THE WESTAIM CORPORATION
ANNUAL REPORT 2021
THE WESTAIM CORPORATION
ANNUAL REPORT 2021
Contents
Letter to Shareholders
Management’s Discussion and Analysis
Management’s Responsibility for Financial Information
Independent Auditor’s Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Board of Directors
Shareholder and Corporate Information
1
4
39
40
43
47
67
67
All currency amounts are in United States dollars, unless otherwise indicated.
Dear Shareholders,
LETTER TO SHAREHOLDERS
April 13, 2022
Dear Fellow Shareholders,
In our ongoing effort to be transparent and good communicators for your company, beginning in Q4 2020, we commenced a quarterly "Investor Presentation"
publication which we release alongside our quarterly earnings. Shareholders have received this comprehensive report well. Our objective is clear to publicly
provide all shareholders with a fulsome quarterly update on operating results and performance metrics. In fact, the details previously only released at our
Annual Investor Day are now available every quarter. We encourage you to review the Q4 2021 Investor Presentation on Westaim's website.
In 2021, Westaim's two businesses, Skyward Specialty Insurance
achieved
terrific operating metrics, with each producing record performance with respect to growth, revenue, and profitability. These strong results position both
companies to execute a 2022 business plan of continued expansion and to respond to shareholder-enhancing opportunities. As a result, we believe that the
intrinsic value within Westaim has never been higher, which is underscored by insider ownership increasing to 24% and the September 2021 commencement
of a Normal Course Issuer Bid.
and Arena Investors
For the year ended December 31, 2021, Westaim reported a Net Profit of $28.3 million (+ $0.19 eps) compared to a 2020 Net Loss of $34.5 million (- $0.24
eps). Our fully diluted book value per share ("FDBVPS") was $2.43 (C$3.07), an increase of 8.5% from $2.24 (C$2.85) as of December 31, 2020. Westaim
valued each at
utilizes "fair value" accounting for its investments in Skyward and
1.0X book value at December 31, 2021. Our investment in Arena Investors however is not carried at fair value, and at December 31, 2021, was carried at
$26.2 million, primarily reflecting a first lien secured revolving loan of $24 million to Arena Investors.
Arena FINCO
management believes the company is
transitioning to an earnings growth platform based on the results delivered by Skyward Specialty and Arena Investors. The attached waterfall chart supports
this view as both organizations are becoming significant earnings contributors.
*
sual items.
- 1 -
Skyward Specialty
Westaim is fortunate to own a look-through interest in 44% of Skyward Specialty, a US-based property and casualty insurance company, offering policies on
an admitted and non-admitted basis, focusing on business lines in high-profit areas
to deliver
top-quartile and consistent returns.
O
In May 2020, we welcomed Andrew Robinson as CEO, and his impact was immediate and substantial. Andrew's strong leadership immediately repositioned
the business and culture to its "Rule Our Niche" strategy focused on execution. Embracing transparency, data-driven underwriting, technology for efficiency,
reserve conservatism, return on capital accountability, and, importantly, adding best-in-class "A" quality talent all motivated with an aligned compensation
program collectively produced the company's best operating results ever in 2021.
While much detail is available in the Q4 2021 Investor Presentation, we have highlighted a few full year 2021 operating metrics comparing to 2020:
Gross Written Premium (
increased 7.6% to $939.9 million versus $873.6 million. Excluding discontinued business, GWP increased 33.9%
to $867.9 million versus $648.3 million.
Reported GAAP net income was $38.3 million compared to a loss of $74.6 million.
Adjusted net income (excluding unusual items) was $49.5 million compared to $16.8 million, an increase of almost 300%.
In Q4 2021, Skyward Specialty elected to strengthen its prior policy years (primarily 2017 and prior) reserve position for reserves subject to our
Loss Portfolio Transfer ("LPT") resulting in an LPT expense charge of $12.7 million (after-tax). Westaim management believes that Skyward
S
reserve position (inclusive of LPT, discontinued and continuing business) at December 31, 2021 is the strongest it has been since
Westaim invested in the company in July 2014.
Combined ratio excluding LPT was 94.6% in 2021 (inclusive of 2.4% Catastrophes) compared to 96.8% (inclusive of 1.0% Catastrophes) in the
prior year.
As of December 31, 2021, the investment portfolio (excluding operating cash and restricted cash) was approximately $949 million, a significant
increase from approximately $765 million at the end of 2020
. Approximately 17% of the portfolio remains
in highly liquid short term investments to take advantage of market opportunities, with the balance diversified among various fixed income and
equity related investment strategies. The portfolio performance in 2021 was strong, producing an average net return of approximately 3.7% for the
year.
increased 8.3% to $426.1 million from $393.5 million at the end of 2020.
The insurance industry continues to experience a robust pricing environment, and specific to US specialty insurers, the favourable rate trend continues albeit
at a more moderate rate. As a result, Skyward is well-positioned to consider several avenues of opportunity to enhance and accelerate business and
shareholder value.
Arena Investors and Arena FINCOs
Westaim's partnership with Arena involves two distinct investments, Arena Investors and the Arena FINCOs. Arena Investors is a global institutional asset
manager that "originates" credit-oriented investments to provide its clients with highly diversified and uncorrelated returns. Dan Zwirn's leadership has evolved
Arena into a worldwide investment firm of 100 professionals across six offices, supported by proprietary systems and robust processes. Investors in Arena's
pooled and drawdown funds enjoyed strong performance in 2021, achieved with little to no leverage and all within an approximately two-year average duration.
The corollary of Arena Investors' consistent performance over the past six years has been the ever-increasing global investor awareness of the firm and their
unique investment abilities to generate attractive returns per unit of risk. In addition, Arena's marketing team, led by Parag Shah, is active globally, with several
closed-end fund campaigns afoot. As a result, we expect Arena's
to continue to grow. On December 31, 2021,
Arena's committed AUM was $2.8 billion and currently committed AUM is approaching $3.5 billion which represents growth of approximately 75% versus
December 31, 2020.
The maturity of Arena Investors, given the leverage of significantly more fee-paying AUM coupled with strong investment performance, became increasingly
evident in 2021. Arena Investors reported total revenue of $65.8 million, composed of recurring fee related revenue (primarily management and asset servicing
fees) of $31.5 million and incentive fee revenue of $34.3 million. EBITDA was $21.1 million for the year, and net income was $19.6 million. A key metric to
demonstrating that Arena
highlight is fee-related earnings, which in 2021 was essentially break-even compared to a 2020 fee-related loss of $3.0 million
Investors has reached a major inflection point milestone. As we detail in the Q4 2021 Investor Presentation (page 26), the Arena Investors "Earn-In"
ownerships structure aligning Westaim shareholders with Arena management currently provides Westaim with a profit percentage of 51% and Arena
management with 49%.
The Arena FINCOs, Westaim's proprietary capital, is primarily invested in Arena's core investment strategy and, at times, provides capital for the strategic
development of Arena Investors as lead investor in Arena product offerings to help grow and build the business. In 2021, the Arena FINCOs earned a net
return of 6.1%, closing with a December 31, 2021 fair value of $172.8 million. With the September 2020, $45 million 6.75% senior secured bond proceeds
now invested and access to a new $21.5 million revolving credit facility to efficiently manage our cash, Arena FINCOs net returns are expected to improve.
- 2 -
At December 31, 2021 Westaim strategically has (either directly or through the Arena FINCOs) small investments in two of Arena Investors flagship products:
(i) Arena Special Opportunities Fund, LP (open-ended), which achieved a net return of 11.3% for the year; and (ii) the Arena Special Opportunities Partners
(Cayman) Fund I, LP (drawdown), which has an inception (October 2020) to date net internal rate of return of 23.1% and a multiple on invested capital of 1.2x.
Our experience is that outside investors welcome Westaim's participation and alignment in Arena's funds.
Westaim's Annual General and Special Meeting will occur on Wednesday, May 18, 2022, at 9:00 am EST at Vantage Venues, 150 King Street West, Toronto,
Ontario, Canada. We will announce the details of our next Investor Day soon which will include a business overview and discussion with management from
Westaim, Skyward Specialty and Arena Investors, followed by a question-and-answer session. We look forward to your participation in these events.
Respectfully,
Cameron MacDonald
President and Chief Executive Officer
- 3 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
TABLE OF CONTENTS
1.
THE COMPANY
2. OVERVIEW OF PERFORMANCE
INVESTMENTS
FINANCING
3.
4.
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 FINCOS INVESTMENT SCHEDULES
15. NON-GAAP MEASURES
16. CAUTIONARY NOTE REGARDING FORWARD-LOOKING 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 consolidated financial
statements including notes for the years ended December 31, 2021 and 2020 as set out on pages 43 to 66 of this annual report. Financial data in this
MD&A has been derived from the audited consolidated financial statements for the years ended December 31, 2021 and 2020 and is intended to enable
the reader to assess the Company’s results of operations for the three months and year ended December 31, 2021 and financial condition as at December
31, 2021. The Company reports its consolidated financial statements using generally accepted accounting principles (“GAAP”) and 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, unless otherwise indicated. Canadian dollars are referenced as C$. The following commentary is current as of
April 13, 2022. Additional information relating to the Company is available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at
www.sedar.com. Certain comparative figures have been reclassified to conform to the presentation of the current year, and certain totals, subtotals and
percentages may not reconcile due to rounding.
IFRS for Investment Entities
The Company qualifies as an investment entity under IFRS and uses fair value as the key measure to monitor and evaluate its primary investments. The
Company reports its financial results in accordance with IFRS applicable to investment entities.
Functional and Presentation Currency
The US$ 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.
- 4 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, 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 Skyward Specialty Insurance Group Inc.
Select financial information concerning Skyward Specialty Insurance Group, Inc. (“Skyward Specialty”) (the “Skyward Specialty Financial Information”)
contained in this MD&A is unaudited and has been derived from the annual audited consolidated financial statements of Skyward Specialty for the years
ended December 31, 2021 and 2020 and the unaudited consolidated financial statements of Skyward Specialty for the three months ended December
30, 2021 and 2020, which have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”). Such statements
are the responsibility of the management of Skyward Specialty. The Skyward Specialty Financial Information, including any Skyward Specialty 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 Skyward Specialty 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 Skyward Specialty Financial Information has been provided solely by Skyward Specialty. Although Westaim has no knowledge that would indicate
that any of the Skyward Specialty 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 Skyward Specialty 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 Skyward Specialty 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 FINCOs and Arena Investors
Select financial information concerning the Arena FINCOs (as hereinafter defined) and Arena Investors (as hereinafter defined) (the “Arena Financial
Information”) contained in this MD&A is unaudited and has been derived from the annual audited financial statements of the Arena FINCOs and Arena
Investors for the years ended December 31, 2021 and 2020 and the unaudited consolidated financial statements of Arena FINCOs and Arena Investors
for the three months ended December 30, 2021 and 2020, which have been prepared in accordance with either IFRS or US GAAP. Such statements are
the responsibility of the management of the Arena FINCOs and Arena Investors. The Arena Financial Information, including any Arena FINCOs and
Arena Investors 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.
The Arena Financial Information has been primarily provided by the management of the Arena FINCOs and Arena Investors. 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 FINCOs and Arena
Investors 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.
Forward-Looking 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
April 13, 2022 for its fiscal year ended December 31, 2021 which is available on SEDAR at www.sedar.com. Please refer to Section 16, Cautionary Note
Regarding Forward-Looking Information of this MD&A.
- 5 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, 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 Skyward Specialty, the Arena FINCOs and Arena Investors. See discussion in
Section 3, Investments of this MD&A for additional information on these investments.
2. OVERVIEW OF PERFORMANCE
Highlights
Revenue and net change in unrealized value of investments
Net recovery of expenses (expenses)
Income tax expense
GAAP profit (loss) and comprehensive income (loss)
Adjusted profit and comprehensive income excluding unusual
items 1
GAAP earnings (loss) per share – basic
GAAP earnings (loss) per share – diluted
Adjusted earnings per share – diluted 1
At December 31:
Shareholders’ equity
Number of Common Shares outstanding 2
Book value per fully diluted share – in US$ 1
Book value per fully diluted share – in C$ 1
Three months ended December 31
2020
2021
Year ended December 31
2020
2021
$
$
$
$
$
$
$
$
$
$
6.8
0.1
(0.2)
$
(9.9)
(4.6)
-
$
33.8
(5.3)
(0.2)
(26.0)
(8.4)
(0.1)
6.7
$
(14.5)
$
28.3
$
(34.5)
11.9
$
4.9
$
34.2
$
5.0
0.05
0.04
0.08
$
$
$
(0.10)
(0.10)
0.03
347.7
142,686,718
2.43
3.07
$
$
$
320.5
143,186,718
2.24
2.85
$
$
$
$
$
$
0.20
0.19
0.23
$ (0.24)
$ (0.24)
$ 0.03
347.7
142,686,718
2.43
3.07
$
$
$
320.5
143,186,718
2.24
2.85
1 See Section 15, Non-GAAP Measures of this MD&A. Period end exchange rates: 1.26410 at December 31, 2021 and 1.27395 at December 31, 2020.
2 Westaim’s common shares (“Common Shares”) are traded on the TSX Venture Exchange (“TSXV”) under the symbol “WED”.
Three months ended December 31, 2021 and 2020
The Company reported a profit and comprehensive income of $6.7 for the three months ended December 31, 2021 (2020 – loss and comprehensive
loss of $14.5).
Revenue and net increase in unrealized value of investments for the three months ended December 31, 2021 was $6.8 (2020 – net decrease in
unrealized value $9.9) and consisted of interest income of $0.3 (2020 - $0.3), advisory fees of $0.3 (2020 - $0.3), an increase of $0.3 in the unrealized
value of the Company’s investments in private entities (2020 – decrease of $12.0), an increase in unrealized value of other investments of $0.1
(2020 - $0.1) and the Company’s share of profit of its associates (as hereinafter defined) of $5.8 (2020 - $1.4).
Net recovery of expenses for the three months ended December 31, 2021 of $0.1 (2020 – expenses of $4.6) consisted of salaries and benefits of
$1.4 (2020 - $1.1), general, administrative and other expenses of $0.2 (2020 - $0.2), professional fees of $0.2 (2020 - $0.4), site restoration provision
expense recovery of $1.5 (2020 – expense of $0.6), share-based compensation expense recovery of $0.5 (2020 – expense of $0.7), a foreign
exchange loss of nominal (2020 – $0.9), interest on preferred securities of $0.5 (2020 - $0.5) and an unrealized gain resulting from a change in the
fair value of the vested Warrants (as hereinafter defined) of $0.4 (2020 – loss of $0.2).
The Company reported income tax expense for the three months ended December 31, 2021 of $0.2 (2020 - nominal).
Years ended December 31, 2021 and 2020
The Company reported a profit and comprehensive income of $28.3 for the year ended December 31, 2021 (2020 – loss and comprehensive loss
of $34.5).
- 6 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
2. OVERVIEW OF PERFORMANCE (continued)
Revenue and net increase in unrealized value of investments for the year ended December 31, 2021 was $33.8 (2020 – net decrease in unrealized
value $26.0) and consisted of interest income of $1.4 (2020 - $1.2), dividend income paid to the Company from the Arena FINCOs (as hereinafter
defined) of $nil (2020 - $22.7), advisory fees of $1.0 (2020 - $1.0), an increase of $21.1 in the unrealized value of the Company’s investments in
private entities (2020 - a decrease of $51.0), an increase in unrealized value of other investments of $0.3 (2020 - $0.2) and the Company’s share
of profit of its associates (as hereinafter defined) of $10.0 (2020 – loss of $0.1).
Net expenses for the year ended December 31, 2021 of $5.3 (2020 - $8.4) consisted of salaries and benefits of $5.0 (2020 - $3.8), general,
administrative and other expenses of $0.8 (2020 - $0.8), professional fees of $1.0 (2020 - $1.3), site restoration provision recovery of $4.1 (2020 –
provision expense of $0.7), share-based compensation expense of $0.5 (2020 – $0.3), a foreign exchange loss of $0.9 (2020 – $0.4), interest on
preferred securities of $2.0 (2020 - $1.9) and an unrealized gain resulting from a change in the fair value of the vested Warrants (as hereinafter
defined) of $0.8 (2020 – $0.8).
The Company reported income tax expense for the year ended December 31, 2021 of $0.2 (2020 - $0.1).
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 Skyward Specialty, the Arena FINCOs and Arena Investors as follows:
Investment in private entities:
- Skyward Specialty
- Arena FINCOs (as
hereinafter defined)
Investment in associates:
- Arena Investors (as
hereinafter defined)
Place of
establishment
Principal place
of business
Ownership interest
at December 31, 2021
Ownership interest
at December 31, 2020
Delaware, U.S.
Delaware, U.S.
Texas, U.S.
New York, U.S.
44.0% owned by the Company
100% owned by the Company
44.5% owned by the Company
100% owned by the Company
Delaware, U.S.
New York, U.S.
51% beneficially owned the Company 1
51% beneficially owned the Company 1
1 Legal equity ownership is 100%, and beneficial ownership denotes profit percentage subject to change over time pursuant to the earn-in rights granted to Bernard
Partners, LLC (“BP LLC”) described below under “Investment in Arena Investors”.
For additional information on the Company’s corporate structure, see the Company’s Annual Information Form dated April 13, 2022 for its fiscal year
ended December 31, 2021 which is available on SEDAR at www.sedar.com.
Skyward Specialty
The Company owns a significant interest in Skyward Specialty, a U.S. based diversified specialty property & casualty insurance holding company
that underwrites select property, casualty, surety, and accident and health insurance coverages through its insurance and reinsurance subsidiaries.
The Company’s investment in Skyward Specialty is recorded in investments in private entities under investments in the Company’s consolidated
financial statements.
Arena FINCOs
The Arena FINCOs include specialty finance companies that primarily purchase fundamentals-based, asset-oriented credit and other investments
for their own account and a company that primarily 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. Fundamentals-based, asset-
oriented credit investments refer to loans or credit arrangements which are generally secured by assets. Fundamentals-based, asset-oriented
lenders and investors manage their risk and exposure by carefully assessing the value of the assets securing the loan or investment, receiving
periodic and frequent reports on collateral value and the status of those assets, and tracking the financial performance of borrowers. The Company’s
investments in the Arena FINCOs are recorded as investments in private entities included under investments in the Company’s consolidated financial
statements.
- 7 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
Arena Investors
Arena Investors Group Holdings, LLC (“AIGH”), through its subsidiaries, operates as an investment manager offering clients access to fundamentals-
based, asset-oriented credit and other investments. AIGH is the sole limited partner of Arena Investors, LP, a limited partnership established to carry
on the third-party investment management business. 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 following chart illustrates a simplified organizational structure of Arena Investors and the Arena FINCOs:
The Westaim Corporation
(“ Westaim”)
100%
The Westaim Corporation of
America
(“ WCA”)
51 % (1)
Arena Investors Group Holdings,
LLC (“AIGH”)
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
Arena FINCOs
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 Arena Investors”.
For a detailed discussion of the business of Arena Investors and the Arena FINCOs, see the Company’s Annual Information Form dated April 13,
2022 for its fiscal year ended December 31, 2021 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 Skyward Specialty 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, 2021 and 2020, 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 4 to the Company’s
audited annual consolidated financial statements for the years ended December 31, 2021 and 2020.
- 8 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
Dividend income from investments in private entities are reported under “Revenue” in the consolidated statements of profit (loss) and comprehensive
income (loss). 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 (loss) and
comprehensive income (loss).
Changes in the Company’s investments in private entities are summarized as follows:
Investments in private entities:
- Skyward Specialty
- Arena FINCOs
Investments in private entities:
- Skyward Specialty
- Arena FINCOs
Investments in private entities:
- Skyward Specialty
- Arena FINCOs
Investments in private entities:
- Skyward Specialty
- Arena FINCOs
Three months ended December 31, 2021
Increase
(decrease) in
unrealized value
before dividends
Ending
Balance
$
(0.2)
0.5
$ 0.3
$ 192.1
172.8
$ 364.9
Opening
Balance
$ 192.3
172.3
$ 364.6
Three months ended December 31, 2020
Increase
(decrease) in
unrealized value
before dividends
Dividends
paid
Ending
Balance
Opening
Balance
Additions -
Equity
Return of
Capital
$ 194.3
169.4
$ 363.7
$ -
-
$ -
$ -
(7.9)
$ (7.9)
$ (13.5)
1.5
$ (12.0)
$ -
-
$ -
$ 180.8
163.0
$ 343.8
Year ended December 31, 2021
Increase in
unrealized
value before
dividends
Ending
Balance
$ 11.3
9.8
$ 21.1
$ 192.1
172.8
$ 364.9
Opening
Balance
$ 180.8
163.0
$ 343.8
Year ended December 31, 2020
Decrease in
unrealized
value before
dividends
Dividends
paid
Ending
Balance
Opening
Balance
Additions -
Equity
Return of
Capital
$ 165.0
205.8
$ 370.8
$ 44.0
-
$ 44.0
$ -
(20.0)
$ (20.0)
$ (28.2)
(0.1)
$ (28.3)
$ -
(22.7)
$ (22.7)
$ 180.8
163.0
$ 343.8
Changes in the Company’s investment in associates are summarized as follows:
Investment in Arena Investors
Opening balance
Increase (decrease) in revolving loan from the Company
The Company’s share of profit (loss)
Ending balance
Three months ended December 31
2020
2021
Year ended December 31
2020
2021
$
$
20.4
-
5.8
26.2
$
$
10.8
8.0
1.4
20.2
$
20.2
(4.0)
10.0
$
$
26.2
$
12.3
8.0
(0.1)
20.2
- 9 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
A. INVESTMENT IN SKYWARD SPECIALTY
The Company’s investment in Skyward Specialty consists of the following:
Three months ended December 31, 2021
Three months ended December 31, 2020
Increase
(decrease) in
unrealized
value of
investment
Opening
Balance
Ending
Balance
Opening
Balance
Additions
- Equity
Increase
(decrease) in
unrealized
value of
investment
Ending
Balance
Investment in Skyward Specialty:
HIIG Partnership-Company’s share of Skyward Specialty
common shares 1
$ 91.7
$ 4.1
$ 95.8
$ 93.6
$ -
$ (7.4)
$ 86.2
HIIG Partnership-Company’s share of other partnership net
assets
Skyward Specialty convertible preferred shares held by the
Company
0.5
(0.1)
0.4
0.5
-
-
0.5
100.1
$ 192.3
(4.2)
$ (0.2)
95.9
$ 192.1
100.2
$ 194.3
-
$ -
(6.1)
$ (13.5)
94.1
$ 180.8
1 The Company’s share of Skyward Specialty common shares held by the HIIG Partnership.
Year ended December 31, 2021
Increase
(decrease) in
unrealized
value of
investment
Opening
Balance
Ending
Balance
Opening
Balance
Year ended December 31, 2020
Increase
(decrease) in
unrealized
value of
investment
Ending
balance
Additions
- Equity
Investment in Skyward Specialty:
HIIG Partnership-Company’s share of Skyward Specialty
common shares 1
$ 86.2
$ 9.6
$ 95.8
$164.3
$ -
$ (78.1)
$ 86.2
HIIG Partnership-Company’s share of other partnership net
assets
Skyward Specialty convertible preferred shares held by the
Company
0.5
(0.1)
0.4
0.7
-
(0.2)
0.5
94.1
$ 180.8
1.8
$ 11.3
95.9
$ 192.1
-
$ 165.0
44.0
$ 44.0
50.1
$ (28.2)
94.1
$ 180.8
1 The Company’s share of Skyward Specialty common shares held by the HIIG Partnership.
At December 31, 2021, the Company owned approximately 62.0% (December 31, 2020 – 62.0%) of the HIIG Partnership and the HIIG Partnership
held Skyward Specialty common shares representing approximately 35.5% (December 31, 2020 – 34.3%) of the total fully diluted Skyward Specialty
common shares outstanding. As a result, Westaim’s look-through interest in fully diluted common shares through the HIIG Partnership was 22.0%
(December 31, 2020 – 21.3%) and had a fair value of $95.8 (December 31, 2020 - $86.2).
The convertible preferred shares of Skyward Specialty were acquired by Westaim on April 20, 2020, as Skyward Specialty completed a rights offering
that resulted in gross proceeds of $100.0 to Skyward Specialty. As part of the rights offering, Westaim purchased $44.0 of the Skyward Specialty
preferred shares offered. The convertible preferred shares were initially convertible into Skyward Specialty common shares based on a conversion
price equal to $1.74 per share. The conversion price was subject to adjustments from time to time based on the occurrence of certain events up to
December 31, 2021. At December 31, 2021, the adjustments are expected to result in a conversion price of $1.51 per share (December 31, 2020 -
$1.38). The fair value of Westaim’s ownership of the Skyward Specialty convertible preferred shares was $95.9 (December 31, 2020 - $94.1).
The Company’s look-through interest in the HIIG Partnership of 22.0% (December 31, 2020 – 21.3%), combined with its direct ownership of the
Skyward Specialty preferred shares, which were convertible into Skyward Specialty common shares representing 22.0% (December 31, 2020 –
23.2%) of the fully diluted Skyward Specialty common shares outstanding, resulted in a 44.0% (December 31, 2020 – 44.5%) look-through interest
in Skyward Specialty at December 31, 2021.
At December 31, 2021, based on the Company’s control of the HIIG Partnership, and its ownership of convertible preferred shares, the Company
held a 57.5% voting interest in Skyward Specialty (December 31, 2020 – 57.5%).
- 10 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
(i) Fair Value
The investment in Skyward Specialty is accounted for at FVTPL. In valuing Skyward Specialty’s fully diluted common shares, using a multiple of net
asset value as the primary valuation technique, fair value was determined to be 1.0x the adjusted stockholders’ equity of Skyward Specialty at
December 31, 2021 (December 31, 2020 - 1.0x). See Note 4, Investment in Skyward Specialty in the Notes to the Financial Statements.
The fair value of the Company’s investment in Skyward Specialty was determined to be $192.1 at December 31, 2021 and $180.8 at December 31,
2020.
The Company recorded a decrease in unrealized value on its investment in Skyward Specialty of $0.2 and an increase $11.3 in the three months
and year ended December 31, 2021, respectively, and a decrease in unrealized value on its investment in Skyward Specialty of $13.5 and $28.2 in
the three months and year ended December 31, 2020, respectively.
The Company’s share of Skyward Specialty’s net comprehensive income excluding unusual items was $5.0 and $17.2 in the three months and year
ended December 31, 2021, respectively, and the Company’s share of Skyward Specialty’s net comprehensive income excluding unusual items was
$5.9 and $11.3 in the three months and year ended December 31, 2020, respectively.
The following chart illustrates the Company’s share of the material changes in the valuation of Skyward Specialty:
Investment in Skyward Specialty
Three months ended December 31
2020
2021
Year ended December 31
2020
2021
Opening Balance
Additional equity contribution
$ 192.3
-
$ 194.3
-
$ 180.8
-
$ 165.0
44.0
Net comprehensive income excluding unusual items
Change in HIIG Partnership other assets
The Company’s share of net comprehensive income
excluding unusual items
Unusual items:
Impact of LPT (defined herein) net of tax
Other unusual net recovery of expenses net of tax
Goodwill and other intangible impairment net of tax
Change in valuation multiple (1.1x to 1.0x)
The Company’s share of unusual items
Total (decrease) increase in unrealized value of investment
Ending Balance
5.1
(0.1)
5.0
(5.6)
0.4
-
-
(5.2)
(0.2)
$ 192.1
5.9
-
5.9
(1.6)
1.6
(19.4)
-
(19.4)
(13.5)
$ 180.8
17.3
(0.1)
17.2
(5.6)
0.4
(0.7)
-
(5.9)
11.3
$ 192.1
11.4
(0.1)
11.3
(5.7)
0.5
(19.4)
(14.9)
(39.5)
(28.2)
$ 180.8
In the second quarter of 2020, Skyward Specialty closed a Loss Portfolio Transfer agreement (“LPT”) that provides reinsurance protection of
approximately $127.4 above Skyward Specialty’s net ceded loss and loss adjustment reserves, primarily related to 2017 and prior policy years,
subject to co-participation required from Skyward Specialty above specific amounts. The LPT resulted in a pretax charge and after tax charge of
approximately $43.5 and $34.3 in Skyward Specialty, respectively, in the three months ended March 31, 2020. The Company’s share of the impact
of the LPT initial charge was taken into account in its valuation of Skyward Specialty in the three months and year ended December 31, 2019.
(ii) Select Financial Information of Skyward Specialty for the years ended December 31, 2021 and 2020
The Company considers certain financial results of Skyward Specialty to be important measures for investors in assessing the Company’s financial
position and performance. In particular, premium volumes provide a measure of Skyward Specialty’s growth; “Loss ratio excluding LPT” (calculated
by dividing net loss and Loss Adjustment Expenses (“LAE”) excluding the charge of the LPT and the adverse development on prior years’ loss and
LAE reserves subject to the LPT by net earned premiums), “Expense ratio” (calculated by dividing the sum of: net policy acquisition expenses,
operating expenses excluding unusual net expense items, less commission and fee income, by net earned premiums), and “Combined ratio
excluding LPT” (calculated by the sum of Loss ratio excluding LPT and Expense ratio) provide measures of Skyward Specialty’s underwriting
profitability; “Net income (loss)” provides a measure of Skyward Specialty’s overall profitability; and “Stockholders’ equity” is a measure that is
generally used by investors to determine the value of insurance companies.
- 11 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
Set out in the tables below are certain Skyward Specialty Financial Information derived from the audited annual consolidated financial statements of
Skyward Specialty for the years ended December 31, 2021 and 2020, which have been prepared in accordance with US GAAP and non-GAAP
measures. Such statements are the responsibility of the management of Skyward Specialty. Readers are cautioned that the Skyward Specialty
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.
Skyward Specialty Condensed Consolidated Balance Sheets
Assets
Investments
Cash and restricted cash
Insurance related assets
Deferred tax asset
Goodwill and other intangible assets
Total assets
Liabilities
Insurance related liabilities
Notes payable
Trust preferred securities
Total liabilities
Stockholders' equity
Stockholders' equity
Stock notes receivable
Total stockholders' equity
Total liabilities and stockholders' equity
December 31, 2021 December 31, 20201
$ 949.4
107.3
936.5
33.7
91.3
$ 2,118.2
$ 765.3
113.6
944.2
41.5
84.0
$ 1,948.6
$ 1,563.6
50.0
78.5
$ 1,692.1
$ 1,426.7
50.0
78.4
$ 1,555.1
$ 435.2
(9.1)
$ 426.1
$ 2,118.2
$ 404.3
(10.8)
$ 393.5
$ 1,948.6
1 Adjusted to conform to the presentation of the current period and restatement of previously reported figures resulting in a decrease in total assets of $4.6, a decrease
in total liabilities of $3.4 and a decrease in total stockholders’ equity of $1.2. For further details refer to the Skyward Specialty’s consolidated financial statements with
independent auditor’s report as of and for the years ended December 31, 2021 and 2020 filed on SEDAR by the Company.
In the year ended December 31, 2021, Skyward Specialty recorded a net increase in goodwill and other intangibles of $7.3. This net increase of
goodwill and other intangibles was primarily the result of purchasing the assets of Aegis Surety Bonds and Insurance Services, LLC related to their
surety underwriting business offset by the sale of Skyward Specialty’s XPro underwriting business, the exit of a professional liability product, and the
sale of a Skyward Specialty insurance company subsidiary.
- 12 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
Skyward Specialty Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Gross written premium
Net written premium
Net earned premium
Commission and fee income
Less: Losses and LAE excluding LPT 1
Less: Policy acquisition costs
Less: Operating expenses 2
Underwriting result excluding LPT 1,2
Net investment income
Net realized and unrealized gains
Investment income
Three months ended December 31
20204
$ 196.4
114.8
2021
$ 224.2
141.0
2021
$ 939.9
529.1
Year ended December 31
20204
$ 873.6
461.5
133.8
1.3
(88.5)
(16.4)
(23.1)
7.1
116.5
0.9
(78.4)
(12.8)
(21.9)
4.3
499.8
3.9
(338.3)
(47.1)
(91.4)
26.9
431.9
5.7
(302.4)
(37.0)
(84.5)
13.7
4.0
7.1
11.1
4.1
9.1
13.2
24.6
17.1
41.7
14.3
0.1
14.4
Interest expense
Amortization expense
Income before taxes excluding unusual items
Income tax expense
Net income excluding unusual items
Impact of LPT net of tax3
Other net recovery of expenses net of tax
Goodwill and other intangible impairment net of tax
Net income (loss)
Total other comprehensive (loss) income
Comprehensive (loss) income
(1.2)
(0.4)
16.6
3.4
13.2
(12.7)
0.8
-
1.3
(2.1)
$ (0.8)
(1.2)
(0.2)
16.1
3.5
12.6
(3.6)
3.6
(45.5)
(32.9)
0.4
$ (32.5)
(4.6)
(1.5)
62.5
13.0
49.5
(12.7)
3.7
(2.2)
38.3
(7.6)
$ 30.7
(5.5)
(1.4)
21.2
4.4
16.8
(47.2)
1.3
(45.5)
(74.6)
7.2
$ (67.4)
Other Select Financial Information
Loss ratio excluding LPT 1
Expense ratio 2
Combined ratio excluding LPT 1,2
Continuing business
Discontinued business
Gross written premium
66.2%
28.5%
94.7%
67.3%
29.0%
96.3%
67.7%
26.9%
94.6%
70.0%
26.8%
96.8%
Three months ended December 31
change
37.7%
(82.2%)
14.2%
2021
$ 217.3
6.8
$ 224.2
20204
$ 157.9
38.5
$ 196.4
Year ended December 31
change
33.9%
(68.1%)
7.6%
20204
$ 648.3
225.3
$ 873.6
2021
$ 867.9
72.0
$ 939.9
1 Excludes adverse development on prior years’ claims reserves subject to the LPT of $28.0 for the three months and year ended December 31, 2021. Excludes
adverse development on prior years’ claims reserves subject to the LPT of $9.0 and $49.0 for the three months and year ended December 31, 2020, respectively.
2 Excludes other unusual net expense recoveries of $4.5 ($3.6 after tax) and $1.7 ($1.3 after tax) for the three months and year ended December 31,2020, respectively.
3 The impact of the LPT net of tax of $12.7 includes adverse development on prior years’ claims reserves subject to the LPT of $28.0 less recoveries from the LPT
reinsurer of $11.9 and less an income tax recovery of $3.4 for the three months and year ended December 31, 2021. The impact of the LPT net of tax of $3.6 includes
adverse development on prior years’ claims reserves subject to the LPT of $9.0 less recoveries from the LPT reinsurer of $4.5 and less an income tax recovery of $0.9
for the three months ended December 31, 2020. The impact of the LPT net of tax of $47.2 includes the initial cost of the LPT of $43.5 plus adverse development on
prior years’ claims reserves subject to the LPT of $49.0 less recoveries from the LPT reinsurer of $32.7 and less an income tax recovery of $12.6 for the year ended
December 31, 2020.
4 Adjusted to conform to the presentation of the current period financial statements including restatement of comprehensive loss of $32.5 and $67.4 for the three months
and year ended December 31, 2020, respectively, compared to the previously reported comprehensive loss of $30.4 and $64.7 for the three months and year ended
December 31, 2020, respectively. For further details refer to the Skyward Specialty’s consolidated financial statements with independent auditor’s report as of and for
the years ended December 31, 2021 and 2020 filed on SEDAR by the Company.
Gross written premiums - Gross written premiums were $224.2 for the three months ended December 31, 2021 compared to $196.4 for the three
months ended December 31, 2020, an increase of 14.2% and $939.9 for the year ended December 31, 2021 compared to $873.6 for the year ended
December 31, 2020, an increase of 7.6%. The gross written premiums were primarily impacted by rate increases and growth in the continuing
business and was partially offset by a reduction in gross written premiums in business in run-off.
- 13 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
Net written premiums - Net written premiums were $141.0 for the three months ended December 31, 2021 compared to $114.8 for the three months
ended December 31, 2020, an increase of 22.8% and $529.1 for the year ended December 31, 2021 compared to $461.5 for the year ended
December 31, 2020, an increase of 14.7%. The net written premiums were impacted by the growth in gross written premiums and higher retentions.
Net earned premiums - Net earned premiums were $133.8 for the three months ended December 31, 2021 compared to $116.5 for the three
months ended December 31, 2020, an increase of 14.8% and $499.8 for the year ended December 31, 2021 compared to $431.9 for the year ended
December 31, 2020, an increase of 15.7%. The increase in net earned premiums was due to Skyward Specialty’s net written premium changes
over the past 24 months.
Losses and LAE excluding LPT – In the three months ended December 31, 2021 and 2020, Skyward Specialty’s Loss ratio, excluding loss and
LAE subject to the LPT was 66.2% and 67.3% respectively and in the years ended December 31, 2021 and 2020, Skyward Specialty’s Loss ratio,
excluding claims subject to the LPT was 67.7% and 70.0% respectively. The improvement in the Loss ratio is driven by underwriting actions including
rate increases over the past two years. The Loss ratio, excluding catastrophes and prior years’ development for the three months ended December
31, 2021 was 64.3% compared to 65.9% for the three months ended December 31, 2020 and for the year ended December 31, 2021 was 65.3%
compared to 68.7% for the year ended December 31, 2020.
Three months ended December 31
2021
2020
Year ended December 31
2020
2021
Losses and LAE
Less: Catastrophes
Less: Prior years’ development
Losses and LAE excluding catastrophes and
prior years’ development
$ 88.5
2.5
-
66.2%
1.9%
-
$ 78.4
0.8
0.8
67.3% $ 338.3
11.8
0.7%
-
0.7%
67.7%
2.4%
-
$ 302.4 70.0%
1.0%
0.3%
4.2
1.3
$ 86.0
64.3%
$ 76.8
65.9%
$ 326.5
65.3%
$ 296.9
68.7%
Operating results (net income excluding unusual items; all amounts net of income tax) - The net income excluding unusual items was $13.2 for the
three months ended December 31, 2021 compared to $12.6 for the three months ended December 31, 2020 and the net income excluding unusual
items was $49.5 for the year ended December 31, 2021 compared to $16.8 for the year ended December 31, 2020. The improvement of $32.7 in
the year ended December 31, 2021 compared to 2020, was primarily the result of increased investment income and an improved underwriting result.
The combined ratio excluding LPT improved to 94.6% from 96.8% for the years ended December 31, 2021 and 2020 despite a higher impact from
catastrophes.
Net income (loss) (all amounts net of income tax) – The operating result of Skyward Specialty was a net income of $1.3 for the three months ended
December 31, 2021 compared to a net loss of $32.9 for the three months ended December 31, 2020 and a net income of $38.3 for the year ended
December 31, 2021 compared to a net loss of $74.6 for the year ended December 31, 2020. The increase of $34.2 in net income for the three
months ended December 31, 2021 was primarily attributable to the unusual items of $11.9 versus $45.5 in the prior period having less of a reduction
to net income. The increase of $112.9 in net income for the year ended December 31, 2021 was primarily attributable to the lower impact of the
unusual items of $11.2 in the year ended December 31, 2021 versus $91.4 in the year ended December 31, 2020 and by the improvement in the
operating results of $32.7 described above.
Stockholders’ equity - Skyward Specialty stockholders’ equity increased to $426.1 at December 31, 2021 from $393.5 at December 31, 2020. The
increase of $32.6 resulted primarily from net income for the period of $38.3 and a decrease in the stockholder notes receivables of $1.7, partially
offset by the other comprehensive loss of $7.6 relating to the after-tax net change in the carrying value of Skyward Specialty’s fixed income portfolio.
B. INVESTMENT IN THE ARENA FINCOS
The Arena FINCOs invest in both debt and equity, hard assets and real estate owned investments, 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 as well as public investments subject to approved investment policies. These
investment strategies include:
- 14 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
Corporate Private Credit
Senior private corporate debt, bank debt, including, without limitation, secondary market bank debt, distressed debt such as senior secured bank
debt before or during a Chapter 11 bankruptcy filing, corporate bonds, including, without limitation, bonds in liquidation or out-of-court exchange
offers and trade claims of distressed companies in anticipation of a recapitalization, 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 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, without limitation, 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, without
limitation, airplanes and components, industrial machinery), commodities (physical and synthetic), reinsurance and premium finance within life and
property casualty insurance businesses, legal-related finance including, without limitation, 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, without limitation,
equipment leases, auto loans, commercial mortgage-backed securities, residential mortgage-backed securities, collateralized loan obligations,
collateralized debt obligations, other structured credits and consumer-related assets, 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-related assets, 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.
Corporate and Other Securities
Illiquid positions in asset-backed securities, collateralized debt obligations, collateralized loan obligations, residential mortgage backed securities,
commercial mortgage backed securities, other securitized bonds or non-bond tranches and liquid positions including, hedged and unhedged
investments in public securities (including, without limitation, public real estate and special purpose acquisition companies (“SPACs”)), preferred
stock, common stock, municipal bonds, senior public corporate debt, 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, limited partnership interests, interests in fund start-ups and investment managers, event-driven relative value equity investments in
transactions such as corporate restructurings, strategic block, other clearly defined events, 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.
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 their assessment of the fair market value of the investment at the time of purchase.
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 their investments.
- 15 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
Accounting for the Arena FINCOs
The Company’s investment in the Arena FINCOs is accounted for at FVTPL and are included in investments in private entities. 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, 2021, in the amount of $172.8 approximated the fair value of the Company’s investments in the Arena FINCOs. See Note
4, Investments in the Arena FINCOs in the Notes to the Financial Statements.
The fair value of the Company’s investment in the Arena FINCOs was determined to be $172.8 and $163.0 at December 31, 2021 and 2020,
respectively.
The Company recorded an increase in the unrealized value of its investments in the Arena FINCOs of $0.5 and $9.8 in the three months and year
ended December 31, 2021, respectively and an increase in the unrealized value of its investments in the Arena FINCOs of $1.5 before the return of
capital to the Company of $7.9 and a decrease in the unrealized value of its investments of $0.1 before dividends paid to the Company of $22.7 and
the return of capital to the Company of $20.0 in the three months and year ended December 31, 2020, respectively. There were no dividends paid
or capital returned to the Company in the three months and year ended December 31, 2021.
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 audited and has been derived from the financial statements of WOH, AOC, AFHC and the consolidated
financial statements of AF and its subsidiaries for the years ended December 31, 2021 and 2020, which have been prepared in accordance with
IFRS or US GAAP. AOC financial statements and AF consolidated financial 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:
Cash and cash equivalents
Due from brokers, net
Investments:
Loans / Private assets
Other Securities
Total investments
Senior secured notes payable
Revolving credit facility payable
Other net assets
Net assets of the Arena FINCOs
December 31, 2021
36.3
$
(1.7)
December 31, 2020
21.4
$
(5.5)
136.8
46.1
182.9
(43.7)
(7.0)
6.0
172.8
$
145.9
34.4
180.3
(43.4)
-
10.2
163.0
$
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 US$ currency hedges to reduce its
non-US$ currency exposure.
On July 2, 2021, Arena Finance II LLC (“AFII”), one of the Arena FINCOs, secured a revolving credit facility with third party lenders with an initial
commitment amount of $13.0 and initial termination date of September 30, 2023. On December 30, 2021, the revolving credit facility agreement
was amended such that an additional commitment amount of $8.5 was secured with another third party lender. Unpaid principal amounts under the
revolving credit facility will bear interest at the London Interbank Offered Rate (“LIBOR”) plus 2.8%. The loan is secured by AFII’s equity interests in
its subsidiaries, carries a parental guarantee from AF, and ranks senior to AFII’s senior secured notes payable. The net proceeds received under
the revolving credit facility are intended to be used as working capital and liquidity support in lieu of maintaining cash reserves and therefore are
expected to keep AFII’s equity and term debt capital fully invested in productive, yield-earning investments.
On September 29, 2020, AFII secured a private placement of $45.0 of 6.75% senior secured notes payable to improve net returns by leveraging
invested assets. The net proceeds received from these notes are being used by the Arena FINCOs in accordance with its investment objectives.
For additional information on the investments of the Arena FINCOs, see Section 14, Additional Arena FINCOs Investment Schedules of this MD&A.
- 16 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
A summary of the operating results of the Arena FINCOs attributable to the Company is as follows:
Net operating results of the Arena FINCOs:
Investment income
Net (losses) gains on investments
Interest expense
Net investment income
Management and asset servicing fees
Incentive fees
Other operating expenses
Net operating results before holding companies’ expenses
Arena FINCOs holding companies’ expenses:
Advisory fees paid to the Company
Other expenses
Net operating results of the Arena FINCOs
Three months ended December 31
2020
2021
Year ended December 31
2020
2021
$
4.8
(2.1)
(0.9)
1.8
(1.1)
-
(0.1)
0.6
$
0.2
3.5
(0.9)
2.8
(1.0)
(0.1)
(0.1)
1.6
$
10.4
9.0
(3.5)
15.9
(4.2)
(0.9)
(0.8)
10.0
$
5.6
0.6
(0.9)
5.3
(4.2)
(0.2)
(0.7)
0.2
(0.1)
-
0.5
$
(0.1)
-
1.5
$
(0.2)
-
9.8
$
(0.2)
(0.1)
(0.1)
$
The Net Return on the investment portfolios of the Arena FINCOs was +0.3% and +6.1% for the three months and year ended December 31, 2021,
respectively and +0.9% and nominal for the three months and year ended December 31, 2020, 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:
Opening balance
Return of capital to the Company
Unrealized gain (loss) before dividends
Dividends paid to the Company
Ending balance
C. INVESTMENT IN ARENA INVESTORS
Three months ended December 31
2020
2021
Year ended December 31
2020
2021
$
$
172.3
-
0.5
-
172.8
$
$
169.4
(7.9)
1.5
-
163.0
$
$
163.0
-
9.8
-
172.8
$
$
205.8
(20.0)
(0.1)
(22.7)
163.0
Arena Investors operates as an investment manager offering third-party clients access to fundamentals-based, asset-oriented credit and other
investments that aim to deliver attractive yields with low volatility. Arena Investors provides investment services to third-party clients consisting of
but not limited to institutional clients, insurance companies, private investment funds and other pooled investment vehicles.
Arena Investors generates revenues primarily from Management Fees, Incentive Fees and Asset Servicing Fees. “Management Fees” are the fees
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 and proprietary accounts are pro-rated on mid-month accounts and 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 calculated as a
percentage of net profits earned by Arena Investors as of the end of each accounting period or applicable withdrawal date related to client accounts
subject to a “high water mark” and loss carryforward provisions for each measurement date. “Asset Servicing Fees” are the fees earned in connection
with the management and servicing of the illiquid portion of clients’ investment portfolios.
As of December 31, 2021, Arena Investors had committed AUM of approximately $2.8 billion. The committed AUM included the net assets of the
Arena FINCOs and the Company’s investment in ASOF LP of approximately $176. As of December 31, 2020, Arena Investors had committed AUM
of approximately $2.0 billion. The committed AUM included the net assets of the Arena FINCOs and the Company’s investment in ASOF LP of
approximately $166.
- 17 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
Rights Granted to BP LLC
On August 31, 2015, agreements were entered into between the Company and BP LLC in respect of AIGH (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
(“EBITDA”) to trailing twelve month revenues) thresholds in accordance with the AIGH Associate Agreement. At December 31, 2021 and December
31, 2020, the thresholds in accordance with the Associate Agreements had not been met, therefore BP LLC’s profit sharing percentage remains at
49%.
Accounting for Arena Investors
The Company has a revolving loan facility to the associates (the “Arena Investors’ Revolving Loan”) with a limit of $35.0 at December 31, 2021.
Arena Investors had drawn down the loan facility by $24.0 at December 31, 2021 (December 31, 2020 - $28.0). See Note 4, Investments in the
Associates in the Notes to the Financial Statements.
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 $26.2 and $20.2 at December 31, 2021 and 2020, respectively. The Company’s 51% share of profit of $5.8 and
$10.0 for the three months and year ended December 31, 2021, respectively, and a share of profit of $1.4 and share of loss of $0.1 for the three
months and year ended December 31, 2020, respectively, was reported under “Net results of investments” in the consolidated statements of profit
(loss) and comprehensive income (loss).
Select Financial Information of Arena Investors
The Company considers certain financial results of Arena Investors to be important measures in assessing the Company’s financial position and
performance, in particular, revenues from the provision of investment management services, and operating expenses. Select financial information
related to Arena Investors set out below is audited and has been derived from the financial statements of AIGH for the years ended December 31,
2021 and 2020, which have been prepared in accordance with US GAAP. Such statements are the responsibility of the management of Arena
Investors. Management of the Company concluded that any reconciling items to IFRS are not material.
Select financial information of Arena Investors is as follows:
Statement of Financial Position
Cash and cash equivalents
Restricted cash
Arena Investors’ Revolving Loan from the Company
Other net assets (liabilities)
Net assets (liabilities)
$
December 31, 2021
2.2
13.4
(24.0)
12.4
4.0
$
$
December 31, 2020
1.0
13.9
(28.0)
(2.5)
(15.6)
$
Company’s share
Arena Investors’ Revolving Loan from the Company
Carrying amount of the Company’s investment in associates
$
$
2.2
24.0
26.2
$
$
(7.8)
28.0
20.2
Restricted cash includes deposits related to investment loans received in advance.
- 18 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
Statement of Profit (Loss) and Comprehensive Income (Loss)
Management and asset servicing fees
Incentive 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 income (loss)
Company’s share of profit (loss) of associates (51%)
1 Adjusted to conform to the presentation of the current period.
Three months ended December 31
20201
$ 5.9
4.2
0.1
10.2
2021
$ 9.3
15.4
0.2
24.9
(10.3)
(1.7)
(1.3)
(0.3)
(13.6)
$ 11.3
$ 5.8
(4.9)
(1.4)
(0.8)
(0.3)
(7.4)
$ 2.8
$ 1.4
Year ended December 31
20201
$ 20.7
7.8
0.3
28.8
2021
$ 31.0
34.3
0.5
65.8
(35.1)
(6.0)
(3.7)
(1.4)
(46.2)
$ 19.6
$ 10.0
(21.7)
(3.2)
(3.0)
(1.1)
(29.0)
$ (0.2)
$ (0.1)
The management, asset servicing and incentive fees were generated from the various segregated client accounts and managed funds of Arena
Investors.
D. INVESTMENT IN ASOF LP
The Company’s investment in ASOF LP, a fund managed by Arena Investors, with a fair value of $3.2 and $2.9 at December 31, 2021 and 2020,
respectively, is included in investments in the consolidated statements of financial position. The Company’s increase in unrealized value on its
investment in ASOF LP was $0.1 and $0.3 in the three months and year ended December 31, 2021, respectively, and $0.1 and $0.2 in the three
months and year ended December 31, 2020, respectively.
4.
FINANCING
Preferred Securities
On June 2, 2017, the Company closed the sale to certain affiliates of Fairfax Financial Holdings Limited (collectively referred to as “Fairfax”) of 5,000,000
Preferred Securities for C$50 million. The Preferred Securities are repayable on demand upon a change of control of Westaim and the liability is
recorded at the principal amount in the consolidated statements of financial position. The C$ 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, 2021 of $39.5
(December 31, 2020 - $39.2). See Note 6, Preferred Securities in the Notes to the Financial Statements.
Canadian Dollar Currency Forward Contracts
At December 31, 2021, the Company has a 365 day C$ exchange forward contract to purchase C$50 million. Additionally, during the year ended
December 31, 2021, the Company settled three C$ exchange forward contracts to purchase C$40 million each. During 2020, the Company settled
four C$ exchange forward contracts to purchase C$40 million each. The impact was to primarily offset Canadian dollar currency gains or losses on
the Company’s underlying Canadian dollar currency liabilities, including the currency exposure arising from the Preferred Securities. See Note 7,
C$ Exchange Forward Contracts in the Notes to the Financial Statements.
The Company has not designated these Canadian dollar currency forward contracts as accounting hedges.
Derivative Warrant Liability
In conjunction with the purchase by Fairfax of C$50 million in Preferred Securities on June 2, 2017, Westaim issued to Fairfax 14,285,715 Warrants
to purchase Common Shares at a strike price of C$3.50, with all of the Warrants having vested on June 2, 2017. 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, 2021, a liability
of $0.2 (December 31, 2020 - $1.0) representing the estimated fair value of the vested Warrants had been accrued in the consolidated statements
of financial position. See Note 8, Derivative Warrant Liability in the Notes to the Financial Statements.
- 19 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
5. ANALYSIS OF FINANCIAL RESULTS
Details of the Company’s operating results are as follows:
Revenue
Interest income
Dividend income from investments in private entities
Advisory fees
Net results of investments
Net expenses
Salaries and benefits
General, administrative and other
Professional fees
Site restoration recovery (expense)
Share-based compensation recovery (expense)
Foreign exchange (loss)
Interest on preferred securities
Derivative warrant gain (loss)
Income tax expense
Three months ended December 31
2020
2021
Year ended December 31
2020
2021
$
$
$
0.3
-
0.3
0.6
6.2
(1.4)
(0.2)
(0.2)
1.5
0.5
-
(0.5)
0.4
0.1
(0.2)
$
$
0.3
-
0.3
0.6
$
$
(10.5)
(1.1)
(0.2)
(0.4)
(0.6)
(0.7)
(0.9)
(0.5)
(0.2)
(4.6)
-
$
$
1.4
-
1.0
2.4
31.4
(5.0)
(0.8)
(1.0)
4.1
(0.5)
(0.9)
(2.0)
0.8
(5.3)
(0.2)
$
$
1.2
22.7
1.0
24.9
(50.9)
(3.8)
(0.8)
(1.3)
(0.7)
(0.3)
(0.4)
(1.9)
0.8
$ (8.4)
(0.1)
GAAP profit (loss) and comprehensive income (loss)
Adjusted profit and comprehensive income excluding unusual
$
6.7
$ (14.5)
$
28.3
$
(34.5)
items 1
$
11.9
$
4.9
$
34.2
$
5.0
1 Non-GAAP measure. See Section 15, Non-GAAP Measures of this MD&A.
5.1 Revenue
In the three months ended December 31, 2021, the Company earned interest on loans made to Arena Investors of $0.3 (2020 - $0.3). In the same
period, the Company earned advisory fees from Skyward Specialty of $0.1 (2020 - $0.1) and from the Arena FINCOs and Arena Investors of $0.2
(2020 - $0.2).
In the year ended December 31, 2021, the Company earned interest on loans made to Arena Investors of $1.4 (2020 - $1.1) and dividends from the
Arena FINCOs of $nil (2020 - $22.7). In the same period, the Company earned advisory fees from Skyward Specialty of $0.5 (2020 - $0.5) and from
the Arena FINCOs and Arena Investors of $0.5 (2020 - $0.5).
5.2 Net Results of Investments
In the three months ended December 31, 2021, the net results of investments consisted of an increase in the unrealized value of the Company’s
investments in private entities of $0.3 (2020 – decrease of $12.0), an increase in the unrealized value of other investments of $0.1 (2020 - $0.1),
and the Company’s share of profit from its investment in associates of $5.8 (2020 – $1.4).
In the year ended December 31, 2021, the net results of investments consisted of an increase in the unrealized value of the Company’s investments
in private entities of $21.1 (2020 – a decrease of $51.0), an increase in the unrealized value of other investments of $0.3 (2020 - $0.2), and the
Company’s share of profit from its investment in associates of $10.0 (2020 – share of loss of $0.1).
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, 2021, the Company recorded
a decrease in unrealized value of $0.2 on its investment in Skyward Specialty (2020 – $13.5), and an increase in unrealized value of $0.5 on its
investment in the Arena FINCOs (2020 – $1.5).
- 20 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
5. ANALYSIS OF FINANCIAL RESULTS (continued)
In the year ended December 31, 2021, the Company recorded an increase in unrealized value of $11.3 on its investment in Skyward Specialty (2020
– a decrease in unrealized value of $28.2), and an increase in unrealized value of $9.8 on its investment in the Arena FINCOs (2020 – a decrease
of $0.1 before dividends paid of $22.7).
Investment in Associates
The Company’s investment in associates is accounted for using the equity method. In the three months ended December 31, 2021, the associates
earned management and asset servicing fees of $9.3 (2020 - $5.9), incentive fees of $15.4 (2020 - $4.2), net gains on investment of $0.2 (2020 -
$0.1) offset by salaries and benefits of $10.3 (2020 - $4.9), professional fees of $1.7 (2020 - $1.4), general, administrative and other expenses of
$1.3 (2020 - $0.8), and interest expense on the Revolving Loan from the Company of $0.3 (2020 - $0.3) resulting in a profit of $11.3 (2020 – $2.8).
In the year ended December 31, 2021, the associates earned management and asset servicing fees of $31.0 (2020 - $20.7), incentive fees of $34.3
(2020 - $7.8), net gains on investment of $0.5 (2020 - $0.3) offset by salaries and benefits of $35.1 (2020 - $21.7), professional fees of $6.0 (2020 -
$3.2), general, administrative and other expenses of $3.7 (2020 - $3.0), and interest expense on the Revolving Loan from the Company of $1.4
(2020 - $1.1) resulting in a profit of $19.6 (2020 – loss of $0.2).
The total of the Company’s 51% share of profit of the associates amounted to $5.8 and $10.0 in the three months and year ended December 31,
2021, respectively, and its share of profit of the associates amounted to $1.4 and a share of loss of $0.1 in the three months and year ended
December 31, 2020, respectively.
5.3 Expenses
Salaries and benefits increased by $1.2 in the year ended December 31, 2021 when compared to the corresponding period in the prior year resulting
partially from the appreciation in the Canadian dollar, which the majority of compensation is paid in.
General, administrative and other expenses in the three months and year ended December 31, 2021 were comparable to the corresponding period
in the prior year.
Professional fees decreased by $0.3 in the year ended December 31, 2021 when compared to the corresponding period in the prior year due to
decreases in legal and tax consultation fees.
The Company has provided indemnifications to third parties and is the recipient of indemnifications from a third party with respect to future site
restoration costs to be incurred on industrial sites formerly owned by the Company and a third party. The Company conducts periodic reviews of
the underlying assumptions supporting the provision, taking into consideration the anticipated method and extent of the remediation consistent with
regulatory requirements, industry practices, current technology and possible uses of the site. Variations in the Company’s site restoration provision
expense from period to period are generally attributed to changes in the estimates of future expenditures used to arrive at the site restoration
provision. Reimbursements from indemnifications the Company is a recipient of are recorded only when received.
The site provision is calculated in C$ and the 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 (loss) and comprehensive income (loss).
Changes to the site restoration provision are as follows:
Opening balance
Changes due to:
Indemnity payment to a third party
Indemnity recovery receipt from a third party
Estimates of future expenditures
Present value adjustment
Unrealized foreign exchange loss
Ending balance
December 31, 2021
4.9
$
December 31, 2020
4.1
$
(2.7)
2.6
(4.1)
-
-
$ 0.7
-
-
0.7
-
0.1
4.9
$
In the second quarter of 2021, the Company negotiated a settlement of C$3.4 million ($2.7) to commute one of its site restoration indemnities related
to certain industrial sites formerly owned by the Company and contemporarily, the Company received a C$3.3 million ($2.6) indemnity recovery from
the previous owners of these same industrial sites. The indemnity recovery of $2.6 was recorded when received and has been reflected in site
restoration (recovery) expense in the consolidated statements of profit (loss) and comprehensive income (loss) for the year ended December 31,
2021. See Note 18, Subsequent Event in the Notes to the Financial Statements for details regarding the settlement of the site restoration provision.
- 21 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
5. ANALYSIS OF FINANCIAL RESULTS (continued)
Changes in share-based compensation expense from period to period result from 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, 2021 also included compensation expense for stock options of $nil (2020 - $nil) and $nil (2020 - $0.2),
respectively. See Section 8, Liquidity and Capital Resources of this MD&A for additional information on the Company’s share-based compensation
plans.
The Company holds C$ 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 years
ended December 31, 2021 and 2020:
Foreign exchange (losses) gains relating to:
- Site restoration provision
- Liabilities for RSUs and DSUs
- Preferred securities
- Derivative warrant liability
- Canadian dollar currency forward contracts
- Other
6. ANALYSIS OF FINANCIAL POSITION
Three months ended December 31
2020
2021
Year ended December 31
2020
2021
$ -
(0.1)
-
-
0.1
-
$ -
$
$
(0.2)
(0.3)
(1.6)
-
1.3
(0.1)
(0.9)
$ -
(0.1)
(0.3)
-
(0.4)
(0.1)
(0.9)
$
$ (0.1)
-
(0.7)
0.1
0.4
(0.1)
$ (0.4)
The Company’s assets, liabilities and shareholders’ equity as at the dates indicated below consisted of the following:
Assets
Cash
Income tax 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
6.1 Cash
December 31, 2021
December 31, 2020
$
$
$
$
6.6
-
0.8
394.3
401.7
13.0
0.2
39.5
0.2
0.7
0.4
54.0
347.7
401.7
$
$
$
$
8.7
0.1
1.6
366.9
377.3
11.0
0.3
39.2
1.0
4.9
0.4
56.8
320.5
377.3
At December 31, 2021, the Company had cash of $6.6 (December 31, 2020 - $8.7).
6.2 Income Tax Receivable
At December 31, 2021, the Company had an income tax receivable of nominal (December 31, 2020 - $0.1).
- 22 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION (continued)
6.3 Other Assets
Other assets were $0.8 and $1.6 at December 31, 2021 and 2020, respectively. Other assets at December 31, 2021 included receivables from
related parties of nominal (December 31, 2020 - $0.8), right of use asset of $0.4 (December 31, 2020 - $0.5), and other receivables of $0.4 (December
31, 2020 - $0.3). See Note 3, Other Assets in the Notes to the Financial Statements.
6.4 Investments
Investments in Private Entities
The Company’s investments in private entities consist of its investments in Skyward Specialty and the Arena FINCOs, which are accounted for at
FVTPL. The fair values of Skyward Specialty and the Arena FINCOs at December 31, 2021 were determined to be $192.1 and $172.8, respectively
(December 31, 2020 - $180.8 and $163.0, 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 associates at December 31, 2021 was $26.2 (December 31, 2020 - $20.2). 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, 2021 was determined to be $3.2 (December 31, 2020 - $2.9). See discussion in Section 3, Investments of this
MD&A.
6.5 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities were $13.0 and $11.0 at December 31, 2021 and 2020, respectively. Accounts payable and accrued
liabilities at December 31, 2021 included liabilities related to accrued employee bonuses of $2.6 (December 31, 2020 - $1.8), RSUs of $5.9
(December 31, 2020 - $5.9), DSUs of $2.2 (December 31, 2020 - $1.7), lease liability of $0.4 (December 31, 2020 - $0.5), interest accrued on the
Preferred Securities of $0.5 (December 31, 2020 - $0.5), fair value of Canadian dollar currency forward contract of $0.4 (December 31, 2020 - $nil),
and other accrued liabilities of $1.0 (December 31, 2020 - $0.6). See Note 3, Other Assets in the Notes to the Financial Statements 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.
6.6 Income Tax Payable
At December 31, 2021, the Company had an income tax payable of $0.2 (December 31, 2020 - $0.3).
6.7 Preferred Securities
The C$50 million principal amount of the Preferred Securities was converted to US$ at the period end exchange rate, resulting in a carrying amount
of the Preferred Securities at December 31, 2021 of $39.5 (December 31, 2020 - $39.2). See discussion in Section 4, Financing of this MD&A.
6.8 Derivative Warrant Liability
At December 31, 2021, a liability of $0.2 (December 31, 2020 - $1.0) 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.
6.9 Site Restoration Provision
The site restoration provision of $0.7 at December 31, 2021 (December 31, 2020 - $4.9) relates to future site restoration costs associated with soil
and groundwater reclamation and remediation costs relating to industrial sites previously owned by the Company. See discussion in Section 5,
Analysis of Financial Results of this MD&A.
- 23 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION (continued)
6.10 Shareholders’ Equity
The details of shareholders’ equity are as follows:
Common Shares
Contributed surplus
Accumulated other comprehensive loss
Deficit
Shareholders’ equity
Common Shares
$
December 31, 2021
381.1
17.7
(2.2)
(48.9)
347.7
$
$
December 31, 2020
382.2
17.7
(2.2)
(77.2)
320.5
$
Westaim had 142,686,718 and 143,186,718 Common Shares outstanding at December 31, 2021 and 2020, respectively. In the year ended
December 31, 2021, Westaim cancelled 500,000 Common Shares that it had acquired at a cost of $1.1 through a normal course issuer bid (“NCIB”).
The TSXV accepted NCIB provides that Westaim may, during the 12-month period commencing October 1, 2021 and ending September 30, 2022,
purchase up to 11,208,044 Common Shares in total, representing approximately 10% of Westaim’s public float as of September 23, 2021. The
NCIB is restricted in that no more than 2,863,734 Common Shares within a 30 day period maybe purchased within the market. Westaim is conducting
the NCIB because it believes the Common Shares currently trade in a price range that represents an attractive investment and a desirable use of a
portion of its corporate funds.
Contributed Surplus
The Company had $17.7 in contributed surplus at December 31, 2021 and 2020.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $2.2 at December 31, 2021 and 2020 comprised cumulative exchange differences from currency
translation as a result of a change in presentation currency from the C$ to the US$ on August 31, 2015.
Deficit
The decrease in deficit of $28.3 from December 31, 2020 to December 31, 2021 is due to the profit and comprehensive income for the year ended
December 31, 2021.
7. OUTLOOK
With the Arena Investors’ platform largely built (product suite, geographies, IT systems, investment capability), its 100+ professionals are poised to
deploy committed capital, continue to increase AUM and demonstrate operating leverage to grow its earnings.
Generally, the US property and casualty insurance market has shifted to a cycle of increasing insurance rates and improved underwriting terms after
several years of poor underwriting results in the industry. Skyward Specialty is well positioned to take advantage of the hardening insurance market
and accelerate its profitable growth and return on equity. Skyward Specialty continues to acquire additional key talent, executes on underwriting
actions to optimize its product mix, maintains protection under an LPT agreement signed in 2020 helps minimize the impact of prior years’ claims
development, effectively manages its investment portfolio to result in improved investment returns, and has an AM Best rating “A-“ with a Stable
Outlook. Skyward Specialty’s objective is to build a top quartile property and casualty specialty insurer.
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 to the Company’s shareholders over the long term.
8.
LIQUIDITY AND CAPITAL RESOURCES
Capital Management Objectives
The Company’s capital currently consists of 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.
- 24 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
8.
LIQUIDITY AND CAPITAL RESOURCES (continued)
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
Westaim’s authorized share capital consists of an unlimited number of Common Shares, Class A preferred shares and Class B preferred shares.
At December 31, 2021, Westaim had Common Shares outstanding of 142,686,718 (December 31, 2020 – 143,186,718), with a stated capital of
$381.1 (December 31, 2020 - $382.2).
There were no Class A or Class B preferred shares outstanding at December 31, 2021 and at December 31, 2020. For further details, see Note 11,
Share Capital in the Notes to the Financial Statements.
Dividends
No dividends were paid in the years ended December 31, 2021 and 2020.
Share-based Compensation Plans
Westaim’s long-term equity incentive plan (the “Incentive Plan”) provides for grants of RSUs, DSUs, stock appreciation rights and other share-based
awards. Westaim 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 Westaim, 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, 2021 and at December 31, 2020, Westaim had 10,428,337 stock options outstanding at strike prices ranging from C$3.00 to
C$3.25.
Westaim had 2,975,198 RSUs outstanding at December 31, 2021 (December 31, 2020 – 3,034,261). The RSUs, at the election of the holder, can
be settled in Common Shares or cash based on the prevailing market price of the common shares on the settlement date. In the year ended
December 31, 2021, 59,063 RSUs were exercised (2020 – none).
At December 31, 2021, 1,093,603 DSUs were vested and outstanding (December 31, 2020 – 855,228 DSUs were vested and outstanding). DSUs
are issued to certain directors in lieu of director fees, at their election, at the market value of 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, 2021 and 2020, no DSUs were exercised.
At December 31, 2021, accounts payable and accrued liabilities included amounts related to outstanding RSUs of $5.9 (December 31, 2020 - $5.9)
and outstanding DSUs of $2.2 (December 31, 2020 - $1.7).
For further details, see Note 12, Share-based Compensation in the Notes to the Financial Statements.
Market for Securities
Westaim’s Common Shares trade on the TSX Venture Exchange (“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.
- 25 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, 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, 2021
Financial assets:
Cash
Other assets (excluding capital assets and right-of-use asset)
Investments
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities (excluding lease
liabilities)
Preferred securities
Site restoration provision
Total financial obligations
Financial assets net of financial obligations
December 31, 2020
Financial assets:
Cash
Income tax receivable
Other assets (excluding capital assets and right-of-use asset)
Investments
Total financial assets
Financial obligations:
Accounts payable and accrued liabilities (excluding lease
liabilities)
Income tax payable
Preferred securities
Site restoration provision
Total financial obligations
Financial assets net of financial obligations
One year or
less
One to five
years
No specific
date / later than
five years
$
$
6.6
0.4
-
7.0
4.5
-
0.7
5.2
1.8
$
$
-
-
24.0
24.0
-
-
-
-
24.0
$
$
-
-
370.3
370.3
8.1
39.5
-
47.6
322.7
$
$
One year or
less
One to five
years
No specific
date / later than
five years
Total
6.6
0.4
394.3
401.3
12.6
39.5
0.7
52.8
348.5
Total
$
8.7
0.1
1.1
-
9.9
$
-
-
-
28.0
28.0
$
-
-
-
338.9
338.9
$
8.7
0.1
1.1
366.9
376.8
2.9
0.3
-
-
3.2
6.7
$
-
-
-
-
-
28.0
$
7.6
-
39.2
4.9
51.7
287.2
10.5
0.3
39.2
4.9
54.9
321.9
$
$
The Company’s investment guidelines stress preservation of capital and market liquidity to support payment of liabilities. The matching of the
duration of financial assets and liabilities is monitored with a view to ensuring that all obligations will be met.
9. RELATED PARTY TRANSACTIONS
Related parties include key management personnel and directors, 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.
For further details, see Note 13, Related Party Transactions in the Notes to the Financial Statements.
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.
- 26 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
10. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS (continued)
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, 2021. Management determined that this valuation technique produced the best indicator of the fair value of the investments in
Skyward Specialty and the Arena FINCOs at December 31, 2021. The significant unobservable inputs used in the valuation of Skyward Specialty
and the Arena FINCOs at December 31, 2021 were the equity of each of the entities at December 31, 2021 and the multiple applied. For a detailed
description of the valuation of the Company’s investments in private entities, see Note 4 to the Company’s audited annual consolidated financial
statements for the years ended December 31, 2021 and 2020. 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 9, Note 12 and Note 14, respectively, to the Company’s audited annual consolidated financial
statements for the years ended December 31, 2021 and 2020.
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, 2021 and 2020.
At December 31, 2021, there were no new pronouncements that impacted the Company.
12. QUARTERLY FINANCIAL INFORMATION
Revenue
Increase (decrease) in unrealized value of
investments, less dividends
Net recovery of expenses (expenses)
Income tax expense
Profit (loss) and comprehensive income (loss)
Q4
2021
$ 0.6
Q3
2021
$ 0.6
Q2
2021
$ 0.6
Q1
2021
$ 0.6
Q4
2020
$ 0.6
6.2
0.1
(0.2)
$ 6.7
3.2
(2.2)
-
$ 1.6
9.9
0.4
-
$ 10.9
12.1
(3.6)
-
(10.5)
(4.6)
-
$ 9.1 $ (14.5)
Q3
2020
$ 0.5
3.5
(3.4)
-
$ 0.6
Q2
2020
$ 0.5
Q1
2020
$ 23.3
3.2
(3.7)
(0.1)
$ (0.1)
(47.1)
3.3
-
$ (20.5)
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 Skyward
Specialty, the Arena FINCOs and Arena Investors. A detailed description of the risk factors associated with the Company and its business is
contained in the Company’s Annual Information Form dated April 13, 2022 for its fiscal year ended December 31, 2021 which is available on SEDAR
at www.sedar.com.
- 27 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES
The investments of the Arena FINCOs shown by investment strategy is as follows:
Investments by Strategy
December 31, 2021
Corporate Private Credit
Real Estate Private Credit
and Real Estate Assets
Commercial and Industrial
Assets
Structured Finance
Consumer Assets
Other Securities
Investments by Strategy
Corporate Private Credit
Real Estate Private Credit
and Real Estate Assets
Commercial and Industrial
Assets
Structured Finance
Consumer Assets
Other Securities
Number of
positions
28
33
28
2
12
100
203
Number of
positions
21
27
17
2
10
81
158
Cost
57.2
30.0
36.6
3.5
16.1
40.8
184.2
Cost
46.9
49.8
26.9
4.9
17.8
35.9
182.2
$
$
$
$
Fair value
54.9
$
Percentage of
investments at
fair value
30.0%
%
Debt investments
11.2%
29.1
15.9%
12.5%
38.7
3.7
10.4
46.1
182.9
$
21.2%
2.0%
5.7%
25.2%
100.0%
14.2%
2.0%
5.7%
10.3%
55.9%
%
Equity, hard
assets and real
estate owned
investments
18.8%
3.4%
7.0%
-
-
14.9%
44.1%
December 31, 2020
Fair value
46.2
$
Percentage of
investments at
fair value
25.6%
%
Debt investments
10.6%
49.9
27.7%
23.1%
30.8
5.2
13.8
34.4
180.3
$
17.1%
2.9%
7.6%
19.1%
100.0%
9.4%
2.9%
7.6%
11.7%
65.3%
%
Equity, hard
assets and real
estate owned
investments
15.0%
4.6%
7.7%
-
-
7.4%
34.7%
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
December 31, 2021
December 31, 2020
Loans / Private Assets
North America
Europe
Asia/Pacific
Latin America
Other Securities 1
North America
Europe
Asia/Pacific
Latin America
Other
1 Net of short positions.
Cost
Fair value
$
112.8
19.2
11.4
-
143.4
13.5
8.3
11.5
2.9
4.6
40.8
$
107.7
18.6
10.5
-
136.8
24.7
5.5
11.4
1.0
3.5
46.1
Percentage of
investments at
fair value
$
58.9%
10.2%
5.7%
-
74.8%
13.5%
3.0%
6.2%
0.5%
2.0%
25.2%
Cost
Fair value
103.4
15.5
27.1
0.3
146.3
20.8
7.2
4.2
0.6
3.1
35.9
$
102.6
14.9
28.2
0.2
145.9
23.9
5.2
2.9
0.5
1.9
34.4
Percentage of
investments at
fair value
56.9%
8.3%
15.6%
0.1%
80.9%
13.2%
2.9%
1.6%
0.3%
1.1%
19.1%
$
184.2
$
182.9
100.0%
$
182.2
$
180.3
100.0%
- 28 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES (continued)
The investments of the Arena FINCOs shown by industry is as follows:
Investments by Industry
December 31, 2021
December 31, 2020
Cost
Fair value
Percentage of
investments at fair
value
Cost
Fair value
Percentage of
investments at
fair value
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
Mixed Use
Residential
Storage
Commercial and Industrial Assets
Lease/Equipment
Other Assets
Structured Finance
Other Assets
Consumer Assets
Consumer
$
$
16.1
0.6
1.1
-
21.3
15.6
2.5
57.2
0.9
3.7
8.1
5.8
2.2
-
9.3
-
30.0
3.6
33.0
36.6
3.5
3.5
16.1
16.1
11.3
0.6
1.1
-
25.2
14.2
2.5
54.9
0.9
3.7
7.6
5.1
2.1
-
9.7
-
29.1
4.7
34.0
38.7
3.7
3.7
10.4
10.4
6.2%
0.3%
0.6%
-
13.8%
7.8%
1.3%
30.0%
0.5%
2.0%
4.2%
2.8%
1.1%
-
5.3%
-
15.9%
2.6%
18.6%
21.2%
2.0%
2.0%
5.7%
5.7%
$
$
14.6
-
0.8
0.1
17.9
12.9
0.6
46.9
15.3
-
0.8
0.1
17.6
11.8
0.6
46.2
8.5%
-
0.4%
0.1%
9.8%
6.5%
0.3%
25.6%
3.0
3.8
6.8
4.9
22.3
1.2
7.7
0.1
49.8
1.8
3.9
6.2
5.6
23.3
1.2
7.8
0.1
49.9
1.0%
2.2%
3.4%
3.1%
13.0%
0.7%
4.2%
0.1%
27.7%
2.6
24.3
26.9
4.9
4.9
17.8
17.8
4.7
26.1
30.8
5.2
5.2
13.8
13.8
2.6%
14.5%
17.1%
2.9%
2.9%
7.6%
7.6%
Total Loans / Private Assets
143.4
136.8
74.8%
146.3
145.9
80.9%
Other Securities (2)
Basic Materials
Biotechnology
Consumer Products
Diversified
Energy
Financial Services
Foreign Exchange Forwards/Options
Healthcare Services
Hospitality
Industrial
Information Technology
Mining
Media
Oil and Gas
Other Assets
Real Estate
Telecommunications
1.4
0.1
6.3
4.3
0.9
5.8
0.4
1.4
-
3.7
1.7
2.1
-
2.4
-
1.6
14.0
46.1
182.9
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 risk by selling product forward and/or employing the use
-
-
4.6
7.7
-
1.1
(1.5)
3.1
0.7
2.6
2.2
0.1
-
0.6
3.3
0.4
9.5
34.4
180.3
-
-
6.3
6.8
-
0.9
-
2.8
0.7
3.1
1.9
0.1
-
1.4
3.2
0.3
8.4
35.9
182.2
-
-
2.5%
4.3%
-
0.6%
(0.8)%
1.7%
0.4%
1.4%
1.2%
0.1%
-
0.4%
1.8%
0.2%
5.3%
19.1%
100.0%
0.8%
0.1%
3.4%
2.4%
0.5%
3.2%
0.2%
0.7%
0.0%
2.0%
0.9%
1.1%
0.0%
1.3%
-
0.9%
7.7%
25.2%
100.0%
1.3
0.1
7.2
4.3
0.7
7.3
-
1.2
-
3.6
1.8
2.2
-
2.0
-
1.7
7.4
40.8
184.2
$
$
$
$
of other derivatives to substantially reduce all risk.
2 Net of short positions.
- 29 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
December 31, 2021
Total coupon
(including PIK) (2)
LTV (3)
n/a (14)
n/a (14)
n/a (14)
12.00%
12.00%
n/a (14)
n/a (14)
n/a (14)
12.00%
10.00%
n/a (7)
n/a (15)
8.00%
12.00%
n/a (14)
10.00%
11.00%
9.13%
10.00%
n/a (8)
3.50%
10.00%
8.00%
10.00%
14.00%
11.00%
9.50%
14.00%
1.00%
n/a (14)
n/a (16)
n/a (14)
n/a (14)
22.00%
10.98%
n/a (14)
n/a (14)
n/a (14)
100%+
31.0%
n/a (14)
n/a (14)
n/a (14)
85.0%
17.0%
9.0%
n/a (15)
67.0%
21.0%
n/a (14)
5.0%
26.0%
83.0%
5.0%
n/a (8)
100%+
5.0%
14.0%
8.0%
43.0%
5.0%
6.3%
67.0%
64.0%
n/a (14)
n/a (16)
n/a (14)
n/a (14)
27.0%
38.8%
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES (continued)
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions
Investments by industry
Ref. no.
Corporate Private Credit
CPC-2209
CPC-3222
CPC-3198
CPC-3349
CPC-5325
CPC-3199EQ
CPC-3677
CPC-4108
CPC-6678
CPC-4985
CPC-7227
CPC-6374
CPC-5974
CPC-5143
CPC-2397
CPC-5830
CPC-6859
CPC-5027
CPC-5913
CPC-7044
CPC-2170
CPC-5914
CPC-6510
CPC-6373
CPC-1010
CPC-5856
CPC-7018
CPC-7199
CPC-7167
CPC-6678EQ
CPC-6532
CPC-3349EQY
CPC-3083
CPC-5889
Subtotal / Weighted average %
Other Assets
Oil & Gas
Oil & Gas
Business Services
Oil & Gas
Oil & Gas
Business Services
Oil & Gas
Retail
Oil & Gas
Other Assets
Business Services
Other Assets
Oil & Gas
Financial Services
Business Services
Business Services
Retail
Business Services
Consumer Products
Oil & Gas
Business Services
Financial Services
Business Services
Oil & Gas
Business Services
Business Services
Retail
Business Services
Retail
Business Services
Business Services
Business Services
Consumer Products
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
$ 12.0
6.7
4.5
7.2
3.4
2.6
1.1
1.6
1.7
1.3
1.3
0.5
2.0
0.8
0.9
0.5
0.5
0.6
0.4
0.5
1.7
0.3
0.2
0.2
0.2
0.1
0.2
0.1
0.6
0.1
0.9
0.8
4.6
0.0
60.1
$ 13.6
5.6
4.5
5.0
3.6
2.6
1.1
1.6
1.7
1.3
1.2
0.6
0.9
0.8
0.9
0.6
0.6
0.6
0.5
0.5
1.1
0.3
0.2
0.2
0.2
0.1
0.2
0.1
0.6
0.1
0.9
0.8
4.6
0.0
57.2
$ 12.2
6.7
6.6
4.9
4.1
2.7
2.1
2.0
1.7
1.5
1.2
1.0
0.8
0.8
0.8
0.7
0.7
0.7
0.6
0.6
0.5
0.5
0.3
0.2
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.0
0.0
0.0
54.9
Europe
North America
North America
Asia Pacific
North America
North America
North America
North America
North America
North America
North America
Europe
Asia Pacific
North America
North America
Europe
Asia Pacific
North America
Europe
North America
North America
Europe
Asia Pacific
Europe
North America
Europe
Europe
North America
North America
North America
North America
Asia Pacific
North America
North America
Equity
Hard Asset
Hard Asset
2nd Lien
1st Lien
Hard Asset
Equity
Hard Asset
1st Lien
1st Lien
Asset Pool
Equity
1st Lien
1st Lien
Equity
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
2nd Lien
Equity
2nd Lien
Equity
Equity
1st Lien
- 30 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES (continued)
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions (continued)
December 31, 2021
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
REPC-6162
REPC-5905
REPC-2683
REPC-4698
REPC-2592
Investments by industry
REPC-4220
REPC-7488
REPC-5591
REPC-2497
REPC-2560
REPC-7319
REPC-6592
REPC-7027
REPC-6384EQ
REPC-5476
Ref. no.
Real Estate Private Credit and Real Estate Assets
Residential
REPC-1068S4
Land - Commercial
REPC-2277
Development
Land - Multi-Family
Development
Residential
Residential
Land - Commercial
Development
Land - Multi-Family
Development
Land - Commercial
Development
Land - Commercial
Development
Hospitality
Hospitality
Residential
Hospitality
Hospitality
Commercial
Land - Single-Family
Development
Land - Multi-Family
Development
Residential
Hospitality
Land - Single-Family
Development
Land - Single-Family
Development
Land - Single-Family
Development
Land - Single-Family
Development
Commercial
Commercial
Residential
Land - Single-Family
Development
Land - Single-Family
Development
Land - Single-Family
Development
Land - Single-Family
Development
Land - Commercial
Development
Commercial
Land - Commercial
Development
REPC-6048
REPC-6334
REPC-7193
REPC-6996
REPC-6854
REPC-6129TL
REPC-6506TL1
REPC-5348
REPC-1015
REPC-6276
REPC-1047
REPC-6995
REPC-6242
REPC-6505
REPC-6194
REPC-6054
3.8
3.1
4.0
2.5
0.1
1.6
1.5
1.2
2.0
1.0
0.9
0.7
0.7
0.6
0.5
0.5
0.4
0.3
0.4
0.5
0.4
0.3
0.2
0.2
0.2
0.1
0.8
0.1
0.1
0.1
0.1
1.3
0.2
3.8
3.1
4.0
2.5
1.7
1.6
1.5
1.2
2.0
1.0
0.9
0.8
0.7
0.7
0.5
0.5
0.3
0.4
0.4
0.5
0.3
0.3
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.0
0.1
LTV (3)
72.0%
65.0%
4.3
3.5
North America
North America
1st Mortgage (5)
1st Mortgage
11.00%
15.00%
3.3
North America
Real Property
n/a (9)
n/a (9)
2.3
1.7
1.6
North America
Asia Pacific
North America
1st Mortgage
1st Mortgage
1st Mortgage
12.00%
13.00%
13.50%
83.0%
66.0%
59.0%
1.5
North America
1st Mortgage
12.00%
46.0%
1.2
North America
1st Mortgage
15.13%
60.0%
1.1
North America
1st Mortgage
10.50%
100%+
1.0
0.9
0.9
0.7
0.7
0.5
0.5
North America
North America
Europe
North America
Europe
North America
Asia Pacific
Real Property
Real Property
1st Mortgage
1st Mortgage
Real Property
1st Mortgage
1st Mortgage
n/a (9)
n/a (9)
13.00%
8.00%
n/a (9)
n/a (9)
11.50%
n/a (9)
n/a (9)
42.7%
80.0%
n/a (9)
n/a (9)
78.0%
0.4
North America
1st Mortgage
11.50%
54.0%
0.4
0.4
0.4
Europe
North America
Asia Pacific
1st Mortgage
1st Mortgage
1st Mortgage
14.00%
10.50%
8.00%
47.7%
61.0%
79.0%
0.3
Asia Pacific
1st Mortgage
11.50%
69.0%
0.3
Asia Pacific
1st Mortgage
11.00%
80.0%
0.2
Asia Pacific
1st Mortgage
9.00%
69.0%
0.2
0.2
0.1
0.1
Europe
Europe
North America
Asia Pacific
Real Property
Real Property
1st Mortgage
1st Mortgage
n/a (9)
n/a (9)
13.75%
5.40%
n/a (9)
n/a (9)
50.0%
70.0%
0.1
Asia Pacific
1st Mortgage
12.00%
69.0%
0.1
Asia Pacific
1st Mortgage
10.00%
74.0%
0.1
Asia Pacific
1st Mortgage
8.00%
74.0%
0.1
North America
1st Mortgage
15.00%
53.0%
0.0
0.0
Europe
North America
1st Mortgage
Real Property
15.00%
n/a (9)
54.0%
n/a (9)
Subtotal / Weighted average %
30.4
30.0
29.1
12.28%
70.0%
- 31 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES (continued)
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions (continued)
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
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
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
4.2
4.1
3.3
2.7
2.2
2.0
2.0
1.9
1.5
1.4
1.3
1.2
1.1
1.1
1.0
0.8
0.7
0.6
0.6
0.6
0.5
0.5
0.5
0.4
0.4
0.4
0.4
0.4
0.3
0.3
0.2
0.1
0.0
0.0
0.0
0.0
0.0
38.7
Asset Pool
1st Lien
Hard Asset
1st Lien
Hard Asset
Equity
Hard Asset
1st Lien
Equity
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
2nd Lien
1st Lien
1st Lien
Equity
Hard Asset
Hard Asset
1st Lien
1st Lien
Hard Asset
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
Equity
December 31, 2021
Total coupon
(including PIK) (2)
LTV (3)
n/a (7)
14.00%
n/a (4)
13.50%
n/a (4)
n/a (14)
n/a (4)
7.88%
n/a (13)
15.00%
15.00%
24.00%
15.00%
12.00%
14.30%
30.00%
16.20%
15.00%
18.00%
12.00%
n/a (14)
n/a (4)
n/a (4)
13.50%
n/a (11)
n/a (4)
n/a (4)
10.00%
9.90%
10.00%
10.00%
18.00%
n/a (16)
18.00%
13.20%
9.26%
n/a (13)
14.57%
49.0%
43.0%
n/a (4)
0.0%
n/a (4)
n/a (14)
n/a (4)
n/a (4)
n/a (13)
61.0%
61.0%
61.0%
85.0%
79.0%
85.0%
61.0%
61.0%
80.0%
61.0%
90.0%
n/a (14)
n/a (4)
n/a (4)
85.0%
48.0%
n/a (4)
n/a (4)
80.0%
100.0%
80.0%
80.0%
77.0%
n/a (16)
77.0%
68.0%
100%+
n/a (13)
55.4%
North America
North America
First Lien
First Lien
3.5
0.2
3.7
n/a (12)
15.00%
15.00%
8.0%
85.0%
12.4%
Investments by industry
Ref. no.
Commercial and Industrial Assets
CI-3045
CI-4898
CI-2651
CI-1800
CI-3978
CI-1999EQY
CI-2201
CI-6253
CI-2000
CI-6752
CI-7004
CI-6750
CI-6016
CI-4282
CI-6006
CI-7164
CI-6648TL
CI-2064
CI-6565
CI-5777
CI-2686
CI-5177
CI-7166
CI-6785
CI-1520
CI-4967
CI-7140
CI-5554A
CI-1035
CI-5554B
CI-5554
CI-7406EQY
CI-1999
CI-5372
CI-5113
CI-1018
CI-2808
Subtotal / Weighted average %
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
Lease/Equipment
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
Lease/Equipment
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
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
Other Assets
Structured Finance
SF-2239
SF-5396
Subtotal / Weighted average %
Other Assets
Other Assets
2.1
4.0
4.0
2.7
1.8
3.1
0.9
2.1
0.6
1.4
1.3
1.1
1.1
1.1
1.0
0.8
0.7
0.3
0.6
0.6
1.0
0.5
0.5
0.4
0.2
0.4
0.9
0.4
0.4
0.3
0.2
0.1
0.0
0.0
0.0
0.2
0.1
36.9
3.1
0.2
3.3
2.1
4.0
4.3
2.7
1.8
3.1
0.9
1.9
0.6
1.4
1.3
1.2
1.1
1.1
1.0
0.8
0.7
0.3
0.6
0.6
1.0
0.5
0.5
0.4
0.2
0.4
0.4
0.4
0.4
0.3
0.2
0.1
0.0
0.0
0.0
0.2
0.1
36.6
3.3
0.2
3.5
- 32 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES (continued)
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions (continued)
Ref. no.
Investments by industry
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
December 31, 2021
Total coupon
(including PIK) (2)
LTV (3)
Consumer Assets
CA-4946
CA-5898
CA-1788/1933/1934
CA-5596
CA-4718
CA-1052F
CA-6288
CA-7092
CA-6154
CA-4727
CA-6834
CA-2729
CA-5060
CA-2373
CA-1052S
Subtotal / Weighted average %
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
3.7
1.8
4.0
0.7
0.4
2.6
0.2
0.2
0.1
0.2
0.1
0.4
0.0
0.3
1.4
16.1
3.6
1.8
4.0
0.7
0.4
2.6
0.2
0.2
0.2
0.2
0.1
0.4
0.0
0.3
1.4
16.1
North America
North America
North America
North America
North America
North America
North America
North America
Europe
North America
North America
North America
North America
North America
North America
3.6
1.8
1.8
0.8
0.7
0.7
0.2
0.2
0.2
0.2
0.1
0.1
0.0
0.0
0.0
10.4
1st Lien
Asset Pool
1st Lien
Asset Pool
Asset Pool
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
Asset Pool
1st Lien
Asset Pool
Asset Pool
1st Lien
15.00%
n/a
n/a (6)
n/a (6)
n/a (12)
15.66%
10.00%
9.00%
15.00%
29.00%
n/a (6)
n/a (12)
25.00%
n/a (12)
15.66%
15.09%
89.0%
60.0%
n/a (4)
n/a (10)
n/a (10)
100.0%
0.0%
75.0%
50.0%
66.0%
n/a (10)
100.0%
64.0%
n/a (10)
100.0%
81.3%
Total / Weighted average %
$ 146.8
$ 143.4
$ 136.8
13.14%
56.9%
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 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, 2021. 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.
Interest not accrued on loans purchased as non-performing.
Investment represents a credit pool purchase with no stated interest rate.
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, 2021.
4
Investment is not a loan. Metric is not applicable.
5 Denotes subordinate position within the structure.
6
7
8 Investment is a maturity default past its maturity date and has an uncertain holding period as of December 31, 2021.
9 Investment represents owned real estate. Metric is not available.
10 Investment represents an unsecured credit pool purchase with no stated interest rate.
11 This investment represents a claim against proceeds subject to a litigation result whereby the FINCOs are not accruing interest.
12 Investment with no stated coupon rate.
13 Investment is a preferred equity investment.
14
Investment is an equity interest in an operating company. Stated coupon and LTV are not applicable.
Investment is a warrant to purchase an equity interest in an operating company. Stated coupon and LTV are not applicable.
Investment is in maturity default where the Company and its partners acquired the borrower in bankruptcy. LTV is not applicable.
15
16
- 33 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES (continued)
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions
December 31, 2020
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Investments by industry
Ref. no.
Corporate Private Credit
CPC-2209
CPC-3349
CPC-3198
CPC-3677
CPC-3222
CPC-3083
CPC-5325
CPC-3199EQ
CPC-4108
CPC-4985
CPC-5143
CPC-2397
CPC-5830
CPC-6254TLB
CPC-5027
CPC-2170
CPC-5914
CPC-5834
CPC-1010
CPC-5856
CPC-4248
CPC-5889
CPC-3349EQY
Subtotal / Weighted average %
Other Assets
Business Services
Oil and Gas
Business Services
Oil and Gas
Business Services
Oil and Gas
Oil and Gas
Oil and Gas
Oil and Gas
Oil and Gas
Financial Services
Business Services
Business Services
Retail
Oil and Gas
Business Services
Business Services
Oil and Gas
Business Services
Healthcare Services
Business Services
Business Services
Real Estate Private Credit and Real Estate Assets
REPC-6054
REPC-5754
REPC-1068S4
REPC-2683
REPC-2277
REPC-6194
REPC-4220
REPC-5840
REPC-6053
REPC-5591
REPC-1207
REPC-2592
REPC-5993
REPC-1942
REPC-5616
REPC-2497
REPC-2560
REPC-2214
REPC-6057
REPC-4134
REPC-4698
REPC-4111
REPC-5476
REPC-5967
REPC-4316
REPC-1047
REPC-1015
Land
-Single-Family Development
Land
-Single-Family Development
Residential
Land
-Multi-Family Development
Land
-Commercial Development
Land
-Single-Family Development
Residential
Land
-Multi-Family Development
Land
-Single-Family Development
Land
-Commercial Development
Hospitality
Land
-Commercial Development
Mixed-Use
Commercial
Residential
Hospitality
Hospitality
Hospitality
Commercial
Residential
Land
-Multi-Family Development
Residential
Land
-Single-Family Development
Land
-Single-Family Development
Self Storage
Land
-Commercial Development
Land
-Commercial Development
Subtotal / Weighted average %
$13.9
4.3
3.8
3.4
4.6
4.0
2.0
2.3
1.6
1.3
0.8
0.8
0.8
0.7
0.6
1.7
0.4
0.3
0.2
0.2
0.1
0.1
0.8
48.7
12.2
6.6
3.7
2.5
$ 12.9
4.1
3.8
3.4
4.7
4.0
2.2
2.3
1.6
1.3
0.8
0.8
0.7
0.6
0.6
1.0
0.4
0.3
0.2
0.2
0.1
0.1
0.8
46.9
11.4
6.0
3.7
2.6
$ 11.8
5.0
5.0
4.3
4.1
3.6
2.2
1.8
1.6
1.4
0.8
0.8
0.7
0.7
0.6
0.5
0.4
0.3
0.2
0.2
0.1
0.1
-
46.2
Europe
Asia/Pacific
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
Europe
North America
North America
North America
Europe
Europe
North America
Europe
North America
North America
Asia/Pacific
Collateral
Equity
Second Lien
Hard Asset
First Lien
Hard Asset
Equity
First Lien
Equity
First Lien
First Lien
First Lien
Equity
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
Equity
Total coupon
(including PIK) (2)
n/a (4)
12.00%
n/a (4)
10.25%
n/a (4)
n/a (4)
12.00%
n/a (4)
11.84%
10.00%
12.00%
n/a (4)
10.00%
10.25%
9.24%
3.50%
10.34%
12.34%
14.00%
11.34%
9.40%
22.00%
n/a(6)
11.01%
LTV (3)
n/a (4)
115.0%
n/a (4)
39.0%
n/a (4)
n/a (4)
18.4%
n/a (4)
41.1%
27.7%
28.0%
n/a (4)
3.5%
39.0%
89.0%
100.0%
3.0%
14.0%
43.0%
5.0%
49.8%
85.9%
n/a (4)
56.0%
11.6
Asia/Pacific
First Mortgage
10.00%
74.0%
6.4
3.7
Asia/Pacific
North America
First Mortgage
First Mortgage(5)
11.00%
11.00%
70.0%
72.0%
3.3
North America
Real Property
n/a (4)
n/a (4)
3.1
3.1
3.2
North America
First Mortgage
15.00%
65.0%
3.4
2.2
1.9
1.8
3.0
2.2
1.9
1.6
1.6
1.1
1.6
1.0
1.9
1.5
2.3
1.0
0.8
1.0
1.0
0.7
0.6
1.9
1.2
2.3
1.0
0.8
1.0
1.0
0.7
0.6
0.4
0.2
0.3
0.1
0.1
0.1
0.2
52.3
0.4
0.2
0.2
0.1
0.1
0.1
0.1
49.8
- 34 -
3.0
2.1
Asia/Pacific
North America
1.9
North America
First Mortgage
First Mortgage
First Mortgage
9.00%
12.00%
69.0%
83.0%
9.50%
75.0%
1.9
Asia/Pacific
First Mortgage
5.40%
70.0%
1.6
1.5
1.3
1.2
1.1
1.1
0.8
0.8
0.8
0.7
0.6
0.4
0.3
North America
Europe
First Mortgage
Real Property
13.50%
n/a (4)
59.0%
n/a (4)
North America
North America
North America
North America
North America
North America
North America
North America
North America
First Mortgage
First Mortgage
Real Property
First Mortgage
Real Property
First Mortgage
Real Property
Real Property
First Mortgage
North America
North America
First Mortgage
First Mortgage
10.50%
12.00%
n/a (4)
9.50%
n/a (4)
8.89%
n/a (4)
9.50%
9.83%
11.50%
9.25%
115.0%
46.0%
n/a (4)
60.0%
n/a (4)
117.0%
n/a (4)
60.0%
58.0%
54.0%
68.0%
0.3
Asia/Pacific
First Mortgage
11.50%
77.0%
0.1
0.1
North America
North America
First Mortgage
First Mortgage
10.00%
9.00%
42.0%
62.0%
0.1
North America
First Mortgage
15.00%
53.0%
North America
Real Property
-
49.9
n/a (4)
10.59%
n/a (4)
72.1%
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES (continued)
Details of the Loan and Private Asset positions of the Arena FINCOs is as follows:
Details of Loan and Private Asset Positions (continued)
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
Investments by industry
Ref. no.
Commercial and Industrial Assets
CI-3045
CI-1800
CI-2651
CI-6006
CI-1999EQY
CI-2201
CI-3978
CI-2686
CI-2064
CI-2000
CI-5011
CI-1035
CI-1520
CI-5001
CI-5372
CI-1999
CI-2808
CI-1018
Subtotal / Weighted average %
Other assets
Other assets
Other assets
Other assets
Other assets
Lease/Equipment
Lease/Equipment
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Other assets
Structured Finance
SF-2239
SF-5396
Subtotal / Weighted average %
Other assets
Other assets
Consumer Assets
Consumer
CA-4946
Consumer
CA-4718
Consumer
CA-3595
Consumer
CA-1052F
Consumer
CA-1788AS3
Consumer
CA-4727
Consumer
CA-1788/1933
Consumer
CA-1933A
Consumer
CA-1934
Consumer
CA-2199
Consumer
CA-2729
Consumer
CA-5060
Consumer
CA-2762
Consumer
CA-2373
Consumer
CA-1052S
Consumer
CA-1788A
Subtotal / Weighted average %
4.4
5.4
4.0
2.9
2.8
0.8
1.7
1.6
0.4
0.5
0.3
0.4
0.2
-
0.1
0.1
0.1
0.2
25.9
4.8
0.1
4.9
4.0
1.3
1.6
2.6
2.5
0.9
0.6
0.8
0.2
0.1
0.7
0.1
0.2
0.3
1.5
0.4
17.8
4.4
5.4
4.3
3.2
3.1
0.8
1.8
1.6
0.4
0.5
0.3
0.4
0.2
-
0.1
0.1
0.1
0.2
26.9
4.8
0.1
4.9
4.0
1.3
1.6
2.6
2.5
0.9
0.6
0.8
0.2
0.1
0.7
0.2
0.2
0.3
1.4
0.4
17.8
6.1
5.6
4.2
3.3
3.0
2.4
2.3
1.6
0.7
0.5
0.4
0.3
0.2
0.1
0.1
-
-
-
30.8
5.1
0.1
5.2
4.0
1.7
1.7
1.5
1.2
1.0
0.8
0.7
0.3
0.3
0.2
0.2
0.1
0.1
-
-
13.8
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
Latin America
North America
North America
North America
Asset Pool
First Lien
Hard Asset
First Lien
Equity
Hard Asset
Hard Asset
Equity
First Lien
Equity
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
Equity
First Lien
December 31, 2020
Total coupon
(including PIK) (2)
LTV (3)
n/a (6)
14.00%
n/a (4)
14.30%
n/a (4)
n/a (4)
n/a (4)
n/a (4)
15.00%
n/a (4)
12.00%
9.90%
n/a (4)
13.20%
18.00%
n/a (7)
n/a (4)
9.26%
14.01%
55.0%
78.0%
n/a (4)
85.0%
n/a (4)
n/a (4)
n/a (4)
n/a (4)
80.0%
n/a (4)
18.0%
100.0%
48.0%
52.0%
77.0%
n/a (7)
n/a (4)
100.0%
69.7%
North America
North America
First Lien
First Lien
n/a (8)
15.00%
15.00%
8.0%
77.0%
9.5%
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
First Lien
Asset Pool
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
First Lien
Asset Pool
Asset Pool
Asset Pool
First Lien
First Lien
15.00%
n/a (9)
15.50%
15.66%
n/a (10)
29.00%
n/a (10)
n/a (10)
n/a (10)
12.00%
n/a (8)
25.00%
n/a (9)
n/a (9)
15.66%
n/a (10)
16.92%
87.0%
n/a (9)
81.0%
116.0%
83.0%
66.0%
83.0%
83.0%
83.0%
26.0%
269.0%
64.0%
n/a (9)
n/a (9)
116.0%
83.0%
88.6%
Total / Weighted average %
$ 149.6
$
146.3
$
145.9
11.93%
67.1%
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 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, 2020. 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, 2020.
4
Investment is not a loan. Metric is not applicable.
5 Denotes subordinate position within the structure.
6 Investment represents an unsecured credit pool purchase with no stated interest rate.
7 Investment is a maturity default where the Arena FINCOs and its partners acquired the borrower in bankruptcy.
8 Investment with no stated coupon rate.
9
10
Investment represents a credit pool purchase with no stated interest rate.
Interest not accrued on loans purchased as non-performing.
- 35 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, 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:
Book value:
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 3
Book value per share - in US$
Book value per share - in C$ 4
Westaim TSXV closing share price - in C$
December 31, 2021
December 31, 2020
$
347.7
$
320.5
5.9
0.2
353.8
$
5.9
1.0
327.4
$
142,686,718
143,186,718
2,975,198
145,661,916
3,034,261
146,220,979
$
$
$
2.43
3.07
2.50
$
$
$
2.24
2.85
2.49
1 See Note 12 to the Company’s audited consolidated financial statements for the years ended December 31, 2021 and 2020. 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 8 to the Company’s audited consolidated financial statements for the years ended December 31, 2021 and 2020. 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 were not included in the adjusted number of Common Shares as none of them
were in-the-money at December 31, 2021 and 2020.
3 See Note 12 to the Company’s audited consolidated financial statements for the years ended December 31, 2021 and 2020. No adjustments were made for
options at December 31, 2021 and 2020 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.
4 Book value per share converted from US$ to C$ at period end exchange rates. Period end exchange rates: 1.26410 at December 31, 2021 and 1.27395 at
December 31, 2020.
(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 other operating expenses of the Arena FINCOs divided by average carrying values
for the Arena FINCOs, for the period.
(c) Adjusted profit and comprehensive income, and adjusted earnings per share – diluted, excluding unusual items
Adjusted profit and comprehensive income excluding unusual items is computed as the GAAP profit (loss) and comprehensive income (loss) less
the net impact of unusual items. Management has presented “adjusted profit and comprehensive income excluding unusual items” and “adjusted
earnings (loss) per share – diluted” to reflect the Company’s share of the results of the regular operations of the Company’s investments.
Adjusted earnings (loss) per share – diluted, excluding unusual items is computed as the adjusted profit and comprehensive income excluding
unusual items on a diluted basis divided by the weighted average number of Common Shares outstanding on a diluted basis.
- 36 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
15. NON-GAAP MEASURES (continued)
The table below provides the reconciliation of the Company’s GAAP profit (loss) and comprehensive income (loss) to the Company’s adjusted profit
and comprehensive income excluding unusual items:
Three months ended December 31
2020
2021
Year ended December 31
2020
2021
The Company’s GAAP profit (loss) and comprehensive income (loss)
$ 6.7
$ (14.5)
$ 28.3
$ (34.5)
The Company’s share of Skyward Specialty unusual items: 1
Impact of LPT net of tax
Other unusual net (expenses) recoveries net of tax
Goodwill impairment net of tax
Change in valuation multiple (1.1x to 1.0x)
Total of the Company’s share of unusual items
(5.6)
0.4
-
-
(5.2)
(1.6)
1.6
(19.4)
-
(19.4)
(5.6)
0.4
(0.7)
-
(5.9)
(5.7)
0.5
(19.4)
(14.9)
(39.5)
The Company’s adjusted profit and comprehensive income excluding
unusual items
$ 11.9
$ 4.9
$ 34.2
$ 5.0
1 The Company’s share of Skyward Specialty unusual items are described in section 3A: Investment in Skyward Specialty.
The adjusted earnings (loss) per share – diluted, excluding unusual items are as follows:
Three months ended December 31
2020
2021
Year ended December 31
2020
2021
Adjusted profit and comprehensive income excluding unusual items
Dilutive RSU recovery and related changes in foreign exchange 1
Adjusted profit (loss) and comprehensive income (loss) excluding
unusual items on a diluted basis
$ 11.9
(0.6)
$ 4.9
-
$ 34.2
-
$ 5.0
(0.3)
$ 11.3
$ 4.9
$ 34.2
$ 4.7
Weighted average number of Common Shares outstanding
Dilutive impact of RSUs1
Weighted average number of Common Shares outstanding on a
diluted basis
142,762,805
3,014,359
143,186,718
-
143,079,869
3,029,245
143,186,718
3,034,261
145,777,164
143,186,718
146,109,113
146,220,979
Adjusted earnings (loss) per share – diluted, excluding unusual items
$ 0.08
$ 0.03
$ 0.23
$ 0.03
1 The RSUs for the three months ended December 31, 2020 are not dilutive.
16. CAUTIONARY NOTE REGARDING FORWARD-LOOKING 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 Skyward Specialty, the Arena
FINCOs and Arena Investors; expectations regarding the Company’s assets and liabilities; the Company’s ability to retain key employees;
management’s belief that its estimates for determining the valuation of the Company’s assets and liabilities are appropriate; the Company’s views
regarding potential future remediation costs; the effect of changes to interpretations of tax legislation on income tax provisions in future periods; and
the Company’s determination that the adoption of new accounting standards will not have a material impact on its consolidated financial statements.
These statements are based on current expectations that are subject to risks, uncertainties and assumptions and the Company can give no
assurance that these expectations are correct. By their nature, these statements are subject to inherent risks and uncertainties that may be general
or specific. A variety of material factors, many of which are beyond the Company’s control, may affect the operations, financial position, performance
and results of the Company and its business, and could cause actual results to differ materially from the expectations expressed in any of these
forward-looking statements.
- 37 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2021
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
16. CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION (continued)
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;
fluctuations in the United States dollar to Canadian dollar exchange rate; the Company’s cash flow; future sales of a substantial number of the
Common Shares; the Company’s ability to raise additional capital; regulatory requirements may delay or deter a change in control of the Company;
the potential treatment of the Company as a passive foreign investment company for U.S. federal income tax purposes; market turmoil, risk of volatile
markets and market disruption risk; exposure to epidemics; Company employee error or misconduct; the Company’s cybersecurity; Skyward
Specialty’s ability to accurately assess underwriting risk; the effect of intense competition and/or industry consolidation on Skyward Specialty’s
business; Skyward Specialty’s reliance on brokers and third parties to sell its products to clients; Skyward Specialty’s ability to alleviate risk through
reinsurance; Skyward Specialty’s reserves may prove to be inadequate; Skyward Specialty’s ability to maintain its financial strength and issuer credit
ratings; the occurrence of catastrophic events including terrorist attacks and weather related natural disasters on Skyward Specialty’s business; the
cyclical nature of the property and casualty insurance industry on Skyward Specialty’s business; the effects of emerging claim and coverage issues
on Skyward Specialty’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 Skyward Specialty insures; the effect of retentions in various lines of business; dependence by Skyward
Specialty on key employees; the effect of litigation and regulatory actions; Skyward Specialty’s ability to successfully manage credit risk (including
credit risk related to the financial health of reinsurers); Skyward Specialty’s ability to compete against larger more well-established competitors;
unfavourable capital market developments or other factors which may affect the investments of Skyward Specialty (including meeting liquidity
requirements); Skyward Specialty’s ability to manage growth effectively; Skyward Specialty’s ability to obtain additional capital; Skyward Specialty’s
ability to receive dividends from its subsidiaries; Skyward Specialty employee error or misconduct; Skyward Specialty’s reliance on information
technology and telecommunications systems; dependence by Skyward Specialty on certain third party service providers and program administrators;
Skyward Specialty’s policies will be enforceable in the manner it intends; Skyward Specialty receiving reimbursement for claims by reinsurers on a
timely basis; Skyward Specialty’s ability to pay claims accurately and timely; Skyward Specialty’s reliance on renewal of existing insurance contracts;
the effect of environmental, social and governance matters on Skyward Specialty’s business; the effect of any changes in accounting practices and
future pronouncements on Skyward Specialty’s business; the effect of additional legislation or market regulation enacted by the U.S. federal
government on Skyward Specialty’s business; Skyward Specialty’s ability to utilize net operating loss carryforwards and certain other tax attributes;
the effect of change of control requirements under Texas insurance laws and regulations on Skyward Specialty’s ability to successfully pursue its
acquisition strategy; the effect of Skyward Specialty’s debt obligations and other financial obligations on its business; Skyward Specialty’s reliance
on its intellectual property rights; Skyward Specialty not infringing the intellectual property rights of others; the effect of changes in underwriting
guidelines on Skyward Specialty’s business; the condition of the global financial markets and economic and geopolitical conditions affecting Arena’s
business; the variable nature of Arena Investors’ revenues, results of operations and cash flows; the effect of rapid changes and growth in AUM on
Arena Investors; Arena Investors’ ability to mitigate operational and due diligence risks; the subjective nature of the valuation of the Arena FINCOs’
investments; Arena Investors’ ability to mitigate regulatory and other legal risks; Arena Investors’ ability to find appropriate investment opportunities;
Arena Investors’ ability to successfully navigate and secure compliance with regulations applicable to it and its business; Arena Investors’ ability to
mitigate private litigation risks; Arena Investors’ ability to manage conflicts of interest; the effects of a decrease in revenues as a result of significant
redemptions in AUM on Arena Investors’ business; the investment performance of Arena Investors’; Arena Investors investment in illiquid
investments; Arena Investors’ ability to retain qualified management staff; Arena Investors’ ability to mitigate the risk of employee misconduct and
employee error; the effect of the COVID-19 pandemic on Arena’s business; effect of market conditions on the Arena FINCOs; Arena Investors’ ability
to implement effective risk management systems; the performance of the investments of the Arena FINCOs; the Arena FINCOs’ investment in illiquid
investments; Arena Investors’ ability to manage risks related to its risk management procedures; Arena Investors’ ability to compete against current
and potential future competitors; 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; the Arena FINCOs’ ability to realize profits; 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; Arena Investors’ cybersecurity and other risk
factors set forth 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.
- 38 -
April 13, 2022
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL INFORMATION
The accompanying consolidated financial statements including the notes thereto have been prepared by,
and are the responsibility of, the management of The Westaim Corporation. This responsibility includes
selecting appropriate accounting policies and making estimates and informed judgments based on the
anticipated impact of current transactions, events and trends, consistent with International Financial
Reporting Standards. The Board of Directors is responsible for ensuring that management fulfills its
responsibility for financial reporting and internal control. In meeting our responsibility for the reliability and
timeliness of financial information, the Company maintains and relies upon a comprehensive system of
internal controls including organizational, procedural and disclosure controls. The Audit Committee,
which is comprised of four Directors, all of whom are independent, meets with management as well as the
external auditors to satisfy itself that management is properly discharging its financial reporting
responsibilities and to review the consolidated financial statements and the report of the auditors. It
reports its findings to the Board of Directors who approve the consolidated financial statements.
The accompanying consolidated financial statements have been audited by Deloitte LLP, the independent
auditors, in accordance with Canadian 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
- 39 -
Deloitte LLP
Bay Adelaide East
8 Adelaide Street West
Suite 200
Toronto ON M5H 0A9
Canada
Tel: 416-601-6150
Fax: 416-601-6151
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, 2021 and 2020, and
the consolidated statements of profit (loss) and comprehensive income (loss), 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, 2021 and 2020, 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
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
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.
40
We obtained Management's Discussion and Analysis and the Annual Report prior to the date of this
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
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
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
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.
41
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 attenti
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
e events or conditions may cause the Company to cease to continue
as a going concern.
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.
Thomas Wewior.
Chartered Professional Accountants
Licensed Public Accountants
April 13, 2022
42
The Westaim Corporation
Consolidated Statements of Financial Position
(thousands of United States dollars)
ASSETS
Cash
Income tax receivable (note 14)
Other assets (note 3)
Investments (note 4)
LIABILITIES
Accounts payable and accrued liabilities (note 5)
Income tax payable (note 14)
Preferred securities (note 6)
Derivative warrant liability (note 8)
Site restoration provision (note 9)
Deferred tax liability (note 14)
Commitments and contingent liabilities (note 10)
SHAREHOLDERS' EQUITY
Share capital (note 11)
Contributed surplus (note 2n)
Accumulated other comprehensive loss (note 2o)
Deficit
December 31
2021
December 31
2020
$
$
$
$
$
$
$
6,558
64
766
394,273
401,661
12,980
153
39,554
156
726
415
53,984
8,741
64
1,637
366,911
377,353
10,994
337
39,248
1,026
4,864
362
56,831
381,127
17,735
(2,227)
(48,958)
347,677
401,661
$
382,182
17,735
(2,227)
(77,168)
320,522
377,353
The accompanying notes are an integral part of these consolidated financial statements.
Approved on behalf of the Board
Ian W. Delaney
Director
John W. Gildner
Director
- 43 -
The Westaim Corporation
Consolidated Statements of Profit (Loss) and Comprehensive Income (Loss)
(thousands of United States dollars except share and per share data)
Revenue
Interest income (note 13)
Dividend income from investments in private entities (note 4 and 13)
Fee income (note 13)
Net results of investments
Increase (decrease) in unrealized value of investments in private entities, less dividends (note 4)
Share of income (loss) from investment in associates (note 4)
Increase in unrealized value of other investments (note 4)
Net expenses
Salaries and benefits
General, administrative and other
Professional fees
Site restoration (recovery) expense (note 9)
Share-based compensation expense (note 12)
Foreign exchange loss
Interest on preferred securities (note 6)
Derivative warrant (gain) (note 8)
Income (loss) before income tax
Income tax expense (note 14)
Profit (loss) and comprehensive income (loss)
Earnings (loss) per share (note 15)
Basic
Diluted
Years Ended December 31
2021
2020
$
1,405
$
-
950
2,355
21,032
10,004
326
31,362
4,984
849
1,038
(4,112)
510
912
1,989
(884)
5,286
28,431
(221)
1,172
22,733
950
24,855
(50,965)
(103)
188
(50,880)
3,767
771
1,241
681
352
379
1,864
(795)
8,260
(34,285)
(115)
$
$
$
28,210
$
(34,400)
0.20 $
0.19 $
(0.24)
(0.24)
Weighted average common shares outstanding
143,079,869
143,186,718
The accompanying notes are an integral part of these consolidated financial statements.
- 44 -
The Westaim Corporation
Consolidated Statements of Changes in Equity
Year ended December 31, 2021
(thousands of United States dollars)
Share
Capital
Contributed
Surplus
Accumulated Other
Comprehensive Loss
Deficit
Total
Equity
Balance at January 1, 2021
$
382,182
$
17,735
$
(2,227)
$
(77,168)
$
320,522
Acquisition and cancellation of common shares (note 11)
Profit and comprehensive income
(1,055)
-
-
-
-
-
-
28,210
(1,055)
28,210
Balance at December 31, 2021
$
381,127
$
17,735
$
(2,227)
$
(48,958)
$
347,677
Year ended December 31, 2020
(thousands of United States dollars)
Share
Capital
Contributed
Surplus
Accumulated Other
Comprehensive Loss
Deficit
Total
Equity
Balance at January 1, 2020
$
382,182
$
17,486
$
(2,227)
$
(42,768)
$
354,673
Stock option plan expense (note 12)
Loss and comprehensive loss
-
-
249
-
-
-
-
(34,400)
249
(34,400)
Balance at December 31, 2020
$
382,182
$
17,735
$
(2,227)
$
(77,168)
$
320,522
The accompanying notes are an integral part of these consolidated financial statements.
- 45 -
The Westaim Corporation
Consolidated Cash Flow Statements
(thousands of United States dollars)
Operating activities
Profit (loss)
(Increase) decrease in unrealized value of investments in private entities, less dividends (note 4)
Share of (income) loss from investment in associates (note 4)
Increase in unrealized value of other investments (note 4)
Share-based compensation expense (note 12)
Share-based compensation payments (note 12)
Site restoration (recovery) expense (note 9)
Depreciation and amortization
Unrealized foreign exchange loss
Derivative warrant gain (note 8)
Change in income tax receivable, payable and deferred (note 14)
Change in other assets
Change in other accounts payable and accrued liabilities
Cash (used in) provided from operating activities
Investing activities
Purchase of investments in private entities (note 4)
Purchase of capital assets
Repayment (advance) of loan made to associates (note 4)
Return of capital from investments in private entities (note 4)
Cash provided from (used in) investing activities
Financing activities
Purchase and cancellation of Common Shares (note 11)
Cash used in financing activities
Net decrease in cash
Cash, beginning of year
Cash, end of year
Supplemental disclosure of cash flow information:
Interest paid
The accompanying notes are an integral part of these consolidated financial statements.
Years Ended December 31
2021
2020
$
28,210
(21,032)
(10,004)
(326)
510
(119)
(4,191)
145
856
(884)
(131)
737
1,111
(5,118)
-
(10)
4,000
-
3,990
(1,055)
(1,055)
(2,183)
8,741
6,558
$
(34,400)
50,965
103
(188)
352
-
681
154
990
(795)
276
298
106
18,542
(44,004)
(34)
(8,000)
19,997
(32,041)
-
-
(13,499)
22,240
8,741
1,984
$
1,856
$
$
$
- 46 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(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 April 13, 2022.
These consolidated financial statements include the accounts of Westaim and its wholly owned subsidiaries, 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 Skyward Specialty Insurance Group Inc. (“Skyward Specialty”),
Arena FINCOs (as defined in note 4) and Arena Investors (as defined in note 4). Westaim’s common shares (“Common Shares”) are traded on
the TSX Venture Exchange (“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 financial statements of entities controlled by Westaim which provide investment-related services are consolidated. These entities consist of
its wholly owned subsidiaries, 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.
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 Skyward Specialty (including Westaim HIIG Limited Partnership (the “HIIG
Partnership”)), and the Arena FINCOs (as defined in note 4).
Investment in associates are accounted for using the equity method in accordance with IAS 28 “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 (as defined in note 4), 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 (loss) and comprehensive income (loss).
(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$, respectively.
(c) Use of estimates
The preparation of financial statements requires management to make estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates and changes in estimates are recorded in the reporting period in which
they are determined. Key estimates include the fair value of investments in private entities, provision for site restoration, fair value of share-
based compensation, fair value of derivative warrant liability, and unrecognized deferred tax assets.
- 47 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
(d) Judgments made by management
Key areas where management has made difficult, complex or subjective judgments in the process of applying the Company’s accounting
policies, often as a result of matters that are inherently uncertain, include determining that the Company meets the definition of an investment
entity under IFRS 10, valuation techniques for fair value determination of investments in private entities, applying the equity method of accounting
for associates and determining that the Company’s functional currency is the US$. For additional information on these judgments, see note 4
for investments in private entities and associates and note 2(b) for functional currency.
(e) Foreign currency translation
Transactions in foreign currencies, including Canadian dollars (“C$”), are translated into US$ 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 (loss) and
comprehensive income (loss).
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 (loss) and comprehensive income (loss).
(f) Revenue recognition
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, 2021, the Company’s cash consisted of cash on deposit in both C$ and US$, including restricted cash on deposit of $nil
(December 31, 2020 - $3,000), see note 7 for C$ Exchange Forward Contracts.
(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, 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, and iii) the Company has the right to
operate the identified asset or the Company designed the identified asset in a way that predetermines how and for what purpose the identified
asset will be used.
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.
- 48 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(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 increases
and decreases arising from changes in fair values including the impact of dividends and/or distributions being recorded in the consolidated
statements of profit (loss) and comprehensive income (loss) 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.
Investment in Arena Special Opportunities Fund, LP (“ASOF LP”) (as defined in note 4), is classified as FVTPL and is 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 (loss) and comprehensive income (loss). Current tax is based on
taxable income in countries where the Company operates which differs from profit (loss) and comprehensive income (loss) because of items of
income or expense that are taxable or deductible in other years and items that are never taxable or deductible.
Deferred tax assets are generally recognized for all deductible temporary income tax differences to the extent that it is probable that taxable
profits will be available against which those deductible temporary differences can be utilized. Deferred tax liabilities are generally recognized
for all taxable temporary differences. Deferred tax assets and liabilities are determined based on the enacted or substantively enacted tax laws
and rates that are anticipated to apply in the year of realization. The measurement of deferred tax assets and liabilities reflects the tax
consequences that would follow from the manner in which the Company expects to recover or settle the carrying amount of the related assets
and liabilities. The carrying amount of the deferred tax asset is reduced to the extent that it is no longer probable that sufficient taxable profits
will be available to allow all or part of the asset to be recovered.
Income tax assets and liabilities are offset when the Company intends to settle on a net basis and there is a legally enforceable right to do so.
- 49 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
(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 (loss) and comprehensive income (loss) 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 estimated future restoration expenditures.
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 costs 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 12. 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. When a change in value occurs, it is recognized in share-based compensation expense (recovery) and foreign exchange gain (loss) in
the applicable financial period.
(q) Earnings (loss) per share
Basic earnings (loss) per share is calculated by dividing profit (loss) by the weighted average number of Common Shares outstanding during
the reporting period. See note 15 for the calculation of the weighted average number of Common Shares outstanding.
Diluted earnings (loss) per share is calculated by dividing profit (loss) by the weighted average number of shares outstanding during the reporting
period after adjusting both amounts for the effects of all dilutive potential Common Shares, which consist of options, RSUs and warrants. Anti-
dilutive potential Common Shares are not included in the calculation of diluted earnings (loss) per share.
3
Other Assets
Other assets consist of the following:
Capital assets
Right of use asset (a)
Receivables from related parties (b)
Accounts receivable and other
- 50 -
$
December 31, 2021
34
368
-
364
766
$
$
December 31, 2020
42
494
830
271
1,637
$
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
3
Other Assets (continued)
(a) Effective, December 1, 2019, the Company entered into a new operating lease for its office premises in Toronto, Ontario, Canada expiring
on November 30, 2024. At the commencement date of the lease, in accordance with IFRS 16, 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 (loss) and comprehensive income (loss). Each
lease payment reduces the lease liability and the accretion of the lease liability is recorded as interest expense included under general,
administrative and other in the consolidated statements of profit (loss) and comprehensive income (loss).
The right of use asset recorded for the Company’s office premises was $368 and $494 at December 31, 2021 and 2020, respectively. The
depreciation on the right of use asset was $126 in the years ended December 31, 2021 and 2020.
The lease liability recorded for the Company’s office premises was $413 and $541 at December 31, 2021 and 2020, respectively. The
lease payments were $132 and $121 in the years ended December 31, 2021 and 2020, respectively and the interest expense on the lease
liability was $6 and $9 in the years ended December 31, 2021 and 2020, respectively. The Company recorded an unrealized foreign
exchange gain relating to the lease liability of $2 in the year ended December 31, 2021, and an unrealized foreign exchange loss relating
to the lease liability of $8 in the year ended December 31, 2020.
(b) Receivables from related parties totaled $nil and $830 at December 31, 2021 and 2020, respectively, which included certain expenses
paid by the Company on behalf of Arena FINCOs and Arena Investors from time to time which were subject to reimbursement.
4
Investments
The carrying values of the Company’s investments in private entities, associates and ASOF LP included under investments in the consolidated
statements of financial position are as follows:
Investments in private entities
Investment in associates
Investment in ASOF LP
$
December 31, 2021
364,877
26,174
3,222
394,273
$
$
December 31, 2020
343,845
20,170
2,896
366,911
$
The Company’s principal investments consist of its investment in Skyward Specialty, Arena FINCOs and Arena Investors. Investments in private
entities are measured at FVTPL and investment in associates is accounted for using the equity method.
Investments in private entities:
- Skyward Specialty
- Arena FINCOs (as hereinafter defined)
Delaware, U.S.
Delaware, U.S.
Texas, U.S.
New York, U.S.
44.0% owned by the Company1
100% owned by the Company
44.5% owned by the Company1
100% owned by the Company
Place of
establishment
Principal place
of business
Ownership interest at
December 31, 2021
Ownership interest at
December 31, 2020
Investment in associates:
- Arena Investors (as hereinafter defined)
Delaware, U.S.
New York, U.S.
51% beneficially owned by the
Company2
51% beneficially owned by the
Company2
1 At December 31, 2021, the Company owned Skyward Specialty’s preferred shares which are convertible into Skyward Specialty common shares representing 22.0% of
the fully diluted Skyward Specialty common shares (December 31, 2020 – 23.2%). The Company also owned 22.0% of the Skyward Specialty fully diluted common shares
through the HIIG Partnership which is established and operates in Ontario, Canada (December 31, 2020 – 21.3%). Accordingly, the Company’s total look-through
ownership interest in Skyward Specialty is 44.0% (December 31, 2020 – 44.5%). Based on the Company’s control of the HIIG Partnership, and its ownership of preferred
shares, the Company held a 57.5% voting interest in Skyward Specialty at December 31, 2021 and 2020.
2 Legal equity ownership is 100%, and beneficial ownership denotes profit percentage subject to change over time pursuant to the earn-in rights granted to Bernard Partners,
LLC (“BP LLC") described below under “Investment in Associates”.
Skyward Specialty
The Company’s investment in Skyward Specialty is recorded as an investment in private entities and is measured at FVTPL in the Company’s
consolidated financial statements. See “Investments in Private Entities” below for a further description of the Company’s investment in Skyward
Specialty.
- 51 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
Arena FINCOs
Arena FINCOs include specialty finance companies that primarily purchase fundamentals-based, asset-oriented credit and other investments
for their own account and a company that primarily 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 measured at FVTPL in the Company’s consolidated financial statements. See “Investments in Private
Entities” below.
Arena Investors
Arena Investors Group Holdings, LLC (“AIGH”), through its subsidiaries, operates as a US based investment manager offering third-party clients
access to primarily fundamentals-based, asset-oriented credit and other investments that aim to deliver attractive yields with low volatility. AIGH
is the sole limited partner of Arena Investors, LP, a limited partnership established under the laws of Delaware to provide investment services
to third-party clients and Arena FINCOs. 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.
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
(loss) and comprehensive income (loss).
The table below summarizes the fair value hierarchy under which the Company’s investments in private entities are valued. Level 1 fair value
measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 fair value
measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability
that are not based on observable market data (unobservable inputs). Inputs are considered 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:
December 31, 2021
Investments in private entities:
- Skyward Specialty
- Arena FINCOs
December 31, 2020
Investments in private entities:
- Skyward Specialty
- Arena FINCOs
Fair value
Level 1
Level 2
Level 3
$ 192,011
172,866
$ 364,877
$
Fair value
Level 1
$ 180,776
163,069
$ 343,845
$
-
-
-
-
-
-
-
-
-
-
-
-
$ 192,011
172,866
$ 364,877
Level 3
$ 180,776
163,069
$ 343,845
Level 2
$
$
Changes in investments in private entities included in Level 3 of the fair value hierarchy are as follows:
Year ended December 31, 2021
Investments in private entities:
- Skyward Specialty
- Arena FINCOs
Opening
balance
Increase in
unrealized value
Ending
Balance
$ 180,776
163,069
$ 343,845
$ 11,235
9,797
$ 21,032
$ 192,011
172,866
$ 364,877
- 52 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
Investments in private entities:
- Skyward Specialty
- Arena FINCOs
Year ended December 31, 2020
Opening
balance
Additions -
Equity
Return of
capital
Decrease in
unrealized value
before dividends
Dividends
paid
Ending
Balance
$ 164,953
205,850
$ 370,803
$ 44,004
-
$ 44,004
$
-
(19,997)
$ (19,997)
$ (28,181)
(51)
$ (28,232)
$
-
(22,733)
$ (22,733)
$ 180,776
163,069
$ 343,845
There were no transfers among Levels 1, 2 and 3 during the years ended December 31, 2021 and 2020.
Investment in Skyward Specialty
At December 31, 2021, the Company’s $192,011 valuation of its investment in Skyward Specialty consisted of the aggregate fair value of: (i)
Skyward Specialty convertible preferred shares held directly by the Company of $95,832, (ii) its share of the Skyward Specialty common shares
held by the HIIG Partnership of $95,785, and (iii) its share of the other net assets of the HIIG Partnership of $394. At December 31, 2020, the
Company’s $180,776 valuation of its investment in Skyward Specialty consisted of the aggregate fair value of: (i) Skyward Specialty convertible
preferred shares held directly by the Company of $94,077, (ii) its share of the Skyward Specialty common shares held by the HIIG Partnership
of $86,177, and (iii) its share of the other net assets of the HIIG Partnership of $522.
The convertible preferred shares of Skyward Specialty were acquired by Westaim on April 20, 2020 as Skyward Specialty completed a rights
offering that resulted in total gross proceeds of $100,000 to Skyward Specialty. As part of the rights offering, Westaim purchased $44,004 of
the Skyward Specialty convertible preferred shares offered. The convertible preferred shares were initially convertible into Skyward Specialty
common shares based on a conversion price equal to $1.74 per share. The conversion price was subject to adjustments from time to time
based on the occurrence of certain events up to December 31, 2021. At December 31, 2021, the adjustments are expected to result in a
conversion price of $1.51 per share. At December 31, 2020, the conversion price subject to adjustments, if effective, was $1.38 per share. At
December 31, 2021, the Company’s direct ownership of the Skyward Specialty preferred shares, which are convertible into Skyward Specialty
common shares represented 22.0% (December 31, 2020 – 23.2%) of the fully diluted Skyward Specialty common shares outstanding.
At December 31, 2021, the Company owned approximately 62.0% (December 31, 2020 – 62.0%) of the HIIG Partnership and the HIIG
Partnership held Skyward Specialty common shares representing approximately 35.5% (December 31, 2020 – 33.9%) of the total fully diluted
Skyward Specialty common shares outstanding. As a result, Westaim’s look-through interest in Skyward Specialty common shares through the
HIIG Partnership was 22.0% (December 31, 2020 – 21.3%).
The Company’s direct ownership of the Skyward Specialty preferred shares, combined with its interest in the HIIG Partnership, resulted in a
44.0% look-through interest in Skyward Specialty at December 31, 2021 (December 31, 2020 – 44.5%).
The Company, through HIIG GP, has a management services agreement with Skyward Specialty (the "Skyward Specialty MSA"), whereby HIIG
GP is entitled to receive from Skyward Specialty an advisory fee of $500 annually.
FVTPL
The investment in Skyward Specialty is accounted for at FVTPL. The fair value of the Company’s investment in Skyward Specialty was
determined to be $192,011 at December 31, 2021 and $180,776 at December 31, 2020.
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
Skyward Specialty at December 31, 2021. The fair value of the investment in Skyward Specialty at December 31, 2021 was derived from a
valuation of the Skyward Specialty fully diluted common shares and other net assets held by the HIIG Partnership, and the Skyward Specialty
convertible preferred shares held by Westaim at December 31, 2021. 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 Skyward Specialty fully diluted common shares, management
determined that using net asset value as the primary valuation technique produced the best indicator of the fair value of the Skyward Specialty
fully diluted common shares at December 31, 2021 and December 31, 2020, given that this is the valuation technique which a market participant
would employ. The Skyward Specialty convertible preferred shares were valued at their common share equivalent on an as converted basis.
- 53 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
In valuing Skyward Specialty’s fully diluted common shares, using a multiple of net asset value as the primary valuation technique, fair value
was determined to be 1.0x the adjusted stockholders’ equity of Skyward Specialty at December 31, 2021 (December 31, 2020 - 1.0x). The
adjusted stockholders’ equity of Skyward Specialty at December 31, 2021 reflects the Skyward Specialty stockholders’ equity obtained from the
audited financial statements of Skyward Specialty as at and for the year ended December 31, 2021 prepared in accordance with accounting
principles generally accepted in the United States of America, adjusted for a reclassification of a stock notes receivable from employees relating
to their purchase of Skyward Specialty common and convertible preferred shares. The adjusted stockholders’ equity contained certain significant
judgments and estimates made by management of Skyward Specialty including the provision for loss and loss adjustment expenses (“LAE”),
the valuation of goodwill and intangible assets, and the valuation allowance recorded against deferred income tax assets.
Due to market uncertainty, the Company felt it appropriate to reduce the fair value of Skyward Specialty’s valuation multiple from 1.1x to 1.0x
adjusted stockholders’ equity at March 31, 2020 which resulted in an unrealized loss to the Company of $14,936 for the year ended December
31, 2020 solely due to this reduction in the valuation multiple.
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 Skyward Specialty at the end of each reporting period.
The Company recorded an increase in the unrealized value on its investment in Skyward Specialty of $11,235 in the year ended December 31,
2021 and a decrease in the unrealized value of $28,181 in the year ended December 31, 2020.
,
For purposes of assessing the sensitivity of Skyward Specialty stockholders’ equity on the valuation of the Company’s investment in Skyward
Specialty, if Skyward Specialty stockholders’ equity at December 31, 2021 was higher by $1,000, the fair value of the Company’s investment in
Skyward Specialty at December 31, 2021 would have increased by approximately $440 (December 31, 2020 - $445) and the change in the
unrealized value of investments in private entities for the year ended December 31, 2021 would have increased by approximately $440 (for the
year ended December 31, 2020 - $445). If Skyward Specialty stockholders’ equity at December 31, 2021 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.
FVTPL
The Company’s investment in the Arena FINCOs is 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 $172,866 at December 31, 2021 and $163,069 at December 31, 2020.
- 54 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
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, 2021 in the amount of $172,866 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,
2021. This same valuation technique was used to determine the fair value of the Company’s investment in the Arena FINCOs of $163,069 at
December 31, 2020.
The significant unobservable inputs used in the valuation of the Arena FINCOs at December 31, 2021 were the aggregate equity of the Arena
FINCOs at December 31, 2021 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, 2021, as described below (December 31, 2020 – 1.0x).
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, senior secured notes payable, 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.
• 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.
- 55 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
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
values of the Company’s investment in the Arena FINCOs at the end of each reporting period.
The Company recorded an increase in the unrealized value of its investment in the Arena FINCOs of $9,797 in the year ended December 31,
2021 in the consolidated statements of profit (loss) and comprehensive income (loss). There were no dividends paid or capital returned in the
year ended December 31, 2021. The Company recorded a decrease in the unrealized value of its investment in the Arena FINCOs of $51 before
dividends paid to the Company of $22,733 in the year ended December 31, 2020. In addition, Arena FINCOs returned capital in the amount of
$19,997 in the year ended December 31, 2020.
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, 2021 was higher by $1,000, the fair value of the Company’s investment in the Arena FINCOs
at December 31, 2021 would have increased by $1,000 (December 31, 2020 - $1,000) and the change in the unrealized value of the investments
in private entities for the year ended December 31, 2021 would have increased by $1,000 (for the year ended December 31, 2020 - $1,000). If
the equity of the Arena FINCOs at December 31, 2021 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. At December 31, 2021 and
December 31, 2020, the thresholds in accordance with the Associate Agreements had not been met, therefore BP LLC’s profit sharing
percentage remains at 49%.
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.
The following summarized financial information represents amounts within the financial statements of Arena Investors:
Financial information of associates:
Assets
Liabilities
Net assets (liabilities)
Company’s share
Arena Investors’ Revolving Loan with the Company
Carrying amount of the Company’s investment in associates
December 31, 2021
December 31, 2020
$
$
$
$
69,301
(65,290)
4,011
2,174
24,000
26,174
$
$
$
$
36,091
(51,695)
(15,604)
(7,830)
28,000
20,170
Year ended December 31
2020
2021
Financial information of associates:
Revenue
Operating expenses 1
Profit (loss) and comprehensive income (loss)
Company’s share of profit (loss) of associates (51%)
$ 28,196
(28,398)
$ (202)
$ (103)
1 Includes interest expense on the Arena Investors’ Revolving Loan granted by the Company of $1,397 and $1,064 in the years ended December 31, 2021 and
2020, respectively.
$ 65,723
(46,107)
$ 19,616
$ 10,004
- 56 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
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 profit (loss) of associates (51%)
(Decrease) increase in Arena Investors’ Revolving Loan with the Company
Ending balance
2021
Year ended December 31
2020
$ 20,170
10,004
(4,000)
$ 26,174
$ 12,273
(103)
8,000
$ 20,170
The Company has a revolving loan to the associates (the “Arena Investors’ Revolving Loan”) with a limit of $35,000 at December 31, 2021
(December 31, 2020 - $35,000) in order to continue funding growth initiatives and working capital needs of Arena Investors. The loan facility
matures on March 31, 2023 and bears an interest rate of 5.60% per annum, effective December 22, 2020. Arena Investors had drawn down
the loan facility by $24,000 at December 31, 2021 (December 31, 2020 - $28,000). 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 $1,397 and $1,064 for the years ended
December 31, 2021 and 2020, respectively, which was reported under “Interest income” in the consolidated statements of profit (loss) and
comprehensive income (loss).
The total of the Company’s 51% share of profit of the associates was $10,004 in the year ended December 31, 2021, and share of loss was
$103 in the year ended December 31, 2020, which was reported under “Share of income (loss) from investment in associates” in the consolidated
statements of profit (loss) and comprehensive income (loss).
INVESTMENTS IN ASOF-LP
The Company’s investments in ASOF LP, a fund managed by Arena Investors, is classified at Level 3 of the fair value hierarchy and measured
at FVTPL. At December 31, 2021 and December 31, 2020, the fair value of the Company’s interest in ASOF LP was determined by Arena
Investors to be $3,222 and $2,896, respectively. The Company reported an increase in the unrealized value of its investment in ASOF LP of
$326 and $188 in the years ended December 31, 2021 and 2020, respectively, which was reported under “Increase in unrealized value of other
investments” in the consolidated statements of profit (loss) and comprehensive income (loss).
5
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
RSUs (note 12)
DSUs (note 12)
Lease liability (note 3)
Interest on Preferred Securities (note 6)
C$ exchange forward contract payable (note 7)
Other accounts payable and accrued liabilities
Ending balance
6
Preferred Securities
$
December 31, 2021
5,884
2,163
413
498
443
3,579
12,980
$
$
December 31, 2020
5,931
1,672
541
493
11
2,346
10,994
$
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$100 million in Westaim in exchange for the
issuance by Westaim of 5% interest bearing notes (the “Preferred Securities”) and Common Share purchase warrants (the “Warrants”) (see
note 8).
The Preferred Securities are denominated in C$, 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 the 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.
- 57 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
6
Preferred Securities (continued)
On June 2, 2017, the Company closed the subscription by Fairfax of C$50 million of Preferred Securities (the “Fairfax Financing”). The Company
had discretion until January 1, 2018 to require Fairfax to purchase all or part of 5,000,000 additional Preferred Securities, and exercised its
discretion not to do so. There were 5,000,000 Preferred Securities outstanding at December 31, 2021 and December 31, 2020.
The Preferred Securities are repayable on demand upon a change of control of Westaim and the liability is recorded at the principal amount in
the consolidated statements of financial position. The Preferred Securities liability is translated into US$ 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 (loss) and comprehensive
income (loss). The carrying amount of the Preferred Securities, which approximated fair value, was $39,554 and $39,248 at December 31,
2021 and 2020, respectively. The Company recorded an unrealized foreign exchange loss relating to the Preferred Securities of $306 and $746
in the years ended December 31, 2021 and 2020, respectively.
Interest expense on the Preferred Securities amounted to $1,989 and $1,864 in the years ended December 31, 2021 and 2020, respectively.
Accrued interest expense was $498 and $493 at December 31, 2021 and 2020, respectively, and was reported under accounts payable and
accrued liabilities in the consolidated statements of financial position.
7
C$ Exchange Forward Contracts
At December 31, 2021, the Company has entered into a 365 day C$ exchange forward contract to purchase C$50 million. Additionally, during
the year ended December 31, 2021, the Company settled three C$ exchange forward contracts to purchase C$40 million. During 2020, the
Company settled four C$ exchange forward contracts to purchase C$40 million each. The impact was to primarily offset C$ currency gains or
losses on the Company’s underlying C$ currency liabilities, including the currency exposure arising from the Preferred Securities.
The Company has not designated these C$ exchange forward contracts as accounting hedges.
Changes to the C$ exchange forward contract payable was as follows:
C$ exchange forward contract (payable) receivable, opening balance
Change in value of C$ exchange forward contracts – (loss) gain
Net cash settlements (received) from C$ exchange forward contracts
C$ exchange forward contract (payable), closing balance
December 31, 2021
$ (11)
(426)
(6)
$ (443)
December 31, 2020
$ 244
370
(625)
$ (11)
A C$ exchange forward contract payable was accrued in the amount of $443 and $11 at December 31, 2021 and 2020, respectively and was
recorded under accounts payable and accrued liabilities in the consolidated statements of financial position. The change in value of C$ exchange
forward contract resulted in a net loss of $426 for the year ended December 31, 2021 and a net gain of $370 for the year ended December 31,
2020, and was reported under foreign exchange loss in the consolidated statements of profit (loss) and comprehensive income (loss).
In connection with Canadian dollar currency forward contracts, the Company pledged cash on deposit of $nil (December 31, 2020 - $3,000) as
security. The restricted cash requirement was eliminated during 2021 upon termination of the Canadian dollar currency forward contract with
the previous counterparty.
8
Derivative Warrant Liability
In connection with the Preferred Securities (see note 6), Westaim issued to Fairfax 14,285,715 Warrants, each exercisable for one 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. 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 the 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 the 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 (loss) and comprehensive income (loss). Subsequent changes in fair value of the vested Warrants are reported in the consolidated
statements of profit (loss) and comprehensive income (loss) for the period in which they arise.
- 58 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
8
Derivative Warrant Liability (continued)
Changes to the derivative warrant liability are as follows:
Opening balance
Change in fair value – gain
Unrealized foreign exchange – loss (gain)
Ending balance
$
December 31, 2021
1,026
(884)
14
156
$
$
December 31, 2020
1,921
(795)
(100)
1,026
$
The Company recorded an unrealized gain resulting from a change in the fair value of the vested Warrants of $884 and $795 in the years ended
December 31, 2021 and 2020, respectively. The Company also recorded an unrealized foreign exchange loss with respect to the vested
Warrants of $14 in the year ended December 31, 2021, and an unrealized foreign exchange gain with respect to the vested Warrants of $100
in the year ended December 31, 2020, under foreign exchange loss in the consolidated statements of profit (loss) and comprehensive income
(loss). At December 31, 2021 and 2020, a liability of $156 and $1,026, respectively, had been recognized with respect to the vested Warrants
in the consolidated statements of financial position.
The fair value liability of the vested Warrants at December 31, 2021 of $156 (December 31, 2020 - $1,026) was estimated using the Monte
Carlo pricing model assuming no dividends are paid on the Common Shares, a risk-free interest rate of 0.17% (December 31, 2020 – 0.17%),
an expiration date between January 1, 2022 and June 2, 2024 (December 31, 2020: January 1, 2021 and June 2, 2024), a volatility of the
underlying Common Shares of 26.50% (December 31, 2020 – 28.36%), a closing price of the Common Shares of C$2.50 (December 31, 2020
- C$2.49) and a strike price of C$3.50. The amounts computed according to the Monte Carlo pricing model may not be indicative of the actual
values realized upon the exercise of the vested Warrants by Fairfax.
A sensitivity analysis is performed within the Monte Carlo pricing model, which produces a probability distribution of possible outcomes by
identifying which inputs impact the outcome the most.
9
Site Restoration Provision
The Company has provided indemnifications to third parties with respect to future site restoration costs to be incurred on industrial sites formerly
owned by the Company. The site restoration provision is based on periodic independent estimates of costs associated with soil and groundwater
reclamation and remediation of these industrial sites. The ultimate environmental costs are uncertain as they are dependent on the future use
of the land and future laws and regulations.
The site provision is calculated in C$ and the 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 (loss) and comprehensive income (loss).
Changes to the site restoration provision are as follows:
Opening balance
Changes due to:
Indemnity payment to a third party
Estimates of future expenditures
Present value adjustment
Unrealized foreign exchange loss
Ending balance
December 31, 2021
4,864
$
December 31, 2020
4,097
$
(2,705)
(1,486)
-
53
726
$
-
686
(5)
86
4,864
$
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 estimated future restoration costs.
In the second quarter of 2021, the Company negotiated a settlement of C$3,400 ($2,705) to commute one of its site restoration indemnities
related to certain industrial sites formerly owned by the Company and contemporarily, the Company received a C$3,300 ($2,626) indemnity
recovery from the previous owners of these same industrial sites. The indemnity recovery was recorded when received and has been reflected
in site restoration (recovery) expense in the consolidated statements of profit (loss) and comprehensive income (loss) for year ended December
31, 2021.
- 59 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
9
Site Restoration Provision (continued)
Possible other future recoveries of costs resulting from indemnifications provided to the Company by previous owners of the Company’s
industrial sites have not been recognized in these financial statements. Future recoveries, if applicable, of the site restoration costs will be
recorded when received. See note 18 for subsequent event impacting site restoration provision.
10 Commitments and Contingent Liabilities
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, 2021, the Company had a total commitment of $827 for future occupancy cost payments including payments due not later
than one year of $278 and payments due later than one year of $549. At December 31, 2020, the Company had a total commitment of $1,114
for future occupancy cost payments including payments due not later than one year of $280 and payments due later than one year of $834.
11 Share Capital
Westaim’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, 2021, Westaim had total Common Shares issued and outstanding of 142,686,718 (December 31, 2020 – 143,186,718), with
a stated capital of $381,127 (December 31, 2020 - $382,182). In the year ended December 31, 2021, Westaim cancelled 500,000 shares that
it had acquired at a cost of $1,055 through a normal course issuer bid. There were no changes in share capital in the year ended December
31, 2020.
No shares of Westaim are held by the Company, and there were no Class A preferred shares or Class B preferred shares outstanding at
December 31, 2021 and 2020.
12 Share-based Compensation
Westaim’s long-term equity incentive plan (the “Incentive Plan”) provides for grants of RSUs, DSUs, stock appreciation rights and other share-
based awards. Westaim also has a stand-alone incentive stock option plan (the “Option Plan”).
The Option Plan is a “rolling plan” which provides that the aggregate number of Common Shares which may be reserved for issuance under the
Option Plan is limited to not more than 10% of the aggregate number of Common Shares outstanding or 14,268,671 at December 31, 2021
(December 31, 2020 – 14,318,671). However, each of the Incentive Plan and the Option Plan provide that under no circumstances shall there
be Common Shares issuable under such plan, together with all other security-based compensation arrangements of Westaim, which exceed
10% of the aggregate number of Common Shares outstanding. As the DSUs are settled solely in cash, they are not included in the 10% limitation
referred to above.
In certain circumstances such as a change of control of Westaim or the sale of substantially all of the assets of Westaim, all outstanding options
and RSUs will vest immediately.
Stock Options - Changes to the number of stock options are as follows:
Opening balance
Granted
Ending balance
Options vested at end of period
Year ended December 31, 2021
Year ended December 31, 2020
Number
10,428,337
-
10,428,337
10,428,337
Weighted Average
Exercise Price
C$
C$
C$
C$
3.10
-
3.10
3.10
Number
10,428,337
-
10,428,337
10,428,337
Weighted Average
Exercise Price
C$
C$
C$
C$
3.10
-
3.10
3.10
December 31, 2021
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
Weighted Average
Remaining
Contractual Life
(years)
3.05
2.25
1.25
2.28
Outstanding
Weighted Average
Exercise Price
C$
C$
C$
C$
3.10
3.00
3.25
3.10
Number of
stock options
vested
3,815,000
3,860,397
2,752,940
10,428,337
Vested
Weighted Average
Exercise Price
3.10
3.00
3.25
3.10
C$
C$
C$
C$
- 60 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
12 Share-based Compensation (continued)
December 31, 2020
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
Weighted Average
Remaining
Contractual Life
(years)
4.05
3.25
2.25
3.28
Outstanding
Weighted Average
Exercise Price
C$
C$
C$
C$
3.10
3.00
3.25
3.10
Number of
stock options
vested
3,815,000
3,860,397
2,752,940
10,428,337
Vested
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 Westaim. These options have a term of seven years,
vested 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 Westaim. These options have a term of seven
years, vested 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 Westaim. These options have a term of
seven years, vested 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 years ended December 31, 2021 and 2020.
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 $nil and $249 in the years ended December 31, 2021 and 2020, respectively, with a
corresponding increase to contributed surplus.
Restricted Share Units - RSUs vest on specific dates and became payable when vested with either cash or Common Shares, at the option of
the holder.
Changes to the number of RSUs are as follows:
Opening balance
Exercised
Ending balance
Year ended December 31
2020
2021
3,034,261
3,034,261
-
(59,063)
3,034,261
2,975,198
On November 14, 2014, an aggregate of 2,375,000 RSUs were granted to certain officers, employees and consultants of Westaim. These
RSUs have a term of fifteen years from date of issue and at December 31, 2021, all of these RSUs had vested, of which 325,000 RSUs had
been exercised and 2,050,000 RSUs were outstanding.
On April 1, 2016, an additional 925,198 RSUs were granted to certain officers and employees of Westaim. These RSUs have a term of fifteen
years from date of issue and at December 31, 2021, all of these RSUs had vested and none have been exercised.
At December 31, 2021 the RSUs outstanding was 2,975,198 (December 31, 2020 - 3,034,261). No RSUs were granted in the years ended
December 31, 2021 and 2020. The RSUs exercised in the year ended December 31, 2021 was 59,063 (2020 – nil).
- 61 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
12 Share-based Compensation (continued)
Compensation expenses relating to RSUs, including the impact of the change in the market value of the Common Shares was an expense of
$28 for the year ended December 31, 2021, and a recovery of $243 for the year ended December 31, 2020. At December 31, 2021, a liability
of $5,884 (December 31, 2020 - $5,931) had been accrued by Westaim with respect to outstanding RSUs in the consolidated statements of
financial position.
Deferred Share Units - DSUs are issued to certain directors of Westaim in lieu of director fees, at their election, at the market value of the
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
2020
2021
642,779
855,228
212,449
238,375
855,228
1,093,603
In the year ended December 31, 2021, 238,375 DSUs were issued in lieu of director fees of $500 and in the year ended December 31, 2020,
212,449 DSUs were issued in lieu of director fees of $343. No DSUs were exercised in the years ended December 31, 2021 and 2020.
Compensation expenses relating to DSUs, including the impact of the change in the market value of the Common Shares was an expense of
$482 and $346 in the years ended December 31, 2021 and 2020, respectively. At December 31, 2021, a liability of $2,163 (December 31, 2020
- $1,672) had been accrued with respect to outstanding DSUs in the consolidated statements of financial position.
13 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 expense related to the Company’s key management personnel and directors are as follows:
Year ended December 31
2020
2021
3,270
4,142
354
507
3,624
4,649
1 Salaries and benefits include director fees paid in cash totaling $110 and $136 in the years ended December 31, 2021 and 2020, respectively.
Salaries and benefits1
Share-based compensation expense
Compensation expense
$
$
$
$
Fees paid to Hartford Consulting, Inc. (“Hartford”), a company owned by William R. Andrus, a director of Skyward Specialty, for insurance
industry related consulting services were $80 and $75 in the years ended December 31, 2021 and 2020, respectively. Compensation relating
to RSUs issued to Hartford was an expense of $3 and a recovery of $5 in the years ended December 31, 2021 and 2020, respectively, and the
amounts were included in the consolidated statements of profit (loss) and comprehensive income (loss) under share-based compensation
expense. In the year ended December 31, 2021, all RSUs issued to Hartford have been exercised for cash. At December 31, 2021, a liability
of $nil (December 31, 2020 - $115) had been accrued in the consolidated statements of financial position with respect to outstanding RSUs held
by Hartford.
The Company received dividends from the Arena FINCOs in the amount of $nil and $22,733 in the years ended December 31, 2021 and 2020,
respectively.
Arena FINCOs returned capital to the Company in the amount of $nil and $19,997 in the years ended December 31, 2021 and 2020, respectively.
- 62 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
13 Related Party Transactions (continued)
The Company earned and received interest on loans to related parties as follows:
Related parties:
Arena Investors Revolving Loan (note 4)
Unrelated parties:
Interest earned on bank balances
Year ended December 31
2020
2021
1,397
1,397
8
1,405
$ 1,064
$ 1,064
$
108
1,172
$
$
$
The Company earned advisory fees of $500 from Skyward Specialty in each of the years ended December 31, 2021 and 2020. The Company
earned advisory fees of $200 and $250 from the Arena FINCOs and Arena Investors, respectively, in each of the years ended December 31,
2021 and 2020. Advisory fees are included in fee income in the consolidated statements of profit (loss) and comprehensive income (loss).
14
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. The deferred tax expense (recovery) recognized in profit or loss is as follows:
Unrealized gain on investments in private entities
Non-capital loss carry-forwards
Difference between statutory and foreign tax credits
Deferred tax (recovery) expense
Year ended December 31
2021
$ (1,042)
1,042
54
$ 54
2020
(38)
-
1
$ (37)
$
As the realization of any related tax benefits is not probable, no deferred income tax assets have been recognized for the following:
Non-capital loss carry-forwards
Capital loss carry-forwards
Deductible temporary differences
Corporate minimum tax credits
Investment tax credits
$
December 31, 2021 December 31, 2020
60,363
5,485
16,675
349
2,166
56,911
5,511
4,553
350
2,175
$
The unrecognized non-capital losses and investment tax credits will expire at various times to the end of 2041, as follows:
Investment tax credits by year of expiry:
2022
2023
2024
2025
2026
Beyond 2026
Non-capital losses by year of expiry:
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
$
$
2,271
4,852
7,137
81
199
16,539
3,021
3,848
2,013
47
6,437
5,893
2,916
1,566
91
56,911
- 63 -
$
507
256
138
313
264
697
2,175
$
`
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
14
Income Taxes (continued)
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 (loss) and comprehensive income (loss):
Profit (loss) before income tax
Statutory income tax rates
Income taxes at statutory income tax rates
Variations due to:
Non-taxable portion of unrealized (gain) loss
on investments in private entities
Tax losses allocated from the HIIG Partnership
Non-deductible (non-taxable) items
Difference between statutory and foreign tax rates
Unrecognized temporary differences
Unrecognized tax losses
Income tax expense
Year ended December 31
2020
2021
$ (34,285)
$ 28,431
26.5%
26.5%
(9,086)
7,534
(1,042)
(36)
(231)
(183)
(1,711)
(4,110)
221
$
7,446
(39)
(6,286)
28
119
7,933
115
$
At December 31, 2021, current income tax receivable from the United States tax authority of $64 (December 31, 2020 - $64) and current income
tax payable to the Canadian federal tax authority of $nil (December 31, 2020 - $3), United States federal tax authority of $153 (December 31,
2020 - $334), a deferred tax liability for Canadian federal taxes of $nil (December 31, 2020 - $6) and a deferred tax liability for United States
federal taxes of $415 (December 31, 2020 - $356) were recorded in the consolidated statements of financial position.
15 Earnings (Loss) per Share
Westaim had 10,428,337 stock options, 2,975,198 RSUs and 14,285,715 Warrants outstanding at December 31, 2021. At December 31, 2020,
Westaim had 10,428,337 stock options, 3,034,261 RSUs and 14,285,715 Warrants outstanding. The stock options and Warrants for the years
ended December 31, 2021 and 2020 and the RSUs for the year ended December 31, 2020 were excluded in the calculation of diluted earnings
(loss) per share as they were not dilutive. The RSUs for the year ended December 31, 2021 were included in the calculation of diluted earnings
(loss) per share as they were dilutive.
Earnings (loss) per share, basic and diluted, are as follows:
Year ended December 31
2020
2021
$ 28,210
143,079,869
$ 0.20
$ (34,400)
143,186,718
(0.24)
$
$ 28,210
(47)
$ 28,163
$ (34,400)
-
$ (34,400)
143,079,869
3,029,245
146,109,113
0.19
$
143,186,718
-
143,186,718
(0.24)
$
Basic earnings (loss) per share:
Profit (loss)
Weighted average number of Common Shares outstanding
Basic earnings (loss) per share
Diluted earnings (loss) per share:
Profit (loss)
Dilutive RSU recovery and related foreign exchange1
Profit (loss) on a diluted basis
Weighted average number of Common Shares outstanding
Dilutive impact of RSUs1
Weighted average number of Common Shares outstanding on a dilutive basis
Diluted earnings (loss) per share
1 The RSUs for the year ended December 31, 2020 were not dilutive.
- 64 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
16
Capital Management
Westaim’s capital currently consists of the Preferred Securities and Common Shares.
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.
17 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, 2021 consists of short-term financial assets and financial liabilities with maturities of less than one year, 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.
Liquidity risk
Liquidity risk is the risk that the Company may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or
can only do so on terms that are materially disadvantageous.
The Company has made investments in private entities and associates which do not typically have an active market. Private investment
transactions can be highly structured and the Company takes measures, where possible, to create defined liquidity events and as part of its
strategy, the Company has sought to create or accelerate such liquidity events. However, such liquidity events are rarely expected in the first
two or three years of making an investment and may not be realized as expected.
At December 31, 2021, the Company’s short-term financial liabilities amounted to $4,673 (December 31, 2020 - $3,187), and the Company has
access to cash and other resources to meet these financial obligations.
Currency risk
The Company’s C$ denominated monetary liabilities exceed C$ denominated monetary assets and most of its operating expenses are paid in
C$. From time to time, the Company may enter into C$ to US$ exchange forward contracts to manage its C$ currency exposures. At December
31, 2021, the Company’s C$50 million (December 31, 2020 – C$40 million) C$ exchange forward contract is effective at reducing a significant
portion of the risk associated with changes in the C$ currency exchange. At December 31, 2021, it is estimated a 10% strengthening of the C$
against the US$ would have increased the foreign exchange loss for the years ended December 31, 2021 by approximately $838 (December
31, 2020 - $1,590). A similar weakening of the C$ would result in an opposite effect.
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 Skyward Specialty and the Arena FINCOs as certain underlying investments
made by these entities are sensitive to interest rate movements.
- 65 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2021 and 2020
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
17 Financial Risk Management (continued)
Equity risk
There is no active market for the Company’s investment in preferred shares of Skyward Specialty and investments in Skyward Specialty (through
the HIIG Partnership) and the Arena FINCOs. 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.
18 Subsequent Event
The remaining indemnities that the Company had provided to certain third parties for environmental liabilities were settled in February 2022 and
March 2022 for net payments of $726, which was equal to the site restoration provision balance at December 31, 2021. Following these
settlements, the Company has no outstanding indemnities and will report a site restoration provision of $nil on its next financial reporting date
of March 31, 2022.
On March 31, 2022, the Company received $2,500 of dividend income from Arena FINCOs.
- 66 -
SHAREHOLDER INFORMATION
BOARD OF DIRECTORS
Stephen R. Cole 1, 2, 3, 5
Lead Director, The Westaim Corporation
President, Seeonee Inc.
Ian W. Delaney 3
Executive Chair, The Westaim Corporation
John W. Gildner 1, 2, 3, 4
Independent Businessman
J. Cameron MacDonald
Lisa Mazzocco2,3,6
Independent Consultant
Kevin E. Parker1,3
Managing Partner, Sustainable Insight Capital Management
Bruce V. Walter 1, 2, 3
Chairman, Nunavut Iron Ore, Inc.
Vice Chair, Centerra Gold Inc.
President and Chief Executive Officer, The Westaim
Corporation
Numbers indicate the individual’s committee membership:
1. Member of the Audit Committee
2. Member of the Human Resources and Compensation Committee
3. Member of the Nominating and Corporate Governance Committee
4. Chair of the Audit Committee
5. Chair of the Human Resources and Compensation Committee
6. Chair of the Nominating and Corporate Governance Committee
The Westaim Corporation Annual and Special Meeting of Shareholders
Wednesday May 18th, 2022 9:00 A.M. EDT
Vantage Venues
150 King Street West, 27th Floor
Toronto, Ontario M5H 1J9
CORPORATE INFORMATION
STOCK INFORMATION
OFFICES
Ian W. Delaney
Executive Chair
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, 2021 were 142,686,718
Robert T. Kittel
Chief Operating Officer
Glenn G. MacNeil
Chief Financial Officer
TRANSFER AGENT & REGISTRAR
Computershare Investor Services Inc.
Home Oil Tower
800, 324 – 8th Avenue SW
Calgary, Alberta T2P 2Z2
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
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THE WESTAIM CORPORATION
70 York Street, Suite 1700
Toronto, Ontario, Canada
M5J 1S9
www.westaim.com
info@westaim.com