THE WESTAIM CORPORATION
ANNUAL REPORT 2014
THE WESTAIM CORPORATION
ANNUAL REPORT 2014
Contents
Letter to Shareholders
Management’s Discussion and Analysis
Management’s Responsibility for Financial Information
Independent Auditor’s Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Board of Directors
Shareholder and Corporate Information
All figures are in Canadian dollars, unless otherwise stated.
1
2
16
17
18
22
35
35
LETTER TO SHAREHOLDERS
Dear Shareholders:
In 2014, Westaim successfully completed a significant investment in Houston International Insurance
Group, Ltd. (“HIIG”). HIIG is a global specialty insurance company and is led by its Chairman and Chief
Executive Officer, Stephen L. Way, who previously founded and led HCC Insurance Holdings, Inc.
(NYSE: “HCC”) which became a multi-billion dollar global specialty insurer, achieving significant
shareholder returns. In January, 2015, Westaim made an additional investment in HIIG and the
Company now owns an approximate 44% indirect interest in HIIG. We are pleased to have invested
alongside global insurers/reinsurers Everest Re Group, Ltd. and Catlin Group Limited and other investors,
including Stephen L. Way and his experienced and seasoned management team.
Westaim has been actively pursuing additional investments aligned with its strategy and objectives of
creating shareholder value over the long term and will continue to do so. The Company’s focus is on
investment opportunities in the financial services sector and it aims to partner with proven management
teams that have demonstrated successful execution to achieve attractive risk-adjusted returns.
On behalf of the Board of Directors, I want to thank Westaim shareholders, employees and other
stakeholders for their support over the past year and look forward to a rewarding 2015.
Sincerely,
J. Cameron MacDonald,
President and Chief Executive Officer
- 1 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
TABLE OF CONTENTS
1.
THE COMPANY
2. OVERVIEW OF PERFORMANCE
3.
4.
5.
6.
INVESTMENTS IN PRIVATE ENTITIES
EQUITY FINANCINGS
ANALYSIS OF FINANCIAL RESULTS
ANALYSIS OF FINANCIAL POSITION
7. OUTLOOK
8.
LIQUIDITY AND CAPITAL RESOURCES
9. RELATED PARTY TRANSACTIONS
10. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
11. CRITICAL ACCOUNTING POLICIES AND RECENTLY ADOPTED AND PENDING ACCOUNTING PRONOUNCEMENTS
12. QUARTERLY FINANCIAL INFORMATION
13. RISKS
14. CAUTIONARY NOTE REGARDING FUTURE ORIENTED FINANCIAL INFORMATION
“Westaim” or the “Company” in this Management’s Discussion and Analysis (“MD&A”) refers to The Westaim Corporation on a consolidated basis. This
MD&A, which has been approved by the Board of Directors of Westaim, should be read in conjunction with Westaim’s audited annual consolidated
financial statements including notes for the years ended December 31, 2014 and 2013 as set out on pages 18 to 34 of this annual report. Financial data
in this MD&A has been derived from the audited annual consolidated financial statements for the years ended December 31, 2014 and 2013 and is
intended to enable the reader to assess Westaim’s results of operations for the three months and year ended December 31, 2014 and financial
condition as at December 31, 2014. The Company reports its consolidated financial statements using accounting policies consistent with International
Financial Reporting Standards (“IFRS”). All amounts are in Canadian dollars unless otherwise indicated. The exchange rate used to convert one
United States dollar to Canadian dollar at December 31, 2014 is 1.1601. The following commentary is current as of March 31, 2015. Additional
information relating to Westaim is available on SEDAR at www.sedar.com. Certain totals, subtotals and percentages may not reconcile due to rounding.
Adoption of IFRS for Investment Entities
Westaim qualifies as an investment entity under IFRS and uses fair value as the key measure to monitor and evaluate its investments. The Company
commenced reporting its financial results in accordance with IFRS applicable to investment entities, on a prospective basis, effective July 1, 2014. See
Section 11, Critical Accounting Policies and Recently Adopted and Pending Accounting Pronouncements of this MD&A.
Non-GAAP measures
Westaim uses both IFRS and non-generally accepted accounting principles (“non-GAAP”) measures to assess performance. The Company cautions
readers about non-GAAP measures that do not have a standardized meaning under IFRS and are unlikely to be comparable to similar measures used
by other companies. Management believes these measures allow for a more complete understanding of the underlying business. These measures are
used to monitor Westaim's results and should not be viewed as a substitute for those determined in accordance with IFRS. Reconciliations of such
measures to the most comparable IFRS figures are included herein. Book value per share represents shareholders’ equity at the end of the period,
determined on an IFRS basis, adjusted upwards by the Company’s liability with respect to restricted share units (“RSUs”), divided by the aggregate of
the total number of common shares outstanding at that date and the number of common shares that would have been issued if all outstanding RSUs
were exercised. The Company believes that this is a useful measurement as the relative increase or decrease from period to period in book value per
share should approximate over the long term the relative increase or decrease in the intrinsic value of the business, but is not necessarily equivalent to
the net realizable value of the Company’s assets per share.
- 2 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
Cautionary Statement Regarding the Valuation of Investments in Private Entities
In the absence of an active market for its investments in private entities, fair values for these investments are determined by management using the
appropriate valuation methodologies after considering the history and nature of the business, operating results and financial conditions, outlook and
prospects, general economic, industry and market conditions, capital market and transaction market conditions, contractual rights relating to the
investment, public market comparables, private market transaction multiples and, where applicable, other pertinent considerations. The process of
valuing investments for which no active market exists is inevitably based on inherent uncertainties and the resulting values may differ from values that
would have been used had an active market existed. The amounts at which the Company's investments in private entities could be disposed of may
differ from the fair value assigned and the differences could be material.
Cautionary Statement Regarding Financial Information of Houston International Insurance Group, Ltd.
Selected financial information (the “HIIG Financial Information”) concerning Houston International Insurance Group, Ltd. (“HIIG”) contained in this MD&A
is unaudited and has been derived from the annual consolidated financial statements of HIIG for the years ended December 31, 2014 and 2013. Such
statements are the responsibility of the management of HIIG, have been prepared in accordance with United States generally accepted accounting
principles (“US GAAP”), and are presented in United States dollars.
The HIIG Financial Information should be read in conjunction with Westaim’s historical financial statements including the notes thereto and the related
MD&A as well as Westaim’s other public filings.
The HIIG Financial Information has been provided solely by HIIG. Although Westaim has no knowledge that would indicate that any of the HIIG
Financial Information contained herein is untrue or otherwise misleading, neither Westaim nor any of its directors or officers assumes any responsibility
for the accuracy or completeness of such information, or for any failure by HIIG to disclose to Westaim events or facts which may have occurred or
which may affect the significance or accuracy of any such financial information but which are unknown to Westaim.
Westaim disclaims and excludes all liability (to the extent permitted by law), for losses, claims, damages, demands, costs and expenses or whatever
nature arising in any way out of or in connection with the HIIG Financial Information, its accuracy, completeness or by reason of reliance by any person
on any of it.
Future Oriented Financial Information
This MD&A may contain forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from these
forward-looking statements as a result of various factors, including those discussed hereinafter or in the Company’s Annual Information Form for the
fiscal year ended December 31, 2014 filed on March 31, 2015. Please refer to the cautionary note in Section 14 of this MD&A.
- 3 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
1.
THE COMPANY
The Westaim Corporation (TSXV: WED) is a Canadian investment company specializing in providing long-term capital to businesses operating
primarily within the global financial services industry. The Company invests, directly and indirectly, through acquisitions, joint ventures and other
arrangements, with the objective of providing its shareholders with capital appreciation and real wealth preservation.
Westaim’s strategy is to pursue investment opportunities with a focus towards the financial services industry and grow shareholder value over the
long-term.
On July 31, 2014, the Company, in combination with third party investors, completed the acquisition of a significant interest in HIIG through
Westaim HIIG Limited Partnership (the “Partnership”), an Ontario limited partnership managed by a subsidiary of the Company. HIIG is a U.S.
based diversified specialty insurance provider and managing general insurance agent covering risks across the United States and certain niche
global markets. For additional information on the acquisition and related financing transactions, see discussion in Section 3, Investments in
Private Entities, Section 4, Equity Financings of this MD&A and the Business Acquisition Report related to the acquisition dated October 8, 2014
available on SEDAR at www.sedar.com.
On October 1, 2013, the Company completed a 50:1 share consolidation of all of its outstanding common shares. All share capital, per share
amounts, and share-based awards in the comparative periods have been adjusted to reflect this change.
2. OVERVIEW OF PERFORMANCE
Highlights
(millions except share and per share data)
Three months ended December 31
2014
2013 (1)
Year ended December 31
2013 (1)
2014
Revenue
Net results of investments
Expenses excluding share-based compensation
Share-based compensation
Income tax recovery
$
$
0.6
13.2
(2.8)
(2.9)
-
$
0.1
-
(2.1)
-
-
$
1.2
26.2
(4.4)
(3.0)
-
Profit (loss) and other comprehensive income (loss)
$
8.1
$
(2.0)
$
20.0
$
0.4
-
(4.1)
(0.1)
0.1
(3.7)
Earnings per share
Profit (loss) and other comprehensive income (loss)
– basic and diluted
Shareholders’ equity - at December 31
$
$
0.11
$
(0.15)
$
0.53
$
(0.27)
194.0
$
30.9
$
194.0
$
30.9
Number of common shares outstanding - at December 31
70,297,342
13,902,937
70,297,342
13,902,937
Book value per share - at December 31 (2)
$
2.71
$
2.22
$
2.71
$
2.22
(1) Adjusted to reflect a 50:1 share consolidation completed on October 1, 2013.
(2) Book value per share represents shareholders’ equity at the end of the period determined on an IFRS basis and adjusted upwards by the Company’s liability with
respect to RSUs (December 31, 2014 - $2.9 million, December 31, 2013 - $nil), divided by the aggregate of the total number of common shares outstanding at
that date and the number of common shares that would have been issued if all outstanding RSUs (December 31, 2014 - 2,375,000 units, December 31, 2013 -
nil) were exercised.
Three months ended December 31, 2014 and 2013
The Company reported a profit of $8.1 million for the three months ended December 31, 2014 (2013 - loss $2.0 million).
Revenue for the three months ended December 31, 2014 of $0.6 million (2013 - $0.1 million) consisted of interest income of $0.3 million (2013 -
$0.1 million) and advisory fees of $0.3 million (2013 - $nil). Net results of investments were $13.2 million for the three months ended December
31, 2014 (2013 - $nil), representing an unrealized gain on investments in private entities recognized by the Company related to its investment in
the Partnership. See discussion in Section 3, Investments in Private Entities of this MD&A. Expenses for the three months ended December 31,
2014 of $5.7 million (2013 - $2.1 million) included share-based compensation expense of $2.9 million (2013 - $nil), site restoration provision
expense of $0.8 million (2013 – recovery $0.4 million), professional fees of $0.4 million (2013 - $2.2 million), foreign exchange gain of $0.5 million
(2013 - $nil) and other general and administrative costs of $2.1 million (2013 - $0.3 million).
- 4 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
2. OVERVIEW OF PERFORMANCE (continued)
Years ended December 31, 2014 and 2013
The Company reported a profit of $20.0 million for the year ended December 31, 2014 (2013 - loss $3.7 million).
Revenue for the year ended December 31, 2014 of $1.2 million (2013 - $0.4 million) consisted of interest income of $0.7 million (2013 - $0.4
million) and advisory fees of $0.5 million (2013 - $nil). Net results of investments were $26.2 million for the year ended December 31, 2014 (2013
- $nil), representing an unrealized gain on investments in private entities recognized by the Company related to its investment in the Partnership.
See discussion in Section 3, Investments in Private Entities of this MD&A. Expenses for the year ended December 31, 2014 of $7.4 million (2013
- $4.2 million) included share-based compensation expense of $3.0 million (2013 - $0.1 million), site restoration provision expense of $1.8 million
(2013 - recovery $0.4 million), a recovery of professional fees of $0.2 million (2013 - expense $2.7 million), foreign exchange gain of $0.7 million
(2013 - $nil) and other general and administrative costs of $3.5 million (2013 - $1.8 million).
3.
INVESTMENTS IN PRIVATE ENTITIES
Investment in Houston International Insurance Group, Ltd.
On July 31, 2014, the Partnership completed the acquisition of approximately 70.8% of the issued and outstanding shares of common stock of
HIIG, an international specialty insurance company headquartered in Houston, for an aggregate purchase price of approximately US$138.7 million
(the “Acquisition”). See discussion in Section 4, Equity Financings of this MD&A regarding related equity financing arrangements completed in the
year ended December 31, 2014.
The Acquisition involved:
(i)
(ii)
the purchase by the Partnership of an aggregate of 16,588,865 shares of common stock in the capital of HIIG (“HIIG Shares”) from certain
shareholders of HIIG (the “Sellers”) for an aggregate purchase price of US$53.7 million; and
the purchase by the Partnership from HIIG of an aggregate of 18,702,673 HIIG Shares from treasury for an aggregate purchase price of
US$85.0 million.
In order to complete the Acquisition and to provide working capital, the Partnership received funding of approximately US$141.1 million. This
funding was provided as to (i) US$75.7 million by Westaim, (ii) US$24.3 million and US$22.9 million by affiliates of Everest Re Group, Ltd. and
Catlin Group Limited, respectively, (iii) US$10.0 million by Stephen L. Way, Chairman and Chief Executive Officer of HIIG, and/or certain investors
affiliated with Mr. Way, and (iv) US$8.2 million by certain other existing shareholders of HIIG and other investors.
The Company’s investment in the Partnership at closing on July 31, 2014 was US$75.7 million ($82.5 million), representing a 53.3% ownership
interest in the Partnership at that time.
The Company was reimbursed $3.1 million in transaction and related costs incurred in connection with the Acquisition and the formation of the
Partnership, and $1.0 million in share issuance costs related to its investment in the Partnership.
Westaim has determined that it qualifies as an investment entity under IFRS and uses fair value as the key measure to monitor and evaluate its
investments. Accordingly, the investment in HIIG, through the Partnership, is accounted for at fair value through profit or loss (“FVTPL”). See note
2 to the Company’s audited consolidated financial statements for the year ended December 31, 2014 and 2013 for the Company’s adoption of
IFRS applicable to investment entities, on a prospective basis, effective July 1, 2014.
In determining the valuation of investments in private entities, the Company considers generally accepted valuation methodologies, including the
original purchase price, the discounted cash flow method, reviews of comparable arm’s length transactions, and reviews of comparable publicly
traded company valuations.
The discounted cash flow approach is one of estimating the present value of the projected cash flows to be generated from the business and
theoretically available (though not necessarily paid) to the capital providers of the investee company. A discount rate is applied to the projected
future cash flows to arrive at a present value. The discount rate is intended to reflect all risks of ownership and the associated risks of realizing a
stream of projected future cash flows. The discounted cash flow method generally involves the estimation of future maintainable operating pre-
debt cash flows which are then discounted using a discount rate based on a weighted average cost of capital. It is a present value calculation of
future operating cash flow expectations. The enterprise value is then reduced for the debt outstanding. Historical net operating earnings of the
Company (adjusted for unusual items), and current performance and prospects are used to estimate its future operating cash flows. For a full
description of the Company’s valuation techniques, see note 5 to the Company’s audited consolidated financial statements for the year ended
December 31, 2014 and 2013.
- 5 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
3.
INVESTMENTS IN PRIVATE ENTITIES (continued)
In determining the valuation of the Company’s investment in the Partnership at the end of each reporting period, the Company considers the
discounted cash flow method to prepare a valuation of HIIG and the Partnership, and reviews comparable arm’s length transactions and
comparable publicly traded company valuations.
In arriving at the fair value of Westaim’s investment in the Partnership at July 31, 2014, the Company also considered the acquisition cost of the
Partnership’s 70.8% investment in HIIG. Given certain seller motivations and the desire of the Sellers to provide limited indemnifications and no
reserve guarantees, the purchase of HIIG Shares from the Sellers was completed at an approximate 29% discount to the December 31, 2013
adjusted book value of HIIG (“Discount Purchase”). The purchase of HIIG Shares from treasury was completed at a valuation equal to
approximately 100% of the December 31, 2013 adjusted book value of HIIG and was, due to the factors outlined above, considered to be a better
indicator of value. This indication of value is also consistent with implied valuation multiples related to the equity financing completed by the
Company to fund the acquisition, implied valuation multiples drawn from comparable public companies and targets of precedent transactions
operating in the specialty insurance market, and a supporting discounted cash flow approach. As a result of the determination that the purchase of
HIIG Shares from the Sellers constituted a Discount Purchase, the Company recognized an unrealized gain on its investment in the Partnership of
$10.4 million at July 31, 2014.
An additional unrealized gain of $15.8 million was recognized in the year ended December 31, 2014, reflecting a change in the fair value of the
investment in the Partnership from August 1, 2014 to December 31, 2014 resulting from an increase in the value of HIIG of $9.8 million as well as
a strengthening of the U.S. dollar against the Canadian dollar of $6.0 million.
The total unrealized gain of $26.2 million has been included in profit of the Company for the year ended December 31, 2014.
After the closing and prior to December 31, 2014, certain HIIG Shares were issued to HIIG management and employees in accordance with their
stock incentive plans. As a result, the Partnership’s ownership of HIIG was reduced from 70.8% upon closing, to 69.0% as at December 31, 2014.
The fair value of the Company’s investment in the Partnership was determined to be $108.7 million at December 31, 2014 and was based on a
valuation of approximately 100% of HIIG’s audited stockholders’ equity at December 31, 2014. This indicator of value was based on a purchase
transaction completed shortly after December 31, 2014, described below, whereby the Company, along with other third party investors, made a
further investment in HIIG through the Partnership. This transaction was the primary indicator of value used by the Company for its valuation in
the Partnership at December 31, 2014.
On January 14, 2015, the Partnership raised US$70.0 million through the sale of additional Class A Units of the Partnership. The proceeds from
this offering were used to acquire 14,752,993 HIIG Shares at an interim purchase price of approximately US$4.7448 per share in order to fund (i)
the purchase by HIIG, through HIIG Underwriters Agency, Inc., of all of the assets of the underwriting business operating as “Elite Underwriting
Services”, a division of U.S. based Elite Brokerage Services, Inc., (ii) an additional capital contribution to HIIG’s subsidiary insurance companies
and (iii) for general corporate purposes.
The final purchase price for the HIIG Shares was determined on March 25, 2015 to be approximately US$4.9249 per HIIG Share based on 100%
of HIIG’s audited stockholders’ equity as at December 31, 2014 (subject to certain adjustments). Accordingly, the final number of HIIG Shares
acquired by the Partnership was 14,213,487 HIIG Shares which shares are considered to have been acquired on January 14, 2015.
In connection with the offering, the Company subscribed for additional Class A Units of the Partnership for an aggregate subscription amount of
approximately US$50.6 million. Based on this additional investment, effective January 14, 2015 the Company owned approximately 58.7% of the
Partnership and the Partnership owned approximately 75.7% of HIIG.
- 6 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
3.
INVESTMENTS IN PRIVATE ENTITIES (continued)
Selected Financial Information of Houston International Insurance Group, Ltd. for the years ended December 31, 2014 and 2013
As disclosed above, as an investment entity under IFRS, the Company uses fair value as the key measure to monitor and evaluate its
investments. Accordingly, the financial results of HIIG are not consolidated by the Company. However, at this time, the Company considers
certain financial results of HIIG to be important measures for investors in assessing the Company’s financial position and performance. In
particular, premium volumes provide a measure of HIIG’s growth, net income and loss and LAE (loss adjustment expense) ratios provide a
measure of HIIG’s profitability, and shareholders’ equity is a measure that is generally used by investors to determine the value of insurance
companies.
Set out below is certain selected financial information relating to HIIG. The HIIG financial information is unaudited and has been derived from the
annual consolidated financial statements of HIIG, prepared in accordance with US GAAP and presented in United States dollars. Such statements
are the responsibility of the management of HIIG. Readers are cautioned that the HIIG financial information has not been reconciled to IFRS and
so may not be comparable to the financial information of issuers that present their financial information in accordance with IFRS.
(unaudited)
(US$ millions)
Income Statement
Gross written premium
Net premiums written
Net premiums earned
Net income
Selected Information
Net premiums written:
Construction
Energy
Specialty
Professional
Property
Non-continuing and other lines
Net Loss and LAE Ratio:
Construction
Energy
Specialty
Professional
Property
Non-continuing and other lines
Balance Sheet Information
Investments, cash and cash equivalents
Stockholders’ equity
Notes:
(1) Not meaningful, but included in the aggregate ratios.
Three months ended
December 31
2014
2013
Year ended
December 31
2014
2013
$
$
$
$
$
$
$
$
$
$
94.1
65.0
61.7
3.9
12.9
11.5
26.0
6.5
8.3
(0.2)
$
65.0
$
100.8
82.7
64.7
$
$
$
444.2
289.7
302.0
(38.8)
$
19.5
18.6
13.2
32.5
7.5
8.5
2.4
82.7
$
$
47.4
53.0
130.5
29.5
26.2
3.1
289.7
79%
54%
76%
37%
29%
n.m. (1)
76%
December 31,
2014
$
$
626.9
248.1
80%
58%
65%
61%
38%
n.m. (1)
81%
65%
55%
71%
54%
36%
n.m. (1)
67%
December 31,
2013
$
$
528.4
140.2
$
$
$
$
$
$
400.7
285.2
221.2
(36.4)
41.8
38.3
123.8
29.1
36.6
15.6
285.2
68%
48%
73%
51%
33%
n.m. (1)
73%
- 7 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
4.
EQUITY FINANCINGS
In connection with the Acquisition, on April 23, 2014, Westaim completed the sale of an aggregate of 50,995,385 subscription receipts (the
“Subscription Receipts”) at a purchase price of $2.65 per Subscription Receipt (the “Subscription Receipt Offering”). On July 29, 2014, an
aggregate of 50,995,385 common shares of Westaim (“Westaim Shares”) were issued upon the conversion of the Subscription Receipts for
aggregate gross proceeds of approximately $135.1 million. An additional 5,399,020 Westaim Shares were issued on July 31, 2014 to certain
funds and co-investors (collectively, the “Investors”) pursuant to subscription agreements entered into by the Investors on April 23, 2014 (the
“Additional Private Placement”). In connection with the Additional Private Placement, Westaim received additional gross proceeds of
approximately $14.3 million.
On July 31, 2014, the Company used US$75.7 million of the proceeds from the Subscription Receipt Offering and the Additional Private
Placement (collectively, the “Offerings”) to purchase Class A Units in the Partnership to enable the Partnership (together with funds committed by
other investors in the Partnership) to complete the Acquisition. The Partnership completed the Acquisition and acquired 70.8% of HIIG for
approximately US$138.7 million (see discussion in Section 3, Investments in Private Entities of this MD&A).
Immediately following the issuance of the Westaim Shares under the Offerings, the Company had 70,297,342 Westaim Shares outstanding, with a
stated capital of $346.8 million.
5. ANALYSIS OF FINANCIAL RESULTS
Details of the Company’s operating results are as follows:
(millions)
Revenue
Net results of investments
Expenses
Salaries and benefits
Office expenses
Professional fee expense (recovery)
Site restoration provision expense (recovery)
Share-based compensation
Foreign exchange gain
Total expenses
Income tax recovery
Profit (loss)
5.1 Revenue
Three months ended December 31
2014
0.6
$
$
13.2
1.7
0.4
0.4
0.8
2.9
(0.5)
5.7
-
8.1
$
$
2013
0.1
-
0.2
0.1
2.2
(0.4)
-
-
2.1
-
(2.0)
Year ended December 31
2013
2014
$
1.2
$
26.2
2.3
1.2
(0.2)
1.8
3.0
(0.7)
7.4
-
20.0
$
$
0.4
-
1.1
0.7
2.7
(0.4)
0.1
-
4.2
0.1
(3.7)
Revenue for the three months and year ended December 31, 2014 of $0.6 million and $1.2 million (2013 - $0.1 million and $0.4 million) consisted
of interest income of $0.3 million and $0.7 million (2013 - $0.1 million and $0.4 million) and advisory fees of $0.3 million and $0.5 million (2013 -
$nil), respectively.
The Company, through its wholly-owned subsidiary, Westaim HIIG GP Inc., entered into a management services agreement (“MSA”) with HIIG
commencing on closing, whereby Westaim HIIG GP Inc. is entitled to receive from HIIG an advisory fee of US$1.0 million annually for the first
three years of the agreement and US$0.5 million annually for the next two years relating to advisory services provided under the agreement. The
Company earned fees under the MSA of $0.3 million and $0.5 million in the three months and year ended December 31, 2014, respectively.
5.2 Net Results of Investments
The Company determined that the purchase of HIIG Shares from the Sellers was a Discount Purchase and not representative of the value of HIIG,
and that the purchase of HIIG Shares from treasury was a better indicator of value. As a result of the determination that the purchase of HIIG
Shares from the Sellers constituted a Discount Purchase, the Company recognized an unrealized gain on its investment in the Partnership of
$10.4 million at July 31, 2014.
- 8 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
5. ANALYSIS OF FINANCIAL RESULTS (continued)
Additional unrealized gains recognized in the three months and year ended December 31, 2014 of $13.2 million and $15.8 million, respectively,
reflected a change in the fair value of the investment in the Partnership since August 1, 2014, resulting from an increase in the value of HIIG ($9.8
million from August 1 to December 31, 2014) and a strengthening of the U.S. dollar against the Canadian dollar ($3.4 million and $6.0 million for
the three months and year ended December 31, 2014, respectively). The total unrealized gain of $13.2 million for the three months ended
December 31, 2014 and $26.2 million for the year ended December 31, 2014 have been included in the respective statements of profit (loss) and
other comprehensive income (loss).
5.3 Expenses
Expenses for the three months ended December 31, 2014 were $5.7 million (2013 - $2.1 million). The increase in total expenses of $3.6 million in
the fourth quarter of 2014 compared to the same period in the prior year was due to an increase in share-based compensation by $2.9 million, an
increase in salaries and benefits by $1.5 million, an increase in office expenses by $0.3 million and an increase in site restoration provision
expense by $1.2 million, offset by a foreign exchange gain of $0.5 million and a reduction in professional fee expense of $1.8 million.
Expenses for the year ended December 31, 2014 were $7.4 million (2013 - $4.2 million). The increase in total expenses of $3.2 million in the year
ended December 31, 2014 compared to the same period in 2013 was due to an increase in share-based compensation by $2.9 million, an
increase in salaries and benefits by $1.2 million, an increase in office expenses by $0.5 million and an increase in site restoration provision
expense by $2.2 million, offset by a foreign exchange gain of $0.7 million and a decrease in professional fee expense of $2.9 million. Following
the completion of the Acquisition on July 31, 2014, the Company was reimbursed $3.1 million in transaction and related costs previously expensed
by the Company.
6. ANALYSIS OF FINANCIAL POSITION
The Company’s assets, liabilities and shareholders’ equity as at the dates indicated below consisted of the following:
(millions)
Assets
Cash and cash equivalents
Accounts receivable and other assets
Investments in private entities
Liabilities
Accounts payable and accrued liabilities
Site restoration provision
Shareholders’ equity
Total liabilities and shareholders’ equity
6.1 Cash and Cash Equivalents
December 31, 2014
December 31, 2013
$
$
$
$
92.9
0.6
108.7
202.2
4.2
4.0
8.2
194.0
202.2
$
$
$
$
35.4
0.2
-
35.6
2.5
2.2
4.7
30.9
35.6
At December 31, 2014, the Company had cash and cash equivalents of $92.9 million compared to $35.4 million at December 31, 2013. In the
year ended December 31, 2014, the Company received the following: net proceeds from the equity financings of $142.1 million, reimbursements
of $1.0 million in share issuance costs and $3.1 million in transaction and related costs incurred in connection with the Acquisition and the
formation of the Partnership. The Company invested $82.5 million in the Partnership during the year. See also discussion in Section 8, Liquidity
and Capital Resources of this MD&A.
On January 14, 2015, the Company made an additional investment in the Partnership of approximately US$50.6 million. See discussion in
Section 3, Investments in Private Entities of this MD&A.
6.2 Accounts Receivable and Other Assets
Accounts receivable and other assets at December 31, 2014 included $0.2 million in capital assets which were placed in use at the end of
September 2014. Depreciation expense for the capital assets was nominal for the three months and year ended December 31, 2014.
- 9 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION (continued)
6.3 Investments in Private Entities
The Company’s investments in private entities at December 31, 2014 consisted of its investment in HIIG, through the Partnership. The investment
is accounted for at FVTPL and the fair value of the investment was determined to be $108.7 million at December 31, 2014. See discussion in
Section 3, Investments in Private Entities of this MD&A.
6.4 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities were $4.2 million at December 31, 2014 and $2.5 million at December 31, 2013. Accounts payable and
accrued liabilities at December 31, 2014 included a liability of $2.9 million with respect to RSUs. For additional information on RSUs, see
discussion in Section 8, Liquidity and Capital Resources of this MD&A.
6.5 Site Restoration Provision
The site restoration provision of $4.0 million at December 31, 2014 and $2.2 million at December 31, 2013 relates to costs associated with soil and
groundwater reclamation and remediation costs. The increase during the three months and year ended December 31, 2014 was related to a
change in the long-term inflation rate assumption from 1.30% at December 31, 2013 to 1.63% at December 31, 2014 and a change in the discount
rate due to a flattening of the yield curve during the second to fourth quarters. The Company conducts periodic reviews of the underlying
assumptions supporting the provision, including remediation costs and regulatory requirements. Reimbursements of costs resulting from
indemnifications provided by previous owners of the industrial sites have not been recognized in these consolidated financial statements. Future
reimbursements will be recorded when received.
6.6 Shareholders’ Equity
The details of shareholders’ equity as at the dates indicated below are as follows:
(millions)
Common shares
Contributed surplus
Deficit
Shareholders’ equity
December 31, 2014
December 31, 2013
$
$
346.7
12.9
(165.6)
194.0
$
$
203.6
12.9
(185.6)
30.9
The Company issued 50,995,385 common shares under the Subscription Receipt Offering on July 29, 2014 and 5,399,020 common shares
pursuant to the Additional Private Placement on July 31, 2014 for net proceeds of $143.1 million, after share issuance costs of $6.3 million. At
December 31, 2014, the Company had 70,297,342 common shares outstanding. See discussion in Section 4, Equity Financings of this MD&A.
The decrease in deficit of $20.0 million from December 31, 2013 to December 31, 2014 is due to the profit for the year ended December 31, 2014.
7. OUTLOOK
The Company, through the Partnership, completed its initial investment in HIIG in the third quarter of 2014 and an additional investment in HIIG in
the first quarter of 2015 (see discussion in Section 3, Investments in Private Entities of this MD&A). These investments are consistent with
Westaim’s strategy to deploy capital with a view to earning attractive risk-adjusted returns. Westaim has partnered with third party investors and
an experienced management team with a proven track record in the global specialty P&C insurance market.
The Company continues to seek additional investment opportunities to create meaningful shareholder value through partnering with aligned and
experienced management teams to build profitable businesses that generate attractive returns over the long term.
- 10 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
8.
LIQUIDITY AND CAPITAL RESOURCES
Capital Management Objectives
The Company’s capital currently consists of common shareholders’ equity. It may have different components in the future.
The Company’s guiding principles for capital management are to maintain the stability and safety of the Company’s capital for its stakeholders
through an appropriate capital mix and a strong balance sheet.
The Company monitors the mix and adequacy of its capital on a continuous basis. The Company employs internal metrics. The capital of the
Company is not subject to any restrictions. Units of the Partnership cannot be issued without the prior approval of the unitholders and, in
connection with any such issuance, the holders of units have pre-emptive rights entitling them to purchase their pro rata share of any units that
may be so issued.
Share Capital
The Company’s authorized share capital consists of an unlimited number of common shares, Class A preferred shares and Class B preferred
shares. On October 1, 2013, the Company completed a 50:1 share consolidation of all of its outstanding common shares. All share capital, per
share amounts, and share-based awards in the comparative period have been adjusted to reflect this change.
In the year ended December 31, 2014, the Company issued 56,394,405 common shares in connection with the Subscription Receipt Offering and
the Additional Private Placement for net proceeds of $143.1 million, after share issuance costs of $6.3 million. See discussion in Section 4, Equity
Financings of this MD&A. At December 31, 2014, the Company had 70,297,342 common shares outstanding (2013 - 13,902,937), with a stated
capital of $346.7 million
There were no Class A or Class B preferred shares outstanding at December 31, 2014 and 2013.
Dividends
No dividends were paid in the years ended December 31, 2014 and 2013.
Share-based Compensation Plans
At the annual and special meeting (the “Meeting”) of the shareholders of the Company held on June 19, 2014, the Company’s shareholders
approved an amendment to the Company’s comprehensive long-term equity incentive plan (the “Incentive Plan”) to adopt substantially the form of
long-term incentive plan of the Company in place prior to the Company’s shares being listed on the TSX-V, with certain exceptions. The
amendments included (a) providing for grants of RSUs, stock appreciation rights and other share-based awards in addition to DSUs, (b) providing
the Board of Directors with the option of establishing a share purchase program; and (c) removing the ability of the Company to grant stock options
under the Incentive Plan. Also at the Meeting, the shareholders of the Company approved the adoption of a stand-alone incentive stock option
plan (the “Option Plan”) in accordance with the policies of the TSX-V.
Unless increased in accordance with the terms of the plan and the rules of the TSX-V or any other applicable stock exchange, the maximum
number of common shares which may be issued under the Incentive Plan is fixed at 7,042,150. The Option Plan is a “rolling plan” which provides
that the aggregate number of common shares which may be reserved for issuance under the Option Plan is limited to not more than 10% of the
aggregate number of common shares outstanding. However, each of the Incentive Plan and the Option Plan provide that under no circumstances
shall there be common shares issuable under such plan, together with all other security-based compensation arrangements of the Company,
which exceed 10% of the aggregate number of common shares outstanding.
The Company had 5,000 and 6,000 stock options outstanding at December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013,
the Company had 113,200 DSUs outstanding. The DSUs were issued at the market value of the Company’s common shares at the date of grant.
Vested DSUs are paid out in cash when the participant ceases to be a director, officer or employee. At December 31, 2014, the Company also
had 2,375,000 RSUs outstanding, issued on November 14, 2014 to certain officers, employees and consultants. The RSUs vest as to 33% on
December 31, 2014 and 22% on May 31, 2015. The remaining 45% of the RSUs vest evenly over 24 months, with the first vesting on June 30,
2015. RSUs are payable when vested with either cash or common shares of the Company. Amounts related to outstanding DSUs of $0.3 million
and outstanding RSUs of $2.9 million were included in accounts payable and accrued liabilities as at December 31, 2014.
- 11 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
8.
LIQUIDITY AND CAPITAL RESOURCES (continued)
Market for Securities
On January 9, 2013, Westaim’s common shares commenced trading on the TSX-V under the symbol “WED”. Until January 8, 2013, the common
shares of Westaim were listed on the Toronto Stock Exchange (the “TSX”) under the symbol “WED”. Westaim Board of Directors determined that
a listing with the TSXV was better suited for the Company at that time while providing continued trading liquidity for the Company’s shareholders.
The Company received approval of its listing on the TSXV prior to voluntarily de-listing from the TSX.
Cash Flow Objectives
The Company manages its liquidity with a view to ensuring that there is sufficient cash to meet all financial commitments and obligations as they
fall due. The Company believes its liquidity requirements for the next year will be met with the cash and cash equivalents on hand. The Company
has sufficient funds to meet its financial obligations and pursue other opportunities. As part of pursuing one or more new opportunities, the
Company may from time to time issue shares from treasury.
The following tables illustrate the duration of the financial assets of the Company compared to its financial obligations:
December 31, 2014 (millions)
Financial assets:
Cash and cash equivalents
Accounts receivable and other assets
Investments in private entities
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities
Site restoration provision
Total financial obligations
One year
or less
No specific
date
$
Total
92.9
0.4
108.7
202.0
$
-
-
108.7
108.7
$
92.9
0.4
-
93.3
4.2
-
4.2
-
4.0
4.0
4.2
4.0
8.2
Financial assets net of financial obligations
$
89.1
$ 104.7
$
193.8
December 31, 2013 (millions)
Financial assets:
Cash and cash equivalents
Accounts receivable and other assets
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities
Site restoration provision
Total financial obligations
One year
or less
No specific
date
Total
$
35.4
0.2
35.6
2.5
-
2.5
$
-
-
-
-
2.2
2.2
$
35.4
0.2
35.6
2.5
2.2
4.7
Financial assets net of financial obligations
$
33.1
$
(2.2)
$
30.9
The Company’s investment guidelines stress preservation of capital and market liquidity to support payment of liabilities. The matching of the
duration of financial assets and liabilities is monitored to ensure that all obligations will be met.
- 12 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
9. RELATED PARTY TRANSACTIONS
Management services agreement
The Company, through its wholly-owned subsidiary, Westaim HIIG GP Inc., entered into an MSA with HIIG commencing upon closing on July 31,
2014, whereby Westaim HIIG GP Inc. is entitled to receive from HIIG an advisory fee of US$1.0 million annually for the first three years of the
agreement and US$0.5 million annually for two years thereafter relating to advisory services provided under the agreement. The Company earned
and received fees of $0.5 million under the MSA in the year ended December 31, 2014.
The Company was reimbursed $2.7 million by HIIG and $0.4 million by the Partnership in transaction and related costs in connection with the
Acquisition and the formation of the Partnership. The total reimbursement of $3.1 million was recorded as an offset to professional fee expense in
the year ended December 31, 2014. The Company was also reimbursed $0.9 million by HIIG and $0.1 million by the Partnership in share
issuance costs related to its investment in the Partnership. The total reimbursed amount of $1.0 million was recorded as an increase in the
Company’s share capital in the year ended December 31, 2014.
Transactions with key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the
Company, directly or indirectly, and include executive officers and directors of the Company.
Compensation expenses related to key management personnel, including non-executive directors, are as follows:
(millions)
Salaries and benefits
Share-based compensation
Three months ended December 31
2014
2013
Year ended December 31
2013
2014
$
$
1.7
2.7
4.4
$
$
0.2
-
0.2
$
$
2.3
2.8
5.1
$
$
1.1
0.1
1.2
Certain officers are entitled to termination benefits equal to twelve months of salary and performance bonus and vesting of all unvested share-
based awards. In the event of a termination in connection with a change of control, the executive officers will be entitled to termination benefits
equal to twenty-four months of salary and performance bonus and vesting of all unvested share-based awards.
On July 29, 2014, an aggregate of 3,400,000 common shares were issued to certain directors and officers of the Company for aggregate gross
proceeds of $9.0 million pursuant to the Subscription Receipt Offering, on terms equivalent to the other participants in the Subscription Receipt
Offering. See discussion in Section 4, Equity Financings of this MD&A.
Consulting fees paid to a company owned by a director of HIIG from August 1 to December 31, 2014 amounted to $0.1 million. An RSU liability of
$0.2 million due to the same company was accrued at December 31, 2014. The corresponding amount was expensed in the statement of profit
(loss) and other comprehensive income (loss) for the three months and year ended December 31, 2014 under share-based compensation
expense.
10. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
Preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions, some of which relate to
matters that are uncertain. As more information becomes known, these estimates and assumptions could change and thus have a material impact
on the Company’s financial condition and results of operations in the future. The Company has established detailed policies and control
procedures that are intended to ensure that management’s judgments and estimates are well controlled, independently reviewed and consistently
applied from period to period. Management believes that its estimates for determining the valuation of the Company’s assets and liabilities are
appropriate.
Valuation of Investments in Private Entities
In determining the valuation of the Company’s investment in the Partnership at the end of each reporting period, the Company uses the discounted
cash flow method to prepare a valuation of HIIG and the Partnership, and reviews comparable arm’s length transactions and comparable publicly
traded company valuations. Due to the inherent uncertainty of valuation, management’s estimated values may differ significantly from the values
that would have been used had a ready market for the investment existed, and the differences could be material.
- 13 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
11. CRITICAL ACCOUNTING POLICIES AND RECENTLY ADOPTED AND PENDING ACCOUNTING PRONOUNCEMENTS
IFRS 10 "Consolidated Financial Statements" ("IFRS 10") provides an exception to the consolidation requirements for entities that meet the
definition of an investment entity and requires such an entity to measure its investments in particular subsidiaries at FVTPL instead of
consolidating those subsidiaries in its consolidated financial statements. The Company accounts for its investment in HIIG, through the
Partnership, at FVTPL.
In accordance with IFRS 10, an investment entity is an entity that: (i) obtains funds from one or more investors for the purpose of providing them
with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for returns from capital
appreciation, investment income, or both, and (iii) measures and evaluates the performance of substantially all of its investments on a fair value
basis. In addition, IFRS 10 clarifies that an investment entity may earn fee income from the provision of investment-related services to external
parties.
Westaim has adopted the strategy to co-invest alongside third party capital in its investment vehicles, the first such vehicle being the Partnership,
with the objective of growing shareholder value through capital appreciation in its investments and generating investment income. In this regard,
the Company uses fair value as the key measure to monitor and evaluate its investments. The Company also earns, through wholly-owned
entities, advisory fees in connection with its investment activities. The provision of these advisory services does not constitute a significant
business activity of the Company and the Company has assessed and concluded that the advisory fees do not represent a substantial source of
income. As a result, Westaim has determined that it qualifies as an investment entity under IFRS, and commenced reporting its financial results in
accordance with IFRS applicable to investment entities, on a prospective basis, effective July 1, 2014. Adopting the investment entity accounting
rules in IFRS 10 did not have an impact on the Company’s consolidated financial statements, except that fair value is used to measure its
investments.
A full description of the Company’s accounting policies and other recently adopted and pending accounting pronouncements are disclosed in note
2 and note 3, respectively, to the audited consolidated financial statements for the years ended December 31, 2014 and 2013.
12. QUARTERLY FINANCIAL INFORMATION
(millions)
Revenue
Net results of investments
Expenses (recovery)
Profit (loss) and other comprehensive income (loss)
Q4
2014
$ 0.6
13.2
5.7
8.1
Q3
2014
$ 0.6
13.0
(2.8)
16.4
Q2
2014
-
$
-
2.9
(2.9)
Q1
2014
$ 0.1
-
1.7
(1.6)
Q4
2013
$ 0.1
-
2.1
(2.0)
Q3
2013
$ 0.1
-
0.6
(0.5)
Q2
2013
$ 0.1
-
0.8
(0.7)
Q1
2013
$ 0.1
-
0.6
(0.5)
Revenue consisted of investment income and advisory fee income. Prior to the third quarter of 2014, quarterly revenue consisted of investment
income. Net results of investments represented unrealized gains on investments in private entities recognized by the Company related to its
investment in the Partnership. Expenses in the fourth quarter of 2014 included stock-based compensation of $2.9 million with respect to
outstanding RSUs and site restoration provision expense of $0.8 million, net of a foreign exchange gain of $0.5 million. Expenses included
transaction and related costs incurred in connection with the investment in HIIG, through the Partnership, of $0.1 million in the third quarter of
2014, $0.5 million in the second quarter of 2014, $1.2 million in the first quarter of 2014 and $2.0 million in the fourth quarter of 2013, with $3.1
million reimbursed to the Company in the third quarter of 2014. The Company recorded a foreign exchange gain of $0.8 million in the third quarter
of 2014. In the second quarter of 2014, the Company recorded a site restoration provision expense of $0.8 million and a foreign exchange loss of
$0.8 million. In the fourth quarter of 2013, the Company recorded a site restoration provision recovery of $0.4 million.
13. RISKS
For a detailed description of risk factors associated with the Company and its business, refer to the Company’s Annual Information Form for the
fiscal year ended December 31, 2014 filed on March 31, 2015. The Company is not aware of any significant changes to its risk factors from those
disclosed at that time.
- 14 -
The Westaim Corporation
Management's Discussion and Analysis
Year ended December 31, 2014
(Currency amounts in Canadian dollars unless otherwise indicated)
14. CAUTIONARY NOTE REGARDING FUTURE ORIENTED FINANCIAL INFORMATION
Certain portions of this MD&A, as well as other public statements by the Company, contain forward-looking statements. In particular, the words
"strategy", "may", "will", "continue", "developed", "objective", "potential", "exploring", "could", "expect", "expected", "expects", “tends”, "indicates",
and words and expressions of similar import, are intended to identify forward-looking statements. Such forward-looking statements include but are
not limited to statements concerning: strategies, alternatives and objectives to maximize value for shareholders; expectations and assumptions
relating to the Company’s business plan; expectations and assumptions relating to HIIG’s business and operations; expectations regarding the
Company’s assets and liabilities; the Company’s ability to retain key employees; management’s belief that its estimates for determining the
valuation of the Company’s assets and liabilities are appropriate; the Company’s views regarding potential future remediation costs; the effect of
changes to interpretations of tax legislation on income tax provisions in future periods; and the Company’s determination that the adoption of new
accounting standards will not have a material impact on its consolidated financial statements.
These statements are based on current expectations that are subject to risks, uncertainties and assumptions and the Company can give no
assurance that these expectations are correct. By their nature, these statements are subject to inherent risks and uncertainties that may be
general or specific. A variety of material factors, many of which are beyond the Company’s control, may affect the operations, financial position,
performance and results of the Company and its business, and could cause actual results to differ materially from the expectations expressed in
any of these forward-looking statements.
The Company's actual results or financial position could differ materially from those anticipated by these forward-looking statements for various
reasons generally beyond the Company’s control, including, without limitation, the following factors: the Company’s ability to implement its
investment strategies or operate its business as management currently expects; the Company’s ability to generate revenue from its investments;
the Company and/or HIIG may have undisclosed liabilities; the Company’s ability to obtain additional funding to pursue additional acquisitions or
other investments; the occurrence of catastrophic events including terrorist attacks and weather related natural disasters; the cyclical nature of the
property and casualty (“P&C”) insurance industry; HIIG’s ability to accurately assess the risks associated with the insurance policies that it writes
and to adequately reserve against past and future claims; the effects of emerging claim and coverage issues on HIIG’s business; the effect of
government regulations designed to protect policyholders and creditors rather than investors; the effect of climate change on the risks that HIIG
insures; HIIG’s reliance on brokers and third parties to sell its products to clients; the effect of intense competition and/or industry consolidation;
HIIG’s ability to accurately assess underwriting risk and to predict future claims frequency; the effect of risk retentions on HIIG’s risk exposure;
HIIG’s ability to alleviate risk through reinsurance; dependence by HIIG on key employees; the effect of litigation and regulatory actions; HIIG’s
ability to successfully manage credit risk (including credit risk related to the financial health of reinsurers); HIIG’s ability to compete against larger
more well-established competitors; unfavourable capital market developments or other factors which may affect the investments of HIIG; HIIG’s
ability to maintain its financial strength and issuer credit ratings; HIIG’s ability to obtain additional funding; HIIG’s ability to successfully pursue its
acquisition strategy; HIIG may be exposed to goodwill or intangible asset impairment in connection with its acquisitions; the ability of HIIG to
receive dividends from its subsidiaries; HIIG’s reliance on information technology and telecommunications systems; dependence by HIIG on
certain third party service providers; general economic, financial and political conditions; the volatility of the stock market and other factors
affecting the Company’s share price; United States dollar to Canadian dollar exchange rate fluctuations; future sales of a substantial number of the
Company’s common shares; and other risk factors set forth herein or in the Company's annual report or other public filings.
The Company disclaims any intention or obligation to revise forward-looking statements whether as a result of new information, future
developments or otherwise except as required by law. All forward-looking statements are expressly qualified in their entirety by this cautionary
statement.
- 15 -
March 31, 2015
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL INFORMATION
The accompanying consolidated financial statements including the notes thereto have been prepared by,
and are the responsibility of, the management of The Westaim Corporation. This responsibility includes
selecting appropriate accounting policies and making estimates and informed judgments based on the
anticipated impact of current transactions, events and trends, consistent with International Financial
Reporting Standards. The Board of Directors is responsible for ensuring that management fulfills its
responsibility for financial reporting and internal control. In meeting our responsibility for the reliability and
timeliness of financial information, the Company maintains and relies upon a comprehensive system of
internal controls including organizational, procedural and disclosure controls. The Audit Committee,
which is comprised of three Directors, all of whom are independent, meets with management as well as
the external auditors to satisfy itself that management is properly discharging its financial reporting
responsibilities and to review the consolidated financial statements and the report of the auditors. It
reports its findings to the Board of Directors who approve the consolidated financial statements.
The accompanying consolidated financial statements have been audited by Deloitte LLP, the independent
auditors, in accordance with generally accepted auditing standards. The auditors have full and
unrestricted access to the Audit Committee.
J. Cameron MacDonald
President and Chief Executive Officer
Glenn G. MacNeil
Chief Financial Officer
- 16 -
Independent Auditor’s Report
TO THE SHAREHOLDERS OF
THE WESTAIM CORPORATION
We have audited the accompanying consolidated financial statements of The Westaim Corporation, which
comprise the consolidated statements of financial position as at December 31, 2014 and December 31, 2013,
and the consolidated statements of profit (loss) and other comprehensive income (loss), consolidated
statements of changes in equity and consolidated statements of cash flows for the years then ended, and a
summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity's
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position
of The Westaim Corporation as at December 31, 2014 and December 31, 2013, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
March 31, 2015
Toronto, Ontario
- 17 -
The Westaim Corporation
Consolidated Statements of Financial Position
(thousands of Canadian dollars)
ASSETS
Cash and cash equivalents (note 8)
Accounts receivable and other assets (note 4)
Investments in private entities (note 5)
LIABILITIES
Accounts payable and accrued liabilities
Site restoration provision (note 6)
Commitments and contingent liabilities (note 7)
Subsequent event (note 15)
SHAREHOLDERS' EQUITY
Share capital (note 8)
Contributed surplus
Deficit
December 31
2014
December 31
2013
$
$
$
$
92,914
644
108,667
202,225
$
$
4,215
4,009
8,224
35,412
159
-
35,571
2,450
2,219
4,669
346,775
12,890
(165,664)
194,001
$
202,225
$
203,640
12,890
(185,628)
30,902
35,571
The accompanying notes are an integral part of these consolidated financial statements
Approved on behalf of the Board
Ian W. Delaney
Director
John W. Gildner
Director
- 18 -
The Westaim Corporation
Consolidated Statements of Profit (Loss) and Other Comprehensive Income (Loss)
(thousands of Canadian dollars except share and per share data)
Year Ended December 31
2013
2014
Revenue
Investment income
Fee income (notes 5 and 10)
Net results of investments
Unrealized gain on investments in private entities (note 5)
Expenses
Salaries and benefits
Office expenses
Professional fee (recovery) expense (note 5)
Site restoration provision expense (recovery) (note 6)
Share-based compensation (note 9)
Depreciation and amortization (note 4)
Foreign exchange gain
Income (loss) before income tax
Income tax recovery (note 11)
Profit (loss) and other comprehensive income (loss)
Earnings per share (note 12)
Profit (loss) and other comprehensive income (loss) - basic and diluted
$
$
$
$
729
462
1,191
26,216
2,333
1,214
(252)
1,790
3,025
11
(678)
7,443
19,964
-
421
-
421
-
1,149
776
2,677
(444)
97
-
-
4,255
(3,834)
124
19,964
$
(3,710)
0.53
$
(0.27)
Weighted average number of common shares outstanding (in thousands)
Basic and diluted
37,976
13,903
The accompanying notes are an integral part of these consolidated financial statements
- 19 -
The Westaim Corporation
Consolidated Statements of Changes in Equity
Year ended December 31, 2014
(thousands of Canadian dollars)
Share
Capital
Contributed
Surplus
Deficit
Total
Equity
Balance at January 1, 2014
$
203,640
$
12,890
$
(185,628)
$
30,902
Share capital issued and paid (note 8)
Profit and other comprehensive income
143,135
-
-
-
-
19,964
143,135
19,964
Balance at December 31, 2014
$
346,775
$
12,890
$
(165,664)
$
194,001
Year ended December 31, 2013
(thousands of Canadian dollars)
Share
Capital
Contributed
Surplus
Deficit
Total
Equity
Balance at January 1, 2013
$
203,640
$
12,890
$
(181,918)
$
34,612
Loss and other comprehensive loss
-
-
(3,710)
(3,710)
Balance at December 31, 2013
$
203,640
$
12,890
$
(185,628)
$
30,902
The accompanying notes are an integral part of these consolidated financial statements
- 20 -
The Westaim Corporation
Consolidated Cash Flow Statements
(thousands of Canadian dollars)
Operating activities
Profit (loss)
Unrealized gain on investments in private entities
Share-based compensation
Site restoration provision expense (recovery)
Lease expense
Depreciation and amortization
Income tax recovery
Net change in other non-cash balances
Accounts receivable and other assets
Accounts payable and accrued liabilities
Income taxes paid
Cash used in operating activities
Investing activities
Purchase of capital assets
Purchase of investment in private entities
Cash used in investing activities
Financing activities
Issuance of share capital, net of issuance costs
Cash provided from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash and cash equivalents is comprised of:
Cash
Year Ended December 31
2013
2014
$
19,964
(26,216)
3,025
1,790
218
11
-
(300)
(1,478)
-
(2,986)
(196)
(82,451)
(82,647)
143,135
143,135
57,502
35,412
92,914
$
(3,710)
-
97
(444)
-
-
(124)
43
1,792
(1,406)
(3,752)
-
-
-
-
-
(3,752)
39,164
35,412
92,914
$
35,412
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
- 21 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
1
Nature of Operations
The Westaim Corporation (the “Company”) was incorporated on May 7, 1996 by articles of incorporation under the Business Corporations
Act (Alberta). The Company’s head office is located at Suite 1700, 70 York Street, Toronto, Ontario, Canada. These financial statements
were authorized for issue by the Board of Directors of the Company on March 31, 2015.
On July 31, 2014, the Company completed the acquisition of a significant interest in Houston International Insurance Group, Ltd. (“HIIG”)
through Westaim HIIG Limited Partnership (the “Partnership”), an Ontario limited partnership managed by a subsidiary of the Company and
with its principal place of business situated at Suite 1700, 70 York Street, Toronto, Ontario, Canada. HIIG is a U.S. based diversified
specialty insurance provider and managing general insurance agent covering risks across the United States and certain niche global
markets. HIIG’s principal place of business is situated at 6th Floor, 800 Gessner Road, Houston, Texas, United States. See notes 5 and 8
for additional information on the acquisition and related financing transactions.
On January 9, 2013, the Company’s common shares commenced trading on the TSX Venture Exchange (“TSX-V”) under the symbol WED.
Until January 8, 2013, the Company’s common shares were traded on the Toronto Stock Exchange under the symbol WED. Concurrent with
the commencement of trading on the TSX Venture Exchange, the Company’s common shares were voluntarily delisted from the Toronto
Stock Exchange. On October 1, 2013, the Company completed a 50:1 share consolidation of all of its outstanding common shares. All
share capital, per share amounts, and share-based awards in the current and comparative periods have been adjusted to reflect this change.
2
Basis of Preparation and Summary of Significant Accounting Policies
Basis of Preparation and Adoption of IFRS for Investment Entities
These financial statements are prepared in compliance with International Financial Reporting Standards (“IFRS”).
IFRS 10 "Consolidated Financial Statements" ("IFRS 10") provides an exception to the consolidation requirements for entities that meet the
definition of an investment entity and requires such an entity to measure its investments in particular subsidiaries at fair value through profit
or loss (“FVTPL”) instead of consolidating those subsidiaries in its consolidated financial statements. The Company accounts for its
investment in the Partnership at FVTPL.
In accordance with IFRS 10, an investment entity is an entity that: (i) obtains funds from one or more investors for the purpose of providing
them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both, and (iii) measures and evaluates the performance of substantially all of its investments on a
fair value basis. In addition, IFRS 10 clarifies that an investment entity may earn fee income from the provision of investment-related
services to external parties.
Westaim pursues business investment opportunities with the objective of growing shareholder value through capital appreciation in these
investments and related income. From time to time, Westaim may also invite other investors with third party capital to co-invest alongside
Westaim. The first such vehicle is the Partnership. The Company uses fair value as the key measure to monitor and evaluate its
investments. The Company also earns, through wholly-owned entities, advisory fees in connection with its investment activities. The
provision of these advisory services does not constitute a significant business activity of the Company and the Company has assessed and
concluded that the advisory fees do not represent a substantial source of income. As a result, Westaim has determined that it qualifies as an
investment entity under IFRS, and commenced reporting its financial results in accordance with IFRS applicable to investment entities, on a
prospective basis, effective July 1, 2014. Adopting the investment entity accounting rules in IFRS 10 did not have an impact on the
Company’s consolidated financial statements, except that fair value is used to measure its investments.
These financial statements include the accounts of the Company and its wholly-owned entities, Westaim Management Limited Partnership,
Westaim Management GP Inc. and Westaim HIIG GP Inc., in accordance with IFRS 10.
All currency amounts are expressed in thousands of Canadian dollars except earnings per share data, unless otherwise noted.
Summary of Significant Accounting Policies
The significant accounting policies used to prepare these financial statements are as follows:
(a) Principles of consolidation
The financial statements of entities which are controlled by the Company, other than those measured at FVTPL, are consolidated. The
financial results of these entities, referred to as subsidiaries, are included in the consolidated financial statements from the date that control
commences until the date that control ceases. Intercompany balances and transactions are eliminated upon consolidation.
- 22 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
2
Basis of Preparation and Summary of Significant Accounting Policies (continued)
(b) Use of estimates
The preparation of financial statements requires management to make estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates and changes in estimates are recorded in the reporting period in
which they are determined. Key estimates include the fair value of investments in private entities, provision for site restoration, fair value of
share-based compensation, and unrecognized deferred tax assets.
(c) Judgments made by management
Key areas where management has made difficult, complex or subjective judgments in the process of applying the Company’s accounting
policies, often as a result of matters that are inherently uncertain, include determining that the Company meets the definition of an investment
entity under IFRS 10, valuation techniques for fair value determination of investments in private entities, site restoration provision and income
taxes. For additional information on these judgments, see note 5 for investments in private entities, note 6 for site restoration provision and
note 11 for income taxes.
(d) Foreign currency translation
The Canadian dollar is the functional and presentation currency of the Company. Transactions in foreign currencies are translated into
Canadian dollars at rates of exchange prevailing at the time of such transactions. Monetary assets and liabilities are translated at current
rates of exchange. Translation differences on investments in private entities measured at FVTPL are included in the statement of profit (loss)
and other comprehensive income (loss) under “unrealized gain on investments in private entities”.
(e) Revenue recognition
Investment income includes interest income and dividend income. Interest income is recognized on an accrual basis and dividend income is
recognized on the ex-dividend date. Advisory fees are recorded as income on an accrual basis when earned.
(f) Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid short-term investments with original maturities of 90 days or less.
Cash and cash equivalents are classified in the financial instrument category of loans and receivables for purposes of measurement. Cash
and cash equivalents are valued at fair value at the issuance date and subsequently at amortized cost using the effective interest method.
Carrying value is a reasonable approximation of fair value.
(g) Capital assets
The Company’s capital assets are reported at cost less accumulated depreciation. Depreciation is calculated based on the estimated useful
lives of the particular assets which is 3 to 10 years for furniture and equipment. Leasehold improvements are depreciated using the straight-
line method over the lesser of the term of the lease or the estimated useful life of the assets. At the end of each reporting period,
management reviews the carrying amounts of capital assets for indications of impairment. An impairment loss is recognized for the amount
by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of fair value less cost to
sell and value in use. Capital assets are included in accounts receivable and other assets in the statement of financial position.
(h) Investments
The Company’s investments in marketable securities and private entities are classified as FVTPL and are carried at fair value. At initial
recognition, the investments are measured at fair value, and gains and losses arising from changes in their fair value, including foreign
exchange gains or losses, are included in the statement of profit (loss) and other comprehensive income (loss) for the period in which they
arise. Transaction costs on the investments are expensed as incurred. Fair value is determined in the manner described in note 5.
Marketable securities are carried at fair value. Quoted market prices, that fall between the bid and close prices for that day, are used in
determining the fair value of individual investments held. The Company records security purchases and sales on a trade date basis.
- 23 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
2
Basis of Preparation and Summary of Significant Accounting Policies (continued)
Investments in securities where no quoted market values are available are generally valued initially at the cost of acquisition on the basis that
such cost is a reasonable estimate of fair value. Such investments are subsequently revalued using accepted industry valuation techniques
such as a substantial arm’s length transaction, earnings multiples of comparable publicly traded companies and discounted cash flow
analysis. Any sale, size or other liquidity restrictions on the investment are considered by management in its determination of fair value. Due
to the inherent uncertainty of valuation, management’s estimated values may differ significantly from the values that would have been used
had a ready market for the investments existed, and the differences could be material.
(i) Income taxes
Income tax expense is recognized in the statement of profit (loss) and other comprehensive income (loss). Current tax is based on taxable
income which differs from profit (loss) and other comprehensive income (loss) because of items of income or expense that are taxable or
deductible in other years and items that are never taxable or deductible.
Deferred tax assets are generally recognized for all deductible temporary income tax differences to the extent that it is probable that taxable
profits will be available against which those deductible temporary differences can be utilized. Deferred tax liabilities are generally recognized
for all taxable temporary differences. Deferred tax assets and liabilities are determined based on the enacted or substantively enacted tax
laws and rates that are anticipated to apply in the year of realization. The measurement of deferred tax assets and liabilities reflects the tax
consequences that would follow from the manner in which the Company expects to recover or settle the carrying amount of the related
assets and liabilities. The carrying amount of the deferred tax asset is reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be recovered.
Income tax assets and liabilities are offset when the Company intends to settle on a net basis and there is a legally enforceable right to
offset.
(j) Site restoration provision
Future site restoration costs relate to industrial sites previously owned by the Company and are estimated taking into consideration the
anticipated method and extent of the remediation consistent with regulatory requirements, industry practices, current technology and possible
uses of the site. The estimated amount of future restoration costs is reviewed periodically based on available information. The amount of the
provision is the present value of the estimated future restoration costs discounted using the rate of interest of a high quality government
bond.
Recoveries of costs resulting from indemnifications provided by previous owners of the Company’s industrial sites have not been recognized
in these financial statements. Future recoveries of site restoration costs will be recorded when received.
(k) Contributed surplus
The cost of stock options is recognized over the period from the issue date to the vesting date and recorded as contributed surplus. When
share capital of the Company is repurchased by the Company, the amount by which the average carrying value of the shares exceeds the
cost to repurchase the shares is removed from share capital and included in contributed surplus.
(l) Share-based compensation
The Company maintains share-based compensation plans, which are described in note 9. As at December 31, 2014 and 2013, all stock
options had vested. Any consideration paid by stock option holders for the purchase of stock is credited to share capital. The cost of stock
options is recognized in income as an expense over the period from the issue date to the vesting date with a corresponding increase in
contributed surplus.
Obligations related to Deferred Share Units (“DSUs”) and Restricted Share Units (“RSUs”) are recorded as liabilities at fair value. At each
reporting date they are re-measured at fair value with reference to the fair value of the Company’s stock price and the number of units that
have vested. The corresponding share-based compensation expense is recognized over the vesting period. When a change in value
occurs, it is recognized in share-based compensation expense in the applicable financial period.
(m) Earnings per share
Basic earnings per share is calculated by dividing profit or loss by the total of the weighted average number of common shares outstanding
during the reporting period. Profit (loss) equals profit (loss) and other comprehensive income (loss) for the years ended December 31, 2014
and 2013.
- 24 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
2
Basis of Preparation and Summary of Significant Accounting Policies (continued)
Diluted earnings per share is calculated on the basis of the weighted average number of shares outstanding during the reporting period plus
an estimate of the additional common shares that would have been outstanding if potentially dilutive common shares had been issued using
the “treasury stock” method. No adjustments to profit or loss are required for dividends, interest or other changes in income for purposes of
calculating diluted earnings per share.
3
Recently Adopted and Pending Accounting Pronouncements
In December 2011, amendments to IAS 32 “Financial Instruments: Presentation” were issued to clarify the existing requirements for offsetting
financial assets and financial liabilities. The amendments are effective for annual periods beginning on or after January 1, 2014. The
adoption of these amendments did not have an impact on the Company’s consolidated financial statements.
In May 2013, International Financial Reporting Standards Interpretations Committee Interpretation 21: Levies ("IFRIC 21") was issued. IFRIC
21 addresses various accounting issues relating to levies imposed by a government. This interpretation is effective for annual periods
beginning on or after January 1, 2014. The adoption of IFRIC 21 did not have an impact on the Company’s consolidated financial
statements.
In November 2009, the IASB issued IFRS 9 “Financial Instruments” (“IFRS 9”) as part of its plan to replace IAS 39 “Financial Instruments:
Recognition and Measurement”. IFRS 9 requires financial assets, including hybrid contracts, to be measured at either fair value or amortized
cost. In October 2010, the IASB amended the requirements for classification and measurement of financial assets and liabilities. In
November 2013, the IASB introduced a new hedge accounting model and allowed early adoption of the own credit provisions of IFRS 9. In
July 2014, the IASB issued the final version of IFRS 9 incorporating a new expected loss impairment model and introducing limited
amendments to the classification and measurement requirements for financial assets. This version supersedes all previous versions and is
mandatorily effective for periods beginning on or after January 1, 2018 with early adoption permitted. The Company is currently assessing
the impact of this new standard on its consolidated financial statements.
4
Accounts Receivable and Other Assets
The following capital assets were included in accounts receivable and other assets at December 31, 2014:
December 31, 2014
Leasehold improvements
Furniture and equipment
Computers
Cost
78
64
54
196
$
$
Accumulated
Depreciation
4
2
5
11
$
$
Net Book Value
$
$
74
62
49
185
Depreciation expense for the year ended December 31, 2014 was $11. There were no capital assets during the year ended December 31,
2013 or as at December 31, 2013.
5
Investments
Fair value measurement
The Company’s investments are classified as FVTPL and are carried at fair value in the statement of financial position. Changes in fair value
are reported under "Net results of investments" in the statement of profit (loss) and other comprehensive income (loss).
The table below summarizes the fair value hierarchy under which the Company’s investments are valued. Level 1 fair value measurements
are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 fair value measurements are
those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are
not based on observable market data (unobservable inputs). Inputs are considered as observable if they are developed using market data,
such as publicly available information about actual events or transactions, and that reflect the assumption that market participants would use
when pricing the asset or liability.
As at December 31, 2014
Investments in private entities
Fair value
$ 108,667
Level 1
$
-
Level 2
$
-
Level 3
$
108,667
- 25 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
5
Investments (continued)
Changes in the fair value measurement of investments in private entities included in Level 3 of the fair value hierarchy for the year ended
December 31, 2014 are as follows:
Year ended
December 31, 2014
Opening balance
Purchase of investment in private entities
Unrealized gain included in income
Ending balance
$
-
82,451
26,216
$ 108,667
There were no transfers between any levels during the year ended December 31, 2014.
Investment in private entities
Fair Value Determination
The fair value of financial assets and instruments that are not traded in an active market, including private entities, is determined by using
valuation techniques. The Company considers a variety of methods and makes assumptions that are based on market conditions existing at
each period end date. Valuation techniques used for non-standardized financial instruments include initial acquisition cost, discounted cash
flow analysis, comparable recent arm’s length transactions, comparable publicly traded companies, reference to other instruments that are
substantially the same, option pricing models and other valuation techniques commonly used by market participants.
The Company may use internally developed models, which are usually based on valuation methods and techniques generally recognized as
standard within the industry. Valuation models are used primarily to value unlisted equity and debt securities for which markets were or have
been inactive during the financial period. Some of the inputs to these models may not be observable and are therefore estimated based on
assumptions.
The output of a model is always an estimate or approximation of a value that cannot be determined with certainty, and valuation techniques
employed may not fully reflect all factors relevant to the positions the Company holds. Valuations are therefore adjusted, where appropriate,
to allow for additional factors including model risk, liquidity risk and counterparty risk.
The discounted cash flow approach is one of estimating the present value of the projected cash flows to be generated from the business and
theoretically available (though not necessarily paid) to the capital providers of the investee company. A discount rate is applied to the
projected future cash flows to arrive at a present value. The discount rate is intended to reflect all risks of ownership and the associated risks
of realizing a stream of projected future cash flows.
The discounted cash flow method generally involves the estimation of future maintainable operating pre-debt cash flows which are then
discounted using a discount rate based on a weighted average cost of capital. It is a present value calculation of future operating cash flow
expectations. The enterprise value is then reduced for the debt outstanding. Historical net operating earnings of the Company (adjusted for
unusual items), and current performance and prospects are used to estimate its future operating cash flows.
Investment in Houston International Insurance Group, Ltd. (HIIG)
On March 12, 2014, the Company announced that the Partnership had agreed to acquire an approximate 42.5% equity ownership interest in
HIIG for aggregate consideration of US$75,000 (the “Initial Acquisition”) through (i) the purchase of shares from certain existing shareholders
of HIIG (the “Sellers”) for US$15,000 and (ii) the subscription for stock from HIIG's treasury for US$60,000, subject to closing adjustments.
The Company had agreed to provide a US$20,000 capital commitment to the Partnership to fund, in part, the Initial Acquisition.
Under a stock purchase agreement entered into in connection with, and as a condition to, the completion of the Initial Acquisition, the
Partnership also had the right and obligation to purchase the remaining shares of HIIG owned by the Sellers (24.6% with the completion of
the Acquisition) for an aggregate purchase price of approximately US$38,700, subject to closing adjustments (the “Second Acquisition”, and
together with the Initial Acquisition, the “Acquisition”). Completion of the Second Acquisition was conditional on the Partnership raising the
funds necessary to complete such purchase on terms reasonably satisfactory to the Partnership. See note 8 regarding the related equity
financing arrangements.
- 26 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
5
Investments (continued)
On April 30, 2014, the Board of Directors of the Company approved an additional equity investment in the Partnership of up to US$25,000 to
fund (subject to the pre-emptive rights of other Partnership investors) the Partnership’s subscription for additional stock from HIIG’s treasury
contingent on the closing of the Acquisition (the “Supplemental Treasury Purchase”). The Supplemental Treasury Purchase allowed the
Partnership to increase its ownership in HIIG to 70.8%. Based on commitments received from certain of the Partnership’s other investors,
the contribution of the Company was approximately US$16,800.
The Acquisition was subject to the receipt of all requisite regulatory approvals, including TSX Venture Exchange approval, and other
regulatory approvals required under applicable U.S. competition and insurance laws, including approval of the Departments of Insurance of
the States of Texas and Oklahoma.
On July 31, 2014, the Company used a portion of the proceeds from the equity financing (described in note 8 below) to purchase Class A
Units of the Partnership and the Partnership (together with funds committed by other investors in the Partnership) completed the Acquisition
and the Supplemental Treasury Purchase and acquired 70.8% of HIIG for US$138,683. The Company’s investment in the Partnership at
closing on July 31, 2014 was US$75,712 ($82,451), representing a 53.3% ownership interest in the Partnership.
After the closing and prior to December 31, 2014, certain HIIG common shares were issued to HIIG management and employees in
accordance with their stock incentive plans. As a result, the Partnership’s ownership of HIIG was reduced from 70.8% upon closing, to
69.0% as at December 31, 2014.
The Partnership exercises control over HIIG and its insurance subsidiaries through its ownership of 69.0% of the issued and outstanding
shares of HIIG (“HIIG Shares”) at December 31, 2014. Westaim is also considered to exercise control over HIIG and its insurance
subsidiaries as Westaim HIIG GP Inc., a wholly-owned subsidiary of Westaim, is the general partner of the Partnership. The amount of
dividends paid by the insurance subsidiaries of HIIG to HIIG may be subject to restrictions imposed by the insurance regulators in the United
States, thereby limiting the amount of dividends HIIG can pay to its shareholders, including the Partnership. Payment of dividends from HIIG
to the Partnership may also be restricted as a result of covenants in credit facilities entered into by HIIG from time to time.
The Company incurred and expensed transaction and related costs in connection with the Acquisition and the Supplemental Treasury
Purchase of $1,806 and $1,942 in the years ended December 31, 2014 and 2013, respectively, of which $2,723 was reimbursed by HIIG and
$407 was reimbursed by the Partnership at closing. The total reimbursement of $3,130 was recorded as an offset to professional fee
expense in the year ended December 31, 2014.
The Company, through its wholly-owned subsidiary, Westaim HIIG GP Inc., entered into a management services agreement ("MSA") with
HIIG commencing upon closing on July 31, 2014, whereby Westaim HIIG GP Inc. is entitled to receive from HIIG an advisory fee of
US$1,000 annually for the first three years of the agreement and US$500 annually for two years thereafter relating to advisory services
provided under the agreement. The Company earned and received fees of $462 under the MSA in the year ended December 31, 2014.
The investment in HIIG, through the Partnership, is accounted for at FVTPL. The fair value of the Company’s investment in the Partnership
was determined to be $108,667 at December 31, 2014.
In determining the valuation of Westaim’s investment in the Partnership at the end of each reporting period, the Company considers the
discounted cash flow method to prepare a valuation of HIIG and the Partnership, and reviews comparable arm’s length transactions and
comparable publicly traded company valuations.
In arriving at the fair value of Westaim’s investment in the Partnership at July 31, 2014, the Company also considered the acquisition cost of
the Partnership’s 70.8% investment in HIIG. Given certain seller motivations and the desire of the Sellers to provide limited indemnifications
and no reserve guarantees, the purchase of HIIG Shares from the Sellers was completed at an approximate 29% discount to the December
31, 2013 adjusted book value of HIIG (“Discount Purchase”). The purchase of HIIG Shares from treasury was completed at a valuation equal
to approximately 100% of the December 31, 2013 adjusted book value of HIIG and was, due to the factors outlined above, considered to be
a better indicator of value. This indication of value is also consistent with implied valuation multiples related to the equity financing completed
by the Company, implied valuation multiples drawn from comparable public companies and targets of precedent transactions operating in the
specialty insurance market, and a supporting discounted cash flow approach. As a result of the determination that the purchase of the HIIG
Shares from the Sellers constituted a Discount Purchase, the Company recognized an unrealized gain on its investment in the Partnership of
$10,355 at July 31, 2014.
An additional unrealized gain of $15,861 was recognized in the period from August 1, 2014 to December 31, 2014, reflecting a change in the
fair value of the investment in the Partnership resulting from an increase in the value of HIIG of $9,802 as well as a strengthening of the U.S.
dollar against the Canadian dollar of $6,059.
- 27 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
5
Investments (continued)
The total unrealized gain of $26,216 has been included in the statement of profit (loss) and other comprehensive income (loss) for the year
ended December 31, 2014.
The fair value of the Company’s investment in the Partnership of $108,667 at December 31, 2014 was based on a valuation of approximately
100% of HIIG’s stockholders’ equity at December 31, 2014. This indicator of value was based on a purchase transaction completed shortly
after December 31, 2014, described below, whereby the Company, along with other third party investors, made a further investment in HIIG
through the Partnership. This transaction was the primary indicator of value used by the Company for its valuation in the Partnership at
December 31, 2014.
If HIIG’s stockholders’ equity at December 31, 2014 were higher by US$1,000, both the fair value of the Company’s investment in the
Partnership at December 31, 2014 and the unrealized gain on investments in private entities for the three months and year ended December
31, 2014 would have increased by approximately $427. If HIIG’s stockholders’ equity at December 31, 2014 were lower by US$1,000, an
opposite effect would have resulted.
A 10% strengthening of the U.S. dollar against the Canadian dollar would have resulted in an increase in the fair value of investments in
private entities at December 31, 2014 by approximately $10,867 and an increase in the unrealized gain on investments in private entities by
a corresponding amount. A similar weakening of the U.S. dollar would have had the opposite impact.
On January 14, 2015, the Partnership raised US$70,000 through the sale of additional Class A Units of the Partnership for the purpose of
acquiring additional HIIG Shares in order to, in part, fund the acquisition by HIIG of all of the assets of an underwriting business. The
purchase price paid for the HIIG Shares was based at a valuation of approximately 100% of HIIG’s stockholders’ equity at December 31,
2014. In connection therewith, the Company subscribed for additional Class A Units of the Partnership for an aggregate subscription amount
of approximately US$50,600. See note 15 for additional information on this subsequent event.
6
Site Restoration Provision
The Company has provided indemnifications to third parties with respect to future site restoration costs to be incurred on industrial sites
formerly owned by the Company. The site restoration provision is based on periodic independent estimates of costs associated with soil and
groundwater reclamation and remediation of these industrial sites. The ultimate environmental costs are uncertain as they are dependent on
the future use of the land and future laws and regulations.
Changes to the site restoration provision are as follows:
Balance at January 1
Changes due to:
Estimates of future expenditures
Inflation
Passage of time and discount rates
Balance at December 31
Year ended December 31
2014
2,219
76
306
1,408
4,009
$
$
2013
2,663
237
133
(814)
2,219
$
$
Estimates of future expenditures could change as a result of periodic reviews of the underlying assumptions supporting the provision,
including remediation costs and regulatory requirements.
Cash flows are estimated to take place over the next 150 years, with the majority to take place later than 50 years after December 31, 2014.
To calculate the site restoration provision, the estimated cash flows were adjusted for inflation and discounted to December 31, 2014. For
inflation and discounting calculations, all cash flows later than 50 years are treated as if the cash flow would occur at 100 years. Inflation is
estimated at 1.63% per annum over the next 100 years. Discount rates are based on risk free rates which range from 1.0% to 2.3% over the
next 30 years. The 30-year risk free rate is used for discounting cash flows that are estimated to occur later than 30 years after December
31, 2014.
Reimbursements of future costs resulting from indemnifications provided by previous owners of the industrial sites have not been recognized
in these financial statements. Future reimbursements will be recorded when received.
- 28 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
7
Commitments and Contingent Liabilities
(a)
In connection with the sale of the operations and assets of NUCRYST Pharmaceuticals Corp. (“Nucryst”) in 2009, Nucryst agreed to
indemnify the purchaser against certain liabilities or losses as described in the asset purchase agreement to an aggregate maximum of
US$11,000, subject to certain exclusions. The Company also agreed to indemnify the purchaser and the purchaser’s directors, officers
and employees, for an indefinite period, from certain environmental liabilities and costs relating to the premises formerly leased by
Nucryst in Fort Saskatchewan, Alberta. No claims have been made under, and no amounts have been accrued related to, these
indemnities.
(b) The Company has operating leases in Toronto with remaining lease terms of up to 5 years. At December 31, 2014, the Company had
a total commitment of $1,321 for future occupancy cost payments including payments due not later than one year of $269 and
payments due later than one year and not later than five years of $1,052.
(c) The Company may be involved in legal matters that arise from time to time in the ordinary course of the Company's business. At this
time, the Company is not aware of any legal matters of this type that are believed to be material to the Company's results of operations,
liquidity or financial condition.
8
Share Capital
The Company’s authorized share capital consists of an unlimited number of common shares with no par value, Class A preferred shares with
no par value and Class B preferred shares with no par value.
The Company’s share capital at December 31, 2014 and 2013 is as follows:
Common shares
Balance at January 1
Issued
Cancelled
Balance at December 31
Year ended
December 31, 2014
Year ended
December 31, 2013 (1)
Number
13,902,937
56,394,405
-
70,297,342
Stated Capital
$ 203,640
143,135
-
$ 346,775
Number
13,902,940
-
(3)
13,902,937
Stated Capital
$ 203,640
-
-
$ 203,640
(1) Adjusted to reflect a 50:1 share consolidation completed on October 1, 2013.
On October 1, 2013, the Company completed a 50:1 share consolidation of all of its outstanding common shares. All share capital, per share
amounts, and share-based awards in the current and comparative periods have been adjusted to reflect this change.
No shares of the Company are held by the Company, and there were no Class A preferred shares or Class B preferred shares outstanding at
December 31, 2014 and 2013.
On April 23, 2014, the Company completed the sale, on an underwritten private placement basis, of 47,180,380 subscription receipts (the
“Subscription Receipts”) of the Company at a price of $2.65 per Subscription Receipt for aggregate gross proceeds to the Company of
$125,028 (the “Offering”). The Company also completed a concurrent non-brokered private placement of 3,815,005 Subscription Receipts
on the same terms as the Offering for aggregate gross proceeds to the Company of $10,110 (the “Concurrent Private Placement”). Investors
in the Concurrent Private Placement included primarily members of the Company’s Board of Directors and management team.
Under the terms of the Offering and the Concurrent Private Placement, the net proceeds of the Offering and the Concurrent Private
Placement were held in escrow pending satisfaction of certain escrow release conditions, including the satisfaction of all conditions required
to complete the Acquisition (other than payment of the purchase price) and the receipt of all regulatory approvals (the “Escrow Release
Conditions”). Upon satisfaction of the Escrow Release Conditions, each Subscription Receipt entitled the holder to receive, for no additional
consideration, one common share of the Company.
Concurrent with the closing of the Offering and the Concurrent Private Placement, the Company also entered into irrevocable subscription
agreements with certain funds and co-investors (collectively, the “Investors”) for the subscription of 5,399,020 common shares of the
Company at a price of $2.65 per share, for aggregate gross proceeds to the Company of $14,307 (the “Additional Subscription”). The
Investors were shareholders of HIIG (and members of the Seller group) and they agreed to use the proceeds from the sale of their HIIG
Shares to the Partnership pursuant to the Acquisition to fund the Additional Subscription. The conditions to the closing of the Additional
Subscription were the same as the Escrow Release Conditions under the Offering and the Concurrent Private Placement.
- 29 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
8
Share Capital (continued)
The Escrow Release Conditions were satisfied on July 29, 2014 and the Subscription Receipts were exchanged for 50,995,385 common
shares of the Company pursuant to the terms of the Offering and the Concurrent Private Placement when the Escrow Release Conditions
were satisfied. Aggregate gross proceeds of the Offering and the Concurrent Private Placement to the Company, before share issuance
costs, amounted to $135,138. The Company used $82,451 of the proceeds from the Offering and the Concurrent Private Placement to
purchase Class A Units in the Partnership to enable the Partnership (together with funds committed by other investors in the Partnership) to
satisfy the cash consideration payable by the Partnership in connection with the Acquisition and the Supplemental Treasury Purchase. See
note 5 for additional information on the investment in HIIG. On July 31, 2014, the Company completed the Additional Subscription. On
closing, the Company issued 5,399,020 common shares of the Company to the Investors at a price of $2.65 per share for aggregate gross
proceeds to the Company of $14,307. The Company was reimbursed $913 by HIIG and $121 by the Partnership in share issuance costs
and the total reimbursed amount of $1,034 was recorded as an increase in the Company’s share capital in the year ended December 31,
2014. The remaining net proceeds from the Offering and the Concurrent Private Placement will be used by the Company for general
corporate purposes and to consider and possibly fund potential future acquisitions (including possible additional equity investments in the
Partnership).
The proceeds of the Offering, the Concurrent Private Placement and the Additional Subscription to the Company were $143,135, net of share
issuance costs of $6,310.
9
Share-based Compensation
At the annual and special meeting (the “Meeting”) of the shareholders of the Company held on June 19, 2014, the Company’s shareholders
approved an amendment to the Company’s comprehensive long-term equity incentive plan (the “Incentive Plan”) to adopt substantially the
form of long-term incentive plan of the Company in place prior to the Company’s shares being listed on the TSX-V, with certain exceptions.
The amendments included (a) providing for grants of RSUs, stock appreciation rights and other share-based awards in addition to DSUs, (b)
providing the Board of Directors with the option of establishing a share purchase program; and (c) removing the ability of the Company to
grant stock options under the Incentive Plan. Also at the Meeting, the shareholders of the Company approved the adoption of a stand-alone
incentive stock option plan (the “Option Plan”) in accordance with the policies of the TSX-V.
Unless increased in accordance with the terms of the plan and the rules of the TSX-V or any other applicable stock exchange, the maximum
number of common shares which may be issued under the Incentive Plan is fixed at 7,042,150. The Option Plan is a “rolling plan” which
provides that the aggregate number of common shares which may be reserved for issuance under the Option Plan is limited to not more than
10% of the aggregate number of common shares outstanding. However, each of the Incentive Plan and the Option Plan provide that under
no circumstances shall there be common shares issuable under such plan, together with all other security-based compensation
arrangements of the Company, which exceed 10% of the aggregate number of common shares outstanding.
Stock Options - Changes to the number of stock options for the years ended December 31, 2014 and 2013 are as follows:
Year ended
December 31, 2014
Year ended
December 31, 2013 (1)
Common share stock options
Outstanding at January 1
Expired and forfeited
Outstanding at December 31
Number
6,000
(1,000)
5,000
Weighted Average
Exercise Price
$ 165.25
$ 197.50
$ 158.80
Number
7,456
(1,456)
6,000
Weighted Average
Exercise Price
$ 153.50
$ 104.00
$ 165.25
(1) Adjusted to reflect a 50:1 share consolidation completed on October 1, 2013.
All stock options outstanding are exercisable, at prices ranging from $61.50 to $309.00, and at December 31, 2014 had an average
remaining contractual life of 1.1 year. There was no compensation expense relating to options in the years ended December 31, 2014 and
2013.
Restricted Share Units - RSUs vest on specific dates and are payable when vested with either cash or common shares of the Company. In
certain circumstances such as a change of control of the Company or the sale of substantially all of the assets of the Company, RSUs vest
immediately.
Obligations related to RSUs are recorded as liabilities at fair value. At each reporting date they are re-measured at fair value with reference
to the fair value of the Company’s stock price and the number of units that have vested. The corresponding share-based compensation
expense is recognized over the vesting period. When a change in value occurs, it is recognized in share-based compensation expense in
the applicable financial period.
- 30 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
9
Share-based Compensation (continued)
On November 14, 2014, an aggregate of 2,375,000 RSUs were granted to certain officers, employees and consultants. These RSUs vest as
to 33% on December 31, 2014 and 22% on May 31, 2015. The remaining 45% of the RSUs vest evenly over 24 months, with the first
vesting on June 30, 2015. There were 2,375,000 RSUs outstanding at December 31, 2014 (December 31, 2013 - nil). Compensation
expense relating to RSUs for the year ended December 31, 2014 was $2,919 (2013 - $nil). At December 31, 2014, a liability of $2,919
(December 31, 2013 - $nil) has been accrued with respect to outstanding RSUs in the statement of financial position.
Deferred Share Units - DSUs are granted to non-executive directors of the Company and are issued at the market value of the Company’s
shares at the date of grant. Vested DSUs are paid out in cash when the participant ceases to be a director, officer or employee.
There were 113,200 DSUs outstanding at December 31, 2014 and 2013. There were no changes to the number of DSUs for the years
ended December 31, 2014 and 2013. For the year ended December 31, 2014, compensation expense relating to DSUs was $106 (2013 -
$97). At December 31, 2014, a liability of $345 (December 31, 2013 - $239) has been accrued with respect to outstanding DSUs in the
statement of financial position.
10 Related Party Transactions
The Company, through its wholly-owned subsidiary, Westaim HIIG GP Inc., entered into an MSA with HIIG commencing upon closing on July
31, 2014, whereby Westaim HIIG GP Inc. is entitled to receive from HIIG an advisory fee of US$1,000 annually for the first three years of the
agreement and US$500 annually for two years thereafter relating to advisory services provided under the agreement. The Company earned
and received fees of $462 under the MSA in the year ended December 31, 2014.
The Company was reimbursed $2,723 by HIIG and $407 by the Partnership in transaction and related costs in connection with the
Acquisition and the Supplemental Treasury Purchase. The total reimbursement of $3,130 was recorded as an offset to professional fee
expense in the year ended December 31, 2014. The Company was also reimbursed $913 by HIIG and $121 by the Partnership in share
issuance costs. The total reimbursed amount of $1,034 was recorded as an increase in the Company’s share capital in the year ended
December 31, 2014.
Transactions with key management personnel
Related parties include key management personnel, close family members of key management personnel and entities which are, directly or
indirectly, controlled by, jointly controlled by or significantly influenced by key management personnel or their close family members. Key
management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the
Company, directly or indirectly, and include executive officers and directors of the Company.
Compensation expenses related to key management personnel for the years ended December 31, 2014 and 2013 are as follows:
Salaries and other short-term employee benefits
Share-based compensation
Year ended December 31
2014
2,321
2,810
5,131
$
$
$
$
2013
1,149
97
1,246
Certain officers are entitled to termination benefits equal to twelve months of salary and performance bonus and vesting of all unvested
share-based awards. In the event of a termination in connection with a change of control, the executive officers will be entitled to termination
benefits equal to twenty-four months of salary and performance bonus and vesting of all unvested share-based awards.
An aggregate of 3,400,000 common shares were issued to certain directors and officers of the Company pursuant to the Concurrent Private
Placement completed on July 29, 2014 for aggregate gross proceeds of $9,010, on terms equivalent to the other participants in the
Concurrent Private Placement. See note 8 for additional information on the Concurrent Private Placement.
Consulting fees paid to a company owned by a director of HIIG from August 1 to December 31, 2014 amounted to $60. An RSU liability of
$215 due to the same company was accrued at December 31, 2014. The corresponding amount was expensed in the statement of profit
(loss) and other comprehensive income (loss) for the year ended December 31, 2014 under share-based compensation expense.
Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated and
are not disclosed in this note.
- 31 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
11
Income Taxes
Income taxes are recognized for deferred income taxes attributed to estimated differences between the financial statement carrying values of
assets and liabilities and their respective income tax bases.
Deferred tax (liabilities)/assets recognized in profit or loss in relation to:
Unrealized gain on investments in private entities
Non-capital loss carry-forwards
Year ended December 31
2014
$ (3,392)
3,392
-
2013
-
-
-
$
$
$
As the realization of any related tax benefits is not probable, no deferred income tax assets have been recognized for the following:
Non-capital loss carry-forwards
Capital loss carry-forwards
Deductible temporary differences
Corporate minimum tax credits
Investment tax credits
December 31, 2014
$
40,925
6,987
12,546
1,406
9,633
December 31, 2013
48,234
$
6,987
6,066
1,406
9,633
The unrecognized non-capital losses and investment tax credits will expire at various times to the end of 2034, as follows:
Non-capital losses by year of expiry:
2027
2028
2029
2030
2031
2033
2034
$
$
1,235
9,048
103
610
20,609
3,830
5,490
40,925
$
Investment tax credits by year of expiry:
2016
2017
2018
2019
2020
2021
Beyond 2021
$
961
3,241
888
961
823
643
2,116
9,633
The following is a reconciliation of income taxes calculated at the statutory income tax rate to the income tax expense included in the
statements of profit (loss) and other comprehensive income (loss):
Profit (loss) before income tax
Statutory income tax rate
Income taxes at statutory income tax rate
Variations due to:
Non-taxable portion of unrealized gain on
investments in private entities
Tax losses allocated from the Partnership
Non-deductible items
Unrecognized temporary differences
Recognized tax losses
Unrecognized tax losses
Adjustment to prior year provision
Income tax recovery
Year ended December 31
2014
$ 19,964
26.5%
5,290
2013
(3,834)
26.5%
(1,016)
$
(3,392)
(15)
7
47
(1,937)
-
-
-
$
-
-
-
1
-
1,015
(124)
(124)
$
- 32 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
12 Earnings per Share
The Company uses the treasury stock method to calculate diluted earnings per share. Following the treasury stock method, the numerator
for the Company’s diluted earnings per share calculation remains unchanged from the basic earnings per share calculation, as the assumed
exercise of the Company’s stock options and RSUs does not result in an adjustment to profit or loss.
The Company had 5,000 stock options and 2,375,000 RSUs outstanding at December 31, 2014. At December 31, 2013, there were 5,000
stock options outstanding. The stock options and RSUs were excluded in the calculation of diluted earnings per share for the years ended
December 31, 2014 and 2013 as they were anti-dilutive. The Company’s diluted earnings per share and basic earnings per share are the
same for the years ended December 31, 2014 and 2013.
13 Capital Management
The Company’s capital currently consists of common shareholders’ equity. It may have different components in the future.
The Company’s guiding principles for capital management are to maintain the stability and safety of the Company’s capital for its
stakeholders through an appropriate capital mix and a strong balance sheet.
The Company monitors the mix and adequacy of its capital on a continuous basis. The Company employs internal metrics. The capital of
the Company is not subject to any restrictions. Units of the Partnership cannot be issued without the prior approval of the unitholders and, in
connection with any such issuance, the holders of units have pre-emptive rights entitling them to purchase their pro rata share of any units
that may be so issued.
14 Financial Risk Management
The Company is exposed to a number of risks due to its business operations. The Company’s statement of financial position at December
31, 2014 consists of short-term financial assets and financial liabilities with maturities of less than one year, investments in private entities
and the site restoration provision. The most significant identified risks which arise from holding financial instruments include credit risk,
liquidity risk, currency risk, interest rate risk and equity risk. The Company has a comprehensive risk management framework to monitor,
evaluate and manage the risks assumed in conducting its business.
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The
Company’s credit risk arises primarily from its cash and cash equivalents. The Company manages such risk by maintaining bank accounts
with a Schedule 1 bank in Canada.
Liquidity risk
Liquidity risk is the risk that the Company may not be able to generate sufficient cash resources to settle its obligations in full as they fall due
or can only do so on terms that are materially disadvantageous.
The Company has made investments in private entities which do not typically have an active market. Private investment transactions can be
highly structured and the Company takes measures, where possible, to create defined liquidity events and as part of its strategy, the
Company has sought to create or accelerate such liquidity events. However, such liquidity events are rarely expected in the first two or three
years of making an investment and may not be realized as expected.
At December 31, 2014, the Company had no debt and its financial assets were significantly higher than its financial liabilities resulting in
minimal liquidity risk.
Currency risk
The Company’s investment in HIIG, through the Partnership, is exposed to foreign exchange risk as HIIG’s operations are located in the
United States and its functional currency is the U.S. dollar. The Company’s functional currency is the Canadian dollar and any fluctuations in
the U.S. dollar relative to the Canadian dollar may have a material impact on the fair value of its investment in HIIG, through the Partnership.
An increase (a decrease) in the value of the U.S. dollar relative to the Canadian dollar increases (decreases) the value of the investment. A
10% strengthening of the U.S. dollar against the Canadian dollar would have resulted in an increase in the fair value of investments in private
entities at December 31, 2014 by approximately $10,867 and an increase in the unrealized gain on investments in private entities by a
corresponding amount. A similar weakening of the U.S. dollar would have had the opposite impact.
- 33 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
(Currency amounts in thousands of Canadian dollars unless otherwise indicated)
14 Financial Risk Management (continued)
The Company also maintains cash balances in U.S. dollars. A 10% strengthening of the U.S. dollar against the Canadian dollar would have
increased foreign exchange gain for the year ended December 31, 2014 by approximately $1,618. A similar weakening of the U.S. dollar
would have resulted in an opposite effect.
Interest rate risk
The Company is subject to nominal interest rate risk on its cash and cash equivalents. The Company does not believe that the results of
operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to interest rates on
its cash and cash equivalents.
Equity risk
HIIG is a private entity and there is no active market for its shares. The Company’s investment in HIIG, through the Partnership, is being
held for strategic and not trading purposes. As such, the Company’s exposure to equity risk is nominal.
15 Subsequent Event
(a) On January 14, 2015, the Partnership raised US$70,000 through the sale of additional Class A Units of the Partnership. The proceeds
from this offering were used to acquire 14,752,993 HIIG Shares at an interim purchase price of approximately US$4.7448 per share in
order to fund (i) the purchase by HIIG, through HIIG Underwriters Agency, Inc., of all of the assets of the underwriting business
operating as “Elite Underwriting Services”, a division of U.S. based Elite Brokerage Services, Inc., (ii) an additional capital contribution
to HIIG’s subsidiary insurance companies and (iii) for general corporate purposes.
The final purchase price for the HIIG Shares was determined on March 25, 2015 to be approximately US$4.9249 per HIIG Share based
on 100% of HIIG’s audited stockholders’ equity as at December 31, 2014 (subject to certain adjustments). Accordingly, the final
number of HIIG Shares acquired by the Partnership was 14,213,487 HIIG Shares which shares are considered to have been acquired
on January 14, 2015.
In connection with the offering, the Company subscribed for additional Class A Units of the Partnership for an aggregate subscription
amount of approximately US$50,600. Based on this additional investment, effective January 14, 2015 the Company owned
approximately 58.7% of the Partnership and the Partnership owned approximately 75.7% of HIIG.
(b) On February 25, 2015, the Company received from HIIG a further reimbursement of $3,028 in share issuance costs in connection with
the Company’s Offering completed in 2014. The amount will be recorded as an increase in the Company’s share capital in the three
months ended March 31, 2015.
- 34 -
SHAREHOLDER INFORMATION
BOARD OF DIRECTORS
Stephen R. Cole 1, 2, 3
President, Seeonee Inc.
Ian W. Delaney
Chairman of the Board,
The Westaim Corporation
John W. Gildner 1, 2, 3
Independent Businessman
J. Cameron MacDonald
President and Chief Executive Officer,
The Westaim Corporation
Daniel P. Owen 1, 2, 3
Chairman and Chief Executive Officer, Molin Holdings Limited
Chairman, Heli-Lynx Helicopter Services Inc.
Peter H. Puccetti
Chief Investment Officer, Goodwood Inc.
Numbers indicate the individual’s committee membership:
1. Member of the Audit Committee
2. Member of the Human Resources and Compensation Committee
3. Member of the Nominating and Corporate Governance Committee
The Westaim Corporation Annual General Meeting of Shareholders Friday May 15, 2015 10:00 a.m.
St. Andrew’s Club and Conference Centre
150 King Street West, Sun Life Financial Tower
S3/4 Inverness Room, 27th Floor
Toronto, Ontario
CORPORATE INFORMATION
STOCK INFORMATION
TRANSFER AGENT
Ian W. Delaney
Chairman
Traded on the TSX Venture Exchange
under the symbol WED
Computershare Trust Company of Canada
600, 530 – 8th Avenue SW
Calgary, Alberta T2P 3S8
J. Cameron MacDonald
Shares issued and outstanding
Tel: 1-800-564-6253
President and Chief Executive Officer
at December 31, 2014 were 70,297,342
E-mail: service@computershare.com
Robert T. Kittel
Chief Operating Officer
Glenn G. MacNeil
Chief Financial Officer
Corporate Office
70 York Street, Suite 1700
Toronto, Ontario M5J 1S9
Tel: (416) 969-3333
Fax: (416) 969-3334
E-mail: info@westaim.com
www.westaim.com
- 35 -
THIS PAGE INTENTIONALLY LEFT BLANK
THIS PAGE INTENTIONALLY LEFT BLANK
THE WESTAIM CORPORATION
70 York Street, Suite 1700
Toronto, Ontario, Canada
M5J 1S9
www.westaim.com
info@westaim.com