(cid:25)(cid:23)(cid:24)(cid:32)(cid:3)(cid:40)(cid:85)(cid:85)(cid:92)(cid:72)(cid:83)(cid:3)(cid:57)(cid:76)(cid:87)(cid:86)(cid:89)(cid:91)
(cid:42)(cid:86)(cid:85)(cid:91)(cid:89)(cid:72)(cid:89)(cid:80)(cid:72)(cid:85)(cid:21)(cid:3)(cid:48)(cid:85)(cid:85)(cid:86)(cid:93)(cid:72)(cid:91)(cid:80)(cid:93)(cid:76)(cid:21)(cid:3)(cid:40)(cid:83)(cid:80)(cid:78)(cid:85)(cid:76)(cid:75)(cid:21)
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
Dear Shareholders,
Last year Sprott continued to build its global platform while gold entered a new bull market. Gold prices
convincingly broke out of their multi-year range in 2019, spurred by coordinated easing by all of the global
central banks. In particular, the US Federal Reserve stumbled into a major policy reversal in July by cutting
interest rates and ending its quantitative tightening program. Further, during the fourth quarter of 2019,
the Fed began intervening in the overnight repo markets to offer additional liquidity into the financial system.
Gold responded to these developments by gaining 18% to close the year at US$1,520 per ounce.
Stronger precious metals prices and increased investor interest contributed to Sprott’s Assets Under
Management (“AUM”) increasing by 14% in 2019 to $12.1 billion. In January 2020, Sprott completed the
previously announced acquisition of the Tocqueville gold strategies in a transaction that added a further $2.3
billion in assets to our managed equities segment at time of deal closure.
In our exchange listed products segment, our physical trusts returned to positive flows in the fourth quarter
of 2019 and the momentum has continued into the start of 2020.
In 2019, we built on the success of our first private resource lending LPs by securing new commitments to
our lending strategies from leading global institutions. We have also expanded our capabilities in this area
with a new royalty and streaming strategy. Total committed capital in this segment is now more than US
$1.3 billion.
With the addition of Tocqueville portfolio managers John Hathaway and Douglas Groh, Sprott believes it
now has the world’s leading gold investment team in terms of sector experience, depth and technical
expertise. By continuing to invest while our competitors retreat from the sector, we have built a global
platform to offer the full spectrum of precious metal investment strategies.
Looking ahead, 2020 is likely to be a pivotal year for Sprott. Detailed analysis shows us that the Federal
Reserve and other global central banks are now required to inject increasing amounts of liquidity into the
financial system. We believe the markets will come to the realization that the Minsky Moment of government
debt levels has already occurred. The Federal Reserve is employing variations of Modern Monetary Theory in
order to provide short-term liquidity to the Treasury markets. To throw gasoline on the fire, populist political
agendas, financed by significant fiscal deficits, are also likely here to stay. We believe this gold bull market
will be different. Gold is no longer a “fringe” asset, is no longer being driven by short-term dislocations, and
is being steadily accumulated by long-term investors as a mandatory portfolio insurance asset.
This is our time to shine. Sprott is uniquely positioned to benefit from these trends, and is committed to
building our funds and delivering exceptional investment performance to our clients and shareholders.
Thank you for your continued support. We look forward to reporting to you on our progress in the months
ahead.
Peter Grosskopf
Chief Executive Officer
P.S. At the time of publication, front page news and markets have become focused on the fallout from the Coronavirus.
We believe that its impact to both the global economy and the financial markets will be substantial, and this may
become the pin that pricks the bubble of confidence in central bank policies and fiat currencies. If so, gold could move
to new highs as a protection asset. It will be an interesting year.
2
Management's Discussion and Analysis
Year ended December 31, 2019
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 an increasingly
constructive gold and silver pricing environment; (ii) expectations regarding deployment of capital called into our lending LPs; (iii) anticipation of flat year-over-year performance
in the Brokerage segment; (iv) anticipation of higher year-over-year operating costs (primarily relating to higher SG&A on increased U.S. operating activities) and lower EBITDA
contribution from non-reportable segments; (v) the impact to the Managed Equities segment of the Tocqueville gold strategies asset management business; (vi) the performance
of the co-investments in the lending LPs; (vii) gold accumulation and new highs as insurance and protection assets; and (viii) the declaration, payment and designation of dividends.
Although the Company believes that the Forward-Looking Statements are reasonable, they are not guarantees of future results, performance or achievements. A number of factors
or assumptions have been used to develop the Forward-Looking Statements, including: (i) the 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, 2020; 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. As a result of the foregoing, readers
should not place undue reliance on the forward-looking statements contained in this MD&A concerning the completion of the acquisition or the timing thereof. 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, 2020, presents an analysis of the consolidated financial condition of
the Company and its subsidiaries as at December 31, 2019, compared with December 31, 2018, and the consolidated results of operations for the
three and twelve months ended December 31, 2019, compared with the three and twelve months ended December 31, 2018. The Board of Directors
approved this MD&A on February 27, 2020. All note references in this MD&A are to the notes to the Company's December 31, 2019 audited annual
consolidated financial statements ("annual financial statements"), unless otherwise noted. The Company was incorporated under the Business
Corporations Act (Ontario) on February 13, 2008.
PRESENTATION OF FINANCIAL INFORMATION
The financial statements, including the required comparative information, have been prepared in accordance with International Financial Reporting
Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). Financial results, including related historical comparatives
contained in this MD&A, unless otherwise specified herein, are based on the annual financial statements. The Canadian dollar is the Company's functional
and reporting currency for purposes of preparing the annual financial statements. 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, 2018.
While the Company’s functional currency is the Canadian dollar, its presentation currency will switch to US dollars effective January 1, 2020. Going
forward, we believe the US dollar will better reflect the Company’s consolidated financial position and results of operations given the significance of
its subsidiaries that have the US market as their primary economic environment. The proportion of the Company’s subsidiaries that have the US market
as their primary economic environment has further increased in 2020 with the January 17, 2020 close of the Tocqueville Asset Management gold
strategies acquisition.
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 are discussed below:
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 Inflows
Net Inflows (consisting of net sales, capital calls and fee earning capital commitments) result in changes to AUM and are described
individually below:
Net Sales
Fund sales (net of redemptions), including 'at-the-market' transactions and secondary offerings of our physical trusts and new
'creations' of ETF units, are a key performance indicator as new assets being managed will lead to higher management fees
and can potentially lead to increased carried interest and performance fee generation (as applicable) given that AUM is also
the basis upon which carried interest and performance fees are calculated.
Capital calls and commitments
Capital calls into our lending LPs are a key source of AUM creation, and ultimately, earnings for the Company. Once capital is
called into our lending LPs, it is included within the AUM of the Company as it will now earn a management fee (NOTE: it is
possible for some forms of committed capital to earn a commitment fee despite being uncalled, in which case, it will also be
included in AUM at that time). Conversely, once loans in our lending LPs are repaid, capital may be returned to investors in
the form of a distribution, thereby reducing our AUM ("capital distributions").
Net Fees
Management fees (net of trailer and sub-advisor fees) and carried interest and performance fees (net of carried interest and
performance fee payouts) are key revenue indicators as they represent the net revenue contribution after directly associated costs
that we generate from our AUM.
Net Commissions
Commissions, net of commission expenses, arise primarily from the transaction based service offerings of our brokerage segment.
Compensation
Compensation excludes commissions, carried interest and performance fee payouts, which are presented net of their related revenues
in this MD&A, and severance and new hire accruals which are non-recurring.
Investable Capital
Investable capital includes: 1) cash, net of syndicate cash holdings; 2) proprietary investments, net of any obligations for securities
sold short; and 3) balance sheet loans.
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 and a better indicator of recurring results
from operations as compared to other non-IFRS financial measures.
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, Adjusted EBITDA and Adjusted base 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 net investments (1)
(Gains) losses on foreign exchange
Non-cash stock-based compensation
Net proceeds from sale transaction
Unamortized placement fees (2)
Other expenses(3)
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, 2019 Dec. 31, 2018 Dec. 31, 2019 Dec. 31, 2018
1,909
9,831
13,532
31,379
354
1,251
1,655
5,169
1,879
478
854
—
—
2,525
312
3,383
598
14,124
(3,912)
(2,026)
1,738
—
(279)
447
1,373
3,619
5,033
23,557
1,401
1,960
5,120
—
—
7,509
419
1,278
2,199
35,275
5,782
(2,310)
5,199
(4,200)
(1,093)
2,746
10,905
10,092
39,547
41,399
(2,391)
1,310
9,824
—
—
10,092
(2,391)
1,310
38,466
(1,802)
915
40,512
(1) This adjustment removes the income effects of certain gains or losses on proprietary and long-term investments to ensure the reporting objectives of our EBITDA metric as
described above are met.
(2) The prior period comparative figures contained a placement fee amortization adjustment to ensure the 2018 results were comparable to 2017 in light of the 2018 adoption of
IFRS 15.
(3) See Other expenses in Note 7 of the annual financial statements. In addition to the items outlined in Note 7, Other expenses also includes severance and new hire accruals of
$0.2 million for the 3 months ended (3 months ended December 31, 2018 - $Nil) and $1.4 million for the 12 months ended (12 months ended December 31, 2018 - $0.5
million).
6
BUSINESS OVERVIEW
Our reportable operating segments are as follows:
Exchange Listed Products
•
The Company's closed-end physical trusts and exchange traded funds ("ETFs").
Lending
•
The Company's lending activities primarily occur through limited partnership vehicles ("lending LPs").
Managed Equities
•
The Company's alternative investment strategies (open-end, closed-end, etc.) managed in-house and on a sub-advised
basis. Prior to Q1 2019, the Company's fixed-term LP vehicles formed part of the "global segment" (which historically
housed all of our U.S. business activities). Effective Q1 2019, the global segment no longer satisfied the qualitative tests
of IFRS 8, Operating Segments ("IFRS 8") as the geographic location of the U.S. businesses is no longer a relevant
consideration by management in the allocation of resources and assessment of product and service performance.
Consequently, the global segment has been deconstructed and its fixed-term LP assets and earnings reallocated to the
managed equities segment given that it is now at the managed equities level that the allocation of resources and assessment
of product and service performance occurs by management.
Brokerage
•
Formerly "Merchant Banking & Advisory Services", this segment has been renamed to reflect the inclusion of our U.S.
broker-dealer alongside our Canada based broker-dealer as the Company's "brokerage segment". Prior to Q1 2019 , the
Company's U.S. broker-dealer formed part of the "global segment" (which historically housed all of our U.S. business
activities). Effective Q1 2019, the global segment no longer satisfied the qualitative tests of IFRS 8 as the geographic
location of the U.S. businesses is no longer a relevant consideration by management in the allocation of resources and
assessment of product and service performance. Consequently, the global segment has been deconstructed and its U.S.
broker-dealer assets and earnings reallocated to the brokerage segment given that it is now at the brokerage level
(independent of geography) that the allocation of resources and assessment of product and service performance occurs
by management.
Corporate
• Provides the Company's various operating segments with capital, balance sheet management and other shared services.
All Other Segments
• Contains all non-reportable segments as per IFRS 8. See Note 14 of the annual financial statements for further details.
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 annual
financial statements.
7
BUSINESS HIGHLIGHTS AND GROWTH INITIATIVES
Investment Performance
Market value appreciation was $174 million during the quarter and $957 million on a full year basis as the Company benefited
from stronger precious metals prices throughout the year.
Product and Business Line Expansion
•
Subsequent to year-end, on January 17, 2020, the Company successfully closed on the acquisition of Tocqueville Asset
Management's gold strategies. Based on AUM valuations as at January 17, 2020, this transaction will add approximately
$2.3 billion (US$1.8 billion) to the Company's total AUM. The transaction cost is US$15 million (US$12.5 million in cash
and Sprott Inc. common shares valued at US$2.5 million). Contingent consideration valued up to an additional US$35
million in cash and Sprott Inc. shares is payable subject to the achievement of certain financial performance conditions
over two years following the closing of the transaction.
• AUM in our lending LPs stood at $1 billion (US$784 million) as of December 31 2019. The $521 million (US$419 million)
increase in the year was primarily due to additional new AUM arising from fee earning committed capital in a new lending
LP and new capital calls into existing lending LPs.
• On January 11, 2019, the Company launched a new Korean co-managed private equity fund with KB Securities (KB Solar
fund), raising $75 million in commitment fee earning AUM in the process.
Other Matters
While the Company’s functional currency is the Canadian dollar, its presentation currency will switch to US dollars effective January
1, 2020. Going forward, we believe the US dollar will better reflect the Company’s consolidated financial position and results of
operations given the significance of its subsidiaries that have the US market as their primary economic environment. The proportion
of the Company’s subsidiaries that have the US market as their primary economic environment has further increased in 2020 with
the January 17, 2020 close of the Tocqueville Asset Management gold strategies acquisition.
8
OUTLOOK
Exchange Listed Products
• We expect this segment to benefit from an increasingly constructive gold and silver pricing environment in 2020 as more
than 98% of this segment’s AUM is directly or indirectly impacted by gold and silver price changes, net of redemptions.
Lending
•
Interest income from balance sheet loans (included in finance income) will no longer be earned in 2020 as we have
successfully transitioned to co-investments in our lending fund strategies instead. Effective 2020, this segment’s revenues
will be generated primarily from two sources: management fees and co-investment income (included in finance income).
• Our lending strategies had a total of approximately $1 billion in AUM at the end of 2019, earning a blended net management
fee rate of approximately 1%. We expect capital calls (net of capital distributions) in 2020 to be in the range of US$100
million to US$200 million, based on our lending team's current view of the loan market and their expectations of possible
repayments.
• At the end of 2019, approximately $40 million of co-investments accounted for 4% of total segment AUM. These co-
investments accounted for approximately 57% of finance income earned in this segment in 2019. NOTE: co-investment
income is included in the finance income line given that it is largely interest income earned from lending LPs we are
invested in alongside our clients.
Managed Equities
•
The purchase of Tocqueville Asset Management’s gold fund strategies (which closed on January 17, 2020) will increase
AUM in this segment by approximately $2.3 billion.
Brokerage
• We anticipate flat year-over-year performance in this segment.
Corporate & Other Non-reportable Segments
• We anticipate higher year-over-year operating costs (primarily relating to higher SG&A on increased U.S. operating activities)
and lower EBITDA contribution from non-reportable segments. (see “Elimination and all other segments” column of the
segment table in Note 14 of the annual financial statements).
9
SUMMARY FINANCIAL INFORMATION
(In thousands $)
SUMMARY INCOME STATEMENT
Management fees
Carried interest and performance fees
less: Trailer and sub-advisor fees
less: Carried interest and performance fee payouts
Net Fees
Commissions
less: Commission expense
Net Commissions
Finance income (1)
Gains (losses) on net investments
Other income (loss)
Total Net Revenues
Compensation (2)
Compensation - severance and new hire accruals
Placement and referral fees
Selling, general and administrative
Interest expense
Amortization and impairment charges (3)
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
2019
Q3
2019
Q2
2019
Q1
2019
Q4
2018
Q3
2018
Q2
2018
Q1
2018
14,106
13,964
13,329
13,558
13,182
13,722
14,559
2,391
1,275
114
—
65
—
—
89
—
—
—
—
—
38
—
—
45
—
685
49
356
14,056
1,117
47
559
15,108
13,899
13,240
13,558
13,144
13,677
14,839
14,567
8,712
3,508
5,204
3,276
(1,652)
161
7,995
3,505
4,490
3,381
791
604
4,406
1,814
2,592
4,595
(546)
(559)
4,409
1,844
2,565
3,918
6
(644)
6,414
2,704
3,710
4,244
6,919
2,453
22,097
23,165
19,322
19,403
30,470
4,573
2,447
2,126
4,824
(4,916)
(275)
15,436
7,516
2,701
4,815
3,293
8,857
3,667
5,190
3,066
(3,122)
(1,823)
3,683
23,508
6,242
27,242
9,731
9,098
7,317
8,387
11,163
8,167
10,634
9,485
204
572
3,942
354
1,655
2,479
222
150
4,191
393
1,180
263
855
336
4,354
302
1,097
3,399
146
78
4,069
324
1,101
637
38
368
359
223
—
148
149
204
4,171
3,404
4,905
4,586
312
598
606
26
457
790
15
456
802
18,937
15,497
17,660
14,742
17,256
13,426
16,960
1,909
0.01
9,824
0.04
5,723
0.02
10,049
0.04
2,116
0.01
9,409
0.04
3,784
0.02
9,184
0.04
9,831
0.04
10,092
0.04
1,975
0.01
9,707
0.04
5,916
0.02
10,686
0.04
66
688
1,179
16,357
13,657
0.06
10,027
0.04
424,344
431,178
445,776
444,325
428,215
401,366
403,985
407,177
69,622
71,495
(569)
70,926
68,596
89,431
(154)
89,277
79,019
60,593
(10,119)
50,474
72,172
48,193
(12,218)
35,975
55,094
47,252
(10,421)
36,831
36,486
41,452
(967)
40,485
115,744
36,372
37,974
(796)
37,178
120,853
42,417
52,097
(932)
51,165
96,352
Proprietary and long-term investments
120,147
110,699
122,607
134,681
129,271
less: obligations related to securities sold short
—
—
—
—
(255)
—
(2,927)
(8,543)
Net investments
Loans receivable
Investable Capital
120,147
110,699
122,607
134,681
129,016
115,744
117,926
—
2,871
32,011
32,360
36,021
36,532
40,208
87,809
50,467
191,073
202,847
205,092
203,016
201,868
192,761
195,312
189,441
Total Enterprise AUM
12,082,468
11,326,546
10,670,982
10,569,449
10,578,426
10,066,112
11,126,042
11,591,213
(1) Finance income includes: (1) interest income from on-balance sheet loans and brokerage client accounts; (2) co-investment income from lending LP units held as part of our
long-term investments portfolio; and (3) ancillary income earned directly or indirectly from lending activities.
(2) See 'Compensation' in the key performance indicators (non-IFRS financial measures) section of this MD&A.
(3) Starting Q1 2019, in order to comply with the new IFRS 16 Leases accounting standard ("IFRS 16"), certain lease assets have now been capitalized and depreciated over
their expected lease terms. See Note 2, Changes in Accounting Policies of the annual financial statements.
10
SUMMARY MANAGEMENT FEE BREAKDOWN
Below is a detailed list of management fee rates on our fund products as at December 31, 2019 (in millions $):
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
Lending
3,843
3,197
1,399
251
153
79
8,922
0.40% N/A (1)
0.35% N/A (1)
0.45% N/A (1)
0.35% N/A (1)
0.50% N/A (1)
0.35% N/A (1)
0.39%
Sprott private resource lending LPs
1,019
1.00% 15-70% of net profits over preferred return
Managed Equities: In-house
Sprott U.S. Value Strategies
Fixed Term Limited Partnerships
Separately Managed Accounts (2)
Sprott Hathaway Special Situations Fund (3)
Total
Managed Equities: Sub-advised
Bullion Funds (3)
Corporate Class Funds (3)
Flow-through LPs (3)
Total
Other
Managed Companies (4)
Separately Managed Accounts (5)
Total
Total AUM
306
242
59
49
656
332
162
93
587
622
276
898
12,082
1.00% N/A
1.70% 15-30% over preferred return
1.00% N/A
0.75% 20% of net profits over preferred return
1.24%
0.51% 5% excess over applicable benchmark indices
0.75% 5% excess over applicable benchmark indices
0.70% 10% of all net profits in excess of the HWM
0.61%
0.50% 20% of net profits over preferred return
0.61% 20% of net profits over preferred return
0.53%
0.51%
(1) Exchange listed products do not generate 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.
(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
RESULTS OF OPERATIONS
AUM SUMMARY
AUM was $12.1 billion as at December 31, 2019, up $0.8 billion (7%) from September 30, 2019 and up $1.5 billion (14%) from
December 31, 2018. On a three and twelve months ended basis we benefited from strong precious metals price appreciation in
our exchange listed products and managed equities segments. We also benefited from capital calls and new commitment fee
earning assets being added to our lending LPs throughout the year, which more than offset capital distributions.
3 months results
(In millions $)
Exchange Listed Products
- Physical Trusts
- ETFs
Lending
Managed Equities
- In-house
- Sub-advised
Other
Total
12 months results
(In millions $)
Exchange Listed Products
- Physical Trusts
- ETFs
Lending
Managed Equities
- In-house
- Sub-advised
Other
Total
AUM
Sep. 30, 2019
Net
Inflows (1)
Market
Value
Changes
Other (2)
AUM
Dec. 31, 2019
8,376
314
8,690
586
592
535
1,127
924
71
(7)
64
474
35
11
46
—
11,327
584
145
23
168
(38)
29
41
70
(26)
174
—
—
—
(3)
—
—
—
—
(3)
8,592
330
8,922
(3)
1,019
656
587
1,243
898
12,082
AUM
Dec. 31, 2018
Net
Inflows (1)
Market
Value
Changes
Other (2)
AUM
Dec. 31, 2019
7,927
237
8,164
498
538
505
1,043
873
(177)
11
(166)
858
66
3
69
68
10,578
829
842
82
924
(55)
52
79
131
(43)
957
—
—
—
(282)
—
—
—
—
(3)
8,592
330
8,922
1,019
656
587
1,243
898
(282)
12,082
(1)
(2)
See 'Net Inflows' in the key performance indicators (non-IFRS financial measures) section of this MD&A.
Includes new AUM from fund acquisitions and lost AUM from fund divestitures and capital distributions of our lending LPs.
(3)
$1.7 billion (US$1.3 billion) of committed capital remains uncalled, of which $697 million (US$536 million) earns a commitment fee (AUM), and $980 million (US$754
million) does not (future AUM).
12
KEY REVENUE LINES
Net Fees in the quarter were $15.1 million, up $2 million (15%)
from the prior period and were $55.8 million on a full year basis,
down $0.4 million (1%).
Finance Income in the quarter was $3.3 million, down $1
million (23%) from the prior period and was $15.2 million
on a full year basis, down $0.3 million (2%).
Finance income primarily includes interest income from
legacy loans, co-investment income from LP units and other
ancillary income earned directly or indirectly from lending
activities. The decrease in finance income in the quarter and
on a full year basis was primarily due to legacy loan
repayments. The resultant lower finance income was partially
offset by increased co-investment income earned in our
lending LPs.
Net Commissions in the quarter were $5.2 million, up $1.5
million from the prior period and were $14.9 million on a full
year basis, down $1 million.
The increase in the quarter was due to improved equity
origination activity in our brokerage segment. The decrease
on a full year basis was due to lower equity origination activity
in the first half of the year that over shadowed the increase
in origination activity in the second half of the year.
Net fees increased in the quarter due to higher average AUM in
our exchange listed products and managed equities segments
given strong precious metals price appreciation and improved
mining equities stock performance. We also benefited from higher
fees in our lending segment as we continue to grow AUM in this
area. Additionally, our managed equities segment generated
higher net performance fees from the prior period.
In thousands $
3 months results
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
13,144
1,720
2,493
1,420
7,511
15,108
996
3,601
1,833
8,678
Q4 2018
Q4 2019
Exchange Listed Products
Lending
Managed Equities
Other
Net fees decreased on a full year basis despite strong precious
metals price appreciation in the second half of the year as
redemptions of our exchange listed products throughout last year
and the first half of this year, led to lower average AUM on a full
year basis from this segment. In addition, we experienced lower
average AUM in the fixed-term LPs of our managed equities
segment. These declines more than offset increased fee
generation in our lending segment and higher performance fees
generated in our managed equities segment.
In thousands $
12 months results
60,000
50,000
40,000
30,000
20,000
10,000
56,227
6,306
12,011
5,258
32,652
2018
55,805
4,802
11,034
7,492
32,477
2019
Exchange Listed Products
Lending
Managed Equities
Other
13
KEY EXPENSE LINES
ADJUSTED BASED EBITDA
Adjusted base EBITDA in the quarter was $9.8 million, down
$0.3 million (3%) from the prior period and was $38.5 million
on a full year basis, down $2 million (5%).
On an aggregate basis, our reportable segments had
improved quarterly performance, however, their results were
more than offset by lower earnings from our non-reportable
segments.
Our full year results were primarily impacted by lower fee
income in our exchange listed products segment due to last
year's redemption experience that continued through to the
first half of this year and lower AUM valuations in our
managed equities segment. We also encountered legacy
loans being repaid in full by the end of the third quarter in
our lending segment, resulting in lower full year finance
income.
Compensation, excluding commissions, carried interest and
performance fee payouts, which are presented net of their related
revenues in this MD&A, and severance and new hire accruals
which are non-recurring, was $9.7 million, down $1.4 million
(13%) from the prior period and was $34.5 million on a full year
basis, down $4.9 million (12%). The decrease in the quarter and
on a full year basis was primarily due to lower LTIP amortization.
In thousands $
3 months results
3,444
4,702
11,163
3,017
Q4 2018
1,667
9,731
5,184
2,880
Q4 2019
*
Salaries
Annual Incentive Program ("AIP")
*
Long-term Incentive Program ("LTIP")
* Prior period comparatives have been adjusted to reflect the
reclassification of variable payments out of salaries into AIP,
consistent with our current reporting methodology
In thousands $
12 months results
7,149
39,449
20,073
34,533
20,392
6,992
12,358
7,018
2018
2019
*
Salaries
Annual Incentive Program ("AIP")
*
Long-term Incentive Program ("LTIP")
* Prior year comparatives have been adjusted to reflect the
reclassification of variable payments out of salaries into AIP,
consistent with our current reporting methodology
SG&A was $3.9 million in the quarter, down $0.2 million (5%)
from the prior period and was $16.6 million on a full year basis,
down $0.5 million (3%).
The decrease was largely due to the adoption of IFRS 16 and our
ongoing cost containment program.
14
ADDITIONAL REVENUES AND EXPENSES
BALANCE SHEET
Net investments losses were mainly due to market value
long-term
depreciation of certain equity holdings and
investments.
Other income was lower in the quarter and on a full year
basis.The decrease was primarily due to FX translation losses in
the current periods (USD-to-CAD) compared to FX translation
gains in the prior periods, net sales proceeds received on last
year's sale transaction in the first quarter of 2018 and income
earned on the early settlement of a loan last year.
Placement and referral fees were higher in the quarter and
on a full year basis. They mainly include referral fees paid in our
brokerage segment.
Interest expense was higher in the quarter and on a full year
basis due to interest accruals on leases from the adoption of IFRS
16 and the draw down of our loan facility in the first quarter of
this year (see Note 15 of the annual financial statements).
Amortization of intangibles did not change in the quarter
and was lower on a full year basis due to finite life fund
management contracts related to fixed term LPs in our managed
equities segment being fully amortized by the end of the first
quarter of the prior period.
Amortization of property and equipment was higher in the
quarter and on a full year basis mainly due to increased
depreciation expense related to leasehold improvements and
leases that were capitalized on the adoption of IFRS 16.
Other expenses were higher in the quarter and on a full year
basis due to higher non-recurring professional fees and
transaction costs.
Investable Capital was $191 million, down $11 million
from December 31, 2018.
In millions $
36
37
71
191
120
2019
Cash
Net Investments
Loans
202
129
2018
1
Total Assets were $424 million, down $4 million (1%) from
December 31, 2018. The slight decrease was primarily due
to a combination of loan repayments, investment exits and
FX losses on goodwill valuation.
Total Liabilities were $70 million, up $15 million (26%)
from December 31, 2018. The increase was primarily due to
the draw down of our loan facility to help fund anticipated
investment activities of the Company over the next 12-18
months. The increase was also due to the recording of a lease
liability on adoption of IFRS 16. These increases were partially
offset by the payment of prior year's accrued liabilities.
Total Shareholder's Equity was $355 million, down $18
million (5%) from December 31, 2018.
15
REPORTABLE OPERATING SEGMENTS
Exchange Listed Products
(In thousands $)
SUMMARY INCOME STATEMENT
Management fees
Other income (loss)
Total Revenues
Compensation
Selling, general and administrative
Interest expense
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, 2019
Dec. 31, 2018
Dec. 31, 2019
Dec. 31, 2018
8,678
(395)
8,283
1,481
1,240
265
315
—
3,301
7,511
719
8,230
1,047
802
—
316
—
2,165
32,477
(811)
31,666
5,052
4,025
1,093
1,263
—
11,433
32,652
827
33,479
4,473
3,295
—
1,259
30
9,057
4,982
6,039
8,922,030
6,065
5,675
8,164,136
20,233
23,863
8,922,030
24,422
24,924
8,164,136
Adjusted base EBITDA in the quarter was $6 million, up $0.4 million (6%) from the prior period and was $23.9 million on a full
year basis, down $1.1 million (4%).
Our three months ended results were positively impacted by higher average AUM given strong precious metals price appreciation
this quarter which more than offset higher compensation and SG&A. However on a full year basis, the strong pricing environment
was more than offset by the redemption experience we encountered last year which continued through to the first half of this year.
Additionally we also incurred higher compensation and SG&A in this segment.
Non-EBITDA highlights:
• Other losses was due to FX translation movements (USD-to-CAD).
•
Interest expense relates to the draw down of our loan facility in the first quarter of this year (see Note 15 of the annual
financial statements).
16
Lending
(In thousands $)
SUMMARY INCOME STATEMENT
Management fees
Carried interest and performance fees
less: Carried interest and performance fee payouts
Net Fees
Finance income (1)
Gains (losses) on net investments
Other income (loss)
Total Net Revenues
Compensation
Placement and referral fees
Selling, general and administrative
Interest expense
Amortization and impairment charges
Other expenses
Total Expenses
3 months ended
12 months ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2019
Dec. 31, 2018
1,833
—
—
1,833
2,985
(134)
(219)
4,465
1,658
20
293
39
36
1,509
3,555
1,420
—
—
1,420
3,619
3,515
1,666
10,220
1,291
49
595
—
37
—
1,972
7,492
—
—
7,492
13,229
(1,542)
(1,069)
18,110
6,643
58
1,032
80
143
1,509
9,465
4,929
685
356
5,258
13,884
1,914
6,290
27,346
5,173
157
1,522
—
78
30
6,960
20,386
15,437
498,231
Net Income before income taxes
Adjusted base EBITDA
Total AUM (2)
(1) Includes: (1) interest income from on-balance sheet loans; and (2) co-investment income from lending LP units held as part of our long-term investments portfolio.
910
3,247
1,019,030
8,645
14,236
1,019,030
8,248
3,300
498,231
(2)
$1.7 billion (US$1.3 billion) of committed capital remains uncalled, of which $697 million (US$536 million) earns a commitment fee (AUM), and $980 million (US$754
million) does not (future AUM).
3 and 12 months ended
Adjusted base EBITDA in the quarter was $3.2 million, down $0.1 million (2%) from the prior period and was $14.2 million on a
full year basis, down $1.2 million (8%).
Our three months ended and full year results were primarily impacted by legacy loans repaid in full by the end of the third quarter,
which led to lower interest income over the periods. This more than offset increased management fees and co-investment income
as we continue to grow AUM in this segment.
Non-EBITDA highlights:
• Net investment losses were due to equity kicker valuations.
• Other losses was due to FX translation movements (USD-to-CAD).
• Other expenses related primarily to non-recurring professional fees.
17
Managed Equities*
(In thousands $)
SUMMARY INCOME STATEMENT
Management fees
Carried interest and performance fees
less: Trailer and sub-advisor fees
less: Carried interest and performance fee payouts
Net Fees
Gains (losses) on net investments
Other income (loss)
Total Net Revenues
Compensation
Selling, general and administrative
Amortization and impairment charges
Other expenses
Total Expenses
Net Income before income taxes
Adjusted base EBITDA
Total AUM
*See "Managed Equities" in the business overview section on page 7 of this MD&A.
3 and 12 months ended
3 months ended
12 months ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2019
Dec. 31, 2018
2,641
2,391
1,317
114
3,601
1,553
454
5,608
1,378
809
67
1
2,255
2,573
—
80
—
2,493
(164)
179
2,508
1,462
596
73
140
2,271
10,356
2,391
1,599
114
11,034
4,721
1,239
16,994
6,052
2,485
280
339
9,156
11,867
1,061
358
559
12,011
(395)
65
11,681
6,104
2,081
540
500
9,225
3,353
1,043
1,243,100
237
1,094
1,043,294
7,838
4,201
1,243,100
2,456
4,571
1,043,294
Adjusted base EBITDA in the quarter was $1 million, down $0.1 million (5%) from the prior period, and was $4.2 million on a full
year basis, down $0.4 million (8%).
Our three months ended results were primarily impacted by higher SG&A which more than offset lower compensation and higher
management fees. On a full year basis, the impact of lower average AUM on fixed-term LPs was more pronounced.
Non-EBITDA highlights:
• Net investments gains were due to market value appreciation of certain holdings.
18
Brokerage*
(In thousands $)
SUMMARY INCOME STATEMENT
Commissions
less: Commission expense
Net Commissions
Management fees
Finance income
Gains (losses) on net investments
Other income (loss)
Total Net Revenues
Compensation (1)
Placement and referral fees
Selling, general and administrative
Interest expense
Amortization and impairment charges
Other expenses
Total Expenses
3 months ended
12 months ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2019
Dec. 31, 2018
8,266
3,498
4,768
473
291
218
(1)
5,749
2,234
468
1,102
17
179
2
4,002
1,747
2,319
5,766
2,823
2,943
445
625
(829)
(167)
3,017
2,501
300
1,625
—
25
—
4,451
(1,434)
547
24,487
10,632
13,855
1,723
1,941
(149)
121
17,491
9,157
893
5,705
77
651
9
16,492
999
4,413
26,120
11,964
14,156
1,746
1,543
(1,701)
4,474
20,218
10,342
666
6,238
—
76
344
17,666
2,552
4,033
Net Income (Loss) before income taxes
Adjusted base EBITDA
*See "Brokerage" in the business overview section on page 7 of this MD&A.
(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 $2.3 million, up $1.8 million from the prior period, and was $4.4 million on a full year
basis, up $0.4 million.
Our three and twelve months ended results were positively impacted by a combination of lower compensation and SG&A expense
and higher net commissions on improved equity origination in the second half of the year. However, the weak equity origination
environment encountered in the first half of the year weighed down our full year results.
Non-EBITDA highlights:
• Net investment gains in the quarter and losses on a full year basis were the result of equity kicker valuations.
• Other income in the prior period was primarily related to net sales proceeds received on last year's sale transaction in the
first quarter of 2018. See Note 7 of the annual financial statements.
19
Corporate
This segment is primarily a cost centre that provides capital, balance sheet management and shared services to the Company's subsidiaries.
(In thousands $)
SUMMARY INCOME STATEMENT
Gains (losses) on net investments
Other income (loss)
Total Revenues
Compensation
Selling, general and administrative
Interest expense
Amortization and impairment charges
Other expenses
Total Expenses
Net Income (Loss) before income taxes
Adjusted base EBITDA
3 and 12 months ended
3 months ended
12 months ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2019
Dec. 31, 2018
(2,786)
422
(2,364)
2,580
483
33
1,049
119
4,264
(6,628)
(2,699)
5,348
(149)
5,199
4,022
328
12
59
159
4,580
619
(1,020)
(3,531)
795
(2,736)
7,651
2,553
123
2,660
861
13,848
2,334
138
2,472
10,308
2,630
93
142
1,355
14,528
(16,584)
(9,674)
(12,056)
(8,982)
• Net investments losses were due to market value depreciation of certain equity holdings and long-term investments.
• Compensation decreased due to lower LTIP amortization and lower incentive accruals.
•
SG&A increased in the quarter due to lower than normal operating expenses this time last year. The decrease on a full
year basis was primarily due to the adoption of IFRS 16 which was partially offset by lower than normal operating expenses
in the second half of last year.
• Higher amortization was due to increased depreciation expense related to leasehold improvements and leases that were
capitalized on the adoption of IFRS 16.
20
Dividends
The following dividends were declared by the Company during the year ended December 31, 2019:
Record date
Payment Date
Cash dividend per share ($)
Total dividend amount
(in thousands $)
March 08, 2019 - Regular Dividend Q4 - 2018
May 21, 2019 - Regular Dividend Q1 - 2019
August 19, 2019 - Regular Dividend Q2 - 2019
November 18, 2019 - Regular Dividend Q3 - 2019
Dividends (1)
March 25, 2019
June 5, 2019
September 3, 2019
December 3, 2019
0.03
0.03
0.03
0.03
7,602
7,605
7,614
7,614
30,435
(1) Subsequent to year-end, on February 27, 2020, a regular dividend of $0.03 per common share was declared for the quarter ended December 31, 2019. This
dividend is payable on March 24, 2020 to shareholders of record at the close of business on March 9, 2020.
Capital Stock
Including the 9 million unvested common shares currently held in the EPSP Trust (December 31, 2018 - 9.9 million), total capital
stock issued and outstanding was 253.1 million (December 31, 2018 - 253 million).
Earnings per share for the current and prior periods have been calculated using the weighted average number of shares outstanding
during the respective periods. Basic earnings per share were $0.01 and $0.06 for the quarter and twelve months ended respectively,
compared to $0.04 and $0.13 in the respective prior periods. Diluted earnings per share were $0.01 and $0.05 for the quarter
and twelve months ended respectively, compared to $0.04 and $0.12 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 2.6 million are exercisable.
21
Liquidity and Capital Resources
As at December 31, 2019, the Company had $20 million (December 31, 2018 - $Nil) outstanding on its credit facility, $5 million
of which is due within 12 months and $15 million is due after 12 months (December 31, 2018 - $Nil and $Nil respectively).
The Company has a 5 year, $90 million credit facility with a major Canadian schedule I chartered bank. The facility consists of a
$25 million term loan and a $65 million revolving line of credit. 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. In the first quarter, the
Company drew $25 million on the term loan portion of the credit facility to avoid its expiry and to partially fund anticipated growth
in the business over the next 12-18 months. As at December 31, 2019, the Company was in compliance with all covenants, terms
and conditions under the credit facility. Key terms under the credit facility are noted below:
Structure
Interest Rate
5-year, $65 million revolver with "bullet maturity" December 31, 2022
5-year, $25 million term loan with 5% of principal amortizing quarterly, with the remaining balance maturing
on December 31, 2022
Prime rate + 0 bps or;
Banker Acceptance Rate + 170 bps
Covenant Terms
Minimum AUM: $8.2 billion
Debt to EBITDA less than 2.5:1
EBITDA to interest expense more than 2.5:1
Commitments
Besides the Company's long-term lease agreements, there may be commitments to 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,
2019, the Company had $8.6 million in co-investment commitments from the lending segment (December 31, 2018 - $38.7 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.
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, expected volatility, and expected 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 and carried interest
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 annual 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.
23
Change in accounting policies
On January 1, 2019, the Company adopted IFRS 16 and IFRIC 23 Uncertainty over Income Tax Treatments ("IFRIC 23"). As a result,
the Company changed its accounting policies. As permitted by the transition provision of IFRS 16, the Company elected not to
restate comparative period results. Accordingly, all comparative period information is presented in accordance with previous
accounting policies. For a summary of the impact of the adoption of IFRS 16, see Note 2 of the annual financial statements. The
adoption of IFRIC 23 did not have a material impact on the Company's annual financial statements.
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 legacy loan book and 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 its lending segment and through co-investments made
in the lending LPs of the lending segment. In addition to the relative default probability of 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 that on-balance sheet 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 on-balance sheet 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 our co-investments in lending LPs arises from fluctuations in cash flows
from making capital calls and receiving capital distributions. The Company manages its loan co-investment liquidity risk through
the ongoing monitoring of scheduled capital calls and distributions ("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.
25
Disclosure Controls and Procedures ("DC&P") and Internal Control over Financial Reporting ("ICFR")
Management is responsible for the design and operational effectiveness of DC&P and ICFR in order to provide reasonable assurance
regarding the disclosure of material information relating to the Company. This includes information required to be disclosed in the
Company's annual filings, interim filings and other reports filed under securities legislation, as well as the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with IFRS.
Consistent with National Instrument 52-109, the Company's CEO and CFO evaluate quarterly the DC&P and ICFR. As at
December 31, 2019, the Company's CEO and CFO concluded that the Company's DC&P and ICFR were properly designed and
were operating effectively. In addition, there were no material changes to ICFR during the quarter.
Managing Risk: Non-financial
Managing Risk: Non-financial
Confidentiality of Information
Confidentiality is essential to the success of the Company's business, and it strives to consistently maintain the highest standards
of trust, integrity and professionalism. Account information is kept under strict control in compliance with all applicable laws, and
physical, procedural, and electronic safeguards are maintained in order to protect this information from access by unauthorized
parties. The Company keeps the affairs of its clients confidential and does not disclose the identities of clients (absent expressed
client consent to do so). If a prospective client requests a reference, the Company will not provide the name of an existing client
before receiving permission from that client to do so.
Conflicts of Interest
The Company established a number of policies with respect to employee personal trading. Employees may not trade any of the
securities held or being considered for investment by any of the Company's funds without prior approval. In addition, employees
must receive prior approval before they are permitted to buy or sell securities. Speculative trading is strongly discouraged. 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, 2019
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, 2019. 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, 2020
Kevin Hibbert, FCPA, FCA
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)
(cid:120)
the consolidated balance sheets as at December 31, 2019 and 2018;
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;
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, 2019 and 2018, 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.
Page 2
Other Information
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 2019".
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 2019" as at the date of this auditors’ 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 IFRS, 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.
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 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)
(cid:120)
(cid:120)
(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
intentional omissions,
resulting
misrepresentations, or the override of internal control;
involve collusion,
from error, as
fraud may
forgery,
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;
evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management;
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;
Page 4
(cid:120)
(cid:120)
(cid:120)
(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;
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;
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
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, 2020
Toronto, Canada
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
Loan facility
Income taxes payable
Total current liabilities
Other accrued liabilities
Loan facility
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)
(Notes 3 and 10)
(Note 7)
(Note 6)
(Note 3)
(Note 7)
(Note 4)
(Note 5)
(Note 5)
(Note 9)
(Notes 3 and 10)
(Note 15)
(Note 15)
(Note 9)
(Note 8)
(Note 8)
Commitments and provisions
(Notes 16 and 17)
The accompanying notes form part of the consolidated financial statements
"Ron Dewhurst"
Director
"Sharon Ranson, FCPA, FCA"
Director
Dec. 31
2019
Dec. 31
2018
71,495
11,338
—
22,847
16,951
1,879
124,510
—
97,300
1,780
21,195
148,975
25,006
5,578
299,834
424,344
30,843
9,027
—
5,000
1,054
45,924
5,546
15,000
3,152
69,622
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
41,641
9,466
255
—
607
51,969
—
—
3,125
55,094
413,114
43,672
(134,104)
32,040
354,722
424,344
412,938
43,383
(117,201)
34,001
373,121
428,215
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
Finance income
Gain (loss) on net investments
Other income (loss)
Total revenue
Expenses
Compensation
Stock-based compensation
Trailer and sub-advisor fees
Placement and referral fees
Selling, general and administrative
Interest expense
Amortization of intangibles
Amortization of property and equipment
Other expenses
Total expenses
Income before income taxes for the period
Provision (recovery) for income taxes
Net income for the period
Basic earnings per share
Diluted earnings per share
Net income for the period
Other comprehensive income (loss)
Items that may be reclassified subsequently to profit or loss
Foreign currency translation gain (loss) on foreign operations (taxes of $Nil)
Total other comprehensive income (loss)
Comprehensive income
The accompanying notes form part of the consolidated financial statements
For the years ended
Dec. 31
2019
Dec. 31
2018
54,957
2,391
25,522
15,170
(1,401)
(438)
96,201
39,596
7,149
1,429
1,136
16,556
1,373
1,167
3,866
6,778
79,050
17,151
3,619
13,532
(Note 3)
(Note 7)
(Note 8)
(Note 5)
(Note 4)
(Note 7)
(Note 9)
(Note 8) $
(Note 8) $
0.06 $
0.05 $
55,519
1,802
27,360
15,427
(2,942)
12,103
109,269
40,072
12,358
179
943
17,066
419
1,431
768
3,376
76,612
32,657
1,278
31,379
0.13
0.12
13,532
31,379
(1,961)
(1,961)
4,328
4,328
11,571
35,707
34
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of Canadian dollars, other than number of
shares)
At Dec. 31, 2018
Shares acquired for equity incentive plan
Shares released on vesting of equity incentive plan
Shares acquired and canceled under normal course issuer bid
Foreign currency translation loss on foreign operations
Stock-based compensation
Issuance of share capital on conversion of RSUs and other
share based considerations
Dividends declared
Net income
Number of
Shares
Outstanding
243,062,337
(1,826,124)
2,803,998
(740,600)
—
—
815,289
61,519
—
(Note 8)
(Note 8)
(Note 8)
(Note 8)
(Note 8)
(Note 12)
Capital
Stock
Contributed
Surplus
Deficit
Accumulated
Other
Comprehensive
Income
Total
Equity
412,938
(6,479)
6,535
(2,266)
—
—
2,191
195
—
43,383
—
(6,535)
—
—
7,149
(325)
—
—
(117,201)
—
—
—
—
—
—
(30,435)
13,532
34,001
—
—
—
(1,961)
—
—
—
—
373,121
(6,479)
—
(2,266)
(1,961)
7,149
1,866
(30,240)
13,532
Balance, Dec. 31, 2019
244,176,419
413,114
43,672
(134,104)
32,040
354,722
At Dec. 31, 2017
IFRS 9 transition adjustment
Shares acquired for equity incentive plan
Shares released on vesting of equity incentive plan
Shares released on exercise of stock option plan
Foreign currency translation loss on foreign operations
Issuance of share capital on purchase of management contracts
Stock-based compensation
Issuance of share capital on conversion of RSUs and other
share based considerations
Dividends declared
Net income
234,098,634
—
(2,402,500)
2,836,201
558,048
—
6,997,387
—
635,939
338,628
—
392,556
—
(7,161)
6,446
1,217
—
17,284
—
1,581
1,015
—
39,907
—
—
(6,446)
(1,217)
—
—
12,358
(1,219)
—
—
(118,272)
(50)
—
—
—
—
—
—
(30,258)
31,379
29,673
—
—
—
4,328
—
—
—
—
—
343,864
(50)
(7,161)
—
—
4,328
17,284
12,358
362
(29,243)
31,379
Balance, Dec. 31, 2018
243,062,337
412,938
43,383
(117,201)
34,001
373,121
The accompanying notes form part of the consolidated financial statements
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
Operating Activities
Net income for the period
Add (deduct) non-cash items:
Loss (gain) on net proprietary investments
Stock-based compensation
Amortization of property, equipment and intangible assets
Current portion of lease liability
Deferred income tax recovery
Current income tax expense
Other items
Income taxes paid
Changes in:
Fees receivable
Loans receivable
Other assets
Accounts payable, accrued liabilities and compensation payable
Cash provided by operating activities
Investing Activities
Purchase of investments
Sale of investments
Purchase of property and equipment
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 under normal course issuer bid
Net advances from loan facility
Dividends paid
Cash provided by (used in) financing activities
Effect of foreign exchange on cash balances
Net increase (decrease) in cash and cash equivalents during the year
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash and cash equivalents:
Cash
Short-term deposits
Supplementary disclosure of cash flow information
Amount of interest received during the year
The accompanying notes form part of the consolidated financial statements
For the years ended
Dec. 31
2019
Dec. 31
2018
13,532
31,379
1,401
7,149
5,033
(2,133)
303
3,316
172
(2,437)
(2,703)
36,021
(6,743)
(11,237)
41,674
(45,383)
50,370
(2,952)
—
2,035
(6,479)
(2,266)
20,000
(30,240)
(18,985)
(481)
24,243
47,252
71,495
66,240
5,255
71,495
5,301
2,942
12,358
2,199
—
1,022
256
(435)
(3,852)
5,141
12,652
12,621
14,728
91,011
(79,267)
37,077
(7,805)
(115,719)
(165,714)
(7,161)
—
—
(29,243)
(36,404)
2,239
(108,868)
156,120
47,252
41,999
5,253
47,252
8,689
36
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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, 2019 and 2018 ("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, 2020 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 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 Capital Partners LP ("SCP");
• 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 Inc. 2011 Employee Profit Sharing Plan Trust (the "Trust")
37
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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
Classification and measurement of Financial Assets
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.
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, co-investments in funds 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 in gains (loss) on net investments on the consolidated statements of operations and comprehensive income.
38
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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:
• 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 credit losses over
the expected lifetime of the Loan. Any subsequent recognition of finance 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 finance
income over the term of the loan using the effective interest method. Fees received may include cash payments and/or securities
in the borrower.
39
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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.
Finance income, which includes interest income and co-investment 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.
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.
40
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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 comprehensive
income 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 and comprehensive income 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 other comprehensive income (loss) or elsewhere in equity.
Deferred taxes are recognized using the liability method for temporary differences that exist between the carrying amounts of assets
and liabilities in the consolidated balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred
tax assets and liabilities are determined based on the enacted or substantively enacted tax rates that are expected to apply when
the differences related to the assets or liabilities reported for tax purposes are expected to reverse in the future. Deferred tax assets
are recognized only when it is probable that sufficient taxable profits will be available or taxable temporary differences reversing
in future periods against which deductible temporary differences may be utilized.
Deferred taxes liabilities are not recognized on the following temporary differences:
• Temporary differences on the initial recognition of assets and liabilities in a transaction that is not a business combination and
that affects neither accounting nor taxable profit or loss;
• Taxable temporary differences related to investments in subsidiaries, associates or joint ventures or joint operations to the
extent they are controlled by the Company and they will not reverse in the foreseeable future;
• Taxable temporary differences arising on the initial recognition of goodwill.
The Company records a provision for uncertain tax positions if it is probable that the Company will have to make a payment to tax
authorities upon their examination of a tax position. This provision is measured at the Company's best estimate of the amount
expected to be paid. Provisions are reversed to income in the period in which management assesses they are no longer required
or determined by statute.
The measurement of tax assets and liabilities requires an assessment of the potential tax consequences of items that can only be
resolved through agreement with the tax authorities. While the ultimate outcome of such tax audits and discussions cannot be
determined with certainty, management estimates the level of provisions required for both current and deferred taxes.
41
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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.
Leases
Changes in accounting policies
The Company adopted IFRS 16 Leases (“IFRS 16”) during the year. As permitted by the transition provisions of IFRS 16,
the Company applied a modified retrospective approach. Accordingly, the Company elected not to restate comparative
period results and there was no impact to opening retained earnings. Below is a summary of the IFRS 16 impacts.
Lease Commitments
The Company recognizes a right-to-use asset and a lease liability as at the lease commencement date. The right-to-use
asset is initially measured at cost and subsequently at cost less any accumulated depreciation and impairment. The lease
liability is initially measured at the present value of future lease payments over the anticipated lease term, discounted using
the Company's incremental borrowing rate. Upon transition to IFRS 16, a right-to-use asset and lease liability of $9.8 million
were recorded. The right-to-use asset is presented on the property and equipment line of the consolidated balance sheet
and the short and long-term portions of the lease liability are presented on the accounts payable and accrued liabilities
line and other accrued liabilities line, respectively, of the consolidated balance sheet. The Company used the practical
expedient when applying IFRS 16 for short-term leases under 12 months and low-value assets such as IT equipment, with
lease payments being expensed as they are occurred.
42
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
Prior to the adoption of IFRS 16, the Company classified its lease obligation as operating leases, with the lease payments
being presented within the selling, general and administrative line of the consolidated statements of operations. Upon
transition to IFRS 16, the right-to-use asset is amortized on a straight-line basis over the term of the lease with the
amortization expense being presented on the amortization of property and equipment line of the consolidated statements
of operations. The lease liability is subsequently remeasured at amortized cost using the effective interest rate method, with
the interest charge on the incremental borrowing rate being presented on the interest expense line of the consolidated
statements of operations.
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.
Expected credit loss
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, 2019 and 2018
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.
44
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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, 2019
Dec. 31, 2018
FVTPL
FVTPL
FVTPL
Non-financial instrument
13,738
5,511
2,434
1,164
22,847
19,066
2,796
2,830
2,019
26,711
Obligations related to securities sold short
FVTPL
—
255
Long-term investments
Consists of the following (in thousands $):
Co-investments in funds
Private holdings
- Private investments
Total long-term investments
Classification and
measurement criteria
Dec. 31, 2019
Dec. 31, 2018
FVTPL
72,602
77,615
FVTPL
24,698
97,300
24,945
102,560
Gains and losses on financial assets and liabilities classified at FVTPL are included in the gain (loss) on net investments on
the consolidated statements of operations.
45
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
4 PROPERTY AND EQUIPMENT
Consist of the following (in thousands $):
Artwork
Furniture and
fixtures
Computer
hardware and
software
Right of use
assets
and
Leasehold
improvements
Total
2,996
—
6,605
—
9,601
—
—
9,601
—
—
—
—
—
—
—
—
9,601
9,601
3,148
(28)
2
44
3,166
146
(12)
3,300
(3,077)
28
(27)
(44)
(3,120)
(58)
41
(3,137)
46
163
2,619
(54)
946
53
3,564
—
(30)
3,534
(2,564)
44
(297)
(46)
(2,863)
(442)
27
(3,278)
701
256
3,939
(28)
252
34
4,197
12,679
(139)
16,737
(1,762)
18
(444)
(23)
(2,211)
(3,366)
15
(5,562)
12,702
(110)
7,805
131
20,528
12,825
(181)
33,172
(7,403)
90
(768)
(113)
(8,194)
(3,866)
83
(11,977)
1,986
11,175
12,334
21,195
Cost
At December 31, 2017
Disposal on Sale Transaction
Additions
Net exchange differences
At December 31, 2018
Additions
Net exchange differences
At December 31, 2019
Accumulated amortization
At December 31, 2017
Disposal on Sale Transaction
Charge for the year
Net exchange differences
At December 31, 2018
Charge for the year
Net exchange differences
At December 31, 2019
Net book value at:
December 31, 2018
December 31, 2019
46
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
5
GOODWILL AND INTANGIBLE ASSETS
Consist of the following (in thousands $):
Cost
At December 31, 2017
Additions
Net exchange differences
At December 31, 2018
Additions
Net exchange differences
At December 31, 2019
Accumulated amortization
At December 31, 2017
Amortization charge for the period
Net exchange differences
At December 31, 2018
Amortization charge for the period
Net exchange differences
At December 31, 2019
Net book value at:
December 31, 2018
December 31, 2019
Fund
management
contracts
(indefinite life)
Fund
management
contracts
(finite life)
Total
Goodwill
166,882
—
13,482
180,364
—
(7,142)
173,222
(142,859)
—
(11,390)
(154,249)
—
6,033
(148,216)
—
133,303
—
133,303
1,830
(12)
135,121
—
—
—
—
—
—
—
47,416
—
—
47,416
—
—
47,416
(30,964)
(1,431)
—
(32,395)
(1,167)
—
(33,562)
214,298
133,303
13,482
361,083
1,830
(7,154)
355,759
(173,823)
(1,431)
(11,390)
(186,644)
(1,167)
6,033
(181,778)
26,115
25,006
133,303
135,121
15,021
13,854
174,439
173,981
47
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
Impairment assessment of goodwill
Previously, the Company reported seven cash generating units ("CGU") for goodwill impairment assessment and testing
purposes:
•
Exchange Listed Products
• Alternative Asset Management
• Global
•
Lending
• Consulting
• Merchant Banking & Advisory
• Corporate
During the first quarter of 2019, as the Company completed the reorganization of its reportable segments, the assets that
were previously aggregated to create the global CGU no longer met the requirements of a CGU as they no longer generated
independent cash flows. As a result, these assets were disaggregated from the global CGU, and were reallocated to existing
CGUs with similar assets that generate largely independent cash flows (brokerage assets within the brokerage CGU and
fixed term LP assets within the managed equities CGU). The Company CGUs are now as follows:
•
•
Exchange Listed Products
Lending
• Managed Equities
• Brokerage
• Corporate
As at December 31, 2019, the Company had allocated $25 million (December 31, 2018 - $26.1 million) of goodwill on a
relative value approach basis to the exchange listed products and managed equities CGUs (previously called the alternative
asset management CGU).
In the normal course, goodwill is tested for impairment once per annum, which for the Company is during the fourth quarter
of each year or earlier if there are indicators of impairment. During the impairment testing process, there was no impairment
in either the exchange listed products CGU or the managed equities CGU.
Impairment assessment of indefinite life fund management contracts
As at December 31, 2019, the Company had an exchange listed fund management contract within the exchange listed
products CGU of $135.1 million related to Central Fund of Canada (December 31, 2018 - $133.3 million). The addition
during the year was for integration costs. There was no impairment as at December 31, 2019.
Impairment assessment of finite life fund management contracts
As at December 31, 2019, the Company had exchange listed fund management contracts within the exchange listed
products CGU of $13.9 million (December 31, 2018 - $15 million). There was no impairment as at December 31, 2019.
48
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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 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
Expected credit loss provision
Less: current portion
Total carrying value of non-current loans receivable
Expected credit losses ("ECL")
Dec. 31, 2019
Dec. 31, 2018
—
—
—
—
—
—
—
37,873
14
(1,816)
36,071
(50)
(15,275)
20,746
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. Finance 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 finance income recognized.
At each reporting date, the Company performs a comprehensive review of each loan measured at amortized cost in its
portfolio to determine the requirements for an ECL provision. As at December 31, 2019, the Company had no loans measured
at amortized cost.
Finance income on impaired loans and the changes in expected credit loss provisions are as follows (in thousands $):
For the years ended
Dec. 31, 2019
Dec. 31, 2018
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
—
50
—
50
(50)
—
—
—
—
50
50
—
—
50
49
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
Sector distribution of loan principal
Distribution of the Company's outstanding loan principal balances by sector:
Loans
Metals and mining
Energy and other
Total loan principal
Dec. 31, 2019
Dec. 31, 2018
Number of Loans
(in thousands $)
Number of Loans
(in thousands $)
—
—
—
—
—
—
1
2
3
34,931
2,942
37,873
Geographic distribution of loan principal
Distribution of the Company's outstanding loan principal balances by geographic location of the underlying security:
Loans
Canada
United States of America
Total loan principal
Dec. 31, 2019
Dec. 31, 2018
Number of Loans
(in thousands $)
Number of Loans
(in thousands $)
—
—
—
—
—
—
1
2
3
1,578
36,295
37,873
50
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
7
OTHER ASSETS, INCOME AND EXPENSES
Other assets
Consist of the following (in thousands $):
Fund recoveries and investment receivables
Deferred Tocqueville acquisition costs(1)
Prepaid expenses
Other (2)
Total Other assets
(1) Includes legal, proxy and investor relations costs.
(2) Other includes miscellaneous third-party receivables.
Other income (loss)
Consist of the following (in thousands $):
Net proceeds from sale transaction (1)
Other investment income (2)
Foreign exchange gain (losses)
Total Other income (loss) (3)
Dec. 31, 2019
7,772
2,358
5,687
2,914
18,731
Dec. 31, 2018
4,722
—
5,369
1,897
11,988
For the years ended
Dec. 31, 2019
Dec. 31, 2018
—
826
(1,960)
(1,134)
4,200
4,417
2,310
10,927
(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.
(2) Primarily includes investment fund income, syndication and trailer fee income.
(3) Excludes royalty income of $0.7 million on a twelve month ended basis (December 31, 2018 - $1.2 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
For the years ended
Dec. 31, 2019
Dec. 31, 2018
756
5,326
6,082
(28)
2,228
2,200
(1) Includes operating, depletion and impairment charges, net of royalty income of $0.7 million on a twelve month ended basis (December 31, 2018 - $1.2 million).
(2) Includes non-recurring professional fees and transaction costs.
51
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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, 2017
Issuance of share capital under dividend reinvestment program
Issuance of share capital on purchase of management contracts
Released on exercise of stock option plan
Issuance of share capital on conversion of RSUs
Acquired for equity incentive plan
Released on vesting of equity incentive plan
At Dec. 31, 2018
Issuance of share capital under dividend reinvestment program
Issuance of share capital on conversion of RSUs and other share based
considerations
Acquired for equity incentive plan
Acquired and cancelled under normal course issuer bid
Released on vesting of equity incentive plan
At Dec. 31, 2019
Number
of shares
Stated value
(in thousands $)
234,098,634
392,556
338,628
6,997,387
558,048
635,939
(2,402,500)
2,836,201
243,062,337
61,519
815,289
(1,826,124)
(740,600)
2,803,998
1,015
17,284
1,217
1,581
(7,161)
6,446
412,938
195
2,191
(6,479)
(2,266)
6,535
244,176,419
413,114
Contributed surplus consists of: stock option expense; earn-out shares expense; equity incentive plans' expense; and
additional purchase consideration.
At Dec. 31, 2017
Expensing of Stock-based compensation over the vesting period
Issuance of share capital on conversion of RSUs
Released on exercise of stock option plan
Released on vesting of common shares for equity incentive plan
At Dec. 31, 2018
Expensing of Stock-based compensation over the vesting period
Issuance of share capital on conversion of RSUs and other share based considerations
Released on vesting of common shares for equity incentive plan
At Dec. 31, 2019
Stated value
(in thousands $)
39,907
12,358
(1,219)
(1,217)
(6,446)
43,383
7,149
(325)
(6,535)
43,672
52
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
Stock option plan
The Company has an option plan (the "Plan") intended to provide incentives to directors, officers, employees and consultants
of the Company and its wholly owned subsidiaries. The aggregate number of shares issuable upon the exercise of all options
granted under the Plan and under all other stock-based compensation arrangements including the Trust and Equity Incentive
Plan ("EIP") cannot exceed 10% of the issued and outstanding shares of the Company as at the date of grant. The options
may be granted at a price that is not less than the market price of the Company's common shares at the time of grant. The
options vest annually over a three-year period and may be exercised during a period not to exceed 10 years from the date
of grant.
There were no stock options issued for the twelve months ended December 31, 2019 (twelve months ended December 31,
2018 - 750,000). There were no options exercised for the year ended December 31, 2019 (year ended December 31, 2018
- 2,000,000 options).
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, 2017
Options exercisable, December 31, 2017
Options issued
Options exercised
Options expired
Options outstanding, December 31, 2018
Options exercisable, December 31, 2018
Options outstanding, December 31, 2019
Options exercisable, December 31, 2019
Options outstanding and exercisable as at December 31, 2019 are as follows:
Number of options
(in thousands)
Weighted average
exercise price ($)
6,975
5,625
750
(2,000)
(2,450)
3,275
1,875
3,275
2,575
5.14
5.79
2.33
2.33
10.00
2.57
2.70
2.57
2.60
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
0.9
6.1
6.4
5.9
150
2,300
125
2,575
53
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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 699,549 RSUs granted during the twelve months ended December 31, 2019 (twelve months ended December
31, 2018 - 2,396,538). The Trust purchased 1.8 million shares in the year ended December 31, 2019 (year ended December
31, 2018 - 2.4 million shares).
Common shares held by the Trust, December 31, 2017
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2018
Acquired
Released on vesting
Unvested common shares held by the Trust, December 31, 2019
Number of
common shares
10,365,957
2,402,500
(2,836,201)
9,932,256
1,826,124
(2,803,998)
8,954,382
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, 2019
Dec. 31, 2018
247
6,902
7,149
424
11,934
12,358
54
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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
For the years ended
Dec. 31, 2019
Dec. 31, 2018
13,532
31,379
253,568
251,848
(9,691)
243,877
3,125
(11,656)
240,192
3,125
Weighted average number of unvested shares purchased by the Trust
9,691
11,656
Weighted average number of common shares - diluted
256,693
254,973
Net income per common share
Basic
Diluted
$
$
0.06 $
0.05 $
0.13
0.12
Capital management
The Company's objectives when managing capital are:
•
•
•
•
•
to meet regulatory requirements and other contractual obligations;
to safeguard the Company's ability to continue as a going concern so that it can continue to provide returns for
shareholders;
to provide financial flexibility to fund possible acquisitions;
to provide adequate seed capital for the Company's new product offerings; and
to provide an adequate return to shareholders through growth in assets under management, growth in
management fees, 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). SCP 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, 2019
and 2018, 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, 2019 and 2018
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 consolidated statements of operations
For the years ended
Dec. 31, 2019
Dec. 31, 2018
3,163
153
3,316
303
3,619
393
(137)
256
1,022
1,278
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
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, 2019
Dec. 31, 2018
17,151
4,545
139
(62)
115
153
(11)
(1,844)
584
3,619
32,657
8,631
153
(559)
(388)
(137)
(279)
(6,680)
537
1,278
The weighted average statutory tax rate was 26.5% (December 31, 2018 - 26.4%). The Company has $7 million of capital tax losses from prior years
that will begin to expire in 2020. The benefit of these capital losses has not been recognized.
56
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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, 2019
Deferred income tax assets
Stock-based compensation
Non-capital losses
Unrealized losses
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, 2018
Deferred income tax assets
Other stock-based compensation
Non-capital losses
Unrealized losses
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
Dec. 31, 2018
Recognized in
income
Recognized in
other
comprehensive
income
Dec. 31, 2019
4,300
5,018
386
513
10,217
7,317
70
59
7,446
2,771
998
(495)
803
(190)
1,116
1,873
(70)
(384)
1,419
(303)
—
(42)
—
(42)
—
—
—
—
(42)
5,298
4,481
1,189
323
11,291
9,190
—
(325)
8,865
2,426
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
57
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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, 2019 and 2018 (in thousands $).
Proprietary Investments
Dec. 31, 2019
Level 1
Level 2
Level 3
Total
Public equities and share purchase warrants
Fixed income securities
Private holdings
Total net recurring fair value measurements
9,843
—
—
9,843
3,895
4,511
—
8,406
—
1,000
2,434
3,434
13,738
5,511
2,434
21,683
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
Long-term investments
Dec. 31, 2019
Co-investments in funds
Private holdings
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
Level 1
Level 2
Level 3
Total
—
—
—
66,686
—
66,686
5,916
24,698
30,614
72,602
24,698
97,300
Dec. 31, 2018
Level 1
Level 2
Level 3
Total
Co-investments in funds
Private holdings
Total net recurring fair value measurements
—
—
—
72,739
—
72,739
4,876
24,945
29,821
77,615
24,945
102,560
58
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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 2019
Dec. 31, 2018
Purchases and
reclassifications
Settlements
Private holdings
Fixed income securities
2,830
1,000
3,830
45
—
45
Net unrealized
gains (losses)
included in net
income
Dec. 31, 2019
(57)
—
(57)
(384)
—
(384)
2,434
1,000
3,434
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
Private holdings
Fixed income securities
Long-term investments
Changes in the fair value of Level 3 measurements - Dec. 31, 2019
Dec. 31, 2018
Purchases and
reclassifications
Settlements
Private holdings
Co-investments in funds
24,945
4,876
29,821
3,424
1,587
5,011
Net unrealized
gains (losses)
included in net
income
Dec. 31, 2019
—
—
—
(3,671)
(547)
(4,218)
24,698
5,916
30,614
Changes in the fair value of Level 3 measurements - Dec. 31, 2018
Dec. 31, 2017
Purchases and
reclassifications
Settlements
Private holdings
Co-investments in funds
8,884
3,268
12,152
11,678
1,467
13,145
Net unrealized
gains (losses)
included in net
income
Dec. 31, 2018
4,383
141
4,524
24,945
4,876
29,821
—
—
—
During the year ended December 31, 2019, the Company transferred public equities of $3.6 million (December 31, 2018 - $0.7 million)
from Level 2 to Level 1 within the fair value hierarchy due to the release of trading restrictions by the issuer. For the year ended
December 31, 2019, the Company purchased level 3 investments of $5.1 million (December 31, 2018 - $16.3 million). For the year
ended December 31, 2019, the Company transferred $0.1 million (December 31, 2018 - $Nil) 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, 2019 and 2018
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
Private holdings
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.
Fair values based on variety of valuation techniques, including discounted
cash flows, comparable recent transactions and other techniques used by
market participants
The Company’s Level 3 securities consist of private holdings, co-investment in funds and fixed income securities of private
companies. The significant unobservable inputs 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,
2018 - $1.2 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 $):
Fixed salaries and benefits
Variable incentive-based compensation
Share-based compensation
For the years ended
Dec. 31, 2019 Dec. 31, 2018
2,845
4,494
2,215
9,554
3,186
4,976
4,344
12,506
The DSU plan for independent directors of the Company vests annually over a three-year period and may only be settled
in cash upon retirement. DSUs issued in lieu of directors' fees and dividends vest immediately. There were 123,497 DSUs
issued during the year (December 31, 2018 - 123,660).
60
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
12 DIVIDENDS
The following dividends were declared by the Company during the year ended December 31, 2019:
Record date
March 08, 2019 - Regular Dividend Q4 - 2018
May 21, 2019 - Regular Dividend Q1 - 2019
August 19, 2019 - Regular Dividend Q2 - 2019
November 18, 2019 - Regular Dividend Q3 - 2019
Dividends (1)
Payment Date
March 25, 2019
June 5, 2019
September 3, 2019
December 3, 2019
Cash dividend per
share ($)
Total dividend amount
(in thousands $)
0.03
0.03
0.03
0.03
7,602
7,605
7,614
7,614
30,435
(1) Subsequent to year-end, on February 27, 2020, a regular dividend of $0.03 per common share was declared for the quarter ended December 31,
2019. This dividend is payable on March 24, 2020 to shareholders of record at the close of business on March 9, 2020.
61
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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 FVTPL. 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 FVTPL increased or decreased by 5%, with all other variables held constant, this
would have resulted in an increase or decrease in net income before tax of approximately $5.9 million for the year
(December 31, 2018 - $6.4 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, SRLC, SC, RCIC and SAM US.
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 co-investment in lending
LPs, are exposed to volatility as a result of sudden changes in interest rates.
As at December 31, 2019, the Company had $5.5 million of fixed income securities (December 31, 2018 - $2.8
million).
Foreign currency risk
Foreign currency risk arises from foreign exchange rate movements that could negatively impact either the carrying
value of financial assets and liabilities or the related cash flows when translating those balances into Canadian
dollars. The Company's primary foreign currency is the United States dollar ("USD"). The Company may employ
certain hedging strategies to mitigate foreign currency risk.
The Global Companies' assets are all denominated in USD with their translation impact being reported as part of
other comprehensive income in the financial statements. Excluding the impact of the Global Companies, as at
December 31, 2019, approximately $96.3 million (December 31, 2018 - $103.3 million) of total Canadian assets
were invested in proprietary investments priced in USD. A total of $38.8 million (December 31, 2018 - $17.3
million) of cash, $7.4 million (December 31, 2018 -$1.3 million) of accounts receivable, $Nil (December 31, 2018
- $34.5 million) of loans receivable and $4.8 million (December 31, 2018 - $2.6 million) of other assets were
denominated in USD. As at December 31, 2019, 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 $7.4 million for the year (December 31, 2018 - $7.9 million) and there would be $Nil
impact to other comprehensive income (December 31, 2018 - $Nil).
62
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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, 2019 had no exposure to credit risk via on-balance sheet loans of SRLC (December 31, 2018
- $36 million). The Company will syndicate loans in certain circumstances if it wishes to reduce its exposure to a
borrower or comply with loan exposure maximums. The Company reviews its policies regarding its lending limits
on an ongoing basis. For precious metal loans, the Company performs the same due diligence procedures as it
would for its resource loans and resource debentures.
Collectability of loans
Besides the above noted measures we take to manage credit risk, the Company will report on credit risk in the
notes to the annual consolidated financial statements and records expected credit loss provisions to ensure that
on-balance sheet 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 on-balance sheet
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 various proprietary transactions. As at
December 31, 2019 and 2018, the Company's most significant proprietary investments counterparty was National
Bank Correspondent Network Inc. ("NBCN"), the carrying broker of SCP, 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.
63
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
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, 2019 and 2018, 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, 2019, the Company had $71.5 million or 17% (December 31, 2018 - $47.3 or 11%) of its total
assets in cash and cash equivalents. In addition, approximately $13.7 million or 14% (December 31, 2018 - $19.1
million or 19%) 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 our co-investments in lending LPs arises from fluctuations
in cash flows from making capital calls and receiving capital distributions. The Company manages its loan co-
investment liquidity risk through the ongoing monitoring of scheduled capital calls and distributions ("match
funding") and through its broader treasury risk management program and enterprise capital budgeting. As at
December 31, 2019, the Company had $8.6 million in co-investment commitments from the Lending segment
(December 31, 2018 - $38.7 million) . Financial liabilities, including accounts payable and accrued liabilities and
compensation and employee bonuses payable, are short-term in nature and are generally due within a year.
The Company's management team is responsible for reviewing resources to ensure funds are readily available to
meet its financial obligations as they come due, as well as ensuring adequate funds exist to support business
strategies and operations growth. The Company manages liquidity risk by monitoring cash balances on a daily
basis. To meet any liquidity shortfalls, actions taken by the Company could include: syndicating a portion of its
loans; slowing its lending activities; drawing on 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.
64
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
14 SEGMENTED INFORMATION
For management purposes, the Company is organized into business units based on its products, services and geographical
location and has five reportable segments as follows:
•
•
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;
Lending (reportable), which provides lending activities through limited partnership vehicles as well as through
direct lending activities using the Company's balance sheet;
• Managed Equities (reportable), which provides asset management and sub-advisory services to the Company's
branded funds, fixed-term LPs and managed accounts;
•
•
Brokerage (reportable), which includes the activities of our Canadian and U.S broker-dealers;
Corporate (reportable), which provides capital, balance sheet management and enterprise shared services to
the Company's subsidiaries;
•
All Other Segments (non-reportable), which do not meet the definition of reportable segments as per IFRS 8.
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.
The following tables present the operations of the Company's segments (in thousands $):
For the year ended December 31, 2019
Total revenue
Total expenses
Pre-tax Income (loss)
Adjusted base EBITDA
For the year ended December 31, 2018
Total revenue
Total expenses
Pre-tax Income (loss)
Adjusted base EBITDA
Exchange
Listed
Products
31,666
11,433
20,233
23,863
Exchange
Listed
Products
33,479
9.057
24.422
24,924
Lending
18,110
9,465
8,645
14,236
Lending
27,702
7,316
20,386
15,437
Managed
Equities
18,707
10,869
7,838
4,201
Brokerage
Corporate
Elimination
and all other
segments
Consolidated
28,123
27,124
999
4,413
(2,736)
13,848
(16,584)
(9,674)
2,331
6,311
(3,980)
1,427
96,201
79,050
17,151
38,466
Managed
Equities (1)
Brokerage (1)
Corporate
Elimination
and all other
segments (1)
Consolidated
12,598
10,142
2,456
4,571
32,182
29,630
2,552
4,033
2,472
14,528
(12,056)
(8,982)
836
5.939
(5.103)
529
109,269
76,612
32,657
40,512
(1) Prior year figures have been restated to reflect the changes in operating segments.
65
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
For geographic reporting purposes, transactions are primarily recorded in the location that corresponds with the underlying
subsidiary's country of domicile that generates the revenue. The following table presents the revenue of the Company by geographic
location (in thousands $):
Canada
United States
15
LOAN FACILITY
For the years ended
Dec. 31, 2019
Dec. 31, 2018
82,708
13,493
96,201
94,719
14,550
109,269
As at December 31, 2019, the Company had $20 million (December 31, 2018 - $Nil) outstanding on its credit facility,
$5 million of which is due within 12 months and $15 million is due after 12 months (December 31, 2018 - $Nil and
$Nil respectively).
The Company has a 5 year, $90 million credit facility with a major Canadian schedule I chartered bank. The facility consists
of a $25 million term loan and a $65 million revolving line of credit. 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. In the
first quarter, the Company drew $25 million on the term loan portion of the credit facility to avoid its expiry and to partially
fund anticipated growth in the business over the next 12-18 months. As at December 31, 2019, the Company was in
compliance with all covenants, terms and conditions under the credit facility. Key terms under the credit facility are noted
below:
Structure
5-year, $65 million revolver with "bullet maturity" December 31, 2022
5-year, $25 million term loan with 5% of principal amortizing quarterly with the remaining balance maturing
on December 31, 2022
Interest Rate
Prime rate + 0 bps or;
Banker Acceptance Rate + 170 bps
Covenant Terms
Minimum AUM: $8.2 billion
Debt to EBITDA less than 2.5:1
EBITDA to interest expense more than 2.5:1
16 COMMITMENTS AND PROVISIONS
Besides the Company's long-term lease agreement, there may be commitments to make investments in the net investments
portfolio of the Company. As at December 31, 2019, the Company had $8.6 million in co-investment commitments from
the lending segment (December 31, 2018 - $38.7 million).
66
SPROTT INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
17. EVENTS AFTER THE REPORTING PERIOD
On January 17, 2020, the Company successfully closed on the acquisition of the Tocqueville Asset Management's gold
strategies for proceeds of US$15 million. Contingent consideration valued up to an additional US$35 million is payable
subject to the achievement of certain financial performance conditions over two years following the closing of the transaction.
67
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
Ronald Dewhurst, Chairman
Sharon Ranson, FCPA, FCA, Director
Rosemary Zigrossi, Director
Graham Birch, Director
Peter Grosskopf, Chief Executive Officer and Director
Rick Rule, Director
Whitney George, President
Kevin Hibbert, FCPA, FCA, 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
Stikeman Elliot LLP
5300 Commerce Court West
199 Bay Street
Toronto, Ontario M5L 1B9
Auditors
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto, Ontario 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 8, 2020 12:00 pm
Stikeman Elliot LLP
5300 Commerce Court West
199 Bay Street
Toronto, Ontario M5L 1B9
www.sprott.com
www.sprott.com