THE WESTAIM CORPORATION
ANNUAL REPORT 2016
THE WESTAIM CORPORATION
ANNUAL REPORT 2016
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
1
3
41
42
43
47
65
65
All currency amounts are in United States dollars, unless otherwise indicated.
LETTER TO SHAREHOLDERS
Dear Shareholders:
In 2016, the main focus of Westaim was to work alongside our partners at Houston International
Insurance Group, Ltd. (“HIIG”) and the Arena Group (“Arena”) and to support the execution of
their business plans and goals.
Fiscal 2016 was a transition year for HIIG. Early in the year, HIIG made the decision that in
order to better position the company for growth and to take advantage of increased scale, it
would (i) evaluate the third-party administrators (“TPAs”) that it used to manage claims, and
replace certain TPAs with new, owner-operated TPAs that would perform better and have a
greater focus on HIIG’s business; and (ii) move the majority of general liability claims from TPAs
to a newly-created and staffed in-house HIIG claims department. These very critical moves are
designed to allow HIIG to have more control over its claims management process and to allow
the business to scale moving forward, and should provide significant savings through reduced
loss adjustment expenses. While this transition was a monumental task, it was completed on a
timely basis in the fourth quarter of 2016.
Largely as a result of this transition, HIIG experienced adverse case reserve development in
2016 that impacted financial results as ultimate loss estimates for certain lines of business were
increased. By year end, substantially all claim files had been fully reviewed and reserved by
new TPAs and new HIIG claims staff, and therefore we are optimistic that the adverse
development experienced in fiscal 2016 will not be a recurring event as we move into fiscal
2017.
Over the past two years since our acquisition, HIIG has significantly strengthened its
management team with experience and depth including new appointments to the positions of
President; Chief Financial Officer; EVP, Property and Casualty Underwriting; and in-house
Actuary. We believe that the current management team is the strongest HIIG has had, and it is
prepared for the growth that we expect lies ahead.
Despite soft market conditions within the property and casualty insurance industry, Westaim and
the management of HIIG remain excited about the future growth and earnings prospects of the
business.
In 2016, Arena continued to deploy its capital, with the rate of deployment accelerating in the
fourth quarter. Arena’s management team has been building a diversified portfolio of quality
asset-oriented credit investments and the investments are performing at or above our
expectations. The vast majority of the investments consist of senior and secured debt
instruments, with short duration, and attractive yields amongst the various investment strategies
that Arena employs. Arena’s goal is to create a continuous pipeline of investment opportunities
highly diversified by industry, strategy and geography and to grow assets under management.
Arena (including Arena Finance and Arena Origination) now has committed assets under
management of over $440 million. Westaim believes that Arena is well-positioned to continue to
expand its business and generate attractive returns for Arena’s clients and for Westaim and its
shareholders.
- 1 -
At December 31, 2016, Westaim’s shareholders’ equity was $318.5 million, translating into a
book value per share of $2.21 (C$2.97).
The Westaim team continues to actively pursue new opportunities to create long-term
shareholder value. On behalf of the Board of Directors, I want to thank Westaim shareholders,
employees and our partners at HIIG and Arena for their ongoing efforts, and we look forward to
a rewarding 2017.
Sincerely,
J. Cameron MacDonald,
President and Chief Executive Officer
- 2 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
TABLE OF CONTENTS
1.
THE COMPANY
2. OVERVIEW OF PERFORMANCE
3.
4.
5.
6.
INVESTMENTS
EQUITY FINANCING
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. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES
15. 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, 2016 and 2015 as set out on pages 43 to 64 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, 2016 and 2015 and is
intended to enable the reader to assess Westaim’s results of operations for the three months and year ended December 31, 2016 and financial
condition as at December 31, 2016. The Company reports its consolidated financial statements using accounting policies consistent with International
Financial Reporting Standards (“IFRS”). All currency amounts are in United States dollars (“US$”) unless otherwise indicated. The following
commentary is current as of March 30, 2017. Additional information relating to Westaim is available on SEDAR at www.sedar.com. Certain
comparative figures have been reclassified to conform to the presentation of the current year, and certain totals, subtotals and percentages may not
reconcile due to rounding.
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 primary investments. The
Company reports its financial results in accordance with IFRS applicable to investment entities.
Functional and Presentation Currency
International Accounting Standard (“IAS”) 21 “The Effects of Changes in Foreign Exchange Rates” (“IAS 21”) describes functional currency as the
currency of the primary economic environment in which an entity operates. As a result of the completion of the Arena Transactions (as hereinafter
defined), a significant majority of the Company’s revenues and costs are sourced and incurred in US$. The Company changed its functional currency
from Canadian dollars (“C$”) to US$, prospectively from the date of change of August 31, 2015.
On August 31, 2015, the Company also changed its presentation currency from C$ to US$. Comparative information for periods prior to August 31,
2015 has been restated in US$ in accordance with IAS 21. See note 2 to the Company’s audited annual consolidated financial statements for the years
ended December 31, 2016 and 2015 for the procedures used in translating the Company’s comparative consolidated financial statements and
associated notes prior to August 31, 2015.
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, in large part because book value
reflects the fair value of the Company's primary investments which are accounted for at fair value through profit or loss under IFRS. However, book
value is not necessarily equivalent to the net realizable value of the Company’s assets per share.
- 3 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States 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, net asset value, discounted cash flow analysis, comparable recent arm’s length transactions, 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.
Select financial information concerning Houston International Insurance Group, Ltd. (“HIIG”) (the “HIIG Financial Information”) 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, 2016 and 2015 (the “HIIG
Statements”) which have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”). Such statements are
the responsibility of the management of HIIG. The HIIG Financial Information, including any HIIG non-GAAP measures contained therein, 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.
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 of 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.
Cautionary Statement Regarding Financial Information of the Arena Group
Select financial information concerning the Arena Group (as hereinafter defined) (the “Arena Financial Information”) contained in this MD&A is unaudited
and has been derived from the financial statements of the Arena Group for the year ended December 31, 2016 and the period from commencement of
operations on August 31, 2015 to December 31, 2015 which have been prepared in accordance with either IFRS or US GAAP. Such statements are
the responsibility of the management of the Arena Group. The Arena Financial Information, including any Arena Group non-GAAP measures contained
therein, may not be reconciled to IFRS and so may not be comparable to the financial information of issuers that present their financial information in
accordance with IFRS.
The Arena 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 Arena Financial Information has been provided by the Arena Group. Although Westaim has no knowledge that would indicate that any of the Arena
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 the Arena Group 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 of whatever
nature arising in any way out of or in connection with the Arena 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, and in the Company’s Annual Information Form dated
March 30, 2017 for its fiscal year ended December 31, 2016 which is available on SEDAR at www.sedar.com. Please refer to the cautionary note in
Section 15 of this MD&A.
- 4 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States 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 global financial services industry and grow shareholder value
over the long term. The Company’s principal investments consist of Houston International Insurance Group, Ltd. (through the Westaim HIIG
Limited Partnership) and the Arena Group. See discussion in Section 3, Investments of this MD&A for additional information on these
investments.
2. OVERVIEW OF PERFORMANCE
Highlights
(millions except share and per share data)
Three months ended December 31
2016
2015
Year ended December 31
2015
2016
Revenue
Net results of investments
Recovery of expenses (expenses)
(Loss) profit
(Loss) earnings per share - basic and diluted
(Loss) profit
Other comprehensive loss
Comprehensive loss
At December 31:
Shareholders’ equity
Number of common shares outstanding
Book value per share - in US$ 1
Book value per share - in C$ 2
$
$
$
$
$
$
0.7
(1.9)
0.3
$
0.5
(3.2)
(3.0)
$
2.7
(4.0)
(7.0)
1.6
12.7
(6.6)
(0.9)
$
(5.7)
$
(8.3)
$
7.7
(0.01)
$
(0.04)
$
(0.06)
$
0.08
(0.9)
-
(0.9)
$
$
(5.7)
-
(5.7)
$
$
(8.3)
-
(8.3)
$
$
7.7
(20.6)
(12.9)
$
$
$
318.5
143,186,718
2.21
2.97
$
$
$
326.1
143,186,718
2.27
3.14
$
$
$
318.5
143,186,718
2.21
2.97
$
$
$
326.1
143,186,718
2.27
3.14
1 Book value per share at the end of the period 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, 2016 - $5.4 million; December 31, 2015 - $3.8 million), divided by the aggregate of the total number of
common shares outstanding at that date and the number of common shares that would have been issued if all outstanding RSUs (December 31, 2016 -
3,082,073 units, December 31, 2015 - 2,209,563 units) were exercised.
2 Book value per share at December 31, 2016 and 2015 converted from US$ to C$ at period end rates of 1.3427 and 1.3840, respectively.
- 5 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
2. OVERVIEW OF PERFORMANCE (continued)
Three months ended December 31, 2016 and 2015
The Company reported a loss and comprehensive loss of $0.9 million for the three months ended December 31, 2016 (2015 - $5.7 million).
Revenue for the three months ended December 31, 2016 of $0.7 million (2015 - $0.5 million) consisted of interest income of $0.3 million (2015 -
$0.3 million) and advisory fees of $0.4 million (2015 - $0.2 million).
Net results of investments were a loss of $1.9 million for the three months ended December 31, 2016 (2015 - $3.2 million), consisting of an
unrealized loss on the Company’s investments in private entities of $1.3 million (2015 - $2.7 million) and the Company’s share of losses of its
Associates (as hereinafter defined) of $0.6 million (2015 - $0.5 million). See discussion in Section 3, Investments of this MD&A.
Recovery of expenses for the three months ended December 31, 2016 of $0.3 million (2015 – expenses of $3.0 million) consisted of share-based
compensation expense of $0.9 million (2015 - $0.2 million), professional fees of $0.1 million (2015 - $0.5 million), site restoration provision
recovery of $1.5 million (2015 - expense of $0.7 million), salaries and benefits of $0.2 million (2015 - $1.5 million), general and administrative costs
of $0.2 million (2015 - $0.2 million), and a foreign exchange gain of $0.2 million (2015 - $0.1 million).
Year ended December 31, 2016 and 2015
The Company reported a loss and comprehensive loss of $8.3 million for the year ended December 31, 2016 (2015 - profit of $7.7 million and
comprehensive loss of $12.9 million).
Revenue for the year ended December 31, 2016 of $2.7 million (2015 - $1.6 million) consisted of interest income of $1.3 million (2015 - $0.6
million) and advisory fees of $1.4 million (2015 - $1.0 million).
Net results of investments were a loss of $4.0 million for the year ended December 31, 2016 (2015 - gain of $12.7 million), consisting of an
unrealized loss on the Company’s investments in private entities of $1.6 million (2015 - gain of $13.6 million), the Company’s share of losses of its
Associates of $2.4 million (2015 - $1.0 million), and a gain on other investments of $nil (2015 - $0.1 million). See discussion in Section 3,
Investments of this MD&A.
Expenses for the year ended December 31, 2016 of $7.0 million (2015 - $6.6 million) consisted of share-based compensation expense of $2.6
million (2015 - $2.7 million), professional fees of $0.9 million (2015 - $1.6 million), site restoration provision recovery of $0.5 million (2015 -
expense of $1.0 million), salaries and benefits of $2.8 million (2015 - $2.1 million), general and administrative costs of $1.0 million (2015 - $0.9
million), and a foreign exchange loss of $0.2 million (2015 - gain of $1.7 million).
The other comprehensive loss of $20.6 million for the year ended December 31, 2015 related to exchange differences from currency restatement
as a result of a change in presentation currency from the C$ to the US$ on August 31, 2015.
- 6 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS
The Company’s principal investments consist of its investments in HIIG (through Westaim HIIG Limited Partnership (the “HIIG Partnership”)) and
the Arena Group, as follows:
Place of
establishment
Principal place
of business
Ownership interest
as at December 31, 2016
Ownership interest
as at December 31, 2015
Ontario, Canada
Ontario, Canada
Delaware, U.S.
Ontario, Canada
Ontario, Canada
New York, U.S.
58.5% owned by Westaim
100% owned by Westaim
100% owned by Westaim
58.5% owned by Westaim
100% owned by Westaim
100% owned by Westaim
Investments in private entities:
- HIIG Partnership
- Arena Finance
- Arena Origination
Investments in Associates:
- WAHII
Delaware, U.S.
New York, U.S.
- ASOF-ON GP
Delaware, U.S.
New York, U.S.
- ASOF-OFF II GP
Delaware, U.S.
New York, U.S.
51% beneficially owned by Westaim,
indirectly through WCA 1
51% beneficially owned by Westaim,
indirectly through WCA 1
51% beneficially owned by Westaim 1
51% beneficially owned by Westaim,
indirectly through WCA 1
51% beneficially owned by Westaim,
indirectly through WCA 1
51% beneficially owned by Westaim 1
1 Legal equity ownership is 100%, and beneficial ownership denotes profit percentage subject to change over time pursuant to the earn-in rights granted to BP LLC
(as hereinafter defined) described under “Investment in the Arena Group - Arena Investors”.
For additional information on the Company’s corporate structure, see the Company’s Annual Information Form dated March 30, 2017 for its fiscal
year ended December 31, 2016 which is available on SEDAR at www.sedar.com.
Houston International Insurance Group, Ltd.
The Company indirectly owns a significant interest in HIIG, through the HIIG Partnership, an Ontario limited partnership managed by Westaim
HIIG GP Inc. HIIG is a U.S. based diversified specialty insurance company providing coverage primarily in the United States but also globally for
certain risks. The Company’s investment in HIIG (through the HIIG Partnership) is recorded under investments in private entities in the Company’s
consolidated financial statements.
Arena Group
On August 31, 2015, the Company established the following three businesses that collectively make up the Arena Group:
Arena Investors – WAHII, ASOF-ON GP and ASOF-OFF II GP (collectively, “Arena Investors”) were established to collectively operate as
an investment manager offering clients access to fundamentals-based, asset-oriented credit investments. The Company’s investment in
Arena Investors is recorded under investments in associates in the Company’s consolidated financial statements.
Arena Finance – Arena Finance, through Arena Finance Holdings Co., LLC (“AFHC”), a Delaware limited liability company wholly-owned by
Arena Finance, and AFHC’s subsidiaries, was set up as a specialty finance company to primarily purchase fundamentals-based, asset-
oriented credit investments for its own account. The Company’s investment in Arena Finance is recorded under investments in private
entities in the Company’s consolidated financial statements.
Arena Origination – Arena Origination, through Arena Origination Co., LLC (“AOC”), a Delaware limited liability company wholly-owned by
Arena Origination, was set up to facilitate the origination of fundamentals-based, asset-oriented credit investments for its own account and/or
possible future sale to Arena Finance, clients of Arena Investors and/or other third parties. The Company’s investment in Arena Origination
is recorded under investments in private entities in the Company’s consolidated financial statements.
The establishment, capitalization and organization of Arena Investors, Arena Finance and Arena Origination are referred to as the “Arena
Transactions”, and Arena Investors, Arena Finance and Arena Origination and related entities are collectively referred to as “Arena” or the “Arena
Group”.
- 7 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
The following chart illustrates a simplified organizational structure of the Arena Group:
* Legal equity ownership is 100%, and beneficial ownership denotes profit percentage subject to change over time pursuant to the earn-in rights granted to BP LLC
described under “Investment in the Arena Group - Arena Investors”.
For a detailed discussion of the business model of the Arena Group, see the Company’s Annual Information Form dated March 30, 2017 for its
fiscal year ended December 31, 2016 which is available on SEDAR at www.sedar.com.
Accounting for the Company’s Investments
The Company’s investments in private entities consist of its investments in HIIG (through the HIIG Partnership), Arena Finance and Arena
Origination. Westaim qualifies as an investment entity under IFRS and uses fair value as the key measure to monitor and evaluate its primary
investments. Accordingly, the Company’s investments in private entities are accounted for at fair value through profit or loss (“FVTPL”).
In determining the valuation of investments in private entities at December 31, 2016 and 2015, the Company used net asset value as the primary
valuation technique. For a detailed description of the valuation of the Company’s investments in private entities, see note 5 to the Company’s
audited annual consolidated financial statements for the years ended December 31, 2016 and 2015.
The Company’s investments in associates consist of its investment in Arena Investors, including the Company’s indirect investment in WAHII
(through WCA), ASOF-ON GP (through WCA), and its direct investment in ASOF-OFF II GP. WAHII, ASOF-ON GP and ASOF-OFF II GP are
collectively referred to as the “Associates”. The Company’s investments in Associates are accounted for using the equity method and consist of
investments in corporations or limited partnerships where the Company has significant influence.
- 8 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Changes in the fair value of the Company’s investments in private entities and the Company’s share of profit (loss) and other comprehensive
income (loss) of Associates are reported under “Net results of investments” in the consolidated statements of (loss) profit and other comprehensive
loss.
Changes in the Company’s investments in private entities are summarized as follows:
Investments in private entities:
- HIIG Partnership
- Arena Finance
- Arena Origination
Three months ended December 31, 2016
Ending
Unrealized
Opening
balance
(loss) gain
balance
Three months ended December 31, 2015
Ending
Unrealized
Opening
balance
gain (loss)
balance
$
$
147.6
141.7
32.5
321.8
$
$
(2.3)
1.1
(0.1)
(1.3)
$
$
145.3
142.8
32.4
320.5
$
$
145.8
145.3
33.7
324.8
$
$
0.2
(2.2)
(0.7)
(2.7)
$
$
146.0
143.1
33.0
322.1
Year ended December 31, 2016
Unrealized
loss
Ending
balance
Opening
balance
Opening
balance
Year ended December 31, 2015
Additions
- Debt
Unrealized
gain (loss)
Additions
- Equity
Ending
balance
Investments in private entities:
- HIIG Partnership
- Arena Finance
- Arena Origination
$ 146.0
143.1
33.0
$ 322.1
$
$
(0.7)
(0.3)
(0.6)
(1.6)
$
$
145.3
142.8
32.4
320.5
$
$
93.7
-
-
93.7
$
50.6
146.6
17.3
$ 214.5
$
$
-
-
17.0
17.0
$
$
1.7
(3.5)
(1.3)
(3.1)
$ 146.0
143.1
33.0
$ 322.1
Changes in the Company’s investments in Associates are summarized as follows:
Three months ended December 31
2016
2015
Year ended December 31
2015
2016
$
$
1.9
-
-
(0.6)
1.3
$
$
1.3
-
2.2
(0.5)
3.0
$
$
3.0
0.3
0.4
(2.4)
1.3
$
$
-
-
4.0
(1.0)
3.0
Investments in Associates
Opening balance
Additions - Equity
Additions - Advances
Share of loss
Ending balance
A. INVESTMENT IN HIIG
On January 14, 2015, the HIIG Partnership raised $70.0 million through the sale of additional Class A Units of the HIIG Partnership. The proceeds
from this offering were used to subscribe for additional common shares of HIIG (“HIIG Shares”) (the “Additional HIIG Acquisition”) in order to fund,
in part, the purchase by HIIG of all the assets of the underwriting business operating as “Elite Underwriting Services”. In connection with this
offering, the Company acquired additional Class A Units of the HIIG Partnership for approximately $50.6 million.
At December 31, 2016, the HIIG Partnership owned approximately 74.6% of the HIIG Shares and the Company owned, directly and indirectly
through HIIG Holdings, approximately 58.5% of the HIIG Partnership, representing an approximate 43.7% indirect ownership interest in HIIG.
Units of the HIIG 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.
- 9 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
(i) Fair Value
The investment in HIIG (through the HIIG Partnership) is accounted for at FVTPL. The fair value of the Company’s investment in the HIIG
Partnership was determined to be $145.3 million at December 31, 2016 and $146.0 million December 31, 2015.
Management used net asset value as the primary valuation technique to arrive at the fair value of the Company’s investment in the HIIG
Partnership at December 31, 2016. The fair value of the HIIG Partnership at December 31, 2016 was derived from a valuation of the HIIG Shares
owned by the HIIG Partnership and other net assets of the HIIG Partnership at December 31, 2016. The carrying values of the HIIG Partnership’s
other net assets, consisting of monetary assets including cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate their fair values due to the short maturity of these financial instruments. In valuing the HIIG Shares, using net asset value
as the primary valuation technique, fair value was determined to be 1.0x the adjusted book value of HIIG, or 100% of the adjusted HIIG
stockholders’ equity, as at December 31, 2016. Management determined that this valuation technique produced the best indicator of the fair value
of the HIIG Shares as at December 31, 2016 as it was also used in a number of HIIG share transactions with arm’s length third parties since
August 1, 2014. This same basis of valuation was used to determine the fair value of the Company’s investment in the HIIG Partnership of $146.0
million at December 31, 2015.
Management considers other secondary valuation methodologies as a way to ensure no significant contradictory evidence exists that would
suggest an adjustment to the fair value as determined by the primary valuation methodology used. In order to do this, the Company may also
consider valuation techniques including the discounted cash flow method, the review of comparable arm’s length transactions involving other
specialty insurance companies and comparable publicly traded company valuations. For greater certainty, these secondary valuation techniques
were not used to arrive at the fair value of the Company’s investment in the HIIG Partnership at the end of each reporting period.
In the three months and year ended December 31, 2016, the Company recorded unrealized losses of $2.3 million and $0.7 million, respectively,
on its investment in the HIIG Partnership. In the three months and year ended December 31, 2015, the Company recorded unrealized gains of
$0.2 million and $18.4 million, respectively, on its investment in the HIIG Partnership. The unrealized gains in the three months and year ended
December 31, 2015 included unrealized foreign exchange gains of $nil and $16.7 million, respectively, resulting from a strengthening of the US$
against the C$, prior to the adoption of the US$ as the Company’s functional currency on August 31, 2015.
(ii) Select Financial Information of HIIG for the years ended December 31, 2016 and 2015
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 loss and LAE ratios” (calculated by dividing net loss and
loss adjustment expenses by net premiums earned) provide a measure of HIIG’s underwriting profitability, net income provides a measure of
HIIG’s overall profitability, and stockholders’ equity is a measure that is generally used by investors to determine the value of insurance
companies.
In the second quarter of 2016, the management of HIIG modified the reporting segments of HIIG to better align the business HIIG writes as well as
with the presentation of other specialty property and casualty insurers in the United States. Comparative figures have been reclassified to conform
to the presentation of the current period. The new reporting segments are as follows:
Commercial - premiums from standard property and casualty lines underwritten by HIIG generally on an admitted basis for which rate filings are
generally required. This segment includes insurance related to Texas workers’ compensation, construction, security firms and pest control
operators.
Specialty - premiums underwritten by HIIG generally on non-admitted or surplus lines basis for which rate filings are generally not required.
This segment includes HIIG’s energy division, professional lines (home health care providers, community banks, E&O and D&O for title
companies and insurance brokers), transactional property, hospitality, and commercial auto business (small risks primarily in Louisiana).
MGU Partners - premiums from contracted managing general underwriters predominantly in specialty insurance lines. This segment includes
primarily managing general underwriters (“MGUs”) serving artisan contractors, lawyers E&O insurance, and auto dealerships.
Accident and Health - premiums from medical stop loss business underwritten by HIIG.
Non-continuing lines - represent lines of business no longer underwritten by HIIG.
- 10 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Set out in the table below is certain select financial information relating to HIIG. The HIIG Financial Information is unaudited and has been derived
from the supporting schedules to the audited consolidated financial statements of HIIG for the years ended December 31, 2016 and 2015 which
have been prepared in accordance with US GAAP. 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)
(millions except for percentage)
Income Statement
Gross written premium
Net premiums written
Net premiums earned
Net (loss) income
Select Information
Gross written premium:
Commercial
Specialty
MGU Partners
Accident and Health
Non-continuing lines
Net premiums written:
Commercial
Specialty
MGU Partners
Accident and Health
Non-continuing lines
Net premiums earned:
Commercial
Specialty
MGU Partners
Accident and Health
Non-continuing lines
Net Loss and LAE Ratio:
Commercial
Specialty
MGU Partners
Accident and Health
Non-continuing lines
Three months ended December 31
Year ended December 31
2016
2015
2016
2015
$
$
$
$
$
$
$
$
$
$
127.2
67.6
70.8
(4.2)
19.2
54.2
32.7
21.0
0.1
127.2
10.5
24.5
22.1
10.4
0.1
67.6
11.3
25.4
23.6
10.4
0.1
70.8
288%
97%
73%
99%
n.m. 1
125%
$
$
$
$
$
$
$
$
$
$
121.0
77.9
85.3
2.8
14.6
54.1
35.0
17.5
(0.2)
121.0
8.5
27.0
28.6
14.0
(0.2)
77.9
12.4
38.0
21.2
14.0
(0.3)
85.3
85%
55%
40%
80%
n.m. 1
66%
$
$
$
$
$
$
$
$
$
$
534.2
286.5
310.4
(7.3)
83.2
230.2
134.8
86.0
-
534.2
45.0
102.7
92.6
47.5
(1.3)
286.5
48.0
115.9
100.3
47.5
(1.3)
310.4
125%
78%
64%
86%
n.m. 1
84%
$
$
$
$
$
$
$
$
$
$
508.7
332.3
326.1
11.4
80.4
271.6
115.5
41.6
(0.4)
508.7
55.5
152.1
90.1
35.1
(0.5)
332.3
57.4
180.1
53.8
35.1
(0.3)
326.1
62%
65%
44%
71%
n.m. 1
68%
Balance Sheet Information
Investments, cash and cash equivalents
Stockholders’ equity
December 31, 2016
$
$
633.8
324.7
December 31, 2015
$
$
700.4
324.5
1 Not meaningful, but included in the aggregate ratios.
- 11 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Gross written premium was $127.2 million for the three months ended December 31, 2016 versus $121.0 million for the three months ended
December 31, 2015, an increase of 5%, and $534.2 million for the year ended December 31, 2016 versus $508.7 million for the year ended
December 31, 2015, an increase of 5%. The increase in gross written premium in the three months ended December 31, 2016 compared to the
same period in the prior year was driven by the Accident and Health (“A&H”) segment and the Commercial segment, partially offset by a decrease
in gross written premium within the MGU Partners segment. The increase in gross written premium in the year ended December 31, 2016
compared to the prior year resulted primarily from the restructuring of a program within the MGU Partners segment and the contribution from the
A&H segment, partially offset by a decline in the Specialty segment as a result of softer overall insurance market conditions.
Net premiums written was $67.6 million for the three months ended December 31, 2016 versus $77.9 million for the three months ended
December 31, 2015, a decrease of 13%, and $286.5 million for the year ended December 31, 2016 versus $332.3 million for the year ended
December 31, 2015, a decrease of 14%. In the three months ended December 31, 2016, the net premiums written increase within the
Commercial segment was more than offset by decreases in the other segments, due to decreases in gross written premium in the MGU Partners
segment and an increased use of reinsurance overall. In the year ended December 31, 2016, the increase in net premiums written within the A&H
segment and the restructured program within the MGU Partners segment was more than offset by decreases in the Commercial and Specialty
segments primarily due to an increased use of reinsurance. While there is a cost to the increased use of reinsurance, HIIG’s reinsurance strategy
is designed to allow HIIG to better control its net growth in a soft market environment, and reduce its exposure to catastrophic events and severity
losses. This strategy is also expected to allow for future expansion of net premiums written by HIIG when more favourable market conditions
return.
Net premiums earned was $70.8 million for the three months ended December 31, 2016 versus $85.3 million for the three months ended
December 31, 2015, a decrease of 17%, and $310.4 million for the year ended December 31, 2016 versus $326.1 million for the year ended
December 31, 2015, a decrease of 5%. The decrease in net premiums earned in the three months ended December 31, 2016 compared to the
same period in the prior year was attributed mostly to a decline in the Specialty segment as discussed above. The decrease in net premiums
earned in the year ended December 31, 2016 compared to the prior year was attributed to the decline in the Commercial and Specialty segments
which was offset by an increase in earned premiums from the restructuring of a program in the MGU Partners segment and the A&H segment.
The decrease in net premiums earned in both periods in 2016 compared to 2015 also resulted from an increased use of reinsurance by HIIG.
The overall net loss and LAE ratio was 125% for the three months ended December 31, 2016 compared to 66% for the same period in the prior
year, and 84% for the year ended December 31, 2016 compared to 68% for the prior year. The overall net loss and LAE ratio increased due to the
reserve strengthening relating to prior years totaling $33.3 million in the three months ended December 31, 2016 and $58.2 million in the year
ended December 31, 2016. Net loss and LAE reserves were increased as a result of a review of claim files following the transition to new third
party administrators (TPAs) and to a new in-house claims unit created primarily to handle general liability claims and the resulting review of open
claim files and subsequent actuarial review. Excluding the prior period reserve strengthening, HIIG’s net loss and LAE ratio would have been 77%
for the three months ended December 31, 2016 and 65% for the year ended December 31, 2016.
HIIG recorded a net loss of $4.2 million for the three months ended December 31, 2016 compared to net income of $2.8 million for the three
months ended December 31, 2015. Net loss was $7.3 million for the year ended December 31, 2016 compared to net income of $11.4 million for
the year ended December 31, 2015. The operating results for the periods in 2016 were impacted primarily by reserve strengthening for prior years
across all lines of $21.6 million after-tax ($33.3 million pre-tax) recognized in the three months ended December 31, 2016 (as discussed above)
and $37.8 million after-tax ($58.2 million pre-tax) recognized in the year ended December 31, 2016. The impact of the reserve strengthening
relating to prior years in the three months and year ended December 31, 2016 was in part favourably offset by a $27.4 million income tax benefit
recorded in the fourth quarter, resulting from a reduction of the valuation allowance against HIIG’s deferred income tax assets.
HIIG stockholders’ equity increased to $324.7 million at December 31, 2016 from $324.5 million at December 31, 2015. The increase of $0.2
million resulted from a favourable change in the unrealized gains on HIIG’s investment portfolio for the year (net of income taxes) of $6.2 million
and the issuance of shares under the employee stock purchase program of $1.3 million, partially offset by the net loss for the year of $7.3 million.
- 12 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
B. INVESTMENT IN THE ARENA GROUP
On August 31, 2015, the Company completed the Arena Transactions and capitalized Arena Finance in the amount of approximately $146.6
million and Arena Origination in the amount of approximately $34.3 million, consisting of $17.3 million in the form of equity and $17.0 million in the
form of a term loan. In addition, Westaim capitalized and started up the business of Arena Investors.
The Arena Group was established to make and manage fundamentals-based, asset-oriented credit investments. Fundamentals-based, asset-
oriented credit investments refer to loans or credit arrangements which are generally secured by assets. These assets could include hard assets
such as real estate, inventory, vehicles, aircraft, watercraft, oil and gas reserves, or a borrower’s plant and equipment and other hard assets, or
soft assets such as securities, receivables, contractual income streams, and certain intellectual property assets. Fundamentals-based, asset-
oriented lenders and investors manage their risk and exposure by carefully assessing the value of the assets securing the loan or investment,
receiving periodic and frequent reports on collateral value and the status of those assets, and tracking the financial performance of borrowers.
The Arena Group seeks to capitalize on opportunities in both private as well as public investments subject to approved investment policies. These
investment strategies include:
Corporate Private Credit
Senior private corporate debt, bank debt, including secondary market bank debt, distressed debt such as senior secured bank debt before or
during a Chapter 11 bankruptcy filing, bridge loans/transition financing, debtor-in-possession (“DIP”) financings, junior secured loans, junior capital
to facilitate restructurings, equity co-investments or warrants alongside corporate loans.
Real Estate Private Credit and Real Estate Assets
Real property, secured or unsecured mezzanine financings, DIP loans, “A-tranche” loans (senior secured loans) and “B-tranche” loans (junior
secured loans) for real estate properties requiring near-term liquidity, structured letters of credit, real estate loans secured by office buildings, retail
centers, hotels, land, single family homes, multi-family apartments, condominium towers, hospitality providers, health care service providers, and
corporate campuses, leases and lease residuals.
Commercial & Industrial Assets
Commercial receivables, investments in entities (including start-up businesses) engaged, or to be engaged, in activities or investments such as
distressed commercial and industrial loans, commercial and industrial assets such as small-scale asset-based loans, trade claims and vendor
puts, specialized or other types of equipment leases and machinery, non-performing loans globally, hard assets (including airplanes and
components, industrial machinery), commodities (physical and synthetic), reinsurance and premium finance within life and property casualty
insurance businesses, legal-related finance including law firm loans, settled and appellate judgments and probate finance, royalties, trust
certificates, intellectual property and other financial instruments that provide for the contractual or conditional payment of an obligation.
Structured Finance Investments
Thinly traded or more illiquid loans and securities backed by mortgages (commercial and residential), other small loans including equipment
leases, auto loans, commercial mortgage-backed securities, residential mortgage-backed securities, manufactured housing-backed securities,
collateralized loan obligations, collateralized debt obligations, other structured credits and consumer credit securitizations, aviation and other
leased asset securitizations, esoteric asset securitization, revenue interests, synthetics, and catastrophe bonds.
Consumer Assets
Auto and title loans, credit cards, consumer installment loans, charged-off consumer obligations, consumer bills, consumer receivables, product-
specific purchase finance, residential mortgages, tax liens, real estate owned homes, other consumer credit securitizations, retail purchase loans
and unsecured consumer loans as well as distressed or charged-off obligations of all of these types, peer-to-peer originated loans of all types,
manufactured housing, and municipal consumer obligations.
Other Securities
Hedged and unhedged investments in public securities (including public real estate), preferred stock, common stock, municipal bonds, senior
public corporate debt, corporate bonds including bonds in liquidation or out-of-court exchange offers and trade claims of distressed companies in
anticipation of a recapitalization, private investment in public equity, other industry relative value, merger arbitrage in transactions such as
mergers, hedged investments in regulated utilities, integrated utilities, merchant energy providers, acquisitions, tender offers, spin-offs,
recapitalizations and Dutch auctions, event-driven relative value equity investments in transactions such as corporate restructurings, strategic
block, other clearly defined event, high-yield bonds, credit arbitrage and convertible bond arbitrage, in/post-bankruptcy equities, demutualizations,
liquidations and litigation claims, real estate securities, business development companies, master limited partnership interests, royalty trusts,
publicly traded partnerships, options and other equity derivatives.
The various investments made by the Company in the Arena Group are described in further detail below.
- 13 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Funding of the Arena Group
The Company has provided funding, directly and indirectly through Arena Finance and Arena Origination, to Arena Investors, as described below.
Start-up Costs
As part of establishing the Arena Group, the Company entered into an acquisition and funding agreement (the “Funding Agreement”) with Arena
Investors, LLC (Old Arena), Bernard Partners, LLC (“BP LLC”), a limited liability company controlled by certain members of the Arena Group
management team, and Arena Investors, LP, an entity owned by WAHII. Under the Funding Agreement, Westaim agreed to provide funding to the
Arena Group of up to $4.3 million for operational start-up costs and the acquisition of start-up capital assets. At December 31, 2016, Westaim had
fulfilled its obligation under the Funding Agreement and provided in aggregate $1.9 million ($0.1 million in 2016 and $1.8 million in 2015) in funding
to the Arena Group.
Transaction Costs and Operating Advances
Westaim has also provided additional funding totaling $4.4 million to Arena Investors consisting of $1.2 million for transaction costs incurred in
connection with the Arena Transactions and $3.2 million for ongoing operating costs and general working capital. This funding of $4.4 million is
expected to be repaid to Westaim in priority to any profit distribution or cash flow participation by the owners or profit participants of Arena
Investors and was recorded as part of the investments in associates in the consolidated statement of financial position at December 31, 2016.
Arena Finance
Arena Finance is a specialty finance company that, through its subsidiaries, primarily purchases fundamentals-based, asset-oriented credit
investments for its own account. Arena Finance, through its subsidiaries, uses the funds that it received from Westaim to primarily acquire loans
and/or other credit investments from Arena Origination or other third parties at their fair market value. Arena Finance does not have a target range
of investment; the size of the loans and/or other credit investments acquired from Arena Origination or other third parties depends on, among other
things, any diversity requirements which may be imposed by any lender as well as the Investment Policy of Arena Finance. In the absence of
such requirements, Arena Finance is not subject to concentration limitations but the management of Arena Finance will use its best judgment as to
what is prudent in the circumstances. Arena Finance seeks to capitalize on opportunities in both private and public investments subject to its
Investment Policy.
Before acquiring any such loans or other investments, Arena Finance reviews the nature of the loan, the creditworthiness of the borrower, the
nature and extent of any collateral and the expected return on such loan or investment. Arena Finance acquires such loans or investments based
on its assessment of the fair market value of the investment at the time of purchase.
On August 31, 2015, the Company capitalized Arena Finance in the amount of approximately $146.6 million.
The primary revenue of Arena Finance, through its subsidiaries, consists of interest income, dividend income and/or fees earned on the credit
investments that it acquires. The operating results of Arena Finance also include gain (loss) on its investments.
Rights Granted to BP LLC
In connection with the Arena Transactions, on August 31, 2015, Arena Finance and BP LLC entered into a limited liability company agreement in
respect of AFHC (the “AFHC LLC Agreement”) setting forth each of Arena Finance’s and BP LLC’s respective rights and obligations as members
of AFHC. Under the AFHC LLC Agreement, BP LLC was issued Class M units which are convertible into Class A units, entitling BP LLC to
acquire an equity interest of up to 20% (16.67% on a fully-diluted basis) in AFHC. The Class M units vest equally over 5 years from August 31,
2015 and carry pre-determined escalating conversion prices which are in excess of the price paid by the Company for its investment in AFHC
(through Arena Finance).
- 14 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Accounting for Arena Finance
The investment in Arena Finance is accounted for at FVTPL and is included in investments in private entities. The fair value of the Company’s
investment in Arena Finance was determined to be $142.8 million and $143.1 million at December 31, 2016 and 2015, respectively.
Management used net asset value as the primary valuation technique and arrived at the fair value of the Company’s investment in Arena Finance
of $142.8 million at December 31, 2016. In valuing Arena Finance, using net asset value as the primary valuation technique, fair value was
determined to be 1.0x the book value, or 100% of the shareholder’s equity, of Arena Finance as at December 31, 2016. The Company determined
that the shareholder’s equity of Arena Finance at December 31, 2016 in the amount of $142.8 million approximated its fair value, as the value of
the Company’s investment in Arena Finance was, through its subsidiaries, composed largely of cash and cash equivalents and investments
carried at fair value at December 31, 2016. This same basis of valuation was used to determine the fair value of the Company’s investment in
Arena Finance of $143.1 million at December 31, 2015.
Management considers other secondary valuation methodologies as a way to ensure no significant contradictory evidence exists that would
suggest an adjustment to the fair value as determined by the primary valuation methodology used. In order to do this, the Company may also
consider valuation techniques including the review of comparable arm’s length transactions involving other specialty finance companies and
comparable publicly traded company valuations. For greater certainty, these secondary valuation techniques were not used to arrive at the fair
value of the Company’s investment in Arena Finance at the end of each reporting period.
The Company recorded an unrealized gain and an unrealized loss on its investment in Arena Finance of $1.1 million and $0.3 million in the three
months and year ended December 31, 2016, respectively, and unrealized losses of $2.2 million and $3.5 million in the three months and year
ended December 31, 2015, respectively.
Select Financial Information of Arena Finance
The Company considers certain financial results of Arena Finance, its subsidiary AFHC, and AFHC’s subsidiaries to be important measures in
assessing the Company’s financial position and performance, in particular, the net assets which can be invested to generate investment income,
and operating expenses. Select financial information related to Arena Finance, AFHC and AFHC’s subsidiaries set out below is unaudited and has
been derived from the financial statements of Arena Finance and the consolidated financial statements of AFHC for the year ended December 31,
2016 and the period from commencement of operations on August 31, 2015 to December 31, 2015, which have been prepared in accordance with
IFRS or US GAAP. Such statements are the responsibility of the management of Arena Finance and AFHC. Readers are cautioned that the
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.
A summary of the net assets of AFHC and AFHC’s subsidiaries is as follows:
(unaudited)
(millions except for percentage)
December 31, 2016
Cash and cash equivalents
Due from brokers, net
Investments:
Loans
Bonds
Equity securities
Bank debt
Private investments in public equity
$
Fair value
30.5
11.7
93.8
1.4
1.4
7.3
1.3
105.2
Other net liabilities
Net assets of AFHC and AFHC’s subsidiaries
(4.4)
143.0
$
Percentage of
net assets at
fair value
21.3%
8.2%
65.5%
1.0%
1.0%
5.1%
0.9%
73.5%
(3.0)%
100.0%
- 15 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
A summary of the net assets of AFHC and AFHC’s subsidiaries is as follows (continued):
(unaudited)
(millions except for percentage)
December 31, 2015
Cash and cash equivalents
Due from brokers, net
Investments:
Loans
Bonds
Equity securities
$
Fair value
88.6
13.3
20.3
0.8
21.3
42.4
Other net liabilities
Net assets of AFHC and AFHC’s subsidiaries
(0.9)
143.4
$
Percentage of
net assets at
fair value
61.8%
9.3%
14.1%
0.5%
14.9%
29.5%
(0.6)%
100.0%
Arena Finance continues to actively deploy its capital and has been investing its cash and cash equivalents in investments in accordance with its
Investment Policy.
Due from brokers consists of cash balances as well as net amounts due from brokers for unsettled securities transactions. Bonds and equity
securities are net of short positions.
For additional information on the investments of AFHC and AFHC’s subsidiaries, see Section 14, Additional Arena Group Investment Schedules of
this MD&A.
A summary of the operating results of Arena Finance, AFHC and AFHC’s subsidiaries is as follows:
(unaudited)
(millions)
Operating results of AFHC and AFHC’s subsidiaries:
Investment income, net
Gain on investments
Operating expenses:
Administrative and service fees
Other operating expenses
Operating results of Arena Finance:
Operating expenses
Deferred income tax (expense) recovery
Operating results of Arena Finance,
AFHC and AFHC’s subsidiaries
Three months ended December 31
2016
2015
Year ended December 31
2015 1
2016
$
$
1.9
1.2
(1.4)
(0.5)
1.2
(0.1)
-
(0.1)
$
0.1
-
(1.8)
(0.1)
(1.8)
-
(0.4)
(0.4)
$
5.2
2.5
(6.6)
(1.5)
(0.4)
(0.3)
0.4
0.1
$
1.1
$
(2.2)
$
(0.3)
$
0.1
-
(2.4)
(0.2)
(2.5)
(0.6)
(0.4)
(1.0)
(3.5)
1 Arena Finance and its subsidiaries commenced operations on August 31, 2015.
A continuity of the carrying value of the Company’s investment in Arena Finance included in the Company’s investments in private entities in the
consolidated statements of financial position is as follows:
(unaudited)
(millions)
Carrying value of Arena Finance:
Opening balance
Share capital issued and paid
Unrealized loss
Ending balance
Year ended
2016
143.1
-
(0.3)
142.8
$
$
2015
-
146.6
(3.5)
143.1
$
$
- 16 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Arena Origination
Arena Origination is a specialty finance company that, through its subsidiary AOC, uses the funds that it received from Westaim to originate
fundamentals-based, asset-oriented credit investments for its own account and/or possible future sale to Arena Finance, clients of Arena Investors
and/or third parties. Arena Origination is a taxable C-Corporation established in the state of Delaware and AOC is a U.S. based limited liability
company established in the state of Delaware. Arena Origination invests in both debt and equity instruments, with an emphasis on debt
instruments comprised of multiple investment strategies including, but not limited to, corporate private credit, real estate private credit and real
estate assets, commercial & industrial assets, structured finance investments, consumer assets, and other securities. Arena Origination does not
have a target range of investment; the size of the loans and/or other credit investments originated depends on, among other things, any diversity
requirements which may be imposed by any lender as well as the Investment Policy of AOC. In the absence of such requirements, Arena
Origination is not subject to concentration limitations but the management of Arena Origination will use its best judgment as to what is prudent in
the circumstances. Arena Origination seeks to capitalize on opportunities in both private and public investments subject to its Investment Policy.
Before originating any such loans or other investments, Arena Origination reviews the nature of the loan, the creditworthiness of the borrower, the
nature and extent of any collateral and the expected return on such loan or investment. Arena Origination originates such loans or investments
based on its assessment of the fair market value of the investment at the time of purchase.
On August 31, 2015, the Company capitalized Arena Origination in the amount of approximately $34.3 million, consisting of $17.3 million in the
form of equity and $17.0 million in the form of a term loan.
The primary revenue of Arena Origination, through AOC, consists of interest income, dividend income and/or investment-related fees earned on
the credit investments that it originates. The operating results of Arena Origination also include gain (loss) on its investments.
Rights Granted to BP LLC
In connection with the Arena Transactions, on August 31, 2015, Arena Origination and BP LLC entered into a limited liability company agreement
in respect of AOC (the “AOC LLC Agreement”) setting forth each of Arena Origination’s and BP LLC’s respective rights and obligations as
members of AOC. Under the AOC LLC Agreement, BP LLC was issued Class M units which are convertible into Class A units, entitling BP LLC to
acquire an equity interest of up to 20% (16.67% on a fully-diluted basis) in AOC. The Class M units vest equally over 5 years from August 31,
2015 and carry pre-determined escalating conversion prices which are in excess of the price paid by the Company for its investment in AOC
(through Arena Origination).
Accounting for Arena Origination
The investment in Arena Origination is accounted for at FVTPL and is included in investments in private entities. The fair value of the Company’s
investment in Arena Origination was determined to be $32.4 million and $33.0 million at December 31, 2016 and 2015, respectively.
Management used net asset value as the primary valuation technique and arrived at the fair value of the Company’s investment in Arena
Origination of $32.4 million at December 31, 2016. In valuing Arena Origination, using net asset value as the primary valuation technique,
management determined that 1.0x the book value, or 100% of the shareholder’s equity, of Arena Origination of $15.4 million at December 31,
2016 and the fair value of the term loan of $17.0 million, totaling $32.4 million, approximated the fair value of the Company’s investment in Arena
Origination. The Company’s investment in Arena Origination, through AOC, composed largely of cash and cash equivalents and investments
carried at fair value at December 31, 2016. This same basis of valuation was used to determine the fair value of the Company’s investment in
Arena Origination of $33.0 million at December 31, 2015.
Management considers other secondary valuation methodologies as a way to ensure no significant contradictory evidence exists that would
suggest an adjustment to the fair value as determined by the primary valuation methodology used. In order to do this, the Company may also
consider valuation techniques including the review of comparable arm’s length transactions involving other specialty finance companies and
comparable publicly traded company valuations. For greater certainty, these secondary valuation techniques were not used to arrive at the fair
value of the Company’s investment in Arena Origination at the end of each reporting period.
The Company recorded unrealized losses on its investment in Arena Origination of $0.1 million and $0.6 million in the three months and year
ended December 31, 2016, respectively, and $0.7 million and $1.3 million in the three months and year ended December 31, 2015, respectively.
- 17 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Select Financial Information of Arena Origination
The Company considers certain financial results of Arena Origination and its subsidiary, AOC, to be important measures in assessing the
Company’s financial position and performance, in particular, the net assets which can be invested to generate investment income, and operating
expenses. Select financial information related to Arena Origination and AOC set out below is unaudited and has been derived from the financial
statements of Arena Origination and AOC for the year ended December 31, 2016 and the period from commencement of operations on August 31,
2015 to December 31, 2015, which have been prepared in accordance with IFRS or US GAAP. Such statements are the responsibility of the
management of Arena Origination and AOC. Readers are cautioned that the 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.
A summary of the net assets of AOC is as follows:
(unaudited)
(millions except for percentage)
December 31, 2016
Cash and cash equivalents
Due from brokers, net
Investments:
Loans
Bonds
Equity securities
Other net liabilities
Net assets of AOC
(unaudited)
(millions except for percentage)
December 31, 2015
Cash and cash equivalents
Due from brokers, net
Escrow deposits
Investments:
Loans
Bonds
Equity securities
Other net liabilities
Net assets of AOC
$
Fair value
8.1
7.5
18.2
0.4
0.3
18.9
(0.1)
34.4
$
$
Fair value
7.0
9.9
3.0
8.7
0.2
5.1
14.0
(0.4)
33.5
$
Percentage of
net assets at
fair value
23.5%
21.8%
52.8%
1.0%
1.0%
54.8%
(0.1)%
100.0%
Percentage of
net assets at
fair value
20.9%
29.5%
9.0%
26.0%
0.6%
15.2%
41.8%
(1.2)%
100.0%
Arena Origination has been investing its cash and cash equivalents in investments in accordance with its Investment Policy and selling its
investments after 90 to 120 days following origination in accordance with its strategy.
Due from brokers consists of cash balances as well as net amounts due from brokers for unsettled securities transactions. Bonds and equity
securities are net of short positions.
For additional information on the investments of AOC, see Section 14, Additional Arena Group Investment Schedules of this MD&A.
- 18 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
The following table shows a summary of the operating results of Arena Origination and AOC:
(unaudited)
(millions)
Operating results of AOC:
Investment income, net
Gain on investments
Operating expenses:
Administrative and service fees
Other operating expenses
Operating results of Arena Origination:
Operating expenses:
Interest expense 2
Start-up costs
Other operating expenses
Three months ended December 31
2016
2015
Year ended December 31
2015 1
2016
$
$
0.7
0.2
-
(0.5)
0.4
(0.3)
-
(0.2)
(0.5)
$
0.1
-
(0.5)
-
(0.4)
(0.3)
-
-
(0.3)
$
2.6
0.4
(0.4)
(1.7)
0.9
(1.2)
-
(0.3)
(1.5)
0.1
-
(0.6)
(0.1)
(0.6)
(0.4)
(0.3)
-
(0.7)
(1.3)
Operating results of Arena Origination and AOC
$
(0.1)
$
(0.7)
$
(0.6)
$
1 Arena Origination and its subsidiary commenced operations on August 31, 2015.
2 On $17.0 million term loan owed to Westaim which carries interest at a rate of 7.25% per annum.
The following table shows a continuity of the carrying value of the Company’s investment in Arena Origination included in the Company’s
investments in private entities in the consolidated statements of financial position:
(unaudited)
(millions)
Carrying value of Arena Origination:
Opening balance
Share capital issued and paid
Unrealized loss
Ending balance
Arena Investors
Year ended
2016
2015
$
$
33.0
-
(0.6)
32.4
$
$
-
34.3
(1.3)
33.0
Arena Investors consists of the Associates including the Company’s indirect investment in WAHII (through WCA), ASOF-ON GP (through WCA),
and its direct investment in ASOF-OFF II GP. WAHII is the sole limited partner of Arena Investors, LP, a limited partnership established under the
laws of Delaware to carry on the third-party investment management business of the Arena Group.
Arena Investors, LP operates as an investment manager offering third-party clients access to fundamentals-based, asset-oriented credit
investments that aim to deliver attractive yields with low volatility. Arena Investors, LP provides investment services to third-party clients consisting
of but not limited to institutional clients, insurance companies, private investment funds and other pooled investment vehicles.
Arena Investors generates revenues primarily from Management Fees and Performance Fees. “Management Fees” are the fees generally
calculated on Arena Investors’ various segregated client accounts and managed funds as a percentage of assets under management (“AUM”).
“Performance Fees” are the fees or profit allocation earned by Arena Investors calculated annually as a percentage of the appreciation (net of
Management Fees and other expenses) in each of the client accounts and funds managed by Arena Investors, subject to a “high water mark” in
respect of such client or fund, as determined from time to time.
Arena Investors has established a U.S. onshore fund, Arena Special Opportunities Fund, LP (“ASOF LP”) and an offshore fund, Arena Special
Opportunities Fund (Cayman), LP, as investment funds for third party investors. Arena Investors continues to be in discussions with potential
clients for additional capital to invest in its various pools of capital, in accordance with its business strategy.
As of December 31, 2016, Arena Investors had committed AUM of approximately $205 million.
- 19 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Rights Granted to BP LLC
In connection with the completion of the Arena Transactions, on August 31, 2015, agreements were entered into between the Company (through
WCA) and BP LLC in respect of WAHII and ASOF-ON GP and between Westaim and BP LLC in respect of ASOF-OFF II GP (the “Associate
Agreements”). The Associate Agreements set forth the members’ respective rights and obligations, as well as BP LLC’s right to participate in
distributions of the capital and profits of the Associates. BP LLC’s initial profit sharing percentage is 49%, and under the Associate Agreements,
BP LLC has the right to earn-in up to 75% equity ownership percentage in the Associates and share up to 75% of the profits of the Associates
based on achieving certain AUM and cashflow (measured by the margin of trailing twelve months earnings before interest, income taxes,
depreciation and amortization to trailing twelve month revenues) thresholds in accordance with the Associate Agreements.
Accounting for Arena Investors
The Company’s investments in the Associates (Arena Investors) are accounted for using the equity method. On June 30, 2016, the Company
made an additional equity investment of $0.3 million in Arena Investors. The carrying amount of the Company’s investments in the Associates was
$1.3 million and $3.0 million at December 31, 2016 and 2015, respectively. The total of the Company’s 51% share of losses of the Associates of
$0.6 million and $2.4 million in the three months and year ended December 31, 2016, respectively, and $0.5 million and $1.0 million in the three
months and year ended December 31, 2015, respectively, was reported under “Net results of investments” in the consolidated statements of (loss)
profit and other comprehensive loss.
Select Financial Information of Arena Investors
The Company considers certain financial results of Arena Investors to be important measures in assessing the Company’s financial position and
performance, in particular, the AUM used in the calculation of revenues from the provision of investment management services, and operating
expenses. Select financial information related to Arena Investors set out below is unaudited and has been derived from the financial statements of
WAHII, ASOF-ON GP and ASOF-OFF II GP for the year ended December 31, 2016 and the period from commencement of operations on August
31, 2015 to December 31, 2015, which have been prepared in accordance with US GAAP. Such statements are the responsibility of the
management of Arena Investors. Management of the Company concluded that any reconciling items to IFRS are not material.
Select financial information of Arena Investors is as follows:
Statement of Financial Position 1
(unaudited)
(millions)
Cash and cash equivalents
Restricted cash
Advances from Westaim
Loan from AFHC
Other net liabilities
Net liabilities
December 31, 2016
December 31, 2015
$
$
0.6
2.9
(4.4)
(2.0)
(3.5)
(6.4)
$
$
1.2
1.5
(4.0)
-
(0.7)
(2.0)
Company’s share
Advances to Arena Investors
Carrying amount of the Company’s interest in Associates
Includes the accounts of WAHII, ASOF-ON GP and ASOF-OFF II GP prepared in accordance with US GAAP with no material reconciling differences to IFRS.
(3.1)
4.4
1.3
(1.0)
4.0
3.0
$
$
$
$
1
The restricted cash of $2.9 million at December 31, 2016 and $1.5 million at December 31, 2015 consisted of $0.2 million used as a security
deposit for Arena Investors’ New York office lease and deposits received in advance. The advances from Westaim of $4.4 million at December
31, 2016 were used by Arena Investors for working capital purposes.
- 20 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Select financial information of Arena Investors is as follows (continued):
Statement of Loss and Other Comprehensive Loss 1
(unaudited)
(millions)
Management and performance fees
Administrative and service fees
Operating expenses
Loss and other comprehensive loss
Three months ended December 31
2016
2015
Year ended December 31
2015 2
2016
$
$
0.9
1.4
(3.5)
(1.2)
$
$
0.1
2.3
(3.4)
(1.0)
$
$
1.8
7.0
(13.5)
(4.7)
$
$
0.1
3.0
(5.1)
(2.0)
(1.0)
Company’s share of losses of Associates (51%)
Includes the accounts of WAHII, ASOF-ON GP and ASOF-OFF II GP prepared in accordance with US GAAP with no material reconciling differences to IFRS.
(0.6)
(0.5)
(2.4)
$
$
$
$
1
2 Arena Investors commenced operations on August 31, 2015.
The management and performance fees were generated from the various segregated client accounts and managed funds of Arena Investors. The
administrative and service fees were charged to AFHC and AOC.
Operating expenses of $3.5 million for the three months ended December 31, 2016 included $2.5 million in salaries and benefits, $0.4 million in
professional fees, and $0.6 million in general administrative, depreciation and other expenses. Operating expenses of $13.5 million for the year
ended December 31, 2016 included $10.4 million in salaries and benefits, $1.1 million in professional fees, and $2.0 million in general
administrative, depreciation and other expenses.
Operating expenses of $3.4 million for the three months ended December 31, 2015 included $2.1 million in salaries and benefits, $0.4 million in
professional fees, and $0.6 million in general administrative expenses and depreciation expense and $0.3 million in transaction costs. Operating
expenses of $5.1 million in the period from commencement of operations on August 31, 2015 to December 31, 2015 included $2.6 million in
salaries and benefits, $0.4 million in professional fees, and $0.9 million in general administrative expenses and depreciation expense, and $1.2
million in transaction costs.
C. OTHER INVESTMENTS
In connection with the Arena Transactions, on August 31, 2015 the Company acquired limited partnership interests in Lantern Endowment
Partners, L.P. (“Lantern”) from an entity affiliated with Daniel B. Zwirn, the Chief Executive Officer of the Arena Group, for $1.8 million (the “Lantern
Purchase”). On October 1, 2015, the assets of Lantern were transferred to ASOF LP, a U.S. onshore fund managed by Arena Investors, and the
Company’s investment in Lantern was correspondingly exchanged into an investment in ASOF LP.
The Company’s investment in ASOF LP, with a fair value of $1.9 million at December 31, 2016 and 2015, was included in other assets in the
consolidated statements of financial position. The Company’s unrealized gain on its investment in ASOF LP in the years ended December 31,
2016 and 2015 was nominal.
4.
EQUITY FINANCING
In order to provide funding to Arena Finance and Arena Origination, and capitalize and fund the start-up costs of the Arena Group, on May 28,
2015 the Company sold, on a private placement basis, 65,296,993 special warrants of the Company (the “Special Warrants”) at a price of C$3.25
per Special Warrant (the “2015 Offering”). Each Special Warrant was deemed to be exercisable into one subscription receipt of Westaim (each, a
“2015 Subscription Receipt”), without further consideration or action, and each 2015 Subscription Receipt entitled the holder to receive upon the
deemed conversion thereof one common share of Westaim subject to adjustment, without further consideration or action. An additional 6,823,152
Special Warrants were also sold pursuant to a concurrent non-brokered private placement of Special Warrants on the same terms as the 2015
Offering (the “2015 Concurrent Private Placement”). The 2015 Concurrent Private Placement included subscriptions by members of the
Company's Board of Directors and management team.
Concurrent with closing of the 2015 Offering and the 2015 Concurrent Private Placement, the Company entered into a subscription agreement
with Daniel B. Zwirn pursuant to which Mr. Zwirn irrevocably agreed to subscribe for 769,231 common shares of Westaim at a price of C$3.25 per
share (the “Zwirn Subscription”).
- 21 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
4.
EQUITY FINANCING (continued)
On August 31, 2015, an aggregate of 72,120,145 additional common shares of the Company were issued for aggregate gross proceeds of $177.3
million upon the deemed conversion of the 2015 Subscription Receipts issued on the deemed exercise of the Special Warrants. The Company
used the proceeds of the 2015 Offering, the 2015 Concurrent Private Placement, and cash on hand to capitalize Arena Finance and Arena
Origination in an amount of approximately $146.6 million and $34.3 million, respectively. The Company also completed the Zwirn Subscription and
an additional 769,231 common shares of the Company were issued to Mr. Zwirn on August 31, 2015 for aggregate gross proceeds of $1.9 million.
At December 31, 2016 and 2015, the Company had a total of 143,186,718 common shares issued and outstanding.
The proceeds from the 2015 Offering, the 2015 Concurrent Private Placement and the Zwirn Subscription to the Company were $169.3 million, net
of share issuance costs of $9.9 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
General, administrative and other
Professional fees
Site restoration provision - (recovery) expense
Share-based compensation
Foreign exchange (gain) loss
(Loss) profit
Other comprehensive loss
Comprehensive loss
5.1 Revenue
Three months ended December 31
2016
0.7
$
2015
0.5
$
Year ended December 31
2015
2016
$
2.7
$
(1.9)
0.2
0.2
0.1
(1.5)
0.9
(0.2)
(0.3)
(0.9)
-
(0.9)
$
$
$
(3.2)
1.5
0.2
0.5
0.7
0.2
(0.1)
3.0
(5.7)
-
(5.7)
$
$
$
(4.0)
2.8
1.0
0.9
(0.5)
2.6
0.2
7.0
(8.3)
-
(8.3)
$
$
$
$
$
$
1.6
12.7
2.1
0.9
1.6
1.0
2.7
(1.7)
6.6
7.7
(20.6)
(12.9)
Revenue for the three months ended December 31, 2016 of $0.7 million (2015 - $0.5 million) consisted of interest income of $0.3 million (2015 -
$0.3 million) and advisory fees of $0.4 million (2015 - $0.2 million). In the three months ended December 31, 2016, the Company earned interest
on the loan made by the Company to Arena Origination of $0.3 million (2015 - $0.3 million). In the same period, the Company earned advisory
fees from HIIG of $0.3 million (2015 - $0.2 million) and from the Arena Group of $0.1 million (2015 - $nil).
Revenue for the year ended December 31, 2016 of $2.7 million (2015 - $1.6 million) consisted of interest income of $1.3 million (2015 - $0.6
million) and advisory fees of $1.4 million (2015 - $1.0 million). In the year ended December 31, 2016, the Company earned interest on the loan
made by the Company to Arena Origination of $1.2 million (2015 - $0.4 million). In the same period, the Company earned advisory fees from HIIG
of $1.0 million (2015 - $1.0 million) and from the Arena Group of $0.4 million (2015 - $nil).
5.2 Net Results of Investments
Net results of investments were a loss of $1.9 million for the three months ended December 31, 2016 (2015 - $3.2 million), consisting of an
unrealized loss on the Company’s investments in private entities of $1.3 million (2015 - $2.7 million) and the Company’s share of losses of its
Associates of $0.6 million (2015 - $0.5 million).
Net results of investments were a loss of $4.0 million for the year ended December 31, 2016 (2015 - gain of $12.7 million), consisting of an
unrealized loss on the Company’s investments in private entities of $1.6 million (2015 - gain of $13.6 million), the Company’s share of losses of its
Associates of $2.4 million (2015 - $1.0 million), and a gain on other investments of $nil (2015 - $0.1 million).
See discussion in Section 3, Investments of this MD&A.
- 22 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
5. ANALYSIS OF FINANCIAL RESULTS (continued)
Investments in Private Entities
In the three months and year ended December 31, 2016, the Company recorded unrealized losses of $2.3 million and $0.7 million, respectively,
on its investment in the HIIG Partnership. In the three months and year ended December 31, 2015, the Company recorded unrealized gains of
$0.2 million and $18.4 million, respectively, on its investment in the HIIG Partnership. The unrealized gains in the three months and year ended
December 31, 2015 included unrealized foreign exchange gains of $nil and $16.7 million, respectively, resulting from a strengthening of the US$
against the C$, prior to the adoption of the US$ as the Company’s functional currency on August 31, 2015.
The Company recorded an unrealized gain of $1.1 million and an unrealized loss of $0.1 million on its investments in Arena Finance and Arena
Origination, respectively, in the three months ended December 31, 2016 (2015 - unrealized losses of $2.2 million and $0.7 million, respectively),
and unrealized losses of $0.3 million and $0.6 million on its investments in Arena Finance and Arena Origination, respectively, in the year ended
December 31, 2016 (2015 - $3.5 million and $1.3 million, respectively).
Investments in Associates
The Company’s investments in the Associates are accounted for using the equity method. In the three months ended December 31, 2016, the
Associates earned management and performance fees of $0.9 million and administrative and service fees of $1.4 million and incurred operating
expenses of $3.5 million, resulting in a loss of $1.2 million. In the year ended December 31, 2016, the Associates earned management and
performance fees of 1.8 million and administrative and service fees of $7.0 million and incurred operating expenses of $13.5 million, resulting in a
loss of $4.7 million.
In the three months ended December 31, 2015, the Associates earned management fees of $0.1 million and administrative and service fees of
$2.3 million and incurred operating expenses of $3.4 million, resulting in a loss of $1.0 million. In the year ended December 31, 2015, the
Associates earned management fees of $0.1 million and administrative and service fees of $3.0 million and incurred operating expenses of $5.1
million, resulting in a loss of $2.0 million.
The total of the Company’s 51% share of losses of the Associates amounted to $0.6 million and $2.4 million in the three months and year ended
December 31, 2016, respectively, and $0.5 million and $1.0 million in the three months and year ended December 31, 2015, respectively,
5.3 Expenses
Salaries and benefits were $1.3 million lower in the fourth quarter of 2016 than the fourth quarter of 2015. The decrease was due to the Company
accruing staff bonus on a quarterly basis in 2016 instead of on an annual basis in the fourth quarter of 2015. Salaries and benefits were $0.7
million higher in the year ended December 31, 2016 than the year ended December 31, 2015, resulting from additional staff hired and increase in
salaries.
Professional fees were $0.4 million higher in the fourth quarter of 2015 than the fourth quarter of 2016 and $0.7 million higher in the year ended
December 31, 2015 than the year ended December 31, 2016 primarily due to fees incurred with respect to the Arena Transactions.
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. Variations in the Company’s site restoration provision expense from period to period are generally attributed to changes
in the discount and inflation rates used to arrive at the site restoration provision. The site restoration provision recovery in the year ended
December 31, 2016 also included a reimbursement in the third quarter of 2016 of $0.4 million in site restoration expenditures pursuant to
indemnifications provided to the Company by previous owners of the industrial sites.
On April 1, 2016, 2,752,940 options and 925,198 RSUs were granted to certain officers and employees of the Company. See Section 8, Liquidity
and Capital Resources of this MD&A for additional information on the Company’s share-based compensation plans. Changes in share-based
compensation expense from period to period result primarily from vesting of RSUs as well as movement in the Company’s share price which
affects the per unit valuation of outstanding RSUs and DSUs. Share-based compensation expense in the three months and year ended
December 31, 2016 also included compensation expense for stock options of $0.2 million and $0.7 million, respectively.
5.4 Other Comprehensive Loss
The other comprehensive loss of $20.6 million for the year ended December 31, 2015 related to exchange differences from currency restatement
as a result of a change in presentation currency from the C$ to the US$ on August 31, 2015.
- 23 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
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
Other assets
Investments in private entities
Investments in associates
Liabilities
Accounts payable and accrued liabilities
Site restoration provision
Shareholders’ equity
Total liabilities and shareholders’ equity
6.1 Cash and Cash Equivalents
December 31, 2016
December 31, 2015
$
$
$
$
3.0
4.4
320.5
1.3
329.2
7.3
3.4
10.7
318.5
329.2
$
$
$
$
7.8
2.6
322.1
3.0
335.5
5.5
3.9
9.4
326.1
335.5
At December 31, 2016, the Company had cash and cash equivalents of $3.0 million compared to $7.8 million at December 31, 2015.
6.2 Other Assets
Other assets at December 31, 2016 included the Company’s portfolio investment in ASOP LP with a fair value of $1.9 million (December 31, 2015
- $1.9 million). Other assets at December 31, 2016 also included $0.1 million of capital assets (December 31, 2015 - $0.1 million). Depreciation
expense for the capital assets was nominal for the three months and years ended December 31, 2016 and 2015.
6.3 Investments in Private Entities
The Company’s investments in private entities consist of its investments in HIIG (through the HIIG Partnership), Arena Finance and Arena
Origination, which are accounted for at FVTPL. The fair values of the HIIG Partnership, Arena Finance and Arena Origination at December 31,
2016 were determined to be $145.3 million, $142.8 million and $32.4 million, respectively (December 31, 2015 - $146.0 million, $143.1 million and
$33.0 million, respectively). See discussion in Section 3, Investments of this MD&A.
6.4 Investments in Associates
The Company’s investments in associates consist of the Company’s indirect investment in Arena Investors. These investments are accounted for
using the equity method. The carrying value of the Company’s investments in the Associates at December 31, 2016 was $1.3 million (December
31, 2015 - $3.0 million). See discussion in Section 3, Investments of this MD&A.
6.5 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities were $7.3 million at December 31, 2016 and $5.5 million at December 31, 2015. Accounts payable and
accrued liabilities at December 31, 2016 included liabilities related to accrued employee bonuses of $0.8 million (December 31, 2015 - $0.5
million), RSUs of $5.4 million (December 31, 2015 - $3.8 million) and DSUs of $0.8 million (December 31, 2015 - $0.6 million). See Section 8,
Liquidity and Capital Resources of this MD&A for additional information on the Company’s share-based compensation plans.
6.6 Site Restoration Provision
The site restoration provision of $3.4 million at December 31, 2016 and $3.9 million at December 31, 2015 relates to costs associated with soil and
groundwater reclamation and remediation costs. The decrease in the provision from December 31, 2015 to December 31, 2016 of $0.5 million
was due to a payment in the third quarter of 2016 of $0.4 million related to expenditures incurred pursuant to an indemnification as well as $0.2
million resulting from a change in the discount and inflation rates used to arrive at the site restoration provision at December 31, 2016, offset in
part by a foreign exchange adjustment of $0.1 million. See discussion in Section 5.3, Expenses of this MD&A for additional information on the
reimbursement to the Company of these expenditures.
- 24 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION (continued)
The Company conducts periodic reviews of the underlying assumptions supporting the provision, including remediation costs and regulatory
requirements. Future reimbursements of costs resulting from indemnifications provided to the Company by previous owners of the industrial sites
have not been recognized in the Company’s consolidated financial statements. Reimbursements are recorded when received.
6.7 Shareholders’ Equity
The details of shareholders’ equity are as follows:
(millions)
Common shares
Contributed surplus
Accumulated other comprehensive loss
Deficit
Shareholders’ equity
Common Shares
December 31, 2016
December 31, 2015
$
$
382.2
12.2
(2.3)
(73.6)
318.5
$
$
382.2
11.5
(2.3)
(65.3)
326.1
On May 28, 2015, the Company completed the 2015 Offering and the 2015 Concurrent Private Placement and on August 31, 2015, an aggregate
of 72,120,145 additional common shares of the Company were issued upon the deemed conversion of the 2015 Subscription Receipts which were
issued on the deemed exercise of the Special Warrants. The Company also completed the Zwirn Subscription and an additional 769,231 common
shares of the Company were issued to Mr. Zwirn on August 31, 2015. See discussion in Section 4, Equity Financing of this MD&A. The Company
had 143,186,718 common shares outstanding at December 31, 2016 and 2015.
The proceeds from the 2015 Offering, the 2015 Concurrent Private Placement and the Zwirn Subscription to the Company were $169.3 million, net
of shares issuance costs of $9.9 million.
In the year ended December 31, 2015, the Company received a reimbursement of $2.5 million in share issuance costs in connection with the
equity financings completed in 2014. The amount was recorded as an increase in the Company’s share capital.
Contributed Surplus
The increase in contributed surplus of $0.7 million resulted from compensation expense relating to stock options in the year ended December 31,
2016.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $2.3 million at December 31, 2016 and 2015 comprised cumulative exchange differences from currency
restatement as a result of a change in presentation currency from the C$ to the US$ on August 31, 2015.
Deficit
The increase in deficit of $8.3 million from December 31, 2015 to December 31, 2016 is due to the loss for the year ended December 31, 2016.
7. OUTLOOK
In 2016, Arena continued to deploy its capital, with the rate of deployment accelerating in the fourth quarter. The focus of Arena’s management
team in 2017 is to expand Arena’s diversified portfolio of quality senior ranking credit investments, increase its pipeline of investment opportunities,
and grow AUM, including attracting new investors. Arena’s investments are performing at or above expectations and its headcount has grown to
38 full time employees as at December 31, 2016.
HIIG’s financial results in 2016 were hampered by the strengthening of its prior period claims reserves in a number of business segments. While
the impact of the reserve strengthening was partially offset by an income tax benefit, HIIG incurred a loss in both the fourth quarter and full year
2016. HIIG undertook a number of initiatives in 2016 to enhance its operations and Westaim believes HIIG ended the year as a stronger
organization. With the initiatives undertaken by HIIG, and an improved economy and rising interest rates in the United States, HIIG’s financial
performance is expected to improve in 2017, despite continuing soft market conditions in the insurance industry.
The Company continues to seek additional investment opportunities to create shareholder value through partnering with other aligned and
experienced management teams to build profitable businesses that generate attractive returns over the long term.
- 25 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States 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.
The Company has not entered into any hedging with respect to currencies.
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 August 31, 2015, the Company issued 72,889,376 common shares in connection with the 2015 Offering, the 2015 Concurrent Private
Placement and the Zwirn Subscription for net proceeds of $169.3 million, after share issuance costs of $9.9 million. In the three months ended
March 31, 2015, the Company received a reimbursement of $2.5 million in share issuance costs in connection with the equity financings
completed in 2014.
At December 31, 2016 and 2015, the Company had 143,186,718 common shares outstanding, with a stated capital of $382.2 million.
There were no Class A or Class B preferred shares outstanding at December 31, 2016 and 2015.
Dividends
No dividends were paid in the years ended December 31, 2016 and 2015.
Share-based Compensation Plans
The Company’s long-term equity incentive plan (the “Incentive Plan”) provides for grants of RSUs, DSUs, stock appreciation rights and other
share-based awards. The Company also has a stand-alone incentive stock option plan (the “Option Plan”).
On March 31, 2016, the Company’s Board of Directors approved amendments to the Incentive Plan which would, among other things, increase the
maximum number of common shares which may be issued under the Incentive Plan from 7,042,150 to 14,318,671. Such amendments were
approved by the shareholders of the Company at the annual and special meeting of shareholders held on May 12, 2016. 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.
At December 31, 2016, the Company had 2,754,940 stock options outstanding (December 31, 2015 - 3,000 stock options outstanding). On April
1, 2016, 2,752,940 options were granted to certain officers and employees of the Company. These options have a term of seven years, vest in
three equal instalments on April 1, 2017, April 1, 2018 and April 1, 2019, and have an exercise price of C$3.25. In the three months and year
ended December 31, 2016, compensation expense relating to options was $0.2 million and $0.7 million, respectively, with an offsetting increase to
contributed surplus.
At December 31, 2016, the Company had 398,731 DSUs outstanding (December 31, 2015 - 319,465 DSUs outstanding). DSUs are issued to
certain directors in lieu of director fees, at their election, at the market value of the Company’s common shares at the date of grant and, with
respect to the DSUs that are outstanding, are paid out in cash no later than the end of the calendar year following the year the participant ceases
to be a director. In the year ended December 31, 2016, 67,695 DSUs were exercised for a cash payment of C$3.33 per DSU, and the DSU
liability was correspondingly reduced by $0.2 million.
- 26 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
8.
LIQUIDITY AND CAPITAL RESOURCES (continued)
The Company also had 3,082,073 RSUs outstanding at December 31, 2016 (December 31, 2015 - 2,209,563 RSUs outstanding). An aggregate
of 2,375,000 RSUs were granted to certain officers, employees and consultants on November 14, 2014, and at December 31, 2016, 2,152,343
(90.6%) of these RSUs had vested, of which 218,125 units had been exercised and 1,934,218 units were outstanding. The remaining 222,657
RSUs vest evenly over 5 months after December 31, 2016.
On April 1, 2016, 925,198 additional RSUs were granted to certain officers and employees of the Company. These RSUs vest in three equal
instalments on April 1, 2017, April 1, 2018 and December 31, 2018 and, once vested, may be settled, at the election of the holder, in common
shares of the Company or cash based on the prevailing market price of the common shares on the settlement date.
In the year ended December 31, 2016, 52,688 RSUs were exercised for a cash payment of C$2.55 per RSU and the RSU liability was
correspondingly reduced by $0.1 million.
At December 31, 2016, accounts payable and accrued liabilities included amounts related to outstanding DSUs of $0.8 million (December 31,
2015 - $0.6 million) and outstanding RSUs of $5.4 million (December 31, 2015 - $3.8 million).
Market for Securities
Westaim’s common shares trade on the TSXV under the symbol “WED”.
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 has sufficient funds to meet its financial obligations. 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, 2016 (millions)
Financial assets:
Cash and cash equivalents
Other assets *
Investments in private entities
Investments in associates
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities
Site restoration provision
Total financial obligations
Financial assets net of financial obligations
* excluding capital assets
December 31, 2015 (millions)
Financial assets:
Cash and cash equivalents
Other assets *
Investments in private entities
Investments in associates
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities
Site restoration provision
Total financial obligations
Financial assets net of financial obligations
* excluding capital assets
One year or less
No specific date
Total
$
$
3.0
2.4
-
-
5.4
1.1
-
1.1
4.3
$
$
-
1.9
320.5
1.3
323.7
6.2
3.4
9.6
314.1
$
$
3.0
4.3
320.5
1.3
329.1
7.3
3.4
10.7
318.4
One year or less
No specific date
Total
$
$
7.8
0.6
-
-
8.4
1.1
-
1.1
7.3
$
$
-
1.9
322.1
3.0
327.0
4.4
3.9
8.3
318.7
$
$
7.8
2.5
322.1
3.0
335.4
5.5
3.9
9.4
326.0
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.
- 27 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
9. RELATED PARTY TRANSACTIONS
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 current and former directors of the Company.
Compensation expenses related to the Company’s key management personnel are as follows:
(millions)
Salaries and benefits
Share-based compensation
Three months ended December 31
2016
2015
Year ended December 31
2015
2016
$
$
0.2
0.9
1.1
$
$
1.4
0.2
1.6
$
$
2.5
2.5
5.0
$
$
1.9
2.4
4.3
Fees paid to Hartford Consulting, Inc. (the “Consultant”), a company owned by William R. Andrus, a director of HIIG, for insurance industry related
consulting services were nominal in the three months ended December 31, 2016 and 2015 and $0.1 million in each of the years ended December
31, 2016 and 2015. Compensation expense relating to RSUs issued to the Consultant was nominal in the three months and year ended
December 31, 2016, and nominal and $0.2 million in the three months and year ended December 31, 2015, respectively, and the amounts were
included in the consolidated statements of (loss) profit and other comprehensive loss under share-based compensation expense. During the year
ended December 31, 2015, 115,937 RSUs were exercised for a cash payment of C$2.78 per RSU, of $0.2 million. At December 31, 2016, a
liability of $0.1 million (December 31, 2015 - $0.1 million) had been accrued in the consolidated statements of financial position with respect to
outstanding RSUs held by the Consultant.
On September 28, 2016, AFHC granted a $10.0 million revolving loan facility to the Associates to fund the working capital needs of Arena
Investors. The loan facility has a term of 36 months and bears interest at a rate of 5.25% per annum. At December 31, 2016, WAHII had drawn
down the loan facility by $2.0 million. Interest on the outstanding loan from September 28, 2016 to December 31, 2016 was nominal. The
Company has provided a limited recourse guaranty to AFHC pledging as security for the loan facility its ownership interests in the Associates.
On May 28, 2015, pursuant to the 2015 Concurrent Private Placement, 6,823,152 Special Warrants were sold at a price of C$3.25 per Special
Warrant to members of the Company's Board of Directors and management team, a shareholder of HIIG and members of the future Arena Group
management team as well as to HIIG and certain HIIG subsidiaries for portfolio investment purposes, on terms equivalent to the other participants
in the 2015 Concurrent Private Placement. See discussion in Section 4, Equity Financing of this MD&A. On August 31, 2015, an aggregate of
6,823,152 additional common shares of the Company were issued under the 2015 Concurrent Private Placement upon the deemed conversion of
the 2015 Subscription Receipts issued on the deemed exercise of the Special Warrants. The aggregate gross proceeds from the 2015 Concurrent
Private Placement to the Company was $16.8 million.
On August 31, 2015, the Company completed the Lantern Purchase and the Zwirn Subscription (see discussion in Section 3, Investments and
Section 4, Equity Financing of this MD&A), and 769,231 common shares of the Company were issued to Mr. Zwirn at C$3.25 per share for
aggregate gross proceeds of $1.9 million.
On August 31, 2015, the Company provided $17.0 million in funding to Arena Origination in the form of an unsecured term loan (see discussion in
Section 3, Investments of this MD&A). The Company earned and received interest on the loan of $0.3 million and $1.2 million in the three months
and year ended December 31, 2016, respectively, and $0.3 million and $0.4 million in the three months and year ended December 31, 2015,
respectively.
The Company earned advisory fees from HIIG of $0.3 million and $1.0 million in the three months and year ended December 31, 2016,
respectively, and $0.2 million and $1.0 million in the three months and year ended December 31, 2015, respectively.
In the year ended December 31, 2015, the Company was reimbursed $2.5 million by HIIG in share issuance costs related to its investment in the
HIIG Partnership and the amount was recorded as an increase in the Company’s share capital.
- 28 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
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.
Management used net asset value as the primary valuation technique in determining the fair value of the Company’s investments in private entities
at December 31, 2016. Management determined that this valuation technique produced the best indicator of the fair value of the HIIG Partnership,
Arena Finance and Arena Origination at December 31, 2016. The significant unobservable inputs used in the valuation of the HIIG Partnership,
Arena Finance and Arena Origination at December 31, 2016 were the equity of each of the entities at December 31, 2016 and the multiple applied.
Management applied a multiple of 1.0x as the equity (adjusted where applicable) of each of the HIIG Partnership, Arena Finance and Arena
Origination approximated the net assets of the respective entity which were carried at fair value at December 31, 2016. For a detailed description
of the valuation of the Company’s investments in private entities, see note 5 to the Company’s audited annual consolidated financial statements for
the years ended December 31, 2016 and 2015. 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.
Other key estimates include the Company’s provision for site restoration, fair value of share-based compensation, and unrecognized deferred tax
assets. Details of these items are disclosed in note 7, note 10 and note 12, respectively, to the Company’s audited annual consolidated financial
statements for the years ended December 31, 2016 and 2015.
11. CRITICAL ACCOUNTING POLICIES AND RECENTLY ADOPTED AND PENDING ACCOUNTING PRONOUNCEMENTS
A 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 annual consolidated financial statements for the years ended December 31, 2016 and 2015.
12. QUARTERLY FINANCIAL INFORMATION
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Q4
2015
Q3
2015
Q2
2015
Q1
2015
(millions)
Revenue
Net results of investments - (loss) gain
Recovery of expenses (expenses)
(Loss) profit
Other comprehensive (loss) income
Comprehensive (loss) income
$ 0.5
(3.2)
(3.0)
(5.7)
-
$ (5.7)
1 Amounts have been restated due to a change in presentation currency from the Canadian dollar to the United States dollar
$ 0.6
(2.3)
(2.0)
(3.7)
-
$ (3.7)
$ 0.7
(2.8)
(3.0)
(5.1)
-
$ (5.1)
$ 0.7
(1.9)
0.3
(0.9)
-
$ (0.9)
$ 0.7
3.0
(2.3)
1.4
-
$ 1.4
(restated 1)
$ 0.4
6.1
0.5
7.0
(9.0)
$ (2.0)
$ 0.3
(2.1)
(1.7)
(3.5)
2.9
$ (0.6)
$ 0.3
11.9
(2.3)
9.9
(14.3)
$ (4.4)
Revenue consisted of investment income and advisory fee income.
Net results of investments in Q4, 2016 included an unrealized loss on investments in private entities of $1.3 million and share of losses of
Associates of $0.6 million. Net results of investments in Q3, 2016 included an unrealized loss on investments in private entities of $1.5 million and
share of losses of Associates of $0.8 million. Net results of investments in Q2, 2016 included an unrealized loss on investments in private entities
of $2.2 million and share of losses of Associates of $0.6 million. Net results of investments in Q1, 2016 included an unrealized gain on
investments in private entities of $3.4 million and share of losses of Associates of $0.4 million. Net results of investments in Q4, 2015 included an
unrealized loss on investments in private entities of $2.7 million and share of losses of Associates of $0.5 million. Net results of investments in Q3,
2015 consisted of an unrealized gain on investments in private entities of $6.6 million, share of losses of Associates of $0.6 million and an
unrealized gain on other investments of $0.1 million. Net results of investments prior to Q3, 2015 represented unrealized gains (losses) on the
Company’s investment in the HIIG Partnership.
Expenses in Q4, 2016 comprised salaries and general and administrative costs of $0.4 million, site restoration provision recovery of $1.5 million,
share-based compensation expense of $0.9 million, professional fees of $0.1 million and a foreign exchange gain of $0.2 million. Expenses in Q3,
2016 comprised salaries and general and administrative costs of $1.1 million, site restoration provision recovery of $0.2 million which was net of a
reimbursement of $0.4 million, share-based compensation expense of $1.0 million and professional fees of $0.1 million. Expenses in Q2, 2016
comprised salaries and general and administrative costs of $1.2 million, site restoration provision expense of $0.9 million, share-based
compensation expense of $0.5 million, professional fees of $0.3 million and a foreign exchange loss of $0.1 million. Expenses in Q1, 2016
comprised salaries and general and administrative costs of $1.1 million, site restoration provision expense of $0.3 million, professional fees of $0.4
million, share-based compensation expense of $0.2 million, and a foreign exchange loss of $0.3 million.
- 29 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
12. QUARTERLY FINANCIAL INFORMATION (continued)
Expenses in Q4, 2015 comprised salaries and general and administrative costs of $1.7 million, site restoration provision expense of $0.7 million,
professional fees of $0.5 million and share-based compensation expense of $0.2 million, net of a foreign exchange gain of $0.1 million. Recovery
of expenses in Q3, 2015 included a recovery of professional fees of $0.4 million, a recovery of site restoration provision of $0.3 million and a
foreign exchange gain of $0.4 million. Expenses in Q2, 2015 included $0.8 million in share-based compensation with respect to outstanding
RSUs, $1.0 million in professional fees incurred mainly in connection with the Arena Transactions and a recovery of site restoration provision of
$0.7 million. Expenses in Q1, 2015 included share-based compensation of $1.5 million with respect to outstanding RSUs and $0.4 million related
to outstanding DSUs, a site restoration provision expense of $0.8 million, net of a foreign exchange gain on US$ bank balances of $1.2 million.
Other comprehensive income (loss) arose from exchange differences from currency restatement as a result of a change in presentation currency
from the C$ to the US$ on August 31, 2015.
13. RISKS
The Company is subject to a number of risks which could affect its business, prospects, financial condition, results of operations and cash flows,
including risks relating to lack of significant revenues, regulatory risks, foreign exchange risks and risks relating to the businesses of HIIG and
Arena. A detailed description of the risk factors associated with the Company and its business is contained in the Company’s Annual Information
Form dated March 30, 2017 for its fiscal year ended December 31, 2016 which is available on SEDAR at www.sedar.com.
- 30 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES
ARENA FINANCE
The investments of AFHC and AFHC’s subsidiaries shown by investment strategy are as follows:
Investment by Strategy
(unaudited)
(millions except for number
of positions and percentage)
Corporate Private Credit
Real Estate Private Credit
and Real Estate Assets
Structured Finance 1
Other Securities
Investment by Strategy
(unaudited)
(millions except for number
of positions and percentage)
Corporate Private Credit
Structured Finance 1
Other Securities
Number of
positions
17
Cost
$
41.3
Fair value
41.0
$
Percentage of
investments at
fair value
39.0%
%
Debt investments
39.0%
%
Equity
investments
-
December 31, 2016
16
17
41
91
14.3
38.8
11.1
105.5
14.0
38.8
11.4
105.2
13.2%
36.9%
10.9%
100.0%
13.2%
36.9%
8.3%
97.4%
-
-
2.6%
2.6%
$
1 The investments in Structured Finance are inclusive of investments in the following investment strategies of the Arena Group: Commercial & Industrial Assets,
Structured Finance Investments and Consumer Assets.
$
Number of
positions
6
1
37
44
Cost
$
16.0
4.3
22.2
42.5
$
Fair value
16.0
4.3
22.1
42.4
Percentage of
investments at
fair value
%
Debt investments
37.8%
10.1%
52.1%
100.0%
37.8%
10.1%
1.9%
49.8%
%
Equity
investments
-
-
50.2%
50.2%
$
1 The investments in Structured Finance are inclusive of investments in the following investment strategies of the Arena Group: Commercial & Industrial Assets,
Structured Finance Investments and Consumer Assets.
$
December 31, 2015
Investments in Corporate Private Credit, Real Estate Private Credit and Real Estate Assets, and Structured Finance relate to loans issued to
privately held entities. Investments in Other Securities are net of short positions and comprise publicly traded corporate bonds, equity securities,
bank debt, private investments in public entity and derivatives.
- 31 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
ARENA FINANCE
The investments of AFHC and AFHC’s subsidiaries shown by industry are as follows:
Investments by Industry
(unaudited)
(millions except for percentage)
Loans
Corporate Private Credit
Business Services
Consumer Products
Financial Services
Healthcare Services
Industrial
Manufacturing
Oil and Gas
Retail
Real Estate Private Credit
and Real Estate Assets
Commercial
Hospitality
Industrial
Land
- Commercial Development
Land
- Multi-Family Development
Land
- Single-Family Luxury
Development
Mixed Use
Multi Family
Residential
Retail
Structured Finance
Commercial & Industrial
Consumer
Lease/Equipment
Real Estate-related
Other assets
Total Loans
Other Securities (1)
Consumer Products
Financial Services
Healthcare Services
Industrial
Oil and Gas
Telecommunications
Information Technology
December 31, 2016
December 31, 2015
Cost
Fair value
Percentage of
investments at
fair value
Cost
Fair value
Percentage of
investments at
fair value
$
$
11.8
3.6
4.5
9.5
2.3
2.9
3.0
3.7
41.3
2.0
1.9
0.4
0.4
2.4
2.8
0.3
0.4
3.4
0.3
14.3
2.0
16.2
4.6
4.0
12.0
38.8
94.4
1.4
0.5
0.3
(0.1)
9.0
-
-
11.1
11.8
3.6
4.5
9.5
2.3
2.9
3.0
3.4
41.0
2.0
1.8
0.4
0.3
2.4
2.8
0.3
0.4
3.4
0.2
14.0
2.0
16.4
4.6
4.0
11.8
38.8
93.8
1.4
0.5
0.4
(0.3)
9.4
-
-
11.4
$
11.3%
3.4%
4.2%
9.1%
2.2%
2.7%
2.8%
3.3%
39.0%
1.9%
1.7%
0.4%
0.3%
2.2%
2.7%
0.3%
0.3%
3.2%
0.2%
13.2%
1.9%
15.6%
4.4%
3.8%
11.2%
36.9%
89.1%
1.4%
0.5%
0.3%
(0.3)%
9.0%
-
-
10.9%
6.3
3.4
-
6.3
-
-
-
-
16.0
-
-
-
-
-
-
-
-
-
-
-
-
4.3
-
-
-
4.3
20.3
6.2
6.9
2.5
-
2.2
1.2
3.2
22.2
$
6.3
3.4
-
6.3
-
-
-
-
16.0
-
-
-
-
-
-
-
-
-
-
-
-
4.3
-
-
-
4.3
20.3
6.2
7.0
2.6
-
1.9
1.2
3.2
22.1
14.8%
8.1%
-
14.9%
-
-
-
-
37.8%
-
-
-
-
-
-
-
-
-
-
-
-
10.1%
-
-
-
10.1%
47.9%
14.6%
16.5%
6.1%
-
4.5%
2.8%
7.6%
52.1%
1 Net of short positions
$
105.5
$
105.2
100.0%
$
42.5
$
42.4
100.0%
- 32 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
ARENA FINANCE
The investments of AFHC and AFHC’s subsidiaries shown by geographic breakdown are as follows:
Investments by
Geographic Breakdown
(unaudited)
(millions except for percentage)
Loans
United States
Canada
Europe
Other Securities (1)
United States
Europe
Other
1 Net of short positions
December 31, 2016
December 31, 2015
Cost
Fair value
Percentage of
investments at
fair value
Cost
Fair value
Percentage of
investments at
fair value
$
$
87.9
0.3
6.2
94.4
8.2
1.5
1.4
11.1
87.9
-
5.9
93.8
7.6
2.5
1.3
11.4
$
83.5%
-
5.6%
89.1%
7.3%
2.4%
1.2%
10.9%
20.3
-
-
20.3
19.2
-
3.0
22.2
$
20.3
-
-
20.3
19.1
-
3.0
22.1
47.9%
-
-
47.9%
45.1%
-
7.0%
52.1%
$
105.5
$
105.2
100.0%
$
42.5
$
42.4
100.0%
- 33 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
ARENA FINANCE
Details of the loan positions of AFHC and AFHC’s subsidiaries are as follows:
Details of Loan Positions
(unaudited)
(millions except for percentage)
December 31, 2016
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
Investments by industry
Ref. no.
Corporate Private Credit
CPC-1361TL
CPC-1571
CPC-1266TL
CPC-1267TL
CPC-1101
CPC-1450
CPC-1270
CPC-1297TL
CPC-1665
CPC-ARENARC1
CPC-1268TL
CPC-1199TL
CPC-1630
CPC-1199TL2
CPC-1781
CPC-1265TL
CPC-1268TL2
CPC-1268TL3
CPC-1199
CPC-1268TL4
CPC-1010
CPC-1268RC
CPC-1009RC
CPC-1267RC
CPC-1266RC
CPC-1265RC
CPC-1009A
CPC-1009B
Subtotal / Weighted average %
Healthcare Services
Business Services
Business Services
Business Services
Manufacturing
Oil and Gas
Consumer Products
Financial Services
Industrial
Financial Services
Healthcare Services
Retail
Healthcare Services
Retail
Business Services
Consumer Products
Healthcare Services
Healthcare Services
Retail
Healthcare Services
Oil and Gas
Healthcare Services
Retail
Business Services
Business Services
Consumer Products
Retail
Retail
Real Estate Private Credit
and Real Estate Assets
REPC-1068S4
REPC-1082
REPC-1068
REPC-1207
REPC-1068S3
REPC-1437
REPC-1029
REPC-1033
REPC-1017
REPC-1025
REPC-1046
REPC-1036
REPC-1013
REPC-1047
REPC-1031
REPC-1041
REPC-1042
REPC-1015
Residential
Land - Single-Family
Luxury Development
Commercial
Hospitality
Land
- Multi-Family Development
Land
- Multi-Family Development
Multi-Family
Mixed Use
Land
- Commercial Development
Industrial
Industrial
Retail
Residential
Land
- Commercial Development
Multi-Family
Mixed Use
Residential
Land
- Commercial Development
Subtotal / Weighted average %
$
$
4.2
3.3
3.3
3.2
2.9
2.9
2.5
2.5
2.3
10.0 (4)
1.7
1.7
1.4
1.2
1.1
1.0
0.9
0.8
0.6
0.5
0.2
0.2
0.5
0.2
0.5
0.4
-
-
50.0
3.1
2.8
2.1
2.1
1.5
0.9
0.3
0.2
0.2
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
4.2
4.2
3.3
3.2
2.9
2.8
2.5
2.5
2.3
2.0
1.7
1.7
1.4
1.2
1.1
1.0
0.9
0.8
0.6
0.5
0.2
0.1
0.2
-
-
-
-
-
41.3
3.1
2.8
2.1
2.0
1.5
0.9
0.3
0.2
0.2
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
$
4.2
4.1
3.3
3.2
2.9
2.8
2.5
2.5
2.3
2.0
1.7
1.6
1.4
1.2
1.2
1.0
0.9
0.8
0.6
0.5
0.2
0.1
-
-
-
-
-
-
41.0
3.1
2.8
2.0
1.8
1.5
0.9
0.3
0.2
0.2
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
United States
Europe
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
Canada
United States
United States
United States
Canada
Canada
First Lien
First Lien
First Lien
First Lien
Second Lien
First Lien
First Lien
First Lien
Second Lien
First Lien
First Lien
First Lien
First Lien (5)
First Lien
Second Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
12.00%
30.00%
8.00%
8.25%
15.00%
10.69%
8.75%
9.25%
13.50%
5.25%
8.50%
10.00%
11.54%
10.00%
11.00%
8.00%
9.00%
9.00%
10.00%
9.00%
14.00%
9.00%
6.20%
8.25%
8.00%
8.00%
10.45%
12.45%
12.07%
LTV (3)
51.0%
34.0%
23.5%
38.0%
71.0%
52.0%
35.0%
49.0%
63.0%
n/a (4)
48.3%
60.0%
53.0%
60.0%
14.0%
28.0%
48.3%
48.3%
60.0%
48.3%
43.0%
48.3%
100.0%
38.0%
23.5%
28.0%
100.0%
100.0%
45.7%
United States
First Mortgage
10.27%
47.0%
United States
United States
Europe
First Mortgage
First Mortgage
First Mortgage
12.00%
5.12% (6)
7.00%
57.0%
48.0%
44.8%
United States
First Mortgage (5)
10.27%
70.0%
United States
United States
United States
First Mortgage
First Mortgage
First Mortgage
United States
United States
United States
United States
United States
United States
United States
United States
United States
First Mortgage
Real Property
First Mortgage
First Mortgage
First Mortgage
First Mortgage
First Mortgage
First Mortgage
First Mortgage
11.27%
9.00%
9.75%
15.00%
n/a (7)
15.00%
2.75%
16.50%
15.00%
6.75%
13.00%
15.00%
66.0%
37.0%
58.0%
66.0%
n/a (7)
55.0%
38.0%
10.0%
50.0%
65.0%
27.0%
32.0%
0.2
14.5
0.1
14.3
0.1
14.00
United States
Real Property
n/a (7)
9.61%
n/a (7)
52.4%
- 34 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
ARENA FINANCE
Details of the loan positions of AFHC and AFHC’s subsidiaries are as follows (continued):
Details of Loan Positions (continued)
(unaudited)
(millions except for percentage)
December 31, 2016
Investments by industry
Ref. no.
Structured Finance
SF-1467
SF-1416
SF-1793
SF-1051
SF-1052F
SF-1788/1933
SF-1282S2
SF-1520
SF-1282S3
SF-1052S
SF-1282
SF-1934
SF-1007
SF-1035
SF-1788REO
SF-1018
SF-1038
SF-1002
SF-1027
SF-1020
SF-1026
SF-1037
Subtotal / Weighted average %
Consumer
Other assets
Lease/Equipment
Real Estate-related
Consumer
Consumer
Other assets
Commercial & Industrial
Other assets
Consumer
Other assets
Consumer
Other assets
Other assets
Consumer
Other assets
Other assets
Other assets
Other assets
Consumer
Other assets
Other assets
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
6.7
9.6
4.6
4.4
3.7
3.1
2.4
2.0
2.4
1.5
2.4
0.9
0.8
0.4
0.3
0.2
0.2
0.4
0.1
0.1
0.1
0.1
46.4
6.7
4.8
4.6
4.0
3.7
3.1
2.0
2.0
1.8
1.5
1.4
0.9
0.5
0.4
0.3
0.2
0.2
0.3
0.1
0.1
0.1
0.1
38.8
6.7
4.8
4.6
4.0
3.7
3.2
2.0
2.0
1.8
1.5
1.4
1.0
0.5
0.4
0.3
0.2
0.2
0.2
0.1
0.1
0.1
-
38.8
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
United States
First Lien
First Lien
Hard Asset
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
Unsecured
First Lien
First Lien
15.00%
18.00%
n/a (8)
12.00%
12.00%
n/a (9)
12.00%
n/a (10)
12.00%
25.00%
12.00%
n/a (9)
13.00%
10.52%
n/a (9)
8.27%
n/a (11)
11.00%
n/a (11)
n/a (12)
n/a (11)
12.00%
14.45%
LTV (3)
75.0%
70.0%
n/a (8)
54.0%
60.0%
53.0%
85.0%
41.0%
85.0%
60.0%
85.0%
53.0%
100.0%
100.0%
53.0%
100.0%
5.0%
100.0%
28.1%
100.0%
26.2%
100.0%
66.7%
Total / Weighted average %
55.0%
$
1 Principal represents the total funding commitment of a loan which, if applicable, is inclusive of any unfunded portion of the commitment at the end of the reporting period. Where a loan
is issued at a discount, the cost amount includes the accreted discount as of the end of the reporting period. A loan may also be acquired at a cost lower than the par value of the
principal outstanding.
$ 110.9
12.46%
94.4
93.8
$
2 Some investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR”) or Prime which reset daily, monthly, quarterly, or semi-
annually and may be subject to a floor. For each, the Company has provided the current contractual interest rate in effect at December 31, 2016. Interest rates listed are inclusive of
PIK, where applicable. PIK is interest paid in kind through an increase in the principal amount of the loan. The internal rate of return for many investments is generally greater than or
equal to the total coupon (additional yield resulting from original issue discounts and/or some form of profit sharing, e.g. warrants). In the event that the internal rate of return on the
investment is less than the stated rate, the lower rate is noted.
Instrument relates to a revolving loan facility granted to Arena Investors (see Section 9, Related Party Transactions of this MD&A for additional information on the loan facility).
3 Loan to value (“LTV”) represents the value of the outstanding loan as a percentage of the estimated fair value of the underlying collateral as of December 31, 2016.
4
5 Denotes subordinate position within the structure.
6 Coupon represents a weighted average rate for three non-performing loans acquired from a regional commercial bank.
7 Coupon and LTV not applicable to real property.
8
9
10
Investment represents an aircraft purchased for repositioning. Coupon and LTV not applicable to hard assets.
Interest not accrued on loans purchased as non-performing.
Interest not accrued on investment in litigation claim proceeds.
Investment in litigation claim proceeds with no stated coupon rate.
Investment with no stated coupon rate.
11
12
- 35 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
ARENA FINANCE
Details of the loan positions of AFHC and AFHC’s subsidiaries are as follows (continued):
Details of Loan Positions
(unaudited)
(millions except for percentage)
December 31, 2015
Investments by industry
Ref. no.
Corporate Private Credit
CPC-1100
CPC-1266
CPC-1267
CPC-1270
CPC-1268
CPC-1265
Subtotal / Weighted average %
Healthcare Services
Business Services
Business Services
Consumer Products
Healthcare Services
Consumer Products
Structured Finance
SF-1052
Consumer
Subtotal / Weighted average %
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
$
4.5
3.5
3.0
2.5
1.8
0.9
16.2
4.3
4.3
$
4.5
3.3
3.0
2.5
1.8
0.9
16.0
4.3
4.3
$
4.5
3.3
3.0
2.5
1.8
0.9
16.0
4.3
4.3
United States
United States
United States
United States
United States
United States
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
9.75%
8.00%
8.25%
8.75%
8.50%
8.00%
8.70%
LTV (3)
44.0%
19.0%
52.0%
54.0%
58.0%
24.0%
42.1%
United States
First Lien
15.99%
15.99%
83.0%
83.0%
Total / Weighted average %
50.6%
$
1 Principal represents the total funding commitment of a loan which, if applicable, is inclusive of any unfunded portion of the commitment at the end of the reporting period. Where a loan
is issued at a discount, the cost amount includes the accreted discount as of the end of the reporting period. A loan may also be acquired at a cost lower than the par value of the
principal outstanding.
10.22%
20.3
20.5
20.3
$
$
2 Some investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR”) or Prime which reset daily, monthly, quarterly, or semi-
annually and may be subject to a floor. For each, the Company has provided the current contractual interest rate in effect at December 31, 2015. Interest rates listed are inclusive of
PIK, where applicable. PIK is interest paid in kind through an increase in the principal amount of the loan. The internal rate of return for many investments is generally greater than or
equal to the total coupon (additional yield resulting from original issue discounts and/or some form of profit sharing, e.g. warrants). In the event that the internal rate of return on the
investment is less than the stated rate, the lower rate is noted.
3 Loan to value (“LTV”) represents the value of the outstanding loan as a percentage of the estimated fair value of the underlying collateral as of December 31, 2015.
- 36 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
ARENA ORIGINATION
The investments of AOC shown by investment strategy are as follows:
Investment by Strategy
(unaudited)
(millions except for number
of positions and percentage)
Investments by strategy:
Corporate Private Credit
Real Estate Private Credit
and Real Estate Assets
Structured Finance 1
Other Securities
Number of
positions
Cost
Fair value
Percentage of
investments at
fair value
%
Debt investments
%
Equity
investments
2
$
3.5
$
3.5
18.5%
18.5%
-
December 31, 2016
2
5
16
25
6.6
8.0
0.7
18.8
6.7
8.0
0.7
18.9
35.5%
42.4%
3.6%
100.0%
35.5%
42.4%
1.8%
98.2%
-
-
1.8%
1.8%
$
1 The investments in Structured Finance are inclusive of investments in the following investment strategies of the Arena Group: Commercial & Industrial Assets,
Structured Finance Investments and Consumer Assets.
$
Investment by Strategy
(unaudited)
(millions except for number
of positions and percentage)
Investments by strategy:
Corporate Private Credit
Real Estate Private Credit
and Real Estate Assets
Other Securities
December 31, 2015
Number of
positions
Cost
Fair value
Percentage of
investments at
fair value
%
Debt investments
%
Equity
investments
1
1
39
41
$
6.0
$
2.7
5.3
14.0
$
$
6.0
2.7
5.3
14.0
42.8%
42.8%
-
19.6%
37.6%
100.0%
19.6%
1.2%
63.6%
-
36.4%
36.4%
Investments in Corporate Private Credit, Real Estate Private Credit and Real Estate Assets, and Structured Finance relate to loans issued to
privately held entities. Investments in Other Securities are net of short positions and comprise publicly traded corporate bonds, equity securities,
bank debt, private investments in public entity and derivatives.
- 37 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
ARENA ORIGINATION
The investments of AOC shown by industry are as follows:
Investments by Industry
(unaudited)
(millions except for percentage)
Loans
Corporate Private Credit
Oil and Gas
Manufacturing
Real Estate Private Credit
and Real Estate Assets
Land
- Commercial Development
Land
- Multi-Family Development
Structured Finance
Consumer
Other assets
Other Securities (1)
Consumer Products
Financial Services
Healthcare Services
Information Technology
Oil and Gas
Telecommunications
1 Net of short positions
December 31, 2016
December 31, 2015
Cost
Fair value
Percentage of
investments at
fair value
Cost
Fair value
Percentage of
investments at
fair value
$
$
3.5
-
3.5
4.4
2.2
6.6
6.2
1.8
8.0
3.5
-
3.5
4.5
2.2
6.7
6.2
1.8
8.0
-
0.1
0.1
-
0.5
-
0.7
-
0.1
0.1
-
0.5
-
0.7
$
18.5%
-
18.5%
23.6%
11.9%
35.5%
32.8%
9.6%
42.4%
96.4%
-
0.5%
0.5%
-
2.6%
-
3.6%
-
6.0
6.0
2.7
-
2.7
-
-
-
8.7
1.4
1.6
0.6
0.8
0.6
0.3
5.3
$
-
6.0
6.0
2.7
-
2.7
-
-
-
8.7
1.4
1.6
0.6
0.8
0.6
0.3
5.3
-
42.8%
42.8%
19.6%
-
19.6%
-
-
-
62.4%
10.3%
11.7%
4.2%
5.3%
4.1%
2.0%
37.6%
$
18.8
$
18.9
100.0%
$
14.0
$
14.0
100.0%
Total Loans
18.1
18.2
The investments of AOC shown by geographic breakdown are as follows:
Investments by
Geographic Breakdown
(unaudited)
(millions except for percentage)
Loans
United States
Other Securities (1)
United States
Europe
Other
1 Net of short positions
December 31, 2016
December 31, 2015
Cost
Fair value
Percentage of
investments at
fair value
Cost
Fair value
Percentage of
investments at
fair value
$
18.1
$
18.2
96.4%
$
8.7
$
8.7
62.4%
0.3
0.1
0.3
0.7
0.1
0.3
0.3
0.7
0.5%
1.5%
1.6%
3.6%
4.6
-
0.7
5.3
4.6
-
0.7
5.3
32.7%
-
4.9%
37.6%
$
18.8
$
18.9
100.0%
$
14.0
$
14.0
100.0%
- 38 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
ARENA ORIGINATION
Details of the loan positions of AOC are as follows:
Details of Loan Positions
(unaudited)
(millions except for percentage)
December 31, 2016
Investments by industry
Ref. no.
Corporate Private Credit
CPC-2051
CPC-1803
Subtotal / Weighted average %
Oil and Gas
Oil and Gas
Real Estate Private Credit
and Real Estate Assets
Land
REPC-1942
- Commercial Development
Land
- Multi-Family Development
REPC-1766
Subtotal / Weighted average %
Structured Finance
SF-1245
SF-1839
SF-1800
SF-1519
SF-1294
SF-1669
SF-1381
Subtotal / Weighted average %
Consumer
Consumer
Other assets
Other assets
Other assets
Other assets
Other assets
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
$
2.5
5.9
8.4
4.4
2.2
6.6
5.2
1.1
1.0
1.5
0.1
-
-
8.9
$
$
2.5
1.0
3.5
4.4
2.2
6.6
5.1
1.1
1.0
0.7
0.1
-
-
8.0
2.5
1.0
3.5
4.5
2.2
6.7
5.1
1.1
1.0
0.7
0.1
-
-
8.0
United States
United States
Second Lien
First Lien
United States
Real Property
United States
First Mortgage
United States
United States
United States
United States
United States
United States
United States
Second Lien
First Lien
First Lien
Second Lien
First Lien
First Lien
First Lien
14.25%
11.00%
13.31%
n/a (4)
15.27%
15.27%
13.00%
18.00%
14.00%
15.00%
n/a (5)
n/a (5)
n/a (5)
14.02%
LTV (3)
57.0%
31.0%
49.5%
n/a (4)
61.8%
61.8%
29.0%
76.0%
80.0%
23.0%
12.0%
12.0%
12.0%
40.9%
Total / Weighted average %
47.0%
$
1 Principal represents the total funding commitment of a loan which, if applicable, is inclusive of any unfunded portion of the commitment at the end of the reporting period. Where a loan
is issued at a discount, the cost amount includes the accreted discount as of the end of the reporting period. A loan may also be acquired at a cost lower than the par value of the
principal outstanding.
14.05%
18.1
23.9
18.2
$
$
2 Some investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR”) or Prime which reset daily, monthly, quarterly, or semi-
annually and may be subject to a floor. For each, the Company has provided the current contractual interest rate in effect at December 31, 2016. Interest rates listed are inclusive of
PIK, where applicable. PIK is interest paid in kind through an increase in the principal amount of the loan. The internal rate of return for many investments is generally greater than or
equal to the total coupon (additional yield resulting from original issue discounts and/or some form of profit sharing, e.g. warrants). In the event that the internal rate of return on the
investment is less than the stated rate, the lower rate is noted.
3 Loan to value (“LTV”) represents the value of the outstanding loan as a percentage of the estimated fair value of the underlying collateral as of December 31, 2016.
4 Coupon and LTV not applicable to real property.
5
Investment in litigation claim proceeds with no stated coupon rate.
Details of Loan Positions
(unaudited)
(millions except for percentage)
Ref. no.
Corporate Private Credit
CPC-1101
Manufacturing
Investments by industry
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
LTV (3)
$
6.0
$
6.0
$
6.0
United States
Second Lien
12.60%
55.0%
December 31, 2015
Real Estate Private Credit
and Real Estate Assets
Land
REPC-1003
- Commercial Development
2.7
2.7
2.7
United States
First Mortgage
12.50%
67.0%
Total / Weighted average %
58.8%
$
1 Principal represents the total funding commitment of a loan which, if applicable, is inclusive of any unfunded portion of the commitment at the end of the reporting period. Where a loan
is issued at a discount, the cost amount includes the accreted discount as of the end of the reporting period. A loan may also be acquired at a cost lower than the par value of the
principal outstanding.
12.57%
8.7
8.7
8.7
$
$
2 Some investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR”) or Prime which reset daily, monthly, quarterly, or semi-
annually and may be subject to a floor. For each, the Company has provided the current contractual interest rate in effect at December 31, 2015. Interest rates listed are inclusive of
PIK, where applicable. PIK is interest paid in kind through an increase in the principal amount of the loan. The internal rate of return for many investments is generally greater than or
equal to the total coupon (additional yield resulting from original issue discounts and/or some form of profit sharing, e.g. warrants). In the event that the internal rate of return on the
investment is less than the stated rate, the lower rate is noted.
3 Loan to value (“LTV”) represents the value of the outstanding loan as a percentage of the estimated fair value of the underlying collateral as of December 31, 2015.
- 39 -
The Westaim Corporation
Year ended December 31, 2016
(Currency amounts in United States dollars unless otherwise indicated)
15. 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 the business and operations of HIIG and the Arena Group;
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: risks inherent in acquisitions generally; the
volatility of the stock market and other factors affecting the Company’s share price; future sales of a substantial number of the Company’s common
shares; the Company’s ability to generate revenue from its investments; the Company’s ability to raise additional capital; environmental risks;
regulatory requirements may delay or deter a change in control of the Company; fluctuations in the US$ to C$ exchange rate; the potential
treatment of the Company as a passive foreign investment company for U.S. federal income tax purposes; the occurrence of catastrophic events
including terrorist attacks and weather related natural disasters; the cyclical nature of the property and casualty insurance industry; HIIG’s ability to
adequately maintain loss reserves to cover its estimated liability for unpaid losses and loss adjustment expenses; 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; 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’s possible exposure to goodwill or intangible asset impairment in connection with its
acquisitions; HIIG’s ability to receive dividends from its subsidiaries; HIIG’s reliance on information technology and telecommunications systems;
dependence by HIIG on certain third party service providers; Arena’s limited operating history; Arena’s ability to mitigate operational and due
diligence risks; the subjective nature of the valuation methods for certain of Arena’s investments; Arena’s ability to mitigate regulatory and other
legal risks; Arena’s ability to find appropriate investment opportunities; Arena Investors’ ability to successfully navigate and secure compliance with
regulations applicable to it and its business; the performance of the investments of Arena; Arena’s investment in illiquid investments; Arena’s
ability to manage risks related to its risk management procedures; dependence by Arena on key management and staff; Arena Investors’ ability to
compete against current and potential future competitors; conflicts of interest; employee error or misconduct; Arena’s ability to finance borrowers in
a variety of industries; dependence by Arena Origination and Arena Finance on the creditworthiness of borrowers; the ability of Arena Origination
and/or Arena Finance to mitigate the risk of default by and bankruptcy of a borrower; the ability of Arena Origination and/or Arena Finance to
adequately obtain, perfect and secure loans; the ability of Arena Origination and/or Arena Finance to limit the need for enforcement or liquidation
procedures; the ability of Arena Origination and/or Arena Finance to protect against fraud; changes to the regulation of the asset-based lending
industry; United States tax law implications relating to the conduct of a U.S. trade or business; 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.
- 40 -
March 30, 2017
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 four 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
- 41 -
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, 2016 and December 31, 2015,
and the consolidated statements of (loss) profit and other comprehensive 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, 2016 and December 31, 2015, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants
Licensed Public Accountants
March 30, 2017
Toronto, Canada
- 42 -
The Westaim Corporation
Consolidated Statements of Financial Position
(thousands of United States dollars)
ASSETS
Cash and cash equivalents
Other assets (note 4)
Investments in private entities (note 5)
Investments in associates (note 5)
LIABILITIES
Accounts payable and accrued liabilities (note 6)
Site restoration provision (note 7)
Commitments and contingent liabilities (note 8)
SHAREHOLDERS' EQUITY
Share capital (note 9)
Contributed surplus (note 10)
Accumulated other comprehensive loss (note 2m)
Deficit
December 31
2016
December 31
2015
$
$
$
$
3,027
4,423
320,464
1,254
329,168
$
7,798
2,586
322,133
2,991
335,508
$
7,224
3,439
10,663
5,521
3,899
9,420
382,182
12,210
(2,227)
(73,660)
318,505
$
329,168
$
382,182
11,498
(2,227)
(65,365)
326,088
335,508
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
- 43 -
The Westaim Corporation
Consolidated Statements of (Loss) Profit and Other Comprehensive Loss
(thousands of United States dollars except share and per share data)
Year Ended December 31
2015
2016
Revenue
Investment income
Fee income (note 11)
Net results of investments
Unrealized (loss) gain on investments in private entities (note 5):
Unrealized loss on investments before foreign exchange
Unrealized foreign exchange gain on investments
Share of loss of associates (note 5)
Gain on other investments
Expenses
Salaries and benefits
General, administrative and other
Professional fees
Site restoration provision - (recovery) expense (note 7)
Share-based compensation (note 10)
Foreign exchange loss (gain)
(Loss) profit
(Loss) earnings per share - basic and diluted (note 13)
Weighted average number of common shares outstanding (in thousands)
Basic and diluted
(Loss) profit
Other comprehensive loss
Exchange differences on change in presentation currency
Comprehensive loss
The accompanying notes are an integral part of these consolidated financial statements
$
$
$
$
$
$
1,256
1,440
2,696
(1,669)
-
(2,376)
47
(3,998)
2,799
979
957
(547)
2,622
183
6,993
606
1,000
1,606
(3,099)
16,698
(1,046)
89
12,642
2,165
920
1,591
1,014
2,693
(1,775)
6,608
(8,295)
$
7,640
(0.06) $
0.08
143,187
94,660
(8,295)
$
7,640
-
(8,295)
$
(20,558)
(12,918)
- 44 -
The Westaim Corporation
Consolidated Statements of Changes in Equity
Year ended December 31, 2016
(thousands of United States dollars)
Share
Capital
Contributed
Surplus
Accumulated
Other
Comprehensive
Loss
Deficit
Total
Equity
Balance at January 1, 2016
$
382,182
$
11,498
$
(2,227)
$
(65,365)
$
326,088
Stock option plan expense (note 10)
Loss
-
-
712
-
-
-
-
(8,295)
712
(8,295)
Balance at December 31, 2016
$
382,182
$
12,210
$
(2,227)
$
(73,660)
$
318,505
Year ended December 31, 2015
(thousands of United States dollars)
Share
Capital
Contributed
Surplus
Accumulated
Other
Comprehensive
Income (Loss)
Deficit
Total
Equity
Balance at January 1, 2015
$
210,404
$
11,498
$
18,331
$
(73,005)
$
167,228
Share capital issued and paid (note 9)
Profit
Other comprehensive loss (note 2m)
171,778
-
-
-
-
-
-
-
(20,558)
-
7,640
-
171,778
7,640
(20,558)
Balance at December 31, 2015
$
382,182
$
11,498
$
(2,227)
$
(65,365)
$
326,088
The accompanying notes are an integral part of these consolidated financial statements
- 45 -
The Westaim Corporation
Consolidated Cash Flow Statements
(thousands of United States dollars)
Operating activities
(Loss) profit
Unrealized loss (gain) on investments in private entities
Share of loss of associates
Unrealized gain on other investments
Share-based compensation expense
Share-based compensation payments
Site restoration provision - (recovery) expense
Site restoration payments
Lease expense
Depreciation and amortization
Unrealized foreign exchange loss (gain)
Net change in other non-cash balances
Other assets
Accounts payable and accrued liabilities
Cash used in operating activities
Investing activities
Purchase of capital assets
Purchase of investments in private entities
Change in investments in associates
Purchase of other investments
Cash used in investing activities
Financing activities
Issuance of share capital, net of issuance costs
Cash provided from financing activities
Effect of exchange rate fluctuations on cash held
Net 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 composed of:
Cash
The accompanying notes are an integral part of these consolidated financial statements
Year Ended December 31
2015
2016
$
(8,295)
1,669
2,376
(47)
2,622
(273)
(547)
(15)
(44)
48
211
(1,769)
1
(4,063)
(69)
-
(639)
-
(708)
-
-
-
(4,771)
7,798
3,027
$
7,640
(13,599)
1,046
(5)
2,693
(336)
1,014
-
(87)
39
(359)
(235)
455
(1,734)
(14)
(231,562)
(4,037)
(1,870)
(237,483)
171,778
171,778
(4,854)
(72,293)
80,091
7,798
3,027
$
7,798
$
$
$
- 46 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
1
Nature of Operations
The Westaim Corporation (“Westaim” or 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
consolidated financial statements were authorized for issue by the Board of Directors of the Company on March 30, 2017.
Westaim is a Canadian investment company specializing in providing long-term capital to businesses operating primarily within the global
financial services industry. The Company’s principal investments consist of Houston International Insurance Group, Ltd. (through Westaim
HIIG Limited Partnership) and the Arena Group (as described in note 5). The Company’s common shares are traded on the TSX Venture
Exchange (the “TSXV”) under the symbol WED.
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Westaim Management
Limited Partnership (“Management LP”), Westaim Management GP Inc. (“Management GP”), Westaim HIIG GP Inc. (“HIIG GP”) and The
Westaim Corporation of America (“WCA”).
All currency amounts are expressed in thousands of United States dollars (“US$”) except per share data, unless otherwise indicated.
2
Summary of Significant Accounting Policies
The significant accounting policies used to prepare these consolidated financial statements are as follows:
(a) Basis of preparation
These consolidated financial statements are prepared in compliance with International Financial Reporting Standards (“IFRS”).
The Company meets the definition of an investment entity under IFRS 10 "Consolidated Financial Statements" ("IFRS 10") and measures its
investments in particular subsidiaries at fair value through profit or loss (“FVTPL”), instead of consolidating those subsidiaries in its
consolidated financial statements. Entities accounted for at FVTPL consist of Westaim HIIG Limited Partnership (the “HIIG Partnership”),
Arena Finance Company Inc. (“Arena Finance”) and Westaim Origination Holdings, Inc. (“Arena Origination”).
The financial statements of entities controlled by the Company which provide investment-related services are consolidated. These entities
consist of its wholly-owned subsidiaries, Management LP, Management GP, HIIG GP and WCA. The financial results of these entities are
included in the consolidated financial statements from the date that control commences until the date that control ceases. The Company
controls an entity when the Company has power over the entity, is exposed to, or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its power over the entity. Assessment of control is based on the substance of the
relationship between the Company and the entity and includes consideration of both existing voting rights and, if applicable, potential voting
rights that are currently exercisable and convertible. Intercompany balances and transactions are eliminated upon consolidation.
Investments in associates are accounted for using the equity method in accordance with International Accounting Standard (“IAS”) 28
“Investments in Associates and Joint Ventures” (“IAS 28”) and consist of investments in corporations or limited partnerships where the
Company has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control over these policies. The Company’s investments in associates consist of its investments in
Westaim Arena Holdings II, LLC (“WAHII”) (through WCA), Arena Special Opportunities Fund (Onshore) GP, LLC (“ASOF-ON GP”) (through
WCA), and Arena Special Opportunities Fund (Offshore) II GP, LP (“ASOF-OFF II GP”) (the “Associates”). These investments are reported
in investments in associates in the consolidated statements of financial position, with the Company’s share of profit (loss) and other
comprehensive income (loss) of the Associates reported under “Net results of investments” in the consolidated statements of (loss) profit and
other comprehensive loss.
(b) Functional and presentation currency
IAS 21 “The Effects of Changes in Foreign Exchange Rates” (“IAS 21”) describes functional currency as the currency of the primary
economic environment in which an entity operates. Following the completion of the Arena Transactions (as described in note 5), a significant
majority of the Company’s revenues and costs are earned and incurred in US$. As a result, the Company changed its functional currency
from Canadian dollars (“C$”) to US$, prospectively from the date of change of August 31, 2015.
- 47 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
On August 31, 2015, the Company also changed its presentation currency from C$ to US$. Comparative information for periods prior to
August 31, 2015 has been restated in US$ in accordance with IAS 21, using the following procedures:
Operating results were translated into US$ at the exchange rates prevailing at the dates of the transactions, or average rates where
Assets and liabilities were translated into US$ at period end exchange rates.
they are suitable proxies.
Share capital, contributed surplus and deficit were translated at the historic rates prevailing at the dates of the transactions.
Differences resulting from the translation of the opening net assets and the results for the periods have been included in other
comprehensive loss.
(c) 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.
(d) 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, applying the equity method of
accounting for associates, determining that the Company’s functional currency is the US$, site restoration provision and income taxes. For
additional information on these judgments, see note 5 for investments in private entities and associates, note 2(b) for functional currency,
note 7 for site restoration provision and note 12 for income taxes.
(e) Foreign currency translation
The US$ is the functional and presentation currency of the Company. Transactions in foreign currencies are translated into US$ at rates of
exchange prevailing at the time of such transactions. Monetary assets and liabilities in foreign currencies are translated into US$ at rates of
exchange at the end of the reporting period. Any resulting foreign exchange gain or loss is included in the consolidated statements of (loss)
profit and other comprehensive loss.
(f) 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 and management fees are recorded as fee income on an accrual basis when earned.
(g) 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.
(h) Capital assets
The Company’s capital assets are included in other assets and 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.
(i) Investments
The Company’s investments in private entities are classified as FVTPL and are carried at fair value. At initial recognition, investments in
private entities are measured at cost, which is representative of fair value, and subsequently, at each reporting date, recorded at fair value
with gains and losses arising from changes in fair values being recorded in the consolidated statements of (loss) profit and other
comprehensive loss for the period in which they arise. Transaction costs on the investments are expensed as incurred.
- 48 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
Investments in associates are initially recorded at cost and subsequently adjusted to recognize the Company’s share of profit (loss) and other
comprehensive income (loss) of the Associates and any dividends from the Associates. Transaction costs on the investments are expensed
as incurred.
Investments in financial assets and instruments that are not traded in an active market, including private entities, 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. 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 may include initial acquisition cost, net asset value,
discounted cash flow analysis, comparable recent arm’s length transactions, comparable publicly traded company metrics, reference to other
instruments that are substantially the same, option pricing models and other valuation techniques commonly used by market participants.
Any sale, size or other liquidity restrictions on the investment are also 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.
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 no market quotes
exist or where 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.
Management is responsible for performing fair value measurements included in the Company’s consolidated financial statements for each
quarter. The Company prepares a detailed valuation for each reporting period describing the valuation processes and procedures
undertaken by management. The applicable valuation memoranda are provided to members of the Company’s audit committee and all Level
3 valuation results are reviewed with the audit committee as part of its review of the Company’s consolidated financial statements.
(j) Income taxes
Income tax expense is recognized in the consolidated statements of (loss) profit and other comprehensive 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.
(k) 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 interest rates of a high quality government bond in
relation to the estimated cash outflows.
Future recoveries of costs resulting from indemnifications provided to the Company by previous owners of the industrial sites have not been
recognized in these consolidated financial statements. Recoveries of site restoration costs are recorded when received.
- 49 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
(l) 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 included in contributed surplus.
(m) Accumulated other comprehensive loss
Comprehensive income (loss) consists of profit (loss) and other comprehensive income (loss). Accumulated other comprehensive loss of
$2,227 at December 31, 2016 and 2015 comprised cumulative exchange differences from currency restatement as a result of a change in
presentation currency from the C$ to the US$ on August 31, 2015.
(n) Share-based compensation
The Company maintains share-based compensation plans, which are described in note 10. 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. Any
consideration paid by stock option holders for the purchase of stock is credited to share capital.
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 or recovery is recognized over the vesting period. When a change in
value occurs, it is recognized in share-based compensation and foreign exchange gain or loss in the applicable financial period.
(o) Earnings per share
Basic earnings per share is calculated by dividing profit or loss by the weighted average number of common shares outstanding during the
reporting period.
Diluted earnings per share is calculated by dividing profit or loss by the weighted average number of shares outstanding during the reporting
period after adjusting both amounts for the effects of all dilutive potential common shares, which consist of options and RSUs. Anti-dilutive
potential common shares are not included in the calculation of diluted earnings per share.
3
Accounting Pronouncements Issued but not yet Adopted
In November 2009, the International Accounting Standards Board (“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.
On May 28, 2014, the IASB and the Financial Accounting Standards Board (FASB) jointly issued a converged standard on the recognition of
revenue from contracts with customers, which will replace all existing revenue standards and interpretations, once mandatorily effective. The
core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts
that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will
also result in enhanced disclosures about revenue and provide guidance for transactions that were not previously addressed
comprehensively. Application of the standard is mandatory and it applies to nearly all contracts with customers. The main exceptions are
leases, financial instruments, insurance contracts and certain non-monetary exchange transactions. IFRS 15 “Revenue from Contracts with
Customers” (“IFRS 15”) is available for early application with mandatory adoption required for fiscal years commencing on or after January 1,
2018 and is to be applied using the retrospective or the modified retrospective approach. While the standards are largely converged, the
U.S. standard does not permit early adoption. The Company is currently assessing the impact of this new standard on its consolidated
financial statements.
- 50 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
3
Accounting Pronouncements Issued but not yet Adopted (continued)
On January 13, 2016, the IASB issued IFRS 16 “Leases” (“IFRS 16”) which will replace IAS 17 “Leases”. IFRS 16 will bring most leases on-
balance sheet for lessees under a single model, eliminating the distinction between operating and financing leases. Lessor accounting
however remains largely unchanged and the distinction between operating and finance leases is retained. The new standard is effective for
periods beginning on or after January 1, 2019 with early adoption permitted if IFRS 15 has also been applied. The Company is currently
assessing the impact of this new standard on its consolidated financial statements.
On June 20, 2016, the IASB issued amendments to IFRS 2 “Share-based Payment” (“IFRS 2”), clarifying the accounting for cash-settled
share-based payment transactions that include a performance condition, the classification of share-based payment transactions with net
settlement features for withholding tax obligations, and the accounting for modifications of share-based payment transactions from cash-
settled to equity-settled. The amendments are effective for annual periods beginning on or after January 1, 2018. The Company is currently
assessing the impact of these amendments on its consolidated financial statements.
4
Other Assets
Other assets consist of the following:
Capital assets
Investment in Arena Special Opportunities Fund, LP (a)
Receivables from related parties (b)
Accounts receivable and other
December 31, 2016
December 31, 2015
$
$
136
1,922
2,200
165
4,423
$
$
115
1,875
411
185
2,586
(a)
In connection with the Arena Transactions, on August 31, 2015 the Company acquired limited partnership interests in Lantern
Endowment Partners, L.P. (“Lantern”) from an entity affiliated with Daniel B. Zwirn, the Chief Executive Officer of the Arena Group, for $1,786
(the “Lantern Purchase”). On October 1, 2015, the assets of Lantern were transferred to Arena Special Opportunities Fund, LP (“ASOF LP”),
a fund managed by Arena Investors, at fair value and the Company’s investment in Lantern was correspondingly exchanged into an
investment in ASOF LP. For a description of Arena Investors, see note 5. The Company’s portfolio investment in ASOF LP is classified at
Level 3 of the fair value hierarchy and measured at FVTPL. At December 31, 2016 and 2015, the fair value of the Company’s interest in
ASOF LP was determined by Arena Investors to be $1,922 and $1,875, respectively. In the years ended December 31, 2016 and 2015, the
Company reported gains of $47 and $89, respectively, with respect to these investments in the consolidated statements of (loss) profit and
other comprehensive loss.
(b) Receivables from related parties totaled $2,200 at December 31, 2016 and $411 at December 31, 2015 and include certain expenses
paid by the Company on behalf of the Arena Group from time to time which are subject to reimbursement.
5
Investments in Private Entities and Associates
The Company’s principal investments consist of its investments in HIIG (through the HIIG Partnership) and the Arena Group. Investments in
private entities are measured at FVTPL and investments in associates are accounted for using the equity method.
Place of
establishment
Principal place
of business
Ownership interest
as at December 31, 2016
Ownership interest
as at December 31, 2015
Ontario, Canada
Ontario, Canada
Delaware, U.S.
Ontario, Canada
Ontario, Canada
New York, U.S.
58.5% owned by Westaim 1
100% owned by Westaim
100% owned by Westaim
58.5% owned by Westaim
100% owned by Westaim
100% owned by Westaim
Investments in private entities:
- HIIG Partnership
- Arena Finance
- Arena Origination
Investments in Associates:
- WAHII
Delaware, U.S.
New York, U.S.
- ASOF-ON GP
Delaware, U.S.
New York, U.S.
- ASOF-OFF II GP
Delaware, U.S.
New York, U.S.
51% beneficially owned by
Westaim, indirectly through WCA 2
51% beneficially owned by
Westaim, indirectly through WCA 2
51% beneficially owned by
Westaim 2
51% beneficially owned by
Westaim, indirectly through WCA 2
51% beneficially owned by
Westaim, indirectly through WCA 2
51% beneficially owned by
Westaim 2
1 On December 31, 2016, the Company transferred part of its ownership interest in the HIIG Partnership to Westaim HIIG Holdings Inc. (“HIIG Holdings”), a
newly incorporated wholly-owned subsidiary, at fair value. No book gain or loss was recorded upon the transfer. Following the transfer, the Company
continues to own, directly and indirectly through HIIG Holdings, 58.5% of the HIIG Partnership.
2 Legal equity ownership is 100%, and beneficial ownership denotes profit percentage subject to change over time pursuant to the earn-in rights granted to BP
LLC described below under “Investments in Associates”.
- 51 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
5
Investments in Private Entities and Associates (continued)
The HIIG Partnership, Arena Finance and Arena Origination are investment entities, as defined in IFRS 10, and account for their investments
in subsidiaries at FVTPL instead of consolidating them. The subsidiaries of the HIIG Partnership, Arena Finance and Arena Origination are
as follows:
HIIG Partnership:
- Houston International Insurance Group, Ltd.
(“HIIG”)
Arena Finance:
- Arena Finance Holdings Co., LLC (“AFHC”)
- Arena Finance National, LLC
- Arena Finance Global, LLC
- Arena Finance Markets GP, LLC
- Arena Finance Markets, LP
Arena Origination:
- Arena Origination Co., LLC (“AOC”)
Houston International Insurance Group, Ltd.
Place of
establishment
Principal place
of business
Ownership interest
as at December 31, 2016
Ownership interest
as at December 31, 2015
Delaware, U.S.
Texas, U.S.
74.6% owned by
HIIG Partnership
75.4% owned by
HIIG Partnership
Delaware, U.S.
New York, U.S.
Delaware, U.S.
Delaware, U.S.
Delaware, U.S.
Delaware, U.S.
New York, U.S.
New York, U.S.
New York, U.S.
New York, U.S.
100% owned by
Arena Finance
100% owned by AFHC
100% owned by AFHC
100% owned by AFHC
100% owned by AFHC
100% owned by
Arena Finance
100% owned by AFHC
100% owned by AFHC
n/a
n/a
Delaware, U.S.
New York, U.S.
100% owned by
Arena Origination
100% owned by
Arena Origination
The Company’s investment in HIIG (through the HIIG Partnership) is recorded as an investment in private entities and is measured at FVTPL
in the Company’s financial statements. See “Investments in Private Entities” below for a further description of the Company’s investment in
the HIIG Partnership.
Arena Group
On August 31, 2015, the Company established the following three businesses:
Arena Investors – WAHII, ASOF-ON GP and ASOF-OFF II GP (collectively, “Arena Investors”) were established to collectively operate
as an investment manager offering clients access to fundamentals-based, asset-oriented credit investments. The Company’s
investment in Arena Investors is accounted for using the equity method in the Company’s consolidated financial statements. See
“Investments in Associates” below.
Arena Finance – Arena Finance, through AFHC and AFHC’s subsidiaries, was set up as a specialty finance company to primarily
purchase fundamentals-based, asset-oriented credit investments for its own account. The Company’s investment in Arena Finance is
measured at FVTPL in the Company’s consolidated financial statements. See “Investments in Private Entities” below.
Arena Origination – Arena Origination, through AOC, was set up to facilitate the origination of fundamentals-based, asset-oriented
credit investments for its own account and/or possible future sale to Arena Finance, clients of Arena Investors and/or other third parties.
The Company’s investment in Arena Origination is measured at FVTPL in the Company’s consolidated financial statements. See
“Investments in Private Entities” below.
The establishment, capitalization and organization of Arena Investors, Arena Finance and Arena Origination are referred to as the “Arena
Transactions”; and Arena Investors, Arena Finance and Arena Origination and related entities are collectively referred to as the “Arena
Group”.
- 52 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
5
Investments in Private Entities and Associates (continued)
INVESTMENTS IN PRIVATE ENTITIES
The Company’s investments in private entities are classified as FVTPL and are carried at fair value in the consolidated statements of
financial position. Changes in fair value are reported under "Net results of investments" in the consolidated statements of (loss) profit and
other comprehensive loss.
The table below summarizes the fair value hierarchy under which the Company’s investments in private entities 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.
The Company’s investments in private entities are as follows:
As at December 31, 2016
Investments in private entities:
- HIIG Partnership
- Arena Finance
- Arena Origination
As at December 31, 2015
Investments in private entities:
- HIIG Partnership
- Arena Finance
- Arena Origination
Fair value
Level 1
Level 2
Level 3
$ 145,227
142,800
32,437
$ 320,464
$
Fair value
Level 1
$ 146,066
143,082
32,985
$ 322,133
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 145,227
142,800
32,437
$ 320,464
Level 3
$ 146,066
143,082
32,985
$ 322,133
Level 2
$
$
$
There were no transfers among Levels 1, 2 and 3 during the years ended December 31, 2016 and 2015.
Changes in investments in private entities included in Level 3 of the fair value hierarchy are as follows:
Year ended December 31, 2016
Investments in private entities:
- HIIG Partnership
- Arena Finance
- Arena Origination
Year ended December 31, 2015
Investments in private entities:
- HIIG Partnership
- Arena Finance
- Arena Origination
Opening
balance
Unrealized
loss
Ending
balance
$ 146,066
143,082
32,985
$ 322,133
$
$
(839)
(282)
(548)
(1,669)
$ 145,227
142,800
32,437
$ 320,464
Opening
balance
Additions
- Equity
Additions
- Debt
Unrealized
gain (loss)
Ending
balance
$ 93,670
-
-
$ 93,670
$ 50,637
146,585
17,340
$ 214,562
$
-
-
17,000
$ 17,000
$ 1,759
(3,503)
(1,355)
$ (3,099)
$ 146,066
143,082
32,985
$ 322,133
In the year ended December 31, 2016, the Company recorded an unrealized loss of $1,669 on its investments in private entities. In the year
ended December 31, 2015, the Company recorded an unrealized loss of $3,099 and an unrealized foreign exchange gain of $16,698 on its
investments in private entities.
- 53 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
5
Investments in Private Entities and Associates (continued)
Investment in Houston International Insurance Group, Ltd.
The Company indirectly owns a significant interest in HIIG, through the HIIG Partnership, an Ontario limited partnership managed by HIIG
GP, a wholly-owned subsidiary of Westaim. HIIG is a U.S. based diversified specialty insurance company providing coverage primarily in the
United States but also globally for certain risks.
At December 31, 2016, the Company owned, directly and indirectly, approximately 58.5% of the HIIG Partnership Units, representing an
approximate 43.7% indirect ownership interest in HIIG.
Westaim controls the HIIG Partnership through its ownership of approximately 58.5% of the Class A Units of the HIIG Partnership and
through its control of HIIG GP, the general partner of the HIIG Partnership; and the HIIG Partnership exercises control over HIIG and its
insurance subsidiaries through its ownership of approximately 74.6% of the issued and outstanding common shares of HIIG (“HIIG Shares”)
at December 31, 2016. 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 HIIG
Partnership. Payment of dividends from HIIG to the HIIG Partnership may also be restricted as a result of covenants in credit facilities
entered into by HIIG from time to time.
FVTPL
The investment in HIIG (through the HIIG Partnership) is accounted for at FVTPL. The fair value of the Company’s investment in the HIIG
Partnership was determined to be $145,227 at December 31, 2016 and $146,066 at December 31, 2015.
Management used net asset value as the primary valuation technique to arrive at the fair value of the Company’s investment in the HIIG
Partnership at December 31, 2016. The fair value of the HIIG Partnership at December 31, 2016 was derived from a valuation of the HIIG
Shares owned by the HIIG Partnership and other net assets of the HIIG Partnership at December 31, 2016. The carrying values of the HIIG
Partnership’s other net assets, consisting of monetary assets including cash and cash equivalents, accounts receivable, accounts payable
and accrued liabilities, approximate their fair values due to the short maturity of these financial instruments. In valuing the HIIG Shares,
using net asset value as the primary valuation technique, fair value was determined to be 1.0x the adjusted book value of HIIG, or 100% of
the adjusted HIIG stockholders’ equity, as at December 31, 2016. Management determined that this valuation technique produced the best
indicator of the fair value of the HIIG Shares as at December 31, 2016 as it was also used in a number of HIIG share transactions with arm’s
length third parties since August 1, 2014. This same basis of valuation was used to determine the fair value of the Company’s investment in
the HIIG Partnership of $146,066 at December 31, 2015.
The significant unobservable inputs used in the valuation were the multiple applied and the adjusted stockholders’ equity of HIIG as at
December 31, 2016. Management applied a multiple of 1.0x as this was also the multiple used to price significant prior HIIG treasury
transactions since the Company made its investment in HIIG (through the HIIG Partnership). The adjusted book value of HIIG as at
December 31, 2016 reflected 100% of HIIG stockholders’ equity obtained from the audited financial statements of HIIG for the year ended
December 31, 2016 prepared in accordance with United States generally accepted accounting principles (“US GAAP”), adjusted for a
reclassification of a receivable from employees relating to their purchase of HIIG Shares. The adjusted book value contained certain
significant judgments and estimates made by management of HIIG including the provision for loss and loss adjustment expenses (LAE), the
valuation of goodwill and intangible assets, and the valuation allowance recorded against deferred income tax assets.
Management considers other secondary valuation methodologies as a way to ensure no significant contradictory evidence exists that would
suggest an adjustment to the fair value as determined by the primary valuation methodology used. In order to do this, the Company may
also consider valuation techniques including the discounted cash flow method, the review of comparable arm’s length transactions involving
other specialty insurance companies and comparable publicly traded company valuations. For greater certainty, these secondary valuation
techniques were not used to arrive at the fair value of the Company’s investment in the HIIG Partnership at the end of each reporting period.
The Company recorded an unrealized loss of $839 and an unrealized gain of $18,457 on its investment in the HIIG Partnership in the years
ended December 31, 2016 and 2015, respectively. The unrealized gain in the year ended December 31, 2015 included an unrealized foreign
exchange gain of $16,698, resulting from a strengthening of the US$ against the C$ prior to the adoption of the US$ as the Company’s
functional currency on August 31, 2015.
For purposes of assessing the sensitivity of HIIG stockholders’ equity on the valuation of the Company’s investment in the HIIG Partnership,
if HIIG stockholders’ equity at December 31, 2016 was higher by $1,000, the fair value of the Company’s investment in the HIIG Partnership
at December 31, 2016 would have increased by approximately $437 (December 31, 2015 - $441) and the unrealized loss on investments in
private entities for the year ended December 31, 2016 would have decreased by approximately $437 (2015 - $441). If HIIG stockholders’
equity at December 31, 2016 was lower by $1,000, an opposite effect would have resulted.
- 54 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
5
Investments in Private Entities and Associates (continued)
Investment in Arena Finance and Arena Origination
The Company owns a 100% interest in Arena Finance, a specialty finance company, and Arena Origination, a specialty finance origination
company, that form part of the Arena Group. Through its ownership of all of the common shares of Arena Finance and Arena Origination,
Westaim exercises control over each of these businesses.
On August 31, 2015, the Company completed the Arena Transactions and capitalized Arena Finance in the amount of $146,585 in the form
of equity and Arena Origination in the amount of $34,340, consisting of $17,340 in the form of equity and $17,000 in the form of a term loan.
The loan to Arena Origination has a seven year term to August 31, 2022, is unsecured and carries interest at a rate of 7.25% per annum,
with interest due on January 1 of each year during the term.
In connection with the Arena Transactions, on August 31, 2015, Arena Finance and Bernard Partners, LLC (“BP LLC”), a limited liability
company controlled by certain members of the Arena Group management team, entered into a limited liability company agreement in respect
of AFHC (the “AFHC LLC Agreement”) under which BP LLC was issued Class M units of AFHC which are convertible into Class A units,
entitling BP LLC to acquire an equity interest of up to 20% (16.67% on a fully-diluted basis) in AFHC. The Class M units vest equally over 5
years from August 31, 2015 and carry pre-determined escalating conversion prices which are in excess of the price paid by the Company for
its investment in AFHC (through Arena Finance). A similar agreement was entered into between Arena Origination and BP LLC with respect
to AOC. No Class M units were converted into Class A units in the year ended December 31, 2016.
FVTPL
The investments in Arena Finance and Arena Origination are accounted for at FVTPL and are included in investments in private entities in
the consolidated statements of financial position. The fair values of the Company’s investments in Arena Finance and Arena Origination
were determined to be $142,800 and $32,437, respectively, at December 31, 2016 and $143,082 and $32,985, respectively, at December
31, 2015.
Management used net asset value as the primary valuation technique and determined that 100% (or 1.0x) of the shareholder’s equity of
Arena Finance at December 31, 2016 in the amount of $142,800 approximated the fair value of the Company’s investment in Arena Finance;
and 100% (or 1.0x) of the shareholder’s equity of Arena Origination at December 31, 2016 in the amount of $15,437 and the fair value of the
term loan of $17,000, totaling $32,437, approximated the fair value of the Company’s investment in Arena Origination. Management
determined that this valuation technique produced the best indicator of the fair value of Arena Finance and Arena Origination at December
31, 2016. This same basis of valuation was used to determine the fair value of the Company’s investments in Arena Finance and Arena
Origination of $143,082 and $32,985, respectively, at December 31, 2015.
The significant unobservable inputs used in the valuation of Arena Finance and Arena Origination at December 31, 2016 were the
shareholder’s equity of each of the entities at December 31, 2016 and the multiple applied. Management applied a multiple of 1.0x as the
shareholder’s equity of Arena Finance and Arena Origination reflected the net assets of the respective entity which were carried at fair value
at December 31, 2016, as described below. The shareholder’s equity contained certain significant judgments and estimates made by
management of Arena Finance and Arena Origination, including the determination of the fair value of their subsidiaries’ investments as noted
below.
The carrying values of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities of
Arena Finance and Arena Origination and their subsidiaries approximate their fair values due to the short maturity of these financial
instruments. The subsidiaries of Arena Finance and Arena Origination also make investments in equity securities, corporate bonds, private
loans and other private investments, warrants and derivative instruments. When an investment is acquired or originated, its fair value is
generally the value of the consideration paid or received. Subsequent to initial recognition, the subsidiaries of Arena Finance and Arena
Origination determine the fair value of the investments using the following valuation techniques and inputs:
Equity securities that are actively traded on a securities exchange are valued based on quoted prices from the applicable exchange.
Equity securities traded on inactive markets and certain foreign equity securities are valued using significant other observable inputs, if
available, and include broker quotes or evaluated price quotes received from pricing services. If the inputs are not observable or timely,
the values of these securities are determined using valuation methodologies for Level 3 investments described below.
- 55 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
5
Investments in Private Entities and Associates (continued)
Corporate bonds are valued using various inputs and techniques, which include third-party pricing services, dealer quotations, and
recently executed transactions in securities of the issuer or comparable issuers. Adjustments to individual bonds can be applied to
recognize trading differences compared to other bonds issued by the same issuer. Values for high-yield bonds are based primarily on
pricing services and dealer quotations from relevant market makers. The dealer quotations received are supported by credit analysis of
the issuer that takes into consideration credit quality assessments, daily trading activity, and the activity of the underlying equities, listed
bonds, and sector-specific trends. If these inputs are not observable or timely, the values of corporate bonds and convertible bonds are
determined using valuation methodologies for Level 3 described below.
Private loans and other private investments are valued using valuation methodologies for Level 3 investments. When valuing private
loans, factors evaluated include the impact of changes in market yields, credit quality of the borrowers and estimated collateral values.
If there is sufficient credit coverage, a yield analysis is performed by projecting cash flows for the instrument and discounting the cash
flows to present value using a market-based, risk adjusted rate. On each valuation date, an analysis of market yields is also performed
to determine if any adjustments to the fair values are necessary. Techniques used to value collateral, real estate, and other hard
assets include discounted cash flows, with the discount rate being the primary unobservable input, recent transaction pricing and third
party appraisals. Private investments held through joint ventures are valued net of each respective joint venture waterfall and other
joint venture assets and liabilities.
Warrants that are actively traded on a securities exchange are valued based on quoted prices. Warrants that are traded over-the-
counter or are privately issued are valued based on observable market inputs, if available. If these inputs are not observable or timely,
the values of warrants are determined using valuation methodologies for Level 3 described below.
Listed derivative instruments, such as listed options, that are actively traded on a national securities exchange are valued based on
quoted prices from the applicable exchange. Derivative instruments that are not listed on an exchange are valued using pricing inputs
observed from actively quoted markets. If the pricing inputs used are not observable and/or the market for the applicable derivative
instruments is inactive, the values of the derivative instruments are determined using valuation methodologies for Level 3 investments
described below.
Where pricing inputs are unobservable and there is little, if any, market activity for Level 3 investments, fair values are determined by
management of the subsidiaries of Arena Finance and Arena Origination using valuation methodologies that consider a range of factors,
including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading
values on public exchanges for comparable securities, current and projected operating performance and financing transactions subsequent
to the acquisition of the investment. The inputs into the determination of fair value may require significant judgment by management of the
subsidiaries of Arena Finance and Arena Origination. Due to the inherent uncertainty of these estimates, these values may differ materially
from the values that would have been used had a ready market for these investments existed.
Management considers other secondary valuation methodologies as a way to ensure no significant contradictory evidence exists that would
suggest an adjustment to the fair value as determined by the primary valuation methodology used. In order to do this, the Company may
also consider valuation techniques including the review of comparable arm’s length transactions involving other specialty finance companies
and comparable publicly traded company valuations. For greater certainty, these secondary valuation techniques were not used to arrive at
the fair values of the Company’s investments in Arena Finance and Arena Origination at the end of each reporting period.
The Company recorded unrealized losses of $282 and $3,503 on its investment in Arena Finance in the years ended December 31, 2016
and 2015, respectively, and $548 and $1,355 on its investment in Arena Origination in the years ended December 31, 2016 and 2015,
respectively. The operating results of Arena Origination included interest expense paid to the Company on the term loan of $1,233 and $411
in the years ended December 31, 2016 and 2015, respectively.
For purposes of assessing the sensitivity of the shareholder’s equity of Arena Finance and Arena Origination on the valuation of the
Company’s investment in these entities which are wholly-owned by the Company, if the shareholder’s equity of either Arena Finance or
Arena Origination at December 31, 2016 was higher by $1,000, the fair value of the Company’s investment in the respective entity at
December 31, 2016 would have increased by $1,000 and the unrealized loss on investments in private entities for the year ended December
31, 2016 would have decreased by approximately $1,000. If the shareholder’s equity of either Arena Finance or Arena Origination at
December 31, 2016 was lower by $1,000, an opposite effect would have resulted.
- 56 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
5
Investments in Private Entities and Associates (continued)
INVESTMENTS IN ASSOCIATES
The Company’s investments in associates consist of its investment in Arena Investors, including the Company’s indirect investment in WAHII
(through WCA), ASOF-ON GP (through WCA), and its direct investment in ASOF-OFF II GP. WAHII is the sole limited partner of Arena
Investors, LP, a limited partnership established under the laws of Delaware to carry on the third-party investment management business of
the Arena Group.
In connection with the completion of the Arena Transactions, agreements were entered into between the Company (through WCA) and BP
LLC in respect of WAHII and ASOF-ON GP and between Westaim and BP LLC in respect of ASOF-OFF II GP (the “Associate Agreements”).
BP LLC’s initial profit sharing percentage is 49%, and under the Associate Agreements, BP LLC has the right to earn-in up to 75% equity
ownership percentage in the Associates and share up to 75% of the profits of the Associates based on achieving certain assets under
management (AUM) and cashflow (measured by the margin of trailing twelve months earnings before interest, income taxes, depreciation
and amortization to trailing twelve month revenues) thresholds in accordance with the Associate Agreements.
The Company concluded that based on the contractual rights and obligations under the Associate Agreements, the Company exercises
significant influence over the Associates. The Company’s investments in the Associates are therefore accounted for using the equity method
in accordance with IAS 28.
The following summarized financial information, which is in compliance with IFRS, represents amounts shown in the financial statements of
the Associates:
As at December 31, 2016
Financial information of Associates:
Assets
Liabilities
Net liabilities
Company’s share
Advances to Associates
Carrying amount of the Company’s interest in Associates
As at December 31, 2015
Financial information of Associates:
Assets
Liabilities
Net liabilities
Company’s share
Advances to Associates
Carrying amount of the Company’s interest in Associates
WAHII
Other associates
Total
$
$
$
$
7,209
(13,652)
(6,443)
(3,158)
4,415
1,257
$
$
$
$
165
(171)
(6)
(3)
-
(3)
WAHII
Other associates
$
$
$
$
4,241
(6,292)
(2,051)
(1,046)
4,037
2,991
$
$
$
$
4
(4)
-
-
-
-
$
$
$
$
$
$
$
$
7,374
(13,823)
(6,449)
(3,161)
4,415
1,254
Total
4,245
(6,296)
(2,051)
(1,046)
4,037
2,991
Year ended December 31, 2016
Other
associates
Total
WAHII
Year ended December 31, 2015
Other
associates
Total
WAHII
Financial information of Associates:
Fee income
Unrealized gain on investments
Transaction costs
Operating expenses
(Loss) income and
other comprehensive (loss) income
Company’s share of (loss) profit
of Associates (51%)
$
$ 8,696
-
-
(13,348)
-
160
-
(168)
$ 8,696
160
-
(13,516)
$ 3,112
-
(1,158)
(4,005)
$
4
-
-
(4)
$ 3,116
-
(1,158)
(4,009)
$ (4,652)
$
(8)
$ (4,660)
$ (2,051)
$
$ (2,372)
$
(4)
$ (2,376)
$ (1,046)
$
-
-
$ (2,051)
$ (1,046)
- 57 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
5
Investments in Private Entities and Associates (continued)
On June 30, 2016, the Company made an additional equity investment of $260 in Arena Investors. The carrying amount of the Company’s
investments in the Associates was $1,254 at December 31, 2016 and $2,991 at December 31, 2015. The total of the Company’s 51% share
of losses of the Associates was $2,376 and $1,046 in the years ended December 31, 2016 and 2015, respectively, and was reported under
“Net results of investments” in the consolidated statements of (loss) profit and other comprehensive loss.
6
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
December 31, 2016
December 31, 2015
Liabilities related to:
RSUs
DSUs
Other accounts payable and accrued liabilities
Ending balance
$
$
5,353
832
1,039
7,224
$
$
3,809
630
1,082
5,521
7
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:
Opening balance
Changes due to:
Expenditures
Estimates of future expenditures
Inflation
Passage of time and discount rates
Exchange adjustment
Ending balance
Year ended December 31
2016
$
3,899
2015
$
3,456
(401)
18
89
(268)
102
3,439
$
-
489
151
374
(571)
3,899
$
In the year ended December 31, 2016, the Company made a payment of $401 for site restoration expenditures relating to the
indemnifications. Of these expenditures, the Company was reimbursed $385 pursuant to indemnifications provided to the Company by
previous owners of the industrial sites. The payment was recorded as a reduction of the site restoration provision and the reimbursement
was included as a recovery in the consolidated statements of (loss) profit and other comprehensive loss.
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, 2016.
To calculate the site restoration provision, the estimated cash outflows were adjusted for inflation and discounted to December 31, 2016. 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 1.76% (December 31, 2015 - 1.72%) per annum over the next 100 years. Discount rates are based on risk free rates which
range from 0.6% to 2.3% (December 31, 2015 - 0.5% to 2.1%) 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, 2016.
8
Commitments and Contingent Liabilities
(a)
In connection with a $10 million revolving loan facility granted by AFHC to the Associates on September 28, 2016 to fund the working
capital needs of Arena Investors, the Company has provided a limited recourse guaranty to AFHC pledging as security for the loan
facility its ownership interests in the Associates.
(b) The Company has operating leases in Toronto with remaining lease terms of up to 4 years. At December 31, 2016, the Company had
a total commitment of $899 for future occupancy cost payments including payments due not later than one year of $308 and payments
due later than one year but not later than four years of $591.
- 58 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
8
Commitments and Contingent Liabilities (continued)
(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.
9
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. Changes to the Company’s share capital are as follows:
Year ended
December 31, 2016
Year ended
December 31, 2015
Common shares
Opening balance
Issued
Share issuance costs
Recovery of share issuance costs
Ending balance
Number
143,186,718
-
-
-
143,186,718
Stated Capital
$ 382,182
-
-
-
$ 382,182
Number
70,297,342
72,889,376
-
-
143,186,718
Stated Capital
$ 210,404
179,150
(9,904)
2,532
$ 382,182
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, 2016 and 2015.
Equity Financing Related to the Arena Transactions
In order to provide funding to Arena Finance and Arena Origination, and capitalize and fund the start-up costs of the Arena Group (see note
5), on May 28, 2015 the Company sold, on a private placement basis, 65,296,993 special warrants of the Company (the “Special Warrants”)
at a price of C$3.25 per Special Warrant (the “2015 Offering”). Each Special Warrant was deemed to be exercisable into one subscription
receipt of Westaim (each, a “2015 Subscription Receipt”), without further consideration or action, and each 2015 Subscription Receipt
entitled the holder to receive upon the deemed conversion thereof one common share of Westaim subject to adjustment, without further
consideration or action. An additional 6,823,152 Special Warrants were also sold pursuant to a concurrent non-brokered private placement
of Special Warrants on the same terms as the 2015 Offering (the “2015 Concurrent Private Placement”). The 2015 Concurrent Private
Placement included subscriptions by members of the Company's Board of Directors and management team.
Concurrent with closing of the 2015 Offering and the 2015 Concurrent Private Placement, the Company entered into a subscription
agreement with Daniel B. Zwirn, pursuant to which Mr. Zwirn irrevocably agreed to subscribe for 769,231 common shares of Westaim at a
price of C$3.25 per share (the “Zwirn Subscription”).
On August 31, 2015, the Company issued an aggregate of 72,120,145 additional common shares of the Company for aggregate gross
proceeds of $177,259 upon the deemed conversion of the 2015 Subscription Receipts issued on the deemed exercise of all the Special
Warrants. The Company used the proceeds of the 2015 Offering, the 2015 Concurrent Private Placement, and cash on hand to capitalize
Arena Finance and Arena Origination in the amounts of $146,585 and $34,340, respectively. See note 5 for additional information on the
Arena Transactions. The Company also completed the Zwirn Subscription and an additional 769,231 common shares of the Company were
issued to Mr. Zwirn on August 31, 2015 for aggregate gross proceeds of approximately $1,891. At December 31, 2016 and 2015, the
Company had a total of 143,186,718 common shares issued and outstanding.
The proceeds from the 2015 Offering, the 2015 Concurrent Private Placement and the Zwirn Subscription to the Company was $169,246, net
of share issuance costs of $9,904.
Share Issuance Costs
On February 25, 2015, the Company received from HIIG a reimbursement of $2,532 in share issuance costs in connection with the
Company’s common share private placement in 2014, the proceeds from which were used, in part, to make the Company’s initial investment
in HIIG (through the HIIG Partnership). The amount was recorded as an increase in the Company’s share capital in the year ended
December 31, 2015.
- 59 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
10 Share-based Compensation
The Company’s long-term equity incentive plan (the “Incentive Plan”) provides for grants of RSUs, DSUs, stock appreciation rights and other
share-based awards. The Company also has a stand-alone incentive stock option plan (the “Option Plan”).
At the annual and special meeting of shareholders of the Company held on May 12, 2016, the shareholders approved amendments to the
Incentive Plan which, among other things, increased the maximum number of common shares which may be issued under the Incentive Plan
from 7,042,150 to 14,318,671. The Option Plan is a “rolling plan” which provides that the aggregate number of common shares which may
be reserved for issuance under the Option Plan is limited to not more than 10% of the aggregate number of common shares outstanding.
However, each of the Incentive Plan and the Option Plan provide that under no circumstances shall there be common shares issuable under
such plan, together with all other security-based compensation arrangements of the Company, which exceed 10% of the aggregate number
of common shares outstanding.
Stock Options - Changes to the number of stock options are as follows:
Common share stock options
Opening balance
Granted
Expired
Ending balance
Options exercisable at end of year
Year ended December 31, 2016
Year ended December 31, 2015
Number
3,000
2,752,940
(1,000)
2,754,940
2,000
Weighted Average
Exercise Price
C$
C$
C$
C$
C$
144.00
3.25
309.00
3.29
61.50
Number
5,000
-
(2,000)
3,000
3,000
Weighted Average
Exercise Price
C$
C$
C$
C$
C$
158.80
-
181.00
144.00
144.00
Information on stock options outstanding and exercisable at December 31, 2016 is as follows:
As at
December 31, 2016
Exercise prices
C$
3.25
C$ 61.50
Number of
stock options
outstanding
2,752,940
2,000
2,754,940
Weighted Average
Remaining
Contractual Life
(years)
6.25
0.13
6.24
Weighted Average
Exercise Price
C$
C$
C$
3.25
61.50
3.29
Number of
stock options
exercisable
-
2,000
2,000
Exercisable
Weighted Average
Exercise Price
C$
C$
C$
-
61.50
61.50
On April 1, 2016, 2,752,940 options were granted to certain officers and employees of the Company. The options have a term of seven
years, vest in three equal instalments on April 1, 2017, April 1, 2018 and April 1, 2019, and have an exercise price of C$3.25.
In the year ended December 31, 2016, compensation expense relating to options was $712, with an offsetting increase to contributed
surplus. The fair value of the options granted by the Company on April 1, 2016 is estimated using the Black-Scholes option pricing model
assuming no dividends are paid on common shares, a risk-free interest rate of 0.61%, an average life of 4.0 years and a volatility of 46.49%.
The amounts computed according to the Black-Scholes pricing model may not be indicative of the actual values realized upon the exercise of
these options by the holders.
Restricted Share Units - RSUs vest on specific dates and are payable when vested with either cash or common shares of the Company, at
the option of the holder. 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.
Changes to the number of RSUs are as follows:
Opening balance
Granted
Exercised
Ending balance
Year ended December 31
2016
2,209,563
925,198
(52,688)
3,082,073
2015
2,375,000
-
(165,437)
2,209,563
On November 14, 2014, an aggregate of 2,375,000 RSUs were granted to certain officers, employees and consultants. At December 31,
2016, 2,152,343 of these RSUs (90.6%) had vested, of which 218,125 units (9.2%) had been exercised and 1,934,218 units (81.4%) were
outstanding. The remaining 222,657 RSUs (9.4%) vest evenly over 5 months after December 31, 2016.
- 60 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
10 Share-based Compensation (continued)
On April 1, 2016, an additional 925,198 RSUs were granted to certain officers and employees of the Company. These RSUs vest in three
equal instalments on April 1, 2017, April 1, 2018 and December 31, 2018. At December 31, 2016, none of these RSUs had vested.
In the years ended December 31, 2016 and 2015, 52,688 RSUs and 165,437 RSUs were exercised for cash payments of C$2.55 per RSU
and C$2.78 per RSU, respectively, and the RSU liability was correspondingly reduced by $105 and $336, respectively.
Compensation expense relating to RSUs was $1,555 and $2,274 for the years ended December 31, 2016 and 2015, respectively. At
December 31, 2016, a liability of $5,353 (December 31, 2015 - $3,809) had been accrued with respect to outstanding RSUs in the
consolidated statements of financial position.
Deferred Share Units - DSUs are issued to certain directors of the Company in lieu of director fees, at their election, at the market value of
the Company’s common shares at the date of grant and are paid out in cash no later than the end of the calendar year following the year the
participant ceases to be a director.
Changes to the number of DSUs are as follows:
Opening balance
Granted
Exercised
Ending balance
Year ended December 31
2016
319,465
146,961
(67,695)
398,731
2015
113,200
206,265
-
319,465
In the year ended December 31, 2016, 146,961 DSUs were issued as payment of director fees (41,519 at a price of C$2.80, 44,447 at a
price of C$2.70, 31,132 at a price of C$2.59 and 29,863 at a price of C$2.70). On February 2, 2015, 91,138 DSUs were issued at a price of
C$2.99 to settle a liability of $235 relating to director fees accrued at December 31, 2014. In the year ended December 31, 2015, an
additional 115,127 DSUs were issued as payment of director fees (33,199 DSUs at a price of C$2.73, 33,484 DSUs at a price of C$2.80,
24,446 at a price of C$3.26 and 23,998 at a price of C$3.36).
In the year ended December 31, 2016, 67,695 DSUs were exercised for a cash payment of C$3.33 per DSU, and the DSU liability was
correspondingly reduced by $168.
Compensation expense relating to DSUs was $355 and $419 for the years ended December 31, 2016 and 2015, respectively. At December
31, 2016, a liability of $832 (December 31, 2015 - $630) had been accrued with respect to outstanding DSUs in the consolidated statements
of financial position.
11 Related Party Transactions
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 current and former directors of the Company.
Compensation expenses related to the Company’s key management personnel are as follows:
Salaries and benefits
Share-based compensation
Year ended December 31
2016
2,441
2,537
4,978
$
$
2015
1,918
2,365
4,283
$
$
Fees paid to Hartford Consulting, Inc. (the “Consultant”), a company owned by William R. Andrus, a director of HIIG, for insurance industry
related consulting services were $136 and $141 in the years ended December 31, 2016 and 2015, respectively. Compensation expense
relating to RSUs issued to the Consultant was $42 and $171 for the years ended December 31, 2016 and 2015, respectively, and the
amounts were included in the consolidated statements of (loss) profit and other comprehensive loss under share-based compensation
expense. During the year ended December 31, 2015, the Consultant exercised 115,937 RSUs for a cash payment of C$2.78 per RSU, or
$233. At December 31, 2016, a liability of $120 (December 31, 2015 - $76) had been accrued in the consolidated statements of financial
position with respect to outstanding RSUs held by the Consultant.
- 61 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
11 Related Party Transactions (continued)
On September 28, 2016, AFHC granted a $10 million revolving loan facility to the Associates to fund the working capital needs of Arena
Investors. The loan facility has a term of 36 months and bears interest at a rate of 5.25% per annum. At December 31, 2016, WAHII had
drawn down the loan facility by $2,000. Interest on the outstanding loan from September 28, 2016 to December 31, 2016 was $26. The
Company has provided a limited recourse guaranty to AFHC pledging as security for the loan facility its ownership interests in the
Associates.
On May 28, 2015, pursuant to the 2015 Concurrent Private Placement, 6,823,152 Special Warrants were sold at a price of C$3.25 per
Special Warrant to members of the Company's Board of Directors and management team, a shareholder of HIIG and members of the future
Arena Group management team as well as to HIIG and certain HIIG subsidiaries for portfolio investment purposes, on terms equivalent to the
other participants in the 2015 Concurrent Private Placement. See note 9 for additional information on the 2015 Concurrent Private
Placement. On August 31, 2015, an aggregate of 6,823,152 additional common shares of the Company were issued under the 2015
Concurrent Private Placement upon the deemed conversion of the 2015 Subscription Receipts issued on the deemed exercise of all the
Special Warrants. The aggregate gross proceeds from the 2015 Concurrent Private Placement to the Company was $16,770.
On August 31, 2015, the Company completed the Lantern Purchase (see note 4) and the Zwirn Subscription (see note 9), and 769,231
common shares of the Company were issued to Mr. Zwirn at C$3.25 per share for aggregate gross proceeds of $1,891.
On August 31, 2015, the Company provided $17,000 in funding to Arena Origination in the form of an unsecured term loan (see note 5). The
Company earned and received interest on the loan of $1,233 and $411 in the years ended December 31, 2016 and 2015, respectively.
The Company earned advisory fees from HIIG of $1,000 in each of the years ended December 31, 2016 and 2015.
In the year ended December 31, 2015, the Company received from HIIG a reimbursement of $2,532 in share issuance costs (see note 9).
The amount was recorded as an increase in the Company’s share capital in the year ended December 31, 2015.
12
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 are as follows:
Unrealized loss (gain) on investments in private entities
Non-capital loss carry-forwards
Year ended December 31
2016
211
(211)
-
$
$
$
2015
(1,826)
1,826
-
$
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, 2016
$
40,734
5,204
16,747
337
6,248
December 31, 2015
$
20,697
5,049
16,876
1,016
6,960
- 62 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
12
Income Taxes (continued)
The unrecognized non-capital losses and investment tax credits will expire at various times to the end of 2036, as follows:
Non-capital losses by year of expiry:
2027
2028
2029
2030
2031
2033
2034
2035
2036
$
$
3,138
6,739
76
188
15,616
2,852
3,634
3,178
5,313
40,734
Investment tax credits by year of expiry:
2017
2018
2019
2020
2021
Beyond 2021
$
$
2,203
661
716
613
479
1,576
6,248
The following is a reconciliation of income taxes calculated at the statutory income tax rate to the income tax expense included in the
consolidated statements of (loss) profit and other comprehensive loss:
(Loss) profit before income tax
Statutory income tax rate
Income taxes at statutory income tax rate
Variations due to:
Non-allowable (non-taxable) portion of unrealized
loss (gain) on investments in private entities
Tax losses allocated from the HIIG Partnership
Non-deductible items
Difference between statutory and foreign tax rates
Unrecognized temporary differences
Unrecognized (recognized) tax losses
Income tax expense
Year ended December 31
2016
$ (8,295)
26.5%
(2,198)
211
(16)
189
(640)
(1,359)
3,813
-
$
2015
$ 7,640
26.5%
2,025
(1,826)
(25)
51
(320)
484
(389)
-
$
13 Earnings per Share
The Company had 2,754,940 stock options and 3,082,073 RSUs outstanding at December 31, 2016 and 3,000 stock options and 2,209,563
RSUs outstanding at December 31, 2015. The stock options and RSUs were excluded in the calculation of diluted earnings per share for the
years ended December 31, 2016 and 2015 as they were not dilutive.
14 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 HIIG 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.
- 63 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2016 and 2015
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
15 Financial Risk Management
The Company is exposed to a number of risks due to its business operations. The Company’s consolidated statement of financial position at
December 31, 2016 consists of short-term financial assets and financial liabilities with maturities of less than one year, investments in private
entities and associates 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 Schedule 1 banks in Canada and a major bank in the United States.
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 and associates 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, 2016, the Company had no debt and its financial assets, excluding investments in private entities and associates, were
higher than its financial liabilities, resulting in minimal liquidity risk. At December 31, 2016, the Company’s short-term financial liabilities
amounted to $1,039.
Currency risk
The Company maintains certain cash balances in C$ and has other C$ denominated monetary assets and liabilities. A 10% strengthening of
the C$ against the US$ would have increased the foreign exchange loss for the year ended December 31, 2016 by approximately $716. A
similar weakening of the C$ would have resulted in an opposite effect.
The Company has not entered into any hedging with respect to currencies.
Interest rate risk
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. The Company is subject to interest rate risks indirectly as a
result of its investments in HIIG (through the HIIG Partnership), Arena Finance and Arena Origination as certain underlying investments
made by these entities are sensitive to interest rate movements.
Equity risk
There is no active market for the Company’s investments in HIIG (through the HIIG Partnership) and the Arena Group. The Company holds
these investments for strategic and not trading purposes. As such, the Company’s exposure to equity risk is nominal.
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SHAREHOLDER INFORMATION
BOARD OF DIRECTORS
Stephen R. Cole 1, 2, 3, 5, 6
J. Cameron MacDonald
Lead Director, The Westaim Corporation
President, Seeonee Inc.
Senior Advisor to Duff & Phelps Canada Limited
Ian W. Delaney 3
Executive Chairman, The Westaim Corporation
John W. Gildner 1, 2, 3, 4
Independent Businessman
President and Chief Executive Officer, The Westaim Corporation
Peter H. Puccetti 2, 3
Chairman, Chief Executive Officer and Chief Investment Officer,
Goodwood Inc.
Bruce V. Walter 1, 2, 3
Chairman, Nunavut Iron Ore, Inc.
Vice Chair, Centerra Gold 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
4. Chair of the Audit Committee
5. Chair of the Human Resources and Compensation Committee
6. Chair of the Nominating and Corporate Governance Committee
The Westaim Corporation Annual and Special Meeting of Shareholders
Thursday May 18th, 2017 10:00 A.M. EDT
St. Andrew’s Club and Conference Centre
150 King Street West, Sun Life Financial Tower
S3/S4 Inverness Room, 27th Floor
Toronto, Ontario M5H 1J9
CORPORATE INFORMATION
STOCK INFORMATION
OFFICES
Ian W. Delaney
Executive Chairman
Traded on the TSX Venture Exchange
under the symbol WED
J. Cameron MacDonald
Shares issued and outstanding
President and Chief Executive Officer
at December 31, 2016 were 143,186,718
The Westaim Corporation, Corporate Office
70 York Street, Suite 1700
Toronto, Ontario M5J 1S9
The Westaim Corporation of America
405 Lexington Avenue, 59th Floor
New York, New York 10174
Robert T. Kittel
Chief Operating Officer
Glenn G. MacNeil
Chief Financial Officer
Joseph A. Schenk
Managing Director
TRANSFER AGENT
CONTACT INFORMATION
Computershare Trust Company of Canada
600, 530 – 8th Avenue SW
Calgary, Alberta T2P 3S8
Tel: 1-800-564-6253
E-mail: service@computershare.com
Tel: (416) 969-3333
Fax: (416) 969-3334
E-mail: info@westaim.com
www.westaim.com
- 65 -
THE WESTAIM CORPORATION
70 York Street, Suite 1700
Toronto, Ontario, Canada
M5J 1S9
www.westaim.com
info@westaim.com