource Lending LPs in 2017. We believe our
natural resource focus positions us well in the competitive landscape and allows us to offer investors a unique vehicle through
which they can access the sector.
8
SUMMARY FINANCIAL INFORMATION
(In $ thousands)
SUMMARY INCOME STATEMENT
Management fees
Performance fees
less: Trailer fees
less: Sub-advisor fees
less: Performance fee payouts
Net Fees
Commissions
less: Commission expense
Net Commissions
Interest income
Gains (losses) on proprietary investments
Gains (losses) on long-term investments (1)
Other income (loss)
Total Net Revenues
Compensation (2)
Compensation - severance accruals
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
less: syndicate cash holdings
Net cash
Proprietary investments
less: obligations related to securities sold
short
Net proprietary investments
Loans receivable
Investable Capital
ASSETS UNDER MANAGEMENT
Exchange Listed Products
Alternative Asset Management
Private Resource Investments (3)
Total Enterprise AUM
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Q4
2016
Q3
2016
Q2
2016
Q1
2016
10,247
3,584
225
—
2,267
11,339
7,366
2,855
4,511
3,588
13,597
20,460
20,677
835
617
426
—
126
2,762
1,124
12
131
2,944
1,060
16
13,389
16,688
16,788
4,746
1,553
3,193
2,789
(63)
(3,770)
3,639
1,144
24,158
—
31,487
47,088
8,878
3,364
5,514
3,387
613
—
(2,648)
23,554
8,200
3,208
4,992
5,829
(1,969)
(8,030)
—
1,338
26,978
—
4,847
26,627
21,895
19,935
3,110
10,552
3,702
24,466
2,959
1,209
1,750
3,594
22,586
20,524
19,315
239
3,325
1,233
31
1,146
3,167
1,107
358
18,236
17,038
5,265
920
4,345
2,787
6,809
—
3,695
35,872
4,478
921
3,557
3,864
17,629
—
1,286
43,374
87
3,016
999
31
15,356
1,133
317
816
3,917
11,486
—
(4,259)
27,316
10,631
5,655
11,784
12,461
14,112
11,099
11,836
10,550
2,193
833
5,761
—
1,386
2,069
22,873
23%
2,519
0.01
7,524
0.03
62
782
5,208
—
1,473
703
13,883
24%
29,804
0.12
8,007
0.03
196
4,628
6,163
—
1,778
289
24,838
20%
(3,606)
(0.01)
8,751
0.04
1
68
6,566
(4,942)
1,790
934
16,878
20%
8,815
0.04
15,882
0.06
283
2,169
6,949
(911)
1,836
660
25,098
26%
754
0.00
4,715
0.02
27
497
7,386
114
1,844
502
21,469
27%
12,531
0.05
8,431
0.03
(26)
1,717
7,887
346
1,844
(284)
23,320
30%
16,946
0.07
5,753
0.02
191
145
7,263
192
4,903
2,215
25,459
32%
1,307
0.01
5,161
0.02
409,849
408,093
387,636
426,647
440,024
431,149
428,209
412,547
65,985
61,707
156,120
(776)
155,344
114,327
152,952
(649)
152,303
134,306
62,925
96,572
64,113
79,710
66,336
67,059
113,882
123,955
100,704
111,252
(477)
(3,838)
(394)
(651)
(2,675)
96,095
137,505
110,044
156,097
123,561
147,545
100,053
166,126
108,577
152,059
61,987
92,496
(1,093)
91,403
133,603
(24,993)
(25,988)
(26,577)
(30,157)
(29,810)
(36,782)
(38,641)
(31,653)
89,334
48,673
108,318
46,215
110,928
125,940
117,735
129,344
113,418
67,804
73,336
67,678
82,470
81,638
293,351
306,836
274,827
309,320
308,974
311,867
303,633
101,950
101,253
294,606
4,634,068
4,539,751
4,591,479
4,758,403
4,411,640
4,943,224
4,829,986
4,169,716
1,115,114
1,177,214
3,323,611
3,529,068
3,653,851
3,937,898
3,816,298
3,476,701
1,574,200
1,474,547
1,391,367
1,404,955
1,182,492
1,207,598
1,154,718
1,153,099
7,323,382
7,191,512
9,306,457
9,692,426
9,247,983
10,088,720
9,801,002
8,799,516
(1) See "Long-term investments" section of Note 2 of the annual financial statements.
(2) Compensation includes stock-based compensation, but excludes Commission expense and Performance fee payouts, which are reported net of commission revenue and
performance revenue, respectively.
(3) Includes the AUM of our Global, Lending and Consulting segments, collectively our "Private Resource Investments" platform.
9
RESULTS OF OPERATIONS
AUM SUMMARY
AUM was $7.3 billion as at December 31, 2017, up $0.1 billion (2%) from September 30, 2017 and down $1.9 billion (21%) from December
31, 2016. The slight increase on a three months ended basis was due to improved precious metals pricing in the quarter. The decrease on a year-
over-year basis was due primarily to the Sale Transaction.
in $ millions
10,000
8,000
6,000
4,000
2,000
0
9,248
1,182
3,654
4,412
7,192
1,475
1,177
4,540
7,323
1,574
1,115
4,634
Dec. 31, 2016
Sep. 30, 2017
Dec. 31, 2017
Exchange Listed Products
Alternative Asset Management
Private Resource Investments
In $ millions
In $ millions
3 Months
Market Value
41
+167
23
103
12 Months
23
(92)
+103
172
EXCHANGE LISTED PRODUCTS: Physical Trusts ($108MM), ETFs ($-5MM)
EXCHANGE LISTED PRODUCTS: Physical Trusts ($167MM), ETFs ($5MM)
ALTERNATIVE ASSET MANAGEMENT: Mutual Funds ($35MM),
Alternative Investment Funds ($-15MM), Managed Accounts ($3MM)
ALTERNATIVE ASSET MANAGEMENT: Mutual Funds ($-109MM),
Alternative Investment Funds ($18MM), Managed Accounts ($-1MM)
PRIVATE RESOURCE INVESTMENTS: Lending LP ($7MM), Fixed-term LP ($-16MM),
Managed Companies & Accounts ($50MM)
PRIVATE RESOURCE INVESTMENTS: Lending LP ($10MM), Fixed-term LP ($-35MM),
Managed Companies & Accounts ($48MM)
Net Sales & Capital Calls
In $ millions
In $ millions
3 Months
-36
(85)
58
(9)
12 Months
225
+52
51
(224)
EXCHANGE LISTED PRODUCTS: Physical Trusts ($-9MM)
EXCHANGE LISTED PRODUCTS: Physical Trusts ($-67MM), ETFs ($118MM)
ALTERNATIVE ASSET MANAGEMENT: Mutual Funds ($-56MM),
Alternative Investment Funds ($-29MM)
ALTERNATIVE ASSET MANAGEMENT: Mutual Funds ($-236MM),
Alternative Investment Funds ($54MM), Managed Accounts ($-42MM)
PRIVATE RESOURCE INVESTMENTS: Lending LP ($58MM)
PRIVATE RESOURCE INVESTMENTS: Lending LP ($193MM), Consulting segment ($32MM)
10
In $ thousands
In $ thousands
6,000
6,000
In $ thousands
5,000
6,000
5,000
In $ thousands
4,000
4,000
5,000
6,000
In $ thousands
3,000
4,000
3,000
6,000
5,000
In $ thousands
2,000
2,000
3,000
4,000
6,000
5,000
In $ thousands
1,000
2,000
4,000
5,000
3,000
1,000
6,000
2,000
4,000
3,000
1,000
5,000
2,000
3,000
4,000
1,000
2,000
3,000
1,000
2,000
1,000
1,000
Net Commissions
In $ thousands
Net Commissions
6,000
Net Commissions
5,000
Net Commissions
4,000
Net Commissions
3,000
Net Commissions
2,000
Net Commissions
1,000
Net Commissions
In $ thousands
25%
6,000
25%
In $ thousands
20%
In $ thousands
15%
In $ thousands
In $ thousands
5,000
25%
6,000
20%
4,000
25%
5,000
20%
6,000
15%
10%
3,000
25%
4,000
20%
5,000
15%
6,000
10%
5%
2,000
25%
3,000
20%
4,000
15%
5,000
10%
6,000
5%
1,000
25%
2,000
20%
3,000
15%
4,000
10%
5,000
5%
1,000
20%
2,000
15%
3,000
10%
4,000
5%
1,000
15%
2,000
10%
3,000
5%
1,000
10%
2,000
5%
1,000
5%
Q2
Q1
Q3
Q4
Q4
Q3
Q2
Q1
2017
2017
2016
2016
2016
2016
2017
2017
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
2017
2017
2016
2016
2017
2017
2016
2016
Net commissions
In $ thousands
% of EBITDA relevant Net Revenues
Net commissions
In $ thousands
In $ thousands
6,000
% of EBITDA relevant Net Revenues
6,000
6,000
Net commissions
5,000
% of EBITDA relevant Net Revenues
5,000
5,000
Net commissions
4,000
Q1
Q2
Q1
2016
Q1
% of EBITDA relevant Net Revenues
4,000
4,000
Q2
Q3
Q1
2016
2016
2016
Q3
Q2
Q1
2016
2016
2016
Net commissions
3,000
2016
2016
2016
Q2
Q1
2016
2016
% of EBITDA relevant Net Revenues
3,000
3,000
Net commissions
2,000
% of EBITDA relevant Net Revenues
2,000
2,000
Net commissions
1,000
% of EBITDA relevant Net Revenues
1,000
1,000
Net Commissions
Net commissions
Net Commissions
% of EBITDA relevant Net Revenues
Net Commissions
Q4
Q3
Q2
Q1
2016
2016
2016
2016
Q1
Q4
Q3
Q2
2016
2016
2016
2016
Q1
Q2
Q1
Q4
Q3
2016
2016
2017
2016
2016
Q2
Q1
Q1
Q4
Q3
2017
2016
2016
2016
2016
Q2
Q1
Q2
Q1
Q4
Q3
2016
2016
2017
2017
2016
2016
Q3
Q2
Q2
Q1
Q4
Q1
2017
2017
2016
2016
2016
2016
Q1
Q2
Q2
Q3
Q1
Q4
Q3
2017
2017
2016
2016
2016
2017
2016
Q4
Q3
Q2
Q1
Q2
Q1
Q3
2017
2017
2016
2016
2017
2016
2016
% of EBITDA relevant Net Revenues
20%
20%
Q2
Q4
Q1
Q4
Q3
Q2
Q3
Q4
Q3
Q2
Q1
Q3
Q4
2017
2016
2017
2017
2017
2016
2016
Q2
Q1
Q4
Q3
Q2
Q3
Q4
Net commissions
15%
2017
2017
2016
2016
2017
2017
Q2
Q1
Q4
Q3
Q4
Q3
Q2
Q1
Q4
Q3
Q4
2017
2017
2017
2016
2017
Q2
Q1
Q4
Q4
Q3
2016
2017
2017
2016
2016
2017
2017
% of EBITDA relevant Net Revenues
15%
15%
2017
2016
2017
2017
2017
2017
2017
2016
2016
2017
2017
Q2
Q1
Q3
Q4
2017
2017
2017
2017
Q2
Q1
Q4
Q3
2017
2017
2017
2017
Q3
Q2
Q4
2017
2017
2017
Q2
Q4
Q3
2017
2017
2017
Q4
Q3
2017
2017
Q4
Q3
2017
2017
Q4
2017
Q4
2017
Net commissions
25%
% of EBITDA relevant Net Revenues
25%
25%
Net commissions
20%
Net commissions
10%
% of EBITDA relevant Net Revenues
10%
10%
Net commissions
5%
% of EBITDA relevant Net Revenues
5%
5%
Net Commissions
25%
Net Commissions
20%
Net Commissions
15%
Net Commissions
10%
Net Commissions
5%
25%
25%
20%
20%
25%
15%
15%
20%
10%
25%
25%
10%
15%
20%
5%
20%
10%
15%
5%
15%
10%
5%
10%
5%
5%
Net commissions
Net commissions
% of EBITDA relevant Net Revenues
Net commissions
% of EBITDA relevant Net Revenues
% of EBITDA relevant Net Revenues
NET REVENUES
Net Fees in the quarter were $11.3 million, down $13.1 million
(54%) from the prior period and were $58.2 million on a full year
basis, down $16.9 million (22%). The decline was due to lower
management and performance fees related to the Sale
Transaction in Q3. The decline in fee generating AUM due to the
Sale Transaction was partially offset by new fee generation from
the deployment of committed capital in our lending LPs and higher
fees from improved precious metals prices in our Exchange Listed
products.
In $ thousands
30,000
22,500
3,564
15,000
7,500
16,224
4,658
Q4 2016
Net Fees
3,312
3,355
4,672
13,927
43,212
17,957
75,000
60,000
45,000
30,000
15,000
14,548
25,077
18,579
Q4 2017
YTD 2016
YTD 2017
Exchange Listed Products
Alternative Asset Management
Private Resource Investments
Net Commissions in the quarter were $4.5 million, up $2.8
million from the prior period and were $18.2 million on a full year
basis, up $7.7 million. The increase was largely due to robust
placement and advisory activity in SCP as it completed a successful
first year. Our US broker-dealer also generated increased private
placement activity during the first half of the year.
Interest Income in the quarter was $3.6 million, flat from the
prior period and was $15.6 million on a full year basis, up $1.4
million (10%). During the quarter, co-investment income from our
seed investment in lending LPs was offset by the on-going run-
off of our on-balance sheet loan book as we work to deploy
committed capital in our lending LPs in the form of fee generating
AUM. On a full year basis, the increase was largely due to the Q1
2017 recognition of interest income on a previously impaired loan
which more than offset the effects of the loan book run-off
mentioned above.
In $ thousands
Net Commissions
6,000
5,000
4,000
3,000
2,000
1,000
In $ thousands
120,000
100,000
80,000
60,000
40,000
20,000
Q1
2016
Q2
2016
Q3
2016
Q4
2016
Q1
2017
Q2
2017
Q3
2017
Q4
2017
Net commissions
% of EBITDA relevant Net Revenues
Interest Income
Q1
2016
Q2
2016
Q3
2016
Q4
2016
Q1
2017
Q2
2017
Q3
2017
Q4
2017
Loan Balance
Interest Income
25%
20%
15%
10%
5%
7,000
6,000
5,000
4,000
3,000
2,000
1,000
11
Expenses
Expenses
Compensation
Compensation
Compensation Trend
Compensation Trend
Excluding commissions and performance fee payouts, which are
Excluding commissions and performance fee payouts, which are
presented net of their related revenues in this MD&A, and
presented net of their related revenues in this MD&A, and
severance accruals which are non recurring, Compensation in the
severance accruals which are non recurring, Compensation in the
quarter was $10.6 million, down $3.5 million (25%) from the
quarter was $10.6 million, down $3.5 million (25%) from the
prior period and was $40.5 million on a full year basis, down $7.1
prior period and was $40.5 million on a full year basis, down $7.1
million (15%). The decrease was due to a combination of lower
million (15%). The decrease was due to a combination of lower
head count after the Sale Transaction as well as lower annual
head count after the Sale Transaction as well as lower annual
incentive program ("AIP") payouts due to the re-launch of the
incentive program ("AIP") payouts due to the re-launch of the
LTIP. The new LTIP introduced in the year as a replacement for the
LTIP. The new LTIP introduced in the year as a replacement for the
2016 program contributed to: (1) lower AIP payouts; and (2) a
2016 program contributed to: (1) lower AIP payouts; and (2) a
higher portion of overall compensation expense being in the form
higher portion of overall compensation expense being in the form
of upfront equity amortization. Over time, the equity amortization
of upfront equity amortization. Over time, the equity amortization
expense will drop due to the graded vesting accounting
expense will drop due to the graded vesting accounting
requirements of IFRS 2. See Note 2 of the annual financial
requirements of IFRS 2. See Note 2 of the annual financial
statements for further details.
statements for further details.
In $ thousands
In $ thousands
6,388
6,388
8,874
8,874
47,597
47,597
6,692
6,692
3,609
3,609
40,531
40,531
Salaries
Salaries
AIP
AIP
LTIP 1
LTIP 1
32,335
32,335
30,2302
30,2302
2016
2016
2017
2017
(1) Upfront amortization of equity grants using the graded vesting method required under IFRS
(1) Upfront amortization of equity grants using the graded vesting method required under IFRS
2. Over time, equity amortization expense will drop under the methodology.
2. Over time, equity amortization expense will drop under the methodology.
(2) Includes 7 months of salary related to employees exited as part of the Sale Transaction.
(2) Includes 7 months of salary related to employees exited as part of the Sale Transaction.
New LTIP
New LTIP
During the year, the Company re-launched the LTIP for senior
During the year, the Company re-launched the LTIP for senior
executives and certain key employees. Since the strategy of the
executives and certain key employees. Since the strategy of the
Company has been refocused and a new executive committee
Company has been refocused and a new executive committee
was selected to execute and manage the strategy, the LTIP was
was selected to execute and manage the strategy, the LTIP was
restructured to incent and align the management and employee
restructured to incent and align the management and employee
base with the new strategy and its expected future results. The
base with the new strategy and its expected future results. The
majority of the executives participating under the old LTIP, as well
majority of the executives participating under the old LTIP, as well
as the executives who left the Company as a result of the Sale
as the executives who left the Company as a result of the Sale
Transaction, forfeited their unvested entitlements under the
Transaction, forfeited their unvested entitlements under the
previous LTIP. The Company has restructured the LTIP with the
previous LTIP. The Company has restructured the LTIP with the
objective of further cementing management and key employee
objective of further cementing management and key employee
alignment with shareholders by setting more stringent, and
alignment with shareholders by setting more stringent, and
performance-based goals than the predecessor program. Features
performance-based goals than the predecessor program. Features
of the new LTIP vs. the old LTIP are summarized here:
of the new LTIP vs. the old LTIP are summarized here:
LTIP
Program Seed
Vesting
Performance Condition
"Old"
"New"
13 million options(1)
3 to 4 years
"Static" performance conditions
(targets set at inception)
Cumulative
(Could be earned at any point
in the 3 to 4 years)
7.5 million shares(2)
5 years
"Dynamic" Performance
conditions
(targets set annually)
Non-cumulative
(Requires in-year
"earn it or lose it")
Reduced
AIP Impact
No Impact
Forfeiture Risk
Low
(Limited forfeiture triggers)
High
(Multiple forfeiture triggers)
(1) The CEO of the Company retained 3.25 million options from the old LTIP with the performance
(1) The CEO of the Company retained 3.25 million options from the old LTIP with the performance
conditions amended to align with the performance conditions of the new LTIP.
conditions amended to align with the performance conditions of the new LTIP.
(2) 7.5 million shares were purchased by the EPSP Trust as part of the secondary offering by Eric Sprott
(2) 7.5 million shares were purchased by the EPSP Trust as part of the secondary offering by Eric Sprott
on June 29, 2017.
on June 29, 2017.
12
12
SG&A
SG&A was $5.8 million in the quarter, down $1.2 million (17%) from the prior period and was $23.7 million on a full year basis,
down $5.8 million (20%). This was due primarily to the positive effects of the Sale Transaction.
Adjusted Base EBITDA
Adjusted Base EBITDA in the quarter was $7.5 million, up $2.8 million (60%) from the prior period, and was $40.2 million on a
full year basis, up $16.1 million (67%). The increase in the quarter was due to: (1) New Management fees in our Lending segment
as well as net asset value ("NAV") appreciation on units held as co-investments in the lending LPs, (2) Higher merchant banking
fees on good Q4 transaction flow by SCP; and (3) market value appreciation of strategic long-term investments in our Corporate
segment. These increases were only partially offset by slightly lower performance in our Alternative Asset Management and Exchange
Listed Products platforms in the quarter. On a full year basis, the increase in EBITDA was due to: (1) increased Net Commissions in
SCP as described above, (2) the reversal of a loan loss provision and recognition of the related interest income on that previously
impaired loan, (3) lower SG&A due to the Sale Transaction; and (4) lower compensation expense due to both the Sale Transaction
and changes to our AIP and LTIP. These increases were only partially offset by lower Management Fees as a result of the Sale
Transaction noted above.
Adjusted Base EBITDA by Operating Segment
In $ thousands
10000
8000
6000
4000
2000
0
-2000
-4000
In $ thousands
50000
40000
30000
20000
10000
0
-10000
-20000
3 Months
7,524
4,715
Q4 2016
Q4 2017
2,928
2,376
3,014
2,173
901
376
1,203
1,304
1,434
163
90
140
840
2,563
Exchange Listed
Products
Alternative Asset
Management
Global
Lending
Consulting
Merchant Banking
& Advisory Services
Corporate
Total
12 Months
40,164
24,060
YTD 2016
YTD 2017
11,861 12,255
7,614
4,382
4,601
5,655
16,962
9,558
5,699
2,425
167
62
8,705 8,188
Exchange Listed
Products
Alternative Asset
Management
Global
Lending
Consulting
Merchant Banking
& Advisory Services
Corporate
Total
13
Total Assets were $410 million, down $30 million (7%) from
December 31, 2016. The decrease was primarily due to the
decline in investable capital previously described, coupled with
a reduction in fees receivable as a result of the Sale Transaction
and ongoing amortization of intangible assets.
Total Liabilities were $66 million, down $14 million (17%)
from December 31, 2016. The decrease was largely due to: (1)
the payment of last year's accrued sub-advisor performance
fees in the current year, and (2) the timing and payment of
current year compensation accruals.
Balance Sheet
Investable Capital was $293 million, down $16 million (5%) from
December 31, 2016. The decrease was primarily due to the net
impact of the following: (1) the Company's participation in the
secondary offering of Sprott Inc. shares by Mr. Eric Sprott, (2) the
payment of corporate dividends; and (3) other operating outflows
(e.g. cash taxes). These decreases were only partially offset by
proceeds received on the Sale Transaction.
2016
2017
48
309
124
Cash
Prop Investment
Loans
293
1551
90
68
118
(1) Subsequent to year-end, on January 16, 2018, cash of $105MM was used to acquire the
assets of CFCL.
14
OPERATING SEGMENTS
Exchange Listed Products
Since Q2 of this year, the results of this segment were reported separately from the results of our Alternative Asset Management segment.
(In $ thousands)
SUMMARY INCOME STATEMENT
Management fees
Other income (loss)
Total Revenues
Compensation
Selling, general and administrative
Amortization and impairment charges
Other expenses
Total Expenses
Net Income (Loss) before income taxes
Adjusted base EBITDA
Total AUM
3 months ended
12 months ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
4,672
94
4,766
1,708
588
340
—
2,636
4,658
45
4,703
1,192
538
345
—
2,075
18,579
(595)
17,984
3,669
2,655
1,369
—
7,693
17,957
284
18,241
3,254
2,842
1,294
38
7,428
2,130
2,376
4,634,068
2,628
2,928
4,411,640
10,291
12,255
4,634,068
10,813
11,861
4,411,640
3 months ended
12 months ended
Adjusted base EBITDA in the quarter was $2.4 million, down $0.6
million (19%) from the prior period:
Adjusted base EBITDA was $12.3 million, up $0.4 million (3%) from
the prior year:
•
Primarily due to higher Compensation expense as a result
of upfront amortization expense related to the new LTIP.
LTIP amortization is recognized using the graded-vesting
method under IFRS 2 which results in higher expense
recognition
in the early years of a stock-based
compensation program and materially lower expense
recognition in the latter years.
Non-EBITDA highlights:
• Other income was mainly driven by FX gains in the quarter
on U.S. dollar denominated cash and receivables.
•
Primarily due to higher Management Fees on improved
precious metals pricing and ETF fund unit creations which
more than offset the increase in Compensation expense
as a result of upfront amortization expense related to the
new LTIP.
Non-EBITDA highlights:
• Other loss was mainly driven by FX losses on U.S. dollar
denominated cash and receivables as the U.S. dollar
weakened over the year.
15
Alternative Asset Management
Since Q2 of this year, the results of this segment were reported separately from the results of our Exchange Listed Products segment.
(In $ thousands)
SUMMARY INCOME STATEMENT
Management fees
Performance fees
less: Trailer fees
less: Sub-advisor fees
less: Performance fee payouts
Net Fees
Gains (losses) on proprietary investments
Other income (loss)
Total Net Revenues
Compensation
Selling, general and administrative
Referral Fees
Amortization and impairment charges
Other expenses
Total Expenses
Net Income (Loss) before income taxes
Adjusted base EBITDA
Total AUM
3 months ended
12 months ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
2,078
3,584
40
—
2,267
3,355
(34)
(294)
3,027
1,585
1,810
—
37
9
3,441
(414)
376
14,146
19,935
3,602
10,553
3,702
16,224
439
1,561
18,224
7,255
3,443
1,270
501
193
12,662
5,562
901
32,901
4,676
7,594
2,611
2,295
25,077
532
34,833
60,442
11,120
8,030
—
1,105
52
20,307
54,431
21,407
14,612
13,891
4,123
43,212
11,108
3,590
57,910
23,104
13,810
1,270
5,209
194
43,587
40,135
7,614
(1)
14,323
4,382
(1)
1,115,114
3,653,851
1,115,114
3,653,851
(1) Approximately 75% was generated by the Canadian diversified assets that were sold on August 1 (December 31, 2016 - 50%)
3 months ended
12 months ended
Adjusted base EBITDA in the quarter was $0.4 million, down $0.5
million from the prior period:
Adjusted base EBITDA was $7.6 million, up $3.2 million (74%)
from the prior year:
•
Primarily due to lower Management fees as we exited this
segment's Canadian diversified funds business in Q3. This
more than offset lower Compensation accruals and SG&A
that resulted from the sale.
•
Primarily due to lower Compensation from reduced head
count and increased equity grant forfeitures upon
completion of the Sale Transaction in Q3, coupled with
lower SG&A spend that more than offset lower
management fee generation post Sale Transaction.
Non-EBITDA highlights:
Non-EBITDA highlights:
•
Loss on proprietary
monetization of seed capital in certain fund holdings.
investments
related
to
the
•
•
Gain on proprietary investments was due to the
monetization of seed capital in funds sold pursuant to the
Sale Transaction.
Other income primarily related to the net sale proceeds
received on the Sale Transaction. See Note 7 of the
financial statements.
16
Global*
(In $ thousands)
SUMMARY INCOME STATEMENT
Management fees
less: Sub-advisor fees
Net Fees
Commissions
less: Commission expense
Net Commissions
Gains (losses) on proprietary investments
Gains (losses) on long-term investments (1)
Other income (loss)
Total Net Revenues
Compensation (2)
Placement and referral fees
Selling, general and administrative
Amortization and impairment charges
Other expenses
Total Expenses
Net Income (Loss) before income taxes
Adjusted base EBITDA
Total AUM
3 months ended
12 months ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
1,804
46
1,758
1,632
519
1,113
(242)
199
54
2,882
683
39
1,120
990
17
2,849
1,904
46
1,858
2,004
674
1,330
(594)
—
145
2,739
1,267
37
1,052
958
18
3,332
7,097
183
6,914
11,487
4,073
7,414
770
199
863
16,160
4,749
157
4,430
3,849
114
13,299
7,527
176
7,351
9,016
2,604
6,412
1,180
—
369
15,312
5,016
240
4,436
3,798
247
13,737
33
1,304
474,550
(593)
1,203
480,678
2,861
5,655
474,550
1,575
4,601
480,678
* This segment, along with our Lending and Consulting segments collectively make up our "Private Resource Investments" platform.
(1) See "Long-term investments" section of Note 2 of the annual financial statements.
(2) Compensation is presented excluding commission expense, which is reported net of commission revenue.
3 months ended
12 months ended
Adjusted base EBITDA in the quarter was $1.3 million, up $0.1
million (8%) from the prior period:
Adjusted base EBITDA was $5.7 million, up $1.1 million (23%)
from the prior year:
•
Lower Compensation expense on lower AIP accruals more
than offset slightly lower Net Commissions on decreased
private placement activity in the U.S broker-dealer
component of this segment and lower management fees
on lower fixed-term LP AUM.
• Higher Net Commissions on increased private placement
activity during the first half of the year in the U.S broker-
dealer component of this segment, as well as lower AIP
accruals at the end of the year, were the largest
contributor to the increase in this segment.
Non-EBITDA highlights:
Non-EBITDA highlights:
•
Losses on proprietary investments in the period were due
to market value depreciation on resource-focused
warrants and other equity kickers received in certain
transactions of our U.S. broker-dealer.
• Gains on proprietary investments were due to market
value appreciation on resource focused warrants and
other equity kickers received in certain transactions of our
U.S. broker-dealer.
17
Lending*
(In $ thousands)
SUMMARY INCOME STATEMENT
Management fees
Interest income (1)
Gains (losses) on proprietary investments
Gains (losses) on long-term investments (2)
Other income (loss)
Total Revenues
Compensation (3)
Placement and referral fees
Selling, general and administrative
Loan loss provision (recovery)
Amortization and impairment charges
Total Expenses
Net Income (Loss) before income taxes
Adjusted base EBITDA
Total AUM (4)
3 months ended
12 months ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
622
3,079
(302)
491
511
4,401
2,855
617
324
—
2
3,798
67
3,171
(599)
—
2,122
4,761
753
800
320
(911)
—
962
1,323
13,860
(488)
491
(4,150)
11,036
4,947
5,888
1,003
(4,942)
6
6,902
603
3,014
252,151
3,799
2,173
49,214
4,134
16,962
252,151
67
12,489
7,106
—
142
19,804
3,196
2,439
937
(259)
—
6,313
13,491
9,558
49,214
* This segment, along with our Global and Consulting segments collectively make up our "Private Resource Investments" platform.
(1) Includes interest income from: (1) on-balance sheet loans; and (2) co-investment income from lending LP units.
(2) See "Long-term investments" section of Note 2 of the annual financial statements.
(3) Includes one-time severance accruals of $2.1 million for the 3 and 12 months ended December 31, 2017 (December 31, 2016 - $nil)
(4) The lending LPs have US$640 million in total firm commitments, US$196 million of which has been deployed and earn management fees.
3 months ended
12 months ended
Adjusted base EBITDA was $3.0 million, up $0.8 million (39%)
from the prior period:
Adjusted base EBITDA was $17.0 million, up $7.4 million (77%)
from the prior year:
•
Primarily the result of new Management fees earned as
we deploy capital as fee generating AUM in our lending
LPs. We also experienced NAV appreciation on our lending
LP units held as co-investments alongside our lending LP
clients.
Non-EBITDA highlights:
•
Losses on proprietary investments were due to market
value depreciation on certain resource focused equity
kickers received on certain loan arrangements.
• Other income was mainly driven by lower FX gains on U.S.
dollar denominated cash, receivables and loans.
•
Placement fees of $0.6 million were incurred in the
quarter to acquire clients for our lending LPs.
•
Primarily the result of new Management fees earned as
we deploy capital as fee generating AUM in our lending
LPs and generate co-investment income and NAV
appreciation from our seed investment in lending LP units.
We also benefited from the commencement of interest
income recognition in Q1 of this year on a previously
impaired loan as well as the reversal of the related loan
loss provision. These increases were only partially offset
by the rest of the loan book being in run-off as we continue
to reduce the average loan balance on our balance sheet.
Non-EBITDA highlights:
•
Losses on proprietary investments were due to market
value depreciation on certain resource focused equity
kickers received on certain loan arrangements.
• Other loss was mainly driven by FX losses on U.S. dollar
denominated cash, receivables and loans.
•
Placement fees of $5.9 million were incurred on a full
year basis to acquire clients for our lending LPs.
18
Consulting*
(In $ thousands)
SUMMARY INCOME STATEMENT
Management fees
Gains (losses) on proprietary investments
Other income (loss)
Total Revenues
Compensation
Placement and referral fees
Selling, general and administrative
Amortization and impairment charges
Other expenses
Total Expenses
3 months ended
12 months ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
1,120
4
679
1,803
1,030
35
361
5
1,257
2,688
1,033
—
236
1,269
738
21
369
15
448
1,591
4,908
352
2,039
7,299
3,805
75
1,347
28
2,509
7,764
4,009
—
1,708
5,717
2,513
108
1,565
50
2,214
6,450
(465)
167
847,500
(733)
(62)
652,600
Net Income (Loss) before income taxes
Adjusted base EBITDA
Total AUM
* This segment, along with our Global and Lending segments collectively make up our "Private Resource Investments" platform.
(885)
(140)
847,500
(322)
(90)
652,600
3 and 12 months ended
Adjusted base EBITDA was negative $0.1 million in the quarter and was $0.2 million on a full year basis due primarily to improved Management
fees on higher AUM, coupled with slightly lower SG&A expenses. This increase more than offset increased compensation expense resulting from
upfront amortization expense on the new LTIP. LTIP amortization is recognized using the graded-vesting method under IFRS 2 which results in
higher expense recognition in the early years of a stock-based compensation program and materially lower expense recognition in the latter
years.
Non-EBITDA highlights:
Higher Other expenses were due to higher operating, depletion and impairment charges taken on the energy asset component of our proprietary
investment holdings.
19
Merchant Banking and Advisory Services
Prior to fiscal 2017, the results of this operating segment were reported with the results of the Corporate segment. Given the increased materiality
of this operating segment as a result of the new SCP business, it is now material enough to require separate presentation as its own reportable
segment.
(In $ thousands)
SUMMARY INCOME STATEMENT
Commissions
less: Commission Expense
Net Commissions
Management fees
Interest income
Gains (losses) on proprietary investments
Other income (loss)
Total Net Revenues
Compensation (1)
Placement and referral fees
Selling, general and administrative
Amortization and impairment charges
Other expenses
Total Expenses
Net Income (Loss) before income taxes
Adjusted base EBITDA
3 months ended
12 months ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
5,118
1,951
3,167
89
509
376
508
4,649
2,011
142
833
4
21
3,011
1,638
1,434
955
534
421
87
424
(247)
608
1,293
852
41
485
3
—
1,381
(88)
163
17,321
8,214
9,107
356
1,733
118
2,027
13,341
4,977
191
2,948
19
137
8,272
5,069
5,699
4,819
762
4,057
329
1,673
598
2,327
8,984
3,272
471
2,298
14
150
6,205
2,777
2,425
(1) Compensation is presented excluding commission expense, which is reported net of commission revenue.
3 months ended
12 months ended
Adjusted base EBITDA in the quarter was $1.4 million, a $1.3 million
increase from the prior period:
Adjusted base EBITDA was $5.7 million, more than doubling our
prior year results:
•
Primarily the result of higher Net Commissions as SCP
successfully completed the last quarter of a successful first
year of operations. This more than offset the increase in
Compensation expense on higher AIP payouts to SCP
employees.
•
Primarily due to higher Net Commissions on placement
and advisory activity as SCP successfully completed its
first full year of operations. This more than offset higher
Compensation expense on AIP payouts to SCP employees.
Non-EBITDA highlights:
Non-EBITDA highlights:
• Gains on proprietary investments were the result of
market value appreciation on certain resource-focused
equity kickers earned on private placement transactions.
• Gains on proprietary investments were the result of
market value appreciation on certain resource-focused
equity kickers earned on private placement transactions.
20
Corporate
This segment is primarily a cost centre that provides capital, balance sheet management and enterprise shared services to the Company's
subsidiaries. In previous quarters, this segment's results were reported on a combined basis with that of our Merchant Banking & Advisory
Services operating segment.
(In $ thousands)
SUMMARY INCOME STATEMENT
Gains (losses) on proprietary investments
Gains (losses) on long-term investments (1)
Other income (loss)
Total Revenues
Compensation
Selling, general and administrative
Amortization and impairment charges
Other expenses
Total Expenses
Net Income (Loss) before income taxes
Adjusted base EBITDA
(1) See "Long-term investments" section of Note 2 of the annual financial statements.
3 and 12 months ended
3 months ended
12 months ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
135
2,949
(303)
2,781
3,103
725
8
765
4,601
(1,820)
(840)
(7,029)
—
668
(6,361)
2,340
742
14
—
3,096
(9,457)
(2,563)
(6,473)
2,949
(2,244)
(5,768)
8,409
3,308
51
1,183
12,951
(18,719)
(8,188)
7,902
—
(679)
7,223
7,717
3,597
62
250
11,626
(4,403)
(8,705)
• Gains on proprietary investments were nominal on a 3 months ended basis. Loss on proprietary investments for the 12 months ended
was due to market value depreciation of specific resource-focused equity holdings.
• Gains on long-term investments were primarily due to the market value appreciation of a specific private holding, and to a lesser
extent, a gain on a strategic public holding.
• Other loss was due to FX losses as the U.S dollar continued to weaken in the year. Other expenses related to non-recurring legal and
other expenses incurred in the year.
• Compensation expense increased due to upfront equity amortization on the new LTIP. LTIP amortization is recognized using the graded-
vesting method under IFRS 2 which results in higher expense recognition in the early years of a stock-based compensation program
and materially lower expense recognition in the latter years.
21
Dividends
The following dividends were declared by the Company during the 12 months ended December 31, 2017:
Record date
March 10, 2017 - regular dividend Q4 - 2016
May 18, 2017 - regular dividend Q1 - 2017
August 21, 2017 - regular dividend Q2 - 2017
November 17, 2017 - regular dividend Q3 - 2017
Dividends (1)
Payment Date
March 27, 2017
June 2, 2017
September 5, 2017
December 4, 2017
Cash dividend per
share ($)
Total dividend
amount ($ in
thousands)
0.03
0.03
0.03
0.03
7,457
7,457
7,313
7,313
29,540
(1) Subsequent to the year-end, on March 1, 2018, a regular dividend of $0.03 per common share was declared for the quarter ended December 31,
2018. This dividend is payable on March 27, 2018 to shareholders of record at the close of business on March 12, 2018.
Capital Stock
Including the 10.4 million unvested common shares currently held in the EPSP Trust (December 31, 2016 - 5.3 million), total capital
stock issued and outstanding was 244.5 million (December 31, 2016 - 248.5 million). The decrease from December 31, 2016 was
primarily due to the Company's participation in the secondary offering of Sprott Inc. in which we purchased 5 million shares from
Mr. Eric Sprott for cancellation.
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 earnings per share were $0.01 and $0.16 for the three and twelve months ended respectively
compared to $0.00 and $0.13 in the respective prior periods. Diluted earnings per share were $0.01 and $0.15 for the three and
twelve months ended respectively, compared to $0.00 and $0.13 in the respective prior periods. Diluted earnings 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 7.0 million stock options are outstanding pursuant to our stock option plan, of which 5.6 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.
As at December 31, 2017, the Company had an undrawn credit facility with a major Canadian chartered bank. 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, Sprott Global Resource Investment Ltd. 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.
22
Commitments
Besides the Company's long-term lease agreements, there may be commitments to provide loans arising from the Lending segment
of our Private Resource Investments platform or commitments to make investments in the proprietary investments portfolio of the
Company. As at December 31, 2017, the Company had direct on-balance sheet loan commitments of $9.9 million arising from the
Lending segment (December 31, 2016 - $Nil) and $7.8 million of co-investment commitments from the Lending segments
(December 31, 2016 - $35.5 million).
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.
23
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.
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 amounts. 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.
24
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 Sprott Resource Lending Corporation ("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.
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 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.
25
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, 2017, 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 quarter.
Managing Risk: Non-financial
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
26
Consolidated Financial Statements
Year ended December 31, 2017
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, 2017. 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, 2018
Kevin Hibbert, CPA, CA
Chief Financial Officer and Senior Managing Director
28
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 sheets as at December 31, 2017 and 2016, the consolidated statements of operation and comprehensive income
(loss), changes in shareholder’s equity and cash flows for the years 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 audits. We conducted
our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on 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 in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial
position of Sprott Inc. as at December 31, 2017 and 2016, and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
March 1, 2018
Toronto, Canada
29
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
Long-term investments
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
Note Payable
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
(Note 6)
(Note 3)
(Note 7)
(Note 6)
(Note 3)
(Note 7)
(Note 5)
(Note 5)
(Note 9)
(Note 3)
(Note 11)
(Note 9)
(Note 8)
(Note 8)
Commitments and provisions
(Note 15)
The accompanying notes form part of the financial statements
"Jack C. Lee"
Director
"James Roddy"
Director
Dec. 31
2017
Dec. 31
2016
156,120
13,776
17,218
64,564
23,161
1,356
276,195
31,455
49,763
1,448
5,299
16,452
24,023
5,214
133,654
409,849
15,812
10,667
24,993
9,900
3,179
64,551
1,434
65,985
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
392,556
39,907
(118,272)
29,673
343,864
409,849
411,231
41,802
(126,264)
33,545
360,314
440,024
30
CONSOLIDATED STATEMENTS OF OPERATIONS
(In $ thousands of Canadian dollars, except for per share amounts)
For the years ended
Dec. 31
2017
Dec. 31
2016
Revenues
Management fees
Performance fees
Commissions
Interest income
Gains (losses) on proprietary investments
Gains (losses) on long-term 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
Amortization of property and equipment
Other expenses
Total expenses
Income before income taxes for the year
Provision for income taxes
Net income for the period
Basic and diluted earnings per share
The accompanying notes form part of the financial statements
64,981
4,676
29,190
15,593
(5,189)
3,639
31,321
144,211
49,566
6,692
6,548
2,610
6,311
(4,942)
23,698
5,600
—
827
3,995
100,905
43,306
5,774
37,532
(Note 7)
(Note 8)
(Note 6)
(Note 5)
(Note 5)
(Note 7)
(Note 9)
(Note 8)
$
0.16 $
84,320
21,407
13,835
14,162
27,894
—
5,569
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
0.13
31
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In $ thousands of Canadian dollars)
Net income 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
The accompanying notes form part of the financial statements
For the years ended
Dec. 31
2017
Dec. 31
2016
37,532
31,538
(3,872)
(3,872)
(1,660)
(1,660)
33,660
29,878
32
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In $ thousands of Canadian dollars, other than number of shares)
At Dec. 31, 2016
Shares acquired for equity incentive plan
Shares released on vesting of equity incentive plan
Foreign currency translation loss on foreign operations
Cancellation of repurchased shares
Stock-based compensation
Issuance of share capital on conversion of RSUs and other share
based considerations
Dividends declared
Net income
(Note 8)
(Note 8)
(Note 8)
(Note 8)
(Note 8)
(Note 12)
Number of
Shares
Outstanding
243,190,293
(8,100,000)
3,021,795
—
(5,000,000)
—
755,413
231,133
—
Capital
Stock
Contributed
Surplus
Deficit
Accumulated
Other
Comprehensive
Income
Total
Equity
411,231
(17,882)
7,938
—
(11,000)
—
1,728
541
—
41,802
—
(7,938)
—
—
6,692
(649)
—
—
(126,264)
—
—
—
—
—
—
(29,540)
37,532
33,545
—
—
(3,872)
—
—
—
—
—
360,314
(17,882)
—
(3,872)
(11,000)
6,692
1,079
(28,999)
37,532
Balance, Dec. 31, 2017
234,098,634
392,556
39,907
(118,272)
29,673
343,864
At Dec. 31, 2015
Shares acquired for equity incentive plan
Shares released on vesting of equity incentive plan
Foreign currency translation loss on foreign operations
Stock-based compensation
Dividends declared
Net income
243,996,605
(1,850,000)
1,033,426
—
—
10,262
—
412,344
(4,473)
3,334
—
—
26
—
38,749
—
(3,334)
—
6,387
—
—
(128,056)
—
—
—
—
(29,746)
31,538
35,205
—
—
(1,660)
—
—
—
358,242
(4,473)
—
(1,660)
6,387
(29,720)
31,538
Balance, Dec. 31, 2016
243,190,293
411,231
41,802
(126,264)
33,545
360,314
The accompanying notes form part of the financial statements
33
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In $ thousands of Canadian dollars, other than number of shares)
Operating Activities
Net income for the period
Add (deduct) non-cash items:
Losses (gains) on proprietary investments
Losses (gains) on Long-term investments
Stock-based compensation
Amortization of property, equipment and intangible assets
Sale of property, equipment and intangible assets
Impairment of intangible assets
Loan loss provisions (recoveries)
Deferred income tax 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 investments
Sale of investments
Purchase of property and equipment
Deferred sales commissions paid
Purchase of intangible assets
Cash provided by (used in) investing activities
Financing Activities
Acquisition of common shares for equity incentive plan
Acquisition of common shares for cancellation
Dividends paid
Cash used in financing activities
Effect of foreign exchange on cash balances
Net increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the period
Cash and cash equivalents:
Cash
Short-term deposits
Supplementary disclosure of cash flow information
Amount of interest received during the year
The accompanying notes form part of the financial statements
For the years ended
Dec. 31
2017
Dec. 31
2016
37,532
31,538
5,189
(3,639)
6,692
6,427
2,063
—
(4,942)
(2,055)
7,829
(3,028)
(13,140)
12,294
23,943
(11,251)
(11,760)
52,154
(61,282)
90,033
(860)
(165)
—
27,726
(7,982)
(11,000)
(28,999)
(47,981)
266
32,165
123,955
156,120
156,108
12
156,120
(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
5,442
5,398
34
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
1.
2.
CORPORATE INFORMATION
Sprott Inc. (the "Company") was incorporated under the Business Corporations Act (Ontario) on
February 13, 2008. Its registered office is at Royal Bank Plaza, South Tower, 200 Bay Street, Suite 2600,
Toronto, Ontario M5J 2J1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance
These annual audited consolidated financial statements for the years ended December 31, 2017 and
2016 ("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, 2018 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") and Sprott Korea Corporation ("Sprott Korea");
Sprott U.S. Holdings Inc. ("SUSHI"), parent of: (i) Rule Investments Inc. ("RII") (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 Sprott Energy Holdco. (Collectively, "Sprott Toscana");
Sprott Genpar Ltd.; and
Sprott Inc. 2011 Employee Profit Sharing Plan Trust (the "Trust").
35
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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
Proprietary investments are investments held with the primary intention of short-term liquidity and capital
management.
Long-term investments
During 2017, we took steps to reposition our business and increase our focus on precious metals and
real assets investments. As part of this strategic change, the Company engaged in a comprehensive
review of its key investment holdings to determine whether the intentions around these holdings remain
unchanged. It was concluded that some of the investments previously considered proprietary in nature
will now be held for more than a year for strategic purposes rather than for short-term liquidity and
capital management purposes. Consequently, these positions have been prospectively classified as non-
current assets. The new long-term investments classification reflects strategic positions held with the
intention of seeding and building the next generation of investment products and services consistent
with the long-term strategic objectives of the Company. These investments primarily include co-
investments in strategically important investment funds, joint-venture interests or equity stakes in other
entities.
Valuation of Investments
Both Proprietary investments and Long-term investments include public equities, share purchase warrants,
fixed income securities, mutual fund and alternative investment strategies, and private holdings. 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 which are valued
using the net asset value per unit of the fund, which represents the underlying net assets at fair values
determined using closing market prices. These investments are generally made in the process of launching
a new fund and are redeemed (if open-end) or sold (if closed-end) as third party investors subscribe. The
balance represents the Company's maximum exposure to loss associated with the investments. Private
holdings include the following:
36
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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.
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.
Resource loans
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.
37
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Impairment of resource loans - Specific loan loss provisions and impairment charges
Loans 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 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. To the extent that
discounted estimated future cash flows are less than the carrying value, a specific loan loss provision is
recorded. Any subsequent recognition of interest income for which a specific loan loss provision exists,
is calculated at the discount rate used in determining the provision, 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 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 been recognized.
Impairment of resource loans - Collective loan loss assessments
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.
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
38
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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 and Strategic Long-Term 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.
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;
39
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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 assessment. The amortization period and the amortization
40
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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.
Discontinued Operations
Revenues and expenses from discontinued operations, as well as non-current assets held for sale, are
reported separately on the consolidated statements of operations and consolidated statements of financial
position respectively, once the sale of a business segment comprising distinct operations is considered
highly probable. A business segment is considered to have distinct operations if the related cash flows
have the same level of granularity as a Cash Generating Unit (“CGU”).
Given that the sale of the Canadian diversified funds business and non-core private wealth client business
(collectively, "the Sale Transaction") comprised only a portion of the previous SAM CGU and SPW CGU
respectively, the operations of that business do not qualify for discontinued operations accounting.
Consequently, revenues and expenses generated after the sale became highly probable were not
presented as discontinued on the consolidated statements of operations, and the non-current assets that
were sold was not reclassified as held for sale on the statements of financial position.
41
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Income taxes
Income tax is comprised of current and deferred tax.
Income tax is recognized in the consolidated statements of operations except to the extent that it relates
to items recognized directly in other comprehensive income or elsewhere in equity, in which case, the
related taxes are also recognized in the consolidated statements of comprehensive income (loss) or
elsewhere in equity.
Deferred taxes are recognized using the liability method for temporary differences that exist between
the carrying amounts of assets and liabilities in the consolidated balance sheet and the amounts attributed
to such assets and liabilities for tax purposes. Deferred tax assets and liabilities are determined based on
the enacted or substantively enacted tax rates that are expected to apply when the differences related
to the assets or liabilities reported for tax purposes are expected to reverse in the future. Deferred tax
assets are recognized only when it is probable that sufficient taxable profits will be available or taxable
temporary differences reversing in future periods against which deductible temporary differences may
be utilized.
Deferred taxes liabilities are not recognized on the following temporary differences:
Temporary differences on the initial recognition of assets and liabilities in a transaction that is
•
not a business combination and that affects neither accounting nor taxable profit or loss;
Taxable temporary differences related to investments in subsidiaries, associates or joint ventures
•
or joint operations to the extent they are controlled by the Company and they will not reverse in the
foreseeable future;
•
Taxable temporary differences arising on the initial recognition of goodwill.
The Company records a provision for uncertain tax positions if it is probable that the Company will have
to make a payment to tax authorities upon their examination of a tax position. This provision is measured
at the Company's best estimate of the amount expected to be paid. Provisions are reversed to income
in the period in which management assesses they are no longer required or determined by statute.
The measurement of tax assets and liabilities requires an assessment of the potential tax consequences
of items that can only be resolved through agreement with the tax authorities. While the ultimate outcome
of such tax audits and discussions cannot be determined with certainty, management estimates the level
of provisions required for both current and deferred taxes.
Share-based payments
The Company uses the fair value method to account for equity settled share-based payments with
employees and directors. Compensation expense is determined using the Black Scholes option valuation
model for stock options. Compensation expense for the share incentive program is determined based
on the fair value of the benefit conferred on the employee. Compensation expense for deferred stock
units ("DSU") is determined based on the value of the Company's common shares at the time of grant.
Compensation expense for earn-out shares is determined using appropriate valuation models.
Compensation expense for the Trust is determined based on the value of the Company's common shares
purchased by the Trust 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
42
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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.
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.
43
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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 senior employees.
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 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.
44
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Future Accounting Standards
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, among other things, 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 characteristics of their contractual cash flows. The standard also
introduces a new "expected loss" impairment model. IFRS 9 is effective for annual periods beginning on
or after January 1, 2018.
Based on current estimates, the adoption of IFRS 9 is not expected to have a material impact to our
consolidated financial statements, aside from enhanced disclosure requirements. We continue to monitor
and refine certain elements of IFRS 9 in advance of Q1 2018 reporting.
IFRS 15, Revenue from Contracts with Customers ("IFRS 15")
IFRS 15 establishes, among other things, 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. Additionally, IFRS
15 requires the recognition of performance fees and carried interest after they are earned and any
applicable claw-back period has expired. IFRS 15 is effective for annual periods beginning on or after
January 1, 2018.
Based on current estimates, the adoption of IFRS 15 is not expected to have a material impact to our
consolidated financial statements, aside from enhanced disclosure requirements. We continue to monitor
and refine certain elements of our approach over IFRS 15 in advance of Q1 2018 reporting.
IFRS 16, Leases (“IFRS 16”)
IFRS 16 was issued by IASB in January 2016 and is effective for annual periods beginning on or after
January 1, 2019. IFRS 16 establishes principals for the recognition, measurement, presentation and
disclosure of leases. The standard introduces a single lessee accounting model that requires, generally
speaking, the recognition of most lease assets on the balance sheet as opposed to off-balance sheet in
the financial statement notes.
Based on current estimates, the adoption of IFRS 16 is not expected to have a material impact to our
consolidated financial statements.
45
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
3.
PROPRIETARY INVESTMENTS, OBLIGATIONS RELATED TO SECURITIES SOLD SHORT
AND LONG-TERM INVESTMENTS
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, 2017
Dec. 31, 2016
43,446
12,132
249
8,737
64,564
42,067
83,327
2,802
19,349
147,545
Obligations related to securities sold short**
24,993
29,810
* 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 $2.1 million (December 31, 2016 - $2.6 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 $2.4 million (December 31, 2016 - $4.0 million) which are recorded at cost, net of depletion and/or impairment charges. As
at December 31, 2017, 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 an impairment of $0.9 million (December
31, 2016 - $nil)
** 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 $26.7 million
(December 31, 2016 - $29.7 million) of long positions in investment strategies and $25.0 million (December 31, 2016 - $29.8
million) of short positions.
Long-term investments
Long-term investments consists of the following (in thousands $):
Public equities and share purchase warrants
Mutual funds and alternative investment strategies
Private holdings*
Total long-term investments
Dec. 31, 2017
Dec. 31, 2016
1,639
35,972
12,152
49,763
—
—
—
—
* Private holdings consists of private company investments classified as HFT which have their changes in fair value recorded in
the consolidated statements of operations.
466
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following ($ in thousands):
Cost
At December 31, 2015
Additions
Net exchange differences
December 31, 2016
Disposal on Sale Transaction
Additions
Net exchange differences
December 31, 2017
Accumulated amortization
At December 31, 2015
Charge for the year
Net exchange differences
December 31, 2016
Disposal on Sale Transaction
Charge for the year
Net exchange differences
December 31, 2017
Net book value at:
December 31, 2016
December 31, 2017
Artwork
Furniture and
fixtures
Computer
hardware
and software
Leasehold
improvements
Total
2,045
577
—
2,622
374
—
2,996
—
—
—
—
—
—
—
—
3,296
5
(46)
3,255
(82)
10
(35)
3,148
2,412
253
(13)
2,652
(462)
465
(36)
2,619
(2,974)
(2,288)
(129)
19
(153)
24
(3,084)
(2,417)
30
(60)
37
86
(266)
33
(3,077)
(2,564)
2,622
2,996
171
71
235
55
8,415
16,168
80
(16)
8,479
(4,532)
11
(19)
915
(75)
17,008
(5,076)
860
(90)
3,939
12,702
(4,562)
(638)
4
(5,196)
3,925
(501)
10
(1,762)
3,283
2,177
(9,824)
(920)
47
(10,697)
4,041
(827)
80
(7,403)
6,311
5,299
47
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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, 2015
182,819
13,858
31,505
45,613
9,485
283,280
Net additions and (disposals)
Transfers
—
—
Net exchange differences
(5,070)
—
(1,510)
—
17,203
1,510
—
—
(847)
(1,355)
686
17,889
—
—
—
(7,272)
At Dec. 31, 2016
177,749
12,348
49,371
44,258
10,171
293,897
Net additions and (disposals)
Net exchange differences
At Dec. 31, 2017
—
(10,867)
166,882
—
—
—
—
(10,171)
(10,171)
(1,955)
(3,127)
— (15,949)
12,348
47,416
41,131
— 267,777
Accumulated amortization and
impairment losses
At Dec. 31, 2015
(156,321)
(9,342)
(23,409)
(45,613)
(7,129)
(241,814)
Amortization charge for the year
Net impairment charge for the year
Net exchange differences
—
—
4,282
—
(4,941)
(3,006)
—
—
556
—
—
1,355
(1,560)
(6,501)
—
—
(3,006)
6,193
At Dec. 31, 2016
(152,039)
(12,348)
(27,794)
(44,258)
(8,689)
(245,128)
Amortization charge for the period
Disposal of intangible assets
Net exchange differences
—
—
9,180
—
—
—
(4,980)
—
—
—
(620)
(5,600)
9,309
9,309
1,810
3,127
—
14,117
At Dec. 31, 2017
Net book value at:
Dec. 31, 2016
Dec. 31, 2017
(142,859)
(12,348)
(30,964)
(41,131)
— (227,302)
25,710
24,023
—
—
21,577
16,452
—
—
1,482
48,769
—
40,475
48
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Impairment assessment of goodwill
During the year, the Company completed it strategic review and reorganization of the business which, in part, culminated
in the sale of non-core assets that formed a material portion of one of its former CGUs. This fundamentally changed how
the business is managed, viewed internally and reported externally, thereby requiring a change in the reporting of our CGUs.
Previously, the Company reported six CGUs for Goodwill impairment assessment and testing purposes:
• SAM
• Global
• Lending
• Corporate
• Consulting
• SPW
After the sale, the Company reorganized its CGUs as follows:
•
•
•
•
•
•
•
Exchange Listed Products
Alternative Asset Management
Global
Lending
Consulting
Merchant Banking & Advisory
Corporate
As at December 31, 2017, the Company had allocated $24.0 million (December 31, 2016 - $25.7 million) of goodwill on a
relative value approach basis to the Exchange Listed Products and Alternative Asset Management CGUs.
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 impairment in either the Exchange Listed
Products CGU or the Alternative Asset Management CGU.
Impairment assessment of finite life fund management contracts
As at December 31, 2017, the Company had fixed-term limited partnerships within the Global CGU of $0.4 million
(December 31, 2016 - $2.9 million) and exchange listed funds within the Exchange Listed Products CGU of $16.1 million
(December 31, 2016 - $18.7 million). There were no indicators of impairment as at December 31, 2017.
Impairment assessment of deferred sales commissions
As part of the Sale Transaction, the Company sold $0.9 million of deferred sales commissions. As a result, as at December 31,
2017, the Company had no deferred sales commissions (December 31, 2016 - $1.5 million).
49
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
6.
LOANS RECEIVABLE
Components of loans receivable
Loans are reported at their amortized cost using the effective interest method. Loans are reported net
of any general or specific loan loss provisions on the Loan loss provisions line of the consolidated statements
of operations. Total carrying value consists of the following (In thousands $):
Loans
Loan principal
Accrued interest
Deferred revenue
Amortized cost, before loan loss provisions
Loan loss provisions
Total carrying value of loans receivable
Less: current portion
Total carrying value of non-current loans receivable
Dec. 31, 2017 Dec. 31, 2016
53,272
252
(4,851)
48,673
—
48,673
(17,218)
31,455
78,814
86
(6,229)
72,671
(4,993)
67,678
(11,631)
56,047
Impaired loans and loan loss provisions
When a loan is classified as impaired, the original expected timing and amount of future cash flows may
be revised to reflect new circumstances. These revised cash flows are discounted using the original effective
interest rate to determine the net realizable value of the loan. Interest income is thereafter recognized
on this net realizable value using the original effective interest rate. Additional changes to the amount
or timing of future cash flows could result in further losses, or the reversal of previous losses, which would
also impact the amount of subsequent interest income recognized.
As at December 31, 2017, the Company performed a comprehensive review of each loan measured at
amortized cost in its portfolio to determine the requirement for specific loan loss provisions. There were
no credit events in the year. For the year ended December 31, 2017, the Company reversed a $5.0 million
specific loan loss provision.
Interest income on impaired loans and the changes in loan loss provision are as follows (In thousands $):
Interest on impaired loans
Loan loss provisions
Balance, beginning of the year
Write-off of resource loans
General loan loss provision
Specific loan loss provision (recovery) on resource loan
Net exchange differences
Balance, end of period
For the years ended
Dec. 31, 2017 Dec. 31, 2016
941
—
4,993
—
—
(4,942)
(51)
—
9,217
(3,866)
(1,200)
941
(99)
4,993
50
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Sector distribution of loan principal
The following table summarizes the distribution of all of the Company’s outstanding loan principal balances by sector:
Metals and mining
Energy and other
Total loan principal
Dec. 31, 2017
Dec. 31, 2016
Number of Loans
2
5
7
(in $ thousands) Number of Loans
5
4
9
13,384
39,888
53,272
(in $ thousands)
38,514
40,300
78,814
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, 2017
Dec. 31, 2016
Number of Loans
2
3
—
—
1
—
1
7
(in $ thousands) Number of Loans
2
2
1
1
1
1
1
9
8,578
31,310
—
—
1,505
—
11,879
53,272
($ in thousands)
24,765
32,446
4,363
964
1,880
2,275
12,121
78,814
Canada
United States of America
Chile
Brazil
Peru
Romania
South Africa
Total loan principal
Priority of security charges
As at December 31, 2017 and December 31, 2016, all of the Company's loans are senior secured.
Past due loans that are not impaired
Loans are considered past due once the borrower has failed to make payments within 30 days of the contractual due date.
As at December 31, 2017 one loan had an interest payment past due and is expected to be paid during the first quarter of
2018. As at December 31, 2016, no loans were past due.
51
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
7. OTHER ASSETS, INCOME AND EXPENSES
Other assets
Other assets (both current and long term) consist of the following (in thousands $):
Fund recoveries and investment receivables
Deferred CFCL acquisition charges (1)
Prepaid expenses
Other (2)
Total Other assets
(1) Includes legal, proxy, solicitation and investor relations costs
(2) Other includes miscellaneous third-party receivables
Other income
Other income consist of the following (in thousands $):
Net proceeds from Sale Transaction (1)
Other investment income (2)
Foreign exchange losses
Total Other income (3)
(1) Gross proceeds of $41.3 million, net of transaction costs of $9.6 million
(2) Primarily includes investment fund income, syndication and trailer fee income
Dec. 31, 2017 Dec. 31, 2016
17,168
4,751
1,947
743
24,609
9,557
1,402
1,663
228
12,850
Dec. 31, 2017 Dec. 31, 2016
31,691
5,425
(7,416)
29,700
—
7,281
(3,474)
3,807
(3) Excludes royalty income of $1.6 million (December 31, 2016 - $1.8 million), which is presented net of operating, depletion and impairment charges below
Other expenses
Other expenses consist of the following (in thousands $):
Costs (recoveries) related to energy assets (1)
Non-recurring expenses (2)
Total Other expenses
Dec. 31, 2017 Dec. 31, 2016
888
1,448
2,336
(509)
1,840
1,331
(1) Includes operating, depletion and impairment charges, net of royalty income of $1.6 million (December 31, 2016 - $1.8 million) which is presented as Other
income on the Statement of Operations.
(2) Non-recurring expenses primarily includes costs related to the secondary offering
52
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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, 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
Issuance of share capital under dividend reinvestment program
Issuance of share capital on conversion of RSU
Cancellation of repurchased shares
Acquired for equity incentive plan
Released on vesting of equity incentive plan
At Dec. 31, 2017
Number of
shares
Stated value
(in $ thousands)
243,996,605
412,344
10,262
(1,850,000)
1,033,426
26
(4,473)
3,334
243,190,293
411,231
231,133
755,413
(5,000,000)
(8,100,000)
3,021,795
234,098,634
541
1,728
(11,000)
(17,882)
7,938
392,556
Contributed surplus consists of: stock option expense; earn-out shares expense; equity incentive plans'
expense; and additional purchase consideration.
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
Expensing of Stock-based compensation over the vesting period
Issuance of share capital on conversion of RSUs and other share based
considerations
Released on vesting of common shares for equity incentive plan
At Dec. 31, 2017
Stated value
(in $ thousands)
38,749
2,477
3,910
(3,334)
41,802
6,692
(649)
(7,938)
39,907
53
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stock option plan
The Company has an option plan (the "Plan") intended to provide incentives to directors, officers,
employees and consultants of the Company and its wholly owned subsidiaries. The aggregate number
of shares issuable upon the exercise of all options granted under the Plan and under all other stock-based
compensation arrangements including the Trust and Equity Incentive Plan ("EIP") cannot exceed 10%
of the issued and outstanding shares of the Company as at the date of grant. The options may be granted
at a price that is not less than the market price of the Company's common shares at the time of grant.
The options vest annually over a three-year period and may be exercised during a period not to exceed
10 years from the date of grant.
No stock options were issued for the year ended December 31, 2017 (year ended December 31, 2016 -
8,250,000 options issued). There were 3,925,000 stock options forfeited during the year ended December
31, 2017 (year ended December 31, 2016 - nil)
For valuing share option grants, the fair value method of accounting is used. The fair value of option
grants is determined using the Black-Scholes option-pricing model, which takes into account the exercise
price of the option, the current share price, the risk-free interest rate, the expected volatility of the share
price over the life of the option and other relevant factors. Compensation cost is recognized over the
vesting period, assuming an estimated forfeiture rate, with an offset to contributed surplus. When
exercised, amounts originally recorded against contributed surplus as well as any consideration paid by
the option holder is credited to capital stock.
A summary of the changes in the Plan is as follows:
Options outstanding, December 31, 2015
Options exercisable, December 31, 2015
Options granted
Options granted
Options outstanding, December 31, 2016
Options exercisable, December 31, 2016
Options forfeited
Options outstanding, December 31, 2017
Options exercisable, December 31, 2017
Number of options
(in thousands)
Weighted average
exercise price ($)
2,650
2,650
7,250
1,000
10,900
4,100
(3,925)
6,975
5,625
9.71
9.71
2.33
2.73
4.16
7.10
2.42
5.14
5.79
Options outstanding and exercisable as at December 31, 2017 are as follows:
Exercise price ($)
10.00
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
150
4,250
125
6,975
0.3
2.9
8.1
8.4
5.3
2,450
150
2,900
125
5,625
54
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Equity incentive plan
For employees in Canada, the Trust has been established and the Company will fund the Trust with cash,
which will be used by the trustee to purchase: (1) on the open market, common shares of the Company
that will be held in the Trust until the awards vest and are distributed to eligible members; or (2) from
treasury, common shares of the Company that will be held in the Trust until the awards vest and are
distributed to eligible employees; and (3) from time-to-time, purchases from 2176423 Ontario Ltd., a
company controlled by Eric Sprott, pursuant to the terms and conditions of a previously announced share
transaction. For employees in the U.S. under the EIP plan, the Company will allot common shares of the
Company as either: (1) restricted stock; (2) unrestricted stock; or (3) restricted stock units ("RSUs"), the
resulting common shares of which will be issued from treasury.
There were 755,413 RSUs issued during the year ended December 31, 2017 (December 31, 2016 -
258,389). The Trust purchased 8.1 million shares in the year ended December 31, 2017 (year ended
December 31, 2016 - $1.85 million).
Common shares held by the Trust, December 31, 2015
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2016
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2017
Number of
common shares
4,471,178
1,850,000
(1,033,426)
5,287,752
8,100,000
(3,021,795)
10,365,957
The table below provides a breakdown of the share-based compensation expense and the corresponding
increase to contributed surplus:
Stock option plan
EPSP / EIP
For the years ended
Dec. 31, 2017 Dec. 31, 2016
(73)
6,765
6,692
2,477
3,910
6,387
55
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Basic and diluted earnings per share
The following table presents the calculation of basic and diluted earnings (loss) per common share:
Numerator ($ in thousands):
Net income - basic and diluted
Denominator (Number of shares in thousands):
Weighted average number of common shares
Weighted average number of unvested shares purchased by the Trust
Weighted average number of common shares - basic
Weighted average number of dilutive stock options
Weighted average number of unvested shares purchased by the Trust
Weighted average number of common shares - diluted
Net income per common share
Basic
Diluted
For the years ended
Dec. 31, 2017 Dec. 31, 2016
37,532
31,538
246,205
247,528
(7,143)
239,062
—
7,143
246,205
(4,167)
243,361
—
4,167
247,528
0.16
0.15
0.13
0.13
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, 2017 and
2016, all entities were in compliance with their respective capital requirements.
56
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
9.
INCOME TAXES
The major components of income tax expense are as follows (in $ thousands):
Current income tax expense (recovery)
Based on taxable income of the current period
Other
Deferred income tax expense (recovery)
Total deferred income tax expense
Income tax expense reported in the statements of operations
For the years ended
Dec. 31, 2017 Dec. 31, 2016
9,003
(1,174)
7,829
(2,055)
5,774
12,846
88
12,934
(6,629)
6,305
Taxes calculated on the Company's earnings differs from the theoretical amount that would arise using
the weighted average tax rate applicable to earnings of the Company as follows (in $ thousands):
Income before income taxes
Tax calculated at domestic tax rates applicable to profits in the respective
countries
Tax effects of:
Non-deductible stock-based compensation
Non-taxable capital (gains) and losses
Capital losses not benefited
Goodwill/Amortization of Intangibles
Adjustments in respect of previous periods
Other temporary differences not benefited
Non-capital losses not benefited
Rate differences and other
Tax charge
For the years ended
Dec. 31, 2017 Dec. 31, 2016
43,306
11,851
1,815
(5,275)
27
130
(1,356)
(1,425)
91
(84)
5,774
37,843
10,251
942
(2,704)
201
468
144
(480)
(2,800)
283
6,305
The weighted average statutory tax rate was 27.4% (December 31, 2016 - 27.1%). This increase was mainly due to increased
profitability of our Global segment, which is U.S based, which are subject to a higher tax rate than the Canadian operations.
The Company has $38 million of unused non-capital tax losses and $11 million of unused capital tax losses from prior years that
will begin to expire in 2027 and 2019, respectively. The benefit of these capital and non-capital tax losses has not been recognized.
57
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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, 2017
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
Proceeds receivable
Other
Total deferred income tax liabilities
Net deferred income tax assets
For the year ended December 31, 2016
Dec. 31, 2016
Recognized in
income
Recognized in
other
comprehensive
income
Dec. 31, 2017
4,223
553
571
5,347
2,039
392
186
993
73
3,683
1,664
(1,635)
267
(86)
(1,454)
(1,547)
(392)
(667)
(714)
(189)
(3,509)
2,055
—
—
—
—
(61)
—
—
—
—
(61)
61
2,588
820
485
3,893
431
—
(481)
279
(116)
113
3,780
Dec. 31,
2015
Recognized in
income
Recognized in
other
comprehensive
income
Dec. 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)
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
58
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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, 2017
and December 31, 2016 (in $ thousands).
Proprietary Investments
Dec. 31, 2017
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
37,845
9,571
—
—
(24,993)
22,423
5,600
2,561
249
—
—
8,410
—
—
—
6,341
43,445
12,132
249
6,341
— (24,993)
37,174
6,341
Dec. 31, 2016
Level 1
Level 2
Level 3
Total
42,067
Public equities and share purchase warrants
83,328
Mutual funds and alternative investment strategies
2,802
Fixed income securities
15,395
Private holdings*
— (29,810)
Obligations related to securities sold short
113,782
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.
36,842
44,774
—
—
(29,810)
51,806
5,225
38,554
1,538
—
—
45,317
—
—
1,264
15,395
16,659
Long-term investments
December 31, 2017
Level 1
Level 2
Level 3
Total
Public equities and share purchase warrants
Mutual funds and alternative investment strategies
Private holdings*
Total net recurring fair value measurements
*Private holdings measured using fair value techniques include private company investments classified as HFT which have their
changes in fair value recorded on the statements of operations
—
—
12,152
12,152
1,639
35,972
—
37,611
1,639
35,972
12,152
49,763
—
—
—
—
59
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
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, 2017
Dec. 31,
2016
Purchases and
reclassifications
Settlements
Net unrealized
gains (losses)
included in net
income
Dec. 31,
2017
Private holdings
Fixed income securities
15,395
1,264
16,659
273
—
273
(526)
(1,264)
(1,790)
3,351
18,493
—
—
3,351
18,493
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
Dec. 31,
2016
Private holdings
Fixed income securities
9,652
1,266
10,918
9,345
—
9,345
(4,898)
—
(4,898)
1,296
15,395
(2)
1,264
1,294
16,659
During the year ended December 31, 2017, the Company transferred public equities of $2.9 million (Dec. 31, 2016
- $1.0 million) from Level 2 to Level 1 within the fair value hierarchy due to the release of trading restrictions by
the issuer. The Company purchased level 3 investments of $3.6 million and transferred $3.3 million (Dec. 31, 2016
- $Nil) from Level 3 to Level 1 within the fair value hierarchy due to the initial public offering of an investment that
was previously privately owned.
The following table presents the valuation techniques used by the Company in measuring Level 2 fair values:
Type
Public equities and share purchase warrants
Mutual funds and alternative investment
strategies
Fixed income securities
Valuation Technique
Fair values are determined using pricing models which
incorporate market-observable inputs.
Fair values are based on the last available Net Asset Value.
Fair values are based on independent market data providers or
third-party broker quotes.
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 $48.7 million (Dec. 31, 2016 - $67.7 million)
and a fair value of $52.8 million (Dec. 31, 2016 - $74.1 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.
60
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
11. RELATED PARTY TRANSACTIONS
The remuneration of directors and other key management personnel of the Company for employment
services rendered are as follows (in thousands $):
Fixed salaries and benefits
Variable incentive-based compensation
Share-based compensation
For the years ended
Dec. 31, 2017 Dec. 31, 2016
4,197
2,818
3,268
10,283
4,560
5,583
8,511
18,654
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 213,727 DSUs issued during the year (December 31, 2016
- 137,300). 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.
On June 29, 2017, the Company participated in the secondary offering of 2176423 Ontario Ltd., a
company beneficially owned by Mr. Eric Sprott. As part of the offering, the Sprott Inc. 2011 Employee
Profit Sharing Trust purchased 7,500,000 shares for a total price of $16.5 million, of which $6.6 million
was paid during the year ended December 31, 2017. As at December 31, 2017, the Company has an
interest bearing note of $9.9 million with Mr. Eric Sprott which is payable over 4 years. The Company
intends to pay off the note within 12 months.
As part of the secondary offering, the Company also purchased 5,000,000 shares for a total price of $11
million. Those shares were subsequently canceled.
12. DIVIDENDS
The following dividends were declared by the Company during the year ended December 31, 2017:
Record date
March 10, 2017 - regular dividend Q4 - 2016
May 18, 2017 - regular dividend Q1 - 2017
Payment Date
March 27, 2017
June 2, 2017
August 21, 2017 - regular dividend Q2 - 2017
September 5, 2017
November 17, 2017 - regular dividend Q3 - 2017
Dividends (1)
December 4, 2017
Cash dividend
per share ($)
Total dividend
amount (in $
thousands)
0.03
0.03
0.03
0.03
7,457
7,457
7,313
7,313
29,540
(1) Subsequent to the year-end, on March 1, 2018, a regular dividend of $0.03 per common share was declared for the quarter
ended December 31, 2018. This dividend is payable on March 27, 2018 to shareholders of record at the close of business on
March 12, 2018.
61
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
13. RISK MANAGEMENT ACTIVITIES
The Company's exposure to market, credit, liquidity and concentration risk is described below:
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 and long-term investments will result in changes in carrying value. If the market
values of proprietary investments and long-term 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 $1.7 million for the year (December 31, 2016 - $5.6
million). For more details about the Company's proprietary investments and long-term
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, 2017 and 2016 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, 2017 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, 2017, the Company had 6 fixed-rate resource based loans and 1 floating-
rate resource based loan (December 31, 2016 - 8 fixed-rate loans and 1 floating-rate loan) with
an aggregate carrying value of $48.7 million (December 31, 2016 - $67.7 million). The Company's
7 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, 2017 and 2016
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, 2017, approximately $59.6 million (December 31,
2016 - $66.0 million) of total Canadian assets were invested in proprietary investments priced in
USD. A total of $55.5 million (December 31, 2016 - $50.9 million) of cash, $1.2 million (December
31, 2016 -$4.5 million) of accounts receivable, $42.1 million (December 31, 2016 - $60.1 million)
of loans receivable and $10.9 million (December 31, 2016 - $1.2 million) of other assets were
denominated in USD. As at December 31, 2017, 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 $6.9 million for the year (December
31, 2016 - $7.5 million).
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.
63
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
As at December 31, 2017, the Company’s net exposure to on-balance sheet credit risk (net loans
receivable) was $48.7 million (December 31, 2016 - $67.7 million) and the Company had no
exposure to off-balance sheet credit risk (loan commitments) (December 31, 2016 - $nil). As at
December 31, 2017, the largest loan in the Company’s loan portfolio was a resource loan with
a carrying value of $26.3 million or 54.0% of the Company’s loans receivable (December 31,
2016 - $21.9 million or 32.3% of the Company’s loans receivable). The Company will syndicate
loans in certain circumstances if it wishes to reduce its exposure to a borrower or comply with
loan exposure maximums. The Company reviews its policies regarding its lending limits on an
ongoing basis. For precious metal loans, the Company performs the same due diligence
procedures as it would for its resource loans and resource debentures.
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, 2017 and 2016, 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, 2017 and 2016, 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.
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, 2017, the Company had $156.1
million or 38.1% (December 31, 2016 - $124.0 million or 28.2%) of its total assets in cash and
64
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
cash equivalents. In addition, approximately $27.3 million or 69.0% (December 31, 2016 - $82.5
million or 70.1%) 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, 2017, the Company had loan funding commitments of
$9.9 million and $7.8 million in investment funding commitments (December 31, 2016 - $nil and
$35.5 million 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.
The Company's management team is responsible for reviewing resources to ensure funds are
readily available to meet its financial obligations as they come due, as well as ensuring adequate
funds exist to support business strategies and operations growth. The Company manages liquidity
risk by monitoring cash balances on a daily basis. To meet any liquidity shortfalls, actions taken
by the Company could include: syndicating a portion of its loans; slowing its lending activities;
drawing on available loan facilities; liquidating proprietary investments and/or issuing common
shares.
Concentration risk
The majority of the Company's AUM, as well as its proprietary investments and loans receivables
are focused on the natural resource sector.
65
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
14. SEGMENTED INFORMATION
For management purposes, the Company is organized into business units based on its products, services
and geographical location and has seven reportable segments as follows:
•
•
Exchange Listed Products, which provides management services to the Company's closed-end
physical trusts and exchange traded funds ("ETFs"), both of which are actively traded on public
securities exchanges.
Alternative Asset Management, which provides asset management and sub-advisory 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 through
the Company's U.S. broker-dealer;
•
Lending, which provides lending activities through limited partnership vehicles as well as through
direct lending activities using the Company's balance sheet;
• Consulting, which includes the operations of SC, Sprott Toscana and Sprott Korea, the
Company's private equity and debt style investment management activities;
• Merchant Banking and Advisory Services, which includes the activities of Sprott Capital Partners,
a division of SPW. Effective this year, the results of our Canadian broker-dealer are presented
separately from Corporate.
• Corporate, which provides capital, balance sheet management and enterprise shared services
to the Company's subsidiaries. Effective this year, the results of this segment are presented
separately from Merchant Banking and Advisory Services.
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.
66
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
The following tables present the operations of the Company's reportable segments (in $ thousands):
For the year ended December 31, 2017
Total revenue
Total expenses
Pre-tax Income (loss)
Adjusted base EBITDA
Exchange
Listed
Products
17,984
Alternative
Asset
Management
72,942
7,693
10,291
12,255
32,807
40,135
7,614
Global
Lending Consulting
20,416
11,036
17,555
2,861
5,655
6,902
4,134
16,962
7,299
7,764
(465)
167
Merchant
Banking &
Advisory Services Corporate Eliminations Consolidated
21,555
16,486
5,069
5,699
(5,768)
12,951
(18,719)
(8,188)
(1,253)
(1,253)
—
—
144,211
100,905
43,306
40,164
For the year ended December 31, 2016
Total revenue
Total expenses
Pre-tax Income (loss)
Adjusted base EBITDA
Exchange
Listed
Products
18,241
Alternative
Asset
Management Global
18,092
90,536
19,804
7,428
10,813
11,861
76,213
14,323
4,382
16,517
6,313
1,575
4,601
13,491
9,558
Lending Consulting
Merchant
Banking &
Advisory Services Corporate Eliminations Consolidated
5,717
6,450
(733)
(62)
9,746
6,969
2,777
2,425
7,223
11,626
(4,403)
(8,705)
(2,172)
(2,172)
—
—
167,187
129,344
37,843
24,060
Inter-segment revenues and expenses are eliminated on consolidation and reflected in the 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
For the years ended
Dec. 31, 2017 Dec. 31, 2016
123,795
20,416
144,211
149,095
18,092
167,187
67
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
15. COMMITMENTS AND PROVISIONS
Besides the Company's long-term lease agreement, there may be commitments to provide loans arising
from the Lending business or commitments to make investments in the proprietary investments portfolio
of the Company. As at December 31, 2017, the Company had loan commitments of $9.9 million
(December 31, 2016 - $nil) and $7.8 million of investment purchase commitments in the proprietary
investments portfolio (December 31, 2016 - $35.5 million).
Future minimum annual rental payments under non-cancellable leases, including operating costs, are
as follows ($ thousands):
2018
2019
2020
2021
2022
Thereafter
2,688
2,711
2,642
2,348
1,978
1,650
14,017
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, 2017,
no provisions were recognized.
16. EVENTS AFTER THE REPORTING PERIOD
On January 16, 2018, the Company successfully closed on the acquisition of Central Fund of Canada for
total proceeds of $120 million.
68
Corporate Information
Head Office
Sprott Inc.
Royal Bank Plaza, South Tower
200 Bay Street, Suite 2600
Toronto, Ontario M5J 2J1, Canada
T: 416.943.8099
1.855.943.8099
Directors & Officers
Jack C. Lee, Chairman
Peter Grosskopf, Chief Executive Officer and Director
Rick Rule, Director
James T. Roddy, Director
Sharon Ranson, Director
Rosemary Zigrossi, Director
Ronald Dewhurst, Director
Kevin Hibbert, CPA, CA, Chief Financial Officer
Arthur Einav, 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
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 416.943.8099
or toll free at 1.855.943.8099
Stock Information
Sprott Inc. common shares are traded on the
Toronto Stock Exchange under the symbol ‘‘SII’’
Annual General Meeting
Friday, May 11, 2018 12:00 pm
Baker & Mackenzie LLP
Brookfield Place, Bay/Wellington Tower
181 Bay Street, Suite 2100
Toronto, Ontario
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2017 Annual Report
Contrarian. Innovative. Aligned.