THE WESTAIM CORPORATION
ANNUAL REPORT 2019
THE WESTAIM CORPORATION
ANNUAL REPORT 2019
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
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8
45
46
49
53
74
74
All currency amounts are in United States dollars, unless otherwise indicated.
Dear Shareholders,
LETTER TO SHAREHOLDERS
Dear Fellow Shareholder:
The Westaim Corporation (“Westaim” or the “Company”) continues to execute on our stated goal of partnering with and building
profitable and sustainable businesses with aligned management teams, and we enter 2020 well positioned for continued growth.
As a measure of Westaim’s performance, internally we have historically looked at the growth in fully diluted book value per share
(“FDBVPS”) as a reasonable measure. Naturally the startup of the Arena Group and the significant initial investments that we
have made to put this business in a position to scale impacted the short term growth of our FDBVPS, especially in the initial
startup phase from Q3 2015 – Q4 2016 (when Arena as a group turned profitable for the first time). The following chart shows
FDBVPS and Westaim’s share price quarterly since Q2 2014:
- 1 -
FDBVPSFDBVPSShare PriceShare Price(US$)(C$)(US$)(C$)2014 - Q2$2.00$2.13$3.00$3.202014 - Q3(1)2.36 2.64 2.68 3.00 2014 - Q42.34 2.71 2.63 3.05 2015 - Q12.33 2.95 2.65 3.36 2015 - Q22.33 2.91 2.61 3.26 2015 - Q3(2)2.31 3.09 2.09 2.80 2015 - Q42.27 3.14 1.97 2.73 2016 - Q12.28 2.96 2.08 2.70 2016 - Q22.24 2.91 1.99 2.59 2016 - Q32.22 2.91 2.06 2.70 2016 - Q4(3)2.21 2.97 2.09 2.80 2017 - Q12.23 2.97 2.01 2.68 2017 - Q22.24 2.91 2.45 3.17 2017 - Q32.27 2.83 2.39 2.98 2017 - Q4(4)2.33 2.92 2.48 3.11 2018 - Q12.35 3.03 2.20 2.83 2018 - Q22.37 3.12 2.45 3.22 2018 - Q32.40 3.10 2.48 3.21 2018 - Q42.42 3.30 1.89 2.58 2019 - Q12.49 3.33 1.92 2.57 2019 - Q22.55 3.34 2.03 2.65 2019 - Q32.56 3.39 1.89 2.50 2019 - Q42.48 3.22 2.04 2.65 H2 201417.2%27.4%-12.3%-4.7%FY 2015-3.0%15.7%-25.0%-10.5%FY 2016-2.6%-5.5%5.7%2.6%FY 20175.4%-1.5%18.9%11.1%FY 20183.9%13.0%-23.8%-17.0%FY 20192.5%-2.5%7.9%2.7%CAGR Since Q2 20144.0%7.8%-6.8%-3.4%Notes:(1) Closed equity capital raise to complete HIIG acquisition at C$2.65 per share.(2) Closed equity capital raise to fund Arena business at C$3.25 per share.(3) Arena Group turns earnings positive; HIIG completes restructuring of its claims department.(4) Valuation of HIIG increased from 1.0x ABVPS to 1.1x ABVPS at December 31, 2017.
In chart form, you can visually see the progression of FDBVPS over this period:
As can clearly be seen in the table and chart above, Westaim has been successful in growing FDBVPS in US$ for each quarter
since the end of 2016, with the notable exception of Q4 2019. In early 2020, Houston International Insurance Group, Ltd. (“HIIG”)
signed a commitment letter in respect of a loss portfolio transfer (“LPT”) transaction (described below under the HIIG Section),
which is designed to mitigate the potential impact of adverse development on prior period loss and loss adjustment expense
(“LAE”) reserves. This LPT transaction will result in an after-tax charge expected to be $34.3 million for HIIG when it closes, which
is expected to be in the first half of 2020. Westaim reflected its share of the expected cost of the LPT in its valuation of HIIG as
at December 31, 2019, which impacted our FDBVPS growth in the quarter. For the full year 2019, FDBPVS growth in US$ grew
by 2.5% despite this charge.
Below is a report card on the performance of each of our businesses in 2019, and their market positioning entering 2020 and
beyond.
HIIG
HIIG achieved solid results for the year ended December 31, 2019. Highlights included:
Gross written premiums were $878.3 million compared to $696.9 million for the year ended December 31, 2018, an increase
of 26%. The Company experienced growth in premiums across all segments, particularly its commercial and specialty
segments.
Net written premiums were $421.7 million compared to $300.5 million for the year ended December 31, 2018, an increase of
40%. This growth was due to the growth in gross written premiums in all segments, combined with an overall increase in net
premium retention by the Company.
- 2 -
BVPS Share Price US$ CAGR Since Q2 2014 4.0% -6.8% C$ CAGR Since Q2 2014 7.8% -3.4% 1.60 1.80 2.00 2.20 2.40 2.60 2.80Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16Sep-16Dec-16Mar-17Jun-17Sep-17Dec-17Mar-18Jun-18Sep-18Dec-18Mar-19Jun-19Sep-19Dec-19Mar-200.4x0.6x0.8x1.0x1.2x1.4x1.6xBVPS (US$)P/BVPS
Underwriting performance, as measured by the Company’s combined ratio, was 98.4% for the year ended December 31, 2019
compared to 99.5% in the prior year. While an overall improvement from 2018, the Company continued to experience adverse
development of prior period loss and LAE claims reserves of $13.9 million pre-tax in 2019 versus $5.8 million in 2018.
HIIG’s investment portfolio achieved excellent performance in 2019, producing a 7.6%1 pre-tax Total Return including both
realized and unrealized gains. This return was assisted by a non-recurring gain on a strategic investment of approximately
$9.3 million pre-tax. Excluding this gain, the total return would have been 6.3%1. Asset allocation as at December 31, 2019
(excluding restricted cash), reflected a barbell portfolio with a high weighting in short term, high quality fixed income securities
(34%) and cash and short term investments (40%), combined with a small equity and strategic investments allocation (11%)
and an allocation to Arena Investors (15%). Overall, the portfolio entered 2020 with a very short duration. HIIG retains an
independent investment advisory firm to provide manager, performance and capital efficiency analysis.
Net income after-tax was $32.3 million compared to $20.9 million for the year ended December 31, 2018. This net income,
combined with unrealized gains on HIIG’s fixed income portfolio recorded under other comprehensive income, resulted in
stockholders’ equity growing to $370.2 million at the end of the year, an increase of 12% from $329.9 million as at December
31, 2018.
During 2018, the property and casualty insurance industry began to experience hardening market conditions with both pricing and
terms strengthening. We believe that HIIG began to meaningfully benefit from these improved conditions in 2019, and is
positioned to continue to do so moving forward. Earlier this year, Marsh Global Analytics stated that global commercial insurance
prices have increased for nine consecutive quarters with the fourth quarter of 2019 increasing 10.6%, the largest year-over-year
increase since 2012.
With the backdrop of favorable insurance industry conditions, in early 2020 the HIIG board of directors approved two transactions
designed to put HIIG in the best possible position to take advantage of current opportunities, improve its solid financial position
and allow for the continued profitable growth of its business. These transactions include:
LPT Transaction: HIIG has been evaluating the prospect of an LPT transaction to help minimize future prior period adverse
loss and LAE reserve development. An LPT transaction is typically designed to mitigate the potential impact of adverse
development of prior period loss and LAE reserves. In February 2020, HIIG entered into a commitment letter for an LPT
transaction with respect to claims reserves for certain divisions, primarily related to 2017 and prior policy years. The closing
of the LPT is subject to regulatory approval and is currently expected in the second quarter of 2020. HIIG is expected to record
an expense of $34.3 million after-tax in the first half of 2020. Westaim’s share of this charge was reflected in Westaim’s Q4
2019 valuation of HIIG.
Rights Offering: In March 2020, HIIG’s board of directors approved a rights offering designed to raise up to $100 million
exclusively from existing direct and indirect shareholders to subscribe on a pro rata basis for Series A Convertible Preferred
Shares that will be convertible at the option of the holder into HIIG common shares. The Preferred Shares will be convertible
into HIIG common shares at a conversion price of $1.74 and will be subject to adjustment from time-to-time based on the
occurrence of certain events. Westaim plans to subscribe for Preferred Shares to the extent of our pro rata ownership of HIIG
common shares of 44%, or approximately $44 million. Additional details regarding the rights offering are included in the notes
to our audited financial statements enclosed herein and available on SEDAR at www.sedar.com.
As the world has become rapidly aware in March 2020, the onset of COVID-19 has caused considerable angst in the global
community and its potential economic impact has caused high levels of volatility in world financial markets. After a considered
review, HIIG does not believe it has material exposure to the impacts of the pandemic under the policies of insurance it currently
has in force. However, particularly in March 2020, considerable volatility experienced in the global financial markets has resulted
in unrealized losses on the public equity securities portion of HIIG’s investment portfolio, which portfolio represented approximately
1 Total Return is equal to the aggregate of net investment income, net unrealized gains on equity securities, net realized (losses) gains, and a
gain on strategic investment less investment related expenses divided by the quarterly average investment portfolio outstanding for the period.
- 3 -
9% of the total investment portfolio as at December 31, 2019. These unrealized losses are expected to impact HIIG’s reported
net income (loss) for the 2020 fiscal year, unless a recovery in the equity markets, and particularly HIIG’s portfolio of equity
securities, is experienced during the remainder of the year. It is HIIG’s strategy and intention to hold and measure its equity
investments over the long term in accordance with its investment strategy.
Arena Group
The Arena Group is primarily comprised of two different investments: (i) Arena Investors, LP (“Arena”) which is a U.S. based
global investment manager focused on credit-oriented opportunities; and (ii) the Arena FINCOs, representing Westaim’s
proprietary capital invested using Arena’s investment strategy.
Arena FINCOs
Westaim’s proprietary capital of approximately $205.8 million as at December 31, 2019 which is held within the Arena FINCOs
achieved overall gross returns (before fees, interest, expenses and income taxes) of approximately 11.5% in 2019 (13.0% in
2018)2. Returns net of interest, fees and other operating expenses, but before income taxes, were approximately 7.0% in 2019
(8.1% for 2018)2.
Arena Investors
Arena’s team of experienced professionals continues to build their business with specialized skills and strong sourcing capabilities
that all contribute to Arena’s unique performance. In keeping with prior years, the 2019 core portfolio was highly diversified, non-
correlated, loan-to-value of 66% (or less), with tight covenants, an average remaining duration of 2 years and an average coupon
of 13%. This performance consistency (with minimal leverage) is reflected in the 2019 results noted above.
Summary of Arena’s Firm-wide Core Holdings at December 31, 2019 (1)
# Positions
Top Attachment
Point(2)
Current LTV
Coupon
Average Remaining
Duration(3)
Corporate Private Credit
Real Estate Private Credit
Commercial
& Industrial Assets
Structured Finance
Consumer Assets
28
29
21
5
18
Weighted Average/Total
101
13%
5%
1%
13%
0%
6%
66%
66%
11.3%
11.5%
2.3 years
1.0 years
60%
16.2%
1.7 years
74%
76%
66%
14.4%
15.3%
13%
2.5 years
3.0 years
2.0 years
2 Gross Returns are calculated and compounded monthly and include the aggregate of investment income, gains (losses) on investments, and
deal expenses (“Gross Income”) divided by the beginning of month net assets (adjusted for any intra month dividends which are prorated for
the number of days excluded from net assets during the month) for the Arena FINCOs (“Adjusted Net Assets”). Net Returns, also calculated
and compounded monthly, include Gross Income less interest expense, fees, and other operating expenses of the Arena FINCOs divided by
the Adjusted Net Assets for the Arena FINCOs.
- 4 -
Summary of Exited Holdings since Arena’s launch in October 2015
# Positions
Top Attachment
Point(2)
Closing
LTV
Coupon
Average Loan Term(4)
Corporate Private Credit
Real Estate Private Credit
Commercial
& Industrial Assets
Structured Finance
Consumer Assets
Weighted Average/Total
29
21
15
5
4
74
4%
5%
39%
56%
11.9%
12.3%
1.3 years
1.2 years
10%
74%
13.8%
1.5 years
0%
0%
5%
57%
56%
52%
13.5%
14.4%
12.6%
1.4 years
1.6 years
1.4 years
(1)
Portfolio characteristics summarize privately negotiated illiquid investments currently or previously held by Arena’s core strategy as of December 31, 2019. In addition, Arena has invested
in liquid investments including convertible structured investments summarized as "Corporate Securities" and other illiquid investments in Arena’s income strategy which are not listed herein.
Top Attachment Point refers to the highest average dollar-weighted position with respect to each borrower’s capital structure for each investment position.
(2)
(3) Weighted average remaining duration is calculated on applicable investments. For those investments that do not allow for a traditional duration calculation (for reasons that include, but are
not limited to, irregular cash flows, additional fundings, no stated maturity date, etc.), this value represents expected remaining weighted average life.
Average loan term refers to the weighted average time between the funding date and exit date in years.
(4)
It is always pleasant to be recognized by your industry peers and on February 12, 2020, Alt Credit Fund Intelligence US Awards
awarded the Arena Special Opportunities Fund, LP an investment fund managed by Arena, the Best Distressed Credit / Special
Situations Award. This is the third major industry award for Arena in as many years.
Defining Arena’s competitive advantage can be described in three distinct categories:
1. Mandate flexibility which allows the asset-backed credit portfolio to be uncorrelated and highly diversified by industry, strategy
and geography.
2. Sourcing ability which produces a “pipeline” that is deep and vast. As highlighted in the diagram below, in 2019, Arena’s
investment team reviewed ~10,000+ potential investments from around the globe, across all sectors, eventually funding 76.
3. Proprietary IT system which provides a highly systematic advantage to administer credit positions for evaluation, ongoing
monitoring, control and audit.
- 5 -
Arena’s committed assets under management (“AUM”), $1.3 billion as of December 31, 2019, continue to grow as does their
pipeline of possible and interested new investors. Parag Shah and his team have materially improved Arena’s communication
and increased the profile of the firm through a variety of publications, conferences, media events, speaking engagements and
industry awards. Bulleted below are a few examples where Arena was publicly featured in 2019 all contributing to expanding the
firms awareness and unique skill sets.
Financial Times
Absolute Return
Kayo Conference – Women’s Energy Summit Alternative Sources of Capital
Bloomberg TV – US, Asia, Europe
White Paper: This Time Is Different, but It Will End the Same Way
Institutional Investor
Grant’s Interest Rate Observer
Alt Credit Interview
Private Debt Investor
The Journal of Fixed Income
Bloomberg Businessweek
AIMA Conference
Forbes 30 Under 30
The global volatility of Q1 2020 has occurred incredibly quickly and can be unsettling. It is worthwhile to refresh a few common
themes and to address how Arena is positioned and executing.
Arena has from its start been a “global chaser of illiquidity”. They are not a middle market fund, a collateralized loan obligation
(“CLO”) or a business development company. Arena originates credit situations where they can take process risk – not value
risk. They are a dedicated, focused team based in New York City and London, UK, with offices in San Francisco and Melbourne,
Australia and a recently opened Jacksonville, Florida office focusing on asset surveillance and operations, as well as
approximately 40 exclusive joint venture relationships.
Over the last several years, Arena was not involved in many of the investment crazes that morphed into fashionable credit and
investment bubbles – whether they are geared toward retail customers (bitcoin, opportunity zones, cannabis) or institutions (middle
market corporate private lending, CLO equity, marketplace loan buying). Arena maintains a diversified portfolio of assets and
loans where they are generally first in the capital stack, short duration (typically around two years) and charging rates that
represent as great a percentage of the cash flow or value of an asset as they can negotiate – typically a targeted 17-18% base
case gross underwritten IRR at inception.
- 6 -
Is Arena or anybody fully impervious to a situation like that through which we are currently passing? Of course not. And Arena
may end up owning a few more companies and assets to which they originally lent, and they will do so without being gratuitous
or overtly aggressive.
Dan Zwirn said to many of us going back a few years: “There’s a storm coming, and we are building an ark”. Importantly,
Arena has taken no macro view, have not invested in situations that require a “greater fool” to take them out, have little
financing recourse or otherwise, has 100% of its capital fully asset-liability matched, and is open for business – as usual.
******************************************************
As we publish this Annual Letter in March 2020, the significant global market volatility has heightened concerns among all business
owners and their stakeholders. Westaim believes that on balance, HIIG and Arena are well-positioned and we are not aware of
any material issues or concerns. The global response to COVID-19 is unprecedented with economic consequences that will
certainly affect us all, with circumstances constantly changing. We will update our views if and when appropriate.
Westaim remains of the view that as HIIG and Arena continue to build and strive to achieve continued profitable growth, this
should provide Westaim options to deploy capital, options which could include share buybacks and/or dividends. To be clear, we
review and consider the attractiveness of these options on a continual basis as we focus on building the business over the long
term.
Yours truly,
J. Cameron MacDonald
President and Chief Executive Officer
- 7 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
TABLE OF CONTENTS
1.
THE COMPANY
2. OVERVIEW OF PERFORMANCE
3.
4.
INVESTMENTS
FINANCING
5. ANALYSIS OF FINANCIAL RESULTS
6. 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. NON-GAAP MEASURES
16. CAUTIONARY NOTE REGARDING FUTURE ORIENTED FINANCIAL INFORMATION
The “Company” in this Management’s Discussion and Analysis (“MD&A”) refers to The Westaim Corporation (“Westaim”) on a consolidated basis. This
MD&A, which has been approved by the Board of Directors of Westaim, should be read in conjunction with the Company’s audited annual consolidated
financial statements including notes for the years ended December 31, 2019 and 2018 as set out on pages 49 to 73 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, 2019 and 2018 and is
intended to enable the reader to assess the Company’s results of operations for the three months and year ended December 31, 2019 and financial
condition as at December 31, 2019. 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$”), the functional and presentation currency of the
Company, except per share data, unless otherwise indicated. Canadian dollars are referenced as C$. The following commentary is current as of March
26, 2020. Additional information relating to the Company is available on SEDAR at www.sedar.com. Certain comparative figures have been
reclassified to conform to the presentation of the current year, and certain totals, subtotals and percentages may not reconcile due to rounding.
During the fourth quarter of 2019, management moved investments in ASOF LP (hereinafter defined) from other assets to investments and reduced the
number of businesses reported under the Arena Group (hereinafter defined) to Arena Investors (hereinafter defined) and Arena FINCOs (hereinafter
defined) to simplify and improve the comparability of investment results. Comparative figures have been reclassified to conform to the presentation of
the current period. See Section 3, Investments of this MD&A
IFRS for Investment Entities
The Company qualifies as an investment entity under IFRS and uses fair value as the key measure to monitor and evaluate its primary investments.
The Company reports its financial results in accordance with IFRS applicable to investment entities.
Functional and Presentation Currency
The US$ is the functional and presentation currency of the Company. International Accounting Standard 21 “The Effects of Changes in Foreign
Exchange Rates” describes functional currency as the currency of the primary economic environment in which an entity operates. A significant majority
of the Company’s revenues and costs are earned and incurred in US$, respectively.
Non-GAAP Measures
The Company 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 the Company'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 contained in Section 15, Non-GAAP Measures of this MD&A.
- 8 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(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, 2019 and 2018 (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 the Company’s historical financial statements including the notes thereto and the
related MD&A as well as the Company’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 annual financial statements of the Arena Group for the years ended December 31, 2019 and 2018 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 the Company’s historical financial statements including the notes thereto and the
related MD&A as well as the Company’s other public filings.
During the fourth quarter of 2019, management consolidated the Arena Group’s financial information into Arena FINCOs (defined hereinafter) and Arena
Investors (defined hereinafter) to simplify and improve the comparability of the Arena Group’s results. Comparative figures have been reclassified to
conform to the presentation of the current period.
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 26, 2020 for its fiscal year ended December 31, 2019 which is available on SEDAR at www.sedar.com. Please refer to Section 16, Cautionary
Note Regarding Future Oriented Financial Information of this MD&A.
- 9 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(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 HIIG (through 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
2018
2019
Year ended December 31
2018
2019
Revenue
Net results of investments
Net recovery of expenses (expenses)
Income tax expense
Profit (loss) and comprehensive income (loss)
Earnings (loss) per share – basic
Earnings (loss) per share – diluted
At December 31:
Shareholders’ equity
Number of common shares outstanding
Book value per share - in US$ 1
Book value per share - in C$ 1
$
$
$
$
$
4.5
(14.4)
(2.2)
(0.9)
$
1.1
2.4
3.2
-
$
9.2
10.2
(9.9)
(0.9)
(13.0)
$
6.7
$
8.6
$
4.5
16.5
(4.1)
-
16.9
(0.09)
(0.09)
$ 0.05
$ 0.04
$
$
$
354.8
143,186,718
2.48
3.22
$
$
$
345.2
143,186,718
2.42
3.30
$
$
$
$
$
0.06
0.06
$ 0.12
$ 0.11
354.8
143,186,718
2.48
3.22
$
$
$
345.2
143,186,718
2.42
3.30
1 Non-GAAP measure. See Section 15, Non-GAAP Measures of this MD&A. Period end exchange rates: 1.29865 at December 31, 2019 and 1.36430 at December
31, 2018.
Three months ended December 31, 2019 and 2018
The Company reported a loss and comprehensive loss of $13.0 million for the three months ended December 31, 2019 (2018 - profit and
comprehensive profit of $6.7 million).
Revenue for the three months ended December 31, 2019 of $4.5 million (2018 - $1.1 million) consisted of interest income of $0.4 million (2018 -
$0.8 million), dividend income paid to the Company from the Arena FINCOs (as hereinafter defined) of $3.8 million (2018 - $nil), and advisory fees
of $0.3 million (2018 - $0.3 million).
Net results of investments were a loss of $14.4 million for the three months ended December 31, 2019 (2018 - gain of $2.4 million), consisting of
an unrealized loss from the Company’s investments in private entities of $10.4 million less dividends paid to the Company of $3.8 million (2018 -
gains of $1.8 million less dividends of $nil), an unrealized gain on other investments of $nil million (2018 - $0.1 million) and the Company’s share
of loss of its associates (as hereinafter defined) of $0.2 million (2018 - profit of $0.5 million).
Net expenses for the three months ended December 31, 2019 of $2.2 million (2018 - net recovery of expenses of $3.2 million) consisted of
salaries and benefits of $1.0 million (2018 - $0.9 million), general, administrative and other expenses of $0.1 million (2018 - $nil), professional fees
of $0.2 million (2018 - $0.1 million), site restoration provision recovery of $1.4 million (2018 - provision of $0.5 million), share-based compensation
of $0.8 million (2018 - recovery of $0.9 million), a foreign exchange loss of $0.6 million (2018 - gain of $0.8 million), interest on preferred securities
of $0.5 million (2018 - $0.5 million) and an unrealized loss resulting from a change in the fair value of the vested Warrants (as hereinafter defined)
of $0.4 million (2018 - gain of $3.5 million).
The Company reported income tax expense for the three months ended December 31, 2019 of $0.9 million (2018 - $nil).
Years ended December 31, 2019 and 2018
The Company reported a profit and comprehensive income of $8.6 million for the year ended December 31, 2019 (2018 - $16.9 million).
- 10 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
2. OVERVIEW OF PERFORMANCE (continued)
Revenue for the year ended December 31, 2019 of $9.2 million (2018 - $4.5 million) consisted of interest income of $2.1 million (2018 - $3.1
million), dividend income paid to the Company from the Arena FINCOs of $4.7 million (2018 - $nil) and advisory fees of $2.4 million (2018 - $1.4
million).
Net results of investments were a gain of $10.2 million for the year ended December 31, 2019 (2018 - $16.5 million), consisting of unrealized gains
from the Company’s investments in private entities of $14.7 million less dividends paid to the Company of $4.7 million (2018 - $17.5 million less
dividends of $nil), an unrealized gain on other investments of $0.2 million (2018 - $0.2 million) and the Company’s share of loss of its associates
(as hereinafter defined) of $nil (2018 - $1.2 million).
Net expenses for the year ended December 31, 2019 of $9.9 million (2018 - $4.1 million) consisted of salaries and benefits of $3.7 million (2018 -
$3.7 million), general, administrative and other expenses of $1.0 million (2018 - $0.9 million), professional fees of $1.0 million (2018 - $0.9 million),
site restoration provision of $0.3 million (2018 - $0.1 million), share-based compensation of $1.5 million (2018 - $1.6 million), a foreign exchange
loss of $1.1 million (2018 – gain of $1.2 million), interest on preferred securities of $1.9 million (2018 - $1.9 million) and an unrealized gain
resulting from a change in the fair value of the vested Warrants (as hereinafter defined) of $0.6 million (2018 - $3.8 million).
The Company reported income tax expense for the year ended December 31, 2019 of $0.9 million (2018 - $nil).
3.
INVESTMENTS
The Company’s investments in private entities and associates are included under investments in the consolidated statements of financial position.
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:
Investments in private entities:
- HIIG Partnership
- Arena FINCOs (as
hereinafter defined)
Investment in associates:
- Arena Investors (as
hereinafter defined)
Place of
establishment
Principal place
of business
Ownership interest
as at December 31, 2019
Ownership interest
as at December 31, 20181
Ontario, Canada
Ontario, Canada/
Delaware, U.S.3
Ontario, Canada
Ontario, Canada/
New York, U.S.3
62.0% owned by the Company2
100% owned by the Company
58.5% owned by the Company
100% owned by the Company
Delaware, U.S.
New York, U.S.
51% beneficially owned the
Company 4
51% beneficially owned the
Company 4
1 Adjusted to conform to the presentation of the current year.
2 On July 1, 2019, HIIG Partnership units held by certain unitholders were redeemed in accordance with the terms of the HIIG Partnership and exchanged for
shares of HIIG resulting in an increase in the Company’s ownership interest in the HIIG Partnership from 58.5% to 62.0% and a decrease in the HIIG Partnership’s
ownership of HIIG shares from 75.1% to 71.0%. The Company’s indirect ownership of HIIG (through the HIIG Partnership) remained unchanged at approximately
44.0%.
3 In 2019, the Arena FINCOs’ Canadian entity was dissolved and two new entities were established in Delaware, U.S with the principal place of business in New
York, U.S.
4 Legal equity ownership is 100%, and beneficial ownership denotes profit percentage subject to change over time pursuant to the earn-in rights granted to Bernard
Partners, LLC (“BP LLC”) described below 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 26, 2020 for its fiscal
year ended December 31, 2019 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 holding company that underwrites select property, casualty, surety, and accident
and health insurance coverages through its insurance subsidiaries. The Company’s investment in HIIG (through the HIIG Partnership) is recorded
in investments in private entities included under investments in the Company’s consolidated financial statements.
- 11 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Arena Group
The Arena Group consists of the following businesses:
Arena Investors – Westaim Arena Holdings II, LLC (“WAHII”), through its subsidiaries, operates as an investment manager offering clients
access to fundamentals-based, asset-oriented credit investments. In 2018, Arena Investors included the Company’s investment in WAHII,
ASOF-ON GP, and ASOF-OFF II GP. Effective January 1, 2019, the Company and BP LLC, transferred their interests in ASOF-ON GP and
ASOF-OFF II GP, respectively to WAHII. 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. The Company’s investment in Arena
Investors is accounted for using the equity method and consists of investments in corporations or limited partnerships where the Company
has significant influence.
The Arena FINCOs – The Arena FINCOs include specialty finance companies that primarily purchase fundamentals-based, asset-oriented
credit investments for their own account and a company that facilitates the origination of fundamentals-based, asset-oriented credit
investments for its own account and/or possible future sale to specialty finance companies, clients of Arena Investors and/or other third
parties. The Company’s investments in the Arena FINCOs are recorded as investments in private entities included under investments in the
Company’s consolidated financial statements.
Arena Investors and the Arena FINCOs are collectively referred to as “Arena” or the “Arena Group”.
The following chart illustrates a simplified organizational structure of the Arena Group:
The Westaim Corporation
(“ Westaim”)
100%
The Westaim Corporation of
America
(“ WCA”)
51 % (1)
Westaim Arena Holdings II,
LLC (“WAHII”)
100%
Westaim Origination
Holdings , Inc.
(“WOH”)
100%
Arena Origination Co., LLC
(“AOC”)
100%
Arena Finance Holdings Co.,
LLC (“AFHC”)
100%
Arena Finance, LLC
(“ AF”)
Arena Investors
The Arena FINCOs
The Arena Group
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 described under “Investment in the Arena Group - Arena Investors”.
- 12 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3. INVESTMENTS (continued)
For a detailed discussion of the business of the Arena Group, see the Company’s Annual Information Form dated March 26, 2020 for its fiscal year
ended December 31, 2019 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) and the Arena FINCOs.
The Company 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, 2019 and 2018, 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 6 to the Company’s
audited annual consolidated financial statements for the years ended December 31, 2019 and 2018.
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 profit and comprehensive income.
Changes in the Company’s investments in private entities are summarized as follows:
(millions)
Investments in private entities:
- HIIG Partnership
- Arena FINCOs 2
Three months ended December 31, 2019
Three months ended December 31, 20181
Opening
Balance
Additions
- Equity
Repayment
of term
loan
Unrealized
gain/(loss)
before
dividends
Dividends
paid
Ending
balance
Opening
balance
Unrealized
gain/(loss)
Ending
Balance
$ 178.1
206.9
$ 385.0
$
$
-
-
-
$
$
-
-
-
$ (13.1)
2.7
$ (10.4)
$
$
-
(3.8)
(3.8)
$ 165.0
205.8
$ 370.8
$
$
162.8
196.2
359.0
$
$
(0.7)
2.5
1.8
$
$
162.1
198.7
360.8
1 Adjusted to conform to the presentation of the current year.
2 Prior to January 1, 2019, ownership subject to the vesting and conversion of Class M units held by BP LLC described under “Investment in the Arena Group – The Arena
FINCOs”. On December 31, 2018, the Company redeemed all M units.
(millions)
Investments in private entities:
- HIIG Partnership
- Arena FINCOs 2
Opening
Balance
Additions
- Equity
Year ended December 31, 2019
Repayment
of term
loan
Unrealized
gain before
dividends
Year ended December 31, 20181
Dividends
paid
Ending
balance
Opening
balance
Unrealized
gain/(loss)
Ending
Balance
$ 162.1
198.7
$ 360.8
$
-
10.0
$ 10.0
$
-
(10.0)
$ (10.0)
$
2.9
11.8
$ 14.7
$
$
-
(4.7)
(4.7)
$ 165.0
205.8
$ 370.8
$
$
157.1
186.2
343.3
$
5.0
12.5
$ 17.5
$
$
162.1
198.7
360.8
1 Adjusted to conform to the presentation of the current year.
2 Prior to January 1, 2019, ownership subject to the vesting and conversion of Class M units held by BP LLC described under “Investment in the Arena Group – The Arena
FINCOs”. On December 31, 2018, the Company redeemed all M units.
Changes in the Company’s investment in associates are summarized as follows:
(millions)
Investment in associates
Opening balance
Additions – Arena Investors Revolving Loan (as hereinafter defined)
Share of gain (loss)
Ending balance
Three months ended December 31
2018
2019
Year ended December 31
2018
2019
$
$
12.5
-
(0.2)
12.3
$
9.3
0.8
0.5
$
$
10.6
$
10.6
1.7
-
12.3
$
$
8.0
3.8
(1.2)
10.6
A. INVESTMENT IN HIIG
At December 31, 2019, the HIIG Partnership owned approximately 71.0% of the common shares of HIIG (“HIIG Shares”). The Company owned
approximately 62.0% of the HIIG Partnership, representing an approximate 44.0% 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.
- 13 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(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 $165.0 million at December 31, 2019 and $162.1 million at December 31, 2018.
Management used a multiple of net asset value as the primary valuation technique to arrive at the fair value of the Company’s investment in the
HIIG Partnership of $165.0 million at December 31, 2019. The fair value of the HIIG Partnership at December 31, 2019 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, 2019. The carrying
values of the HIIG Partnership’s other net assets, consisting of monetary assets including cash and accounts receivable less accounts payable
and accrued liabilities, approximate their fair values due to the short maturity of these financial instruments. In valuing the HIIG Shares,
management determined that using net asset value as the primary valuation technique produced the best indicator of the fair value of the HIIG
Shares as at December 31, 2019 and 2018, given that this is the valuation technique which a market participant would employ.
On February 25, 2020 HIIG executed a commitment letter to enter into a loss portfolio transfer (“LPT”) reinsurance agreement. Pursuant to the
commitment letter, HIIG agreed to cede $118.8 million of net claim reserves for certain divisions, primarily related to 2017 and prior policy years.
The LPT provides reinsurance protection of approximately $127.4 million above the net ceded claim reserves and is subject to co-participations at
specified amounts. The LPT is expected to result in a pretax charge and after tax charge of approximately $43.5 million and $34.4 million,
respectively, in the first half of 2020. Completion of the transaction, is subject to, among other things, regulatory approvals and satisfaction of
various other customary closing conditions.
In valuing the HIIG Shares, using a multiple of net asset value as the primary valuation technique, fair value was determined to be 1.1x the
adjusted book value (or adjusted Stockholders’ Equity) of HIIG as at December 31, 2019 and 2018. In determining the adjusted book value of
HIIG, the after tax charge of the LPT was deducted from the book value of HIIG as at December 31, 2019. The adjusted book value of HIIG as at
December 31, 2019 reflected 100% of HIIG stockholders’ equity obtained from the audited financial statements of HIIG prepared in accordance
with US GAAP, adjusted for the after tax charge of the LPT and a reclassification of a stock notes 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), and the valuation of goodwill and other intangible 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 property and casualty 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 $13.1 million and $0.7 million in the three months ended December 31, 2019 and 2018, respectively,
and an unrealized gain of $2.9 million and $5.0 million in the years ended December 31, 2019 and 2018, respectively, on its investment in the HIIG
Partnership.
(ii) Select Financial Information of HIIG for the years ended December 31, 2019 and 2018
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 ratio” (calculated by dividing net loss and
loss adjustment expenses by net earned premiums) and “combined ratio” (calculated by dividing the aggregate of net loss and LAE, net policy
acquisition expenses and operating expenses by net earned premiums) provide measures 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 fourth quarter of 2019, the management of HIIG modified the reporting segments of HIIG to better describe its business. Comparative
figures have been reclassified to conform to the presentation of the current period. The reporting segments of HIIG are as follows:
Accident and Health - group medical insurance business written on an excess basis known as stop loss business including both aggregate and
specific coverage provided to self-funded medical programs for small and medium size employee groups.
Commercial - standard lines of business generally written on an admitted basis by most markets known as “Main Street” or “Middle Market”
business.
Excess & Surplus - lines of business written on a non-admitted basis through wholesale brokers or managing general agents. Some Excess &
Surplus business is included in other segments where written in conjunction with admitted lines.
- 14 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3. INVESTMENTS (continued)
Specialty - niche business of generally unusual or difficult risks and business specific to certain industries or professions requiring underwriters
with more specific knowledge and expertise.
Non-continuing lines - represent lines of business no longer actively underwritten by HIIG.
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 annual consolidated condensed financial statements of HIIG for the years ended December 31, 2019 and
2018 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 premiums
Net written premiums
Net earned premiums
Net income
Combined ratio
Select Information
Gross written premiums:
Commercial
Specialty
Excess & Surplus
Accident and Health
Non-continuing lines
Net written premiums:
Commercial
Specialty
Excess & Surplus
Accident and Health
Non-continuing lines
Net earned premiums:
Commercial
Specialty
Excess & Surplus
Accident and Health
Non-continuing lines
Net Loss and LAE Ratio:
Commercial
Specialty
Excess & Surplus
Accident and Health
Non-continuing lines
Three months ended December 31
20181
2019
Years ended December 31
20181
2019
$
$
$
$
$
$
$
$
$
$
185.3
90.3
111.6
8.0
96.9%
53.8
46.3
57.6
27.6
-
185.3
29.9
27.4
22.4
10.6
-
90.3
38.6
36.2
26.1
10.6
0.1
111.6
73.1%
63.7%
72.8%
107.6%
n.m.2
73.5%
$
$
$
$
$
$
$
$
$
$
179.7
78.8
74.4
3.9
106.6%
48.8
49.5
57.4
22.4
1.6
179.7
26.9
25.5
18.0
7.4
1.0
78.8
22.3
21.6
21.1
7.4
2.0
74.4
76.1%
78.1%
85.8%
76.5%
n.m.2
80.2%
$
$
$
$
$
$
$
$
$
$
878.3
421.7
385.1
32.3
98.4%
247.1
255.4
264.0
111.4
0.4
878.3
136.1
137.7
105.3
42.2
0.4
421.7
124.4
119.9
95.1
42.2
3.5
385.1
73.6%
66.4%
66.6%
96.7%
n.m.2
73.0%
$
$
$
$
$
$
$
$
$
$
696.9
300.5
277.6
20.9
99.5%
164.4
195.9
247.3
84.3
5.0
696.9
92.0
91.0
86.4
28.3
2.8
300.5
78.6
83.6
83.0
28.3
4.1
277.6
69.6%
65.8%
69.7%
76.3%
n.m.2
70.8%
Balance Sheet Information
Investments, cash and cash equivalents
Stockholders’ equity
December 31, 2019
797.7
370.2
$
$
December 31, 2018
624.3
329.9
$
$
1 Adjusted to conform to the presentation of the current year.
2 Not material or meaningful, but included in aggregate numbers.
- 15 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3.
INVESTMENTS (continued)
Gross written premiums - Gross written premiums were $185.3 million for the three months ended December 31, 2019 compared to $179.7
million for the three months ended December 31, 2018, an increase of 3.1%, and $878.3 million for the year ended December 31, 2019 compared
to $696.9 million for the year ended December 31, 2018, an increase of 26.0%. The increase in gross written premiums in the three months and
year ended December 31, 2019 compared to the same periods in the prior year was driven primarily by growth in the Commercial and Accident
and Health segments. The Specialty and Excess and Surplus did not have growth in the three months ended December 31, 2019, but did
contribute to the increase for the full year ended December 31, 2019.
Net written premiums - Net written premiums were $90.3 million for the three months ended December 31, 2019 compared to $78.8 million for
the three months ended December 31, 2018, an increase of 14.5%, and $421.7 million for the year ended December 31, 2019 compared to
$300.5 million for the year ended December 31, 2018, an increase of 40.3%, resulting from the growth in gross written premiums and an increase
in HIIG’s net retention.
Net earned premiums - Net earned premiums were $111.6 million for the three months ended December 31, 2019 compared to $74.4 million for
the three months ended December 31, 2018, an increase of 50.0%, and $385.1 million for the year ended December 31, 2019 compared to
$277.6 million for the year ended December 31, 2018, an increase of 38.7%. The increase in net earned premiums was due to HIIG’s net written
premium growth over the past 24 months.
Overall net loss and LAE ratio - The overall net loss and LAE ratio was 73.5% for the three months ended December 31, 2019 compared to
80.2% for the same period in the prior year, and 73.0% for the year ended December 31, 2019 compared to 70.8% for the same period in the prior
year. The table below provides details of HIIG’s adverse loss development on prior year loss and LAE reserves of $nil and $13.9 million in the
three months and year ended December 31, 2019, respectively, compared to $5.0 million and $5.8 million in the three months and year ended
December 31, 2018, respectively.
Net adverse (favourable) development
(unaudited)
(millions)
Commercial
Specialty
Excess & Surplus
Accident and Health
Non-continuing lines
1 Adjusted to conform to the presentation of the current year.
Three months ended December 31
20181
2019
Year ended December 31
20181
2019
$
$
-
-
-
-
-
-
$
$
0.8
2.4
1.4
-
0.4
5.0
$
$
6.1
2.7
0.4
2.0
2.7
13.9
$
$
(0.1)
3.5
1.2
-
1.2
5.8
Operating results (all amounts net of income tax) - HIIG recorded net income of $8.0 million for the three months ended December 31, 2019
compared to $3.9 million for the three months ended December 31, 2018, and net income of $32.3 million for the year ended December 31, 2019
compared to $20.9 million for the year ended December 31, 2018. The increase for the year ended December 31, 2019 of $11.4 million in net
income was primarily attributable to higher investment income of $11.1 million and a higher underwriting result of $3.9 million, which was partially
offset by a decrease in income from strategic investments of $2.7 million and higher interest and other expenses of $0.9 million. Investment
income included reporting the changes in fair value of equity securities for the period as part of the operating result following the adoption of US
GAAP standard ASU 2016-01.
Stockholders’ equity - HIIG stockholders’ equity increased to $370.2 million at December 31, 2019 from $329.9 million at December 31,
2018. The increase of $40.3 million resulted from HIIG’s net income for the period of $32.3 million and a favourable change in the fair value of
investments recorded under accumulated other comprehensive income, net of income tax of $8.0 million.
B. INVESTMENT IN THE ARENA GROUP
The Arena Group makes and manages 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 include real estate, inventory, vehicles,
aircraft, watercraft, oil and gas reserves, a borrower’s plant and equipment, other hard assets, 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.
- 16 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3. INVESTMENTS (continued)
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 and 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, 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,
structured convertible notes, 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 Arena FINCOs
The Arena FINCOs include specialty finance companies that primarily purchase fundamentals-based, asset-oriented credit investments for their
own account and a company that facilitates the origination of fundamentals-based, asset-oriented credit investments for its own account and/or
possible future sale to specialty finance companies, clients of Arena Investors and/or other third parties. This company 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. The Arena FINCOs do not have a target range of investment; the size of the loans and/or other credit investments acquired
depends on, among other things, any diversity requirements which may be imposed by any lender as well as their own investment policy. In the
absence of such requirements, the Arena FINCOs are not subject to concentration limitations but the management of the Arena FINCOs will use
their best judgment as to what is prudent in the circumstances.
The Arena FINCOs seek to capitalize on opportunities in both private and public investments subject to its investment policy.
- 17 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3. INVESTMENTS (continued)
Before acquiring or originating any such loans or other investments, the Arena FINCOs review 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. The Arena FINCOs originate and/or acquire
such loans or investments based on its assessment of the fair market value of the investment at the time of purchase.
On June 9, 2017, the Company used part of the proceeds from the Fairfax financing (see discussion in Section 4, Financing of this MD&A) to loan
C$50 million to the Arena FINCOs (the “Arena FINCOs Demand Loan”) on market terms. The Arena FINCOs Demand Loan was denominated in
C$, repayable on demand (with a final repayment date not later than June 9, 2022) and secured by the assets of the Arena FINCOs. The Arena
FINCOs Demand Loan carried interest at a rate of 4.5% per annum plus the greater of (i) 3-month LIBOR and (ii) 1%, with the applicable rate
adjusted at the beginning of each quarter. Interest was due at the end of each calendar quarter. At December 31, 2018, C$30 million in principal
repayments had been made by the Arena FINCOs and on May 9, 2019 and September 4, 2019, the Arena FINCOs made principal repayments of
C$2.4 million and C$17.6 million, respectively, resulting in an outstanding loan of C$nil to the Arena FINCOs at December 31, 2019 (C$20 million
to the Arena FINCOs at December 31, 2018). The Arena FINCOs Demand Loan was translated into US$ at rates of exchange at the end of each
reporting period and any resulting unrealized foreign exchange gain or loss was included in the consolidated statements of profit and
comprehensive income. At December 31, 2019 and 2018, the US$ converted value of the Arena FINCOs Demand Loan was $nil and $14.7
million, respectively. The Company recorded a foreign exchange gain relating to the Arena FINCOs Demand Loan of $nil and $0.3 million for the
three months and year ended December 31, 2019, respectively and a foreign exchange loss relating to the Arena FINCOs Demand Loan of $1.0
million and $1.7 million for the three months and year ended December 31, 2018, respectively. The Arena FINCOs used the loan proceeds for
investment purposes.
In connection with the original capitalization of the Arena FINCOs, the Company granted a term loan (the “Arena FINCOs Term Loan”) with a
balance of $10 million at December 31, 2018. The Arena FINCOs Term Loan had a seven year term to August 31, 2022, was unsecured and
carried interest at a rate of 7.25% per annum, with interest due on January 1 of each year during the term. On April 1, 2019, the Company
converted the Arena FINCOs Term Loan of $10 million into additional common shares of WOH and as a result the balance of the 7.25% Arena
FINCOs Term Loan was $nil at December 31, 2019 (December 31, 2018 - $10 million).
The primary revenue of the Arena FINCOs consists of interest income, dividend income and/or investment-related fees earned on the credit
investments that it originates or acquires. The operating results of the Arena FINCOs also include gains (losses) on its investments.
The Arena FINCOs paid cash dividends to Westaim in the amount of $3.7 million and $4.6 million in the three months and year ended December
31, 2019, respectively, and paid a dividend in kind in the amount of $0.1 million for each of the three months and year ended December 31, 2019,
resulting in a decrease in the Company’s carrying value of the Arena FINCOs. No dividends were paid in the three months and year ended
December 31, 2018.
Rights Granted to BP LLC
Each of AOC and AFHC is governed by the terms of a limited liability company agreement, originally dated August 31, 2015, as amended from
time to time, between Bernard Partners, LLC (“BP LLC”), a limited liability company controlled by certain members of the Arena Group
management team, and a wholly-owned subsidiary of the Company setting forth the rights and obligations each of BP LLC and the Company
(through its relevant subsidiary) as members of each of AOC and AFHC. Under each such agreement, BP LLC was issued Class M units which
were 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 each of AOC
and AFHC. The Class M units were to vest equally over 5 years from August 31, 2015 and carry escalating conversion prices in excess of the
price paid by the Company for its investment in AOC and AFHC. On December 31, 2018, the Company through AOC and AFHC redeemed all
Class M units of each of AOC and AFHC outstanding for the aggregate “in the money” amount of $0.7 million and this amount was recorded as a
liability on the financial statements of the Arena FINCOs at December 31, 2018 and therefore reflected in their fair value. The liability of $0.7
million was paid to BP LLC on March 27, 2019.
Accounting for the Arena FINCOs
The Company’s investments in the Arena FINCOs are accounted for at FVTPL and are included in investments in private entities. The fair value of
the Company’s investments in the Arena FINCOs was determined to be $205.8 million and $198.7 million at December 31, 2019 and 2018,
respectively.
Management used net asset value as the primary valuation technique and arrived at the fair value of the Company’s investments in the Arena
FINCOs of $205.8 million at December 31, 2019. 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 the Arena FINCOs at December 31, 2019, in the amount of $205.8 million approximated the fair
value of the Company’s investments in the Arena FINCOs. The Company’s investments in the Arena FINCOs are composed largely of cash and
cash equivalents and investments, carried at fair value at December 31, 2019. This same valuation technique was also used to determine the fair
value of the Company’s investments in the Arena FINCOs of $198.7 million at December 31, 2018.
- 18 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3. INVESTMENTS (continued)
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 investments in the Arena FINCOs at the end of each reporting period.
The Company recorded an unrealized gain on its investments in the Arena FINCOs of $2.7 million before dividends paid to the Company of $3.8
million in the three months ended December 31, 2019 and an unrealized gain of $2.5 million in the three months ended December 31, 2018. There
were no dividends paid in the three months ended 31, 2018. In the year ended December 31, 2019, the Company recorded an unrealized gain on
its investments in the Arena FINCOs of $11.8 million before dividends paid to the Company of $4.7 million and in the year ended December 31,
2018, the Company recorded an unrealized gain of $12.5 million. No dividends were paid in the year ended December 31, 2018.
Select Financial Information of the Arena FINCOs
The Company considers certain financial results of the Arena FINCOs 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 the Arena FINCOs set out below is unaudited and has been derived from the financial statements of WOH, Arena Origination
Co., LLC (“AOC”), Arena Finance Holdings Co., LLC (“AFHC”) and the consolidated financial statements of Arena Finance, LLC (“AF”) and its
subsidiaries for the three months and years ended December 31, 2019 and 2018, which have been prepared in accordance with IFRS or US
GAAP. Such statements are the responsibility of the management of the Arena FINCOs. 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 the Arena FINCOs is as follows:
(unaudited)
(millions except for percentage)
Cash and cash equivalents
Due from brokers, net
Investments:
Loans / Private assets
Other Securities
Arena FINCOs Demand Loan payable to the Company
Other net assets (liabilities)
Net assets of the Arena FINCOs
1 Adjusted to conform to the presentation of the current year.
December 31, 2019
December 31, 20181
$
Fair value
8.6
1.6
167.6
21.5
189.1
-
6.5
205.8
$
Percentage of
net assets at
fair value
4.2%
0.8%
81.4%
10.4%
91.8%
-
3.2%
100.0%
$
Fair value
24.3
4.3
177.7
10.3
188.0
(14.7)
(3.2)
198.7
$
Percentage of
net assets at
fair value
12.2%
2.2%
89.4%
5.2%
94.6%
(7.4)%
(1.6)%
100.0%
Due from brokers consists of cash balances as well as net amounts due from brokers for unsettled securities transactions. Investment securities
are net of short positions. In the normal course of the Arena FINCOs’ operations, the Arena FINCOs enter into currency hedges to reduce its
currency exposure.
For additional information on the investments of the Arena FINCOs, see Section 14, Additional Arena Group Investment Schedules of this MD&A.
- 19 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3. INVESTMENTS (continued)
A summary of the operating results of the Arena FINCOs attributable to the Company is as follows:
(unaudited)
(millions)
Net operating results of the Arena FINCOs:
Investment income, net
Net gains (losses) on investments
Operating expenses:
Management and asset servicing fees
Incentive fees
Administrative fees
Interest expense on the Arena FINCOs Demand Loan
paid to the Company
Deal expenses and other operating expenses
$
Operating income attributable to BP LLC’s Class M units
Operating income attributable to the Company’s Class A units
Arena FINCOs holding companies’ expenses:
Advisory fees paid to the Company
Interest expense on the Arena FINCOs term loan paid to
the Company
Other expenses
Income tax expense
Net operating results of the Arena FINCOs
$
1 Adjusted to conform to the presentation of the current year.
Three months ended December 31
20181
2019
Year ended December 31
20181
2019
5.6
(0.6)
(1.3)
(0.3)
-
-
(0.7)
2.7
-
2.7
-
-
-
-
-
2.7
$
$
6.0
(0.5)
-
-
(1.2)
(0.3)
(0.6)
3.4
0.1
3.3
(0.1)
(0.2)
(0.2)
(0.3)
(0.8)
2.5
$
$
19.7
3.9
(5.0)
(1.5)
-
(0.7)
(2.7)
13.7
-
13.7
(1.3)
(0.2)
-
(0.4)
(1.9)
11.8
$
$
19.4
5.2
-
-
(5.8)
(1.4)
(2.4)
15.0
0.6
14.4
(0.4)
(0.7)
(0.2)
(0.6)
(1.9)
12.5
The Net Return on the investment portfolios of the Arena FINCOs was 1.3% and 7.0% for the three months and year ended December 31, 2019,
respectively and 1.7% and 8.1% for the three months and year ended December 31, 2018, respectively. See Section 15, Non-GAAP Measures of
this MD&A.
The following table shows a continuity of the carrying value of the Company’s investments in the Arena FINCOs included in the Company’s
investments in private entities is as follows:
(unaudited)
(millions)
Carrying value of the Arena FINCOs:
Opening balance
Unrealized gain before dividends
Dividends paid to the Company
Ending balance
Arena Investors
Three months ended December 31
2018
2019
Year ended December 31
2018
2019
$
$
206.9
2.7
(3.8)
205.8
$
$
196.2
2.5
-
198.7
$
$
198.7
11.8
(4.7)
205.8
$
$
186.2
12.5
-
198.7
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.
- 20 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3. INVESTMENTS (continued)
Arena Investors generates revenues primarily from Management Fees, Incentive Fees and Asset Servicing Fees. “Management Fees” are the
fees generally calculated on Arena Investors’ various segregated client accounts and private pooled investment vehicles as a percentage of assets
under management (“AUM”). Management fees for separately managed accounts may be based on a percentage of the fair value of invested
capital for the account during the ramp-up phase. “Incentive Fees” are the fees generally calculated as a percentage of net profits earned by
Arena Investors as of the end of each fiscal year or applicable withdrawal date related to client accounts subject to a “high water mark”, preferred
return and loss carryforward provisions for each measurement date. “Asset Servicing Fees” are the fees generally earned in connection with the
management and servicing of the illiquid portion of clients’ investment portfolios.
Arena Investors has established a U.S. onshore fund, Arena Special Opportunities Fund, LP (“ASOF LP”) and offshore funds, Arena Special
Opportunities Fund (Cayman), LP and Arena Special Opportunities Fund (Cayman 2), LLC, as commingled investment vehicles. Arena Investors
continues to be in discussions with potential clients for additional capital to invest in its various pools, in accordance with its business strategy.
As of December 31, 2019, the Arena Group had committed AUM of approximately $1.3 billion. The committed AUM included the net assets of the
Arena FINCOs totaling $206 million. As of December 31, 2018, the Arena Group had committed AUM of approximately $1.0 billion. The committed
AUM included the net assets of the Arena FINCOs totaling $199 million.
Rights Granted to BP LLC
On August 31, 2015, agreements were entered into between the Company and BP LLC in respect of WAHII (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 profit 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 to thereby share up to 75% of the profit of the associates based on
achieving certain AUM and cash flow (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 WAHII Associate Agreement.
Accounting for Arena Investors
On March 6, 2019, the Company amended a revolving loan facility to the associates (the “Arena Investors’ Revolving Loan”) from the limit of $20
million to $25 million in order to continue funding growth initiatives and working capital needs of Arena Investors. The loan facility had a term of 36
months to December 21, 2020, which has been extended to March 31, 2023 and bears interest at a rate of 5.25% per annum. Arena Investors had
drawn down the loan facility by $20.0 million at December 31, 2019 and $18.3 million at December 31, 2018. The loan facility is secured by all the
assets of Arena Investors.
The Company’s investments in the associates (Arena Investors) are accounted for using the equity method. The carrying amount of the
Company’s investment in the associates was $12.3 million and $10.6 million at December 31, 2019 and 2018, respectively. The total of the
Company’s 51% share of loss of $0.2 million and share of profit of $0.5 million for the three months ended December 31, 2019 and 2018,
respectively, and share of loss of $nil and $1.2 million in the year ended December 31, 2019 and 2018, respectively, was reported under “Net
results of investments” in the consolidated statements of profit and comprehensive income.
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, 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 for the three months and year
ended December 31, 2019 and from the financial statements of WAHII, ASOF-ON GP and ASOF-OFF II GP for the three months and year ended
December 31, 2018, 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.
- 21 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
3. INVESTMENTS (continued)
Select financial information of Arena Investors is as follows:
Statement of Financial Position
(unaudited)
(millions)
Cash and cash equivalents
Restricted cash
Arena Investors’ Revolving Loan from the Company
Other net liabilities
Net liabilities
$
December 31, 2019
1.6
6.5
(20.0)
(3.5)
(15.4)
$
$
December 31, 20181
1.0
5.1
(18.3)
(3.0)
(15.2)
$
Company’s share
Arena Investors’ Revolving Loan from the Company
Carrying amount of the Company’s investment 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.
(7.7)
20.0
12.3
(7.7)
18.3
10.6
$
$
$
$
1
Restricted cash includes deposits related to investment loans received in advance.
Statement of Profit (Loss) and Comprehensive Income (Loss)
(unaudited)
(millions)
Management and asset servicing fees
Incentive fees
Administrative fees
Net gains on investments
Total revenue
Salaries and benefits
Professional fees
General, administration and other expenses
Interest expense on the Revolving Loan from the Company
Total expenses
Profit (loss) and comprehensive profit (loss)
Company’s share of profit (loss) of associates (51%)
Three months ended December 31
20181,2
$ 2.9
1.7
1.3
-
5.9
2019
$ 4.9
2.4
-
0.1
7.4
(5.4)
(1.1)
(1.2)
(0.2)
(7.9)
$ (0.5)
$ (0.2)
(2.7)
(0.8)
(1.0)
(0.3)
(4.8)
$ 1.1
$ 0.5
Year ended December 31
20181,2
$ 9.4
5.8
5.9
0.2
21.3
2019
$ 18.7
9.6
-
0.3
28.6
(20.6)
(3.7)
(3.5)
(1.0)
(28.8)
$ (0.2)
$ -
(16.5)
(2.9)
(3.2)
(0.9)
(23.5)
$ (2.2)
$ (1.2)
1 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.
2 Adjusted to conform to the presentation of the current year.
The management, asset servicing and incentive fees were generated from the various segregated client accounts and managed funds of Arena
Investors. Effective January 1, 2019, investment management fees, asset servicing fees and incentive fees replaced administrative fees that were
charged to the Arena FINCOs in 2018 and prior years.
C. OTHER INVESTMENTS
The Company’s investment in ASOF LP, a fund managed by Arena Investors, LP, with a fair value of $2.7 million at December 31, 2019 and $2.5
million at December 31, 2018, is included in investments in the consolidated statements of financial position. The Company’s unrealized gain on
its investment in ASOF LP was $nil and $0.2 million in the three months and year ended December 31, 2019, respectively and $0.1 million and
$0.2 million in the three months and year ended December 31, 2018, respectively.
4.
FINANCING
Preferred Securities
On April 3, 2017, the Company announced that it had entered into an agreement pursuant to which Fairfax Financial Holdings Limited, through
certain of its subsidiaries (collectively, “Fairfax”), had agreed subject to the execution of definitive documentation to make an investment of up to
C$100 million in Westaim in exchange for the issuance by Westaim of 5% interest bearing notes (the “Preferred Securities”) and common share
purchase warrants (the “Warrants”) (collectively, the “Private Placement”).
- 22 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
4. FINANCING (continued)
The Preferred Securities are denominated in C$, each issuable for a principal amount of C$10 and carry interest at a rate of 5% per annum. The
Preferred Securities are subordinate secured securities that will mature on May 26, 2116 but may be repaid, in whole or in part, by the Company at
any time after June 2, 2022 and at any time after June 2, 2020 if the volume-weighted average trading price of Westaim’s common shares for any
10 day period prior to the date on which the applicable redemption notice is given is at least C$5.60.
On June 2, 2017, the Company closed a subscription by Fairfax of C$50 million of Preferred Securities. The proceeds raised from the Fairfax
financing were used by Westaim to make interest bearing loans to the Arena Group. See discussion in Section 3, Investments of this MD&A for
additional information on these loans. The Company had discretion until January 1, 2018 to require Fairfax to purchase all or part of 5,000,000
additional Preferred Securities, and exercised its discretion not to do so. There were 5,000,000 Preferred Securities outstanding at December 31,
2019 and 2018.
The Preferred Securities are repayable on demand upon a change of control of Westaim and the liability is recorded at the principal amount in the
consolidated statements of financial position. The Preferred Securities liability is translated into US$ at rates of exchange at the end of each
reporting period and any resulting unrealized foreign exchange gain or loss is included in the consolidated statements of profit and comprehensive
income. At December 31, 2019 and 2018, the US$ converted amount of the Preferred Securities was $38.5 million and $36.6 million,
respectively. The Company recorded an unrealized foreign exchange loss of $0.8 million and $1.9 million relating to the Preferred Securities in the
three months and year ended December 31, 2019, respectively, and an unrealized foreign exchange gains of $2.1 million and $3.3 million in the
three months and year ended December 31, 2018, respectively. The carrying amount of the Preferred Securities approximated fair value at
December 31, 2019.
Interest on the Preferred Securities amounted to $0.5 million and $1.9 million in the three months and year ended December 31, 2019,
respectively, and $0.5 million and $1.9 million the three months and year ended December 31, 2018, respectively. At December 31, 2019, interest
of $0.5 million (December 31, 2018 - $0.5 million) was accrued in the consolidated statements of financial position.
Foreign Currency Forward Contract
On December 20, 2018, the Company entered into a Canadian dollar currency forward contract to sell $26.3 million and buy C$35 million to
manage the Canadian dollar currency exposures, including the currency exposure arising from the Preferred Securities. The contract matured on
December 20, 2019 and resulted in a realized foreign exchange gain of $0.4 million. On December 20, 2019, the Company entered into a new
Canadian dollar currency forward contract to sell $30.6 million and buy C$40 million to manage the Canadian dollar currency exposures, including
the currency exposure arising from the Preferred Securities. The contract has a term to maturity of three months and may be renewed at market
rates. The Company has not designated these Canadian dollar currency forward contracts as accounting hedges. A gain was accrued on the
Canadian dollar currency forward contract in the amount of $0.3 million at December 31, 2019 and was recorded under other assets in the
consolidated statements of financial position. A loss was accrued on the Canadian dollar currency forward contract in the amount of $0.6 million at
December 31, 2018 and was recorded under accounts payable and accrued liabilities in the consolidated statements of financial position. A gain
on the Canadian dollar currency forward contract in the amount of $0.5 million and $1.3 million in the three months and year ended December 31,
2019, respectively, and losses on the Canadian dollar currency forward contract in the amount of $1.2 million and $1.7 million in the three months
and year ended December 31, 2018, respectively, was recorded under foreign exchange in the consolidated statements of profit and
comprehensive income. In connection with Canadian dollar currency forward contracts which the Company may enter into from time to time, the
Company has obtained a credit facility under which the Company has pledged cash on deposit of $3.0 million (December 31, 2018 - $4.4 million)
as security. The security shall remain in effect for the duration of the outstanding foreign exchange forward contract.
Warrants
In conjunction with the private placement of Preferred Securities, Westaim also issued to Fairfax 28,571,430 Warrants, each exercisable for one
Westaim common share at an exercise price of C$3.50. The Warrants vest proportionately based upon the aggregate percentage of Preferred
Securities purchased by Fairfax, with 14,285,715 having vested on June 2, 2017. The remaining 14,285,715 unvested Warrants were cancelled on
January 31, 2018. Each vested Warrant is exercisable on or prior to June 2, 2022, but the expiry date will be extended to June 2, 2024 if the
volume-weighted average trading price of Westaim’s common shares for the 10 day period ending on June 2, 2022 is less than C$5.60. After
June 2, 2020, the Company can also elect to require early exercise of the Warrants if the volume-weighted average trading price of Westaim’s
common shares for any 10 day period prior to the election is at least C$5.60.
The Warrants are subject to a cashless exercise at the discretion of Fairfax and are classified as a derivative liability in accordance with IFRS and
measured at FVTPL. Subsequent changes in fair value of the vested Warrants and the related foreign exchange impact are reported in the
consolidated statements of profit and comprehensive income for the period in which they arise.
- 23 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
4. FINANCING (continued)
Changes to the derivative warrant liability are as follows:
(millions)
Opening balance
Change in fair value – (gain)
Unrealized foreign exchange loss (gain)
Ending balance
Three months ended December 31
2018
$ 6.2
(3.5)
(0.3)
$ 2.4
2019
$ 1.5
0.4
-
$ 1.9
2019
$ 2.4
(0.6)
0.1
$ 1.9
Year ended December 31
2018
$ 6.7
(3.8)
(0.5)
$ 2.4
At December 31, 2019 and 2018, a liability of $1.9 million and $2.4 million, respectively, had been recognized with respect to the vested Warrants
in the consolidated statements of financial position. The Company recognized an unrealized loss of $0.4 million and an unrealized gain of $0.6
million in the three months and year ended December 31, 2019, and unrealized gains of $3.5 million and $3.8 million in the three months and year
ended December 31, 2018, respectively, resulting from a change in the fair value of the vested Warrants. The Company also recorded unrealized
foreign exchange losses with respect to the vested Warrants of $nil and $0.1 million in the three months and year ended December 31, 2019,
respectively, and unrealized foreign exchange gains of $0.3 million and $0.5 million in the three months and year ended December 31, 2018,
respectively, under foreign exchange in the consolidated statements of profit and comprehensive income.
The fair value of the vested Warrants at December 31, 2019 of $1.9 million (December 31, 2018 - $2.4 million) was estimated using the Monte
Carlo pricing model assuming no dividends are paid on the common shares, a risk-free interest rate of 1.69% (December 31, 2018 - 1.87%), an
expiration date between January 1, 2020 and June 2, 2024 (December 31, 2018: January 1, 2019 and June 2, 2024), a volatility of the underlying
common shares of the Company of 23.23% (December 31, 2018 – 23.42%), a closing price of common shares of C$2.65 (December 31, 2018 -
C$2.58) and a strike price of C$3.50. The amounts computed according to the Monte Carlo pricing model may not be indicative of the actual
values realized upon the exercise of the vested Warrants by Fairfax.
5. ANALYSIS OF FINANCIAL RESULTS
Details of the Company’s operating results are as follows:
(millions)
Revenue
Interest income
Dividend income from investments in private entities
Advisory fee income
Net results of investments
Expenses
Salaries and benefits
General, administrative and other
Professional fees
Site restoration provision
Share-based compensation
Foreign exchange
Interest on preferred securities
Derivative warrants
Income tax expense
Three months ended December 31
2018
2019
Year ended December 31
2018
2019
$
$
$
0.4
3.8
0.3
4.5
(14.4)
(1.0)
(0.1)
(0.2)
1.4
(0.8)
(0.6)
(0.5)
(0.4)
(2.2)
(0.9)
$
$
$
0.8
-
0.3
1.1
2.4
(0.9)
-
(0.1)
(0.5)
0.9
0.8
(0.5)
3.5
3.2
-
$
$
$
2.1
4.7
2.4
9.2
10.2
(3.7)
(1.0)
(1.0)
(0.3)
(1.5)
(1.1)
(1.9)
0.6
(9.9)
(0.9)
$
$
3.1
-
1.4
4.5
16.5
(3.7)
(0.9)
(0.9)
(0.1)
(1.6)
1.2
(1.9)
3.8
(4.1)
-
$
Profit (loss) and comprehensive income (loss)
$
(13.0)
$
6.7
$
8.6
$
16.9
5.1 Revenue
In the three months ended December 31, 2019, the Company earned interest on loans made to the Arena Group of $0.2 million (2018 - $0.8
million) and dividends from the Arena Group of $3.8 million (2018 - $nil). In the same period, the Company earned advisory fees from HIIG of $0.1
million (2018 - $0.2 million) and from the Arena Group of $0.2 million (2018 - $0.1 million).
- 24 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
5. ANALYSIS OF FINANCIAL RESULTS (continued)
In the year ended December 31, 2019, the Company earned interest on loans made to the Arena Group of $1.9 million (2018 - $3.1 million) and
dividends from the Arena Group of $4.7 million (2018 - $nil). In the same period, the Company earned advisory fees from HIIG of $0.8 million
(2018 - $1.0 million) and from the Arena Group of $1.6 million (2018 - $0.4 million).
5.2 Net Results of Investments
In the three months ended December 31, 2019, the net results of investments consisted of an unrealized loss from the Company’s investments in
private entities of $10.4 million less dividends paid to the Company of $3.8 million (2018 – unrealized gain of $1.8 million less dividends of $nil),
unrealized gains on other investments of $nil (2018 - $0.1 million) and the Company’s share of loss of its associates of $0.2 million (2018 – share
of gains of $0.5 million).
In the year ended December 31, 2019, the net results of investments consisted of unrealized gains from the Company’s investments in private
entities of $14.7 million less dividends paid to the Company of $4.7 million (2018 - $17.5 million less dividends of $nil), unrealized gains on other
investments of $0.2 million (2018 - $0.2 million) and the Company’s share of loss of its associates of $nil (2018 - $1.2 million).
See discussion in Section 3, Investments of this MD&A.
Investments in Private Entities
The Company’s investments in private entities are accounted for at FVTPL. In the three months ended December 31, 2019, the Company
recorded an unrealized loss of $13.1 million on its investment in the HIIG Partnership (2018 - $0.7 million), an unrealized gain of $2.7 million less
dividends paid to the Company of $3.8 million on its investment in the Arena FINCOs (2018 - $2.5 million less dividends of $nil).
In the year ended December 31, 2019, the Company recorded an unrealized gain of $2.9 million on its investment in the HIIG Partnership (2018 -
$5.0 million), an unrealized gain of $11.8 million less dividends paid to the Company of $4.7 million on its investment in the Arena FINCOs (2018 -
$12.5 million less dividends of $nil).
Investment in Associates
The Company’s investment in associates is accounted for using the equity method. In the three months ended December 31, 2019, the
associates earned management and asset servicing fees of $4.9 million (2018 - $2.9 million), incentive fees of $2.4 million (2018 - $1.7 million),
administrative fees of $nil (2018 - $1.3 million), net gains on investment of $0.1 million (2018 - $nil), offset by salaries and benefits of $5.4 million
(2018 - $2.7 million), professional fees of $1.1 million (2018 - $0.8 million), general, administrative and other expenses of $1.2 million (2018 - $1.0
million), and interest expense on the Revolving Loan from the Company of $0.2 million (2018 - $0.3 million) resulting in a loss of $0.5 million (2018
- profit of $1.1 million).
In the year ended December 31, 2019, the associates earned management and asset servicing fees of $18.7 million (2018 - $9.4 million),
incentive fees of $9.6 million (2018 - $5.8 million), administrative fees of $nil (2018 - $5.9 million), net gains on investment of $0.3 million, (2018 -
$0.2 million), offset by salaries and benefits of $20.6 million (2018 - $16.5 million), professional fees of $3.7 million (2018 - $2.9 million), general,
administrative and other expenses of $3.5 million (2018 - $3.2 million), and interest expense on the Revolving Loan from the Company of $1.0
million (2018 - $0.9 million) resulting in a loss of $0.2 million (2018 - $2.2 million).
The total of the Company’s 51% share of loss of the associates amounted to $0.2 million and $nil in the three months and year ended December
31, 2019, respectively, and its share of profit of the associates amounted to $0.5 million and a share of loss of $1.2 million in the three months and
year ended December 31, 2018, respectively.
5.3 Expenses
Salaries and benefits, general, administrative and other expenses and professional fees in the three months and year ended December 31, 2019
were comparable to the corresponding period in the prior year.
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. Reimbursements of site restoration costs are recorded when
received.
- 25 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
5. ANALYSIS OF FINANCIAL RESULTS (continued)
Changes in share-based compensation expense from period to period result from the vesting of RSUs, the issuance of DSUs in lieu of director
fees, 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, 2019 also included compensation expense for stock options of $0.3
million (2018 - $0.5 million) and $1.0 million (2018 - $2.3 million), respectively. See Section 8, Liquidity and Capital Resources of this MD&A for
additional information on the Company’s share-based compensation plans.
The Company holds C$ denominated assets and liabilities and the Company’s operating results include foreign exchange gains or losses arising
from the revaluation of the Company’s C$ denominated net liabilities and revaluation of C$ foreign exchange forward contract into US$ at period
end exchange rates. The following is a breakdown of the major components of the foreign exchange gain (loss) in the three months and year
ended December 31, 2019 and 2018:
(millions)
Foreign exchange gains (losses) relating to:
- site restoration provision
- liabilities for RSUs and DSUs
- Preferred securities
- Arena FINCOs Demand Loan receivable
- derivative warrant liability
- foreign exchange forward contracts
- other
6. ANALYSIS OF FINANCIAL POSITION
Three months ended December 31
2018
2019
Year ended December 31
2018
2019
$
$
(0.1)
(0.1)
(0.8)
-
-
0.5
(0.1)
(0.6)
$ 0.2
0.5
2.1
(1.0)
0.3
(1.2)
(0.1)
$ 0.8
$
$
(0.2)
(0.3)
(1.9)
0.3
(0.1)
1.3
(0.2)
(1.1)
$ 0.3
0.7
3.3
(1.7)
0.5
(1.7)
(0.2)
$ 1.2
The Company’s assets, liabilities and shareholders’ equity as at the dates indicated below consisted of the following:
(millions)
Assets
Cash
Income tax receivable
Arena FINCOs Demand Loan receivable
Other assets
Investments
Liabilities
Accounts payable and accrued liabilities
Income tax payable
Preferred securities
Derivative warrant liability
Site restoration provision
Deferred tax liability
Shareholders’ equity
Total liabilities and shareholders’ equity
1 Adjusted to conform to the presentation of the current year.
6.1 Cash
December 31, 2019
December 31, 20181
$
$
$
$
22.2
0.4
-
2.3
385.8
410.7
10.7
0.4
38.5
1.9
4.1
0.3
55.9
354.8
410.7
$
$
$
$
7.8
-
14.7
1.0
373.9
397.4
9.6
-
36.6
2.4
3.6
-
52.2
345.2
397.4
At December 31, 2019, the Company had cash of $22.2 million compared to $7.8 million at December 31, 2018. At December 31, 2019 and 2018,
cash consisted of cash on deposit, including restricted cash on deposit of $3.0 million and $4.4 million, respectively.
- 26 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION (continued)
6.2 Income Tax Receivable
At December 31, 2019, the Company had an income tax receivable due from the Canadian federal tax authority of $0.4 million compared to $nil
million at December 31, 2018.
6.3 Loans Receivable
On June 9, 2017, the Company used the proceeds from the Fairfax financing to loan C$50.0 million to the Arena FINCOs on market terms. At
December 31, 2018, C$30.0 million in principal repayments had been made by the Arena FINCOs and on May 9, 2019 and September 4, 2019,
the Arena FINCOs made a principal repayment of C$2.3 million, and C$17.7 million respectively, resulting in an outstanding loan of C$nil to the
Arena FINCOs at December 31, 2019 (C$20.0 million to the Arena FINCOs at December 31, 2018). For additional information on these loans, see
discussion in Section 3, Investments of this MD&A. At December 31, 2019, the carrying amount of the loans totaled $nil (December 2018 - $14.7
million).
6.4 Other Assets
Other assets were $2.3 million and $1.0 million at December 31, 2019 and 2018, respectively. Other assets at December 31, 2019 included
receivables from related parties of $1.1 million (December 31, 2018 - $0.7 million), right of use asset of $0.6 million (December 31, 2018 - $nil),
capital assets of $nil (December 31, 2018 - $0.1 million), fair value of foreign exchange forward contract of $0.3 million (December 31, 2018 - $nil)
and other receivables of $0.3 million (December 31, 2018 - $0.2 million).
Effective, December 1, 2019, the Company entered into an operating lease for the office premises in Toronto expiring on November 30, 2024. At
the commencement date of the lease, a right of use asset was recorded at cost under other assets and a lease liability was recorded at amortized
cost under accounts payable and accrued liabilities in the consolidated statements of financial position. Subsequent to initial recognition, the right
of use asset is depreciated using the straight-line method over the term of the lease with depreciation recorded in the consolidated statements of
profit and comprehensive income. Each lease payment reduces the lease liability and the accretion of the lease liability is recorded as interest
expense in the consolidated statements of profit and comprehensive income.
The right of use asset for office premises was $0.6 million and $nil at December 31, 2019 and 2018, respectively. The depreciation on the right of
use asset for the years ended December 31, 2019 was nominal (December 31, 2018 - $nil).
The lease liability for office premises was $0.6 million and $nil at December 31, 2019 and 2018, respectively. The lease payments were $nil and
the interest expense on the lease liability was nominal for the year ended December 31, 2019 (December 31, 2018 - $nil). The Company recorded
a nominal foreign exchange loss relating to the lease liability for the year ended December 31, 2019 (December 31, 2018 - $nil).
Depreciation expense for the capital assets was nominal for the three months and year ended December 31, 2019 and 2018.
6.5 Investments
Investments in Private Entities
The Company’s investments in private entities consist of its investments in HIIG (through the HIIG Partnership) and the Arena FINCOs, which are
accounted for at FVTPL. The fair values of the HIIG Partnership and the Arena FINCOs at December 31, 2019 were determined to be $165.0
million and $205.8 million, respectively (December 31, 2018 - $162.1 million and $198.7 million, respectively). See discussion in Section 3,
Investments of this MD&A.
Investment in Associates
The Company’s investment in associates consists of the Company’s investment in Arena Investors. This investment is accounted for using the
equity method. The carrying value of the Company’s investment in then associates at December 31, 2019 was $12.3 million (December 31, 2018
- $10.6 million). See discussion in Section 3, Investments of this MD&A.
Other Investments
The Company’s investment in other investments consists of the Company’s investment in ASOF LP, which is accounted for at FVTPL. The fair
value of ASOF LP at December 31, 2019 was determined to be $2.7 million (December 31, 2018 - $2.5 million). See discussion in Section 3,
Investments of this MD&A.
- 27 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION (continued)
6.6 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities were $10.7 million and $9.6 million at December 31, 2019 and 2018, respectively. Accounts payable and
accrued liabilities at December 31, 2019 included liabilities related to accrued employee bonuses of $1.7 million (December 31, 2018 - $1.6
million), RSUs of $6.2 million (December 31, 2018 - $5.7 million), DSUs of $1.3 million (December 31, 2018 - $1.0 million), lease liability of $0.6
million (December 31, 2018 - $nil), interest accrued on the Preferred Securities of $0.5 million (December 31, 2018 - $0.5 million), unrealized loss
on the foreign exchange forward contract of $nil (December 31, 2018 - $0.6 million) and other accrued liabilities of $0.4 million (December 31,
2018 - $0.2 million). See Section 6.3 Other Assets of this MD&A for additional information on the lease liability. See Section 8, Liquidity and
Capital Resources of this MD&A for additional information on the Company’s share-based compensation plans.
6.7 Income Tax Payable
At December 31, 2019, the Company had an income tax payable due to the United States federal tax authority of $0.4 million compared to $nil
million at December 31, 2018.
6.8 Preferred Securities
On June 2, 2017, the Company closed the sale to Fairfax of 5,000,000 Preferred Securities for C$50.0 million. The Preferred Securities are
repayable on demand upon a change of control of Westaim and the liability is recorded at the principal amount in the consolidated statements of
financial position. The C$ principal amount of the Preferred Securities was converted to US$ at the period end exchange rate, resulting in a
carrying amount of the Preferred Securities at December 31, 2019 of $38.5 million (December 31, 2018 - $36.6 million). See discussion in Section
4, Financing of this MD&A.
6.9 Derivative Warrant Liability
In conjunction with the purchase by Fairfax of C$50.0 million in Preferred Securities on June 2, 2017, Westaim issued to Fairfax 28,571,430
Warrants, with 14,285,715 Warrants having vested on June 2, 2017. The remaining 14,285,715 unvested warrants were cancelled on January
31, 2018. The Warrants are subject to a cashless exercise at the discretion of Fairfax and are classified as a derivative liability and measured at
FVTPL. At December 31, 2019, a liability of $1.9 million (December 31, 2018 - $2.4 million) representing the estimated fair value of the vested
Warrants had been accrued in the consolidated statements of financial position. See discussion in Section 4, Financing of this MD&A.
6.10 Site Restoration Provision
The site restoration provision of $4.1 million at December 31, 2019 and $3.6 million at December 31, 2018 relates to future site restoration costs
associated with soil and groundwater reclamation and remediation costs relating to industrial sites previously owned by the Company.
The Company conducts periodic reviews of the underlying assumptions supporting the provision, 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
amount of the provision is adjusted for the present value of the estimated future restoration costs discounted using interest rates of high quality
government bonds and inflation in relation to the estimated timing of cash outflows.
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.
6.11 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, 2019
382.2
17.5
(2.2)
(42.7)
354.8
$
The Company had 143,186,718 common shares outstanding at December 31, 2019 and 2018.
- 28 -
$
December 31, 2018
382.2
16.5
(2.2)
(51.3)
345.2
$
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION (continued)
Contributed Surplus
The Company had $17.5 million in contributed surplus at December 31, 2019 (December 31, 2018 - $16.5 million). The increase in contributed
surplus of $1.0 million resulted from compensation expense relating to stock options in the year ended December 31, 2019.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $2.2 million at December 31, 2019 and 2018 comprised cumulative exchange differences from currency
translation as a result of a change in presentation currency from the C$ to the US$ on August 31, 2015.
Deficit
The decrease in deficit of $8.6 million from December 31, 2018 to December 31, 2019 is due to the profit for the year ended December 31, 2019.
7. OUTLOOK
The focus of Arena’s management team is to continue to expand Arena’s diversified portfolio of quality senior ranking credit investments, increase
its pipeline of investment opportunities, and grow its AUM primarily by attracting new third-party investors. Arena’s investments are performing at
expectations and Arena had 56 employees as at December 31, 2019.
Following the catastrophe losses experienced by the property and casualty insurance industry in 2017 and 2018 due to adverse weather
conditions and wildfires in the United States, the Company believes that the industry is at the start of a cycle of increasing insurance rates and
improved underwriting terms. This expected improvement in industry conditions, combined with operational enhancement initiatives undertaken by
HIIG and a measured increase in the retention of premium, is expected to result in continued improvement in HIIG’s financial performance.
The Company is continuing 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.
8.
LIQUIDITY AND CAPITAL RESOURCES
Capital Management Objectives
The Company’s capital currently consists of the Preferred Securities and common shareholders’ equity.
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.
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.
At December 31, 2019 and 2018, 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, 2019 and 2018.
Dividends
No dividends were paid in the years ended December 31, 2019 and 2018.
- 29 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
8.
LIQUIDITY AND CAPITAL RESOURCES (continued)
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”).
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. As the DSUs
are settled solely in cash, they are not included in the 10% limitation referred to above.
At December 31, 2019 and 2018, the Company had 10,428,337 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. At December 31, 2019, all of these 2,752,940 outstanding options had vested.
On April 3, 2017, 3,860,397 additional 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 December 31, 2017, December 31, 2018 and December 31, 2019, and have an exercise price of
C$3.00. At December 31, 2019, all of these 3,860,397 options had vested. On January 18, 2018, 3,815,000 additional 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 December 31,
2018, December 31, 2019 and December 31, 2020, and have an exercise price of C$3.10. At December 31, 2019, 2,543,333 of these 3,815,000
options had vested.
In the three months and year ended December 31, 2019, compensation expense relating to options was $0.3 million (2018 - $0.5 million) and $1.0
million (2018 - $2.3 million), respectively, with a corresponding increase to contributed surplus.
The Company also had 3,034,261 RSUs outstanding at December 31, 2019 and 2018. On November 14, 2014, an aggregate of 2,375,000 RSUs
were granted to certain officers, employees and consultants. There RSUs have a term of fifteen years and at December 31, 2019, all of these
RSUs had vested, of which 265,937 RSUs had been exercised and 2,109,063 RSUs are outstanding. On April 1, 2016, 925,198 additional RSUs
were granted to certain officers and employees of the Company. These RSUs have a term of fifteen years and at December 31, 2019, all of the
RSUs had vested and 925,198 units are outstanding. The RSUs, at the election of the holder, can be settled in common shares of the Company or
cash based on the prevailing market price of the common shares on the settlement date.
At December 31, 2019, 642,779 DSUs were vested and outstanding (December 31, 2018 – 518,855 DSUs were vested and 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.
With respect to the DSUs that are outstanding, they are paid out solely in cash no later than the end of the calendar year following the year the
participant ceases to be a director. In the years ended December 31, 2019 and 2018, no DSUs were exercised.
At December 31, 2019, accounts payable and accrued liabilities included amounts related to outstanding RSUs of $6.2 million (December 31,
2018 - $5.7 million) and outstanding DSUs of $1.3 million (December 31, 2018 - $1.0 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.
- 30 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
8.
LIQUIDITY AND CAPITAL RESOURCES (continued)
The following tables illustrate the duration of the financial assets of the Company compared to its financial obligations:
December 31, 2019 (millions)
Financial assets:
Cash
Income tax receivable
Other assets (excluding capital assets)
Investments
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities
Income tax payable
Preferred securities
Site restoration provision
Deferred tax liability
Total financial obligations
Financial assets net of financial obligations
December 31, 2018 (millions)1
Financial assets:
Cash
Arena FINCOs Demand Loan receivable
Other assets (excluding capital assets)
Investments
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities
Preferred securities
Site restoration provision
Total financial obligations
Financial assets net of financial obligations
1 Adjusted to conform to the presentation of the current year.
One year or
less
$
22.2
0.4
1.7
-
24.3
2.6
0.4
-
-
-
3.0
21.3
$
One to five
years
No specific
date/ later than
five years
$
-
-
$
0.6
20.0
20.6
0.6
-
-
-
0.3
0.9
19.7
$
$
-
-
-
365.8
365.8
7.5
-
38.5
4.1
-
50.1
315.7
Total
$
22.2
0.4
2.3
385.8
410.7
10.7
0.4
38.5
4.1
0.3
54.0
356.7
$
One year or
less
One to five
years
No specific
date/ later than
five years
Total
$
$
7.8
-
0.9
-
8.7
2.9
-
-
2.9
5.8
$
$
-
14.7
-
28.3
43.0
-
-
-
-
43.0
$
$
-
-
-
345.6
345.6
6.7
36.6
3.6
46.9
298.7
$
$
7.8
14.7
0.9
373.9
397.3
9.6
36.6
3.6
49.8
347.5
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 with a view to ensuring that all obligations will be met.
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 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
2018
0.9
(0.9)
-
2019
0.9
0.7
1.6
$
$
$
$
Year ended December 31
2018
2019
3.3
3.2
1.6
1.4
4.9
4.6
$
$
$
$
- 31 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
9. RELATED PARTY TRANSACTIONS (continued)
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 and compensation expense relating to RSUs issued to the Consultant were $0.1 million in each of the years ended December
31, 2019 and 2018. At December 31, 2019, a liability of $0.1 million (December 31, 2018 - $0.1 million) had been accrued in the consolidated
statements of financial position with respect to outstanding RSUs held by the Consultant.
The Company received a cash dividend of $3.7 million (2018 - $nil) and a dividend in kind of $0.1 million (2018 - $nil) from the Arena FINCOs in
the three months ended December 31, 2019 and a cash dividend of $4.6 million (2018 - $nil) and a dividend in kind of $0.1 million (2018 - $nil)
from the Arena FINCOs in the year ended December 31, 2019.
The Company earned and received interest on loans to related parties as follows:
(millions)
Arena FINCOs Term Loan
Arena FINCOs Demand Loan
Arena Investors Revolving Loan
$
Three months ended December 31
2018
0.2
0.3
0.3
0.8
2019
-
-
0.2
0.2
$
$
$
Year ended December 31
2018
2019
0.7
0.2
1.4
0.7
0.9
1.0
3.0
1.9
$
$
$
$
The Company earned advisory fees from the Arena Group of $0.2 million and $0.1 million in the three months ended December 31, 2019 and
2018, respectively, and $1.6 million and $0.4 million in the years ended December 31, 2019 and 2018, respectively. The Company also earned
advisory fees from HIIG of $0.1 million and $0.2 million in the three months ended December 31, 2019 and 2018, respectively and $0.8 million and
$1.0 million in the years ended December 31, 2019 and 2018, respectively.
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, 2019. Management determined that this valuation technique produced the best indicator of the fair value of the HIIG Partnership,
and the Arena FINCOs at December 31, 2019. The significant unobservable inputs used in the valuation of the HIIG Partnership and the Arena
FINCOs at December 31, 2019 were the equity of each of the entities at December 31, 2019 and the multiple applied. For a detailed description of
the valuation of the Company’s investments in private entities, see note 6 to the Company’s audited annual consolidated financial statements for
the years ended December 31, 2019 and 2018. Due to the inherent uncertainty of valuation, management’s estimated values may differ
significantly from the values that would have been used had an active market for the investment existed, and the differences could be material.
The fair value of the vested Warrants is estimated using the Monte Carlo pricing model which contains various assumptions made by
management. The amounts computed according to the Monte Carlo pricing model may not be indicative of the actual values realized upon the
exercise of the vested Warrants by Fairfax.
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 11, note 14 and note 16, respectively, to the Company’s audited annual consolidated financial
statements for the years ended December 31, 2019 and 2018.
11. CRITICAL ACCOUNTING POLICIES AND RECENTLY ADOPTED AND PENDING ACCOUNTING PRONOUNCEMENTS
A description of the Company’s accounting policies is disclosed in note 2 to the audited annual consolidated financial statements for the years
ended December 31, 2019 and 2018
- 32 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
11. CRITICAL ACCOUNTING POLICIES AND RECENTLY ADOPTED AND PENDING ACCOUNTING PRONOUNCEMENTS (continued)
A description of the Company’s recently adopted and pending accounting pronouncements are as follows:
(a) Adopted in the current period
On January 13, 2016, the IASB issued IFRS 16 “Leases” (“IFRS 16”) which replaced IAS 17 “Leases”. As required, the Company adopted IFRS
16, effective January 1, 2019. IFRS 16 eliminates the distinction between operating and finance leases for lessees, requiring instead that the
Company recognize a right-of-use asset and a lease liability at lease commencement for all leases, with certain exceptions permitted through
elections and practical expedients on the transition date. As a result of the adoption of IFRS 16, on December 1, 2019, a right of use asset of $0.6
million and a lease liability of $0.6 million were recorded on the Company’s consolidated statements of financial position. The Company adopted
the modified retrospective approach of adoption whereby comparative periods were not restated.
In June 2017, the IASB published IFRIC 23, “Uncertainty over Income Tax Treatments” (“IFRIC 23”) effective for annual periods beginning on or
after January 1, 2019. The interpretation requires an entity to assess whether it is probable that a tax authority will accept an uncertain tax
treatment used, or proposed to be used, by an entity in its income tax filings and to exercise judgment in determining whether each tax treatment
should be considered independently or whether some tax treatments should be considered together. The decision should be based on which
approach provides better predictions of the resolution of the uncertainty. An entity also has to consider whether it is probable that the relevant
authority will accept each tax treatment, or group of tax treatments, assuming that the taxation authority with the right to examine any amounts
reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. The adoption of IFRIC 23 did not
have a material impact on the Company’s consolidated financial statements
12. QUARTERLY FINANCIAL INFORMATION
(millions)
Revenue
Net results of investments – (loss) gain
Net (expenses) recovery of expenses
Income tax expense
Profit (loss) and comprehensive income (loss)
Q4
2019
$ 4.5
(14.4)
(2.2)
(0.9)
$ (13.0)
Q3
2019
$ 2.1
2.7
(1.1)
-
$ 3.7
Q2
2019
$ 1.2
10.1
(3.5)
-
$ 7.8
Q1
2019
$ 1.4
11.8
(3.1)
-
$ 10.1
Q4
2018
$ 1.1
2.4
3.2
-
$ 6.7
Q3
2018
$ 1.2
5.3
(2.1)
-
$ 4.4
Q2
2018
$ 1.1
4.4
(5.6)
-
$ (0.1)
Q1
2018
$ 1.1
4.4
0.4
-
$ 5.9
The Company’s quarterly financial results do not follow any special trends and are not generally subject to seasonal variation but are instead
impacted by general market and economic conditions, regulatory risks and foreign exchange fluctuations. In addition, the value of the derivative
warrant liability, site restoration obligations and share-based compensation are impacted by fluctuations in the trading price of the Company’s
shares, discount rates, and foreign exchange fluctuations.
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 26, 2020 for its fiscal year ended December 31, 2019 which is available on SEDAR at www.sedar.com.
- 33 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES
THE ARENA FINCOs
The investments of the Arena FINCOs shown by investment strategy is as follows:
Investments by Strategy
(unaudited)
(millions except for number
of positions and percentage)
Corporate Private Credit
Real Estate Private Credit
and Real Estate Assets
Commercial and Industrial
Assets
Structured Finance
Consumer Assets
Other Securities
Investments by Strategy
(unaudited)
(millions except for number
of positions and percentage)
Corporate Private Credit
Real Estate Private Credit
and Real Estate Assets
Commercial and Industrial
Assets
Structured Finance
Consumer Assets
Other Securities
Number of
positions
35
26
21
2
15
55
154
Number of
positions
26
23
23
3
14
32
121
Cost
58.7
30.3
43.0
4.4
23.6
25.6
185.6
Cost
51.8
32.1
64.7
4.2
21.9
13.0
187.7
$
$
$
$
December 31, 2019
Fair value
61.9
$
Percentage of
investments at
fair value
32.7%
%
Debt investments
18.7%
%
Equity
investments
14.0%
31.5
16.7%
12.0%
47.3
4.4
22.5
21.5
189.1
$
24.9%
2.4%
11.9%
11.4%
100.0%
16.3%
2.4%
11.9%
8.7%
70.0%
4.7%
8.6%
-
-
2.7%
30.0%
December 31, 2018
Fair value
56.2
$
Percentage of
investments at
fair value
29.9%
%
Debt investments
24.6%
%
Equity
investments
5.3%
30.3
16.1%
14.4%
66.4
4.2
20.6
10.3
188.0
$
35.3%
2.3%
10.9%
5.5%
100.0%
25.8%
2.3%
10.9%
2.5%
80.5%
1.7%
9.5%
-
-
3.0%
19.5%
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, structured convertible notes and derivatives.
The investments of the Arena FINCOs shown by geographic breakdown is as follows:
Investments by
Geographic Breakdown
(unaudited)
(millions except for percentage)
Loans / Private Assets
North America
Europe
Asia/Pacific
Latin America
Other Securities 1
North America
Europe
Asia/Pacific
Canada
Other
1 Net of short positions.
December 31, 2019
December 31, 2018
Cost
Fair value
$
137.7
15.7
6.0
0.6
160.0
11.7
8.1
2.7
-
3.1
25.6
$
142.5
18.0
6.6
0.5
167.6
10.7
6.3
2.3
-
2.2
21.5
Percentage of
investments at
fair value
75.4%
9.5%
3.5%
0.2%
88.6%
$
5.7%
3.3%
1.2%
-
1.2%
11.4%
Cost
Fair value
Percentage of
investments at
fair value
151.4
12.2
7.1
4.0
174.7
0.7
5.5
1.8
2.3
2.7
13.0
$
154.5
12.4
6.8
4.0
177.7
0.4
4.4
1.8
1.4
2.3
10.3
82.2%
6.6%
3.6%
2.1%
94.5%
0.2%
2.4%
1.0%
0.7%
1.2%
5.5%
$
185.6
$
189.1
100.0%
$
187.7
$
188.0
100.0%
- 34 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
THE ARENA FINCOs
The investments of the Arena FINCOs shown by industry is as follows:
Investments by Industry
(unaudited)
(millions except for percentage)
Loans / Private Assets
Corporate Private Credit
Business Services
Consumer Products
Financial Services
Healthcare Services
Oil and Gas (1)
Other Assets
Retail
Real Estate Private Credit
and Real Estate Assets
Commercial
Hospitality
Land - Commercial Development
Land - Multi-Family Development
Land - Single-Family Development
Residential
Retail
Storage
Commercial and Industrial Assets
Lease/Equipment
Oil and Gas
Other Assets
Structured Finance
Other Assets
Consumer Assets
Consumer
Total Loans / Private Assets
December 31, 2019
December 31, 2018
Cost
Fair value
Percentage of
investments at
fair value
Cost
Fair value
Percentage of
investments at
fair value
$
$
17.1
-
1.8
6.7
16.9
12.1
4.1
58.7
17.5
-
1.8
6.8
18.6
13.1
4.1
61.9
$
9.3%
-
0.9%
3.6%
9.8%
6.9%
2.2%
32.7%
$
17.3
0.9
2.6
3.2
13.7
11.7
2.4
51.8
18.5
0.9
2.6
3.2
15.2
13.4
2.4
56.2
9.9%
0.5%
1.4%
1.7%
8.1%
7.1%
1.2%
29.9%
2.0
8.4
5.2
5.3
1.3
7.8
-
0.3
30.3
1.6
9.6
5.2
5.4
1.4
8.0
-
0.3
31.5
0.9%
5.0%
2.8%
2.9%
0.7%
4.2%
-
0.2%
16.7%
7.3
7.1
6.3
2.6
2.6
5.4
0.8
-
32.1
5.4
7.3
6.4
2.6
2.5
5.3
0.8
-
30.3
2.9%
3.9%
3.4%
1.4%
1.3%
2.8%
0.4%
-
16.1%
5.2
0.7
37.1
43.0
4.4
4.4
23.6
23.6
160.0
7.7
0.8
38.8
47.3
4.4
4.4
22.5
22.5
167.6
4.0%
0.4%
20.5%
24.9%
2.4%
2.4%
11.9%
11.9%
88.6%
9.6
-
55.1
64.7
4.2
4.2
21.9
21.9
174.7
10.9
-
55.5
66.4
4.2
4.2
20.6
20.6
177.7
5.9%
-
29.4%
35.3%
2.3%
2.3%
10.9%
10.9%
94.5%
Other Securities (2)
Consumer Products
Financial Services
Foreign Exchange Forwards
Healthcare Services
Industrial
Information Technology
Oil and Gas
Real Estate
Telecommunications
Utilities
2.0
1.7
(0.2)
0.3
2.8
1.7
3.6
3.2
5.2
1.2
21.5
189.1
1 The Arena FINCOs’ exposure to commodity price risk in its private loans is generally mitigated as borrowers are typically required to hedge the commodity price
2.2
0.2
(0.5)
0.2
3.5
0.8
1.1
-
2.8
-
10.3
188.0
4.6
1.7
-
0.2
3.2
1.6
3.9
3.1
6.1
1.2
25.6
185.6
3.9
0.2
-
-
3.7
0.9
1.1
-
3.2
-
13.0
187.7
1.2%
0.1%
(0.3)%
0.1%
1.9%
0.4%
0.6%
-
1.5%
-
5.5%
100.0%
1.0%
0.9%
(0.1)%
0.1%
1.5%
0.9%
1.9%
1.7%
2.8%
0.7%
11.4%
100.0%
$
$
$
$
risk by selling product forward and/or employing the use of other derivatives to substantially reduce all risk.
2 Net of short position
- 35 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
THE ARENA FINCOs
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions
(unaudited)
(millions except for percentage)
December 30, 2019
Investments by industry
Ref. no.
Corporate Private Credit
CPC-2209
CPC-3198
CPC-3222
CPC-3349
CPC-3677
CPC-4248
CPC-3083TL
CPC-3199
CPC-1361TL
CPC-2364
CPC-3316
CPC-5027
CPC-4108
CPC-2752
CPC-3107
CPC-4985
CPC-3824
CPC-1927
CPC-3376
CPC-2170
CPC-5143
CPC-2397
CPC-3083
CPC-3349EQY
CPC-3391
CPC-4347
CPC-4256
CPC-4248EQY
CPC-4530
CPC-3108
CPC-3199EQY
CPC-1010
CPC-2208
CPC-4473
Subtotal / Weighted average %
Other Assets
Oil and Gas
Oil and Gas
Business Services
Business Services
Healthcare Services
Business Services
Oil and Gas
Healthcare Services
Retail
Business Services
Retail
Oil and Gas
Other Assets
Business Services
Oil and Gas
Oil and Gas
Financial Services
Business Services
Oil and Gas
Oil and Gas
Financial Services
Business Services
Business Services
Healthcare Services
Healthcare Services
Healthcare Services
Healthcare Services
Business Services
Business Services
Oil and Gas
Oil and Gas
Business Services
Healthcare Services
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
$ 10.4
3.8
4.7
3.6
3.5
3.6
2.9
2.3
2.2
2.2
2.1
1.9
1.7
1.6
1.2
1.3
1.2
1.0
1.0
1.8
0.8
0.8
0.8
1.2
0.4
0.4
0.4
0.3
0.3
0.3
-
0.2
0.6
0.1
60.2
$ 10.5
3.8
4.7
3.7
3.5
2.9
2.7
2.3
2.2
2.2
2.1
1.9
1.7
1.6
1.3
1.3
1.2
1.0
1.0
0.9
0.8
0.8
0.8
0.8
0.4
0.4
0.4
0.4
0.3
0.3
-
0.2
0.6
-
58.7
$ 11.5
5.4
4.7
4.4
3.8
2.9
2.8
2.3
2.2
2.2
2.1
1.9
1.7
1.6
1.4
1.3
1.2
1.0
1.0
0.8
0.8
0.8
0.7
0.6
0.4
0.4
0.4
0.4
0.3
0.3
0.2
0.2
0.1
0.1
61.9
Europe
North America
North America
Asia/Pacific
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
Asia/Pacific
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
Equity
Hard Asset
Hard Asset
Second Lien
First Lien
First Lien
Second Lien
First Lien
First Lien
First Lien(5)
Second Lien
First Lien
First Lien
First Lien
Equity
First Lien
First Lien
First Lien
Second Lien
First Lien(7)
Hard Asset
Equity
Equity
Equity
First Lien
First Lien
First Lien
Equity
First Lien
Second Lien
Equity
First Lien
Second Lien
Equity
n/a (4)
n/a (4)
n/a (4)
12.00%
10.41%
11.01%
9.46%
15.00%
12.26%
10.64%
9.76%
11.91%
13.50%
14.00%
n/a (6)
10.00%
9.66%
15.00%
10.60%
5.25%
12.00%
n/a (4)
n/a (8)
n/a(6)
9.73%
10.00%
9.00%
n/a(8)
9.50%
10.35%
n/a (4)
14.00%
n/a (4)
n/a (6)
11.28%
LTV (3)
n/a (4)
n/a (4)
110.0%
76.0%
52.0%
68.0%
94.0%
90.0%
41.0%
37.0%
57.0%
81.0%
40.0%
30.0%
n/a (6)
32.0%
75.0%
29.0%
23.0%
100.0%
91.6%
n/a (4)
n/a (8)
n/a(6)
24.6%
29.0%
15.6%
n/a(8)
11.6%
6.0%
n/a (4)
43.0%
n/a (4)
n/a (6)
66.9%
- 36 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
THE ARENA FINCOs
Details of Loan and Private Asset Positions (continued)
(unaudited)
(millions except for percentage)
December 31, 2019
Ref. no.
Real Estate Private Credit
and Real Estate Assets
REPC-1207
REPC-1068S4
REPC-2277
Investments by industry
Hospitality
Residential
Land
- Commercial Development
Land
- Multi-Family Development
Land
- Commercial Development
Land
- Multi-Family Development
Commercial
Hospitality
Residential
Residential
Residential
Hospitality
Land
- Multi-Family Development
Hospitality
Residential
Self Storage
Land
- Single-Family Development
Land
- Single-Family Development
Land
- Single-Family Development
Land
- Single-Family Development
Land
- Single-Family Development
Land
- Single-Family Development
Land
- Commercial Development
Land
- Single-Family Development
Land
- Single-Family Development
Land
- Commercial Development
REPC-2683
REPC-2592
REPC-4698
REPC-1942
REPC-2214
REPC-4111
REPC-4133
REPC-4220
REPC-2560
REPC-3812
REPC-2497
REPC-1068
REPC-4319
REPC-4350
REPC-4437
REPC-4097
REPC-4212
REPC-2528
REPC-4684
REPC-1047
REPC-4436
REPC-5123
REPC-1015
Subtotal / Weighted average %
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
LTV (3)
4.6
3.7
5.2
3.7
6.5
3.7
Europe
North America
Real Property
First Mortgage(5)
n/a(9)
12.26%
n/a(9)
61.0%
3.1
3.1
3.1
North America
First Mortgage
15.00%
50.0%
2.6
2.6
2.7
North America
First Mortgage
12.51%
44.0%
1.9
1.9
2.0
North America
First Mortgage
10.51%
79.0%
2.0
2.0
1.4
1.2
1.1
1.1
0.9
1.3
0.9
0.7
1.6
0.4
0.3
0.3
0.3
0.3
1.9
2.0
1.4
1.2
1.1
1.1
0.9
0.8
0.9
0.7
0.3
0.2
0.2
0.2
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.2
32.4
0.1
30.3
1.9
1.6
1.4
1.3
1.2
1.1
0.9
0.8
0.8
0.7
0.3
0.2
0.2
0.2
0.2
0.2
0.2
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
First Mortgage
Real Property
First Mortgage
First Mortgage
First Mortgage
First Mortgage
First Mortgage
First Mortgage
First Mortgage
Real Property
First Mortgage
11.50%
n/a (10)
10.51%
9.25%
9.83%
12.00%
10.51%
11.50%
10.51%
n/a(9)
11.00%
54.0%
n/a (10)
108.0%
80.0%
58.0%
83.0%
108.0%
42.0%
108.0%
n/a(9)
64.0%
Asia/Pacific
First Mortgage
11.00%
69.0%
Asia/Pacific
First Mortgage
11.00%
55.0%
Asia/Pacific
First Mortgage
11.00%
75.0%
Asia/Pacific
First Mortgage
11.00%
55.0%
North America
First Mortgage
10.00%
57.0%
Asia/Pacific
First Mortgage
11.00%
67.0%
0.1
North America
First Mortgage
15.00%
53.0%
0.1
0.1
Asia/Pacific
First Mortgage
11.00%
53.0%
Asia/Pacific
First Mortgage
12.00%
61.0%
-
North America
Real Property
n/a(9)
n/a(9)
31.5
11.78%
65.9%
- 37 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
THE ARENA FINCOs
Details of Loan and Private Asset Positions (continued)
(unaudited)
(millions except for percentage)
December 31, 2019
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
Investments by industry
Ref. no.
Commercial and Industrial Assets
CI-1800
CI-3045
CI-2651
CI-2686
CI-3978
CI-2064
CI-1999EQY
CI-2201
CI-1520
CI-4250
CI-5001
CI-4301
CI-2203
CI-4753
CI-4370
CI-2000
CI-4091
CI-1716
CI-3221
CI-1035
CI-4905
CI-5113
CI-1999
CI-2808
CI-1282
CI-1018
Subtotal / Weighted average %
Other assets
Other assets
Other assets
Other assets
Lease/Equipment
Other assets
Other assets
Lease/Equipment
Other assets
Other assets
Other assets
Oil and Gas
Lease/Equipment
Other assets
Other assets
Other assets
Other assets
Lease/Equipment
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Structured Finance
SF-2228
SF-2239
Subtotal / Weighted average %
Other assets
Other assets
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
Asia/Pacific
North America
North America
North America
North America
North America
North America
North America
North America
North America
First Lien
Asset Pool
Hard Asset
First Lien
Hard Asset
First Lien
Equity
Hard Asset
First Lien
First Lien
First Lien
Hard Asset
Hard Asset
Second Lien
First Lien
Equity
Asset Pool
Hard Asset
First Lien
First Lien
First Lien
First Lien
First Lien
Equity
First Lien
First Lien
14.00%
n/a (11)
8.00%
18.25%
n/a (12)
12.76%
n/a (4)
n/a (12)
n/a (13)
14.76%
13.20%
n/a (4)
n/a (12)
18.00%
n/a
n/a (8)
n/a (11)
n/a (12)
13.20%
11.51%
13.20%
13.20%
0.00%
n/a (4)
n/a (16)
9.26%
13.56%
LTV (3)
27.1%
66.3%
75.0%
80.0%
n/a (12)
80.0%
n/a (4)
n/a (12)
41.0%
76.0%
52.0%
13.0%(14)
n/a (12)
33.0%
19.0%
n/a (8)
49.0%
n/a (12)
52.0%
100.0%
52.0%
52.0%
n/a(15)
n/a (4)
n/a (16)
100.0%
56.4%
North America
North America
First Lien
First Lien
16.00%
n/a (17)
16.00%
80.0%
54.0%
68.4%
8.9
6.3
4.0
4.0
2.7
2.9
2.8
1.7
1.9
1.3
0.9
0.6
0.4
0.6
0.5
0.5
0.4
-
0.4
0.4
0.2
0.1
0.1
-
-
0.2
41.8
2.5
1.9
4.4
8.9
6.3
4.3
4.1
3.1
2.9
3.1
1.7
1.9
1.2
0.9
0.7
0.4
0.6
0.5
0.5
0.4
-
0.4
0.5
0.2
0.1
0.1
-
-
0.2
43.0
2.5
1.9
4.4
9.2
8.0
4.3
4.1
3.7
3.0
3.0
2.9
1.9
1.2
0.9
0.8
0.7
0.6
0.5
0.5
0.4
0.4
0.4
0.3
0.2
0.1
0.1
0.1
-
-
47.3
2.5
1.9
4.4
- 38 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
THE ARENA FINCOs
Details of Loan and Private Asset Positions (continued)
(unaudited)
(millions except for percentage)
December 31, 2019
Investments by industry
Ref. no.
Consumer Assets
Consumer
CA-3595
Consumer
CA-1052F
Consumer
CA-4718
Consumer
CA-2620
Consumer
CA-4727
Consumer
CA-2204
Consumer
CA-2199
Consumer
CA-3178
Consumer
CA-1788AS3
Consumer
CA-2139
Consumer
CA-1788/1933
Consumer
CA-1933A
Consumer
CA-2762
Consumer
CA-2373
Consumer
CA-2729
Consumer
CA-4007
Consumer
CA-1788A
Consumer
CA-1934
Consumer
CA-2470
CA-1052S
Consumer
Subtotal / Weighted average %
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
5.1
2.6
2.0
0.6
1.5
2.5
1.3
4.0
1.3
1.0
0.6
0.8
0.6
0.2
0.8
0.3
0.4
0.2
0.1
1.5
27.4
4.9
2.6
2.0
0.6
1.5
1.5
1.3
1.3
1.3
1.1
0.6
0.8
0.6
0.2
0.8
0.3
0.4
0.2
0.1
1.5
23.6
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
Latin America
North America
North America
North America
North America
North America
North America
North America
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
Asset Pool
First Lien
First Lien
Second Lien
First Lien
First Lien
First Lien
First Lien
5.0
2.5
2.2
1.6
1.5
1.4
1.3
1.3
1.0
0.9
0.8
0.7
0.5
0.5
0.4
0.3
0.3
0.2
0.1
-
22.5
15.50%
15.66%
29.00%
n/a (18)
25.00%
14.91%
12.00%
15.00%
n/a (18)
n/a (18)
n/a (18)
n/a (18)
n/a (19)
n/a (17)
n/a (17)
16.00%
n/a (18)
n/a (18)
11.26%
15.66%
17.99%
LTV (3)
81.1%
116.0%
66.0%
27.0%
64.0%
80.0%
95.0%
80.0%
82.0%
100.0%
82.0%
82.0%
n/a (19)
52.0%
252.0%
28.0%
82.0%
82.0%
80.0%
116.0%
81.5%
Total / Weighted average %
66.3%
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.
$ 166.3
13.09%
160.0
167.6
$
$
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, 2019. 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, 2019.
4
Investment is not a loan. Metric is not applicable.
5 Denotes subordinate position within the structure.
6
7 The first lien term loan is primed by a debtor-in-possession loan, of which the Arena group is a participant.
8
Investment is a warrant to purchase an equity interest in an operating company.
Investment is a preferred equity investment.
Investment represents owned real estate acquired through lender default.
Investment is directly held property acquired when the Arena group and its partners foreclosed upon a related loan.
Investment represents a credit pool purchase with no stated interest rate.
Investment represents an aircraft purchased. Coupon and LTV not applicable to hard assets.
Investment in litigation claim proceeds with no stated coupon rate.
Investment represents a right to collect a fixed cash flow stream. While not technically a loan, the contract is backed by assets valued at 3-4 times the total collection amount.
9
10
11
12
13
14
15 Investment is a maturity default where the Arena Group and its partners acquired the borrower in bankruptcy.
16 Investment is remaining profit participation on a repaid off loan.
17
18
19 Investment represents an unsecured credit pool purchase with no stated interest rate.
Investment with no stated coupon rate.
Interest not accrued on loans purchased as non-performing.
- 39 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
THE ARENA FINCOs
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions
(unaudited)
(millions except for percentage)
December 31, 2018
Investments by industry
Ref. no.
Corporate Private Credit
CPC-2209
CPC-3198
CPC-3222
CPC-3349
CPC-2514
CPC-2364
CPC-1266TL
CPC-1361TL
CPC-3083TL
CPC-2208
CPC-3316
CPC-3199
CPC-3824
CPC-3376
CPC-2752
CPC-1927
CPC-2170
CPC-3107
CPC-2104
CPC-3391
CPC-3349EQY
CPC-2397
CPC-1265TL
CPC-3108
CPC-3083
CPC-2752A
CPC-3373
CPC-1010
CPC-1265RC
CPC-1266RC
Subtotal / Weighted average %
Other Assets
Oil and Gas
Oil and Gas
Business Services
Other Assets
Retail
Business Services
Healthcare Services
Business Services
Business Services
Business Services
Oil and Gas
Oil and Gas
Business Services
Other Assets
Financial Services
Oil and Gas
Business Services
Business Services
Healthcare Services
Business Services
Financial Services
Consumer Products
Business Services
Business Services
Financial Services
Oil and Gas
Oil and Gas
Consumer Products
Business Services
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
$ 6.9
3.7
4.6
4.4
3.4
2.5
2.3
2.3
2.5
2.2
2.1
1.9
4.0
1.6
1.6
1.4
2.2
1.4
-
0.9
0.8
0.7
0.7
0.6
0.5
0.4
0.5
0.2
0.4
0.4
57.1
$ 6.9
3.7
4.5
3.7
3.3
2.4
2.3
2.3
2.2
2.1
2.1
1.8
2.0
1.6
1.6
1.4
1.2
1.4
-
0.9
0.8
0.7
0.7
0.6
0.5
0.4
0.3
0.2
0.2
-
51.8
$ 8.5
4.8
4.5
3.5
3.3
2.4
2.4
2.3
2.3
2.2
2.1
2.0
2.0
1.6
1.6
1.4
1.4
1.4
1.2
0.9
0.8
0.7
0.7
0.6
0.5
0.4
0.3
0.2
0.2
-
56.2
Europe
North America
North America
Asia/Pacific
Latin America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
Asia/Pacific
North America
North America
North America
North America
North America
North America
North America
North America
North America
Equity
Hard Asset
First Lien
Second Lien
First Lien
First Lien(5)
First Lien
First Lien
Second Lien
Second Lien
Second Lien
First Lien
First Lien
Second Lien
First Lien
First Lien
First Lien(6)
Second Lien
First Lien
First Lien
Equity
Equity
First Lien
Second Lien
Equity
First Lien
First Lien
First Lien
First Lien
First Lien
n/a (4)
n/a (4)
13.88%
12.00%
12.50%
11.54%
9.50%
13.00%
13.50%
11.75%
10.50%
15.00%
10.56%
12.50%
14.50%
15.00%
5.75%
12.45%
n/a (7)
10.13%
n/a(8)
n/a (4)
9.81%
10.75%
n/a (8)
14.50%
10.00%
14.00%
9.81%
9.50%
12.15%
LTV (3)
n/a (4)
n/a (4)
59.0%
54.0%
37.0%
55.0%
44.0%
62.0%
87.0%
13.0%
72.0%
40.0%
32.0%
31.0%
40.0%
49.0%
87.0%
27.0%
n/a (7)
16.0%
n/a(8)
n/a (4)
25.0%
9.0%
n/a (8)
40.0%
15.0%
43.0%
25.0%
44.0%
47.6%
- 40 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
THE ARENA FINCOs
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions (continued)
(unaudited)
(millions except for percentage)
December 31, 2018
Ref. no.
Investments by industry
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
LTV (3)
Real Estate Private Credit
and Real Estate Assets
REPC-1068S4
REPC-1207
REPC-2277
REPC-3700
REPC-2683
REPC-2692
REPC-2592
REPC-1942
REPC-2214
REPC-3655
REPC-1766
REPC-2560
REPC-2497
REPC-2187
REPC-3037
REPC-2736EUR
REPC-1068
REPC-2159
REPC-3035
REPC-1017
REPC-1047
REPC-1042
REPC-1015
Residential
Hospitality
Land
- Commercial Development
Commercial
Land
- Multi-Family Development
Land
- Single-Family Development
Land
- Commercial Development
Commercial
Hospitality
Land
- Commercial Development
Residential
Hospitality
Hospitality
Retail
Hospitality
Commercial
Residential
Commercial
Hospitality
Land
- Commercial Development
Land
- Commercial Development
Residential
Land
- Commercial Development
Subtotal / Weighted average %
Commercial and Industrial Assets
CI-3045
CI-2253
CI-1811
CI-1800
CI-3978
CI-2686
CI-2201
CI-2651
CI-3044
CI-1999
CI-2866
CI-1519
CI-2808
CI-1793
CI-1520
CI-2203
CI-2064
CI-1716
CI-1999
CI-2000
CI-1035
CI-2323
CI-1018
Subtotal / Weighted average %
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Lease/Equipment
Other assets
Other assets
Other assets
Lease/Equipment
Other assets
Other assets
Lease/Equipment
Other assets
Lease/Equipment
Other assets
Lease/Equipment
Other assets
Other assets
Other assets
Lease/Equipment
Other assets
3.7
3.1
3.7
2.9
3.1
2.7
3.1
2.7
2.6
2.5
2.6
2.6
1.9
1.8
1.3
1.9
1.8
1.3
1.0
0.9
0.9
0.9
0.8
0.7
2.5
0.6
0.4
0.3
0.1
0.1
0.1
0.2
25.0
1.0
1.1
0.9
0.9
0.8
0.7
2.4
0.6
0.4
0.3
0.1
0.1
0.1
0.1
32.1
8.3
7.0
5.8
5.1
4.8
6.2
3.8
4.0
3.0
2.8
2.5
3.0
2.4
1.3
1.9
1.4
1.5
0.2
0.5
0.2
0.4
0.2
0.2
66.5
8.3
7.0
5.8
5.1
4.8
4.8
3.9
4.3
2.8
3.0
2.5
2.5
2.4
1.3
1.9
1.4
1.2
0.2
0.5
0.2
0.4
0.2
0.2
64.7
- 41 -
3.7
3.2
3.1
2.7
North America
Europe
First Mortgage(5)
First Mortgage
North America
North America
First Mortgage
First Mortgage
13.00%
7.00%
61.0%
43.0%
15.00%
15.50%
50.0%
44.0%
2.6
North America
First Mortgage
13.25%
59.0%
2.5
2.0
1.6
1.3
1.0
0.9
0.9
0.9
0.8
0.7
0.7
0.6
0.4
0.3
Asia/Pacific
First Mortgage
13.50%
33.0%
North America
North America
North America
First Mortgage
Real Property
First Mortgage
North America
North America
North America
North America
North America
North America
Europe
North America
North America
North America
First Mortgage(5)
Real Property
First Mortgage
First Mortgage
First Mortgage
First Mortgage
First Mortgage
Real Property
First Mortgage
First Mortgage
11.25%
n/a (9)
11.25%
11.50%
n/a (9)
11.25%
11.25%
10.70%
10.75%
15.00%
n/a (9)
12.00%
12.50%
79.0%
n/a (9)
67.0%
55.0%
n/a (9)
68.0%
82.0%
82.0%
77.0%
100.0%+
n/a (9)
10.0%
63.0%
0.2
North America
First Mortgage
15.00%
66.0%
0.1
0.1
North America
North America
First Mortgage
First Mortgage
North America
Real Property
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
Asset Pool
First Lien
Second Lien
First Lien
Hard Asset
First Lien
Hard Asset
Hard Asset
First Lien
First Lien
First Lien
Second Lien
First Lien
Hard Asset
First Lien
Hard Asset
First Lien
Hard Asset
First Lien
Equity
First Lien
Hard Asset
First Lien
-
30.3
8.2
7.9
5.8
5.2
4.8
4.7
4.3
4.3
2.8
2.7
2.5
2.5
2.4
2.0
1.9
1.4
1.3
0.6
0.4
0.3
0.3
0.1
-
66.4
15.00%
15.00%
53.0%
32.0%
n/a (9)
12.40%
n/a (9)
56.8%
n/a (10)
14.00%
15.00%
14.00%
n/a (11)
18.75%
n/a (11)
8.00%
n/a
14.00%
11.29%
15.00%
14.00%
n/a (11)
n/a (12)
n/a (11)
13.50%
n/a (11)
14.00%
n/a (9)
11.63%
n/a (11)
9.38%
13.92%
66.0%
92.0%
89.0%
26.0%
n/a (11)
80.0%
n/a (11)
75.0%
75.0%
100.0%
80.0%
38.0%
80.0%
n/a (11)
41.0%
n/a (11)
76.0%
n/a (11)
100.0%+
n/a(9)
100.0%
n/a (11)
100.0%
72.5%
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
14. ADDITIONAL ARENA GROUP INVESTMENT SCHEDULES (continued)
THE ARENA FINCOs
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions (continued)
(unaudited)
(millions except for percentage)
December 31, 2018
Investments by industry
Ref. no.
Structured Finance
SF-2228
SF-2228DD1
SF-2261
SF-1038
Subtotal / Weighted average %
Other assets
Other assets
Other assets
Other assets
Consumer Assets
Consumer
CA-1839
Consumer
CA-1052F
Consumer
CA-2620
Consumer
CA-2204
Consumer
CA-2373
Consumer
CA-1788AS3
Consumer
CA-1788/1933
Consumer
CA-1998
Consumer
CA-2139
Consumer
CA-3178
Consumer
CA-1933A
Consumer
CA-2762
Consumer
CA-2199
Consumer
CA-2729
Consumer
CA-1934
Consumer
CA-1788A
Consumer
CA-4007
Consumer
CA-2470
Consumer
CA-3196
CA-1052S
Consumer
Subtotal / Weighted average %
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
LTV (3)
2.4
1.7
0.3
0.2
4.6
3.7
2.9
2.6
4.3
0.9
1.3
0.8
1.2
1.0
5.7
0.8
0.7
0.5
0.6
0.2
0.4
0.3
3.2
0.3
1.5
32.9
2.4
1.3
0.3
0.2
4.2
3.7
2.9
2.4
1.4
0.9
1.3
0.8
1.1
1.1
0.9
0.8
0.7
0.5
0.6
0.2
0.4
0.3
0.1
0.3
1.5
21.9
North America
North America
North America
North America
First Lien
First Lien
First Lien
First Lien
2.4
1.3
0.3
0.2
4.2
16.00%
16.00%
18.00%
n/a (13)
16.15%
80.0%
80.0%
78.0%
5.0%
76.7%
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
Latin America
North America
North America
North America
North America
North America
North America
North America
North America
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
Asset Pool
First Lien
First Lien
First Lien
First Lien
Second Lien
First Lien
First Lien
First Lien
3.7
2.7
2.6
1.4
1.3
1.3
1.2
1.1
1.0
0.9
0.7
0.7
0.5
0.4
0.3
0.3
0.3
0.1
0.1
-
20.6
18.00%
15.66%
n/a (14)
15.81%
12.00%
n/a (14)
n/a (14)
7.87%
n/a (14)
15.81%
n/a (14)
n/a (15)
12.00%
n/a (13)
n/a (14)
n/a (14)
16.00%
11.17%
n/a(13)
15.66%
15.11%
66.0%
100.0%
25.0%
80.0%
52.0%
78.0%
78.0%
70.0%
100.0%
80.0%
78.0%
n/a (15)
95.0%
100.0%
78.0%
78.0%
54.0%
80.0%
100.0%
100.0%
71.9%
Total / Weighted average %
$ 186.1
$
174.7
$
177.7
13.20%
62.7%
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.
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, 2018. 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, 2018.
4
Investment is not a loan. Metric is not applicable.
5 Denotes subordinate position within the structure.
6 The first lien term loan is primed by a debtor-in-possession loan, of which the Arena group is a participant.
7
Investment is remaining profit participation on a paid off loan.
Investment is a preferred equity investment.
Investment represents owned real estate acquired through lender default.
Investment represents a credit pool purchase with no stated interest rate.
Investment represents an aircraft purchased. Coupon and LTV not applicable to hard assets.
Investment in litigation claim proceeds with no stated coupon rate.
Investment with no stated coupon rate.
Interest not accrued on loans purchased as non-performing.
Investment represents an unsecured credit pool purchase with no stated interest rate.
8
9
10
11
12
13
14
15
- 42 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
15. NON-GAAP MEASURES
(a) Book value per share
Book value per share is computed as book value divided by the adjusted number of common shares. Management believes book value per share
is a useful financial performance measure of the Company 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 Company’s businesses, 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.
The table below provides the reconciliation of the Company’s shareholders’ equity at the end of the period, determined on an IFRS basis, to book
value, and the number of common shares outstanding at the end of the period to the adjusted number of common shares:
(millions except share and per share data)
Book value (in US$):
Shareholders’ equity per IFRS
Adjustments:
RSU liability 1
Derivative warrant liability 2
Number of common shares:
Number of common shares outstanding
Adjustments for assumed exercise of:
Outstanding RSUs 1
Adjusted number of common shares
Book value per share - in US$
Book value per share - in C$ 3
Westaim TSXV closing share price - in C$
December 31, 2019
December 31, 2018
$
354.8
$
345.2
6.2
1.9
362.9
$
5.7
2.4
353.3
$
143,186,718
143,186,718
3,034,261
146,220,979
3,034,261
146,220,979
$
$
$
2.48
3.22
2.65
$
$
$
2.42
3.30
2.58
1 See note 14 to the Company’s audited consolidated financial statements for the years ended December 31, 2019 and 2018. Liability related to RSUs converted
from C$ to US$ at period end exchange rates. RSUs are exercisable for common shares or cash at no cost to the holders. Adjustment made to reflect a
reclassification of the RSU liability to shareholders’ equity assuming all outstanding RSUs were exercised for common shares.
2 See note 10 to the Company’s audited consolidated financial statements for the years ended December 31, 2019 and 2018. Derivative warrant liability converted
from C$ to US$ at period end exchange rates. Adjustment made as the non-cash fair value change in the derivative warrant liability from period to period is not
indicative of the change in the intrinsic value of the Company. Vested Warrants not included in the adjusted number of common shares as none of them were in-
the-money at December 31, 2019 and December 31, 2018.
3 Book value per share converted from US$ to C$ at period end exchange rates. Period end exchange rates: 1.29865 at December 31, 2019 and 1.36430 at
December 31, 2018.
4 See note 14 to the Company’s audited consolidated financial statements for the years ended December 31, 2019 and 2018. No adjustments were made for
options for the years ended December 31, 2019 and 2018 since they were not in-the money. The exercise of in-the-money options would have resulted in an
infusion of capital to the Company.
(b) Net Returns on the Arena FINCOs Investment Portfolios
Net Return on the Arena FINCOs investment portfolios is the aggregate of investment income, net of gains (losses) on investments less interest
expense, management, asset servicing and incentive fees, and deal expenses and other operating expenses of the Arena FINCOs divided by
average carrying values for the Arena FINCOs, for the period.
16. 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.
- 43 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2019
(Currency amounts in United States dollars unless otherwise indicated)
16. CAUTIONARY NOTE REGARDING FUTURE ORIENTED FINANCIAL INFORMATION (continued)
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; Arena’s limited operating record and
history of operating losses; 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 the Arena FINCOs on the
creditworthiness of borrowers; the ability of the Arena FINCOs to mitigate the risk of default by and bankruptcy of a borrower; the ability of the
Arena FINCOs to adequately obtain, perfect and secure loans; the ability of the Arena FINCOs to limit the need for enforcement or liquidation
procedures; the ability of the Arena FINCOs 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; 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; 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.
- 44 -
March 26, 2020
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL INFORMATION
The accompanying consolidated financial statements including the notes thereto have been prepared by,
and are the responsibility of, the management of The Westaim Corporation. This responsibility includes
selecting appropriate accounting policies and making estimates and informed judgments based on the
anticipated impact of current transactions, events and trends, consistent with International Financial
Reporting Standards. The Board of Directors is responsible for ensuring that management fulfills its
responsibility for financial reporting and internal control. In meeting our responsibility for the reliability and
timeliness of financial information, the Company maintains and relies upon a comprehensive system of
internal controls including organizational, procedural and disclosure controls. The Audit Committee,
which is comprised of three Directors, all of whom are independent, meets with management as well as
the external auditors to satisfy itself that management is properly discharging its financial reporting
responsibilities and to review the consolidated financial statements and the report of the auditors. It
reports its findings to the Board of Directors who approve the consolidated financial statements.
The accompanying consolidated financial statements have been audited by Deloitte LLP, the independent
auditors, in accordance with generally accepted auditing standards. The auditors have full and
unrestricted access to the Audit Committee.
J. Cameron MacDonald
President and Chief Executive Officer
Glenn G. MacNeil
Chief Financial Officer
- 45 -
Deloitte LLP
Bay Adelaide East
8 Adelaide Street West
Suite 200
Toronto ON M5H 0A9
Canada
Tel: 416-601-6150
Fax: 416-601-6610
www.deloitte.ca
Independent Auditor’s Report
To the Shareholders and the Board of Directors of
The Westaim Corporation
Opinion
We have audited the consolidated financial statements of The Westaim Corporation (the “Company”),
which comprise the consolidated statements of financial position as at December 31, 2019 and 2018, and
the consolidated statements of profit and comprehensive income, changes in equity and cash flows for the
years then ended, and notes to the consolidated financial statements, including a summary of significant
accounting policies (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial
position of the Company as at December 31, 2019 and 2018, and its financial performance and its cash
flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian
GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the Company in
accordance with the ethical requirements that are relevant to our audit of the financial statements in
Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Other Information
Management is responsible for the other information. The other information comprises:
● Management’s Discussion and Analysis
●
The information, other than the financial statements and our auditor’s report thereon, in the Annual
Report.
Our opinion on the financial statements does not cover the other information and we do not and will not
express any form of assurance conclusion thereon. In connection with our audit of the financial
statements, our responsibility is to read the other information identified above and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit, or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis and Annual Report prior to the date of this auditor’s
report. If, based on the work we have performed on this other information, we conclude that there is a
material misstatement of this other information, we are required to report that fact in this auditor’s report.
We have nothing to report in this regard.
-46-
Responsibilities of Management and Those Charged with Governance for the Financial
Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with IFRS, and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless management either intends to liquidate the Company or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the
basis of these financial statements.
As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
●
Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting
a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control.
● Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control.
●
●
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the Company to cease to continue as
a going concern.
-47-
●
Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in
a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Matthew Welchinski.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Ontario
March 26, 2020
-48-
The Westaim Corporation
Consolidated Statements of Financial Position
(thousands of United States dollars)
ASSETS
Cash
Income tax receivable (note 16)
Loans receivable (note 4)
Other assets (note 2j and 5)
Investments (note 2j and 6)
LIABILITIES
Accounts payable and accrued liabilities (note 7)
Income tax payable (note 16)
Preferred securities (note 8)
Derivative warrant liability (note 10)
Site restoration provision (note 11)
Deferred tax liability (note 16)
Commitments and contingent liabilities (note 12)
SHAREHOLDERS' EQUITY
Share capital (note 13)
Contributed surplus (note 14)
Accumulated other comprehensive loss (note 2o)
Deficit
December 31
2019
December 31
2018
$
$
$
$
22,240
427
-
2,298
385,784
410,749
10,770
387
38,502
1,921
4,097
399
56,076
382,182
17,486
(2,227)
(42,768)
354,673
410,749
$
$
$
$
7,836
-
14,660
982
373,921
397,399
9,605
-
36,649
2,382
3,584
-
52,220
382,182
16,516
(2,227)
(51,292)
345,179
397,399
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
- 49 -
The Westaim Corporation
Consolidated Statements of Profit and Comprehensive Income
(thousands of United States dollars except share and per share data)
Revenue
Interest income (note 15)
Dividend income from investments in private entities (note 15)
Fee income (note 15)
Net results of investments
Unrealized gain on investments in private entities, net of dividends (note 6)
Share of loss from investment in associates (note 6)
Unrealized gain on other investments (note 6)
Net expenses
Salaries and benefits
General, administrative and other
Professional fees
Site restoration provision (note 11)
Share-based compensation (note 14)
Foreign exchange
Interest on preferred securities (note 8)
Interest on lease liability (note 5)
Derivative warrant (note 10)
Income before income tax
Income tax expense (note 16)
Profit and comprehensive income
Earnings per share (note 17)
Basic
Diluted
Common shares outstanding
The accompanying notes are an integral part of these consolidated financial statements
- 50 -
Year Ended December 31
2019
2018
$
2,071
4,698
2,404
9,173
9,960
(86)
239
10,113
3,674
947
1,024
348
1,418
1,070
1,899
1
(557)
9,824
9,462
(938)
3,060
-
1,440
4,500
17,465
(1,101)
214
16,578
3,746
1,032
910
99
1,557
(1,149)
1,902
-
(3,812)
4,285
16,793
-
8,524
$
16,793
0.06
0.06
$
$
0.12
0.11
143,187
143,187
$
$
$
$
The Westaim Corporation
Consolidated Statements of Changes in Equity
Year ended December 31, 2019
(thousands of United States dollars)
Share
Capital
Contributed
Surplus
Accumulated
Other
Comprehensive
Loss
Deficit
Total
Equity
Balance at January 1, 2019
$
382,182
$
16,516
$
(2,227)
$
(51,292)
$
345,179
Stock option plan expense (note 14)
Profit and comprehensive income
-
-
970
-
-
-
-
8,524
970
8,524
Balance at December 31, 2019
$
382,182
$
17,486
$
(2,227)
$
(42,768)
$
354,673
Year ended December 31, 2018
(thousands of United States dollars)
Share
Capital
Contributed
Surplus
Accumulated
Other
Comprehensive
Loss
Deficit
Total
Equity
Balance at January 1, 2018
$
382,182
$
14,172
$
(2,227)
$
(68,085)
$
326,042
Stock option plan expense (note 14)
Profit and comprehensive income
-
-
2,344
-
-
-
-
16,793
2,344
16,793
Balance at December 31, 2018
$
382,182
$
16,516
$
(2,227)
$
(51,292)
$
345,179
The accompanying notes are an integral part of these consolidated financial statements
- 51 -
Year Ended December 31
2018
2019
$
8,524
(9,960)
86
(239)
1,418
348
(49)
(10)
49
1,484
(557)
(427)
387
399
(1,115)
1,007
1,345
(3,789)
18,601
(3)
(1,750)
13,059
14,404
7,836
22,240
$
16,793
(17,465)
1,101
(214)
1,557
99
-
(12)
42
(2,060)
(3,812)
-
-
-
(262)
632
(3,601)
(3,717)
11,109
(18)
(3,750)
3,624
23
7,813
7,836
22,240
$
7,836
1,876
$
1,942
$
$
$
$
The Westaim Corporation
Consolidated Cash Flow Statements
(thousands of United States dollars)
Operating activities
Profit
Unrealized gain on investments in private entities, net of dividends (note 6)
Share of loss of associates (note 6)
Unrealized gain on other investments (note 6)
Share-based compensation (note 14)
Site restoration provision (note 11)
Site restoration net payments
Lease expense
Depreciation and amortization
Unrealized foreign exchange (gain) loss
Change in fair value of derivative warrant liability (note 10)
Change in income tax receivable (note 16)
Change in income tax payable (note 16)
Change in deferred tax Liability (note 16)
Net change in other non-cash balances
Other assets
Accounts payable and accrued liabilities
Cash provided from (used in) operating activities
Investing activities
Loans made to subsidiaries (note 4)
Repayment of loans made to subsidiaries (note 4)
Purchase of capital assets
Loans made to associates (note 6)
Cash provided from investing activities
Net increase in cash
Cash, beginning of period
Cash, end of period
Cash is composed of:
Cash
Supplemental disclosure of cash flow information:
Interest paid
The accompanying notes are an integral part of these consolidated financial statements
- 52 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
1
Nature of Operations
The Westaim Corporation (“Westaim”) was incorporated on May 7, 1996 by articles of incorporation under the Business Corporations Act
(Alberta). Westaim’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 Westaim on March 26, 2020.
These consolidated financial statements include the accounts of Westaim and its wholly-owned subsidiaries, Westaim Management Limited
Partnership (“Management LP”), Westaim Management GP Inc. (“Management GP”), Westaim HIIG GP Inc. (“HIIG GP”), Arena Finance
Company II Inc. (“AFCII”) and The Westaim Corporation of America (“WCA”) and are collectively referred to as the “Company”.
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 defined in note 6). Westaim’s common shares are traded on the TSX Venture Exchange
(the “TSXV”) under the symbol WED.
All currency amounts are expressed in thousands of United States dollars (“US$”), the functional and presentation currency of the Company,
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 relevant 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”), and the Arena
FINCOs (as defined in note 6).
The financial statements of entities controlled by Westaim which provide investment-related services are consolidated. These entities consist
of its wholly-owned subsidiaries, Management LP, Management GP, HIIG GP, AFCII 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 or convertible. Intercompany balances and transactions are eliminated upon consolidation.
Investment in associates is accounted for using the equity method in accordance with “Investments in Associates and Joint Ventures” (“IAS
28”) and consists 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 investment in associates consist of its investment in Arena Investors, and is reported under investments in the consolidated
statements of financial position, with the Company’s share of profit (loss) and comprehensive income (loss) of the associates reported under
“Net results of investments” in the consolidated statements of profit and comprehensive income.
(b) Functional and presentation currency
The US$ is the functional and presentation currency of the Company. IAS 21 “The Effects of Changes in Foreign Exchange Rates” describes
functional currency as the currency of the primary economic environment in which an entity operates. A significant majority of the Company’s
revenues and costs are earned and incurred in US$, respectively.
(c) Use of estimates
The preparation of financial statements requires management to make estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates and changes in estimates are recorded in the reporting period in
which they are determined. Key estimates include the fair value of investments in private entities, provision for site restoration, fair value of
share-based compensation, fair value of derivative warrant liability, and unrecognized deferred tax assets.
- 53 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
(d) Judgments made by management
Key areas where management has made difficult, complex or subjective judgments in the process of applying the Company’s accounting
policies, often as a result of matters that are inherently uncertain, include determining that the Company meets the definition of an investment
entity under IFRS 10, valuation techniques for fair value determination of investments in private entities, applying the equity method of
accounting for associates and determining that the Company’s functional currency is the US$. For additional information on these judgments,
see note 6 for investments in private entities and associates and note 2(b) for functional currency.
(e) Foreign currency translation
Transactions in foreign currencies are translated into US$ at rates of exchange prevailing at the time of such transactions. Monetary assets
and liabilities transacted in foreign currencies are translated into US$ at rates of exchange at the end of the reporting period. Non-monetary
items measured at fair value in a foreign currency are translated using exchange rates at the date when the fair value was measured. Any
resulting foreign exchange gain or loss is included in the consolidated statements of profit and comprehensive income.
From time to time, the Company may enter into foreign exchange forward contracts to manage certain foreign currency exposures arising
from foreign currency denominated transactions. The Company has not designated any foreign exchange forward contracts as accounting
hedges. Any resulting foreign exchange gain or loss arising from the foreign exchange forward contracts is included in the consolidated
statements of profit and comprehensive income.
(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 over time as these services are performed.
(g) Cash and cash equivalents
Cash and cash equivalents generally consist of cash on deposit and highly liquid short-term investments with original maturities of 90 days or
less. At December 31, 2019, the Company’s cash consisted of cash on deposit, including restricted cash on deposit of $3,000 (December 31,
2018 - $4,375) (see note 9).
(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 life 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 any indication 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) Leases
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for
consideration. To assess whether a contract conveys a right to control the use of an identified asset, the Company assesses whether, i) the
contract involves an identified asset, which is physically distinct and cannot be substituted by the supplier and ii) the Company has the right to
obtain substantially all of the economic benefits from the use of the identified asset during the period of use, the Company has the right to
operate the identified asset and the Company designed the identified asset in a way that predetermines how and for what purpose the
identified asset will be used.
This policy is applied to contracts entered into or modified on or after January 1, 2019.
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right of use asset is initially
measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made on or before the
commencement date, plus any costs incurred to dismantle and remove the underlying asset or restore the underlying asset or the site on
which it is located, less any lease incentives received.
The right of use asset is measured at cost less any accumulated depreciation and any accumulated impairment losses. Depreciation is
measured using the straight line method from the commencement date to the earlier of the end of the useful life of the right of use asset or the
end of the lease term.
- 54 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
The lease liability is initially measured at the present value of the future lease payments not paid at the commencement date and the lease
payments are discounted using the interest rate implicit in the lease if the rate can be readily determined, or the lessee’s incremental
borrowing rate if the rate cannot be determined.
In accordance with IFRS 16 “Leases” (“IFRS 16”), the Company has elected not to recognize right of use assets and lease liabilities for short
term leases of less than a term of 12 months and leases of low value. The Company recognizes the lease payments associated with these
leases as an expense on a straight line basis over the term of the lease.
(j) 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 including the impact of dividends and/or distributions being recorded in the
consolidated statements of profit and comprehensive income for the period in which they arise. Transaction costs on the investments are
expensed as incurred.
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 and/or distributions received from the associates.
During 2019, management reclassified its investment in ASOF LP (as hereinafter defined) of $2,708 (December 31, 2018 - $2,469) from other
assets in the consolidated statements of financial position to investments to improve comparability of investment results. Comparative figures
have been reclassified to conform to the presentation of the current period. Investment in ASOF LP is classified as FVTPL and are carried at
fair value.
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 an active
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
accepted 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
reporting period. 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.
(k) Income taxes
Income tax expense is recognized in the consolidated statements of profit and comprehensive income. Current tax which is based on taxable
income in countries where the Company operates differs from profit and comprehensive income 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.
- 55 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
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 do so.
(l) Warrants
Warrants subject to a cashless exercise at the discretion of the holder are classified as a derivative liability and measured at FVTPL. Change
in the fair value of the warrants is reported in the consolidated statements of profit and comprehensive income for the period in which they
arise.
(m) 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 high quality government bonds and
inflation in relation to the estimated cash outflows.
Future reimbursements 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. Reimbursements of site restoration costs are recorded when received.
(n) Contributed surplus
The cost of stock options are 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.
(o) Accumulated other comprehensive loss
Accumulated other comprehensive loss consists of cumulative exchange differences from currency translation.
(p) Share-based compensation
The Company maintains share-based compensation plans, which are described in note 14. The value attributed to stock options at issuance
are 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.
(q) Earnings per share
Basic earnings per share is calculated by dividing profit by the weighted average number of common shares outstanding during the reporting
period.
Diluted earnings per share is calculated by dividing profit 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, RSUs and Warrants. Anti-dilutive
potential common shares are not included in the calculation of diluted earnings per share.
3
Accounting Pronouncements
(a) Adopted in the current period
On January 13, 2016, the IASB issued IFRS 16, which replaced IAS 17 “Leases”. As required, the Company adopted IFRS 16, effective
January 1, 2019. IFRS 16 eliminates the distinction between operating and finance leases for lessees, requiring instead that the Company
recognize a right-of-use asset and a lease liability at lease commencement for all leases, with certain exceptions permitted through elections
and practical expedients on the transition date. As a result of the adoption of IFRS 16, on December 1, 2019, a right of use asset of $631 and
a lease liability of $631 were recorded on the Company’s consolidated statements of financial position (see note 5). The Company adopted
the modified retrospective approach of adoption whereby comparative periods were not restated.
- 56 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
3
Accounting Pronouncements (continued)
In June 2017, the IASB published IFRIC 23, “Uncertainty over Income Tax Treatments” (“IFRIC 23”) effective for annual periods beginning on
or after January 1, 2019. The interpretation requires an entity to assess whether it is probable that a tax authority will accept an uncertain tax
treatment used, or proposed to be used, by an entity in its income tax filings and to exercise judgment in determining whether each tax
treatment should be considered independently or whether some tax treatments should be considered together. The decision should be based
on which approach provides better predictions of the resolution of the uncertainty. An entity also has to consider whether it is probable that the
relevant authority will accept each tax treatment, or group of tax treatments, assuming that the taxation authority with the right to examine any
amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. The adoption of
IFRIC 23 did not have a material impact on the Company’s consolidated financial statements.
4
Loans Receivable
On June 9, 2017, the Company used the proceeds from the Fairfax Financing (as defined in note 8) to loan Canadian dollars (“C$”) 50,000 to
the Arena FINCOs (as defined in note 6) (the “Arena FINCOs Demand Loan”) on market terms. The Arena FINCOs Demand Loan was
denominated in C$, repayable on demand (with a final repayment date not later than June 9, 2022) and secured by the assets of the Arena
FINCOs. The Arena FINCOs Demand Loan carried interest at a rate of 4.5% per annum plus the greater of (i) 3-month LIBOR and (ii) 1%,
with the applicable rate adjusted at the beginning of each quarter. Interest was due at the end of each calendar quarter.
At December 31, 2018, C$30,000 in principal repayments had been made by the Arena FINCOs and on May 9, 2019 and September 4, 2019,
the loan was further repaid by C$2,350 and C$17,650, respectively, resulting in an outstanding loan of C$nil to the Arena FINCOs at
December 31, 2019 (C$20,000 to the Arena FINCOs at December 31, 2018).
The Arena FINCOs Demand Loan was recorded under loans receivable in the consolidated statements of financial position. The Arena
FINCOs Demand Loan was translated into US$ at rates of exchange at the end of each reporting period and any resulting foreign exchange
gain or loss was included in the consolidated statements of profit and comprehensive income. At December 31, 2019 and 2018, the carrying
amount of the Arena FINCOs Demand Loan, which was recorded at fair value, totaled $nil and $14,660, respectively. The Company recorded
a foreign exchange gain relating to the Arena FINCOs Demand Loan of $313 and a foreign exchange loss of $1,707 for the years ended
December 31, 2019 and 2018, respectively.
Interest on the Arena FINCOs Demand Loan earned and received by the Company totaled $680 and $1,385 for the years ended December
31, 2019 and 2018, respectively, and was included in interest income in the consolidated statements of profit and comprehensive income.
5
Other Assets
Other assets consist of the following:
Capital assets
Right of use asset (a)
Receivables from related parties (b)
Fair value of foreign exchange forward contract (note 9)
Accounts receivable and other
1 Adjusted to conform to the presentation of the current year.
$
December 31, 2019
36
620
1,119
244
279
2,298
$
December 31, 20181
71
$
-
727
-
184
982
$
(a) Effective, December 1, 2019, Westaim entered into a new operating lease for its office premises in Toronto expiring on November 30,
2024. At the commencement date of the lease, a right of use asset was recorded at cost under other assets and a lease liability was
recorded at amortized cost under accounts payable and accrued liabilities in the consolidated statements of financial position.
Subsequent to initial recognition, the right of use asset is depreciated using the straight-line method over the term of the lease with
depreciation recorded in the consolidated statements of profit and comprehensive income. Each lease payment reduces the lease
liability and the accretion of the lease liability is recorded as interest expense in the consolidated statements of profit and comprehensive
income.
The right of use asset recorded for the office premises was $620 and $nil at December 31, 2019 and 2018, respectively. The
depreciation on the right of use asset for the years ended December 31, 2019 and 2018 was $11 and $nil, respectively.
- 57 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
5
Other Assets (continued)
The lease liability recorded for the office premises was $645 and $nil at December 31, 2019 and 2018, respectively. The lease
payments were $nil and the interest expense on the lease liability was $1 for the year ended December 31, 2019. The lease payments
and the interest expense on the lease liability were $nil for the year ended December 31, 2018. The Company recorded a foreign
exchange loss relating to the lease liability of $13 and $nil for the years ended December 31, 2019 and 2018, respectively.
(b) Receivables from related parties totaled $1,119 at December 31, 2019 and $727 at December 31, 2018 and included certain expenses
paid by the Company on behalf of the Arena Group and HIIG from time to time which are subject to reimbursement.
6
Investments
The carrying values of the Company’s investments in private entities, associates and Arena Special Opportunities Fund, LP (“ASOF LP”)
included under investments in the consolidated statements of financial position are as follows:
Investments in private entities
Investment in associates
Investment in Arena Special Opportunities Fund, LP (“ASOF LP”)
1 Adjusted to conform to the presentation of the current year.
$
December 31, 2019
370,803
12,273
2,708
385,784
$
$
December 31, 20181
360,843
10,609
2,469
373,921
$
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 investment in associates is accounted for using the equity method.
Investments in private entities:
- HIIG Partnership
- Arena FINCOs (as
hereinafter defined)
Investment in associates:
- Arena Investors (as
hereinafter defined)
Place of
establishment
Principal place
of business
Ownership interest as at
December 31, 2019
Ownership interest as at
December 31, 20181
Ontario, Canada
Ontario, Canada
Ontario, Canada/ Ontario, Canada/
New York, U.S.3
Delaware, U.S.3
62.0% owned by the Company 2
100% owned by the Company
58.5% owned by the Company
100% owned by the Company
Delaware, U.S.
New York, U.S.
51% beneficially owned by the
Company 4
51% beneficially owned by the
Company 4
1 Adjusted to conform to the presentation of the current year.
2 On July 1, 2019, HIIG Partnership units held by certain unitholders were redeemed in accordance with the terms of the HIIG Partnership and exchanged for shares of
HIIG resulting in an increase in the Company’s ownership interest in the HIIG Partnership from 58.5% to 62.0% and a decrease in the HIIG Partnership’s ownership of
HIIG shares from 75.1% to 71.0%. The Company’s indirect ownership of HIIG (through the HIIG Partnership) remained unchanged at approximately 44.0%.
3 In 2019, the Arena FINCOs’ Canadian entity was dissolved and two new entities were established in Delaware, U.S with the principal place of business in New York,
U.S.
4 Legal equity ownership is 100%, and beneficial ownership denotes profit percentage subject to change over time pursuant to the earn-in rights granted to Bernard
Partners, LLC (“BP LLC") described below under “Investment in Associates”.
The HIIG Partnership and Arena FINCOs are investment entities, as defined in IFRS 10, and the Company accounts for these investments at
FVTPL instead of consolidating them. The subsidiaries of the HIIG Partnership and Arena FINCOs are as follows:
HIIG Partnership:
- Houston International Insurance Group, Ltd.
Delaware, U.S.
Texas, U.S.
(“HIIG”)
71.0% owned by HIIG
Partnership
75.1% owned by HIIG
Partnership
Place of
establishment
Principal place
of business
Ownership interest
as at December 31, 2019
Ownership interest
as at December 31, 20181
Arena FINCOs:
- Arena Finance Company Inc. (“AFC”)
- Arena Finance Holdings Co., LLC (“AFHC”)
- Arena Finance, LLC (“AF”)
- Westaim Origination Holdings Inc. (“WOH”)
- Arena Origination Co., LLC (“AOC”)
Ontario, Canada Ontario, Canada
New York, U.S.
Delaware, U.S.
New York, U.S.
Delaware, U.S.
New York, U.S.
Delaware, U.S.
New York, U.S.
Delaware, U.S.
na2
100% owned by the Company2
100% owned by AFHC
100% owned by the Company
100% owned by WOH
100% owned by the Company
100% owned by AFC2
na3
100% owned by the Company
100% owned by WOH
1 Adjusted to conform to the presentation of the current year.
2 On October 1, 2019, AFC was dissolved resulting in the Company owning 100% of AFHC. Prior to the dissolution of AFC, AFC owned 100% of AFHC and its
subsidiaries.
3 On October 1, 2019, AF was established.
- 58 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
6
Investments (continued)
Houston International Insurance Group, Ltd.
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
The Arena Group consists of the following businesses:
Arena Investors – Westaim Arena Holdings II, LLC (“WAHII”), through its subsidiaries, operates as an investment manager offering
clients access to fundamentals-based, asset-oriented credit investments. In 2018, Arena Investors included the Company’s investment
in WAHII, ASOF-ON GP, and ASOF-OFF II GP. Effective January 1, 2019, the Company and BP LLC, transferred their interests in
ASOF-ON GP and ASOF-OFF II GP, respectively to WAHII. 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.
The Company’s investment in Arena Investors is accounted for using the equity method in the Company’s consolidated financial
statements. See “Investment in Associates” below.
The Arena FINCOs – The Arena FINCOs include specialty finance companies that primarily purchase fundamentals-based, asset-
oriented credit investments for their own account and a company that facilitates the origination of fundamentals-based, asset-oriented
credit investments for its own account and/or possible future sale to specialty finance companies, clients of Arena Investors and/or other
third parties. The Company’s investments in the Arena FINCOs is measured at FVTPL in the Company’s consolidated financial
statements. See “Investments in Private Entities” below.
Arena Investors and the Arena FINCOs are collectively referred to as the “Arena Group”.
INVESTMENTS IN PRIVATE ENTITIES
The Company’s investments in private entities are classified as FVTPL and are carried at fair value under investments in the consolidated
statements of financial position. Changes in fair value are reported under "Net results of investments" in the consolidated statements of profit
and comprehensive income.
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 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, 2019
Investments in private entities:
- HIIG Partnership
- Arena FINCOs
As at December 31, 20181
Investments in private entities:
- HIIG Partnership
- Arena FINCOs
Fair value
Level 1
Level 2
Level 3
$ 164,953
205,850
$ 370,803
$
Fair value
Level 1
$ 162,118
198,725
$ 360,843
$
-
-
-
-
-
-
-
-
-
-
-
-
$ 164,953
205,850
$ 370,803
Level 3
$ 162,118
198,725
$ 360,843
Level 2
$
$
1 Adjusted to conform to the presentation of the current year.
- 59 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
6
Investments (continued)
Changes in investments in private entities included in Level 3 of the fair value hierarchy are as follows:
Year ended December 31, 2019
Investments in private entities:
- HIIG Partnership
- Arena FINCOs
Year ended December 31, 20181
Investments in private entities:
- HIIG Partnership
- Arena FINCOs
Opening
balance
Additions -
Equity
Repayment
of term loan
Unrealized
gain before
dividends
Dividends
paid
Ending
balance
$ 162,118
198,725
$ 360,843
$
-
10,000
$ 10,000
$
-
(10,000)
$ (10,000)
$
2,835
11,823
$ 14,658
$
$
-
(4,698)
(4,698)
$ 164,953
205,850
$ 370,803
Opening
balance
Additions -
Equity
Repayment
of term loan
Unrealized
gain before
dividends
Dividends
paid
Ending
Balance
$ 157,107
186,271
$ 343,378
$
$
-
-
-
$
$
-
-
-
$
5,011
12,454
$ 17,465
$
$
-
-
-
$ 162,118
198,725
$ 360,843
1 Adjusted to conform to the presentation of the current year.
There were no transfers among Levels 1, 2 and 3 during the years ended December 31, 2019 and 2018.
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 holding company that underwrites select property,
casualty, surety, and accident and health insurance coverages through its insurance subsidiaries.
At December 31, 2019, the Company owned approximately 62.0% of the HIIG Partnership, representing an approximate 44.0% indirect
ownership interest in HIIG.
Westaim controls the HIIG Partnership through its ownership of approximately 62.0% 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 71.0% of the issued and outstanding common shares of HIIG (“HIIG Shares”) at December 31, 2019. The
amount of dividends paid to HIIG by its subsidiaries which carry on an insurance business 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.
The Company, through HIIG GP, entered into a management services agreement (the "HIIG MSA") with HIIG commencing on July 31, 2014,
whereby HIIG GP was entitled to receive from HIIG an advisory fee of $1,000 annually for the first three years of the agreement and $500
annually for two years thereafter relating to advisory services provided under the HIIG MSA. The HIIG MSA was amended as of July 1, 2017
such that HIIG GP is entitled to receive from HIIG an advisory fee of $1,000 annually for the final two years of the agreement to July 31, 2019.
The HIIG MSA was further amended such that HIIG GP is entitled to receive from HIIG an advisory fee of $500 annually effective August 1,
2019.
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 $164,953 at December 31, 2019 and $162,118 at December 31, 2018.
- 60 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
6
Investments (continued)
Management used a multiple of net asset value as the primary valuation technique to arrive at the fair value of the Company’s investment in
the HIIG Partnership of $164,953 at December 31, 2019. The fair value of the HIIG Partnership at December 31, 2019 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, 2019. 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, management determined that using net asset value as the primary valuation technique produced the best indicator of
the fair value of the HIIG Shares as at December 31, 2019 and 2018, given that this is the valuation technique which a market participant
would employ.
On February 25, 2020 HIIG executed a commitment letter to enter into a loss portfolio transfer (“LPT”) reinsurance agreement. Pursuant to the
commitment letter, HIIG agreed to cede $118,800 of net claim reserves for certain divisions, primarily related to 2017 and prior policy years.
The LPT provides reinsurance protection of approximately $127,400 above the net ceded claim reserves and is subject to co-participations at
specified amounts. The LPT is expected to result in a pretax charge and after tax charge of approximately $43,500 and $34,400, respectively,
in the first half of 2020. Completion of the transaction is subject to, among other things, regulatory approvals and satisfaction of various other
customary closing conditions.
The significant unobservable inputs used in the valuation were the multiple applied and the adjusted book value of HIIG as at December 31,
2019. Management applied a multiple of 1.1x to the adjusted book value of HIIG at December 31, 2019 (December 31, 2018 - 1.1x). In
determining the adjusted book value of HIIG, the after tax charge of the LPT was deducted from the book value of HIIG as at December 31,
2019. The adjusted book value of HIIG as at December 31, 2019 reflected 100% of HIIG stockholders’ equity obtained from the audited
financial statements of HIIG prepared in accordance with United States generally accepted accounting principles (“US GAAP”), adjusted for
the after tax charge of the LPT and a reclassification of a stock notes 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, 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 unrealized gains on its investment in the HIIG Partnership of $2,835 and $5,011 in the years ended December 31,
2019 and 2018, respectively.
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, 2019 was higher by $1,000, the fair value of the Company’s investment in the HIIG Partnership at
December 31, 2019 would have increased by approximately $484 (December 31, 2018 - $483) and the unrealized gain on investments in
private entities for the year ended December 31, 2019 would have increased by approximately $484 (2018 - $483). If HIIG stockholders’
equity at December 31, 2019 was lower by $1,000, an opposite effect would have resulted.
Investment in the Arena FINCOs
The Company owns a 100% interest in the Arena FINCOs and exercises control over the businesses of the Arena FINCOs.
Each of AOC and AFHC is governed by the terms of a limited liability company agreement, originally dated August 31, 2015, as amended
from time to time, between Bernard Partners, LLC (“BP LLC”), a limited liability company controlled by certain members of the Arena Group
management team, and a wholly-owned subsidiary of the Company setting forth the rights and obligations each of BP LLC and the Company
(through its relevant subsidiary) as members of each of AOC and AFHC. Under each such agreement, BP LLC was issued Class M units
which were 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 each
of AOC and AFHC. The Class M units were to vest equally over 5 years from August 31, 2015 and carry escalating conversion prices in
excess of the price paid by the Company for its investment in AOC and AFHC. On December 31, 2018, the Company, through AOC and
AFHC redeemed all Class M units of each of AOC and AFHC outstanding for the aggregate “in the money” amount of $724 and this amount
was recorded as a liability on the financial statements of the Arena FINCOs at December 31, 2018 and therefore reflected in their fair value.
The liability of $724 was paid to BP LLC on March 27, 2019.
- 61 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
6
Investments (continued)
In connection with the capitalization of the Arena FINCOs, the Company granted a term loan (the “Arena FINCOs Term Loan”) with a balance
of $10,000 outstanding at December 31, 2018. The Arena FINCOs Term Loan had a seven year term to August 31, 2022, was unsecured and
carried interest at a rate of 7.25% per annum, with interest due on or before January 1 of each year during the term. On April 1, 2019, the
Company converted the Arena FINCOs Term Loan of $10,000 into additional common shares of WOH and as a result the balance of the
7.25% term loan was $nil at December 31, 2019 (December 31, 2018 - $10,000).
On September 30, 2019, October 21, 2019 and November 13, 2019, the Arena FINCOs paid a cash dividend to the Company in the amount
of $882, $1,799 and $1,900, respectively, and on October 1, 2019 Arena FINCOs issued a dividend in kind to the Company in the amount of
$117, resulting in a decrease of $4,698 in the Company’s carrying value of the Arena FINCOs. No dividends were paid or issued in kind in
2018.
FVTPL
The Company’s investment in the Arena FINCOs are accounted for at FVTPL and are included in investments in private entities. The fair
value of the Company’s investment in the Arena FINCOs was determined to be $205,850 at December 31, 2019 and $198,725 at December
31, 2018.
Management used net asset value as the primary valuation technique and determined that 100% (or 1.0x) of the equity of the Arena FINCOs
at December 31, 2019 in the amount of $205,850 approximated the fair value of the Company’s investment in the Arena FINCOs.
Management determined that the net asset value valuation technique produced the best indicator of the fair value of the Arena FINCOs at
December 31, 2019. This same valuation technique was used to determine the fair value of the Company’s investment in the Arena FINCOs
of $198,725 at December 31, 2018.
The significant unobservable inputs used in the valuation of the Arena FINCOs at December 31, 2019 were the aggregate equity of the Arena
FINCOs at December 31, 2019 and the multiple applied. Management applied a multiple of 1.0x as the equity of each of the entities reflected
the net assets of the respective entity which were carried at fair value at December 31, 2019, as described below. The equity contained
certain significant judgments and estimates made by management of the Arena FINCOs, 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
the Arena FINCOs approximate their fair values due to the short maturity of these financial instruments. The Arena FINCOs 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 Arena FINCOs 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, which include broker quotes or evaluated price quotes received from pricing services. If the inputs are not observable or
available on a timely basis, the values of these securities are determined using valuation methodologies for Level 3 investments
described below.
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 investments 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.
- 62 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
6
Investments (continued)
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 investments 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 Arena FINCOs 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 Arena FINCOs. 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 investment in the Arena FINCOs at the end of each reporting period.
The Company recorded unrealized gains on its investment in the Arena FINCOs of $11,823 before dividends paid to the Company of $4,698
in the year ended December 31, 2019 and unrealized gains on its investment in the Arena FINCOs of $12,454 in the year ended December
31, 2018. There were no dividends paid in the year ended December 31, 2018. The operating results of the Arena FINCOs includes interest
expense on the Arena FINCOs Term Loan and the Arena FINCOs Demand Loan from the Company to the Arena FINCOs of $859 and $2,110
in the years ended December 31, 2019 and 2018, respectively.
For purposes of assessing the sensitivity of the equity of the Arena FINCOs on the valuation of the Company’s investment in the Arena
FINCOs, if the equity of the Arena FINCOs at December 31, 2019 was higher by $1,000, the fair value of the Company’s investment in the
Arena FINCOs at December 31, 2019 would have increased by $1,000 (December 31, 2018 - $1,000) and the unrealized gain on investments
in private entities for the year ended December 31, 2019 would have increased by $1,000 (2018 - $1,000). If the equity of the Arena FINCOs
at December 31, 2019 was lower by $1,000, an opposite effect would have resulted.
INVESTMENT IN ASSOCIATES
On August 31, 2015, agreements were entered into between the Company and BP LLC in respect of Arena Investors (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 profit of the associates based on achieving certain assets
under management (“AUM”) and cash flow (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 does not
exercise control but exercises significant influence over the associates. The Company’s investment in associates is therefore accounted for
using the equity method in accordance with IAS 28.
- 63 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
6
Investments (continued)
The following summarized financial information represents amounts within the financial statements of Arena Investors:
Financial information of associates:
Assets
Liabilities
Net liabilities
Company’s share
Arena Investors’ Revolving Loan with the Company
Carrying amount of the Company’s investment in associates
Financial information of associates:
Revenue
Operating expenses 2
Loss and comprehensive loss
Company’s share of loss of associates (51%)
December 31, 2019
December 31, 20181
$
$
$
$
27,363
(42,765)
(15,402)
(7,727)
20,000
12,273
$
$
$
$
19,021
(34,255)
(15,234)
(7,641)
18,250
10,609
Year ended
December 31, 2019
Year ended
December 31, 20181
$ 28,646
(28,813)
$ (167)
$ (86)
$ 21,343
(23,503)
$ (2,160)
$ (1,101)
1 Adjusted to conform to the presentation of the current year.
2 Includes interest expense on the Arena Investors’ Revolving Loan granted by the Company of $1,018 and $856 in the years ended December 31, 2019 and
2018, respectively.
The following table shows the continuity of the carrying amount of the Company’s investment in Arena Investors:
Carrying amount of investment in associates:
Opening balance
Company’s share of loss of associates (51%)
Addition - Arena Investors’ Revolving Loan with the Company
Ending balance
December 31, 2019
December 31, 2018
$ 10,609
(86)
1,750
$ 12,273
$ 7,960
(1,101)
3,750
$ 10,609
On March 6, 2019, the Company amended the Arena Investors’ Revolving Loan from the limit of $20,000 to $25,000 in order to continue
funding growth initiatives and working capital needs of Arena Investors. The loan facility had a term of 36 months to December 21, 2020,
which has been extended to March 31, 2023 and bears interest at a rate of 5.25% per annum. Arena Investors had drawn down the loan
facility by $20,000 and $18,250 at December 31, 2019 and 2018, respectively. The loan facility is secured by all the assets of Arena
Investors. The Company earned and received interest on the Arena Investors’ Revolving Loan of $1,018 and $856 for the years ended
December 31, 2019 and 2018 respectively and was reported under “Interest income” in the consolidated statements of profit and
comprehensive income.
The total of the Company’s 51% share of loss of the associates was $86 and $1,101 in the years ended December 31, 2019 and 2018,
respectively, and was reported under “Share of loss from investment in associates” in the consolidated statements of profit and
comprehensive income.
INVESTMENTS IN ASOF-LP
The Company’s investments in ASOF LP, a fund managed by Arena Investors, LP, is classified at Level 3 of the fair value hierarchy and
measured at FVTPL. At December 31, 2019 and 2018, the fair value of the Company’s interest in ASOF LP was determined by Arena
Investors to be $2,708 and $2,469, respectively. The Company reported unrealized gains of $239 and $214 in the years ended December 31,
2019 and 2018, respectively, with respect to the investment in the consolidated statements of profit and comprehensive income.
- 64 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
7
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
RSUs (note 14)
DSUs (note 14)
Lease liability (note 5)
Interest on Preferred Securities (note 8)
Fair value of foreign exchange forward contract (note 9)
Other accounts payable and accrued liabilities
Ending balance
8
Preferred Securities
$
December 31, 2019
6,192
1,312
645
485
-
2,136
10,770
$
$
December 31, 2018
5,738
981
-
462
630
1,794
9,605
$
On April 3, 2017, the Company announced that it had entered into an agreement pursuant to which Fairfax Financial Holdings Limited,
through certain of its subsidiaries (collectively, “Fairfax”), had agreed to make an investment of up to C$100,000 in Westaim in exchange for
the issuance by Westaim of 5% interest bearing notes (the “Preferred Securities”) and common share purchase warrants (the “Warrants”) (see
note 10) (collectively, the “Private Placement”).
The Preferred Securities are denominated in C$, each issuable for a principal amount of C$10 and carry interest at a rate of 5% per annum.
The Preferred Securities are subordinate secured securities that will mature on May 26, 2116 but may be repaid, in whole or in part, by the
Company at any time after June 2, 2022 and at any time after June 2, 2020 if the volume-weighted average trading price of Westaim’s common
shares for any 10 day period prior to the date on which the applicable redemption notice is given is at least C$5.60.
On June 2, 2017, the Company closed the subscription by Fairfax of C$50,000 of Preferred Securities (the “Fairfax Financing”). The
proceeds raised from the Fairfax Financing were used by Westaim to make interest bearing loans to the Arena Group (see note 4). The
Company had discretion until January 1, 2018 to require Fairfax to purchase all or part of 5,000,000 additional Preferred Securities, and
exercised its discretion not to do so. There were 5,000,000 Preferred Securities outstanding at December 31, 2019 and December 31, 2018.
The Preferred Securities are repayable on demand upon a change of control of Westaim and the liability is recorded at the principal amount in
the consolidated statements of financial position. The Preferred Securities liability is translated into US$ at rates of exchange at the end of
each reporting period and any resulting foreign exchange gain or loss is included in the consolidated statements of profit and comprehensive
income. The carrying amount of the Preferred Securities, which approximated fair value, was $38,502 and $36,649 at December 31, 2019
and 2018, respectively. The Company recorded an unrealized foreign exchange loss relating to the Preferred Securities of $1,852 and an
unrealized foreign exchange gain of $3,227 in the years ended December 31, 2019 and 2018, respectively.
Interest on the Preferred Securities amounted to $1,899 and $1,902 in the years ended December 31, 2019 and 2018, respectively. Accrued
interest was $485 and $462 at December 31, 2019 and 2018, respectively, and was reported under accounts payable and accrued liabilities
in the consolidated statements of financial position.
9
Foreign Currency Forward Contract
On December 21, 2017, the Company entered into a Canadian dollar currency forward contract to sell $15,840 and buy C$20,000 to manage
the Canadian dollar currency exposures including the currency exposure arising from the Preferred Securities. The contract matured on
December 21, 2018 and resulted in a realized foreign exchange loss of $966. On December 20, 2018, the Company entered into a new
Canadian dollar currency forward contract to sell $26,284 and buy C$35,000 to manage the Canadian dollar currency exposures including the
currency exposure arising from the Preferred Securities. The contract matured on December 20, 2019 and resulted in a realized foreign
exchange gain of $399. On December 20, 2019, the Company entered into a new Canadian dollar currency forward contract to sell $30,558
and buy C$40,000 to manage the Canadian dollar currency exposures including the currency exposure arising from the Preferred Securities.
The contract has a term to maturity of less than one year and may be renewed at market rates. The Company has not designated these
Canadian dollar currency forward contracts as accounting hedges. A gain was accrued on the Canadian dollar currency forward contract in
the amount of $244 at December 31, 2019 and was recorded under other assets in the consolidated statements of financial position. A loss
was accrued on the Canadian dollar currency forward contract in the amount of $630 at December 31, 2018 and was recorded under
accounts payable and accrued liabilities in the consolidated statements of financial position. The foreign exchange gain relating to the forward
contract was $1,272 and the foreign exchange loss relating to the forward contract was $1,706 for the years ended December 31, 2019 and
2018, respectively, and was reported under foreign exchange in the consolidated statements of profit and comprehensive income. In
connection with Canadian dollar currency forward contracts which the Company may enter into from time to time, the Company has obtained
a credit facility under which the Company has pledged cash on deposit of $3,000 (December 31, 2018 - $4,375) as security. The security shall
remain in effect for the duration of the outstanding Canadian dollar currency forward contract.
- 65 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
10 Derivative Warrant Liability
In connection with the Private Placement (see note 8), Westaim issued to Fairfax 28,571,430 Warrants, each exercisable for one Westaim
common share at an exercise price of C$3.50. The Warrants vest proportionately based upon the aggregate percentage of Preferred Securities
purchased by Fairfax, with 14,285,715 having vested on June 2, 2017. The remaining 14,285,715 unvested Warrants were cancelled on
January 31, 2018. Each vested Warrant is exercisable on or prior to June 2, 2022, but the expiry date will be extended to June 2, 2024 if the
volume-weighted average trading price of Westaim’s common shares for the 10 day period ending on June 2, 2022 is less than C$5.60. After
June 2, 2020, the Company can also elect to require early exercise of the Warrants if the volume-weighted average trading price of
Westaim’s common shares for any 10 day period prior to the election is at least C$5.60.
The Warrants are subject to a cashless exercise at the discretion of Fairfax and are classified as a derivative liability in accordance with IFRS
and measured at FVTPL. The fair value of the vested Warrants at initial recognition was recorded as an expense in the consolidated
statements of profit and comprehensive income. Subsequent changes in fair value of the vested Warrants are reported in the consolidated
statements of profit and comprehensive income for the period in which they arise.
Changes to the derivative warrant liability are as follows:
Opening balance
Change in fair value – (gain)
Unrealized foreign exchange - loss (gain)
Ending balance
$
Year ended
December 31, 2019
2,382
(557)
96
1,921
$
$
Year ended
December 31, 2018
6,678
(3,812)
(484)
2,382
$
The Company recognized unrealized gains resulting from a change in the fair value of the vested Warrants of $557 and $3,812 in the years
ended December 31, 2019 and 2018, respectively. The Company also recorded an unrealized foreign exchange loss with respect to the
vested Warrants of $96 and an unrealized gain of $484 in the years ended December 31, 2019 and 2018, respectively, under foreign
exchange in the consolidated statements of profit and comprehensive income. At December 31, 2019 and 2018, a liability of $1,921 and
$2,382, respectively, had been recognized with respect to the vested Warrants in the consolidated statements of financial position.
The fair value of the vested Warrants at December 31, 2019 of $1,921 (December 31, 2018 - $2,382) was estimated using the Monte Carlo
pricing model assuming no dividends are paid on the common shares, a risk-free interest rate of 1.69% (December 31, 2018 - 1.87%), an
expiration date between January 1, 2020 and June 2, 2024 (December 31, 2018: January 1, 2019 and June 2, 2024), a volatility of the
underlying common shares of the Company of 23.23% (December 31, 2018 – 23.42%), a closing price of common shares of C$2.65
(December 31, 2018 - C$2.58) and a strike price of C$3.50. The amounts computed according to the Monte Carlo pricing model may not be
indicative of the actual values realized upon the exercise of the vested Warrants by Fairfax.
A sensitivity analysis is performed within the Monte Carlo pricing model, which produces a probability distribution of possible outcomes by
identifying which inputs impact the outcome the most.
11 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:
Indemnity payment for site restoration
Indemnity recovery for site restoration
Estimates of future expenditures
Present value adjustment
Unrealized foreign exchange loss (gain)
Ending balance
- 66 -
Year ended
December 31, 2019
3,584
$
Year ended
December 31, 2018
3,770
$
(341)
292
(839)
1,187
214
4,097
$
-
-
102
(3)
(285)
3,584
$
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
11 Site Restoration Provision (continued)
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.
The Company conducts periodic reviews of the underlying assumptions supporting the provision, 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 amount of the provision is adjusted for the present value of the estimated future restoration costs discounted using interest rates of
high quality government bonds and inflation in relation to the estimated timing of cash outflows.
Recoveries of costs resulting from indemnifications provided by previous owners of the Company’s industrial sites have not been recognized
in these financial statements. Future recoveries of the site restoration costs will be recorded when received.
12 Commitments and Contingent Liabilities
(a)
In connection with foreign exchange forward contract which the Company entered into on December 20, 2019, the Company has
obtained a credit facility under which the Company has pledged cash on deposit of $3,000 (December 31, 2018 - $4,375) as security
(see note 9).
(b) Effective, December 1, 2019, Westaim entered into a new operating lease for the office premises in Toronto expiring on November 30,
2024. At December 31, 2019, the Company had a total commitment of $1,367 for future occupancy cost payments including payments
due not later than one year of $255 and payments due later than one year of $1,112. At December 31, 2018, the Company had a total
commitment of $1,567 for future occupancy cost payments including payments due not later than one year of $293 and payments due
later than one year of $1,274.
13 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.
At December 31, 2019 and 2018, the Company had a total of 143,186,718 common shares issued and outstanding, with a stated capital of
$382,182. There were no changes in share capital in the years ended December 31, 2019 and 2018.
No shares of the Company are held by the Company, and there were no Class A preferred shares or Class B preferred shares outstanding at
December 31, 2019 and 2018.
14 Share-based Compensation
The Company’s long-term equity incentive plan (the “Incentive Plan”) provides for grants of RSUs, DSUs, stock appreciation rights and other
share-based awards. The Company also has a stand-alone incentive stock option plan (the “Option Plan”).
The Option Plan is a “rolling plan” which provides that the aggregate number of common shares which may be reserved for issuance under
the Option Plan is limited to not more than 10% of the aggregate number of common shares outstanding or 14,318,671 as at December 31,
2019. However, each of the Incentive Plan and the Option Plan provide that under no circumstances shall there be common shares issuable
under such plan, together with all other security-based compensation arrangements of the Company, which exceed 10% of the aggregate
number of common shares outstanding. As the DSUs are settled solely in cash, they are not included in the 10% limitation referred to above.
In certain circumstances such as a change of control of the Company or the sale of substantially all of the assets of the Company, all
outstanding options and RSUs will vest immediately.
- 67 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
14 Share-based Compensation (continued)
Stock Options - Changes to the number of stock options are as follows:
Opening balance
Granted
Ending balance
Options exercisable at end of period
Year ended December 31, 2019
Year ended December 31, 2018
Number
10,428,337
-
10,428,337
9,156,670
Weighted Average
Exercise Price
C$
C$
C$
C$
3.10
-
3.10
3.10
Number
6,613,337
3,815,000
10,428,337
5,680,558
Weighted Average
Exercise Price
C$
C$
C$
C$
3.10
3.10
3.10
3.10
As at December 31, 2019
Exercise prices
3.10
C$
3.00
C$
3.25
C$
As at December 31, 2018
Exercise prices
3.10
C$
3.00
C$
3.25
C$
Number of
stock options
outstanding
3,815,000
3,860,397
2,752,940
10,428,337
Number of
stock options
outstanding
3,815,000
3,860,397
2,752,940
10,428,337
Weighted Average
Remaining
Contractual Life
(years)
5.05
4.26
3.25
4.28
Weighted Average
Remaining
Contractual Life
(years)
6.05
5.26
4.25
5.28
Weighted Average
Exercise Price
C$
C$
C$
C$
3.10
3.00
3.25
3.10
Weighted Average
Exercise Price
C$
C$
C$
C$
3.10
3.00
3.25
3.10
Number of
stock options
exercisable
2,543,333
3,860,397
2,752,940
9,156,670
Number of
stock options
exercisable
1,271,667
2,573,598
1,835,293
5,680,558
Exercisable
Weighted Average
Exercise Price
3.10
3.00
3.25
3.10
C$
C$
C$
C$
Exercisable
Weighted Average
Exercise Price
3.10
3.00
3.25
3.10
C$
C$
C$
C$
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. The fair value
of the options granted on April 1, 2016 was C$0.7332 per option estimated using the Black-Scholes option pricing model assuming no
dividends are paid on the common shares, a risk-free interest rate of 0.61%, an average life of 4.0 years, a volatility of 46.49%, and a grant
date share price of C$2.54 converted to US$ at an exchange rate of $1.3047.
On April 3, 2017, 3,860,397 additional 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 December 31, 2017, December 31, 2018 and December 31, 2019, and have an exercise price
of C$3.00. The fair value of the options granted on April 3, 2017 was C$0.8616 per option estimated using the Black-Scholes option pricing
model assuming no dividends are paid on the common shares, a risk-free interest rate of 1.00%, an average life of 4.0 years, a volatility of
35.45%, and a grant date share price of C$2.98 converted to US$ at an exchange rate of $1.3386.
On January 18, 2018, 3,815,000 additional 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 December 31, 2018, December 31, 2019 and December 31, 2020, and have an
exercise price of C$3.10. The fair value of the options granted on January 18, 2018 was C$0.7185 per option estimated using the Black-
Scholes option pricing model assuming no dividends are paid on the common shares, a risk-free interest rate of 1.92%, an average life of 4.0
years, a volatility of 25.35%, and a grant date share price of C$3.10 converted to US$ at an exchange rate of $1.2429.
No options were granted or issued in the year ended December 31, 2019.
The amounts computed according to the Black-Scholes pricing model may not be indicative of the actual values realized upon the exercise of
options by the holders.
Compensation expense relating to options was $970 and $2,344 in the years ended December 31, 2019 and 2018, respectively, with a
corresponding increase to contributed surplus.
Restricted Share Units - RSUs vested on specific dates and became payable when vested with either cash or common shares of the
Company, at the option of the holder.
- 68 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
14 Share-based Compensation (continued)
Changes to the number of RSUs are as follows:
Opening balance
Exercised
Ending balance
Year ended December 31
2018
2019
3,034,261
3,034,261
-
-
3,034,261
3,034,261
On November 14, 2014, an aggregate of 2,375,000 RSUs were granted to certain officers, employees and consultants. These RSUs have a
term of fifteen years from date of issue and at December 31, 2019, all of these RSUs had vested, of which 265,937 RSUs had been exercised
and 2,109,063 RSUs were outstanding.
On April 1, 2016, an additional 925,198 RSUs were granted to certain officers and employees of the Company. These RSUs have a term of
fifteen years from date of issue and at December 31, 2019, all of these RSUs had vested and none have been exercised.
There were 3,034,261 RSUs outstanding at December 31, 2019 and December 31, 2018. No RSUs were granted or exercised in the years
ended December 31, 2019 and 2018.
Compensation expenses relating to RSUs, including the impact of the change in the market value of the Company’s common shares was
$169 and a recovery of $827 for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019, a liability of $6,192
(December 31, 2018 - $5,738) had been accrued by the Company 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 solely 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
Ending balance
Year ended December 31
2018
2019
416,529
518,855
102,326
123,924
518,855
642,779
In the year ended December 31, 2019, 123,924 DSUs were issued in lieu of director fees of $244 and in the year ended December 31, 2018,
102,326 DSUs were issued in lieu of director fees of $228. No DSUs were exercised in the years ended December 31, 2019 and 2018.
Compensation expenses relating to DSUs, including the impact of the change in the market value of the Company’s common shares was
$279 and $40 in the years ended December 31, 2019 and 2018, respectively. At December 31, 2019, a liability of $1,312 (December 31,
2018 - $981) had been accrued with respect to outstanding DSUs in the consolidated statements of financial position.
15 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
$
$
- 69 -
Year ended December 31
2018
2019
3,311
3,186
1,550
1,401
4,861
4,587
$
$
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
15 Related Party Transactions (continued)
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 $138 in the years ended December 31, 2019 and 2018, respectively. Compensation relating to
RSUs issued to the Consultant was an expense of $3 and a recovery of $23 for the years ended December 31, 2019 and 2018, respectively,
and the amounts were included in the consolidated statements of profit and comprehensive income under share-based compensation
expense. At December 31, 2019, a liability of $121 (December 31, 2018 - $112) had been accrued in the consolidated statements of financial
position with respect to outstanding RSUs held by the Consultant.
The Company received a cash dividend from the Arena FINCOs in the amount of $4,581 and a dividend in kind in the amount of $117 in the
year ended December 31, 2019. No dividends were received in 2018.
The Company earned and received interest on loans to related parties as follows:
Related parties:
Arena FINCOs Term Loan (note 6)
Arena FINCOs Demand Loan (note 4 and 6)
Arena Investors Revolving Loan (note 6)
Unrelated parties:
Interest earned on bank balances
Year ended December 31
2018
2019
179
680
1,018
1,877
194
2,071
$
725
1,385
856
$ 2,966
$
94
3,060
$
$
$
The Company earned advisory fees of $791 and $1,000 from HIIG in the years ended December 31, 2019 and 2018, respectively and the
Company earned advisory fees of $1,613 and $440 from the Arena Group in the years ended December 31, 2019 and 2018, respectively.
Advisory fees are included in fee income in the consolidated statements of profit and comprehensive income.
On December 31, 2018, all outstanding M units of each of AOC and AFHC held by BP LLC were redeemed. Redemption payments in respect
of the redemption of the M units of each of AOC and AFHC in the amount of $724, were paid to BP LLC on March 27, 2019.
16
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 assets / (liabilities) recognized in profit or loss are as follows:
Unrealized gain on investments in private entities
Non-capital loss carry-forwards
Difference between statutory and foreign tax credits
Year ended December 31
2018
2019
(2,314)
$ (862)
2,314
-
-
96
$ -
$ (766)
$
As the realization of any related tax benefits is not probable, no deferred income tax assets have been recognized for the following:
$
December 31, 2019 December 31, 2018
30,237
5,121
13,928
325
3,330
38,612
5,380
11,138
342
2,758
$
Non-capital loss carry-forwards
Capital loss carry-forwards
Deductible temporary differences
Corporate minimum tax credits
Investment tax credits
- 70 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
16
Income Taxes (continued)
The unrecognized non-capital losses and investment tax credits will expire at various times to the end of 2039, as follows:
Non-capital losses by year of expiry:
2032
2033
2034
2035
2036
2037
2038
2039
$
$
7,739
2,949
3,757
1,988
69
10,200
5,817
6,093
38,612
$
Investment tax credits by year of expiry:
2020
2021
2022
2023
10,127
2024
5,712
Beyond 2025
4,577
$
634
495
249
135
306
939
2,758
25,661
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 profit and comprehensive income:
Profit before income tax
Statutory income tax rates
Income taxes at statutory income tax rates
Variations due to:
Non-taxable portion of unrealized loss (gain)
on investments in private entities
Tax losses allocated from the HIIG Partnership
Non-taxable items
Difference between statutory and foreign tax rates
Unrecognized temporary differences
Unrecognized tax losses
Income tax expense
Year ended December 31
2018
2019
$ 16,793
$ 9,462
26.5%
26.5%
4,450
2,507
132
(45)
(1,120)
(51)
(14)
(471)
938
$
(2,314)
(22)
(517)
22
(1,471)
(148)
-
$
At December 31, 2019, a current income tax receivable from the Canadian federal tax authority of $427 and current income tax payables to
the United States federal tax authority of $387 were recorded in the consolidated statements of financial position. At December 31, 2018,
there was no current income tax receivable or payable recorded in the consolidated statements of financial position.
At December 31, 2019, a deferred income tax liability for United States federal taxes of $399 was recorded in the consolidated statements of
financial position and at December 31, 2018, there was no deferred tax liability recorded in the consolidated statements of financial position.
Income tax expense recorded in the consolidated statements of profit and comprehensive income was $938 and $nil in the years ended
December 31, 2019 and 2018, respectively. Income tax expense consists of current Canadian tax recoveries in the amount of $132 (2018 -
$nil), current United State tax expenses of $304 (2018 - $nil) and deferred United State tax expenses of $766 (2018 - $nil).
17 Earnings per Share
The Company had 10,428,337 stock options, 3,034,261 RSUs and 14,285,715 Warrants outstanding at December 31, 2019 and 2018. The
stock options and Warrants for the years ended December 31, 2019 and 2018 were excluded in the calculation of diluted earnings per share
as they were not dilutive. The RSUs for the year ended December 31, 2019 and 2018 were included in the calculation of diluted earnings per
share as they were dilutive.
- 71 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
17 Earnings per Share (continued)
Earnings per share, basic and diluted, are as follows:
Basic earnings per share:
Profit
Weighted average number of common shares outstanding
Basic earnings per share
Diluted earnings per share:
Profit
Dilutive RSU expense (recovery)
Profit on a diluted basis
Weighted average number of common shares outstanding
Dilutive impact of RSUs
Weighted average number of common shares outstanding on a dilutive basis
Diluted earnings per share
1 Adjusted to conform to the presentation of the current year.
18
Capital Management
Year ended December 31
20181
2019
$ 8,524
143,186,718
0.06
$
$ 16,793
143,186,718
0.12
$
$ 8,524
454
$ 8,978
143,186,718
3,034,264
146,220,979
0.06
$
$ 16,793
(1,416)
$ 15,377
143,186,718
2,963,557
146,150,275
0.11
$
The Company’s capital currently consists of the Preferred Securities and common shareholders’ equity.
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.
19 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, 2019 consists of short-term financial assets and financial liabilities with maturities of less than one year, loans receivable,
investments in private entities and associates, Preferred Securities, derivative warrant liability 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 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.
Loans receivable by the Company were made to subsidiaries which the Company controls and the loans are secured by underlying assets of
the subsidiaries. Therefore, credit risk related to these loans is nominal.
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.
- 72 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
19 Financial Risk Management (continued)
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, 2019, the Company’s short-term financial liabilities amounted to $3,008 (December 31, 2018 - $2,886), and the Company
has access to cash and other resources to meet these financial obligations.
Currency risk
The Company’s C$ denominated monetary liabilities exceed C$ denominated monetary assets, including its C$40 million (December 2018 –
C$35 million) foreign exchange forward contract. A 10% strengthening of the C$ against the US$ would have increased the foreign exchange
loss for the year ended December 31, 2019 by approximately $1,534. A similar weakening of the C$ would have resulted in an opposite
effect.
From time to time, the Company may enter into foreign exchange forward contracts to manage certain foreign currency exposures arising
from foreign currency denominated transactions. The Company has not designated any foreign exchange forward contracts as accounting
hedges.
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, loans receivable, or the Preferred Securities. The Company is
subject to interest rate risks indirectly as a result of its investment in HIIG (through the HIIG Partnership) and the Arena FINCOs 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 investment in HIIG (through the HIIG Partnership) and the Arena Group. The Company holds
these investments for strategic and not trading purposes. The fair values of these investments recorded in the Company’s consolidated
financial statements have been arrived at using industry accepted valuation techniques. Due to the inherent uncertainty of valuation, these
fair values may not be indicative of the actual values which can be realized upon a liquidity event for these investments.
20 Subsequent Events
In the period subsequent to December 31, 2019, global financial markets have been experiencing significant volatility. During this period, in
respect of the Company’s investment in HIIG LP, declines in multiples of book value are observed for peer insurance companies, implying a
decline in the multiple applied to the adjusted book value of HIIG. The value of HIIG’s and the Arena FINCOs’ investment portfolios could also
be impacted as a result of the financial market volatility. Since these market conditions are continuing to fluctuate significantly, it is not
possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the
Company and its investments in future periods. These market events are not representative of market conditions that existed as at the
December 31, 2019 valuation date.
On March 19, 2020, the Company committed to invest $44 million into a $100 million HIIG’s rights offering (“Rights Offering”), representing the
Company’s pro rata ownership of HIIG common shares (“HIIG Common Shares”) through HIIG LP. Under the Rights Offering, existing
holders of HIIG Common Shares, including HIIG LP unitholders, are entitled to subscribe for an aggregate of two million shares of Series A
Convertible Preferred Stock (the “Preferred Shares”) at $50 par value on a pro rata basis. The Rights Offering is expected to close during the
first half of 2020 and is subject to customary closing conditions. In order to help fund the Company’s Rights Offering commitment, the
Company received cash distributions in January and early March totaling $35 million from the Arena FINCOs.
The Preferred Shares will initially be convertible into HIIG Common Shares based on a conversion price equal to $1.74 (the “Conversion
Price”). Upon completion by HIIG of the LPT transaction, the Conversion Price will be reduced for the after-tax cost of the LPT transaction (on
a per share basis) and will also be subject to adjustment from time to time based on the occurrence of certain events. In the event of any
liquidation of HIIG, holders of the Preferred Shares will be entitled to receive in preference to the holders of the HIIG Common Shares an
amount equal to the aggregate of the (i) the face value of each Preferred Share held plus (ii) the amount of any declared but unpaid dividends
payable in respect of the HIIG Common Shares underlying such Preferred Shares. At all meetings of shareholders of HIIG holders of the
Preferred Shares will be entitled to such number of votes as is equal to the total number of HIIG Common Shares (disregarding fractions)
issuable upon the conversion in full of the Preferred Shares at the then applicable Conversion Price.
- 73 -
SHAREHOLDER INFORMATION
BOARD OF DIRECTORS
Stephen R. Cole 1, 2, 3, 5, 6
J. Cameron MacDonald
Lead Director, The Westaim Corporation
President, Seeonee Inc.
President and Chief Executive Officer, The Westaim
Corporation
Ian W. Delaney 3
Executive Chairman, The Westaim Corporation
Bruce V. Walter 1, 2, 3
Chairman, Nunavut Iron Ore, Inc.
Vice Chair, Centerra Gold Inc.
John W. Gildner 1, 2, 3, 4
Independent Businessman
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
CORPORATE INFORMATION
STOCK INFORMATION
OFFICES
Ian W. Delaney
Executive Chairman
Traded on the TSX Venture Exchange
under the symbol WED
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
CONTACT INFORMATION
Tel: (416) 969-3333
Fax: (416) 969-3334
E-mail: info@westaim.com
www.westaim.com
J. Cameron MacDonald
Shares issued and outstanding
President and Chief Executive Officer
at December 31, 2019 were 143,186,718
Robert T. Kittel
Chief Operating Officer
Glenn G. MacNeil
Chief Financial Officer
TRANSFER AGENT & REGISTRAR
Computershare Investor Services Inc.
600, 530 – 8th Avenue SW
Calgary, Alberta T2P 3S8
www.investorcentre.com
Shareholder inquiries by phone
Toll Free: 1-800-564-6253
Toll : 1-514-982-7555
Fax Numbers : 1-888-453-0330
1-514-982-7635
- 74 -
THE WESTAIM CORPORATION
70 York Street, Suite 1700
Toronto, Ontario, Canada
M5J 1S9
www.westaim.com
info@westaim.com