THE WESTAIM CORPORATION
ANNUAL REPORT 2022
THE WESTAIM CORPORATION
ANNUAL REPORT 2022
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
6
45
46
50
54
73
73
All currency amounts are in United States dollars, unless otherwise indicated.
LETTER TO SHAREHOLDERS1
LETTER TO SHAREHOLDERS(1)
March 30, 2023
Dear Fellow Shareholders,
Early in 2022, the economic evidence of escalating inflation awakened monetary authorities to raise interest rates and, in doing so, ignited significant volatility
across global bond and equity markets. Within this financial turbulence, Westaim's two businesses, Arena (comprising Arena Investors, LP (“Arena Investors”)
and Arena FINCOs) and Skyward Specialty Insurance Group, Inc. ("Skyward Specialty") performed admirably.
By many measures 2022 was a transformative and pivotal year. Arena Investors continued to grow, achieve solid absolute (and relative) investment
performance across all funds and increase their committed Assets Under Management (“AUM”) to $3.5 billion. Likewise, Skyward Specialty enjoyed an
extraordinary year within the backdrop of a favourable pricing environment, allowing the business to grow its revenues, profitability and return on invested
capital significantly. Notably, in January 2023, Skyward Specialty completed an Initial Public Offering (“IPO”) on the National Association of Securities Dealers
Automated Quotations (“NASDAQ”) exchange. Management believes the collective actions of both businesses and their resulting achievements in 2022 have
materially increased Westaim's earning power and in turn its intrinsic valuation.
2
For the year ended December 31, 2022, Westaim reported a GAAP3 profit and comprehensive income of $18.0 million (GAAP diluted earnings per share of
$0.12) compared to a GAAP profit and comprehensive income in 2021 of $28.3 million (GAAP diluted earnings per share of $0.19). Unfortunately, our fair
value accounting does not fully reflect the profitability Skyward Specialty achieved during the year, which is discussed in more detail below. Our fully diluted
book value per share ('FDBVPS") was $2.56, an increase of 5.4% from $2.43 as of December 31, 2021. In Canadian currency, our FDBVPS was C$3.46, an
increase of 12.7% from C$3.07 as of December 31, 2021.
As a reminder, we encourage Westaim shareholders to subscribe and review our quarterly Investor Presentation, which we release alongside our quarterly
earnings reports and press release. We do not host quarterly conference calls. Thus, the objective of the quarterly Investment Presentation is to provide all
shareholders equal access to a thorough quarterly report detailing the essential metrics within our two businesses and measure their progress over time.
1 This Letter to Shareholders contains forward-looking information and 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. Please also read the Company’s cautionary notes on forward-looking information as may be found in the Company’s MD&A and annual information form for the year ended December 31, 2022.
2 Arena Special Opportunities Fund, LP (“ASOF LP”).
3 Generally accepted accounting principles (“GAAP”).
- 1 -
The waterfall chart below details the book value appreciation for the year ended December 31, 2022:
Skyward Specialty
Skyward Specialty is a US-based specialty property and casualty insurance company offering products and solutions on a non-admitted (or excess and
surplus) and admitted basis. Skyward Specialty focuses on market niches that are underserved or dislocated in order to achieve a competitive position to meet
the needs of businesses and customers operating in these markets. Andrew Robinson, Skyward Specialty’s Chief Executive Officer, refers to this strategy as
"Rule Our Niche." Their ongoing execution is building a solid, defensible market position with a competitive moat and, as their results highlight, winning in their
chosen markets.
With much detail available in the Westaim Q4 2022 Investor Presentation and on the Skyward Specialty website (www.skywardinsurance.com), we have
highlighted a few 2022 operating metrics:
• Gross written premium increased 21.7% to $1,143.9 million in FY 2022 versus $939.8 million in FY 2021
• Net Income was $39.4 million in FY 2022 versus $38.3 million in FY 2021
•
•
•
Adjusting operating income4 was $58.6 million in FY 2022 versus $36.1 million in FY 2021
Adjusted combined ratio5 was 92.6% in FY 2022 versus 94.6% in FY 2021
Annualized adjusted return-on-equity (“ROE”)6 and annualized adjusted return-on-tangible equity (“ROTE”)7 was 13.8% and 17.6% in FY 2022,
respectively versus 8.8% and 11.2% in FY 2021, respectively
Stockholders' equity decreased 1.0% to $421.7 million at December 31, 2022 from $426.1 million at December 31, 2021, primarily due to unrealized
losses in the fixed income portfolio
•
With continued strong operating results and an industry environment conducive to profitable growth, the Skyward Specialty Board concluded that the company
was ready for an IPO. This process, a very large and time-consuming undertaking, included several key milestones:
• On April 26, 2022 Skyward Specialty submitted a confidential draft registration statement on Form S-1 with the US Securities and Exchange
Commission ("SEC") relating to the IPO.
• On January 4, 2023, Skyward Specialty launched the IPO and its related roadshow with the aim to trade on the Nasdaq Global Select Market under
the symbol "SKWD" with a price range of $14.00 - $16.00 per common share.
• On January 12, 2023, the IPO was priced at the mid-point of the range, $15 per common share and began trading on the NASDAQ the morning of
January 13, 2023.
• On January 18, 2023, Skyward Specialty closed an upsized IPO of 8,952,383 shares of its common stock, consisting of 4,750,000 shares sold by
Skyward Specialty and 4,202,383 shares sold by selling shareholders at the public offering price of $15.00 per common share.
4 Skyward Specialty defines adjusted operating income (a non-GAAP measure) as net income excluding the impact of certain items that may not be indicative of underlying business trends, operating results, or future outlook, net of tax
impact. They use adjusted operating income as an internal performance measure in the management of their operations because they believe it gives management and other users of their financial information useful insight into their
results of operations and their underlying business performance. Adjusted operating income should not be viewed as a substitute for net income calculated in accordance with GAAP, and other companies may define adjusted operating
income differently.
5 Skyward Specialty defines adjusted loss ratio and adjusted combined ratio (a non-GAAP measure) as the corresponding ratio (calculated in accordance with GAAP), excluding losses and losses and loss adjustment expense (“LAE”)
related to the Loss Portfolio Transfer (“LPT”) and all development on reserves fully or partially covered by the LPT and amortization of deferred gains associated with recoveries of prior LPT reserve strengthening. Skyward Specialty uses
these adjusted ratios as internal performance measures in the management of their operations because they believe they give management and other users of their financial information useful insight into their results of operations and
their underlying business performance. Their adjusted loss ratio and adjusted combined ratio should not be viewed as substitutes for their loss ratio and combined ratio, respectively.
6 Annualized adjusted ROE (a non-GAAP measure) is adjusted operating income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period.
7 Annualized adjusted ROTE (a non-GAAP measure) is adjusted operating income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders' equity during the period.
- 2 -
The IPO was the first IPO of 2023 in the United States, and we are pleased to share that it was well received. The net proceeds to Skyward Specialty of
approximately $62.3 million from the primary offering enhance the Skyward Specialty's capital structure, allow it to grow and to continue to execute its "Rule
our Niche" strategy.
Westaim was highly supportive of the IPO process and did not sell any Skyward Specialty shares in the offering. Post IPO, Westaim owns 14,567,139, or
approximately 38.7% of the 37.7 million fully diluted Skyward Specialty common shares outstanding. We have high confidence in Andrew Robinson and the
senior leadership team and believe Skyward Specialty has a promising future. Skyward Specialty is well-positioned and aligned with all stakeholders. Once
again, we congratulation everyone on the Skyward Specialty team for this significant achievement.
As of December 31, 2022, Westaim valued Skyward Specialty at $218.9 million in its financial statements (and therefore its FDBVPS), which is consistent with
the early January 2023 IPO offering price of $15.00 per common share.
Finally, with Skyward Specialty becoming an independent SEC issuer, Westaim will alter our Skyward Specialty quarterly and annual communication
accordingly. Moving forward, we will direct our shareholders to access Skyward Specialty earnings results, presentations, and all other communication and
information directly through their investor website.
Please register on Skyward Specialty's Email Alerts – link attached.
https://investors.skywardinsurance.com/ir-resources/email-alerts
Arena Investors and Arena FINCOs
"There's a storm coming, and we are building an ark. Importantly, Arena has taken no macro view, has not invested in situations that require a "greater fool"
to take us out, has little financing recourse or otherwise, has 100% of its capital fully asset-liability matched, and is open for business – as usual.”
- Daniel Zwirn, March 2020
In prior years’ annual letters, we have highlighted our partnership with Arena, which comprises two distinct entities; Arena Investors and Arena FINCOs. Arena
Investors is a global institutional asset manager that underwrites asset and credit-oriented investments to provide diversified and uncorrelated returns to its
clients and investors. Its eight offices include 120+ employees and consultants, allowing the firm to be "on-the-ground" and an active investor in over 20
countries. Arena FINCOs, represents Westaim’s capital and is allocated among our two wholly-owned subsidiaries, Westaim Origination Holdings, Inc. and
Arena Finance Holdings Co., LLC.
Over the past few years, Arena adopted and communicated a defensive investment posture and believes we are experiencing ongoing market volatility not
seen since the Great Financial Crisis of 2007 – 2009 (“GFC”). Arena believes that the excessive liquidity, extremely low interest rates and easy money provided
over the past several years is over, not coming back, and that the economic pain of past speculation has only begun to show. This is not a "hiccup”, and they
don't expect a rapid V-shaped recovery. You may recall Daniel Zwirn, Arena's CEO/CIO, expressing concern that the "whatever it takes" policies employed
through COVID-19 would only exacerbate the asset/credit bubble that had been built up since the GFC. Arena also believes that the inflation that reared its
ugly head in 2021 and accelerated into 2022 was likely not transitory and that high rates and inflation will persist for longer than is currently generally perceived.
Throughout this “everything bubble” period since its inception, Arena aimed to avoid the lure of speculative investments and can now play offence as:
"the current market is as favorable as it has been since Arena began and is continuing to improve in the size and variety of opportunities available."
- Daniel Zwirn, January 2023
Since inception, Arena has deployed approximately $4.7 billion into over 350 privately negotiated transactions, which averages 50 transactions per year, and
a little more than $10 million per investment. Over this period approximately 190 positions have been exited, including 33 in 2022, and these 33 have realized
a 16.7% gross return.
# Positions
Top Attachment
Point
33
2%
Closing
LTV
63%
Coupon
11.0%
Gross Underwritten Internal
Rate-of-Return (“IRR”)8
Gross
Realized IRR9
Average Loan
Term (Years)
15.9%
16.7%
2.0
Summary of Arena's 2022 Exited Holdings
8 Gross underwritten IRR (a non-GAAP measure): represent the internal rate of return prior to or at the time of making the initial investment as reflected in and supported by loan agreements, including, but not limited to, note purchase
agreements and origination agreements. The gross underwritten IRR is one of many metrics considered by Arena prior to investment and is not typically updated after the initial funding date. The gross underwritten IRR may be presented
as a single percentage or a range. Such gross IRRs are estimated and do not take into account any entity-level management fees, incentive allocation, and/or any other associated fees, all of which may significantly reduce the net return
received attributable to any investment. These gross underwritten IRRs are not a proxy for investment performance for any strategy or fund; investment performance may be provided upon request. The gross underwritten IRRs disclosed
herein are being presented for the purpose of providing insight into the investment objectives of Arena, detailing anticipated risk and reward characteristics in order to facilitate comparisons with other investments and establish a benchmark
for future evaluation of Arena’s strategy. The IRRs are also being presented because financially sophisticated investors may find this information useful in determining where Arena’s strategies may fit within their investment portfolios. The
IRRs included in this Letter to Shareholders are not intended, and must not be regarded, as a representation, warranty, or prediction that any Arena vehicles will achieve any particular return with respect to any particular investment
opportunity or for a particular time period, or that Arena and its investors will not incur losses. In evaluating these IRRs, it should be noted that (a) there can be no assurance that Arena will be able to source and consummate investments
of the type it is seeking to make, and (b) the assumptions underlying the IRRs may not prove to be accurate or materialize. There can be no assurance that the objective of the investment shown can be met or that substantial losses will
be avoided.
9 Gross Realized IRR (a non-GAAP measure) calculations are presented net of expenses and gross of Arena-level fees.
- 3 -
Amidst the downward volatility of 2022, investors in Arena's pooled and drawdown funds achieved solid absolute and relative returns that varied between
-2.0% and +15.0%. Arena Investors’ investment flow remains impressively vast, and its underwritten returns, payment patterns, and default activity remain
consistent with prior years. As a result, in management’s view, the performance volatility in 2022 primarily reflects conservative and independent marks versus
material deterioration or permanent impairment.
Arena's December 31, 2022, committed AUM is approximately $3.5 billion compared to $2.8 billion on December 31, 2021. This AUM growth is consistent
with prior years, observing an approximately 48% compounded annual growth rate from December 2015. Throughout 2023, Arena expects to be active in six
fundraising campaigns across three core strategies – Multi-strategy, Stable Income (primarily Real Estate Credit and ABS) and Excess Capacity (primarily
New Zealand Real Estate Credit).
In 2022, Arena Investors reported total revenues of $48.2 million comprised of recurring revenue of $43.7 million (2021: $31.5 million) and total incentive
income of $4.5 million (2021: $34.3 million). Earnings before interest, income taxes, depreciation and amortization (“EBITDA”) was $3.2 million (2021: $21.1
million) for the year, and net income of $1.5 million (2021: $19.6 million) collectively reflects the decline in year-over-year incentive income. Significantly, Arena
Investors Fee Related Earnings ("FRE") improved to $4.9 million in FY 2022 compared to fee related loss of $0.1 in FY 2021, highlighting the leverage of scale
and additional fee-paying AUM.
As you are aware, Arena FINCOs represent Westaim’s proprietary capital invested in Arena's core multi-strategy and, at times, provides for the strategic
development of Arena Investors as the lead or seed investor in Arena product offerings to help grow and build the business. However, Westaim has and will
withdraw capital from Arena FINCOs when compelling alternative opportunities arise to optimize returns. As a reminder in 2020, Westaim withdrew
approximately $43 million of capital from the Arena FINCOs to participate in Skyward Specialty's rights offering, which proved to be an excellent investment.
Due to this additional mandate, the portfolio profile of Arena FINCOs does not reflect Arena’s diversified multi-strategy funds and will experience more
concentration and volatility as a result. Despite this, we believe the returns over time as investments are realized will be in keeping with targeted returns
produced across the multi-strategy spectrum.
In 2022, Arena FINCOs earned a net return10 of -1.6%, closing with a value of $160.1 million at December 31, 2022.
Westaim
Allocating Westaim’s capital to aligned, high-quality leadership teams within attractive industries is the precursor to building great businesses with sustainable
momentum and is a hallmark of Westaim’s strategy, further enabled by the permanent nature of our capital. It can happen quickly (like our past investment in
Jevco Insurance Company), but in most cases it takes time. We are fortunate to have Andrew and Dan leading their teams at Skyward Specialty and Arena
Investors – we believe despite considerable past successes, their best years are yet to come.
As we write this letter, management believes Westaim's "intrinsic value" is significantly greater than both Westaim’s current trading price of C$2.90 per share
and the December 31, 2022 FDBVPS of C$3.46, primarily due to Skyward Specialty’s common shares trading materially above the $15.00 included in our
book value calculation, and due to the nominal valuation attributed to Arena Investors in Westaim’s book value despite having $3.5 billion of committed AUM
and growing FRE.
10 Net Return (a non-GAAP measure) 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.
- 4 -
We believe Westaim's approximately 22% insider ownership underscores our conviction in the quality and value of our two businesses, and the value of the
permanent capital structure of the holding company and the investment orientation this provides. We understand that in today's marketplace, few, if any,
holding companies command a premium valuation to their NAV - we assure you that management and the Westaim Board are continually considering all
possible alternatives, levers and scenarios to narrow this chasm.
Westaim's Annual General Meeting and Investor Day will occur on Thursday, May 18, 2023 at Vantage Venues, 150 King Street West, Toronto, Ontario,
Canada, M5H 1J9. The Annual General Meeting will be convened in-person at 9:00 AM ET. The Investor Day will be held in-person and virtually at 9:30 AM
ET. The Investor Day will include a business overview and discussion with Westaim and Arena Investors management, followed by a question-and-answer
session. Unfortunately, for the reasons stated earlier in this letter, Skyward Specialty will not participate in the Investor Day. However, we look forward to your
in-person or virtual participation.
Respectfully,
Cameron MacDonald
President and Chief Executive Officer
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The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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, 2022 and 2021 as set out on pages 50 to 72 of this annual report (“Financial Statements”).
Financial data in this MD&A has been derived from the Financial Statements and is intended to enable the reader to assess the Company’s results of
operations for the three months and year ended December 31, 2022 and financial condition as at December 31, 2022. 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$. The following commentary is current as of March 30, 2023. Additional information relating
to the Company is available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. Certain comparative figures
have been reclassified to conform to the presentation of the current year, and certain totals, subtotals and percentages may not reconcile due to rounding.
IFRS for Investment Entities
The Company qualifies as an investment entity under IFRS and uses fair value as the key measure to monitor and evaluate its primary investments. The
Company reports its financial results in accordance with IFRS applicable to investment entities.
Functional and Presentation Currency
The US$ 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.
- 6 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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.
Supplementary financial measures (the “Skyward Specialty Supplementary Financial Measures”) concerning Skyward Specialty Insurance Group, Inc.
(“Skyward Specialty”) contained in this MD&A are unaudited and have been derived from the Skyward Specialty Fourth Quarter 2022 Results press
release dated February 28, 2023 and the Skyward Specialty Form 10-K Annual Report for its fiscal year ended December 31, 2022 filed with the U.S.
Securities and Exchange Commission at www.sec.gov/edgar. Such statements are the responsibility of the management of Skyward Specialty. The
Skyward Specialty Supplementary Financial Measures, including any Skyward Specialty non-GAAP measures contained therein, have 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 Supplementary Financial Measures 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. For more information about Skyward Specialty, please see Skyward
Specialty’s audited financial statements for the year ended December 31, 2022 available at www.sec.gov/edgar.
The Skyward Specialty Supplementary Financial Measures have been provided solely by Skyward Specialty. Although Westaim has no knowledge that
would indicate that any of the Skyward Specialty Supplementary Financial Measures contained herein are 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 Supplementary Financial Measures, 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
Supplementary financial measures concerning the Arena FINCOs (as hereinafter defined) and Arena Investors (as hereinafter defined) (the “Arena
Supplementary Financial Measures”) contained in this MD&A are unaudited and have been derived from the audited consolidated financial statements of
the Arena FINCOs and Arena Investors for the years ended December 31, 2022 and 2021 and the unaudited consolidated financial statements of Arena
FINCOs and Arena Investors for the three months ended December 30, 2022 and 2021, 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 Supplementary Financial
Measures, 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 Supplementary Financial Measures 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 Supplementary Financial Measures have 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 Supplementary Financial Measures contained herein are 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 Supplementary Financial Measures, 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
March 30, 2023 for its fiscal year ended December 31, 2022 which is available on SEDAR at www.sedar.com. Please refer to Section 16, Cautionary
Note Regarding Forward-Looking Information of this MD&A.
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The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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
Three months ended December 31
2021
2022
Year ended December 31
2021
2022
Revenue and net change in unrealized value of investments
Net (expenses) recovery of expenses
Income tax recovery (expense)
$ 35.1
(2.5)
0.2
$ 6.8
0.1
(0.2)
$ 27.4
(9.8)
0.4
$ 33.8
(5.3)
(0.2)
GAAP profit and comprehensive income
$ 32.8
$ 6.7
$ 18.0
$ 28.3
GAAP earnings per share – basic
GAAP earnings per share – diluted
$ 0.23
$ 0.23
$ 0.05
$ 0.04
$ 0.13
$ 0.12
$ 0.20
$ 0.19
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$ 3
1 See Section 15, Non-GAAP Measures of this MD&A.
2 Westaim’s common shares (“Common Shares”) are listed and posted for trading on the TSX Venture Exchange (“TSXV”) under the symbol “WED”.
3 Period end exchange rates: 1.35360 at December 31, 2022 and 1.26410 at December 31, 2021.
$ 363.2
141,386,718
$ 2.56
$ 3.46
$ 347.7
142,686,718
$ 2.43
$ 3.07
Three months ended December 31, 2022 and 2021
The Company reported a profit and comprehensive income of $32.8 and $6.7 for the three months ended December 31, 2022 and 2021, respectively.
Revenue and net change in unrealized value of investments was a net increase of $35.1 for the three months ended December 31, 2022 (2021 –
$6.8), and consisted of interest income of $0.3 (2021 - $0.3), dividend income paid to the Company from the Arena FINCOs of $0.5 (2021 - $nil),
advisory fees of $0.3 (2021 - $0.3), an increase of $40.5 in the unrealized value of the investment in Skyward Specialty (2021 – decrease of $0.2),
a decrease of $6.6 in the unrealized value of the investments in the Arena FINCOs, which was a decrease of $6.1 before dividends paid of $0.5
(2021 – increase of $0.5 before dividends paid of $nil), the Company’s share of income and comprehensive income of Arena Investors of $0.1 (2021
– $5.8) and a decrease in the unrealized value of the Company’s investment in Arena Special Opportunities Fund, LP (“ASOF LP”) of a nominal
amount (2021 – increase of $0.1).
Net expenses for the three months ended December 31, 2022 of $2.5 (2021 – net recovery of expenses of $0.1) consisted of salaries and benefits
of $1.2 (2021 - $1.4), general, administrative and other expenses of $0.2 (2021 - $0.2), professional fees of $0.2 (2021 - $0.2), site restoration
provision expense of $nil (2021 – recovery of $1.5), share-based compensation expense $0.2 (2021 – net recovery of expense of $0.5), a foreign
exchange loss of $0.2 (2021 – a nominal amount), interest on preferred securities of $0.5 (2021 - $0.5) and an unrealized gain resulting from a
change in the fair value of the vested Warrants (as hereinafter defined) of a nominal amount (2021 – $0.4).
The Company reported income tax recovery for the three months ended December 31, 2022 of $0.2 (2021 – expense of $0.2).
Years ended December 31, 2022 and 2021
The Company reported a profit and comprehensive income of $18.0 and $28.3 for the years ended December 31, 2022 and 2021, respectively.
- 8 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
2. OVERVIEW OF PERFORMANCE (continued)
Revenue and net change in unrealized value of investments was a net increase of $27.4 for the year ended December 31, 2022 (2021 – $33.8), and
consisted of interest income of $1.3 (2021 - $1.4), dividend income paid to the Company from the Arena FINCOs of $8.4 (2021 - $nil), advisory fees
of $1.0 (2021 - $1.0), an increase of $26.8 in the unrealized value of the investment in Skyward Specialty (2021 – $11.3), a decrease of $10.8 in the
unrealized value of the investments in the Arena FINCOs, which was a decrease of $2.4 before dividends paid of $8.4 (2021 – increase of $9.8
before dividends paid of $nil), the Company’s share of profit and comprehensive income of Arena Investors of $0.7 (2021 - $10.0) and a decrease
in the unrealized value of the Company’s investment in ASOF LP of a nominal amount (2021 – increase of $0.3).
Net expenses for the year ended December 31, 2022 of $9.8 (2021 – $5.3) consisted of salaries and benefits of $4.8 (2021 - $5.0), general,
administrative and other expenses of $0.9 (2021 - $0.8), professional fees of $1.5 (2021 - $1.0), site restoration provision expense of $nil (2021 –
recovery of $4.1), share-based compensation expense of $0.9 (2021 – $0.5), a foreign exchange gain of $0.1 (2021 – loss of $0.9), interest on
preferred securities of $1.9 (2021 - $2.0) and an unrealized gain resulting from a change in the fair value of the vested Warrants of $0.1 (2021 –
$0.8).
The Company reported income tax recovery for the year ended December 31, 2022 of $0.4 (2021 – expense of $0.2).
3.
INVESTMENTS
The Company’s principal investments consist of its investments in Skyward Specialty, the Arena FINCOs and Arena Investors.
Place of
establishment
Principal place
of business
Ownership interest
at December 31, 2022
Ownership interest
at December 31, 2021
Skyward Specialty
Arena FINCOs
Arena Investors
Delaware, U.S.
Delaware, U.S.
Delaware, U.S.
Texas, U.S.
New York, U.S.
New York, U.S.
43.8% owned by the Company 1
100% owned by the Company
51% owned the Company 2
44.0% owned by the Company
100% owned by the Company
51% beneficially owned the Company 1
1 See section 3.A. Investment in Skyward Specialty for details of the Company’s ownership in Skyward Specialty
2 Legal equity ownership is 51% (December 31, 2021 - 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”. Effective April 1, 2022, BP LLC achieved the threshold
to increase its equity ownership of Arena Investors from 0% to 49% and as a result, the Company’s equity ownership decreased from 100% to 51%.
For additional information on the Company’s corporate structure, see the Company’s Annual Information Form dated March 30, 2023 for its fiscal
year ended December 31, 2022 which is available on SEDAR at www.sedar.com.
Skyward Specialty
The Company owns a significant ownership 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 under investments in the Company’s consolidated financial statements.
For more information on Skyward Specialty becoming a public company with shares trading on the NASDAQ under symbol SKWD, see Note 17,
Subsequent Events in the Notes to the Financial Statements.
Arena FINCOs
The Arena FINCOs are private companies which 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 under investments in the Company’s consolidated financial statements.
Arena FINCOs refers to WOH, AFHC (as each is defined hereinafter) and each of their respective subsidiaries.
Arena Investors
Arena Investors Group Holdings, LLC (“AIGH” or “Arena Investors”), a private company, through its wholly-owned subsidiaries and subsidiaries
which AIGH has a controlling interest, 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.
- 9 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
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 and profit percentage are 51%. Ownership and profit percentage are 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 March 30,
2023 for its fiscal year ended December 31, 2022 which is available on SEDAR at www.sedar.com.
Accounting for the Company’s Investments
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 Skyward Specialty, Arena FINCOs and ASOF LP are accounted for at fair value through profit or loss
(“FVTPL”). The Company’s investment in Arena Investors is accounted for using the equity method since the Company does not exercise control
but exercises significant influence over Arena Investors. For a detailed description of the accounting and valuation of the Company’s investments,
see Note 4, Investments in the Notes to the Financial Statements.
Dividend income from investments in private entities are reported under “Revenue” in the consolidated statements of profit and comprehensive
income. Changes in the fair value of the Company’s investments in Skyward Specialty, Arena FINCOs and ASOF LP and the Company’s share of
profit and other comprehensive income of Arena Investors are reported under “Net results of investments” in the consolidated statements of profit
and comprehensive income.
- 10 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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, 2022
Opening
Balance
Increase in
unrealized value
of investment
Ending
Balance
Three months ended December 31, 2021
Increase
(decrease) in
unrealized value
of investment
Ending
Balance
Opening
Balance
Investment in Skyward Specialty:
HIIG Partnership-Company’s share of Skyward Specialty
common shares 1
$ 89.0
$ 20.2
$ 109.2
$ 91.7
$ 4.1
$ 95.8
HIIG Partnership-Company’s share of other partnership net
assets
0.4
-
0.4
0.5
(0.1)
0.4
Skyward Specialty convertible preferred shares held by the
Company 2
89.0
$ 178.4
20.3
$ 40.5
109.3
$ 218.9
Year ended December 31, 2022
100.1
$ 192.3
(4.2)
$ (0.2)
95.9
$ 192.1
Year ended December 31, 2021
Opening
Balance
Increase in
unrealized value
of investment
Ending
Balance
Opening
Balance
Increase
(decrease) in
unrealized value
of investment
Ending
Balance
Investment in Skyward Specialty:
HIIG Partnership-Company’s share of Skyward Specialty
common shares 1
$ 95.8
$ 13.4
$ 109.2
$ 86.2
$ 9.6
$ 95.8
HIIG Partnership-Company’s share of other partnership net
assets
Skyward Specialty convertible preferred shares held by the
Company 2
0.4
95.9
$ 192.1
-
0.4
0.5
(0.1)
0.4
13.4
$ 26.8
109.3
$ 218.9
94.1
$ 180.8
1.8
$ 11.3
95.9
$ 192.1
1 The Company’s share of Skyward Specialty common shares held by the Westaim HIIG Limited Partnership (the “HIIG Partnership”).
2 The Skyward Specialty convertible preferred shares were automatically converted in Skyward Specialty common shares on January 18, 2023. See Note 17,
Subsequent Events in the Notes to the Financial Statements.
At December 31, 2022, the Company owned approximately 98.5% (December 31, 2021 – 62.0%) of the HIIG Partnership and the HIIG Partnership
held Skyward Specialty common shares representing approximately 22.2% (December 31, 2021 – 35.5%) of the total fully diluted Skyward Specialty
common shares outstanding. As a result, at December 31, 2022, Westaim’s look-through interest in fully diluted common shares through the HIIG
Partnership was 21.9% (December 31, 2021 – 22.0%) and had a fair value of $109.2 (December 31, 2021 - $95.8).
At December 31, 2022, Westaim’s direct ownership of the Skyward Specialty preferred shares, which are convertible into Skyward Specialty common
shares was $109.3 (December 31, 2021 - $95.9). See Note 17, Subsequent Events in the Notes to the Financial Statements.
At December 31, 2022, the Company’s look-through interest in the HIIG Partnership of 21.9% (December 31, 2021 – 22.0%), combined with its
direct ownership of the Skyward Specialty preferred shares, which were convertible into Skyward Specialty common shares representing 21.9%
(December 31, 2021 – 22.0%) of the fully diluted Skyward Specialty common shares outstanding, resulted in a 43.8% (December 31, 2021 – 44.0%)
look-through interest in Skyward Specialty.
At December 31, 2022, based on the Company’s control of the HIIG Partnership, and its ownership of convertible preferred shares, the Company
held a 44.1% voting interest in Skyward Specialty (December 31, 2021 – 57.5%).
(i) Fair Value
The investment in Skyward Specialty is accounted for at FVTPL. In valuing Skyward Specialty’s fully diluted common shares, using multiple valuation
techniques, fair value was determined to be $15.00 per share of Skyward Specialty’s common stock at December 31, 2022. At December 31, 2021,
the Company used a multiple of 1.0x of the net asset value of Skyward Specialty as the primary valuation technique. 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 $218.9 at December 31, 2022 (December 31, 2021 - $192.1)
and consisted of the aggregate fair value of (i) Skyward Specialty convertible preferred shares held directly by the Company, which were convertible
into 7,285,359 Skyward Specialty common shares at $15.00 per share for $109.3 (December 31, 2021 - $95.9), (ii) its share of the Skyward Specialty
common shares held by the HIIG Partnership of 7,281,780 Skyward Specialty common shares at $15.00 per share for $109.2 (December 31, 2021
- $95.8) and (iii) its share of the other net assets of the HIIG Partnership of $0.4 (December 31, 2021 - $0.4).
- 11 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
The Company recorded an increase in unrealized value on its investment in Skyward Specialty of $40.5 and $26.8 in the three months and year
ended December 31, 2022, respectively, and a decrease in unrealized value on its investment in Skyward Specialty of $0.2 and an increase of $11.3
in the three months and year ended December 31, 2021, respectively.
(ii) Skyward Specialty Supplementary Financial Measures for the three months and year ended December 31, 2022 and 2021
The Company considers certain financial results of Skyward Specialty to be important measures for investors in assessing the Company’s financial
position and performance. Set out in the tables below are certain Skyward Specialty Supplementary Financial Measures, derived from the Skyward
Specialty Fourth Quarter 2022 Results press release dated February 28, 2023 and the Skyward Specialty Form 10-K Annual Report for its fiscal
year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission at www.sec.gov/edgar. Such statements are the
responsibility of the management of Skyward Specialty. Readers are cautioned that the Skyward Specialty Supplementary Financial Measures 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 Supplementary Financial Measures contains certain financial measures and ratios that are not required by or presented in
accordance with US GAAP. These measures are referred to as “non-GAAP financial measures” and are used when planning, monitoring, and
evaluating performance. Skyward Specialty has chosen to exclude the net impact of the Loss Portfolio Transfer (“LPT”), all development on reserves
fully or partially covered by the LPT and amortization of deferred gains associated with recoveries of prior LPT reserve strengthening in certain non-
GAAP metrics, where noted, as the business subject to the LPT is not representative of their continuing business strategy. The business subject to
the LPT is primarily related to policy years 2017 and prior, was generated and managed under prior leadership of Skyward Specialty, and has either
been exited or substantially repositioned during the reevaluation of their portfolio. Skyward Specialty considers these non-GAAP financial measures
to be useful metrics for management and investors to facilitate operating performance comparisons from period to period. While they believe that
these non-GAAP financial measures are useful in evaluating their business, this information should be considered supplemental in nature and is not
meant to be a substitute for revenue or net income, in each case as recognized in accordance with GAAP. In addition, other companies, including
companies in their industry, may calculate such measures differently, which reduces their usefulness as comparative measures.
- 12 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
Skyward Specialty’s Consolidated Balance Sheets
Assets
Investments
Cash and cash equivalents
Restricted cash
Premiums receivable, net of allowance
Reinsurance recoverables
Ceded unearned premium
Deferred policy acquisition costs
Deferred income taxes
Goodwill and intangible assets, net
Other assets
Total assets
Liabilities
Reserves for losses and loss adjustment expenses
Unearned premiums
Deferred ceding commission
Reinsurance and premium payables
Funds held for others
Accounts payable and accrued liabilities
Notes payable
Subordinated debt, net of debt issuance costs
Total liabilities
Stockholders' equity
Stock and additional paid-in capital
Stock notes receivable
Accumulated other comprehensive (loss) income
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
December 31, 2022
December 31, 2021
$ 1,082.4
45.4
79.6
139.2
581.4
157.6
68.9
36.2
89.9
82.8
$ 2,363.4
$ 1,141.8
442.5
29.8
113.7
36.8
48.5
50.0
78.6
$ 1,941.7
$ 577.5
(6.9)
(43.5)
(105.4)
$ 421.7
$ 2,363.4
$ 949.3
42.1
65.2
112.1
536.3
138.0
59.4
33.7
91.4
90.7
$ 2,118.2
$ 979.5
363.3
30.5
119.9
29.6
40.8
50.0
78.5
$ 1,692.1
$ 575.4
(9.1)
4.6
(144.8)
$ 426.1
$ 2,118.2
Tangible stockholders’ equity1
$ 331.8
$ 334.7
1 Tangible stockholders’ equity is a non-GAAP measure calculated as the total stockholders’ equity less goodwill and intangible assets. Skyward Specialty’s definition
of tangible stockholders’ equity may not be comparable to that of other companies and should not be viewed as a substitute for stockholders’ equity calculated in
accordance with GAAP. Tangible stockholders’ equity is used by Skyward Specialty management to evaluate the strength of Skyward Specialty’s balance sheet and
to compare returns relative to this measure.
- 13 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
Skyward Specialty’s Consolidated Statement of Operations and Comprehensive Income (Loss)
Revenues:
Net earned premiums
Commission and fee income
Net investment income
Net investment gains (losses)
Net realized gain on sale of business
Other income (loss)
Total revenues
Expenses:
Losses and loss adjustment expense (“LAE”)
Underwriting, acquisition and insurance expenses
Impairment charges
Interest expense
Amortization expense
Total expenses
Income before income taxes
Income tax expense
Net Income
Comprehensive income (loss):
Net income
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Net change in unrealized (losses) gains on
investments, net of tax
Reclassification adjustment for gains on
securities no longer held, net of tax
Total other comprehensive income (loss)
Comprehensive income (loss)
Skyward Specialty’s Share and Per Share Data
Weighted average basic shares
Weighted average diluted shares
Basic earnings per share
Diluted earnings per share
Basic adjusted earnings per share
Diluted adjusted earnings per share
Annualized ROE2
Annualized adjusted ROE3
Annualized ROTE4
Annualized adjusted ROTE5
Shares outstanding
Fully diluted shares outstanding
Book value per share
Fully diluted book value per share
Fully diluted tangible book value per share
Three months ended December 31
20211
2022
Year ended December 31
2021
2022
$ 170.1
1.6
5.3
10.4
-
-
187.4
$ 133.8
1.3
4.0
7.1
-
1.1
147.3
$ 616.0
5.2
36.9
(15.7)
-
-
642.4
$ 499.8
4.0
24.6
17.1
5.1
(0.4)
550.2
109.0
49.9
-
2.1
0.4
161.4
26.0
5.6
20.4
20.4
0.7
0.1
0.8
$ 21.2
104.6
39.5
-
1.2
0.4
145.7
1.6
0.3
1.3
1.3
(3.5)
0.2
(3.3)
$ (2.0)
402.5
182.2
-
6.4
1.5
592.6
49.8
10.4
39.4
39.4
(48.5)
0.4
(48.1)
$ (8.7)
354.5
138.5
2.8
4.6
1.5
501.9
48.3
10.0
38.3
38.3
(8.2)
0.6
(7.6)
$ 30.7
16,576,760
32,669,335
16,341,011
32,567,203
16,568,393
32,653,194
16,308,712
32,468,048
$ 0.64
$ 0.63
$ 0.37
$ 0.36
19.9%
11.3%
25.5%
14.5%
$ 0.04
$ 0.04
$ 0.24
$ 0.23
1.2%
7.1%
1.6%
9.0%
$ 1.24
$ 1.21
$ 1.84
$ 1.79
9.3%
13.8%
11.8%
17.6%
16,599,666
33,290,638
$ 25.82
$ 12.87
$ 10.17
$ 1.21
$ 1.18
$ 1.14
$ 1.11
9.4%
8.8%
11.9%
11.2%
16,533,620
33,082,691
$ 26.32
$ 13.15
$ 10.39
1 Adjusted to conform to the presentation of the current period financial statements.
2 Annualized ROE is net income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity during the period.
3 Annualized adjusted ROE is adjusted operating income expressed on an annualized basis as a percentage of average beginning and ending stockholders' equity
during the period.
4 Annualized ROTE is net income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders' equity during the period.
5 Annualized adjusted ROTE is adjusted operating income expressed on an annualized basis as a percentage of average beginning and ending tangible stockholders'
equity during the period.
- 14 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
Skyward Specialty results for the three months ended December 31, 2022
Skyward Specialty reported net income of $20.4, or $0.63 per diluted share, for the three months ended December 31, 2022 compared to $1.3, or
$0.04 per diluted share, for the three months ended December 31, 2021. Adjusted operating income (see “Adjusted operating income” below for a
description of this non-GAAP measure) was $11.6, or $0.36 per diluted share, for the three months ended December 31, 2022 compared to $7.6, or
$0.23 per diluted share, for the three months ended December 31, 2021. For the three months ending December 31, 2022 gross written premiums
increased 18.1%, while continuing business grew 21.4% versus the same period in 2021, the combined ratio was 92.4% (2021: 106.8%), the adjusted
combined ratio (see chart below for non-GAAP measure) was 92.8% (2021: 94.8%), net investment income increased 30.6% to $5.3 compared to
the same period in 2021.
Skyward Specialty Premiums
Total continuing business
Exited business
Total gross written premiums
Ceded written premiums
Net Retention
Net written premiums
Net earned premiums
1 Not meaningful.
Three months ended December 31
change
21.4%
(86.1%)
18.1%
2.0%
NM1
27.6%
27.2%
2022
$ 263.9
0.9
$ 264.8
$ (84.8)
68.0%
$ 180.0
$ 170.1
2021
$ 217.3
6.9
$ 224.2
$ (83.2)
62.9%
$ 141.0
$133.8
Year ended December 31
change
31.2%
(92.6%)
21.7%
14.0%
NM1
27.7%
23.2%
2021
$ 867.9
71.9
$ 939.8
$ (410.7)
56.3%
$ 529.1
$ 499.8
2022
$ 1,138.6
5.3
$ 1,143.9
$ (468.4)
59.1%
$ 675.5
$ 616.0
The increase during three months ended December 31, 2022 in gross written premiums, when compared to the same 2021 period, was primarily
driven by double-digit premium growth in the Accident & Health, Captives, Professional Lines, Surety, and Transactional E&S underwriting divisions.
The increase during the year ended December 31, 2022 in gross written premiums, when compared to the same 2021 period, was driven by double-
digit premium growth in each of Skyward Specialty’s eight underwriting divisions.
Underwriting Income (Loss)
Skyward Specialty defines underwriting income (loss) as net income (loss) before income taxes excluding net investment income, net realized and
unrealized gains and losses on investments, impairment charges, interest expense, amortization expense and other income and expenses.
Underwriting income (loss) represents the pre-tax profitability of Skyward Specialty’s underwriting operations and allows Skyward Specialty to
evaluate their underwriting performance without regard to investment income. Skyward Specialty uses this metric as they believe it gives
management and other users of their financial information useful insight into their underlying business performance. Underwriting income (loss)
should not be viewed as a substitute for pre-tax income (loss) calculated in accordance with GAAP, and other companies may define underwriting
income (loss) differently.
(All amounts before federal income tax)
Income before federal income tax
Add:
Interest expense
Amortization expense
Less:
Net investment income
Net investment gains (losses)
Impairment charges
Other income
Underwriting income (loss)
Three months ended December 31
2021
$ 1.6
2022
$ 26.0
Year ended December 31
2021
$ 48.3
2022
$ 49.8
2.1
0.4
5.3
10.4
-
-
$ 12.8
1.2
0.4
4.0
7.1
-
1.1
$ (9.0)
6.4
1.5
36.9
(15.7)
-
-
$ 36.5
4.6
1.5
24.6
17.1
(2.8)
4.7
$ 10.8
- 15 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
Adjusted Loss Ratio / Adjusted Combined Ratio
Skyward Specialty defines adjusted loss ratio and adjusted combined ratio as the corresponding ratio (calculated in accordance with GAAP),
excluding losses and LAE related to the LPT and all development on reserves fully or partially covered by the LPT and amortization of deferred gains
associated with recoveries of prior LPT reserve strengthening. Skyward Specialty uses these adjusted ratios as internal performance measures in
the management of their operations because they believe they give management and other users of their financial information useful insight into
their results of operations and their underlying business performance. Their adjusted loss ratio and adjusted combined ratio should not be viewed
as substitutes for their loss ratio and combined ratio, respectively.
Net earned premiums
Losses and LAE
Less: Pre-tax net impact of LPT
Adjusted losses and LAE
Loss ratio
Less: Net impact of LPT
Adjusted loss ratio
Expense ratio
Combined ratio
Less: Net impact of LPT
Adjusted combined ratio
Three months ended December 31
2021
$ 133.8
2022
$ 170.1
Year ended December 31
2021
$ 499.8
2022
$ 616.0
109.0
(0.7)
$ 109.7
64.0%
(0.4)%
64.4%
28.4%
92.4%
(0.4)%
92.8%
104.6
16.1
$ 88.5
78.2%
12.0%
66.2%
28.6%
106.8%
12.0%
94.8%
402.5
8.6
$ 393.9
65.3%
1.4%
63.9%
28.7%
94.0%
1.4%
92.6%
354.5
16.1
$ 338.4
70.9%
3.2%
67.7%
26.9%
97.8%
3.2%
94.6%
The adjusted loss ratio for the three months and year ended December 31, 2022 improved 1.8 points and 3.8 points, respectively, when compared
to the same 2021 periods. The improvements for the three months and year ended December 31, 2022 were primarily driven by (i) a shift in the mix
of business, (ii) continued run-off of exited business, and (iii) lower catastrophe losses. Catastrophe losses from Winter Storm Elliott added 1.2 points
to adjusted loss ratio for the three months ended December 31, 2022 compared to 2021, which was impacted by 1.9 points of catastrophe losses
from tornadoes in the U.S. Midwest. Catastrophe losses from Hurricane Ian and Winter Storm Elliott added 1.1 points to the year ended December
31, 2022 adjusted loss ratio compared to 2021, which was impacted by 2.4 points of catastrophe losses from tornadoes in the Midwest, Hurricane
Ida and the first quarter winter storms.
The expense ratio decreased 0.2 points and increased 1.8 points for the three months and year ended December 31 2022, respectively, when
compared to the same 2021 periods. The increase in the year ended December 31, 2022, was primarily driven by changes in mix of business
resulting in higher net policy acquisition expenses combined with higher operating expenses due to continued investment in new underwriters and
underwriting teams.
Investment Results
Cash and short-term investments1
Core fixed income
Opportunistic fixed income
Equities
Net investment income
Net unrealized gains (losses) on equity securities still held
Net realized (losses) gains
1 Excludes restricted cash.
Three months ended December 31
2021
$ 0.1
2.5
1.1
0.3
$ 4.0
2022
$ 0.8
5.9
(2.3)
0.9
$ 5.3
Year ended December 31
2021
2022
$ 0.2
$ 1.4
8.8
16.5
12.5
16.8
3.1
2.2
$ 24.6
$ 36.9
$ 11.1
$ (0.7)
$ 6.2
$ 0.9
$ (15.1)
$ (0.6)
$ 15.2
$ 1.9
- 16 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3.
INVESTMENTS (continued)
Net investment income in the three months and year ended December 31, 2022 benefited from increased income in the core fixed income portfolio,
due to (i) a larger asset base as they increased the allocation to this part of the investment portfolio and (ii) higher net investment yields in the core
fixed income portfolio of 3.7% and 3.0%, respectively, compared to 2.2% and 2.3%, respectively, for the same 2021 periods.
Net investment income in the three months ended December 31, 2022 was impacted by a decline in income from the opportunistic fixed income
portfolio, although the result for the year ended December 31, 2022 still benefited from an increase in income from this portfolio when compared to
the same 2021 period.
The investment portfolio had a net investment yield of 3.4% for the year ended December 31, 2022 (2021: 2.7%).
Adjusted Operating Income
Skyward Specialty defines adjusted operating income (a non-GAAP measure) as net income excluding the impact of certain items that may not be
indicative of underlying business trends, operating results, or future outlook, net of tax impact. They use adjusted operating income as an internal
performance measure in the management of their operations because they believe it gives management and other users of their financial information
useful insight into their results of operations and their underlying business performance. Adjusted operating income should not be viewed as a
substitute for net income calculated in accordance with GAAP, and other companies may define adjusted operating income differently.
(All amounts after federal income tax)
Income as reported
Less:
Net impact of LPT
Net investment gains (losses)
Net realized gain on sale of business
Impairment charges
Other income (expenses)
Adjusted operating income
Three months ended December 31
2021
$ 1.3
2022
$ 20.4
Year ended December 31
2021
$ 38.3
2022
$ 39.4
0.6
8.2
-
-
-
$ 11.6
(12.7)
5.6
-
-
0.8
$ 7.6
(6.8)
(12.4)
-
-
-
$ 58.6
(12.7)
13.5
4.0
(2.2)
(0.4)
$ 36.1
Stockholders’ Equity
Skyward Specialty’s stockholders’ equity was $421.7 at December 31, 2022 which represents an increase of 5.5% when compared to stockholders'
equity of $399.8 at September 30, 2022. The increase in stockholders’ equity was primarily due to an increase in net operating income and an
increase in the market value of Skyward Specialty’s investment portfolio.
- 17 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
B. INVESTMENT IN THE ARENA FINCOS
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.
Opening balance
Return of capital to the Company
Unrealized (loss) gain before dividends
Dividends paid to the Company
Ending balance
Three months ended December 31
2021
2022
Year ended December 31
2021
2022
$
$
168.6
(1.9)
(6.1)
(0.5)
160.1
$
$
172.3
-
0.5
-
172.8
$
$
172.8
(1.9)
(2.4)
(8.4)
160.1
$
$
163.0
-
9.8
-
172.8
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 investments, real estate private investments, 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:
Corporate Private Investments
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 Investments
Real property, secured or unsecured mezzanine financings, DIP loans, “A-tranche” loans (senior secured loans) and “B-tranche” loans (junior
secured loans) for real estate properties requiring near-term liquidity, structured letters of credit, real estate loans secured by office buildings, retail
centres, hotels, land, single family homes, multi-family apartments, condominium towers, hospitality providers, health care service providers, and
corporate campuses, leases and lease residuals.
Structured Finance and 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. 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. 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.
- 18 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
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 investments
that it originates or acquires. The operating results of the Arena FINCOs also include gains (losses) on their investments.
(i) Accounting for the Arena FINCOs
The Company’s investment in the Arena FINCOs is accounted for at FVTPL. 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, 2022, in the amount of $160.1
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 $160.1 and $172.8 at December 31, 2022 and 2021,
respectively.
The Company recorded a decrease in the unrealized value of its investments in the Arena FINCOs of $6.6, which was a decrease of $6.1 before
dividends paid to the Company of $0.5 in the three months ended December 31, 2022, and a decrease in the unrealized value of its investments in
the Arena FINCOs of $10.8, which was a decrease of $2.4 before dividends paid to the Company of $8.4 in the year ended December 31, 2022. In
addition, the Arena FINCOs returned capital in the amount of $1.9 in the three months and year ended December 31, 2022. 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. There were no dividends paid or capital returned to the Company in the three months and year ended December 31, 2021.
(ii) Arena FINCOs Supplementary Financial Measures for the three months and year ended December 31, 2022 and 2021
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. Supplementary Financial
Measures related to the Arena FINCOs set out below is unaudited and has been derived from the unaudited financial statements of WOH and AFHC,
the audited financial statements of AOC and the audited consolidated financial statements of AF and its subsidiaries for the years ended December
31, 2022 and 2021 and the unaudited financial statements of AOC, AF and its subsidiaries for the three months ended December 31, 2022 and
2021, 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.
- 19 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
A summary of the net assets of the Arena FINCOs is as follows:
Cash and cash equivalents
Investments:
Loans / private assets
Other securities
Total investments
Other net assets
Due to brokers, net
Senior secured notes payable
Revolving credit facility payable
Net assets of the Arena FINCOs
December 31, 2022
16.7
$
December 31, 2021
36.3
$
161.2
37.8
199.0
7.9
(17.0)
(43.9)
(2.6)
160.1
$
136.8
46.1
182.9
6.0
(1.7)
(43.7)
(7.0)
172.8
$
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.
During 2021, Arena Finance II LLC (“AFII”), one of the Arena FINCOs, secured a revolving credit facility with third party lenders with a commitment
amount of $25.0 and initial termination date of September 30, 2023. Unpaid principal amounts under the revolving credit facility will bear interest at
the 3-month London Interbank Offered Rate (“LIBOR”) plus 2.8%. Additionally, an unused facility fee accrues at a rate of 0.50% per annum and is
payable monthly in arrears. 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.
AFII has 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.
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 (loss) income
Management and asset servicing fees
Incentive fees recovery (expense)
Other operating expenses
Net operating results before holding companies’ expenses
Arena FINCOs holding companies’ expenses:
Advisory fees paid to the Company
Net operating results of the Arena FINCOs
Three months ended December 31
2021
2022
Year ended December 31
2021
2022
$
1.9
(5.5)
(1.1)
(4.7)
(1.0)
0.1
(0.4)
(6.0)
$
4.8
(2.1)
(0.9)
1.8
(1.1)
-
(0.1)
0.6
$
5.2
2.4
(4.1)
3.5
(4.3)
(0.4)
(1.0)
(2.2)
$
10.4
9.0
(3.5)
15.9
(4.2)
(0.9)
(0.8)
10.0
(0.1)
(6.1)
$
(0.1)
0.5
$
(0.2)
(2.4)
$
(0.2)
9.8
$
The Net Return on the investment portfolios of the Arena FINCOs was -3.6% and -1.6% for the three months and year ended December 31, 2022,
respectively, and +0.3% and +6.1% for the three months and year ended December 31, 2021, respectively. See Section 15, Non-GAAP Measures
of this MD&A.
- 20 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
C. INVESTMENT IN ARENA INVESTORS
Changes in the Company’s investment in associates are summarized as follows:
Investment in Arena Investors
Opening balance
Decrease in revolving loan from the Company
The Company’s share of profit and comprehensive income
Ending balance
Three months ended December 31
2021
2022
Year ended December 31
2021
2022
$ 26.8
-
0.1
$ 26.9
$ 20.4
-
5.8
$ 26.2
$ 26.2
-
0.7
$ 26.9
$ 20.2
(4.0)
10.0
$ 26.2
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. 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.
At December 31, 2022, Arena Investors had committed assets under management (“AUM”) of approximately $3.5 billion (December 31, 2021: $2.8
billion). AUM refers to the assets for which Arena Investors provides investment management, advisory or certain other investment-related services.
AUM is generally based on the net asset value of the funds managed by Arena Investors plus any unfunded commitments. Arena Investors’
calculation of AUM may differ from the calculations of other asset managers, and as a result, may not be comparable to similar measures presented
by other asset managers. Arena Investors’ calculations of AUM are not based on any definition set forth in the governing documents of the investment
funds and are not calculated pursuant to any regulatory definitions. At December 31, 2022, AUM included the net assets of the Arena FINCOs and
the Company’s investment in ASOF LP of approximately $163 (December 31, 2021: $176).
(i) 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 was 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 April 1, 2022, under the Associate
Agreements, BP LLC achieved the threshold to increase its equity ownership of Arena Investors from 0% to 49%. At December 31, 2022, the
Company’s equity ownership and profit sharing percentage of Arena Investors is 51%. At December 31, 2021, the thresholds in accordance with
the Associate Agreements had not been met, therefore the Company’s equity ownership of Arena Investors was 100% and its profit sharing
percentage was 51%.
(ii) 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, 2022.
Arena Investors had drawn down the loan facility by $24.0 at December 31, 2022 (December 31, 2021 - $24.0). See Note 4, Investment in Arena
Investors in the Notes to the Financial Statements.
The Company’s investment in Arena Investors is accounted for using the equity method. The carrying amount of the Company’s investment in Arena
Investors was $26.9 and $26.2 at December 31, 2022 and December 31, 2021. The Company’s 51% share of Arena Investors’ profit and
comprehensive profit that amounted to $0.1 and $0.7 for the three months and year ended December 31, 2022, respectively, and $5.8 and $10.0
for the three months and year ended December 31, 2021, respectively, was reported under “Net results of investments” in the consolidated
statements of profit and comprehensive income.
- 21 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
(iii) Arena Investors Supplementary Financial Measures for the three months and year ended December 31, 2022 and 2021
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. Supplementary Financial
Measures related to Arena Investors set out below is unaudited and has been derived from the audited financial statements of AIGH for the years
ended December 31, 2022 and 2021 and the unaudited financial statements of AIGH for the three months ended December 31, 2022 and 2021,
which have been prepared in accordance with US GAAP. Such statements are the responsibility of the management of Arena Investors.
Supplementary Financial Measures includes EBITDA which is a common measure for operating profitability. Management of the Company
concluded that any reconciling items to IFRS are not material.
Supplementary Financial Measures of Arena Investors is as follows:
Supplementary Financial Measures from Arena Investors’ Statement of Financial Position
Cash and cash equivalents
Restricted cash
Arena Investors’ Revolving Loan from the Company
Other net (liabilities) assets
Net assets
Less: net assets attributable to non-controlling interests
Net assets attributable to Arena Investors
Company’s share of Arena Investors’ net assets
Arena Investors’ Revolving Loan from the Company
Carrying amount of the Company’s investment in Arena Investors
December 31, 2022
$ 4.8
28.2
(24.0)
(3.2)
5.8
0.2
$ 5.6
$ 2.9
24.0
$ 26.9
December 31, 2021
$ 2.2
13.4
(24.0)
12.4
4.0
-
$ 4.0
$ 2.2
24.0
$ 26.2
Restricted cash includes deposits received in advance for pre-funded work fees and prepaid deposits primarily from investment loans.
Supplementary Financial Measures from Arena Investors’ Statement of Profit and Comprehensive Income
Three months ended December 31
20211
$ 7.2
2.1
0.2
9.5
Management fees
Asset servicing fees
Other income
Total recurring revenue
Operating expenses (excluding incentive fees compensation
2022
$ 8.2
2.4
1.3
11.9
expense)
Fee related earnings (loss)
Incentive fees
Incentive fees compensation expense
Net incentive fees
EBITDA
Depreciation
Revolving loan interest expense paid to the Company
Taxes
Profit and comprehensive income
Company’s share of profit and comprehensive income of Arena
Investors (51%)
1 Adjusted to conform to the presentation of the current period financial statements.
(11.3)
0.6
(1.0)
1.1
0.1
0.7
(0.1)
(0.3)
-
0.3
(7.0)
2.5
15.4
(6.3)
9.1
11.6
-
(0.3)
-
11.3
Year ended December 31
20211
20221
$ 24.0
$ 31.9
7.0
10.6
0.5
1.2
31.5
43.7
(38.8)
4.9
4.5
(6.2)
(1.7)
3.2
(0.2)
(1.3)
(0.2)
1.5
(31.6)
(0.1)
34.3
(13.1)
21.2
21.1
(0.1)
(1.4)
-
19.6
$ 0.1
$ 5.8
$ 0.7
$ 10.0
The management, asset servicing and incentive fees were generated from the various segregated client accounts including Arena FINCOs and
other managed funds of Arena Investors.
- 22 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
3. INVESTMENTS (continued)
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 at both December 31, 2022 and 2021, is
included under investments in the consolidated statements of financial position. The Company’s decrease in unrealized value on its investment in
ASOF LP was a nominal amount in each of the three months and year ended December 31, 2022, respectively, and was an increase of $0.1 and
$0.3 in the three months and year ended December 31, 2021, 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, 2022 of $36.9
(December 31, 2021 - $39.5). See Note 6, Preferred Securities in the Notes to the Financial Statements.
Canadian Dollar Currency Forward Contracts
At December 31, 2022, the Company had a 188 day C$ exchange forward contract to purchase C$50 million maturing on March 28, 2023. For the
year ended December 31, 2022, the Company settled a C$ exchange forward contract to purchase C$50 million and incurred a realized foreign
exchange loss of $3.0. For the year ended December 31, 2021, the Company settled three C$ exchange forward contracts to purchase C$40 million
each and earned a net realized foreign exchange gain of a nominal amount. The realized foreign exchange loss from the forward contracts for the
year ended December 31, 2022 was more than offset by other realized and unrealized C$ currency net gains on the Company’s underlying C$
currency assets and liabilities, including the currency exposure arising from the Preferred Securities, which resulted in a net unrealized and realized
foreign exchange gain of $0.1 in the year ended December 31, 2022 (for the year ended December 31, 2021: net loss of $0.9). See Note 7, C$
Exchange Forward Contracts and Note 17, Subsequent Events 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 (the “Warrants”) 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, 2022,
a liability of $0.1 (December 31, 2021 - $0.2) 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.
- 23 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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
Share-based compensation (expense) recovery
Foreign exchange (loss) gain
Interest on preferred securities
Derivative warrant gain
Income tax recovery (expense)
Three months ended December 31
2021
2022
Year ended December 31
2021
2022
$
$
$
0.3
0.5
0.3
1.1
34.0
(1.2)
(0.2)
(0.2)
-
(0.2)
(0.2)
(0.5)
-
(2.5)
0.2
$
$
$
$
$
$
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)
1.3
8.4
1.0
10.7
16.7
(4.8)
(0.9)
(1.5)
-
(0.9)
0.1
(1.9)
0.1
(9.8)
0.4
$
$
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)
GAAP profit and comprehensive income
$
32.8
$
6.7
$
18.0
$
28.3
5.1 Revenue
In the three months ended December 31, 2022, the Company earned interest on loans made to Arena Investors of $0.3 (2021 - $0.3), received
dividends paid to the Company from the Arena FINCOs of $0.5 (2021 - $nil), and earned advisory fees from Skyward Specialty of $0.1 (2021 - $0.1)
and from the Arena FINCOs and Arena Investors of $0.2 (2021 - $0.2).
In the year ended December 31, 2022, the Company earned interest on loans made to Arena Investors of $1.3 (2021 - $1.4), received dividends
paid to the Company from the Arena FINCOs of $8.4 (2021 - $nil), and earned advisory fees from Skyward Specialty of $0.5 (2021 - $0.5) and from
the Arena FINCOs and Arena Investors of $0.5 (2021 - $0.5).
5.2 Net Results of Investments
In the three months ended December 31, 2022, the net results of investments consisted of an increase of $40.5 in the unrealized value of the
investment in Skyward Specialty (2021 – decrease of $0.2), a decrease of $6.6 in the unrealized value of the investments in the Arena FINCOs,
which was a decrease of $6.1 before dividends paid of $0.5 (2021 – increase of $0.5 before dividends paid of $nil), the Company’s share of income
and comprehensive income of Arena Investors of $0.1 (2021 – $5.8) and a decrease in unrealized value of the Company’s investment in ASOF LP
of a nominal amount (2021 – increase of $0.1).
In the year ended December 31, 2022, the net results of investments consisted of an increase of $26.8 in the unrealized value of the investment in
Skyward Specialty (2021 – $11.3), a decrease of $10.8 in the unrealized value of the investments in the Arena FINCOs, which was a decrease of
$2.4 before dividends paid of $8.4 (2021 – increase of $9.8 before dividends paid of $nil), the Company’s share of profit and comprehensive income
of Arena Investors of $0.7 (2021 - $10.0) and a decrease in unrealized value of the Company’s investment in ASOF LP of a nominal amount (2021
– increase of $0.3).
See discussion in Section 3, Investments of this MD&A.
- 24 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
5. ANALYSIS OF FINANCIAL RESULTS (continued)
5.3 Expenses
Salaries and benefits in the three months and year ended December 31, 2022 were comparable to the corresponding periods in the prior year.
General, administrative and other expenses in the three months and year ended December 31, 2022 were comparable to the corresponding periods
in the prior year.
Professional fees increased by $0.5 in the year ended December 31, 2022 when compared to the corresponding period in the prior year due to
certain expenses relating to non-recurring consultation and legal fees. Professional fees in the three months ended December 31, 2022 were
comparable to the corresponding period in the prior year.
Changes in share-based compensation expense from period to period result from the issuance of DSUs in lieu of director fees, as well as movement
in the Company’s share price which affects the per unit valuation of outstanding restricted share units (“RSUs”) and deferred share units (“DSUs”).
See Section 8, Liquidity and Capital Resources of this MD&A for additional information on the Company’s share-based compensation plans.
The Company holds C$ 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 (loss) gain in the three months and year ended
December 31, 2022 and 2021:
Foreign exchange (losses) gains relating to:
- Liabilities for RSUs and DSUs
- Preferred securities
- Canadian dollar currency forward contracts
- Other
Three months ended December 31
2021
2022
Year ended December 31
2021
2022
$ (0.2)
(0.8)
0.8
-
$ (0.2)
$ (0.1)
-
0.1
-
$ -
$ 0.5
2.6
(3.0)
-
$ 0.1
$ (0.1)
(0.3)
(0.4)
(0.1)
$ (0.9)
- 25 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION
The Company’s assets, liabilities and shareholders’ equity as at the dates indicated below consisted of the following:
Assets
Cash
Other assets
Investments
Deferred tax asset
Liabilities
Accounts payable and accrued liabilities
Income tax payable
Preferred securities
Derivative warrant liability
Deferred tax liability
Shareholders’ equity
Total liabilities and shareholders’ equity
6.1 Cash
December 31, 2022
December 31, 2021
$
$
$
$
3.4
0.6
409.1
0.2
413.3
12.9
0.2
36.9
0.1
-
50.1
363.2
413.3
$
$
$
$
6.6
0.8
394.3
-
401.7
13.7
0.2
39.5
0.2
0.4
54.0
347.7
401.7
At December 31, 2022, the Company had cash of $3.4 (December 31, 2021 - $6.6).
6.2 Other Assets
Other assets were $0.6 and $0.8 at December 31, 2022 and 2021, respectively. Other assets at December 31, 2022 included right of use asset of
$0.3 (December 31, 2021 - $0.4), and other receivables of $0.3 (December 31, 2021 - $0.4). See Note 3, Other Assets in the Notes to the Financial
Statements.
6.3 Investments
Investments were $409.1 and $394.3 at December 31, 2022 and 2021, respectively, and consisted of the investments in: Skyward Specialty, the
Arena FINCOs, Arena Investors, and ASOF LP.
The Company’s investment in Skyward Specialty, which is accounted for at FVTPL, was determined to be $218.9 and $192.1 at December 31, 2022
and 2021, respectively. See discussion in Section 3, Investment in Skyward Specialty of this MD&A.
The Company’s investment in the Arena FINCOs, which is accounted for at FVTPL, was determined to be $160.1 and $172.8 at December 31, 2022
and 2021, respectively. See discussion in Section 3, Investment in the Arena FINCOs of this MD&A.
The Company’s investment in Arena Investors, which is accounted for using the equity method, was determined to be $26.9 and $26.2 at December
31, 2022 and 2021, respectively. See discussion in Section 3, Investment in Arena Investors of this MD&A.
The Company’s investment in ASOF LP, which is accounted for at FVTPL, was determined to be $3.2 at each of December 31, 2022 and 2021.
See discussion in Section 3, Investment in ASOF LP of this MD&A.
- 26 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION (continued)
6.4 Deferred Tax Asset
At December 31, 2022, the Company reported a deferred tax asset of $0.2 (December 31, 2021 – deferred tax liability $0.4) primarily related to
temporary differences of its United States taxable income and it is probable that taxable profits will be available against which those temporary
differences can be utilized. Canadian deferred tax assets are not recognized and cannot be netted against deferred tax liabilities of another country.
See Note 2(k), Summary of Significant Accounting Policies Income Taxes and Note 13, Income Taxes in the Notes to Financial Statements.
6.5 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities were $12.9 at December 31, 2022 (December 31, 2021 - $13.7). Accounts payable and accrued liabilities
at December 31, 2022 included liabilities related to accrued employee bonuses of $2.4 (December 31, 2021 - $2.6), RSUs of $5.8 (December 31,
2021 - $5.9), DSUs of $2.6 (December 31, 2021 - $2.2), lease liability of $0.3 (December 31, 2021 - $0.4), interest accrued on the Preferred Securities
of $0.5 (December 31, 2021 - $0.5), fair value of Canadian dollar currency forward contract of $0.5 (December 31, 2021 - $0.4), and other accrued
liabilities of $0.8 (December 31, 2021 - $1.7). 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, 2022, the Company had an income tax payable of $0.2 (December 31, 2021 - $0.2).
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, 2022 of $36.9 (December 31, 2021 - $39.5). See discussion in Section 4, Financing of this MD&A.
6.8 Derivative Warrant Liability
At December 31, 2022, a liability of $0.1 (December 31, 2021 - $0.2) 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 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, 2022
378.6
17.7
(2.2)
(30.9)
363.2
$
$
December 31, 2021
381.1
17.7
(2.2)
(48.9)
347.7
$
Westaim had 141,386,718 Common Shares outstanding at December 31, 2022 and 142,686,718 Common Shares at December 31, 2021. In the
year ended December 31, 2022, Westaim cancelled 1,300,000 Common Shares that it had acquired at a cost of $2.5 through its normal course
issuer bid (“NCIB”). In the year ended December 31, 2021, Westaim cancelled 500,000 Common Shares that it had acquired at a cost of $1.1
through the prior NCIB. For further details, see Note 10, Share Capital in the Notes to the Financial Statements.
Contributed Surplus
The Company had $17.7 in contributed surplus at December 31, 2022 and 2021.
- 27 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
6. ANALYSIS OF FINANCIAL POSITION (continued)
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $2.2 at December 31, 2022 and 2021 comprised cumulative exchange differences from currency
translation as a result of a change in presentation currency from the C$ to the US$ on August 31, 2015.
Deficit
The decrease in deficit of $18.0 from December 31, 2021 to December 31, 2022 is due to the profit and comprehensive income for the year ended
December 31, 2022.
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.
Skyward Specialty is well positioned to take advantage of the hard 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 that helps minimize the impact of prior years’ claims development and effectively manages its investment portfolio
to result in improved investment returns. Skyward Specialty has an AM Best rating “A-“ with a Stable Outlook. Skyward Specialty’s objective is to
build a top quartile property and casualty specialty publicly traded insurer trading at or above peer multiples of book value.
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.
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, 2022, Westaim had 141,386,718 Common Shares outstanding (December 31, 2021 – 142,686,718), with a stated capital of $378.6
(December 31, 2021 - $381.1).
There were no Class A or Class B preferred shares outstanding at December 31, 2022 or 2021. For further details, see Note 10, Share Capital in
the Notes to the Financial Statements.
Dividends
No dividends were paid by the Company in the years ended December 31, 2022 and 2021.
- 28 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
8.
LIQUIDITY AND CAPITAL RESOURCES (continued)
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, subject to the terms of the Option Plan, the aggregate number of Common Shares which may be
reserved for issuance thereunder 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, subject to the terms of the plan, the number of Common Shares issuable under such plan, together
with all other security-based compensation arrangements of Westaim, shall not exceed 10% of the aggregate number of Common Shares
outstanding. As the DSUs are settled solely in cash, they are not included in this 10% limitation.
At December 31, 2022 and 2021, 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, 2022 and 2021. 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. There were no RSUs exercised in the year
ended December 31, 2022 and 59,063 RSUs exercised in the year ended December 31, 2021.
At December 31, 2022, 1,355,133 DSUs were vested and outstanding (December 31, 2021 – 1,093,603 DSUs). 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, 2022 and 2021, no DSUs were redeemed by the Company.
At December 31, 2022, accounts payable and accrued liabilities included amounts related to outstanding RSUs of $5.8 (December 31, 2021 - $5.9)
and outstanding DSUs of $2.6 (December 31, 2021 - $2.2).
For further details, see Note 11, Share-based Compensation in the Notes to the Financial Statements.
Market for Securities
Westaim’s Common Shares are listed and posted for trading on the TSXV under the symbol “WED”.
Cash Flow Objectives
The Company manages its liquidity with a view to ensuring that there is sufficient cash to meet all financial commitments and obligations as they fall
due including having access to liquidity from dividends from the Arena FINCOs. The Company has sufficient funds to meet its financial obligations.
As part of pursuing one or more new opportunities, the Company may from time to time issue shares from treasury.
The following tables illustrate the duration of the financial assets of the Company compared to its financial obligations:
December 31, 2022
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
Total financial obligations
Net financial (obligations) assets
One year or
less
One to five
years
No specific
date / later than
five years
$ 3.4
0.3
-
3.7
4.4
-
4.4
$ (0.7)
$ -
-
24.0
24.0
-
-
-
$ 24.0
$ -
-
385.1
385.1
8.4
36.9
45.3
$ 339.8
Total
$ 3.4
0.3
409.1
412.8
12.8
36.9
49.7
$ 363.1
- 29 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
8.
LIQUIDITY AND CAPITAL RESOURCES (continued)
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
Total financial obligations
Net financial assets
One year or
less
One to five
years
No specific
date / later than
five years
$
$
6.6
0.4
-
7.0
5.2
-
5.2
1.8
$
$
-
-
24.0
24.0
-
-
-
24.0
$
$
-
-
370.3
370.3
8.1
39.5
47.6
322.7
$
$
Total
6.6
0.4
394.3
401.3
13.3
39.5
52.8
348.5
The Company’s investment guidelines stress preservation of capital and market liquidity to support payment of liabilities. The matching of the
duration of financial assets and liabilities is monitored with a view to ensuring that all obligations will be met.
9. RELATED PARTY TRANSACTIONS
Related parties include key management personnel 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 12, 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.
Management used an indication of value from market participants as the primary valuation technique in determining the fair value of the Company’s
investment in Skyward Specialty and net asset value as the primary valuation technique in determining the fair value of the Company’s investment
in the Arena FINCOs at December 31, 2022. Management determined that these valuation techniques produced the best indicator of the fair value
of the investments in private entities December 31, 2022. The significant unobservable inputs used in the valuation of Skyward Specialty and the
Arena FINCOs at December 31, 2022 were the equity of each of the entities at December 31, 2022, value of the price per Skyward Specialty common
share offered by a market participant, and the multiple applied to net assets of the Arena FINCOs. For a detailed description of the valuation of the
Company’s investments in private entities, see Note 4, Investments in the Notes to the Financial Statements. 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.
Other key estimates include the Company’s fair value of share-based compensation and unrecognized deferred tax assets. Details of these items
are disclosed in Note 11 and Note 13, respectively, to the Company’s audited consolidated financial statements for the years ended December 31,
2022 and 2021.
11. CRITICAL ACCOUNTING POLICIES AND RECENTLY ADOPTED AND PENDING ACCOUNTING PRONOUNCEMENTS
A description of the Company’s accounting policies is disclosed in Note 2, Summary of Significant Accounting Policies in the Notes to the Financial
Statements.
At December 31, 2022, there were no new pronouncements that impacted the Company.
- 30 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
12. QUARTERLY FINANCIAL INFORMATION
Revenue
Increase (decrease) in unrealized value of
investments, less dividends
Net (expenses) recovery of expenses
Income tax recovery (expense)
Profit (loss) and comprehensive income (loss)
Q4
2022
$ 1.1
Q3
2022
$ 3.4
Q2
2022
$ 3.2
Q1
2022
$ 3.0
Q4
2021
$ 0.6
Q3
2021
$ 0.6
Q2
2021
$ 0.6
Q1
2021
$ 0.6
34.0
(2.5)
0.2
(2.7)
(2.4)
0.3
$ 32.8 $ (16.7) $ (1.6)
(18.5)
(2.5)
0.9
3.9
(2.4)
(1.0)
$ 3.5
6.2
0.1
(0.2)
$ 6.7
3.2
(2.2)
-
$ 1.6
9.9
0.4
-
$ 10.9
12.1
(3.6)
-
$ 9.1
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 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 March 30, 2023 for its fiscal year ended December 31, 2022 which is available on
SEDAR at www.sedar.com.
- 31 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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, 2022
Number of
positions
24
36
49
188
297
Corporate Private Investments
Real Estate Private Investments
Structured Finance and Assets
Other Securities
Investments by Strategy
Cost
$
50.1
47.0
59.1
44.0
200.2
$
Corporate Private Investments
Real Estate Private Investments
Structured Finance and Assets
Other Securities
Number of
positions
28
33
42
100
203
Cost
$
57.2
30.0
56.2
40.8
184.2
$
$
Fair value
60.2
45.8
55.2
37.8
199.0
$
$
Fair value
54.9
29.1
52.8
46.1
182.9
$
Percentage of
investments at
fair value
30.2%
23.0%
27.8%
19.0%
100.0%
%
Debt investments
7.6%
15.9%
21.7%
5.8%
51.0%
%
Equity, hard
assets and real
estate owned
investments
22.6%
7.1%
6.1%
13.2%
49.0%
December 31, 2021
Percentage of
investments at
fair value
30.0%
15.9%
28.9%
25.2%
100.0%
%
Debt investments
11.2%
12.5%
21.9%
10.3%
55.9%
%
Equity, hard
assets and real
estate owned
investments
18.8%
3.4%
7.0%
14.9%
44.1%
Investments in Corporate Private Investments, Real Estate Private Investments, 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, 2022
December 31, 2021
Loans / Private Assets
North America
Europe
Asia/Pacific
Latin America
Other Securities 1
North America
Asia/Pacific
Europe
Other
Latin America
1
Net of short positions.
Cost
Fair value
$ 111.1
30.1
13.4
1.6
156.2
$ 111.8
35.1
12.5
1.8
161.2
30.7
5.2
7.8
0.3
-
44.0
30.6
3.9
3.1
0.2
-
37.8
Percentage of
investments at
fair value
Cost
Fair value
56.2%
17.6%
6.3%
0.9%
81.0%
15.4%
2.0%
1.5%
0.1%
0.0%
19.0%
$
112.8
19.2
11.4
-
143.4
13.5
11.5
8.3
4.6
2.9
40.8
$
107.7
18.6
10.5
-
136.8
24.7
11.4
5.5
3.5
1.0
46.1
Percentage of
investments at
fair value
58.9%
10.2%
5.7%
0.0%
74.8%
13.5%
6.2%
3.0%
2.0%
0.5%
25.2%
$
200.2
$
199.0
100.0%
$
184.2
$
182.9
100.0%
- 32 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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, 2022
December 31, 2021
Cost
Fair value
Percentage of
investments at fair
value
Loans / Private Assets
Corporate Private Investments
Basic Materials
Business Services
Consumer Products
Financial Services
Oil and Gas (1)
Other Assets
Retail
Real Estate Private Investments
Commercial
Hospitality
Land - Commercial Development
Land - Multi-Family Development
Land - Single-Family Development
Mixed Use
Retail
Residential
Structured Finance and Assets
Lease/Equipment
Other Assets
Consumer Assets
$ 0.5
9.9
2.5
1.4
20.7
14.5
0.6
50.1
$ 0.6
10.0
2.6
0.8
27.4
18.1
0.7
60.2
1.4
8.9
6.5
4.7
4.4
0.4
6.8
13.9
47.0
1.7
37.5
19.9
59.1
1.3
9.8
6.8
2.7
3.9
0.4
6.7
14.2
45.8
2.5
36.7
16.0
55.2
Total Loans / Private Assets
156.2
161.2
Other Securities (2)
Basic Materials
Biotechnology
Consumer Products
Diversified
Energy
Financial Services
Foreign Exchange Forwards/Options
Fund Investment
Healthcare Services
Industrial
Information Technology
Interest Rate Derivatives
Mining
Oil and Gas
Real Estate
Retail
Technology
Telecommunications
2.0
0.8
11.9
9.0
0.3
2.5
-
3.2
0.5
3.1
1.6
0.4
0.1
0.8
2.0
0.1
3.4
2.3
44.0
$ 200.2
2.1
0.9
8.9
7.8
0.4
2.4
(1.0)
3.6
0.7
2.3
1.2
0.4
0.1
1.3
0.8
0.1
3.5
2.3
37.8
$ 199.0
0.3%
5.0%
1.3%
0.4%
13.7%
9.1%
0.4%
30.2%
0.6%
4.9%
3.4%
1.4%
2.0%
0.2%
3.4%
7.1%
23.0%
1.3%
18.4%
8.1%
27.8%
81.0%
1.1%
0.4%
4.5%
3.9%
0.2%
1.2%
(0.5)%
1.8%
0.4%
1.1%
0.6%
0.2%
0.1%
0.7%
0.4%
0.1%
1.7%
1.1%
19.0%
100.0%
Cost
Fair value
$ -
16.1
0.6
1.1
21.3
15.6
2.5
57.2
$ -
11.3
0.6
1.1
25.2
14.2
2.5
54.9
0.9
3.7
8.1
5.8
2.2
-
-
9.3
30.0
3.6
36.5
16.1
56.2
0.9
3.7
7.6
5.1
2.1
-
-
9.7
29.1
4.7
37.7
10.4
52.8
143.4
136.8
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
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
Percentage of
investments at
fair value
0.0%
6.2%
0.3%
0.6%
13.8%
7.8%
1.3%
30.0%
0.5%
2.0%
4.2%
2.8%
1.1%
0.0%
0.0%
5.3%
15.9%
2.6%
20.6%
5.7%
28.9%
74.8%
0.8%
0.1%
3.4%
2.4%
0.5%
3.2%
0.2%
0.0%
0.7%
2.0%
0.9%
0.0%
1.1%
1.3%
0.9%
0.0%
0.0%
7.7%
25.2%
100.0%
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
of other derivatives to substantially reduce all risk.
2 Net of short positions.
- 33 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
December 31, 2022
Total coupon
(including PIK) (2)
LTV (3)
n/a (14)
n/a (14)
n/a (14)
12.75%
14.00%
11.00%
10.00%
n/a (14)
3.50%
n/a (14)
10.00%
13.77%
9.50%
20.00%
10.00%
n/a (14)
n/a (14)
10.00%
12.29%
10.00%
n/a (14)
10.00%
11.00%
14.00%
14.00%
n/a (14)
11.79%
n/a (14)
n/a (14)
n/a (14)
100%+
27.0%
27.0%
17.0%
n/a (14)
100%+
n/a (14)
0.0%
84.0%
10.0%
66.7%
3.0%
n/a (14)
n/a (14)
1.4%
100%+
2.3%
n/a (14)
2.2%
4.0%
43.0%
34.6%
n/a (14)
77.4%
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES (continued)
Details of the Loan and Private Asset positions of the Arena FINCOs are as follows:
Details of Loan and Private Asset Positions
Investments by industry
Ref. no.
Corporate Private Investments
CPC-3222
CPC-2209
CPC-3349
CPC-5325
CPC-7044
CPC-6859
CPC-4985
CPC-5143EQY
CPC-2170
CPC-7227
CPC-5830
CPC-5027
CPC-7018
CPC-8155
CPC-6677
CPC-6374
CPC-2397
CPC-5913
CPC-7677
CPC-5914
CPC-7312EQY
CPC-6373
CPC-5856
CPC-1010
CPC-5889
CPC-7167
Subtotal / Weighted average %
Oil & Gas
Other Assets
Business Services
Oil & Gas
Consumer Products
Business Services
Oil & Gas
Oil & Gas
Oil & Gas
Other Assets
Business Services
Retail
Business Services
Basic Materials
Business Services
Business Services
Financial Services
Business Services
Financial Services
Business Services
Business Services
Business Services
Business Services
Oil & Gas
Consumer Products
Business Services
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
13.6
12.2
5.4
2.7
3.6
1.3
1.3
1.3
1.7
0.7
0.5
0.6
0.5
0.6
0.4
0.0
1.0
0.3
0.5
0.3
0.3
0.2
0.1
0.2
0.0
0.0
49.3
13.8
13.8
5.4
2.9
2.5
1.4
1.3
1.3
1.2
0.7
0.6
0.6
0.5
0.5
0.5
0.1
1.0
0.4
0.4
0.3
0.3
0.3
0.1
0.2
0.0
0.0
50.1
North America
Europe
Asia Pacific
North America
North America
Asia Pacific
North America
North America
North America
North America
Europe
North America
Europe
Asia Pacific
Europe
Europe
North America
Europe
North America
Europe
North America
Europe
Europe
North America
North America
North America
Equity
Equity
Equity
1st Lien
1st Lien
1st Lien
1st Lien
Hard Asset
1st Lien
Asset Pool
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
Equity
Equity
1st Lien
1st Lien
1st Lien
Equity
1st Lien
1st Lien
1st Lien
1st Lien
Equity
20.3
17.4
4.6
3.3
2.6
1.6
1.5
1.4
0.7
0.7
0.7
0.7
0.6
0.6
0.5
0.5
0.4
0.4
0.4
0.3
0.3
0.3
0.2
0.2
0.0
0.0
60.2
- 34 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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 are as follows:
Details of Loan and Private Asset Positions (continued)
December 31, 2022
Principal (1)
Investments at
cost
Investments at
fair value
Geographic
location
Collateral
Total coupon
(including PIK) (2)
5.0
5.0
4.5
4.4
2.5
2.4
2.3
2.3
1.8
1.4
1.1
1.1
1.1
1.1
1.0
0.9
0.9
0.8
0.8
0.7
0.6
0.5
0.5
Europe
North America
North America
1st Mortgage
Real Property
1st Mortgage
North America
Europe
North America
1st Mortgage
1st Mortgage
Real Property
North America
North America
Asia Pacific
Europe
North America
1st Mortgage
Real Property
1st Mortgage
Real Property
1st Mortgage
North America
Europe
North America
Real Property
1st Mortgage
1st Mortgage
North America
Asia Pacific
1st Mortgage
1st Mortgage
Europe
North America
Asia Pacific
Real Property
1st Mortgage
1st Mortgage
Europe
Asia Pacific
1st Mortgage
1st Mortgage
North America
Asia Pacific
Asset Pool
1st Mortgage
0.4
Asia Pacific
1st Mortgage
0.4
Asia Pacific
1st Mortgage
0.4
0.4
0.4
0.3
0.3
Europe
North America
North America
Europe
North America
Real Property
1st Mortgage
1st Mortgage
Real Property
Real Property
13.80%
n/a (9)
19.00%
9.68%
12.50%
n/a (9)
7.00%
n/a (9)
13.00%
n/a (9)
12.94%
n/a (9)
15.69%
19.38%
9.53%
18.00%
n/a (9)
12.10%
8.00%
16.69%
20.00%
n/a (4)
15.00%
12.00%
9.18%
n/a (9)
24.00%
18.00%
n/a (9)
n/a (9)
LTV (3)
93.7%
n/a (9)
65.0%
30.0%
78.0%
n/a (9)
30.0%
n/a (9)
71.0%
n/a (9)
100%+
n/a (9)
58.0%
62.0%
50.1%
57.0%
n/a (9)
100%+
73.0%
67.0%
91.0%
n/a (4)
76.0%
40.0%
88.0%
n/a (9)
75.2%
51.5%
n/a (9)
n/a (9)
0.2
Asia Pacific
1st Mortgage
11.50%
100%+
0.1
Asia Pacific
1st Mortgage
Europe
North America
Real Property
1st Mortgage
Asia Pacific
North America
1st Mortgage
Real Property
0.1
0.1
0.0
0.0
45.8
11.00%
n/a (9)
15.00%
12.00%
n/a (9)
77.0%
n/a (9)
53.0%
40.0%
n/a (9)
13.59%
67.5%
Investments by industry
RECPC-6592
RECPC-6996
RECPC-2560
RECPC-7319
RECPC-5905
RECPC-8192
RECPC-7586
RECPC-2683
RECPC-7027
RECPC-7390
RECPC-6506TL1
RECPC-7654
RECPC-4220
RECPC-7488
RECPC-8135
RECPC-2592
Ref. no.
Real Estate Private Investments
Hospitality
RECPC-6932
Residential
RECPC-1068S4
Land - Commercial
RECPC-2277
Development
Retail
Residential
Land - Multi-Family
Development
Retail
Residential
Residential
Hospitality
Land - Commercial
Development
Hospitality
Residential
Land - Commercial
Development
Hospitality
Land - Single-Family
Development
Hospitality
Residential
Land - Single-Family
Development
Residential
Land - Single-Family
Development
Commercial
Land - Single-Family
Development
Land - Single-Family
Development
Land - Single-Family
Development
Commercial
Hospitality
Mixed Use
Commercial
Land - Multi-Family
Development
Land - Single-Family
Development
Land - Single-Family
Development
Commercial
Land - Commercial
Development
Residential
Land - Commercial
Development
RECPC-7554
RECPC-6129
RECPC-8622
RECPC-6334
RECPC-4698
RECPC-6384EQ
RECPC-6194
RECPC-6048
RECPC-1047
RECPC-6854
RECPC-5476
RECPC-8417
RECPC-1015
RECPC-8118
RECPC-6505
RECPC-6995
RECPC-6242
3.6
5.1
3.2
4.5
2.1
4.3
2.3
2.3
1.3
1.3
2.0
0.9
0.9
1.1
0.9
0.9
0.6
0.8
0.8
0.6
0.6
0.4
0.5
0.4
0.4
0.6
0.4
0.4
0.2
0.4
0.4
0.1
0.2
0.1
0.0
0.2
4.7
5.1
3.2
4.5
2.4
4.3
2.3
2.3
1.7
1.3
2.0
0.9
1.0
1.1
0.9
1.0
0.7
0.8
0.8
0.6
0.7
0.4
0.5
0.4
0.5
0.6
0.4
0.4
0.2
0.4
0.4
0.1
0.2
0.1
0.0
0.1
Subtotal / Weighted average %
44.8
47.0
- 35 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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 are as follows:
Details of Loan and Private Asset Positions (continued)
Investments by industry
Ref. no.
Structured Finance and Assets
Other Assets
SF-2239
Other Assets
CI-4898
Other Assets
CI-6785
Other Assets
CI-3045
Other Assets
CI-2651
Consumer
CA-6834
Consumer
CA-5596C
Consumer
CA-5898
Consumer
CA-4946
Other Assets
CI-1999EQ
Lease/Equipment
CI-2201
Other Assets
SF-8578
Consumer
CA-7491
Other Assets
CI-2000
Other Assets
CI-3978
Other Assets
CI-5554
Consumer
CA-6444
Other Assets
SF-7254
Consumer
CA-7474
Other Assets
CI-6253
Other Assets
CI-5177
Consumer
CA-6154
Lease/Equipment
CI-6006
Other Assets
CI-6750
Other Assets
CI-6648TL
Consumer
CA-7092
Other Assets
CI-6016
Consumer
CA-8720
Other Assets
CI-8104
Other Assets
CI-6004
Other Assets
CI-6565
Other Assets
CI-7166
Other Assets
CI-7492
Consumer
CA-4718
Other Assets
CI-1520
Consumer
CA-6288
Other Assets
CI-1035
Consumer
CA-4727
Other Assets
CI-4967
Other Assets
CI-2064
Other Assets
SF-5396
Other Assets
CI-7985
Consumer
CA-8621
Consumer
CA-1052F
Consumer
CA-2729
Other Assets
CI-8048
Other Assets
CI-2686
Consumer
CA-7573
Other Assets
CA-6328
Other Assets
CI-7721
Consumer
CA-1052S
Other Assets
CI-7140
Other Assets
CI-1018
CI-1999
Other Assets
Subtotal / Weighted average %
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
5.0
4.0
3.6
1.3
4.0
2.3
2.3
2.5
1.8
3.0
0.9
1.6
1.7
0.9
1.7
1.4
1.1
1.2
1.2
1.2
0.9
0.7
0.8
0.9
0.8
0.5
0.6
0.5
0.5
0.5
0.5
0.4
0.3
0.4
0.2
0.2
0.5
0.1
0.2
0.0
0.2
0.2
0.2
2.6
0.0
0.0
0.2
0.0
0.0
0.0
1.5
1.0
0.2
0.0
58.3
5.7
4.0
3.6
1.3
4.3
2.3
2.3
2.5
1.8
3.0
0.9
1.6
1.7
0.9
1.8
1.4
1.1
1.2
1.2
1.1
0.9
0.9
0.8
0.9
0.8
0.6
0.5
0.5
0.5
0.5
0.5
0.4
0.3
0.4
0.2
0.2
0.5
0.1
0.2
0.0
0.2
0.2
0.2
2.6
0.0
0.0
0.2
0.0
0.0
0.0
1.5
0.6
0.2
0.0
59.1
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
North America
Europe
North America
Europe
North America
North America
North America
North America
North America
Latin America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
North America
Asia Pacific
North America
North America
North America
North America
North America
North America
6.5
4.2
3.6
2.8
2.6
2.4
2.3
2.1
1.8
1.8
1.6
1.6
1.6
1.4
1.4
1.4
1.3
1.2
1.2
1.1
1.0
0.9
0.9
0.9
0.8
0.6
0.5
0.5
0.5
0.5
0.5
0.5
0.4
0.4
0.3
0.3
0.3
0.3
0.3
0.2
0.2
0.2
0.2
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
55.2
1st Lien
1st Lien
1st Lien
Asset Pool
Hard Asset
Asset Pool
Asset Pool
Asset Pool
1st Lien
Equity
Hard Asset
1st Lien
Asset Pool
Equity
Hard Asset
1st Lien
Asset Pool
1st Lien
Asset Pool
1st Lien
Hard Asset
1st Lien
1st Lien
Asset Pool
1st Lien
1st Lien
1st Lien
Asset Pool
Hard Asset
Hard Asset
1st Lien
Hard Asset
Hard Asset
Asset Pool
1st Lien
1st Lien
1st Lien
1st Lien
Hard Asset
2nd Lien
1st Lien
1st Lien
Asset Pool
1st Lien
1st Lien
Hard Asset
Equity
Asset Pool
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
1st Lien
December 31, 2022
Total coupon
(including PIK) (2)
LTV (3)
n/a (10)
16.80%
13.50%
n/a (7)
n/a (14)
n/a (10)
n/a (10)
n/a (10)
16.39%
n/a (14)
n/a (4)
9.50%
n/a (10)
n/a (14)
n/a (4)
10.00%
n/a (10)
20.00%
n/a (10)
13.88%
n/a (14)
18.50%
13.79%
24.00%
16.20%
9.00%
15.00%
n/a (10)
n/a (14)
n/a (14)
18.00%
n/a (14)
n/a (14)
n/a (10)
n/a (11)
10.00%
9.90%
29.00%
n/a (14)
15.00%
15.00%
15.00%
n/a (10)
15.66%
n/a (10)
n/a (14)
n/a (14)
n/a (10)
12.00%
10.88%
15.66%
n/a (14)
9.26%
n/a (16)
15.16%
29.0%
42.1%
97.0%
29.4%
n/a (14)
n/a (10)
n/a (10)
n/a (10)
89.0%
n/a (14)
n/a (4)
23.8%
n/a (10)
n/a (14)
n/a (4)
77.0%
n/a (10)
69.3%
n/a (10)
44.0%
n/a (14)
62.0%
100.0%
86.0%
86.0%
29.0%
88.7%
n/a (10)
n/a (14)
n/a (14)
86.0%
n/a (14)
n/a (14)
n/a (10)
48.0%
60.8%
100.0%
66.0%
n/a (14)
67.0%
100%+
86.0%
n/a (10)
100.0%
100.0%
n/a (14)
n/a (14)
n/a (10)
99.0%
44.0%
100.0%
n/a (14)
100.0%
n/a (16)
57.5%
Total / Weighted average %
$ 152.4
$ 156.2
$ 161.2
13.70%
66.0%
- 36 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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 are as follows:
Details of Loan and Private Asset Positions (continued)
December 31, 2022
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, 2022. 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, 2022.
4
Investment is not a loan. Metric is not applicable.
5 Denotes subordinate position within the structure.
6
7
Interest not accrued on loans purchased as non-performing.
Investment represents a credit pool purchase with no stated interest rate.
8 Investment is a maturity default past its maturity date and has an uncertain holding period as of December 31, 2022.
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
- 37 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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 are as follows:
Details of Loan and Private Asset Positions
Investments by industry
Ref. no.
Corporate Private Investments
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
- 38 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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 are 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)
Investments by industry
Ref. no.
Real Estate Private Investments
REPC-1068S4
REPC-2277
REPC-2683
REPC-4220
REPC-7488
REPC-5591
REPC-6162
REPC-5905
REPC-2592
REPC-2497
REPC-2560
REPC-7319
REPC-6592
REPC-7027
REPC-6384EQ
REPC-5476
REPC-4698
REPC-6854
REPC-6129TL
REPC-6506TL1
REPC-6505
REPC-6242
REPC-6194
REPC-6048
REPC-6334
REPC-7193
REPC-6996
REPC-6995
REPC-6054
REPC-6276
REPC-1047
REPC-5348
REPC-1015
Residential
Land - Commercial
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
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%
- 39 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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 (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)
n/a (12)
15.00%
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)
8.0%
85.0%
14. ADDITIONAL ARENA FINCOs’ INVESTMENT SCHEDULES (continued)
Details of the Loan and Private Asset positions of the Arena FINCOs are as follows:
Details of Loan and Private Asset Positions (continued)
Investments by industry
Ref. no.
Structured Finance and Assets
Other Assets
CI-3045
Other Assets
CI-4898
Other Assets
CI-2651
Other Assets
CI-1800
Other Assets
CI-3978
Other Assets
CI-1999EQY
Lease/Equipment
CI-2201
Other Assets
CI-6253
Other Assets
CI-2000
Other Assets
CI-6752
Other Assets
CI-7004
Other Assets
CI-6750
Other Assets
CI-6016
Lease/Equipment
CI-4282
Lease/Equipment
CI-6006
Other Assets
CI-7164
Other Assets
CI-6648TL
Other Assets
CI-2064
Other Assets
CI-6565
Lease/Equipment
CI-5777
Other Assets
CI-2686
Other Assets
CI-5177
Other Assets
CI-7166
Other Assets
CI-6785
Other Assets
CI-1520
Other Assets
CI-4967
Other Assets
CI-7140
Other Assets
CI-5554A
Other Assets
CI-1035
Other Assets
CI-5554B
Other Assets
CI-5554
Other Assets
CI-7406EQY
Other Assets
CI-1999
Other Assets
CI-5372
Other Assets
CI-5113
Other Assets
CI-1018
Other Assets
CI-2808
Other Assets
SF-2239
Other Assets
SF-5396
Principal (1)
Investments
at cost
Investments
at fair value
Geographic
location
Collateral
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
3.5
0.2
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
North America
North America
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
First Lien
First Lien
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
3.1
0.2
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
3.3
0.2
- 40 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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 are 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)
Structure Finance and Assets (continued)
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
56.3
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
56.2
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
52.8
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%
14.67%
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%
56.1%
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.
3 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
Interest not accrued on loans purchased as non-performing.
Investment represents a credit pool purchase with no stated interest rate.
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
- 41 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(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. 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, 2022
December 31, 2021
$
363.2
$
347.7
5.8
0.1
369.1
5.9
0.2
353.8
$
$
141,386,718
142,686,718
2,975,198
144,361,916
2,975,198
145,661,916
$
$
$
2.56
3.46
2.63
$
$
$
2.43
3.07
2.50
1 See Note 11, Share-based Compensation in the Notes to the Financial Statements. 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, Derivative Warrant Liability in the Notes to the Financial Statements. 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, 2022
and 2021.
3 See Note 11, Share-based Compensation in the Notes to the Financial Statements. No adjustments were made for options at December 31, 2022 and 2021 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: 1.35360 at December 31, 2022 and 1.26410 at
December 31, 2021.
(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.
- 42 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
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 information which reflect the
current expectations of management regarding the Company’s future growth, results of operations, performance and business prospects and
opportunities. 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.
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); 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;
increased costs of Skyward Specialty being a public company; material weaknesses identified in Skyward Specialty’s internal control over financial
reporting; Skyward Specialty’s reduced reporting and disclosure obligations as an emerging growth company; the volatility or decline in Skyward
Specialty’s stock price and operating results; substantial future sales of shares of Skyward Specialty’s common stock or the perception thereof;
changes in Skyward Specialty’s underwriting guidelines or strategy without stockholder approval; anti-takeover provisions in Skyward Specialty’s
organizational documents; the Court of Chancery of the State of Delaware has the exclusive forum for substantially all Skyward Specialty disputes;
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
- 43 -
The Westaim Corporation
Management’s Discussion and Analysis
Year ended December 31, 2022
(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)
16. CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION (continued)
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 herein or in the Company’s annual
report or other public filings.
The Company disclaims any intention or obligation to revise forward-looking statements whether as a result of new information, future developments
or otherwise except as required by law. All forward-looking statements are expressly qualified in their entirety by this cautionary statement.
- 44 -
March 30, 2023
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
- 45 -
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, 2022 and 2021, 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, 2022 and 2021, and its financial performance and its cash
flows for the years then ended in accordance with International Financial Reporting Standards ("IFRS").
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards ("Canadian
GAAS"). Our responsibilities under those standards are further described in the Auditor’s Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the Company in
accordance with the ethical requirements that are relevant to our audit of the financial statements in
Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our
audit of the consolidated financial statements for the year ended December 31, 2022. These matters
were addressed in the context of our audit of the consolidated financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these matters.
Investments— Refer to Notes 2 and 4 to the financial statements
Key Audit Matter Description
The Company’s investment portfolio includes private investments for which reliable quotations are not
readily available, or for which there is no closing bid price. Management uses various valuation
methodologies with unobservable market inputs in its determination of the fair value of private
investments. The valuation methodologies used in estimating the fair value of these private investments
vary based on the specific characteristics of the private investments.
The valuation of the private investments is inherently subjective and involves the use of significant
management judgment and unobservable market inputs. As a result, the procedures related to the
valuation methodologies and unobservable market inputs required a high degree of auditor judgment
and increased audit effort, including the use of fair value specialists.
How the Key Audit Matter Was Addressed in the Audit
With the assistance of fair value specialists, our audit procedures related to the valuation methodologies
and unobservable market inputs used by management to estimate the fair value of the private
investments included the following, among others:
• Evaluated the appropriateness of the methodologies used in the valuation of private investments and
the reasonableness of any significant changes in valuation methodologies or significant unobservable
market inputs;
• Reviewed relevant internal and external information, including industry information, to assess the
reasonability of unobservable market inputs in instances where these inputs were more subjective;
• Evaluated significant judgments and estimates at the underlying private investments through
oversight of the auditors of the private investments and assessing financial information from the
auditors to understand significant judgments and estimates, significant findings or issues identified,
actions taken to address them, and conclusions reached;
• For certain investments, developed independent fair value estimates by using private investments
financial information, which was compared to agreements or underlying source documents provided
to the Company by the private investments, and available market information from third party
sources such as market spreads, market multiples, and leverages; and
• For certain investments, evaluated management’s fair value estimates by comparing to subsequent
transactions, taking into account changes in market or investment specific conditions.
Other Information
Management is responsible for the other information. The other information comprises:
• Management's Discussion and Analysis
• The information, other than the financial statements and our auditor’s report thereon, in the Annual
Report.
Our opinion on the financial statements does not cover the other information and we do not express any
form of assurance conclusion thereon. In connection with our audit of the financial statements, our
responsibility is to read the other information identified above and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or our knowledge obtained in
the audit, or otherwise appears to be materially misstated.
We obtained Management's Discussion and Analysis and the Annual Report prior to the date of this
auditor’s report. If, based on the work we have performed on this other information, we conclude that
there is a material misstatement of this other information, we are required to report that fact in this
auditor’s report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with IFRS, and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless management either intends to liquidate the Company or to
cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company's financial reporting process.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the
basis of these financial statements.
As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting
a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company's ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the Company to cease to continue
as a going concern.
• 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.
From the matters communicated with those charged with governance, we determine those matters that
were of most significance in the audit of the consolidated financial statements of the current period and
are therefore the key audit matters. We describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our report because the adverse consequences
of doing so would reasonably be expected to outweigh the public interest benefits of such
communication.
The engagement partner on the audit resulting in this independent auditor’s report is Eric Leopold.
Chartered Professional Accountants
Licensed Public Accountants
March 30, 2023
The Westaim Corporation
Consolidated Statements of Financial Position
(thousands of United States dollars)
ASSETS
Cash
Income tax receivable (note 13)
Other assets (note 3)
Investments
Investment in Skyward Specialty (note 4)
Investment in Arena FINCOs (note 4)
Investment in Arena Investors (note 4)
Investment in ASOF LP (note 4)
Deferred tax asset (note 13)
LIABILITIES
Accounts payable and accrued liabilities (note 5)
Income tax payable (note 13)
Preferred securities (note 6)
Derivative warrant liability (note 8)
Deferred tax liability (note 13)
Commitments and contingent liabilities (note 9)
SHAREHOLDERS' EQUITY
Share capital (note 10)
Contributed surplus (note 2m)
Accumulated other comprehensive loss (note 2n)
Deficit
December 31
2022
December 31
2021
$
$
$
$
$
3,434
-
552
218,879
160,113
26,957
3,179
409,128
178
413,292
12,940
245
36,939
94
-
50,218
$
$
6,558
64
766
192,011
172,866
26,174
3,222
394,273
-
401,661
13,706
153
39,554
156
415
53,984
378,563
17,735
(2,227)
(30,997)
363,074
413,292
$
381,127
17,735
(2,227)
(48,958)
347,677
401,661
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
- 50 -
The Westaim Corporation
Consolidated Statements of Profit and Comprehensive Income
(thousands of United States dollars except share and per share data)
Revenue
Interest income (note 12)
Dividend income from investment in Arena FINCOs (note 4 and 12)
Fee income (note 12)
Net results of investments
Increase in unrealized value of investment in Skyward Specialty (note 4)
(Decrease) increase in unrealized value of investment in Arena FINCOs, less dividends (note 4)
Share of income from investment in Arena Investors (note 4)
(Decrease) increase in unrealized value of investment in ASOF LP (note 4)
Net expenses
Salaries and benefits
General, administrative and other
Professional fees
Site restoration (recovery)
Share-based compensation expense (note 11)
Foreign exchange (gain) loss
Interest on preferred securities (note 6)
Derivative warrant (gain) (note 8)
Profit before income tax
Income tax recovery (expense) (note 13)
Profit and comprehensive income
Earnings per share (note 14)
Basic
Diluted
Weighted average common shares outstanding - basic
Weighted average common shares outstanding - diluted
The accompanying notes are an integral part of these consolidated financial statements.
- 51 -
Year Ended December 31
2022
2021
$
$
1,382
8,350
950
10,682
26,868
(10,853)
783
(43)
16,755
4,811
860
1,525
-
874
(80)
1,900
(57)
9,833
17,604
357
1,405
-
950
2,355
11,235
9,797
10,004
326
31,362
4,984
849
1,038
(4,112)
510
912
1,989
(884)
5,286
28,431
(221)
$
$
$
17,961
$
28,210
0.13 $
0.12 $
0.20
0.19
141,901,513
144,876,711
143,079,869
146,109,113
The Westaim Corporation
Consolidated Statements of Changes in Equity
Year ended December 31, 2022
(thousands of United States dollars)
Share
Capital
Contributed
Surplus
Accumulated Other
Comprehensive Loss
Deficit
Total
Equity
Balance at January 1, 2022
$
381,127
$
17,735
$
(2,227)
$
(48,958)
$
347,677
Cancellation of common shares (note 10)
Profit and comprehensive income
(2,564)
-
-
-
-
-
-
17,961
(2,564)
17,961
Balance at December 31, 2022
$
378,563
$
17,735
$
(2,227)
$
(30,997)
$
363,074
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
Cancellation of common shares (note 10)
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
The accompanying notes are an integral part of these consolidated financial statements.
- 52 -
The Westaim Corporation
Consolidated Cash Flow Statements
(thousands of United States dollars)
Operating activities
Profit
Increase in unrealized value of investment in Skyward Specialty (note 4)
Decrease (increase) in unrealized value of investment in Arena FINCOs, less dividends (note 4)
Share of income from investment in Arena Investors (note 4)
Decrease (increase) in unrealized value of investment in ASOF LP (note 4)
Share-based compensation expense (note 11)
Share-based compensation payments (note 11)
Site restoration (recovery)
Depreciation and amortization
Unrealized foreign exchange (gain) loss
Derivative warrant gain (note 8)
Change in income tax receivable, payable and deferred (note 13)
Net changes in other non-cash balances
Change in other assets
Change in other accounts payable and accrued liabilities
Cash used in operating activities
Investing activities
Purchase of capital assets
Repayment of loan made to Arena Investors (note 4)
Return of capital from investments in Arena FINCOs (note 4)
Cash provided from investing activities
Financing activities
Purchase and cancellation of Common Shares (note 10)
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.
Year Ended December 31
2022
2021
$
17,961
(26,868)
10,853
(783)
43
874
-
-
141
(3,105)
(57)
(437)
64
(1,146)
(2,460)
-
-
1,900
1,900
(2,564)
(2,564)
(3,124)
6,558
3,434
$
28,210
(11,235)
(9,797)
(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
1,932
$
1,984
$
$
$
- 53 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
1
Nature of Operations
The Westaim Corporation (“Westaim”) was incorporated on May 7, 1996 by articles of incorporation under the Business Corporations Act
(Alberta). Westaim’s head office is located at Suite 1700, 70 York Street, Toronto, Ontario, Canada. These consolidated financial statements
were authorized for issue by the Board of Directors of Westaim on March 30, 2023.
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”) (as
defined in note 4), Arena FINCOs (as defined in note 4) and Arena Investors (as defined in note 4). Westaim’s common shares (“Common
Shares”) are listed and posted for trading on the TSX Venture Exchange (the “TSXV”) under the symbol “WED”.
All currency amounts are expressed in thousands of United States dollars (“US$”), the functional and presentation currency of the Company,
except per share data, unless otherwise indicated.
2
Summary of Significant Accounting Policies
The significant accounting policies used to prepare these consolidated financial statements are as follows:
(a) Basis of preparation
These consolidated financial statements are prepared in compliance with International Financial Reporting Standards (“IFRS”).
The 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. Investments accounted for at FVTPL consist of Skyward Specialty (including Westaim HIIG Limited Partnership (the “HIIG
Partnership”)), the Arena FINCOs and Arena Special Opportunities Fund, LP (“ASOF LP”). See note 4 for investments’ definitions.
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 and is reported under “Investment in Arena Investors” in
the consolidated statements of financial position, with the Company’s share of profit and comprehensive income of Arena Investors reported
under “Net results of investments” in the consolidated statements of profit and comprehensive income.
(b) Functional and presentation currency
The US$ is the functional and presentation currency of the Company. IAS 21 “The Effects of Changes in Foreign Exchange Rates” describes
functional currency as the currency of the primary economic environment in which an entity operates. A significant majority of the Company’s
revenues and costs are earned and incurred in US$, respectively.
(c) Use of estimates
The preparation of financial statements requires management to make estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates and changes in estimates are recorded in the reporting period in which
they are determined. Key estimates include the fair value of investments classified as FVTPL, fair value of share-based compensation, fair
value of derivative warrant liability, and unrecognized deferred tax assets and liabilities.
- 54 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
2
Summary of Significant Accounting Policies (continued)
(d) Judgments made by management
Key areas where management has made difficult, complex or subjective judgments in the process of applying the Company’s accounting
policies, often as a result of matters that are inherently uncertain, include determining that the Company meets the definition of an investment
entity under IFRS 10, valuation techniques for fair value determination of investments classified as FVTPL, applying the equity method of
accounting for associates and determining that the Company’s functional currency is the US$. For additional information on these judgments,
see note 4 for investments 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 and comprehensive
income.
From time to time, the Company may enter into foreign exchange forward contracts to manage certain foreign currency exposures arising from
foreign currency denominated transactions. The Company has not designated any foreign exchange forward contracts as accounting hedges.
Any resulting foreign exchange gain or loss arising from the foreign exchange forward contracts is included in the consolidated statements of
profit and comprehensive income.
(f) Revenue recognition
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, 2022, the Company’s cash consisted of cash on deposit in both C$ and US$.
(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.
- 55 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(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 Skyward Specialty, Arena FINCOs and ASOF LP are classified as FVTPL and are carried at fair value. At initial
recognition, these investments were measured at cost, which was 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 and comprehensive income for the period in which they arise. Transaction costs on the
investments are expensed as incurred.
Investment in Arena Investors was initially recorded at cost and subsequently adjusted to recognize the Company’s share of profit and other
comprehensive income of Arena Investors and any dividends and/or distributions received from Arena Investors.
Investments in financial assets and instruments that are not traded in an active market, including private entities, are generally valued initially at
the cost of acquisition on the basis that such cost is a reasonable estimate of fair value. Such investments are subsequently revalued using
accepted industry valuation techniques. The Company considers a variety of methods and makes assumptions that are based on market
conditions existing at each period end date. Valuation techniques used may include initial acquisition cost, net asset value, discounted cash
flow analysis, comparable recent arm’s length transactions, comparable publicly traded company metrics, reference to other instruments that
are substantially the same, option pricing models and other valuation techniques commonly used by market participants. Any sale, size or other
liquidity restrictions on the investment are also considered by management in its determination of fair value. Due to the inherent uncertainty of
valuation, management’s estimated values may differ significantly from the values that would have been used had an active market for the
investments existed, and the differences could be material.
The Company may use internally developed models, which are usually based on valuation methods and techniques generally recognized as
accepted within the industry. Valuation models are used primarily to value unlisted equity and debt securities for which no market quotes exist
or where markets were or have been inactive during the financial period. Some of the inputs to these models may not be observable and are
therefore estimated based on assumptions. The output of a model is always an estimate or approximation of a value that cannot be determined
with certainty, and valuation techniques employed may not fully reflect all factors relevant to the positions the Company holds. Valuations are
therefore adjusted, where appropriate, to allow for additional factors including model risk, liquidity risk and counterparty risk.
Management is responsible for performing fair value measurements included in the Company’s consolidated financial statements for each
reporting period. The Company prepares a detailed valuation for each reporting period describing the valuation processes and procedures
undertaken by management. The applicable valuation memoranda are provided to members of the Company’s audit committee and all Level 3
valuation results are reviewed with the audit committee as part of its review of the Company’s consolidated financial statements.
(k) Income taxes
Income tax expense is recognized in the consolidated statements of profit and comprehensive income. Current tax, based on taxable income in
countries where the Company operates, may differ from profit and comprehensive income because of items of income or expense that are
taxable or deductible in other years and items that are never taxable or deductible.
Deferred tax assets are generally recognized for all deductible temporary income tax differences to the extent that it is probable that taxable
profits will be available against which those deductible temporary differences can be utilized. Deferred tax liabilities are generally recognized
for all taxable temporary differences. Deferred tax assets and liabilities are determined based on the enacted or substantively enacted tax laws
and rates that are anticipated to apply in the year of realization. The measurement of deferred tax assets and liabilities reflects the tax
consequences that would follow from the manner in which the Company expects to recover or settle the carrying amount of the related assets
and liabilities. The carrying amount of the deferred tax asset is reduced to the extent that it is no longer probable that sufficient taxable profits
will be available to allow all or part of the asset to be recovered.
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.
- 56 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(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 and comprehensive income for the period in which they arise.
(m) Contributed surplus
When share capital of the Company is repurchased by the Company, the amount by which the cost to repurchase the shares exceeds the
average carrying value of the shares is included in contributed surplus. The cost of stock options was recognized over the period from the issue
date to the vesting date and recorded as contributed surplus.
(n) Accumulated other comprehensive loss
Accumulated other comprehensive loss consists of cumulative exchange differences from currency translation as a result of a change in
presentation currency from C$ to US$ on August 31, 2015.
(o) Share-based compensation
The Company maintains share-based compensation plans, which are described in note 11. 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.
(p) Earnings per share
Basic earnings per share is calculated by dividing profit by the weighted average number of Common Shares outstanding during the reporting
period. See note 14 for the calculation of the weighted average number of Common Shares outstanding.
Diluted earnings per share is calculated by dividing profit by the weighted average number of shares outstanding during the reporting period
after adjusting both amounts for the effects of all dilutive potential Common Shares, which consist of options, RSUs and warrants. Anti-dilutive
potential Common Shares are not included in the calculation of diluted earnings per share.
$
December 31, 2022
19
242
291
552
$
$
December 31, 2021
34
368
364
766
$
3
Other Assets
Other assets consist of the following:
Capital assets
Right of use asset
Accounts receivable and other
- 57 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
3
Other Assets (continued)
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 and comprehensive income. 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 and comprehensive income.
The right of use asset recorded for the Company’s office premises was $242 and $368 at December 31, 2022 and December 31, 2021,
respectively. The depreciation on the right of use asset was $126 in each of the years ended December 31, 2022 and 2021.
The lease liability recorded for the Company’s office premises was $261 and $413 at December 31, 2022 and December 31, 2021, respectively.
The lease payments were $132 in each of the years ended December 31, 2022 and 2021, and the interest expense on the lease liability was
$5 and $6 in the years ended December 31, 2022 and 2021, respectively. The Company recorded an unrealized foreign exchange gain relating
to the lease liability of $25 and $2 in the years ended December 31, 2022 and 2021, respectively.
4
Investments
The Company’s principal investments consist of its investment in Skyward Specialty, Arena FINCOs and Arena Investors. Investments in
Skyward Specialty and Arena FINCOs are measured at FVTPL and the investment in Arena Investors is accounted for using the equity method.
Place of
establishment
Principal place
of business
Ownership interest at
December 31, 2022
Ownership interest at
December 31, 2021
Skyward Specialty1
Arena FINCOs
Arena Investors
Delaware, U.S.
Delaware, U.S.
Delaware, U.S.
Texas, U.S.
New York, U.S.
New York, U.S.
43.8% owned by the Company1
100% owned by the Company
51% owned by the Company2
44.0% owned by the Company1
100% owned by the Company
51% beneficially owned by the
Company2
1 Skyward Specialty includes the Company’s ownership in the HIIG Partnership which is established and operates in Ontario, Canada. See note 4 investment in Skyward
Specialty for details of the Company’s ownership in Skyward Specialty and note 17 subsequent events.
2 Legal equity ownership is 51% (December 31, 2021 - 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”. Effective April 1, 2022, BP LLC achieved the threshold to increase its
equity ownership of Arena Investors from 0% to 49% and as a result, the Company’s equity ownership decreased from 100% to 51%.
The Company’s investments in Skyward Specialty and Arena FINCOs are classified as FVTPL and are carried at fair value under investments
in the consolidated statements of financial position. Changes in fair value are reported under "Net results of investments" in the consolidated
statements of profit and comprehensive income.
The table below summarizes the fair value hierarchy under which the Company’s investments classified as FVTPL 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.
- 58 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
The Company’s investments classified as FVTPL are as follows:
December 31, 2022
- Skyward Specialty
- Arena FINCOs
- ASOF LP
December 31, 2021
- Skyward Specialty
- Arena FINCOs
- ASOF LP
Fair value
Level 1
Level 2
Level 3
$
218,879
160,113
3,179
$ 382,171
$
Fair value
Level 1
$ 192,011
172,866
3,222
$ 368,099
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 218,879
160,113
3,179
$
382,171
Level 3
$ 192,011
172,866
3,222
$ 368,099
Level 2
$
$
There were no transfers among Levels 1, 2 and 3 during the years ended December 31, 2022 and 2021.
Investment in Skyward Specialty
The Company’s investment in Skyward Specialty consists of the following:
Year ended December 31, 2022
Year ended December 31, 2021
Increase
(decrease) in
unrealized
value of
investment
Opening
Balance
Increase
(decrease) in
unrealized
value of
investment
Ending
Balance
Ending
Balance
Opening
Balance
Investment in Skyward Specialty:
Company’s share of Skyward Specialty common
shares held by the HIIG Partnership
$ 95,785
$ 13,442
$ 109,227
$ 86,177
$ 9,608
$ 95,785
Company’s share of other net assets of the HIIG
Partnership
Skyward Specialty convertible preferred shares
held by the Company
394
(22)
372
522
(128)
394
95,832
$ 192,011
13,448
$ 26,868
109,280
$ 218,879
94,077
$ 180,776
1,755
$ 11,235
95,832
$ 192,011
At December 31, 2022, the Company’s $218,879 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 $109,280, (ii) its share of the Skyward Specialty common shares
held by the HIIG Partnership of $109,227, and (iii) its share of the other net assets of the HIIG Partnership of $372. 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, 2022, the Company’s direct ownership of the Skyward Specialty preferred shares, which are convertible into 7,285,359
Skyward Specialty common shares, represented 21.9% (December 31, 2021 – 22.0%) of the fully diluted Skyward Specialty common shares
outstanding. On January 18, 2023 the Skyward Specialty preferred shares were converted to Skyward Specialty common shares. See note 17
for subsequent events.
At December 31, 2022, the Company owned approximately 98.5% (December 31, 2021 – 62.0%) of the HIIG Partnership and the HIIG
Partnership held Skyward Specialty common shares representing approximately 22.2% (December 31, 2021 – 35.5%) of the total fully diluted
Skyward Specialty common shares outstanding. As a result, at December 31, 2022, Westaim’s look-through interest in Skyward Specialty
common shares through the HIIG Partnership was 21.9% (December 31, 2021 – 22.0%).
The Company’s direct ownership of the Skyward Specialty preferred shares, combined with its interest in the HIIG Partnership, resulted in a
43.8% look-through interest in Skyward Specialty at December 31, 2022 (December 31, 2021 – 44.0%).
- 59 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
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 for the years ended December 31, 2022 and 2021. See note
17 for subsequent events.
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 $218,879 at December 31, 2022 and $192,011 at December 31, 2021.
At December 31, 2022, the Company’s estimated fair value of Skyward Specialty common shares held (directly or indirectly) by the Company
was supported by using multiple valuation techniques including a series of discussions with various market participants. The market participants’
valuation was determined through the process Skyward Specialty initiated in 2022 with third party firms to establish a public market through an
initial public offering of the Skyward Specialty common shares (the “IPO”). This fair value of Skyward Specialty common shares was used by
the Company to fair value its investment in Skyward Specialty common shares held by the HIIG Partnership and the Skyward Specialty
convertible preferred shares held directly by Westaim. On November 14, 2022, Skyward Specialty filed a registration statement on Form S-1
with the U.S. Securities and Exchange Commission (“SEC”) relating to a proposed IPO of shares of its common stock. The process resulted
with a recommendation in December 2022 from Skyward Specialty management and the external advisors to the Skyward Specialty board of
directors, indicating that there were market participants who would participate in the IPO with Skyward Specialty common shares having a
trading price in the range of $14 to $16 per share following a 4 for 1 reverse stock split (the “Reverse Stock Split”) and the conversion of Skyward
Specialty’s preferred shares. Westaim’s management selected $15 per Skyward Specialty share at December 31, 2022 as the best estimate
of fair value for its valuation for Skyward Specialty’s common shares. The Skyward Specialty convertible preferred shares were valued at their
common share equivalent on an as converted basis. Unless otherwise indicated, all references herein to the number of or price per Skyward
Specialty common share are after giving effect to the Reverse Stock Split.
At December 31, 2022, the Company’s investment in Skyward Specialty was $218,879 consisting of the aggregate of: (i) Skyward Specialty
convertible preferred shares held directly by the Company as converted to 7,285,359 Skyward Specialty common shares at $15 per share for
$109,280, (ii) the Company’s share of the Skyward Specialty common shares held by the HIIG Partnership of 7,281,780 Skyward Specialty
common shares at $15 per share for $109,227, and (iii) the Company’s share of the fair value of other net assets of the HIIG Partnership of
$372. The carrying values of the HIIG Partnership’s other net assets, consisting of monetary assets and liabilities including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities, which approximates their fair values due to the short maturity of
these financial instruments. See note 17 for subsequent events.
At December 31, 2021, the Company used a multiple of net asset value as the primary valuation technique and arrived at the fair value of the
Company’s investment in Skyward Specialty fully diluted common shares held by the HIIG Partnership, other net assets held by the HIIG
Partnership and the Skyward Specialty convertible preferred shares held directly by Westaim. Fair value was determined to be 1.0x the adjusted
stockholders’ equity of Skyward Specialty at December 31, 2021.
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 multiples of net asset value, 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 certainty, the 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 $26,868 and $11,235 in the years ended
December 31, 2022 and 2021, respectively, in the consolidated statements of profit and comprehensive income.
For purposes of assessing the sensitivity of the Skyward Specialty per share value on the valuation of the Company’s investment in Skyward
Specialty, if the value of a Skyward Specialty common share was higher by $1.00 per share, the fair value of the Company’s investment in
Skyward Specialty at December 31, 2022 would have increased by approximately $14,567 (December 31, 2021 - $14,567) and the change in
the unrealized value of investment in Skyward Specialty for the year ended December 31, 2022 would have increased by approximately $14,567
(for the year ended December 31, 2021 - $14,567). If the value of a Skyward Specialty common share at December 31, 2022 was lower by
$1.00 per share, an opposite effect would have resulted.
,
- 60 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
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.
Arena FINCOs are private companies which 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 investment in the Arena FINCOs is accounted for at FVTPL in the Company’s consolidated financial statements.
The Company’s investment in the Arena FINCOs consists of the following:
Opening balance
Return of capital from the Arena FINCOs to the Company
(Decrease) increase in unrealized value before dividends
Dividends paid by the Arena FINCOs to the Company
Ending balance
FVTPL
Year ended December 31
2021
$ 163,069
-
9,797
-
$ 172,866
2022
$ 172,866
(1,900)
(2,503)
(8,350)
$ 160,113
The Company’s investment in the Arena FINCOs is accounted for at FVTPL and was determined to be $160,113 at December 31, 2022 and
$172,866 at December 31, 2021.
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, 2022 in the amount of $160,113 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,
2022. This same valuation technique was used to determine the fair value of the Company’s investment in the Arena FINCOs of $172,866 at
December 31, 2021.
The significant unobservable inputs used in the valuation of the Arena FINCOs at December 31, 2022 were the aggregate equity of the Arena
FINCOs at December 31, 2022 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, 2022, as described below (December 31, 2021 – 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, revolving credit
facility 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.
- 61 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
•
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.
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 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 a decrease in the unrealized value of its investment in the Arena FINCOs of $2,503 before dividends paid of $8,350 in
the year ended December 31, 2022 in the consolidated statements of profit and comprehensive income. In addition, Arena FINCOs returned
capital in the amount of $1,900 in the year ended December 31, 2022. 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. There were no dividends paid or capital returned in the year
ended December 31, 2021.
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, 2022 was higher by $1,000, the fair value of the Company’s investment in the Arena FINCOs
at December 31, 2022 would have increased by $1,000 (December 31, 2021 - $1,000) and the change in the unrealized value of the investment
in the Arena FINCOs for the year ended December 31, 2022 would have increased by $1,000 (for the year ended December 31, 2021 - $1,000).
If the equity of the Arena FINCOs at December 31, 2022 was lower by $1,000, an opposite effect would have resulted.
Investment in Arena Investors
Arena Investors Group Holdings, LLC (“AIGH”), a private company, through its wholly-owned subsidiaries and subsidiaries which AIGH has a
controlling interest, 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.
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 Arena Investors and share up to 75% of the profit of Arena Investors 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 April 1, 2022,
under the Associate Agreements, BP LLC achieved the threshold to increase its equity ownership of Arena Investors from 0% to 49%. At
December 31, 2022, the Company’s equity ownership of Arena Investors and its profit sharing percentage is 51%. At December 31, 2021, the
thresholds in accordance with the Associate Agreements had not been met, therefore the Company’s equity ownership of Arena Investors was
100% and its profit sharing percentage was 51%.
- 62 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
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 Arena Investors. The Company’s investment in Arena Investors 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 Arena Investors:
Assets
Liabilities
Net assets
Less: net assets attributable to non-controlling interests
Net assets attributable to Arena Investors
Company’s share
Arena Investors’ Revolving Loan with the Company
Carrying amount of the Company’s investment in Arena Investors
Financial information of Arena Investors:
Revenue
Operating expenses 1
Profit and comprehensive income
Profit and comprehensive income attributable to non-controlling interests
Profit and comprehensive income attributable to Arena Investors
December 31, 2022
December 31, 2021
$ 86,525
(80,798)
5,727
178
$ 5,549
$ 2,957
24,000
$ 26,957
$ 69,301
(65,290)
4,011
-
$ 4,011
$ 2,174
24,000
$ 26,174
Year ended December 31
2021
2022
$ 48,727
(47,011)
1,716
178
$ 1,538
$ 65,723
(46,107)
19,616
-
$ 19,616
Company’s share of profit and comprehensive income of Arena Investors (51%)
$ 10,004
1 Includes interest expense on the Arena Investors’ Revolving Loan granted by the Company of $1,344 and $1,397 in the years ended December 31, 2022 and
2021, respectively.
$ 783
The following table shows the continuity of the carrying amount of the Company’s investment in Arena Investors:
Carrying amount of investment in Arena Investors:
Opening balance
Company’s share of profit and comprehensive income of Arena Investors (51%)
Decrease in Arena Investors’ Revolving Loan with the Company
Ending balance
Year ended December 31
2021
2022
$ 26,174
783
-
$ 26,957
$ 20,170
10,004
(4,000)
$ 26,174
The Company has a revolving loan to Arena Investors (the “Arena Investors’ Revolving Loan”) with a limit of $35,000 at December 31, 2022
(December 31, 2021 - $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. Arena Investors had drawn down the loan facility by $24,000 at
December 31, 2022 (December 31, 2021 - $24,000). 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 $1,344 and $1,397 for the years ended December 31, 2022 and 2021,
respectively, which was reported under “Interest income” in the consolidated statements of profit and comprehensive income. See note 17 for
subsequent events.
The total of the Company’s 51% share of profit and comprehensive income of Arena Investors was $783 and $10,004 in the years ended
December 31, 2022 and 2021, respectively, which was reported under “Share of income from investment in Arena Investors” in the consolidated
statements of profit and comprehensive income.
- 63 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
4
Investments (continued)
Investment in ASOF LP
The Company’s investment 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, 2022 and December 31, 2021, the fair value of the Company’s minority interest in ASOF LP was determined by
Arena Investors to be $3,179 and $3,222, respectively. The Company reported a decrease in the unrealized value of its investment in ASOF
LP of $43 and an increase of $326 in the years ended December 31, 2022 and 2021, respectively, which was reported under “(Decrease)
increase in unrealized value of investment in ASOF LP” in the consolidated statements of profit and comprehensive income.
5
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
RSUs (note 11)
DSUs (note 11)
Lease liability (note 3)
Interest on Preferred Securities (note 6)
C$ exchange forward contract payable (note 7)
Site restoration provision
Other accounts payable and accrued liabilities
Ending balance
$
December 31, 2022
5,781
2,633
261
466
478
-
3,321
12,940
$
$
December 31, 2021
5,884
2,163
413
498
443
726
3,579
13,706
$
At December 31, 2021, the Company reported a site restoration provision liability of $726 for the remaining indemnities that the Company had
provided to certain third parties for environmental liabilities. In February 2022 and March 2022, the Company entered into release agreements
with certain third parties, made net payments of $726 to settle the environmental liability provision balance at December 31, 2021 and, as a
result, at December 31, 2022, the site restoration provision liability was $nil.
6
Preferred Securities
On April 3, 2017, the Company announced that it had entered into an agreement pursuant to which Fairfax Financial Holdings Limited, through
certain of its subsidiaries (collectively, “Fairfax”), had agreed 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 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.
On June 2, 2017, the Company closed the subscription by Fairfax of C$50 million of Preferred Securities (the “Fairfax Financing”). There were
5,000,000 Preferred Securities outstanding at December 31, 2022 and December 31, 2021.
The Preferred Securities are repayable on demand upon a change of control of Westaim and the liability is recorded at the principal amount in
the consolidated statements of financial position. The Preferred Securities liability is translated into US$ at rates of exchange at the end of each
reporting period and any resulting foreign exchange gain or loss is included in the consolidated statements of profit and comprehensive income.
The carrying amount of the Preferred Securities, which approximated fair value, was $36,939 and $39,554 at December 31, 2022 and 2021,
respectively. The Company recorded an unrealized foreign exchange gain relating to the Preferred Securities of $2,615 in the year ended
December 31, 2022, and an unrealized foreign exchange loss relating to the Preferred Securities of $306 in the year ended December 31, 2021.
Interest expense on the Preferred Securities amounted to $1,900 and $1,989 in the years ended December 31, 2022 and 2021, respectively.
Accrued interest expense was $466 and $498 at December 31, 2022 and 2021, respectively, and was reported under accounts payable and
accrued liabilities in the consolidated statements of financial position.
- 64 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
7
C$ Exchange Forward Contracts
At December 31, 2022, the Company had a 188 day C$ exchange forward contract to purchase C$50 million maturing on March 28, 2023. For
the year ended December 31, 2022, the Company settled a C$ exchange forward contract to purchase C$50 million and incurred a realized
foreign exchange loss of $2,973. For the year ended December 31, 2021, the Company settled three C$ exchange forward contracts each to
purchase C$40 million and earned a net realized foreign exchange gain of $6. The realized foreign exchange loss from the forward contracts
for the year ended December 31, 2022 was more than offset by other realized and unrealized C$ currency net gains on the Company’s underlying
C$ currency assets and liabilities, including the currency exposure arising from the Preferred Securities, which resulted in a net unrealized and
realized foreign exchange gain of $80 in the year ended December 31, 2022 (for the year ended December 31, 2021: net loss of $912). See
note 17 for subsequent events.
The Company has not designated these C$ exchange forward contracts as accounting hedges.
Changes to the C$ exchange forward contract payable was as follows:
C$ exchange forward contract payable, opening balance
Change in value of C$ exchange forward contracts – (loss)
Net cash settlements paid (received) from C$ exchange forward contracts
C$ exchange forward contract payable, closing balance
December 31, 2022
$ (443)
(3,008)
2,973
$ (478)
December 31, 2021
$ (11)
(426)
(6)
$ (443)
A C$ exchange forward contract payable was accrued in the amount of $478 and $443 at December 31, 2022 and 2021, respectively, and was
recorded under accounts payable and accrued liabilities in the consolidated statements of financial position. The change in value of C$ exchange
forward contracts resulted in a net loss of $3,008 and $426 for the years ended December 31, 2022 and 2021, respectively, and was reported
under foreign exchange (gain) loss in the consolidated statements of profit and comprehensive income.
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. Each vested Warrant was originally exercisable on or prior to June 2, 2022, and the expiry date automatically
extended to June 2, 2024 since the volume-weighted average trading price of the Common Shares for the 10 day period ending on June 2,
2022 was less than C$5.60. The Company can 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 up to June 2, 2024.
The Warrants are subject to a cashless exercise at the discretion of Fairfax and are classified as a derivative liability in accordance with IFRS
and measured at FVTPL. The fair value of the vested Warrants at initial recognition was recorded as an expense in the consolidated statements
of profit and comprehensive income. Subsequent changes in fair value of the vested Warrants are reported in the consolidated statements of
profit and comprehensive income for the period in which they arise.
Changes to the derivative warrant liability are as follows:
Opening balance
Change in fair value – (gain)
Unrealized foreign exchange – (gain) loss
Ending balance
$
December 31, 2022
156
(57)
(5)
94
$
$
December 31, 2021
1,026
(884)
14
156
$
The fair value liability of the vested Warrants at December 31, 2022 of $94 (December 31, 2021 - $156) was estimated using the Monte Carlo
pricing model assuming no dividends are paid on the Common Shares, a risk-free interest rate of 4.37% (December 31, 2021 - 0.17%), an
expiration date between January 1, 2023 and June 2, 2024 (December 31, 2021: January 1, 2022 and June 2, 2024), a volatility of the underlying
Common Shares of 24.87% (December 31, 2021 – 26.50%), a closing price of the Common Shares of C$2.63 (December 31, 2021 - C$2.50)
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.
The Company recorded an unrealized gain resulting from a change in the fair value of the vested Warrants of $57 and $884 in the years ended
December 31, 2022 and 2021, respectively. The Company also recorded an unrealized foreign exchange gain with respect to the vested
Warrants of $5 in the year ended December 31, 2022, and an unrealized foreign exchange loss with respect to the vested Warrants of $14 in
the year ended December 31, 2021, under foreign exchange (gain) loss in the consolidated statements of profit and comprehensive income.
- 65 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
9 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, 2022, the Company had a total commitment of $513 for future occupancy cost payments including payments due not later than
one year of $268 and payments due later than one year of $245. 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.
10 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, 2022, Westaim had 141,386,718 Common Shares issued and outstanding (December 31, 2021 – 142,686,718), with a stated
capital of $378,563 (December 31, 2021 - $381,127). In the year ended December 31, 2022, Westaim cancelled 1,300,000 Common Shares it
had acquired at a cost of $2,564 through its normal course issuer bid (the “NCIB”). In the year ended December 31, 2021, Westaim cancelled
500,000 Common Shares that it had acquired at a cost of $1,055 through the prior NCIB. The NCIB, which was approved by the TSXV, provides
that Westaim may, during the 12-month period commencing October 1, 2022 and ending September 30, 2023, purchase up to 11,005,494
Common Shares in total, representing approximately 10% of Westaim’s public float and not more than 2,827,734 Common Shares within a 30
day period. The NCIB for the 12-month period which commenced October 1, 2021 and ended September 30, 2022, provided that Westaim could
purchase up to 11,208,044 Common Shares in total and not more than 2,863,734 Common Shares within a 30 day period. 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 its corporate funds as cash becomes available.
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, 2022 and December 31, 2021.
11 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, subject to the terms of the Option Plan, 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 14,138,671 at December 31, 2022 (December 31, 2021 – 14,268,671). However, each of the Incentive Plan and the Option Plan provide
that, subject to the terms of the plan, the number of Common Shares issuable under such plan, together with all other security-based
compensation arrangements of Westaim, shall not exceed 10% of the aggregate number of Common Shares outstanding. As the DSUs are
settled solely in cash, they are not included in this 10% limitation.
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, 2022
Year ended December 31, 2021
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, 2022
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)
2.05
1.25
0.25
1.28
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$
- 66 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
11
Share-based Compensation (continued)
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$
On April 1, 2016, 2,752,940 options were granted to certain officers and employees of Westaim. Subject to the terms of the Option Plan, 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. Subject to the terms of the Option
Plan, 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. Subject to the terms of the
Option Plan, 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, 2022 or 2021.
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 in the years ended December 31, 2022 and 2021.
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
2021
3,034,261
(59,063)
2,975,198
2022
2,975,198
-
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, 2022, 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, 2022, all of these RSUs had vested and none have been exercised.
There were 2,975,198 RSUs outstanding at December 31, 2022 and 2021. No RSUs were granted in the years ended December 31, 2022 or
2021. There were no RSUs exercised in the year ended December 31, 2022, and 59,063 RSUs were exercised in the year ended December
31, 2021.
- 67 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
11
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
$258 and $28 for the years ended December 31, 2022 and 2021, respectively. The Company also recorded an unrealized foreign exchange
gain with respect to the RSUs of $361 in the year ended December 31, 2022, and an unrealized foreign exchange loss with respect to the RSUs
of $44 in the year ended December 31, 2021, under foreign exchange (gain) loss in the consolidated statements of profit and comprehensive
income. At December 31, 2022, a liability of $5,781 (December 31, 2021 - $5,884) 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
2021
2022
855,228
1,093,603
238,375
261,530
1,093,603
1,355,133
In the year ended December 31, 2022, 261,530 DSUs were issued in lieu of director fees of $497 and in the year ended December 31, 2021,
238,375 DSUs were issued in lieu of director fees of $500. No DSUs were exercised in the years ended December 31, 2022 and 2021.
Compensation expenses relating to DSUs, including the impact of the change in the market value of the Common Shares was an expense of
$616 and $482 in the years ended December 31, 2022 and 2021, respectively. The Company also recorded an unrealized foreign exchange
gain with respect to the DSUs of $146 in the year ended December 31, 2022, and an unrealized foreign exchange loss with respect to the DSUs
of $8 in the year ended December 31, 2021, under foreign exchange (gain) loss in the consolidated statements of profit and comprehensive
income. At December 31, 2022, a liability of $2,633 (December 31, 2021 - $2,163) had been accrued with respect to outstanding DSUs in the
consolidated statements of financial position.
12 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:
Salaries and benefits1
Share-based compensation expense
Compensation expense
$
$
Year ended December 31
2021
2022
4,142
4,120
507
874
4,649
4,994
$
$
1 Salaries and benefits include director fees paid in cash totaling $110 in the years ended December 31, 2022 and 2021, respectively.
The Company received dividends from the Arena FINCOs in the amount of $8,350 and $nil in the years ended December 31, 2022 and 2021,
respectively.
Arena FINCOs returned capital to the Company in the amount of $1,900 and $nil in the years ended December 31, 2022 and 2021, respectively.
The Company earned and received interest on the Arena Investors’ Revolving Loan of $1,344 and $1,397 in the years ended December 31,
2022 and 2021, respectively. Interest on the Arena Investors Revolving Loan plus interest received from the Company’s bank balance are
included in interest income in the consolidated statements of profit and comprehensive income.
The Company earned advisory fees of $500 from Skyward Specialty in each of the years ended December 31, 2022 and 2021. 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,
2022 and 2021. Advisory fees are included in fee income in the consolidated statements of profit and comprehensive income. See note 17 for
subsequent events.
- 68 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
13
Income Taxes
The following is a reconciliation of income taxes calculated at the statutory income tax rate to the income tax expense included in the consolidated
statements of profit and comprehensive income:
Profit before income tax
Statutory income tax rates
Income taxes at statutory income tax rates
Variations due to:
Non-taxable portion of unrealized (gain)
on investments classified as FVTPL
Tax losses allocated from the HIIG Partnership
(Non-taxable) non-deductible items
Difference between statutory and foreign tax rates
Unrecognized tax losses
Income tax (recovery) expense
Year ended December 31
2021
2022
$ 28,431
$ 17,604
26.5%
26.5%
7,534
4,665
(2,638)
(7)
(2,500)
22
101
$ (357)
(1,042)
(36)
(231)
(183)
(5,821)
$ 221
At December 31, 2022, a current income tax receivable of $nil (December 31, 2021 - $64) and current income tax payable of $245 (December
31, 2021 - $153), and a deferred tax asset for United States taxes of $178 (December 31, 2021 – deferred tax liability of $415) were recorded
in the consolidated statements of financial position.
As the realization of any Canadian income tax benefits are 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, 2022 December 31, 2021
$ 56,911
5,511
4,553
350
2,175
$ 52,776
5,367
-
350
1,668
The unrecognized non-capital losses and investment tax credits will expire at various times to the end of 2042, as follows:
Non-capital losses by year of expiry:
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
$ 2,866
4,852
7,137
81
199
16,539
3,021
3,848
2,013
47
3,931
5,624
-
-
87
2,531
52,776
$
Investment tax credits by year of expiry:
2023
2024
2025
2026
2027
2028
$
256
138
313
264
522
175
1,668
$
`
- 69 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
14 Earnings per Share
Westaim had 10,428,337 stock options, 2,975,198 RSUs and 14,285,715 Warrants outstanding at December 31, 2022 and 2021. The stock
options and Warrants for the year ended December 31, 2022 and 2021 were excluded in the calculation of diluted earnings per share as they
were not dilutive. The RSUs for the years ended December 31, 2022 and 2021 were included in the calculation of diluted earnings per share
as they were dilutive.
Earnings per share, basic and diluted, are as follows:
Basic earnings per share:
Profit and comprehensive income
Weighted average number of Common Shares
outstanding
Basic earnings per share
Diluted earnings per share:
Profit and comprehensive income
Dilutive RSU recovery and related foreign exchange
Profit and comprehensive income on a diluted basis
Weighted average number of Common Shares
outstanding
Dilutive impact of RSUs
Weighted average number of Common Shares outstanding
on a dilutive basis
Diluted earnings per share
Common Shares outstanding at December 31, 2022 was 141,386,718 (December 31, 2021: 142,686,718).
15
Capital Management
Westaim’s capital currently consists of the Preferred Securities and Common Shares.
Year ended December 31
2021
2022
$ 17,961
$ 28,210
141,901,513
$ 0.13
143,079,869
$ 0.20
$ 17,961
(103)
$ 17,858
$ 28,210
(47)
$ 28,163
141,901,513
2,975,198
143,079,869
3,029,245
144,876,711
$ 0.12
146,109,113
$ 0.19
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.
16 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, 2022 consists of short-term financial assets and financial liabilities with maturities of less than one year, investments in Skyward
Specialty, Arena FINCOs, Arena Investors, and ASOF LP, Preferred Securities, and derivative warrant liability. 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.
- 70 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
16 Financial Risk Management (continued)
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 level 3 investments classified as FVTPL 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, 2022, the Company’s short-term financial liabilities amounted to $4,510 (December 31, 2021 - $4,673), and the Company has
access to cash and other resources to meet these financial obligations.
Currency risk
The Company’s C$ 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, 2022, the Company’s C$50 million (December 31, 2021 – C$50 million) C$ exchange forward contract is effective at reducing a significant
portion of the risk associated with changes in the C$ currency exchange. At December 31, 2022, it is estimated a 10% strengthening of the C$
against the US$ would have increased the foreign exchange loss by approximately $835 and $838 for the years ended December 31, 2022 and
2021, respectively. A similar weakening of the C$ 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 investments in Skyward Specialty and the Arena FINCOs as certain underlying investments
made by these entities are sensitive to interest rate movements.
Equity risk
At December 31, 2022, 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. See note 17 for subsequent events.
17 Subsequent Events
On January 4, 2023, Skyward Specialty announced the launch of its IPO indicating an expected offering price between $14 to $16 per share of
Skyward Specialty common stock including the offering of 4,750,000 shares sold by Skyward Specialty (after giving effect to the 4 for 1 reverse
stock split which was effective on January 3, 2023). On January 18, 2023, Skyward Specialty announced the close of the IPO at a price of $15
per share listed on the Nasdaq Global Select Market under the ticker symbol “SKWD”. With the closing of the IPO on January 18, 2023, the
Skyward Specialty convertible preferred shares, including those which the Company owned, automatically converted to Skyward Specialty
shares of common stock. As a result, Westaim now holds 7,285,359 Skyward Specialty common shares directly and its share of Skyward
Specialty common shares through the HIIG Partnership of 7,281,780 for a total of 14,567,139. Westaim is restricted from trading Skyward
Specialty common shares under a lock-up agreement through to July 12, 2023.
As per the terms of the Skyward Specialty MSA, the agreement which the Company earned advisory fees from Skyward Specialty of $500
annually, automatically terminated with the closing of IPO of Skyward Specialty on January 18, 2023.
- 71 -
The Westaim Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
(Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated)
17 Subsequent Events (continued)
On March 22, 2023, the Company extended the Arena Investors’ Revolving Loan from March 31, 2023 to March 31, 2025 and increased the
interest rate from 5.60% to 7.25% per annum effective April 1, 2023.
On March 28, 2023, the Company settled its 188 day C$ exchange forward contract to purchase C$50 million and incurred a realized foreign
exchange loss of $997 which was primarily offset by unrealized foreign exchange gains in the Company’s Canadian dollar liabilities. Coinciding
with this settlement, the Company entered into a new 92 day C$ exchange forward contract to purchase C$50 million maturing on June 28,
2023.
- 72 -
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
Thursday May 18th, 2023 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, 2022 were 141,386,718
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
- 73 -
THE WESTAIM CORPORATION
70 York Street, Suite 1700
Toronto, Ontario, Canada
M5J 1S9
www.westaim.com
info@westaim.com