2018 Annual Report
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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
33
37
February 27, 2019
Dear Shareholders,
The fourth quarter of 2018 was difficult for investors as trade tensions and growth fears caused steep declines
in equity markets and led most major asset classes into negative territory for the year. Amid broadly negative
returns for the year, gold and silver were rare outliers, admirably performing their traditional roles as safe
havens and portfolio diversifiers, returning 8% and 7% respectively during the quarter. Early in 2019, the
outlook for precious metals improved further when, after three years of gradual tightening, the Fed finally
blinked by not raising rates at its January meeting and signaling patience going forward. We believe that
precious metals and their related equities are now poised for a multi-year uptrend, triggered by a growing
realization that the Fed’s tightening cycle is reaching its conclusion.
Due largely to the strong late-year performance of gold and silver, Sprott’s assets under management (“AUM”)
increased by approximately $0.5 billion during the fourth quarter to close the year at $10.6 billion. Adjusted
base EBITDA for the quarter was $10.1 million or $0.04 per share, up $2.6 million (34%) from the prior
period. The increase in earnings was due to higher net fees generated on the acquired CFCL assets and newly
called capital and higher co-investment income generated in our lending LPs. These increases were partially
offset by lower contributions from our Canadian and U.S broker-dealers. For the year ended December 31,
2018, we reported adjusted base EBITDA of $40.5 million or $0.16 per share.
With approximately 90% of our AUM concentrated in precious metal-related investments, we are pleased
with our positioning and continue to focus on using this specialty to achieve profitable long-term growth.
In recent years, we have remained true to our contrarian roots by investing in the business while others in
the precious metals space have retreated. We have strengthened our management team with the appointment
of Whitney George as President of Sprott and deepened our mining and portfolio management expertise
with the addition of Dr. Neil Adshead at Sprott US. Looking ahead, we are focused on growing our business
by increasing the scale of key units such as Private Lending and our Exchange-Listed products. We are also
rebuilding our managed equities platform and recently took another step in this direction by launching a
new joint venture with John Hathaway and the Tocqueville precious metals team.
At Sprott we are committed to being at the forefront of innovation in the precious metals sector and have
made early stage investments in a number of digital gold platforms. With investor sentiment towards the
sector improving, we believe these platforms could be poised for widespread adoption in the years ahead.
Thank you for your continued support. We look forward to reporting to you on our progress throughout the
year.
Sincerely,
Peter Grosskopf
Chief Executive Officer
2
Management's Discussion and Analysis
Year ended December 31, 2018
3
FORWARD LOOKING STATEMENTS
Certain statements in this Management's Discussion & Analysis ("MD&A"), and in particular the "Business Highlights and Growth Initiatives" section and
"Outlook" subsection, 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 continued wind-down of balance sheet lending as we grow the AUM in our suite of lending LPs,
including that balance sheet run-off will reach a conclusion by the end of 2019, leading to material increases in lending LP management fees in 2020 and
onwards; (ii) expectations regarding deployment of capital called into our lending LPs in 2019; (iii) expectation that the strong finish to the price of gold in the
year will carry forward to 2019; (iv) expectation that there will be a lower redemption experience for exchange listed products in 2019; (v) expectation that the
average AUM for exchange listed products will likely be lower in 2019; (vi) expectation that, to the extent that loan repayments outpace capital deployments,
declines in 2019 interest income could outpace increases in management fees from our lending LPs; (vii) anticipation that earnings from the alternative asset
management business will be relatively flat to slightly positive year-over-year; (viii) expectation that equity origination and placement fee activities will continue
to come under pressure in 2019 as it did in 2018; (ix) expectation that we will see a material decrease in compensation expense in 2019 and the primary
reasons causing such decrease as described under the heading “Outlook - Corporate”; (x) 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 (xi) 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,
Estimates and Changes in Accounting Policies". 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 resulting in regulatory sanctions or reputational harm; (v) performance fee fluctuations; (vi) a business segment or another counterparty
failing to pay its financial obligation; (vii) failure of the Company to meet its demand for cash or fund obligations as they come due; (viii) changes in the investment
management industry; (ix) failure to implement effective information security policies, procedures and capabilities; (x) lack of investment opportunities; (xi) risks
related to regulatory compliance; (xii) failure to manage risks appropriately; (xiii) failure to deal appropriately with conflicts of interest; (xiv) competitive pressures;
(xv) corporate growth which may be difficult to sustain and may place significant demands on existing administrative, operational and financial resources; (xvi)
failure to comply with privacy laws; (xvii) failure to successfully implement succession planning; (xviii) foreign exchange risk relating to the relative value of the
U.S. dollar; (xix) litigation risk; (xx) failure to develop effective business resiliency plans; (xxi) failure to obtain or maintain sufficient insurance coverage on
favourable economic terms; (xxii) historical financial information being not necessarily indicative of future performance; (xxiii) the market price of common shares
of the Company may fluctuate widely and rapidly; (xxiv) risks relating to the Company’s investment products; (xxv) risks relating to the Company's proprietary
investments; (xxvi) risks relating to the Company's lending business; (xxvii) risks relating to the Company’s merchant bank and advisory business; (xxviii) those
risks described under the heading "Risk Factors" in the Company’s annual information form dated February 27, 2019; and (xxix) 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 February 27, 2019, presents an analysis of the consolidated financial condition of
the Company and its subsidiaries as at December 31, 2018, compared with December 31, 2017, and the consolidated results of operations for the
three and twelve months ended December 31, 2018, compared with the three and twelve months ended December 31, 2017. The Board of Directors
approved this MD&A on February 27, 2019. All note references in this MD&A are to the notes to the Company's December 31, 2018 audited consolidated
financial statements ("financial statements"), unless otherwise noted. The Company was incorporated under the Business Corporations Act (Ontario)
on February 13, 2008.
PRESENTATION OF FINANCIAL INFORMATION
The 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 financial statements. The Canadian dollar is the Company's functional and
reporting currency for purposes of preparing the 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 and twelve
months ended December 31, 2017.
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 & Capital Calls
Sales and capital calls, net of redemptions and distributions, are key performance indicators 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 carried interest
and performance fee generation given that AUM is also the basis upon which carried interest and performance fees are calculated.
Net Fees
Management fees, carried interest and performance fees, net of trailer fees, sub-advisor fees, carried interest and performance fee
payouts, 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, arise from the transaction based service offerings of our Canadian and U.S broker-
dealers.
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 (recovery) for income taxes
Depreciation and amortization
EBITDA
Other adjustments:
(Gains) losses on proprietary investments
(Gains) losses on foreign exchange
Non-cash stock-based compensation
Net proceeds from Sale Transaction
Unamortized placement fees
Other expenses(1)
Adjusted EBITDA
Other adjustments:
Carried interest and performance fees
Carried interest and performance fee related expenses
Adjusted base EBITDA
3 months ended
12 months ended
Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2017
9,831
2,519
31,379
37,532
312
3,383
598
14,124
(3,912)
(2,026)
1,738
—
(279)
447
10,092
—
—
10,092
22
(1,234)
1,386
2,693
63
(340)
1,275
915
349
3,886
8,841
(3,584)
2,267
7,524
419
1,278
2,199
35,275
5,782
(2,310)
5,199
(4,200)
(1,093)
2,746
41,399
(1,802)
915
40,512
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
(1) See Other Expenses in Note 7 of the financial statements. In addition to the items outlined in Note 7, Other also includes severance accruals of $Nil for the
3 months ended (2017 - $2.2 million) and $0.5 million for the 12 months ended (2017 - $2.5 million).
6
BUSINESS OVERVIEW
Our reportable operating segments are as follows:
* These reportable operating segments substantially form our "Private Resource Investments" Platform. Previously, we separately disclosed the results of our Consulting segment.
Exchange Listed Products
•
The Company's closed-end physical trusts and exchange traded funds ("ETFs").
Alternative Asset Management
•
The Company's alternative investment strategies and sub-advised products.
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 limited partnership vehicles ("lending LPs"). Balance sheet lending
continues to wind-down as we grow the AUM in our suite of lending LPs.
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").
Corporate
• Provides the Company's various operating segments with capital, balance sheet management and other shared services.
All Other Segments
• Given its immateriality relative to the three quantitative tests of IFRS 8, effective Q1 2018, the Consulting segment no
longer met the definition of a reportable segment. Consequently, this segment is now included as part of "All Other
Segments" in Note 14 of the financial statements. Consulting is the only segment in this category as all other Company
segments are reportable.
For a detailed account of the underlying principal subsidiaries within our reportable business segments, refer to the Company's Annual Information Form and Note 2 of the financial
statements.
7
BUSINESS HIGHLIGHTS AND GROWTH INITIATIVES
Investment Performance
Market value appreciation was $929 million during the quarter, and on a full year basis was down $16 million. Strong precious
metals prices in the fourth quarter offset a significant amount of market value depreciation experienced earlier in the year.
Product and Business Line Expansion
• AUM in our lending LPs stood at $498 million (US$365 million) as of December 31, 2018. This was due to $246 million
(US$164 million) of new capital calls into our lending LPs (net of capital distributions) during the year. Subsequent to year-
end, total uncalled capital (i.e. committed but not yet called into our lending LPs) stood at $965 million (US$707 million).
The $625 million (US$449 million) increase from September 30, 2018 was primarily due to the December and January
closings of an additional $590 million (US$432 million) in capital commitments.
• On January 29, 2018, the Company completed the sale of its non-core private wealth client business (together with the
August 1, 2017 sale of its non-core Canadian diversified funds business, referred to as the "Sale Transaction").
• On January 16, 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 added $4.3 billion to Company AUM at the time. Upon
closing, the assets of CFCL were transfered to the Sprott Physical Gold & Silver Trust ("CEF").
Outlook
Exchange Listed Products
• We expect the strong finish to the price of gold in the year to carry forward to 2019, however, the benefit of higher gold
prices will be somewhat offset by starting 2019 with a lower AUM base given our 2018 redemption experience (15% of
acquired CFCL assets).
Lending
• We expect a relatively steady deployment of called capital (AUM growth) into our lending LPs in 2019, ranging from US
$200 million - US$400 million by end of that year. Over that same time period, we expect our legacy balance sheet loans
to continue running off at about the same pace it has historically. However, to the extent that loan repayments outpace
capital deployments, declines in 2019 interest income could outpace increases in 2019 management fees from our lending
LPs. We anticipate the balance sheet run-off to reach a conclusion by end of 2019.
Alternative Asset Management
• We anticipate earnings from this business to be relatively flat to slightly positive year-over-year.
Canadian & U.S. broker-dealer businesses
• We expect the pace of equity origination and placement fee activity to be similar in 2019 to what it was in 2018.
Corporate
• We expect to see a material decrease in corporate expenses in 2019, primarily due to: (1) lower LTIP amortization as the
graded vesting schedule of the 2017 grants reach the low points of the amortization schedule; and (2) slightly flat to lower
SG&A as we continue our cost containment efforts.
8
SUMMARY FINANCIAL INFORMATION
(In thousands $)
SUMMARY INCOME STATEMENT
Management fees
Carried interest and performance fees
less: Trailer fees
less: Sub-advisor fees
less: Carried interest and performance fee payouts
Net Fees
Commissions
less: Commission expense
Net Commissions
Interest income
Gains (losses) on proprietary investments
Gains (losses) on long-term investments
Other income (loss)
Total Net Revenues
Compensation (1)
Compensation - severance accruals
Placement and referral fees
Selling, general and administrative
Expected credit loss provisions (recoveries) (2)
Amortization and impairment charges
Other expenses
Total Expenses
Net Income (Loss)
Net Income (Loss) per share
Adjusted base EBITDA
Adjusted base EBITDA per share
SUMMARY BALANCE SHEET
Total Assets
Total Liabilities
Cash
less: syndicate cash holdings
Net cash
Q4
2018
Q3
2018
Q2
2018
Q1
2018
Q4
2017
Q3
2017
Q2
2017
Q1
2017
13,182
13,722
14,559
—
38
—
—
—
45
—
—
685
49
—
356
14,056
1,117
47
—
559
13,144
13,677
14,839
14,567
4,573
2,447
2,126
4,824
7,516
2,701
4,815
3,293
8,857
3,667
5,190
2,775
10,247
3,584
225
—
2,267
11,339
7,366
2,855
4,511
3,588
6,414
2,704
3,710
4,244
3,912
3,007
2,453
(4,765)
(3,050)
(1,879)
(63)
(3,770)
(151)
(275)
(72)
3,683
23,508
56
6,533
27,242
3,639
1,144
24,158
—
31,487
47,088
30,470
15,436
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
8,878
3,364
5,514
3,387
613
—
(2,648)
23,554
8,200
3,208
4,992
5,829
(1,969)
—
1,338
26,978
11,163
8,167
10,634
9,485
10,631
5,655
11,784
12,461
38
368
359
223
—
148
4,483
3,430
4,920
—
598
606
—
457
790
—
456
802
17,256
13,426
16,960
9,831
0.04
10,092
0.04
1,975
0.01
9,707
0.04
5,916
0.02
10,686
0.04
149
204
4,652
—
688
1,179
16,357
13,657
0.06
10,027
0.04
2,193
833
5,761
—
1,386
2,069
62
782
5,208
—
1,473
703
196
4,628
6,163
—
1,778
289
1
68
6,566
(4,942)
1,790
934
22,873
13,883
24,838
16,878
2,519
0.01
7,524
0.03
29,804
0.12
8,007
0.03
(3,606)
(0.01)
8,751
0.04
8,815
0.04
15,882
0.06
428,215
401,366
403,985
407,177
409,849
408,093
387,636
426,647
55,094
47,252
(10,421)
36,831
36,486
41,452
(967)
40,485
36,372
37,974
(796)
37,178
42,417
52,097
(932)
51,165
96,352
65,985
61,707
156,120
152,952
62,925
96,572
64,113
113,882
(776)
(649)
(477)
(3,838)
155,344
114,327
152,303
134,306
96,095
137,505
110,044
156,097
Proprietary and long-term investments
129,271
115,744
120,853
less: obligations related to securities sold short
(255)
—
(2,927)
(8,543)
(24,993)
(25,988)
(26,577)
(30,157)
Net investments
Loans receivable
Investable Capital
ASSETS UNDER MANAGEMENT
Exchange Listed Products
Alternative Asset Management
Private Resource Investments (3)
Total Enterprise AUM
129,016
115,744
117,926
36,021
36,532
40,208
87,809
50,467
89,334
48,673
108,318
110,928
125,940
46,215
67,804
73,336
201,868
192,761
195,312
189,441
293,351
306,836
274,827
309,320
8,164,136
7,560,651
8,530,082
9,014,378
4,634,068
4,539,751
4,591,479
4,758,403
799,942
868,003
1,009,007
1,054,745
1,115,114
1,177,214
3,323,611
3,529,068
1,614,348
1,637,458
1,586,953
1,522,090
1,574,200
1,474,547
1,391,367
1,404,955
10,578,426
10,066,112
11,126,042
11,591,213
7,323,382
7,191,512
9,306,457
9,692,426
(1) Compensation includes stock-based compensation, but excludes commission expense, carried interest and performance fee payouts, which are reported net of commission
revenue, carried interest and performance fees, respectively.
(2) Starting Q1, 2018, in order to comply with the new IFRS 9 accounting standard, an expected loss model was used. In the periods prior to Jan 1, 2018, an incurred loss
model was used as per IAS 39. See Changes in accounting policies in Note 2 of the annual financial statements.
(3) Primarily includes the AUM of our Consulting, Global and Lending segments.
9
RESULTS OF OPERATIONS
AUM SUMMARY
AUM was $10.6 billion as at December 31, 2018, up $0.5 billion (5%)
from September 30, 2018 and up $3.3 billion (44%) from December
31, 2017. The increase on a three months ended basis was primarily
due to higher precious metal prices in our physical trusts net of
redemptions. The increase on a full year basis was primarily due to the
successful acquisition of CFCL and higher capital calls activity (AUM) in
our lending LPs. These increases more than offset the redemption activity
in our physical trusts and sub-advised product offerings.
In millions $
12,000
10,000
8,000
6,000
4,000
2,000
7,323
1,574
1,115
4,634
10,066
1,637
868
7,561
10,578
1,614
800
8,164
Dec. 31, 2017
Exchange Listed Products
Sept. 30, 2018
Alternative Asset Management
Dec. 31, 2018
Private Resource Investments
3 months results
In millions $
Exchange Listed Products
- Physical Trusts
- ETFs
Alternative Asset Management
- In-house
- Sub-advised
Private Resource Investments
- Managed Companies
- Private Resource Lending LPs
- Fixed Term LPs
- Separately Managed Accounts
Total
AUM
Sept. 30, 2018
Net Sales
& Capital Calls
Market
Value Change
Distributions,
Acquisitions
& Divestitures
AUM
Dec. 31, 2018
7,320
241
7,561
376
492
868
595
493
270
279
1,637
10,066
(1)
(300)
(41)
(341)
—
(3)
(3)
—
35
—
—
35
(309)
907
37
944
(30)
16
(14)
11
27
(27)
(12)
(1)
929
—
—
—
(51)
—
(51)
(2)
—
(57)
—
—
(57)
(108)
7,927
237
8,164
295
505
800
606
498
243
267
1,614
10,578
(1) Total CFCL units acquired on January 16, 2018 were 252 million. For the 3 months ended December 31, 2018, 9 million units ($139 million or 4%) were redeemed.
(2) Distributions of principal receipts to clients of our lending LPs.
12 months results
In millions $
Exchange Listed Products
- Physical Trusts
- ETFs
Alternative Asset Management
- In-house
- Sub-advised
Private Resource Investments
- Managed Companies
- Private Resource Lending LPs
- Fixed Term LPs
- Separately Managed Accounts
Total
AUM
Dec. 31, 2017
Net Sales
& Capital Calls
Market
Value Change
Distributions,
Acquisitions
& Divestitures
AUM
Dec. 31, 2018
4,200
434
4,634
405
710
1,115
706
252
308
308
1,574
7,323
(1)
(883)
(131)
(1,014)
(10)
(92)
(102)
—
320
—
—
320
(796)
273
(66)
207
(49)
(113)
(162)
(2)
47
(65)
(41)
(61)
(16)
4,337
—
4,337
(51)
—
(51)
(2)
(98)
(121)
—
—
(219)
4,067
7,927
237
8,164
295
505
800
606
498
243
267
1,614
10,578
(1) Total CFCL units acquired on January 16, 2018 were 252 million. For the 12 months ended December 31, 2018, 37 million units ($616 million or 15%) were redeemed.
(2) Distributions of principal receipts to clients of our lending LPs.
10
MANAGEMENT FEES BREAKDOWN
Below is a detailed list of management fee rates on our fund products as at December 31, 2018 (in thousands $):
FUND
AUM
BLENDED NET
MANAGEMENT
FEE RATE
CARRIED INTEREST AND PERFORMANCE
FEE CRITERIA
Exchange Listed Products
Sprott Physical Gold and Silver Trust
Sprott Physical Gold Trust
Sprott Physical Silver Trust
Sprott Gold Miner's ETF
Sprott Physical Platinum & Palladium Trust
Sprott Jr. Gold Miner's ETF
Total
Alternative Asset Management: In-house
Sprott U.S. Value Strategies
Separately Managed Accounts (2)
Total
Alternative Asset Management: Sub-advised
Bullion Funds (3)
Corporate Class Funds (3)
Flow-through LPs (3)
Total
Private Resource Investments
Managed Companies (4)
Sprott Private Resource Lending LPs
Separately Managed Accounts (5)
Fixed Term Limited Partnerships
Total
Total AUM
3,830,912
2,763,268
1,194,220
179,440
138,562
57,734
8,164,136
248,570
45,970
294,540
311,261
106,789
87,352
505,402
605,598
498,231
267,068
243,451
1,614,348
10,578,426
0.40% N/A (1)
0.35% N/A (1)
0.45% N/A (1)
0.57% N/A (1)
0.50% N/A (1)
0.57% N/A (1)
0.40%
1.00% 15% of all net profits in excess of the HWM
1.00% N/A
1.00%
0.51% 10% excess over applicable benchmark indices
0.75% 10% excess over applicable benchmark indices
0.70% 20% of all net profits in excess of the HWM
0.59%
0.50% N/A
1.23% 15-70% of net profits over guaranteed return
0.61% 20% of net profits over guaranteed return
1.70% 15-30% over guaranteed return
0.92%
0.51%
(1) Exchange listed products do not attract performance fees, however the management fees they generate are closely correlated to precious metals prices.
(2) Institutional managed accounts.
(3) Management fee rate represents the net amount received by the Company as sub-advisor for these products.
(4) Includes Sprott Resource Holdings Inc. and Sprott Korea Corp.
(5) Includes our private equity strategy in Sprott Asia and high net worth discretionary managed accounts in the U.S.
11
KEY REVENUE LINES
Net Fees in the quarter were $13.1 million, up $1.8 million (16%) from the prior period and were $56.2 million on a full year
basis, down $2.0 million (3%). The increase on a three months ended basis was due to management fee generation on the newly
acquired CFCL assets in our Exchange Listed Products platform. We also experienced increased fee generation from our lending
LPs as we continue to deploy called capital as fee earning AUM. On a full year basis, excluding net fees that were earned last year
on the diversified assets sold as part of the Sale Transaction, Net Fees were up $14.9 million (36%). The increase on a normalized
basis was due to management fee generation on the newly acquired CFCL assets in our Exchange Listed Products platform. We
also experienced increased fee generation from our lending LPs as we continue to deploy called capital as fee earning AUM.
In thousands $
3 months results
In thousands $
12 months results
14,000
12,000
10,000
8,000
6,000
4,000
2,000
11,339
3,355
3,312
4,672
14,548
13,144
7,522
16,053
8,224
1,558
4,075
7,511
70,000
60,000
50,000
40,000
30,000
20,000
10,000
Q4 2017
Q4 2018
41,351(1)
8,224
14,548
18,579
YTD 2017
Exchange Listed Products
Private Resource Investments
Alternative Asset Management
56,227
7,522
16,053
32,652
YTD 2018
(1) Excludes fees generated from the non-core assets sold in August 2017.
Interest Income in the quarter was $4.2 million, up $0.7 million (18%) from the prior period and was $15.1 million on a full
year basis, down $0.5 million (3%). The increase on a three months ended basis was primarily due to increased co-investments in
our lending LPs. Excluding last year's impact of catch-up interest recorded on a previously impaired loan, interest income on a full
year basis was up $2.2 million (17%). The full year increase on a normalized basis was primarily due to the early settlement of
loans and income generation from our co-investments in lending LPs.
In million $
900
800
700
600
500
400
300
200
100
0
Successful transition from balance sheet loans to AUM
493
(1)
498
389
252
282
187
49
53
74
Q4
2016
Q1
2017
Q2
2017
Q3
2017
Q4
2017
Q1
2018
Q2
2018
Q3
2018
Q4
2018
Legacy on-balance sheet loans
AUM (Cumulative called capital and market value changes)
(1) $965 million (US$707 million) of committed capital remains uncalled (future AUM).
Net Commissions in the quarter were $3.7 million, down $0.8 million (18%) from the prior period and were $15.8 million on a
full year basis, down $2.4 million (13%). The decline was due to lower equity origination and placement activities in both our
Canadian and U.S broker-dealers.
12
KEY EXPENSE LINES
Compensation, excluding commissions, carried interest and performance fee payouts, which are presented net of their related
revenues in this MD&A, and severance accruals which are non-recurring, was $11.2 million, up $0.5 million (5%) from the prior
period and was $39.4 million on a full year basis, which was down $1.1 million (3%).The increase on a three months ended basis
was mainly due to year-end incentive accrual true-ups. The decrease on a full year basis was primarily due to lower head count as
a result of last year's Sale Transaction which more than offset the higher equity amortization.
In thousands $
3 months results
12 months results
2,922
3,444
10,631
1,070
6,639
11,163
5,118
2,601
6,692
4,734
40,531
12,358
39,449
22,274
29,105
4,817
Q4 2017
Q4 2018
YTD 2017
YTD 2018
Salaries
Annual Incentive Program ("AIP")
Long-term Incentive Program ("LTIP")
SG&A was $4.5 million in the quarter, down $1.3 million (22%) from the prior period and was $17.5 million on a full year basis,
down $6.2 million (26%). This was largely due to lower rent, marketing, sales, professional fees, technology and fund operating
expenses as a result of last year's Sale Transaction, and to a lesser extent, our on-going cost containment program.
ADDITIONAL REVENUE AND EXPENSE HIGHLIGHTS
Proprietary investments gains during the quarter and losses on a full year basis were due to market value movements of certain
resource equity holdings and bullion investments.
Gains on long-term investments were due to market value appreciation of our strategic long-term investments.
Other income was higher in the quarter and lower on a full year basis. The increase in the quarter was mainly from foreign
exchange gains on U.S dollar dominated cash, receivables and loans. The decrease on a full year basis was primarily due to net
sales proceeds received on last year's Sale Transaction in the prior period.
Placement and referral fees were lower in the quarter and on a full year basis due to less usage of placement agents in our
lending business.
Expected credit loss provisions ("ECL") were $Nil in the quarter, however on transition to IFRS 9 in the first quarter of this
year, a Stage 1 ECL provision of $50 thousand was charged to opening retained earnings (December 31, 2017 - $Nil).
Amortization of intangibles was lower due to finite life fund management contracts in our Global segment being fully amortized
in the first quarter of this year.
Amortization of property and equipment had a nominal increase on a three months ended basis and was flat on a full year
basis.
Other expenses were lower in the quarter and on a full year basis, due to lower costs related to our energy assets.
13
Adjusted Base EBITDA
3 months results
Adjusted base EBITDA in the quarter was $10.1 million, up $2.6 million (34%) from the prior period. The increase in earnings was
due to higher net fees generated on the newly acquired CFCL assets and newly called capital (AUM) and higher co-investment
income generated in our lending LPs. These increases were partially offset by lower fees earned on U.S. based fixed-term LPs and
lower net commissions due to lower equity origination and placement activities in both our Canadian and U.S broker-dealers.
In thousands $
15,000
12,500
10,000
7,500
5,000
2,500
-2,500
-5,000
5,675
2,376
376
471
1,304
375
1,434
1,094
3,014
3,300
10,092
7,524
Q4 2018
Q4 2017
840
1,020
Exchange Listed Products
Alternative Asset
Management
Global
Lending
Merchant Banking
& Advisory Services
Corporate
Total
(1)
12 months results
Adjusted base EBITDA on a full year basis was $40.5 million, up $0.3 million (1%). Excluding the impact of last year's Sale Transaction,
catch-up interest and loan loss reversal, adjusted base EBITDA was up $13.7 million (51%). The increase in earnings on a normalized
basis was due to higher net fees generated on the newly acquired CFCL assets and newly called capital (AUM) and higher co-
investment income generated in our lending LPs. These increases were partially offset by lower fees earned on U.S. based fixed-
term LPs and lower net commissions due to lower equity origination and placement activities in both our Canadian and U.S broker-
dealers.
In thousands $
In thousands $
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-5,000
-10,000
24,924
12,255
1,905 (2)
1,686
5,655
3,037
9,362 (2)
5,699
4,474
15,437
40,512
26,855 (2)
YTD 2018
YTD 2017
Exchange Listed Products
Alternative Asset
Management
Global
Lending
Merchant Banking
& Advisory Services
8,982
8,188
Corporate
Total
(1)
(1) Net of consolidation eliminations and non-reportable segments. See Note 14 of the annual financial statements.
(2) Excludes EBITDA generated in 2017 from: 1) non-core assets sold in our Alternative Asset Management segment; and 2) loan loss provision reversal and related catch-up interest in our
Lending segment.
14
Balance Sheet
Investable Capital was $202 million, down $91 million (31%)
from December 31, 2017. The decrease was primarily due to the
purchase of CFCL assets in January of this year.
In millions $
48
293
155
2017
36
37
202
129
2018
Cash
Net Investments
Loans
90
1
Total Assets were $428 million, up $18 million (4%) from
December 31, 2017. The slight increase was primarily due to
increased
intangible assets attributable to the CFCL
transaction, offset by the deployment of investable capital
previously described.
Total Liabilities were $55 million, down $11 million (17%)
from December 31, 2017. The decrease was largely due to
lower obligations related to securities sold short as we unwind
certain hedge positions in our proprietary investments.
Total Shareholder's Equity was $373 million, up $29
million (9%) from December 31, 2017. The increase was
primarily due to the issuance of share capital on purchase of
CFCL.
15
REPORTABLE OPERATING SEGMENTS
Exchange Listed Products
(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 before income taxes
Adjusted base EBITDA
Total AUM
3 and 12 months ended
3 months ended
12 months ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2018
Dec. 31, 2017
7,511
719
8,230
1,047
802
316
—
2,165
4,672
94
4,766
1,708
588
340
—
2,636
32,652
827
33,479
4,473
3,295
1,259
30
9,057
18,579
(595)
17,984
3,669
2,655
1,369
—
7,693
6,065
5,675
8,164,136
2,130
2,376
4,634,068
24,422
24,924
8,164,136
10,291
12,255
4,634,068
Adjusted base EBITDA in the quarter was $5.7 million, up $3.3 million from the prior period and $24.9 million on a full year basis, up $12.7
million:
•
The increase was primarily due to higher management fees generated on new AUM from the CFCL acquisition. This increase was
partially offset by higher compensation expense on a full year basis as a result of higher LTIP amortization.
Non-EBITDA highlights:
• Other income during the quarter and on a full year basis was mainly driven by FX movements on U.S dollar dominated cash and
receivables.
16
Alternative Asset Management
(In thousands $)
SUMMARY INCOME STATEMENT
Management fees
Carried interest and performance fees
less: Trailer fees
less: Sub-advisor fees
less: Carried interest and performance fee payouts
Net Fees
Gains (losses) on proprietary investments
Other income (loss)
Total Net 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 and 12 months ended
3 months ended
12 months ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2018
Dec. 31, 2017
1,596
—
38
—
—
1,558
—
359
1,917
955
641
72
—
1,668
249
471
2,078
3,584
40
—
2,267
3,355
(34)
(294)
3,027
1,585
1,810
37
9
3,441
(414)
376
7,199
1,061
179
—
559
7,522
5
878
8,405
4,530
1,949
275
11
6,765
1,640
1,686
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
40,135
7,614
799,942
1,115,114
799,942
1,115,114
Adjusted base EBITDA in the quarter was $0.5 million, up $0.1 million (25%) from the prior period and was $1.7 million on a full year basis,
down $5.9 million (78%). Excluding the impact of last year's Sale Transaction, adjusted base EBITDA was down $0.2 million (11%) on a full
year basis primarily due to fund redemptions and market value depreciation.
Non-EBITDA highlights:
• Other income increased during the quarter due to FX movements on U.S dollar dominated cash and receivables. However, Other income
was lower on a full year basis due to net sales proceeds received on last year's Sale Transaction.
17
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
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
Total AUM
3 months ended
12 months ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2018
Dec. 31, 2017
1,426
42
1,384
2,298
949
1,349
(565)
(172)
(144)
1,852
2,021
9
1,121
22
140
3,313
1,804
46
1,758
1,632
519
1,113
(242)
199
54
2,882
683
39
1,120
990
17
2,849
6,429
179
6,250
9,685
3,341
6,344
(730)
(434)
(400)
11,030
8,154
102
4,316
328
503
13,403
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
(1,461)
375
396,698
33
1,304
474,550
(2,373)
3,037
396,698
2,861
5,655
474,550
* This segment, along with our Lending segment substantially forms our "Private Resource Investments" platform.
(1) Compensation is presented excluding commission expense, which is reported net of commission revenue.
3 and 12 months ended
Adjusted base EBITDA in the quarter was $0.4 million, down $0.9 million (71%) from the prior period, and was $3.0 million on a full year basis,
down $2.6 million (46%):
• On a three months ended basis, lower EBITDA was due to lower net fee generation on lower AUM in fixed-term LP products.
• On a full year basis, lower EBITDA was due to lower net commissions on reduced private placement activity in the U.S. broker-dealer
portion of this segment, as well as lower net fee generation on lower AUM in fixed-term LPs as previously noted.
Non-EBITDA highlights:
•
Proprietary investment losses were due to market value depreciation on warrants and other equity kickers received in certain transactions
of our U.S. broker-dealer.
• Other losses were mainly driven by FX movements on Canadian dollar denominated cash and receivables.
• Compensation increased due to higher restricted stock unit ("RSU") issuance.
• Other expenses related primarily to non-recurring professional fees.
18
Lending*
(In thousands $)
SUMMARY INCOME STATEMENT
Management fees
Carried interest and performance fees
less: Carried interest and performance fee payouts
Net Fees
Interest income (1)
Gains (losses) on proprietary investments
Gains on long-term investments
Other income (loss)
Total Revenues
Compensation
Placement and referral fees
Selling, general and administrative
Expected credit loss provisions (recoveries)
Amortization and impairment charges
Other expenses
Total Expenses
Net Income before income taxes
Adjusted base EBITDA
Total AUM (2)
3 months ended
12 months ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2018
Dec. 31, 2017
1,420
—
—
1,420
3,619
3,488
27
1,666
10,220
1,291
49
595
—
37
—
1,972
622
—
—
622
3,079
(302)
491
511
4,401
2,855
617
324
—
2
—
3,798
4,929
685
356
5,258
13,884
1,871
43
6,290
27,346
5,173
157
1,522
—
78
30
6,960
1,323
—
—
1,323
13,860
(488)
491
(4,150)
11,036
4,947
5,888
1,003
(4,942)
6
—
6,902
8,248
3,300
498,231
603
3,014
252,151
20,386
15,437
498,231
4,134
16,962
252,151
* This segment, along with our Global segment, substantially forms 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) During the quarter, the Company's Lending segment AUM grew by $5 million (US$3 million) and on a full year basis by $246 million (US$164 million). This brings our total
Lending segment AUM to $498 million (US$365 million). $965 million (US$707 million) of committed capital remains uncalled (future AUM).
3 and 12 months ended
Adjusted base EBITDA in the quarter was $3.3 million, up $0.3 million (9%) from the prior period. The increase was primarily due to higher
management fees and co-investment income from our lending LPs.
On a full year basis, adjusted base EBITDA was $15.4 million, down $1.5 million (9%). Excluding the impact of last year's loan loss reversal and
catch-up interest, adjusted base EBITDA was up $6.1 million (65%). The increase in earnings on a normalized basis was primarily due to higher
management fees and co-investment income from our lending LPs. We also benefited from the acceleration of deferred interest income on the
early settlement of loans.
Non-EBITDA highlights:
• Carried interest net of related payouts was $Nil on a three months ended basis and $0.3 million on a full year basis as a result of
certain crystallization events in Q2 2018.
• Gains on proprietary investments were due to market value appreciation on equity kickers received on certain loan arrangements.
• Other income was mainly driven by FX movements on U.S dollar dominated cash, receivables and loans.
19
Merchant Banking and Advisory Services
(In thousands $)
SUMMARY INCOME STATEMENT
Commissions
less: Commission Expense
Net Commissions
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, 2018
Dec. 31, 2017
Dec. 31, 2018
Dec. 31, 2017
3,929
1,871
2,058
625
(256)
(171)
2,256
990
291
625
2
—
1,908
348
1,094
5,118
1,951
3,167
509
376
597
4,649
2,011
142
833
4
21
3,011
1,638
1,434
17,453
8,619
8,834
1,252
(939)
4,350
13,497
3,877
564
2,415
12
301
7,169
6,328
4,474
17,321
8,214
9,107
1,733
118
2,383
13,341
4,977
191
2,948
19
137
8,272
5,069
5,699
(1) Compensation is presented excluding commission expense, which is reported net of commission revenue.
3 and 12 months ended
Adjusted base EBITDA in the quarter was $1.1 million, down $0.3 million (24%) from the prior period, and was $4.5 million on a full year basis,
down $1.2 million (21%):
•
Lower compensation expense was more than offset by lower net commissions and lower trailer fee income on assets under
administration attributable to Sprott products as a result of the Sale Transaction.
• On a full year basis, results were also impacted by lower interest income.
Non-EBITDA highlights:
•
Losses on proprietary investments were the result of market value depreciation on equity kickers earned on private placement
transactions.
• Other income on a full year basis was primarily related to the net sale proceeds received on the Sale Transaction. See Note 7 of the
annual financial statements.
20
Corporate
This segment is primarily a cost centre that provides capital, balance sheet management and shared services to the Company's subsidiaries.
(In thousands $)
SUMMARY INCOME STATEMENT
Gains (losses) on proprietary investments
Gains (losses) on long-term investments
Other income (loss)
Total Revenues
Compensation
Selling, general and administrative
Amortization and impairment charges
Other expenses
Total Expenses
Net Income (Loss) before income taxes
Adjusted base EBITDA
3 and 12 months ended
3 months ended
12 months ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2018
Dec. 31, 2017
2,196
3,152
(149)
5,199
4,022
340
59
159
4,580
619
(1,020)
135
2,949
(303)
2,781
3,103
725
8
765
4,601
(1,820)
(840)
(897)
3,231
138
2,472
10,308
2,723
142
1,355
14,528
(12,056)
(8,982)
(6,473)
2,949
(2,244)
(5,768)
8,409
3,308
51
1,183
12,951
(18,719)
(8,188)
•
Proprietary investments gains during the quarter and losses on a full year basis were due to market value movements of certain
resource equity holdings and bullion investments.
•
Long-term investment gains were due to market value appreciation of our strategic long-term investments.
• Other loss during the quarter and other income on a year-to-date basis was mainly driven by FX movements on U.S dollar dominated
cash and receivables.
• Higher compensation expense was largely a result of higher LTIP amortization.
•
Lower SG&A was largely due to our on-going cost containment program.
• Other expenses related primarily to non-recurring professional fees.
21
Dividends
The following dividends were declared by the Company during the 12 months ended December 31, 2018:
Record date
Payment Date
Cash dividend per share ($)
Total dividend amount
(in thousands $)
March 12, 2018 - Regular Dividend Q4 - 2017
May 21, 2018 - Regular Dividend Q1 - 2018
August 20, 2018 - Regular Dividend Q2 - 2018
November 19, 2018 - Regular Dividend Q3 - 2018
Dividends (1)
March 27, 2018
June 5, 2018
September 4, 2018
December 4, 2018
0.03
0.03
0.03
0.03
7,553
7,553
7,566
7,586
30,258
(1) Subsequent to the year-end, on February 27, 2019, a regular dividend of $0.03 per common share was declared for the quarter ended December 31,
2018. This dividend is payable on March 25, 2019 to shareholders of record at the close of business on March 8, 2019.
Capital Stock
Including the 9.9 million unvested common shares currently held in the EPSP Trust (December 31, 2017 - 10.4 million), total capital
stock issued and outstanding was 253.0 million (December 31, 2017 - 244.5 million). The increase from December 31, 2017 was
primarily due to the issuance of shares as part of the purchase of CFCL on January 16, 2018.
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 was $0.04 and $0.13 for the three and twelve months ended respectively
compared to $0.01 and $0.16 in the respective prior periods. Diluted earnings per share was $0.04 and $0.12 for the three and
twelve months ended respectively compared to $0.01 and $0.15 in the respective prior periods. Diluted earnings per share reflects
the dilutive effect of in-the-money stock options, unvested shares held in the EPSP Trust and outstanding restricted stock units.
A total of 3.3 million stock options are outstanding pursuant to our stock option plan, of which 1.9 million are exercisable.
Liquidity and Capital Resources
Management fees and interest income can be projected and forecasted with a higher degree of certainty than commission income,
carried interest and performance fees, 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.
As at December 31 2018, the Company had a $90 million undrawn credit facility with a major Canadian schedule I 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.
Sprott Private Wealth LP ("SPW") and Sprott Asset Management ("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 ("SEC").
Commitments
Besides the Company's long-term lease agreements, there may be commitments to provide loans or make co-investments in lending
LPs arising from our Lending segment or commitments to make investments in the net investments portfolio of the Company. As
at December 31, 2018, the Company had no direct on-balance sheet loan commitments (December 31, 2017 - $9.9 million) and
$38.7 million in co-investment commitments from the Lending segment (December 31, 2017 - $7.8 million).
22
Significant Accounting Judgments, Estimates and Changes in Accounting Policies
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.
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.
Loan loss provisions
Due to the nature of provisions, a considerable part of their determination is based on estimates and judgments, including assumptions
concerning the likelihood of future events occurring. The actual outcome of these uncertain events may be materially different from
the initial provision in the Company's financial statements. Management exercises judgment to determine the expected credit loss,
the probability of default and loss given default.
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.
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: (1) the extent of the Company's direct and indirect interests in the
investee; (2) the level of compensation to be received from the investee for management and other services provided to it; (3) "kick
out rights" available to other investors in the investee; and (4) other indicators of the extent of power that the Company has over
the investee.
23
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.
Change in accounting policies
In Q1, 2018 the Company adopted IFRS 9 Financial Instruments (“IFRS 9”) and IFRS 15 Revenue from Contracts with Customers
(“IFRS 15”). As a result, the Company changed its accounting policies. As permitted by the transition provision of both IFRS 9 and
IFRS 15, the Company elected not to restate comparative period results. Accordingly, all comparative period information is presented
in accordance with previous accounting policies.
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 on and off-balance sheet assets and liabilities
will result in changes in carrying value or recoverable amounts. The Company's revenues are also exposed to price risk since
management fees, carried interests and performance fees 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.
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. Management takes into account a number of factors and is committed to several processes
to ensure that this risk is appropriately managed.
Foreign currency risk
Foreign currency risk arises from foreign exchange rate movements that could negatively impact either the carrying value of
financial assets and liabilities or the related cash flows when translating those balances into Canadian dollars. The Company's
primary foreign currency is the United States Dollar ("USD"). The Company may employ certain hedging strategies to mitigate
foreign currency risk.
Credit risk
Credit risk is the risk that a borrower will not honor its commitments and a loss to the Company may result. Credit risk generally
arises in the Company's on balance sheet loans, co-investments in lending LPs and its net investments portfolio.
Loans receivable
The Company incurs credit risk primarily in the on-balance sheet loans of Sprott Resource Lending Corporation ("SRLC") and
through co-investments made in the lending LPs managed by SRLC. In addition to the relative default probability of SRLC borrowers
(both directly via on balance sheet loans and indirectly via borrowers of the lending LPs we co-invest with), 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 and co-investments 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 loan. Additionally, the value of the Company's underlying security in a loan 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 loan origination process, management takes into
account a number of factors and is committed to several processes to ensure that this risk is appropriately managed.
24
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 expected credit loss provisions 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. Management takes into account a number
of factors and is committed to several processes to ensure that this risk is appropriately managed.
Net investments
The Company incurs credit risk when entering into, settling and financing transactions with counterparties. Management takes
into account a number of factors and is committed to several processes to ensure that this risk is appropriately managed.
Other
The majority of accounts receivable relate to management fees, carried interest 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 $90 million committed line of credit with a major Canadian Schedule I chartered bank.
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 (both directly via on balance sheet loans and indirectly via borrowers of the lending LPs
we co-invest with). The Company manages its loan commitment liquidity risk through the ongoing monitoring of scheduled loan
fundings and repayments ("match funding") and through its broader treasury risk management program and enterprise capital
budgeting.
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 the line of credit; liquidating net investments;
and/or issuing common shares.
Concentration risk
A significant portion of the Company's AUM as well as its net investments and loans are focused on the natural resource sector,
and in particular, precious metals related investments and transactions. In addition, from time-to-time, certain net investment and
loan positions may be concentrated to a material degree in a single position or group of positions. Management takes into account
a number of factors and is committed to several processes to ensure that this risk is appropriately managed.
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 of
December 31, 2018, 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.
25
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").
Additional information relating to the Company, including the Company's Annual Information Form is available on SEDAR at www.sedar.com
26
Consolidated Financial Statements
Year ended December 31, 2018
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, 2018. 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
February 27, 2019
Kevin Hibbert, CPA, CA
Chief Financial Officer and Senior Managing Director
28
KPMG LLP
Chartered Professional Accountants
Bay Adelaide Centre
Suite 4600
333 Bay Street
Toronto, ON M5H 2S5
Telephone (416) 777-8500
Fax (416) 777-8818
www.kpmg.ca
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Sprott Inc.
Opinion
We have audited the consolidated financial statements of Sprott Inc. (the "Company"), which
comprise:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the consolidated balance sheets as at December 31, 2018 and 2017;
the consolidated statements of operations and comprehensive income for the years then ended;
the consolidated statements of changes in shareholders’ equity for the years then ended;
the consolidated statements of cash flows for the years then ended;
(cid:120) and notes to the consolidated financial statements, including a summary of significant accounting
policies.
(hereinafter referred to as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated financial position of the Company as at December 31, 2018 and 2017, and its
consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the "Auditors’ Responsibilities for the
Audit of the Financial Statements" section of our auditors’ report.
We are independent of the Company in accordance with the ethical requirements that are relevant
to our audit of the financial statements in Canada and we have fulfilled our other responsibilities in
accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
("KPMG International"), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
29
Page 2
Information Other than the Financial Statements and Auditor’s Report Thereon
Management is responsible for the other information. Other information comprises:
(cid:120)
(cid:120)
the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon,
included in a document likely to be entitled "Annual Report 2018".
Our opinion on the financial statements does not cover the other information and we do not and will
not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for
indications that the other information appears to be materially misstated.
We obtained the information, other than the financial statements and the auditors’ report thereon,
included in Management’s Discussion and Analysis filed with the relevant Canadian Securities
Commissions and the "Annual Report 2018" as at the date of this auditor’s report.
If, based on the work we have performed on this other information, we conclude that there is a
material misstatement of this other information, we are required to report that fact in the auditors’
report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s
ability to continue as a going concern, disclosing as applicable, matters related to going concern and
using the going concern basis of accounting unless management either intends to liquidate the
Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company‘s financial reporting
process.
30
Page 3
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are/is free from material misstatement, whether due to fraud or error, and to issue an auditors’ report
that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted
in accordance with Canadian generally accepted auditing standards will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken
on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit.
We also:
(cid:120)
identify and assess the risks of material misstatement of the financial statements, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override
of internal control;
(cid:120) obtain an understanding of internal control relevant to the audit 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 Company's internal control;
(cid:120) evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management;
(cid:120) conclude on the appropriateness of management's use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the Company's ability to continue as a
going concern. If we conclude that a material uncertainty exists, we are required to draw attention
in our auditors’ report to the related disclosures in the financial statements or, if such disclosures
are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditors’ report. However, future events or conditions may cause the
Company to cease to continue as a going concern;
31
Page 4
(cid:120) evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represents the underlying transactions and
events in a manner that achieves fair presentation;
(cid:120) communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit;
(cid:120) provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where
applicable, related safeguards; and
(cid:120) obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the group Entity to express an opinion on the financial statements. We
are responsible for the direction, supervision and performance of the group audit. We remain
solely responsible for our audit opinion;
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is James Loewen.
February 27, 2019
Toronto, Canada
32
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 4)
(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
"Sharon Ranson"
Director
Dec. 31
2018
Dec. 31
2017
47,252
8,635
15,275
26,711
10,774
2,379
111,026
20,746
102,560
1,214
12,334
148,324
26,115
5,896
317,189
428,215
36,141
9,466
255
5,500
607
51,969
3,125
55,094
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
412,938
43,383
(117,201)
34,001
373,121
428,215
392,556
39,907
(118,272)
29,673
343,864
409,849
33
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of Canadian dollars, except for per share amounts)
Revenues
Management fees
Carried interest and performance fees
Commissions
Interest income
Loss on proprietary investments
Gains on long-term investments
Other income
Total revenue
Expenses
Compensation
Stock-based compensation
Trailer fees
Sub-advisor fees
Placement and referral fees
Expected credit loss provisions (recoveries)
Selling, general and administrative
Amortization of intangibles
Amortization of property and equipment
Other expenses
Total expenses
Income before income taxes for the period
Provision for income taxes
Net income for the period
Basic earnings per share
Diluted earnings per share
Net income for the period
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Foreign currency translation gain (loss) on foreign operations (taxes of $Nil)
Total other comprehensive income (loss)
Comprehensive income
The accompanying notes form part of the financial statements
For the years ended
Dec. 31
2018
Dec. 31
2017
55,519
1,802
27,360
15,136
(5,782)
2,840
12,394
109,269
40,072
12,358
179
—
943
—
17,485
1,431
768
3,376
76,612
32,657
1,278
31,379
(Note 3)
(Note 3)
(Note 7)
(Note 8)
(Note 6)
(Note 5)
(Note 4)
(Note 7)
(Note 9)
(Note 8)
(Note 8)
$
$
0.13 $
0.12 $
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
0.16
0.15
31,379
37,532
4,328
4,328
(3,872)
(3,872)
35,707
33,660
34
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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 on proprietary investments
Gains on Long-term investments
Stock-based compensation
Amortization of property, equipment and intangible assets
Sale of property, equipment and intangible assets
Expected credit loss provision (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
Note payable repayment
Dividends paid
Cash used in financing activities
Effect of foreign exchange on cash balances
Net increase (decrease) in cash and cash equivalents during the year
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the 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
2018
Dec. 31
2017
31,379
37,532
5,782
(2,840)
12,358
2,199
—
—
1,022
256
(435)
(3,852)
5,141
12,652
19,128
12,621
95,411
(79,267)
37,077
(7,805)
—
(115,719)
(165,714)
(7,161)
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(4,400)
(29,243)
(40,804)
2,239
(108,868)
156,120
47,252
41,999
5,253
47,252
8,689
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
5,442
36
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
1 CORPORATE INFORMATION
Sprott Inc. (the "Company") was incorporated under the Business Corporations Act (Ontario) on February 13, 2008. Its registered
office is at Royal Bank Plaza, South Tower, 200 Bay Street, Suite 2600, Toronto, Ontario M5J 2J1.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance
These annual audited consolidated financial statements for the years ended December 31, 2018 and 2017 ("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 February 27, 2019 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 fair value through profit or loss ("FVTPL") or fair value through other comprehensive income
("FVOCI"), both 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: (1) Rule Investments Inc. ("RII") (2) Sprott Global Resource Investments Ltd.
("SGRIL"); (3) Sprott Asset Management USA Inc. ("SAM US"); and (4) Resource Capital Investment Corporation ("RCIC").
Collectively, the interests of SUSHI are referred to as "Global" in these financial statements;
• Sprott Resource Lending Corp. ("SRLC");
• Sprott Genpar Ltd.; and
• Sprott Inc. 2011 Employee Profit Sharing Plan Trust (the "Trust")
37
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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
Long-term investments are investments held for strategic purposes rather than for short-term liquidity and capital management
purposes. 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.
Financial Instruments
Changes in accounting policies
In the first quarter of the current year, the Company adopted IFRS 9 Financial Instruments (“IFRS 9”). As a result, the Company
changed its accounting policies in the areas outlined below. As permitted by the transition provisions of IFRS 9, the Company
elected not to restate comparative period results. Accordingly, any adjustments to the carrying amounts of financial assets and
liabilities at the date of transition were recognized in the opening retained earnings of the current period. See "Expected credit
losses" section of Note 6 for further details.
Classification and measurement of Financial Assets
Under IFRS 9, financial assets are measured at initial recognition at fair value, and are classified and subsequently measured at
FVTPL, amortized cost or FVOCI.
Financial assets are measured at amortized cost if the contractual terms of the instrument give rise to cash flows that are solely
payments of principal and interest on the principal amount outstanding and it is held within a business model whose objective
is to hold assets to collect contractual cash flows.
Financial assets are measured at FVOCI if the contractual terms of the instrument give rise to cash flows that are solely for
payments of principal and interest on the principal amount outstanding and it is held within a business model whose objective
is to hold assets to collect contractual cash flow and to sell financial assets. For equity instruments that are not held for trading,
the Company may also elect to irrevocably elect, on an investment by investment basis, to present changes in the fair value of
an investment through OCI.
All financial assets that are not measured at amortized cost or FVOCI are measured at FVTPL. This includes all derivative financial
assets the Company may hold.
The adoption of IFRS 9 required the following reclassifications of financial assets and liabilities:
Cash and Cash equivalents
Fees Receivable and Loans receivable
Proprietary investments:
- Public equities
- Co-investments in funds
- Private Holdings
Accounts payable and accrued liabilities
IFRS 9
Amortized Cost
Amortized Cost
IAS 39
Held for Trading
Loans and Receivable
FVTPL
FVTPL
FVTPL
Other Financial Liabilities
Held for Trading
Held for Trading
Held for Trading
Other Financial Liabilities
38
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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 private company investments which are
classified as FVTPL 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.
Fair value hierarchy
All financial instruments recognized at fair value in the consolidated balance sheets are classified into three fair value hierarchy
levels as follows:
• Level 1: valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities;
• Level 2: valuation techniques based on inputs that are quoted prices of similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; inputs other than quoted prices used in a valuation
model that are observable for that instrument; and inputs that are derived from or corroborated by observable market
data by correlation or other means; and
• Level 3: valuation techniques with significant unobservable market inputs.
The Company will transfer financial instruments into or out of levels in the fair value hierarchy to the extent the instrument no
longer satisfies the criteria for inclusion in the category in question. Level 3 valuations are prepared by the Company and reviewed
and approved by management at each reporting date. Valuation results, including the appropriateness of model inputs, are
compared to actual market transactions to the extent readily available. Valuations of level 3 assets are also discussed with the
Audit Committee as deemed necessary by the Company.
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.
Impairment of financial assets
Expected credit losses are a probability-weighted estimate of future credit losses. Credit losses are measured as the present value
of the difference between the cash flows due to the Company in accordance with the contract and the cash flows the Company
expects to receive.
At each reporting date, management assesses the probability of default and the loss given default using economic and market
trends, quoted credit rating of the borrower, market value of the asset, and appraisals, if any, of the security underlying the loan.
The impairment is then classified into three stages:
39
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
• Stage 1 - For Loans where credit risk has not increased significantly, an impairment is recognized equal to the credit losses
expected to result from defaults occurring over the following twelve months.
• Stage 2 - For Loans where credit risk has increased significantly, an impairment is recognized equal to the credit losses
expected to result from defaults occurring over the life of the loan.
• Stage 3 - For Loans which are credit impaired, a loss allowance is recognized equal to the expected lifetime of the Loan.
Any subsequent recognition of interest income for which an expected credit loss provision exists, is calculated at the
discount rate used in determining the provision, which may differ from the contractual rate of interest.
Loans receivable
Loans receivable are financial assets with fixed or determinable payments that are held solely for payments of principal and
interest on the principal amount outstanding and are held within a business model whose objective is to hold assets to collect
contractual cash flows. Loans receivable are measured at amortized cost.
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.
Recognition of income and related expenses
Changes in accounting policy
In the first quarter of the current year, the Company adopted IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). As
a result, the Company changed its accounting policies in the areas outlined below. As permitted by the transition provisions of
IFRS 15, the Company elected not to restate comparative period results. Accordingly, any adjustments to the carrying amounts
of financial assets and liabilities at the date of transition were recognized in the opening retained earnings of the current period.
There was no material transitional impact on conversion to IFRS 15.
Recognition of income and related expenses
The Company receives variable consideration in the form of management fees, which are allocated to distinct time periods in
which the management services are being provided. Management fees are recognized when they are no longer susceptible to
market factors and no longer subject to a significant reversal in revenue.
The Company may also earn variable consideration in the form of carried interest and performance fees. These fees are recognized
when they are no longer susceptible to market factors or subject to significant reversal in revenue, which is determined subject
to agreements in the underlying funds.
Commission income is recognized when the related services are rendered and no longer subject to a significant reversal in revenue.
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.
Costs related to obtaining a contract with clients ("placement fees") are amortized on a systematic basis related to the transfer
of services to those clients.
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. Any loss resulting from impairment of
property and equipment is expensed in the period the impairment is identified.
40
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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 method for an intangible asset with a finite useful life is reviewed at each reporting date. Changes in
the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for
by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization
expense and any impairment losses on intangible assets with finite lives are recognized in the consolidated statements of operations.
Intangible assets with indefinite useful lives are not amortized, but are assessed for impairment indicators at each reporting date,
or more frequently if changes in circumstances indicate that the carrying value may be impaired. In addition to impairment indicator
assessments, indefinite life intangibles must be tested annually for impairment. The indefinite life of an intangible asset is reviewed
annually to determine whether the indefinite life continues to be supportable. If no longer supportable, changes in useful life from
indefinite to finite are made prospectively.
Any loss resulting from impairment of intangible assets is expensed in the period the impairment is identified. Any gain resulting
from an impairment reversal of intangible assets is recognized in the period the impairment reversal is identified but cannot exceed
the carrying amount that would have been determined (net of amortization and impairment) had no impairment loss been recognized
for the intangible asset in prior periods.
Business combinations and goodwill
The purchase price of an acquisition accounted for under the acquisition method is allocated based on the fair values of the net
identifiable assets acquired. The excess of the purchase price over the fair values of such identifiable net assets is recorded as goodwill.
Goodwill, which is measured at cost less any accumulated impairment losses, is not amortized, but rather, is assessed for impairment
indicators at each reporting date, or more frequently if changes in circumstances indicate that the carrying value may be impaired.
In addition to quarterly impairment indicator assessments, goodwill must be tested annually for impairment. For the purpose of
impairment testing, goodwill is allocated to each of the Company's cash generating units ("CGUs") that are expected to benefit
from the acquisition. The recoverable amount of a CGU is compared to its carrying value plus any goodwill allocated to the CGU. If
the recoverable amount of a CGU is less than its carrying value plus allocated goodwill, an impairment charge is recognized, first
against the carrying value of the goodwill, with any remaining difference being applied against the carrying value of assets contained
in the impacted CGUs. Impairment losses on goodwill are recorded in the consolidated statements of operations and cannot be
subsequently reversed.
Income taxes
Income tax is comprised of current and deferred tax.
Income tax is recognized in the consolidated statements of operations except to the extent that it relates to items recognized directly
in other comprehensive income or elsewhere in equity, in which case, the related taxes are also recognized in the consolidated
statements of comprehensive income (loss) or elsewhere in equity.
Deferred taxes are recognized using the liability method for temporary differences that exist between the carrying amounts of assets
and liabilities in the consolidated balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred
tax assets and liabilities are determined based on the enacted or substantively enacted tax rates that are expected to apply when
the differences related to the assets or liabilities reported for tax purposes are expected to reverse in the future. Deferred tax assets
are recognized only when it is probable that sufficient taxable profits will be available or taxable temporary differences reversing in
future periods against which deductible temporary differences may be utilized.
41
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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 related to the Company's
Employee Profit Sharing Plan is determined based on the value of the Company's common shares purchased by the Trust as of the
grant date. Compensation expense is recognized over the vesting period with a corresponding increase to contributed surplus other
than for the Company's DSUs where the corresponding increase is to liabilities. Stock options and common shares held by the Trust
vest in installments which require a graded vesting methodology to account for these share-based awards. On the exercise of stock
options for shares, the contributed surplus previously recorded with respect to the exercised options and the consideration paid is
credited to capital stock. On the issuance of the earn-out shares, the contributed surplus previously recorded with respect to the
issued earn-out shares is credited to capital stock. On the vesting of common shares in the Trust, the contributed surplus previously
recorded is credited to capital stock. On the exercise of DSUs, the liability previously recorded is credited to cash.
Earnings per share
Basic and diluted earnings per share are computed by dividing net income by the weighted average number of common shares
outstanding during the period.
The Company applies the treasury stock method to determine the dilutive impact, if any, of stock options and unvested shares
purchased for the Trust. The treasury stock method determines the number of incremental common shares by assuming that the
number of dilutive securities the Company has granted to employees have been issued.
Foreign currency translation
Accounts in the financial statements of the Company's subsidiaries are measured using their functional currency, being the currency
of the primary economic environment in which the entity operates. The Company's performance is evaluated and its liquidity is
managed in Canadian dollars. Therefore, the Canadian dollar is the functional currency of the Company. The Canadian dollar is also
the functional currency of all its subsidiaries, with the exception of Global Companies, which uses the U.S. dollar as its functional
currency. Accordingly, the assets and liabilities of Global Companies are translated into Canadian dollars using the rate in effect on
the date of the consolidated balance sheets. Revenue and expenses are translated at the average rate over the reporting period.
Foreign currency translation gains and losses arising from the Company's translation of its net investment in Global Companies,
including goodwill and the identified intangible assets, are included in accumulated other comprehensive income or loss as a separate
component within shareholders' equity until there has been a realized reduction in the value of the underlying investment.
42
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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.
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.
Loan loss provisions
Due to the nature of provisions, a considerable part of their determination is based on estimates and judgments, including
assumptions concerning the likelihood of future events occurring. The actual outcome of these uncertain events may be materially
different from provisions recorded on the Company's financial statements. With regard to loan impairments, management exercises
judgment to determine the expected credit loss, the probability of default and loss given default.
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.
43
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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: (1) the extent of the Company's direct and indirect interests
in the investee; (2) the level of compensation to be received from the investee for management and other services provided to
it; (3) "kick out rights" available to other investors in the investee; and (4) other indicators of the extent of power that the
Company has over the investee.
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.
Future Accounting Standards
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.
IFRIC 23, Uncertainty over Income Tax Treatements ("IFRIC 23")
IFRIC 23 was issued by IASB in June 27 and is effective for annual periods beginning on or after January 1, 2019. IFRIC 23 clarifies
the accounting treatment for income tax items that have yet to be accepted by tax authorities in order to enhance transparency.
IFRIC 23 does not introduce new disclosures but reinforces the need to comply with existing requirements about judgments
made, the assumptions used and other estimates, along with the potential impact of uncertainties.
Based on current estimates, the adoption of IFRIC 23 is not expected to have a material impact to our consolidated financial
statements.
44
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
3 PROPRIETARY INVESTMENTS, OBLIGATIONS RELATED TO SECURITIES SOLD SHORT
AND LONG-TERM INVESTMENTS
Proprietary investments and Obligations related to securities sold short
Consist of the following (in thousands $):
Public equities and share purchase warrants
Fixed income securities
Private holdings:
- Private investments
- Energy contracts
Total proprietary investments
Classification and
measurement criteria
Dec. 31, 2018
Dec. 31, 2017
FVTPL
FVTPL
FVTPL
Non-financial instrument
19,066
2,796
2,830
2,019
26,711
55,578
249
4,269
4,468
64,564
Obligations related to securities sold short
FVTPL
255
24,993
Long-term investments
Consists of the following (in thousands $):
Public equities and share purchase warrants
Co-investments in funds
Private holdings
- Private investments
Total long-term investments
Classification and
measurement criteria
Dec. 31, 2018
Dec. 31, 2017
FVTPL
FVTPL
FVTPL
—
72,739
29,821
102,560
1,639
35,972
12,152
49,763
Realized gains and losses on financial assets classified at FVTPL are included in the gains (loss) on proprietary investments and
Long-term investments on the consolidated statements of operations.
45
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
4 PROPERTY AND EQUIPMENT
Consist of the following (in thousands $):
Cost
At December 31, 2016
Disposal on Sale Transaction
Additions
Net exchange differences
At December 31, 2017
Additions
Disposals
Net exchange differences
At December 31, 2018
Accumulated amortization
At December 31, 2016
Disposal on Sale Transaction
Charge for the year
Net exchange differences
At December 31, 2017
Charge for the year
Disposals
Net exchange differences
At December 31, 2018
Net book value at:
December 31, 2017
December 31, 2018
Artwork
Furniture and
fixtures
Computer
hardware and
software
Leasehold
improvements
Total
2,622
—
374
—
2,996
6,605
—
—
9,601
—
—
—
—
—
—
—
—
2,996
9,601
3,255
(82)
10
(35)
3,148
2
(28)
44
3,166
(3,084)
30
(60)
37
(3,077)
(27)
28
(44)
(3,120)
71
46
2,652
(462)
465
(36)
2,619
946
(54)
53
3,564
(2,417)
86
(266)
33
(2,564)
(297)
44
(46)
(2,863)
55
701
8,479
(4,532)
11
(19)
3,939
252
(28)
34
4,197
(5,196)
3,925
(501)
10
(1,762)
(444)
18
(23)
(2,211)
17,008
(5,076)
860
(90)
12,702
7,805
(110)
131
20,528
(10,697)
4,041
(827)
80
(7,403)
(768)
90
(113)
(8,194)
2,177
1,986
5,299
12,334
46
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
5
GOODWILL AND INTANGIBLE ASSETS
Consist of the following (in thousands $):
Cost
At December 31, 2016
Net additions and (disposals)
Net exchange differences
At December 31, 2017
Net additions and (disposals)
Net exchange differences
At December 31, 2018
Accumulated amortization
At December 31, 2016
Amortization charge for the year
Disposals in the year
Net exchange differences
At December 31, 2017
Amortization charge for the year
Net exchange differences
At December 31, 2018
Net book value at:
December 31, 2017
December 31, 2018
Fund
management
contracts -
indefinite life
Fund
management
contracts -
finite life
Goodwill
Deferred sales
commissions
Total
177,749
—
(10,867)
166,882
—
13,482
180,364
(152,039)
—
—
9,180
(142,859)
—
(11,390)
(154,249)
—
—
—
—
133,303
—
133,303
—
—
—
—
—
—
—
—
49,371
—
(1,955)
47,416
—
—
47,416
(27,794)
(4,980)
—
1,810
(30,964)
(1,431)
—
(32,395)
10,171
(10,171)
237,291
(10,171)
— (12,822)
— 214,298
— 133,303
—
13,482
— 361,083
(188,522)
(8,689)
(5,600)
(620)
9,309
9,309
—
10,990
— (173,823)
(1,431)
—
— (11,390)
— (186,644)
24,023
26,115
—
133,303
16,452
15,021
—
40,475
— 174,439
47
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
Impairment assessment of goodwill
The Company identified seven cash generating units ("CGUs") for goodwill impairment and testing purposes: Exchange
Listed Products, Alternative Asset Management, Global, Lending, Consulting, Merchant Banking & Advisory and Corporate.
As at December 31, 2018, the Company had allocated $26.1 million (December 31, 2017 - $24.0 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 was no impairment in either the Exchange Listed Products CGU
or the Alternative Asset Management CGU.
Impairment assessment of indefinite life fund management contracts
As at December 31, 2018, the Company had an exchange listed fund management contract within the Exchange Listed
Products CGU of $133.3 million related to the purchase of the Central Fund of Canada in the first quarter of the current
year. There was no impairment as at December 31, 2018.
Impairment assessment of finite life fund management contracts
As at December 31, 2018, the Company had no fixed-term limited partnerships within the Global CGU (December 31, 2017
- $0.4 million) and exchange listed funds within the Exchange Listed Products CGU of $15.0 million (December 31, 2017
- $16.1 million). There was no impairment as at December 31, 2018.
48
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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 expected
credit loss loss provisions on the expected credit 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
Loan loss provisions
Less: current portion
Total carrying value of non-current loans receivable
Expected credit losses ("ECL")
Dec. 31, 2018
Dec. 31, 2017
37,873
14
(1,816)
36,071
(50)
(15,275)
20,746
53,272
252
(4,851)
48,673
—
(17,218)
31,455
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.
On transition to IFRS 9, a Stage 1 ECL provision of $50 thousand (December 31, 2017 - $Nil) was recorded through opening
retained earnings under the transitional provision of IFRS 9. As at December 31, 2018, the Company performed a
comprehensive review of each loan measured at amortized cost in its portfolio to determine the requirement for an ECL
provision. There were no credit events in the year.
Interest income on impaired loans and the changes in expected credit loss provisions are as follows (in thousands $):
For the years ended
Interest on impaired loans
Expected credit loss provisions
Balance, beginning of the year
Transition adjustment
Revised balance, beginning of the year
Expected credit loss provision (recovery)
Net exchange differences
Balance, end of period
Dec. 31, 2018
—
—
50
50
—
—
50
(1) With the transition to IFRS 9, an expected loss model was used. In the prior period, an incurred loss model was used. See Changes in Accounting Policy in Note 2.
Dec. 31, 2017 (1)
—
4,993
—
4,993
(4,942)
(51)
—
49
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
Sector distribution of loan principal
Distribution of Company outstanding loan principal balances by sector:
Loans
Metals and mining
Energy and other
Total loan principal
Dec. 31, 2018
Dec. 31, 2017
Number of Loans
(in thousands $)
Number of Loans
(in thousands $)
1
2
3
34,931
2,942
37,873
3
4
7
41,961
11,311
53,272
Geographic distribution of loan principal
Distribution of Company outstanding loan principal balances by geographic location of the underlying security:
Canada
United States of America
Peru
South Africa
Total loan principal
Dec. 31, 2018
Dec. 31, 2017
Number of Loans
1
2
—
—
3
(in thousands $)
1,578
36,295
—
—
37,873
Number of Loans
2
3
1
1
7
(in thousands $)
8,578
31,310
1,505
11,879
53,272
50
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
7
OTHER ASSETS, INCOME AND EXPENSES
Other assets
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
Consist of the following (in thousands $):
Net proceeds from Sale Transaction (1)
Other investment income (2)
Foreign exchange gain (losses)
Total Other income (3)
Dec. 31, 2018
4,722
—
5,369
1,897
11,988
Dec. 31, 2017
17,168
4,751
1,947
743
24,609
For the years ended
Dec. 31, 2018
Dec. 31, 2017
4,200
4,708
2,310
11,218
31,691
5,383
(7,412)
29,662
(1) Gross proceeds of $5.0 million, net of transaction costs of $0.8 million. This relates to the January 29, 2018 closing of the sale of our non-core private wealth client business. For 2017
income, gross proceeds of $41.3 million, net of transaction costs of $9.6 million. This relates to the August 1, 2017 closing of the sale of Canadian diversified funds business.
(2) Primarily includes investment fund income, syndication and trailer fee income.
(3) Excludes royalty income of $1.2 million (December 31, 2017 - $1.7 million), which is presented net of operating, depletion and impairment charges below.
Other expenses
Consist of the following (in thousands $):
Costs (recoveries) related to energy assets (1)
Other (2)
Total Other expenses
(1) Includes operating, depletion and impairment charges, net of royalty income of $1.2 million (December 31, 2017 - $1.7 million).
(2) Primarily includes non-recurring professional fees.
For the years ended
Dec. 31, 2018
Dec. 31, 2017
(28)
2,228
2,200
888
1,448
2,336
51
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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, 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
Issuance of share capital under dividend reinvestment program
Issuance of share capital on purchase of management contracts
Issuance of share capital on conversion of RSU
Acquired for equity incentive plan
Released on exercise of stock option plan
Released on vesting of equity incentive plan
At Dec. 31, 2018
Number of shares
Stated value
(in thousands $)
243,190,293
231,133
755,413
(5,000,000)
(8,100,000)
3,021,795
234,098,634
338,628
6,997,387
635,939
(2,402,500)
558,048
2,836,201
411,231
541
1,728
(11,000)
(17,882)
7,938
392,556
1,015
17,284
1,581
(7,161)
1,217
6,446
243,062,337
412,938
Contributed surplus consists of: stock option expense; earn-out shares expense; equity incentive plans'
expense; and additional purchase consideration.
At Dec. 31, 2016
Expensing of Sprott Inc. stock options over the vesting period
Expensing of Stock-based compensation over the vesting period
Issuance of share capital on conversion of RSUs
Release of GTU shares
Expensing of EPSP as referral fees
Released on vesting of common shares for equity incentive plan
At Dec. 31, 2017
Expensing of Stock-based compensation over the vesting period
Issuance of share capital on conversion of RSU
Released on exercise of stock option plan
Released on vesting of common shares for equity incentive plan
At Dec. 31, 2018
Stated value
(in thousands $)
41,802
(73)
6,765
(1,667)
675
343
(7,938)
39,907
12,358
(1,219)
(1,217)
(6,446)
43,383
52
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
Stock option plan
The Company has an option plan (the "Plan") intended to provide incentives to directors, officers, employees and consultants
of the Company and its wholly owned subsidiaries. The aggregate number of shares issuable upon the exercise of all options
granted under the Plan and under all other stock-based compensation arrangements including the Trust and Equity Incentive
Plan ("EIP") cannot exceed 10% of the issued and outstanding shares of the Company as at the date of grant. The options
may be granted at a price that is not less than the market price of the Company's common shares at the time of grant. The
options vest annually over a three-year period and may be exercised during a period not to exceed 10 years from the date
of grant.
There were 750,000 stock options issued for the year ended ended December 31, 2018 (year ended December 31, 2017
- nil). There were 2,000,000 options exercised in the year ended December 31, 2018 (year ended December 31, 2017 - 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, 2016
Options exercisable, December 31, 2016
Options forfeited
Options outstanding, December 31, 2017
Options exercisable, December 31, 2017
Options issued
Options exercised
Options expired
Options outstanding, December 31, 2018
Options exercisable, December 31, 2018
Options outstanding and exercisable as at December 31, 2018 are as follows:
Number of options
(in thousands)
Weighted average
exercise price ($)
10,900
4,100
(3,925)
6,975
5,625
750
(2,000)
(2,450)
3,275
1,875
4.16
7.10
2.42
5.14
5.79
2.33
2.33
10.00
2.57
2.70
Exercise price ($)
6.60
2.33
2.73
2.33 to 6.60
Number of
outstanding options
(in thousands)
Weighted average
remaining contractual
life
(years)
Number of options
exercisable
(in thousands)
150
3,000
125
3,275
1.9
7.1
7.4
6.9
150
1,600
125
1,875
53
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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 2,396,538 RSUs issued during the year ended December 31, 2018 (year ended December 31, 2017 - 755,413).
The Trust purchased 2.4 million shares in the year ended December 31, 2018 (year ended December 31, 2017 - 8.1 million).
Common shares held by the Trust, December 31, 2016
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2017
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2018
Number of common
shares
5,287,752
8,100,000
(3,021,795)
10,365,957
2,402,500
(2,836,201)
9,932,256
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, 2018
Dec. 31, 2017
424
11,934
12,358
(73)
6,765
6,692
54
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
Basic and diluted earnings per share
The following table presents the calculation of basic and diluted earnings (loss) per common share:
Numerator (in thousands $):
Net income (loss) - basic and diluted
Denominator (Number of shares in thousands):
Weighted average number of common shares
Weighted average number of unvested shares purchased by the Trust
Weighted average number of common shares - basic
Weighted average number of 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
Capital management
The Company's objectives when managing capital are:
For the years ended
Dec. 31, 2018
Dec. 31, 2017
31,379
37,532
251,848
246,205
(11,656)
(7,143)
240,192
3,125
239,062
—
11,656
7,143
254,973
246,205
$
$
0.13 $
0.12 $
0.16
0.15
•
•
•
•
•
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, carried interest 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, 2018
and 2017, all entities were in compliance with their respective capital requirements.
55
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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, 2018
Dec. 31, 2017
393
(137)
256
1,022
1,278
9,003
(1,174)
7,829
(2,055)
5,774
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
Intangibles
Adjustments in respect of previous periods
Other temporary differences not benefited
Non-capital losses not benefited previously
Rate differences and other
Tax charge
For the years ended
Dec. 31, 2018
Dec. 31, 2017
32,657
8,631
153
(559)
—
(388)
(137)
(279)
(6,680)
537
1,278
43,306
11,851
1,815
(5,275)
27
130
(1,356)
(1,425)
91
(84)
5,774
The weighted average statutory tax rate was 26.4% (December 31, 2017 - 27.4%). This decrease was mainly due to decreased profitability of our
Global segment, which is U.S based. The Company has $6 million of non-capital tax losses and $12 million of 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.
56
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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, 2018
Deferred income tax assets
Other stock-based compensation
Non-capital losses
Unrealized gains
Other
Total deferred income tax assets
Deferred income tax liabilities
Fund management contracts
Proceeds receivable
Other
Total deferred income tax liabilities
Net deferred income tax assets
For the year ended December 31, 2017
Deferred income tax assets
Other stock-based compensation
Non-capital losses
Unrealized gains
Other
Total deferred income tax assets
Deferred income tax liabilities
Fund management contracts
Deferred sales commissions
Proceeds receivable
Other
Total deferred income tax liabilities
Net deferred income tax assets (liabilities)
Dec. 31, 2017
Recognized in
income
Recognized in
other
comprehensive
income
Dec. 31, 2018
2,588
820
481
485
4,374
431
279
(116)
594
3,780
1,712
4,185
(95)
28
5,830
6,886
(209)
175
6,852
(1,022)
—
13
—
13
—
—
—
—
13
4,300
5,018
386
513
10,217
7,317
70
59
7,446
2,771
Dec. 31, 2016
Recognized in
income
Recognized in
other
comprehensive
income
Dec. 31, 2017
4,223
553
(186)
571
5,161
2,039
392
993
73
3,497
1,664
(1,635)
267
667
(86)
(787)
(1,547)
(392)
(714)
(189)
(2,842)
2,055
—
—
—
—
—
(61)
—
—
—
(61)
61
2,588
820
481
485
4,374
431
—
279
(116)
594
3,780
57
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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, 2018 and December 31, 2017 (in thousands $).
Proprietary Investments
Dec. 31, 2018
Level 1
Level 2
Level 3
Total
Public equities and share purchase warrants
Fixed income securities
Private holdings
Obligations related to securities sold short
Total net recurring fair value measurements
13,680
—
—
(255)
13,425
5,386
1,796
—
—
7,182
—
1,000
2,830
—
3,830
19,066
2,796
2,830
(255)
24,437
Dec. 31, 2017
Level 1
Level 2
Level 3
Total
Public equities and share purchase warrants
Fixed income securities
Private holdings
Obligations related to securities sold short
Total net recurring fair value measurements
Long-term investments
Dec. 31, 2018
47,417
—
—
(24,993)
22,424
8,161
249
—
—
8,410
—
—
4,269
—
4,269
55,578
249
4,269
(24,993)
35,103
Level 1
Level 2
Level 3
Total
Co-investments in funds
Private holdings
Total net recurring fair value measurements
—
—
—
72,739
—
72,739
—
29,821
29,821
72,739
29,821
102,560
Dec. 31, 2017
Level 1
Level 2
Level 3
Total
Public equities and share purchase warrants
Co-investments in funds
Private holdings
Total net recurring fair value measurements
—
—
—
—
1,639
35,972
—
37,611
—
—
12,152
12,152
1,639
35,972
12,152
49,763
58
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
The following tables provides a summary of changes in the fair value of Level 3 financial assets (in thousands $):
Proprietary Investments
Changes in the fair value of Level 3 measurements - Dec. 31, 2018
Dec. 31, 2017
Purchases and
reclassifications
Settlements
Net unrealized
gains (losses)
included in net
income
Dec. 31, 2018
4,269
—
4,269
2,135
1,000
3,135
(3,680)
—
(3,680)
106
—
106
2,830
1,000
3,830
Changes in the fair value of Level 3 measurements - Dec. 31, 2017
Dec. 31, 2016
Purchases and
reclassifications
Settlements
3,984
1,264
5,248
272
—
272
(16)
(1,264)
(1,280)
Net unrealized
gains (losses)
included in net
income
Dec. 31, 2017
29
—
29
4,269
—
4,269
Private holdings
Fixed income securities
Private holdings
Fixed income securities
Long-term investments
Changes in the fair value of Level 3 measurements - Dec. 31, 2018
Dec. 31, 2017
Purchases and
reclassifications
Settlements
Net unrealized
gains (losses)
included in net
income
Dec. 31, 2018
Private holdings
12,152
12,152
13,145
13,145
—
—
4,524
4,524
29,821
29,821
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
8,830
8,830
—
—
—
—
3,322
3,322
12,152
12,152
During the year ended December 31, 2018, the Company transferred public equities of $0.7 million (Dec. 31, 2017 - $2.9 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 $16.3 million and transferred $Nil (Dec. 31, 2017 - $3.3 million) from Level 3 to Level 1 within the fair value hierarchy.
59
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
The following table presents the valuation techniques used by the Company in measuring fair values:
Type
Valuation Technique
Public equities and share purchase warrants
Fair values are determined using pricing models which incorporate all
available market-observable inputs.
Co-investments in funds
Fixed income securities
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.
The Company’s Level 3 securities consists of private holdings and fixed income securities of private companies. The Company
determines fair value using a variety of valuation techniques, including discounted cash flows, comparable recent transactions
and other techniques used by market participants. The significant unobservable input used in these valuation techniques
can vary considerably over time, and include grey market financing prices, discount rates and extraction recovery rates of
mining projects. A significant change in any of these inputs in isolation would result in a material impact in fair value
measurement. The potential impact of a 5% change in the significant unobservable inputs on profit or loss would be
approximately $1.2 million (December 31, 2017 - $0.5 million)
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.
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, 2018 Dec. 31, 2017
3,186
4,976
4,344
12,506
4,197
2,818
3,268
10,283
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 123,660 DSUs issued during the year (December 31, 2017 - 213,727). 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, which included a $9.9 million note payable over four years. As at December 31,
2018, the balance of the note payable is $5.5 million.
60
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
12 DIVIDENDS
The following dividends were declared by the Company during the year ended December 31, 2018:
Record date
March 12, 2018 - Regular Dividend Q4 - 2017
May 21, 2018 - Regular Dividend Q1 - 2018
August 20, 2018 - Regular Dividend Q2 - 2018
November 19, 2018 - Regular Dividend Q3 - 2018
Dividends (1)
Payment Date
March 27, 2018
June 5, 2018
September 4, 2018
December 4, 2018
Cash dividend per
share ($)
Total dividend amount
(in thousands $)
0.03
0.03
0.03
0.03
7,553
7,553
7,566
7,586
30,258
(1) Subsequent to the quarter-end, on February 27, 2019, a regular dividend of $0.03 per common share was declared for the quarter ended December 31, 2018. This dividend is payable
on March 25, 2019 to shareholders of record at the close of business on March 8, 2019.
61
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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 $6.4 million for the year (December 31,
2017 - $1.7 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, RCIC and SAM US.
As at December 31, 2018 and 2017 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 on balance sheet loans
and co-investment in lending LPs, 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, 2018 the Company's loan portfolio consisted of only fixed-rate loans. The Company
is also exposed to changes in the value of a loan when that loan’s interest rate is at a rate other than current
market rates.
As at December 31, 2018, the Company's on balance sheet loan portfolio had 3 fixed-rate resource based loans
and no floating-rate resource based loan (December 31, 2017 - 6 fixed-rate loans and 1 floating-rate loan) with
an aggregate carrying value of $36.0 million (December 31, 2017 - $48.7 million). The Company's 3 loans range
in maturity dates from 1 to 3 years.
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.
62
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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, 2018, approximately $103.3 million (December 31, 2017 - $59.6 million) of total Canadian assets
were invested in proprietary investments priced in USD. A total of $17.3 million (December 31, 2017 - $55.5
million) of cash, $1.3 million (December 31, 2017 -$1.2 million) of accounts receivable, $34.5 million (December
31, 2017 - $42.1 million) of loans receivable and $2.6 million (December 31, 2017 - $10.9 million) of other assets
were denominated in USD. As at December 31, 2018, if the exchange rate between USD and the Canadian dollar
increased or decreased by 5%, with all other variables held constant, the increase or decrease in net income would
have been approximately $7.9 million for the year (December 31, 2017 - $6.9 million) and there would be $Nil
impact to OCI (December 31, 2017 - $Nil).
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 on-balance sheet loans of SRLC and through co-investments made
in the lending LPs managed by SRLC. In addition to the relative default probability of SRLC borrowers (both directly
via on balance sheet loans and indirectly via borrowers in the lending LPs we co-invest with), 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 will adversely affect the
value of the Company's security against a loan. Additionally, the value of the Company's underlying security in a
loan can be negatively affected if the actual amount or quality of the commodity proves to be less than that
originally estimated, or the ability to extract the commodity proves to be more difficult or more costly than originally
estimated. During the loan origination process, management takes into account a number of factors and is
committed to several processes to ensure that this risk is appropriately mitigated. These include:
• emphasis on first priority and/or secured financings;
• the investigation of the creditworthiness of borrowers;
• the employment of qualified and experienced loan professionals;
• a review of the sufficiency of the borrower’s business plans including plans that will enhance the value
of the underlying security;
• frequent and documented status updates provided on business plans;
• engagement of qualified independent advisors (e.g. lawyers, engineers and geologists) to protect
Company interests;
•
legal reviews that are performed to ensure that all due diligence requirements are met prior to funding.
As at December 31, 2018, the Company’s net exposure to credit risk in the on-balance sheet loans of SRLC and
through the loan portfolio of the lending LPs was $36.0 million (December 31, 2017 - $48.7 million) and the
Company had no exposure to off-balance sheet credit risk (loan commitments) (December 31, 2017 - $nil). As at
December 31, 2018, the largest loan in the Company’s on-balance sheet loan portfolio was a resource loan with
a carrying value of $33.2 million or 92% of the Company’s loans receivable (December 31, 2017 - $26.3 million
or 54% 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.
63
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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 expected credit loss 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, 2018 and 2017, 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, carried interest 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, 2018 and 2017, 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 $90 million committed line of credit
with a major Canadian Schedule I bank. 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, 2018, the Company had $47.3 million or 11% (December 31, 2017 - $156.1 million or 38%)
of its total assets in cash and cash equivalents. In addition, approximately $19.1 million or 19% (December 31,
2017 - $27.3 million or 69%) 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 and co-investments in lending LPs 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
("match funding") and through its broader treasury risk management program and enterprise capital budgeting.
As at December 31, 2018, the Company had no loan funding commitments and $38.7 million in co-investment
commitments from the Lending segment (December 31, 2017 - $9.9 million and $7.8 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.
64
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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 the line of credit; 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, and in particular, precious metals & mining.
65
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
14 SEGMENTED INFORMATION
For management purposes, the Company is organized into business units based on its products, services and geographical
location and has six reportable segments as follows:
•
•
•
•
Exchange Listed Products (reportable), 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 (reportable), which provides asset management and sub-advisory services
to the Company's branded funds and managed accounts;
Global (reportable), 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 (reportable), which provides lending activities through limited partnership vehicles as well as through
direct lending activities using the Company's balance sheet;
• Merchant Banking and Advisory Services (reportable), 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 (reportable), 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;
All Other Segments (non-reportable), which do not meet the definition of reportable segments as per IFRS 8.
Effective Q1, 2018, the Consulting segment is now part of "All Other Segments" as it no longer constitutes a
reportable operating segment on its own, given its immateriality relative to the three quantitative tests of IFRS
8. Consulting is the only segment in this category as all other Company segments are reportable.
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, carried interest and performance fees and carried interest
and performance fee payouts (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, 2018 and 2017
The following tables present the operations of the Company's reportable segments (in thousands $):
For the year ended December 31, 2018
Exchange
Listed Products
Alternative Asset
Management
Global
Lending
Merchant Banking &
Advisory Services
Corporate (1)
Eliminations and All
Other Segments (2)
Consolidated
Total revenue
Total expenses
Pre-tax Income (loss)
Adjusted base EBITDA
33,479
9,057
24,422
24,924
9,143
7,503
1,640
1,686
14,550
16,923
(2,373)
3,037
27,702
7,316
20,386
15,437
22,116
15,788
6,328
4,474
2,472
14,528
(12,056)
(8,982)
(193)
5,497
(5,690)
(64)
109,269
76,612
32,657
40,512
(1) Historically, this reportable segment included losses on proprietary investments relating to the Company's investment in Sprott Resource Holdings Inc. ("SRHI"). This has been reclassified to "All
Other Segments" as SRHI is a managed company of the non-reportable Consulting segment.
(2) Inter-segment revenues and expenses are eliminated on consolidation and reflected in the Eliminations column. Effective Q1, 2018, the former Consulting segment no longer met the definition of
a reportable segment as per IFRS 8.
For the year ended December 31, 2017
Exchange
Listed Products
Alternative Asset
Management
Total revenue
Total expenses
Pre-tax Income (loss)
Adjusted base EBITDA
17,984
7,693
10,291
12,255
72,942
32,807
40,135
7,614
Global
20,416
17,555
2,861
5,655
Lending
11,036
6,902
4,134
16,962
Merchant Banking
& Advisory Services
Corporate (1)
Eliminations and All
Other Segments (2)
Consolidated
21,555
16,486
5,069
5,699
(5,768)
12,951
(18,719)
(8,188)
6,046
6,511
(465)
167
144,211
100,905
43,306
40,164
(1) Historically, this reportable segment included losses on proprietary investments relating to the Company's investment in Sprott Resource Holdings Inc. ("SRHI"). This has been reclassified to "All
Other Segments" as SRHI is a managed company of the non-reportable Consulting segment.
(2) Inter-segment revenues and expenses are eliminated on consolidation and reflected in the Eliminations column. Effective Q1, 2018, the former Consulting segment no longer met the definition of
a reportable segment as per IFRS 8.
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, 2018
Dec. 31, 2017
94,719
14,550
109,269
123,795
20,416
144,211
67
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2018 and 2017
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 net investments portfolio of the Company. As at December 31, 2018,
the Company had no loan commitments (December 31, 2017 - $9.9 million) and $38.7 million in co-investment commitments
from the Lending segment (December 31, 2017 - $7.8 million).
Future minimum annual rental payments under non-cancellable leases, including operating costs, are as follows ($
thousands):
2019
2020
2021
2022
2023
Thereafter
2,580
2,606
2,632
2,153
1,847
1,866
13,684
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, 2018, no provisions were recognized.
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
Sharon Ranson, FCPA, FCA, 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 10, 2019 12:00 pm
Baker & Mackenzie LLP
Brookfield Place, Bay/Wellington Tower
181 Bay Street, Suite 2100
Toronto, Ontario
www.sprott.com