The Westaim Corporation
Annual Report 2023

Plain-text annual report

THE WESTAIM CORPORATION ANNUAL REPORT 2023 THE WESTAIM CORPORATION ANNUAL REPORT 2023 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 5 38 39 43 47 66 66 All currency amounts are in United States dollars, unless otherwise indicated.  LETTER TO SHAREHOLDERS1 LETTER TO SHAREHOLDERS(1) March 27, 2024 Dear Fellow Shareholders, We believe The Westaim Corporation (“Westaim” or the “Company”) materially increased the intrinsic value per diluted share of the Company due to the excellent operating performance of your businesses, Skyward Specialty Insurance Group, Inc. ("Skyward Specialty"), Arena and Arena FINCOs, highlighted by the Initial Public Offering (“IPO”) of Skyward Specialty early in the year. We are incredibly pleased with the results in 2023, as they reflect several years of value creating activities in both of your businesses. Summarized below are the performances of Skyward Specialty, Arena and Arena FINCOs. Skyward Specialty On January 13, 2023, Skyward Specialty completed an Initial Public Offering ("IPO") on the NASDAQ exchange, priced at $15.00 per Skyward Specialty common share, which immediately enjoyed a strong market reception. After an extraordinarily strong debut, Skyward Specialty received broad analyst coverage highlighting management's "Rule Our Niche" underwriting discipline across eight core business lines. As we write this letter, Skyward Specialty trades around $36.00 per Skyward Specialty common share, producing a realized and unrealized profit for Westaim of approximately $275 million over our cash investment of approximately $170 million. Andrew Robinson, Skyward Specialty's Chairman and CEO, leads an impressive organization of 515 employees that collectively delivered exceptional results: (cid:120) Gross written premium increased 27.6% to $1,459.8 million in FY 2023 versus $1,144.0 million in FY 2022 (cid:120) (cid:120) (cid:120) Net income was $86.0 million in FY 2023 versus $39.4 million in FY 2022 Adjusted combined ratio of 90.9% in FY 2023 versus 92.6% in FY 2022 Annualized adjusted return-on-equity ("ROE") and annualized adjusted return-on-tangible equity ("ROTE") were 14.9% and 17.9% in FY2023, versus 13.8% and 17.6% in FY 2022 Shareholders' equity increased to $661.0 million on December 31, 2023, from $421.7 million at December 31, 2022, due primarily to net income and fixed income portfolio performance and executing a follow-on treasury offering of 2,150,000 Skyward Specialty common shares at $30.50. Most impressively, fully diluted book value finished the year at $15.96 per share, an increase of 24% over $12.87 per share at the end of 2022. A tremendously successful year by any measure. (cid:120) Westaim elected not to sell any Skyward Specialty shares in the January 2023 IPO offering and owned 14,567,139 Skyward Specialty common shares or approximately 38.7% of the 37.7 million fully diluted Skyward Specialty common shares outstanding immediately post IPO. As the first step in monetizing our investment, during 2023 Westaim participated in two follow-on secondary Skyward Specialty common share offerings. On June 12, 2023, Westaim sold 3,987,500 Skyward Specialty common shares at $23.00 per share, resulting in net proceeds of $87.4 million. On November 20, 2023, Westaim sold an additional 3,600,000 Skyward Specialty common shares at $30.50 per share, resulting in approximately $104.9 million in net proceeds. Currently, Westaim owns 6,979,639 Skyward Specialty common shares or approximately 17.5% of the common shares outstanding. On November 30, 2023, Rob Kittel and I resigned from the Skyward Specialty Board of Directors. In full cooperation with Andrew Robinson, we agreed it was time to transition the Skyward Specialty Board to independent directors, all with exceptional experience, who will provide strong counsel to management and good governance to all stakeholders. Rob and I want to personally acknowledge our enjoyment and privilege of working alongside such a group of high-quality professionals. Thank you. Westaim's support and conviction of Skyward Specialty are well ingrained, and we have ongoing confidence in the management's ability to attract and retain exceptional talent, all of whom are aligned to deliver on their ongoing commitment to be a "top quartile financial performer." 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. - 1 - Arena and Arena FINCOs Our aligned partnership with Arena is executed through two distinct entities: Arena Investors Group Holdings, LLC (“AIGH” or “Arena”) and Arena FINCOs. (cid:120) Arena has essentially two related and complementary businesses: (cid:120) Arena Investors is a global asset manager that originates and underwrites credit-oriented "senior" investments across eight business units to provide its clients with highly diversified and uncorrelated returns, employing minimal leverage and a average duration of approximately two-years. Arena Institutional Services ("AIS") monetizes in-house intellectual property without using Arena's capital. AIS includes Quaestor Consulting Group, which provides workouts and special services for fee-paying third parties; Quaestor Capital Markets and Arena Business Solutions facilitate capital-raising services for Arena-related investments and third parties. Arena FINCOs represents Westaim's proprietary capital invested in a portfolio of Arena Investor’s multi-strategy approach. (cid:120) (cid:120) Arena’s aim is to build portfolios that reflect the best return per unit of risk available based on the immense investment universe that Arena accesses on a global basis. At its core, this can be demonstrated simply by the follow chart:2 As of December 31, 2023, Arena's committed assets under management ("AUM") are $3.2 billion versus $3.5 billion as of December 31, 2022. Arena's AUM is allocated amongst separately managed accounts, open-ended pooled funds, and drawdown fund structures. With the rise in interest rates and an expanded opportunity set, Arena’s management believes that underwritten IRRs have moved higher by 2 to 3% and the opportunity see has grown dramatically. The AUM decline year over year reflects distributions from liquidating fund structures as gains are harvested and capital is returned to investors. With six fund raising campaigns afoot, all drawdown or closed-end oriented, with the largest being ASOP III, we expect Arena's committed AUM growth to return in 2024.2 2 Actual results may vary. Target performance is not indicative of future performance. The information presented is illustrative.2 Note gross IRRs higher than 20% are capped at 20%, net IRRs assume annual management fees of 2% and an incentive fee of 20%. Pre-2020, ASOP I was seeded with a pool of existing investments. 3 Note gross IRRs higher than 20% are capped at 20%, net IRRs assume annual management fees of 2% and an incentive fee of 20%. Pre-2020, ASOP I was seeded with a pool of existing investments. - 2 - Summary of Exited Holdings since Arena's Launch in October 2015(4) # Positions 195 Top Attachment Point 2% Closing LTV 58% Coupon 13.2% Gross Underwritten IRR 16.3% Gross Realized IRR (5) 20.1% Average Loan Term (Years) (6) 1.7 AIGH achieved the following financial results in FY 2023: (cid:120) (cid:120) (cid:120) AIGH reported revenue of $63.1 million in FY 2023 versus $48.2 million in FY 2022. Total Arena EBITDA of $10.1 million in FY 2023 versus $3.3 million in FY 2022. Net income of $8.7 million in FY 2023 versus $1.5 million in FY 2022. Arena Investors reported recurring revenue of $42.8 million in FY 2023 versus $43.3 million in FY 2022, achieving $2.2 million in fee related earnings in FY 2023 versus $8.3 million in FY 2022 and $6.5 million in EBITDA in FY 2023 versus $6.4 million in FY 2022. AIS produced $11.5 million of revenue in FY 2023 versus $0.6 million in FY 2022 and $5.7 million of EBITDA in FY 2023 versus ($0.8) million in FY 2022. We expect AIS profitable growth to continue. As you will recall from prior communications, Arena is of the view that the market "slow rolling implosion" that commenced in 2021 continues, created by a decade of irresponsible monetary policy and Covid-inspired acceleration of fiscal imprudence. This has elevated interest rates and inflation, putting monetary authorities in an exceedingly difficult position. The by-product of these actions is a market opportunity for Arena that has never been greater and will continue to grow. Arena's platform is built, and we are collectively laser focused on capitalizing on this opportunity. Westaim In 2023, Westaim enjoyed our best operating results – ever. Westaim's share price, book value per diluted share and our views on our “intrinsic value per diluted share" increased significantly. As at December 31, 2023: (cid:120) Westaim shares closed at C$3.76, an increase of 43.0% versus C$2.63 on December 31, 2022 (cid:120) (cid:120) (cid:120) (cid:120) Net income was $183.9 million in FY 2023 versus $18.0 million in FY 2022 Diluted earnings per share of $1.32 in FY 2023 versus diluted earnings per share of $0.12 in FY 2022 Book value per fully diluted share of $3.83 (C$5.08) as of December 31, 2023; a rise of 49.6% versus $2.56 (C$3.46) at December 31, 2022 Shareholders' equity ended 2023 at $518.3 million, an increase of 42.8% versus $363.2 million at December 31, 2022 The most significant contributor to the above-noted metrics would be the appreciation of Skyward Specialty shares, which increased from $15.00 on the IPO and ended the year at $33.88 per share, for a gain of 125.9%. Westaim's participation in two follow-on secondary offerings of Skyward Specialty common shares netted $192.3 million. Westaim utilized prior tax losses, allowing the realized and unrealized gain in our total Skyward Specialty position to be largely sheltered in 2023. Unfortunately (or fortunately you could say), all of our tax attributes were essential utilized in 2023, so Westaim will be a cash tax payor moving forward. On June 12, 2023, Westaim elected to redeem all of the 5,000,000 5% subordinate preferred securities (C$50 million) of Westaim held by certain affiliates of Fairfax Financial Holdings Limited (“Fairfax”) and, as part of a related transaction, Fairfax surrendered 14.3 million common share warrants to the Company. Your management team believed this transaction was accretive to Westaim shareholders and made an excellent use of proceeds. In 2023, we significantly ramped up activity on our Normal Course Issuer Bid (“NCIB”). In 2023, Westaim acquired and cancelled 9.9 million Common Shares at an average price of $2.67 per share. At December 31, 2023, Westaim had 131.8 million common shares outstanding, versus 141.4 million at December 31, 2022. In conversations with our shareholders and other investors and through our quarterly materials, we do our best to highlight and communicate the intrinsic value within Westaim. As noted in our quarterly Investor Presentations, our balance sheet is debt-free, with core assets consisting of cash and securities carried at market value, and little value attributed to our investment in Arena. Despite the positive share appreciation in 2023, Westaim shares continue to trade at a value meaningfully below our book value per share. We will continue to utilize our NCIB to repurchase our Common Shares. 4 Portfolio characteristics summarize privately negotiated private investments currently or previously held by Arena’s multi-strategy approach as of December 31, 2023. In addition, Arena has invested in liquid investments, including convertible structured investments summarized as “Corporate Securities” and other private investments in Arena’s stable income strategies that are not listed herein. 5 Current and realized IRR calculations are presented net of expenses and gross of Arena-level fees. Actual results may vary. Performance of all vehicles is available upon request. 6 Average loan term refers to the weighted average time in years between the funding date and exit date. - 3 - Westaim enjoys financial strength to respond to attractive investment opportunities. Our relationships and brand awareness have increased over the years, providing Westaim a flow of opportunities that we would not have been made aware of in years past. However, our focus remains unchanged - we seek high- quality management teams within an aligned partnership to build great businesses over the long term. Alongside any potential transactions, management and the board of directors continually consider all options to deploy Westaim's capital, including more substantial share buybacks and/or dividends. The Annual General Meeting and Investor Day will be held on Thursday, May 16, 2024, at 9:00 am ET. The schedule will include a business overview and discussion with Westaim and Arena’s management, followed by a question-and-answer session. We look forward to seeing you there. Respectfully, Cameron MacDonald President and Chief Executive Officer - 4 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 3. 4. INVESTMENTS FINANCING 5. ANALYSIS OF FINANCIAL RESULTS 6. ANALYSIS OF FINANCIAL POSITION 7. OUTLOOK 8. LIQUIDITY AND CAPITAL RESOURCES 9. RELATED PARTY TRANSACTIONS 10. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS 11. CRITICAL ACCOUNTING POLICIES AND RECENTLY ADOPTED AND PENDING ACCOUNTING PRONOUNCEMENTS 12. QUARTERLY FINANCIAL INFORMATION 13. RISKS 14. ADDITIONAL ARENA 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 year ended December 31, 2023 and 2022 as set out on pages 43 to 65 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, 2023 and financial condition as at December 31, 2023. 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$. The following commentary is current as of March 27, 2024. Additional information relating to the Company is available on SEDAR+ at www.sedarplus.ca. Certain comparative figures have been reclassified to conform to the presentation of the current year, and certain totals, subtotals and percentages may not reconcile due to rounding. IFRS for Investment Entities The Company qualifies as an investment entity under IFRS and uses fair value as the key measure to monitor and evaluate its primary investments. The Company reports its financial results in accordance with IFRS applicable to investment entities. Functional and Presentation Currency The US$ 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. - 5 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 the Arena FINCOs and Arena Supplementary financial measures concerning the Arena FINCOs (as hereinafter defined) and Arena (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 for the years ended December 31, 2023 and 2022 and the unaudited consolidated financial statements of Arena FINCOs and Arena for the three months ended December 31, 2023 and 2022, 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. The Arena Supplementary Financial Measures, including any Arena FINCOs and Arena 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. 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 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 for its fiscal year ended December 31, 2022, which is available on SEDAR+ at www.sedarplus.ca, as same may be modified or superseded by a subsequently filed Annual Information Form. Please refer to Section 16, Cautionary Note Regarding Forward-Looking Information of this MD&A. - 6 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 Insurance Group, Inc. (“Skyward Specialty”), the Arena FINCOs and Arena. 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 2022 2023 Year ended December 31 2022 2023 Revenue and net change in value of investments Net expenses Income taxes (expense) recovery $ 53.3 (16.1) (2.1) $ 35.1 (2.5) 0.2 $ 212.8 (26.6) (2.3) $ 27.4 (9.8) 0.4 Profit and comprehensive income $ 35.1 $ 32.8 $ 183.9 $ 18.0 Earnings per share – basic Earnings per share – diluted At December 31: Shareholders’ equity Number of Common Shares outstanding 1 Book value per fully diluted share – in US$ 2 Book value per fully diluted share – in C$ 3 $ 0.26 $ 0.26 $ 0.23 $ 0.23 $ 1.33 $ 1.32 $ 0.13 $ 0.12 $ 518.3 131,757,285 $ 3.83 $ 5.08 $ 363.2 141,386,718 $ 2.56 $ 3.46 1 Westaim’s common shares (“Common Shares”) are listed and posted for trading on the TSX Venture Exchange (“TSXV”) under the symbol “WED”. 2 See Section 15, Non-GAAP Measures of this MD&A. 3 Period end exchange rates: 1.32405 at December 31, 2023 and 1.35360 at December 31, 2022. Three months ended December 31, 2023 and 2022 The Company reported a profit and comprehensive income of $35.1 and $32.8 for the three months ended December 31, 2023 and 2022, respectively. Revenue and net change in value of investments was a net increase of $53.3 for the three months ended December 31, 2023 (2022 – $35.1), and consisted of interest income of $1.6 (2022 - $0.3), dividend income paid to the Company from the Arena FINCOs of $nil (2022 - $0.5), advisory fees of $0.2 (2022 - $0.3), an increase of $51.9 in the value of the investment in Skyward Specialty (2022 – $40.5), a decrease of $0.9 in the value of the investments in the Arena FINCOs (2022 – decrease of $6.6, which was a decrease of $6.1 before dividends paid of $0.5), the Company’s share of Arena’s comprehensive income of $0.6 (2022 – $0.1) and a decrease in the value of the Company’s investment in Arena Special Opportunities Fund, LP (“ASOF LP”) of $0.1 (2022 – decrease of a nominal amount). Net expenses for the three months ended December 31, 2023 of $16.1 (2022 – $2.5) consisted of salaries and benefits of $12.2 (2022 - $1.2), general, administrative and other expenses of $0.2 (2022 - $0.2), professional fees of $0.5 (2022 - $0.2), share-based compensation expense $2.9 (2022 – $0.2), a foreign exchange loss of $0.3 (2022 – $0.2), and interest on preferred securities of $nil (2022 - $0.5). The Company reported income taxes expense for the three months ended December 31, 2023 of $2.1 (2022 – recovery of $0.2). Years ended December 31, 2023 and 2022 The Company reported a profit and comprehensive income of $183.9 and $18.0 for the years ended December 31, 2023 and 2022, respectively. - 7 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 value of investments was a net increase of $212.8 for the year ended December 31, 2023 (2022 – $27.4), and consisted of interest income of $3.7 (2022 - $1.3), dividend income paid to the Company from the Arena FINCOs of $4.4 (2022 - $8.4), advisory fees of $0.5 (2022 - $1.0), an increase of $210.3 in the value of the investment in Skyward Specialty (2022 – $26.8), a decrease of $10.4 in the value of the investments in the Arena FINCOs, which was a decrease of $6.0 before dividends paid of $4.4 (2022 – decrease of $10.8, which was a decrease of $2.4 before dividends paid of $8.4), the Company’s share of Arena’s comprehensive income of Arena of $4.5 (2022 – $0.7) and a decrease in the value of the Company’s investment in ASOF LP of $0.2 (2022 – a decrease of a nominal amount). Net expenses for the year ended December 31, 2023 of $26.6 (2022 – $9.8) consisted of salaries and benefits of $16.0 (2022 - $4.8), general, administrative and other expenses of $0.9 (2022 - $0.9), professional fees of $1.5 (2022 - $1.5), share-based compensation expense $6.7 (2022 – $0.9), a foreign exchange loss of $0.6 (2022 – gain of $0.1), interest on preferred securities of $1.0 (2022 - $1.9) and a gain resulting from a change in the fair value of the vested Warrants (as hereinafter defined) of $0.1 (2022 – $0.1). The Company reported income taxes expense for the year ended December 31, 2023 of $2.3 (2022 – recovery of $0.4). 3. INVESTMENTS The Company’s principal investments consist of its investments in Skyward Specialty, the Arena FINCOs and Arena. Skyward Specialty Arena FINCOs Arena Place of establishment Delaware, U.S. Delaware, U.S. Delaware, U.S. Principal place of business Texas, U.S. New York, U.S. New York, U.S. Ownership interest at December 31, 2023 17.5% owned by the Company 1 100% owned by the Company 51% owned the Company 2 Ownership interest at December 31, 2022 43.8% owned by the Company 1 100% owned by the Company 51% owned the Company 2 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, 2022 - 51%) is subject to change over time pursuant to the earn-in rights granted to Bernard Partners, LLC (“BP LLC”) described below under “Investment in Arena”. For additional information on the Company’s corporate structure, see the Company’s Annual Information Form for its fiscal year ended December 31, 2022, which is available on SEDAR+ at www.sedarplus.ca, as same may be modified or superseded by a subsequently filed Annual Information Form. Skyward Specialty The Company owns a significant ownership interest in Skyward Specialty (NASDAQ: SKWD), a U.S. based publicly traded 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 additional information on Skyward Specialty, see Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) filings at www.sec.gov/edgar/search-and-access. 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 Arena Investors Group Holdings, LLC (“AIGH” or “Arena”), is a private company, through its wholly-owned subsidiaries and subsidiaries which Arena has a controlling interest. Arena consists of two main business lines, Arena Investors and Arena Institutional Services (“AIS”). Arena Investors operates as a global investment manager offering third-party clients, including the Arena FINCOs, access to fundamentals-based, credit and asset- oriented investments that aim to deliver above-market returns with low volatility. Arena Investors provides investment services primarily to institutional third-party clients consisting of, but not limited to, insurance companies, endowments, foundations, pensions, sovereign funds and other pooled investment vehicles or private investment funds. AIS leverages certain intellectual property to offer third-party services to other entities to assist in the management of their investments. - 8 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 3. INVESTMENTS (continued) The Company’s investment in Arena is accounted for using the equity method and consists of investments in corporations or limited partnerships where the Company has significant influence. The following chart illustrates a simplified organizational structure of Arena and the Arena FINCOs: The Westaim Corporation (“Westaim”)”) 100% The Westaim Corporation of America (“WCA”) 51% 1 100% 100% Arena Investors Group Holdings, LLC (“AIGH” or “Arena”) Westaim Origination Holdings, Inc. (“WOH”) Arena Finance Holdings Co., LLC (“AFHC”) Subsidiaries operating as Arena Investors (“Arena Investors”) Subsidiaries operating as Arena Institutional Services (“AIS”) 100% 100% Arena Origination Co., LLC (“AOC”) Arena Finance, LLC and subsidiaries (“AF”) Arena 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”. For a detailed discussion of the business of Arena and the Arena FINCOs, see the Company’s Annual Information Form for its fiscal year ended December 31, 2022, which is available on SEDAR+ at www.sedarplus.ca, as same may be modified or superseded by a subsequently filed Annual Information Form. 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, the Arena FINCOs and ASOF LP are accounted for at fair value through profit or loss (“FVTPL”). The Company’s investment in Arena is accounted for using the equity method since the Company does not exercise control but exercises significant influence over Arena. 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, the Arena FINCOs and ASOF LP and the Company’s share of Arena’s comprehensive income are reported under “Net results of investments” in the consolidated statements of profit and comprehensive income. - 9 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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: HIIG Partnership-Company’s share of Skyward Specialty common shares 1 HIIG Partnership-Company’s share of other HIIG Partnership net assets Skyward Specialty convertible preferred shares held by the Company 2 Skyward Specialty common shares held by the Company 2 HIIG Partnership-Company’s share of Skyward Specialty common shares 1 HIIG Partnership-Company’s share of other HIIG Partnership net assets Skyward Specialty convertible preferred shares held by the Company 2 Skyward Specialty common shares held by the Company 2 HIIG Partnership-Company’s share of Skyward Specialty common shares 1 HIIG Partnership-Company’s share of other HIIG Partnership net assets Skyward Specialty convertible preferred shares held by the Company 2 Skyward Specialty common shares held by the Company 2 HIIG Partnership-Company’s share of Skyward Specialty common shares 1 HIIG Partnership-Company’s share of other HIIG Partnership net assets Skyward Specialty convertible preferred shares held by the Company 2 Skyward Specialty common shares held by the Company 2 Skyward Specialty preferred shares converted to common shares $ - - - - $ - Proceeds from sale of Skyward Specialty common shares $ - - - (104.9) $ (104.9) Opening Balance $ - - - 289.5 $ 289.5 Skyward Specialty preferred shares converted to common shares $ - - - - $ - Proceeds from sale of Skyward Specialty common shares $ - - - - $ - Opening Balance $ 89.0 0.4 89.0 - $ 178.4 Skyward Specialty preferred shares converted to common shares $ - - (109.3) 109.3 $ - Proceeds from sale of Skyward Specialty common shares $ - - - (192.3) $ (192.3) Opening Balance $ 109.2 0.4 109.3 - $ 218.9 Skyward Specialty preferred shares converted to common shares $ - - - - $ - Proceeds from sale of Skyward Specialty common shares $ - - - - $ - Opening Balance $ 95.8 0.4 - 95.9 $ 192.1 Three months ended December 31, 2023 Net increase in value of investment $ - - - 51.9 $ 51.9 Dissolution of HIIG Partnership $ - - - - $ - Ending Balance $ - - - 236.5 $ 236.5 Three months ended December 31, 2022 Net increase in value of investment $ 20.2 - 20.3 - $ 40.5 Dissolution of HIIG Partnership $ - - - - $ - Ending Balance $ 109.2 0.4 109.3 - $ 218.9 Year ended December 31, 2023 Net increase in value of investment $ 63.3 - - 146.9 $ 210.3 Dissolution of HIIG Partnership $ (172.5) (0.4) - 172.5 $ (0.4) Ending Balance $ - - - 236.5 $ 236.5 Year ended December 31, 2022 Net increase in value of investment $ 13.4 - 13.4 $ 26.8 Dissolution of HIIG Partnership $ - - - - $ - Ending Balance $ 109.2 0.4 109.3 $ 218.9 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 to Skyward Specialty common shares on January 18, 2023. On January 18, 2023, Skyward Specialty closed its initial public offering (the “IPO”). In connection with the IPO, the Skyward Specialty common shares became listed on the Nasdaq Global Select Market under the ticker symbol “SKWD”. Also in connection with the IPO, the Skyward Specialty convertible preferred shares automatically converted into Skyward Specialty common shares, including those owned by the Company which converted into 7,285,359 Skyward Specialty common shares. - 10 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 3. INVESTMENTS (continued) On June 12, 2023, Skyward Specialty closed its underwritten secondary public offering (the “Skyward Secondary Offering”). Under the Skyward Secondary Offering, Westaim sold 3,850,000 Skyward Specialty common shares at a price to the public of $23.00 per Skyward Specialty common share (the “Secondary Offering Price”). The underwriters also exercised in full their option to purchase an additional 577,500 Skyward Specialty common shares from the selling stockholders at the Skyward Offering Price, of which 137,500 Skyward Specialty common shares were sold by Westaim. The proceeds to Westaim from the 3,987,500 Skyward Specialty common shares it sold, less underwriting commissions of 4.75%, were approximately $87.4. On July 31, 2023, the HIIG Partnership expired pursuant to the terms of HIIG Partnership’s limited partnership agreement, originally made as of March 12, 2014 and amended and restated as of June 27, 2014 and as further amended on November 10, 2022. Accordingly, on July 31, 2023, the HIIG Partnership was dissolved and distributed its net assets to its limited partners, resulting in the Company (in its capacity as a limited partner) receiving 7,281,780 Skyward Specialty common shares valued at $172.5 ($23.69 per Skyward Specialty common share on July 31, 2023) and $0.4 in cash on the dissolution date. On November 20, 2023, Skyward Specialty closed its upsized follow-on offering (the “Skyward Upsized Follow-On Offering”). Under the Skyward Upsized Follow-On Offering, Westaim sold 3,600,000 Skyward Specialty common shares at a price to the public of $30.50 per Skyward Specialty common share. The proceeds to Westaim from the 3,600,000 Skyward Specialty common shares it sold, less underwriting commissions of 4.5%, were approximately $104.9. At December 31, 2023, Westaim directly held 6,979,639 Skyward Specialty common shares. At December 31, 2022, Westaim directly held Skyward Specialty preferred shares which were convertible into 7,285,359 common shares and indirectly held 7,281,780 Skyward Specialty common shares through the Company’s interest in the HIIG Partnership for a total of 14,567,139 Skyward Specialty common shares. (i) Fair Value The investment in Skyward Specialty is classified at Level 1 of the fair value hierarchy and is accounted for at FVTPL. At December 31, 2023, the Company’s estimated fair value of Skyward Specialty common shares held directly by the Company was supported by the “SKWD” closing trading price on the Nasdaq Global Select Market of $33.88 per Skyward Specialty common share on the last trading day of 2023. At December 31, 2022, the Company’s estimated fair value of Skyward Specialty’s fully diluted common shares, using multiple valuation techniques, was determined to be $15.00 per Skyward Specialty common shares. See Note 4, Investment in Skyward Specialty in the Notes to the Financial Statements. At December 31, 2023, the fair value of the Company’s investment in Skyward Specialty was determined to be $236.5 which consisted of 6,979,639 Skyward Specialty common shares held directly by the Company at $33.88 per Skyward Specialty common share. At December 31, 2022 the fair value of the Company’s investment in Skyward Specialty was determined to be $218.9 and consisted of the aggregate fair value of (i) 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 Skyward Specialty common share for $109.2, (ii) its share of the other net assets of the HIIG Partnership of $0.4, and (iii) convertible preferred shares held directly by the Company, which were convertible into 7,285,359 Skyward Specialty common shares at $15.00 per Skyward Specialty common share for $109.3. The Company recorded an increase in the value on its investment in Skyward Specialty of $51.9 and $210.3 in the three months and year ended December 31, 2023, respectively, and $40.5 and $26.8 in the three months and year ended December 31, 2022, respectively. 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 Decrease in value before dividends Dividends paid to the Company Ending balance Three months ended December 31 2022 2023 Year ended December 31 2022 2023 $ $ 148.1 - (0.9) - 147.2 $ $ 168.6 (1.9) (6.1) (0.5) 160.1 $ $ 160.1 (2.5) (6.0) (4.4) 147.2 $ $ 172.8 (1.9) (2.4) (8.4) 160.1 - 11 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 3. INVESTMENTS (continued) 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 less liquid 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. Corporate and Other Securities 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. - 12 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 3. INVESTMENTS (continued) (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, 2023, in the amount of $147.2 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 $147.2 and $160.1 at December 31, 2023 and 2022, respectively. The Company recorded a decrease in the value of its investments in the Arena FINCOs of $0.9 in the three months ended December 31, 2023, and a decrease in the value of its investments in the Arena FINCOs of $10.4, which was a decrease of $6.0 before dividends paid to the Company of $4.4 in the year ended December 31, 2023. The Company recorded a decrease in the 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 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 to the Company of $nil and $2.5 in the three months and year ended December 31, 2023, respectively. The Arena FINCOs returned capital returned to the Company of $1.9 in the three months and year ended December 31, 2022. (ii) Arena FINCOs Supplementary Financial Measures for the three months and year ended December 31, 2023 and 2022 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, 2023 and 2022, and the unaudited financial statements of AOC, AF and its subsidiaries for the three months ended December 31, 2023 and 2022, which have been prepared in accordance with IFRS or US GAAP. AOC financial statements and AF consolidated financial statements are the responsibility of the management of the Arena FINCOs. Readers are cautioned that the financial information has not been reconciled to IFRS and so may not be comparable to the financial information of issuers that present their financial information in accordance with IFRS. A summary of the net assets of the Arena FINCOs is as follows: Cash and cash equivalents 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, 2023 27.3 $ December 31, 2022 16.7 $ 162.3 29.7 192.0 3.9 (12.1) (44.4) (19.5) 147.2 $ 161.2 37.8 199.0 7.9 (17.0) (43.9) (2.6) 160.1 $ 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. Arena Finance II LLC (“AFII”), one of the Arena FINCOs, has a private placement of $45.0 of 6.75% senior secured notes payable to improve net returns by leveraging invested assets. AFII incurred issuance costs relating to the notes of $1.7 which is recorded as a discount to the net proceeds received and is amortized over the life of the notes. The net proceeds received from these notes are being used by the Arena FINCOs in accordance with its investment objectives. - 13 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 3. INVESTMENTS (continued) AFII has a revolving credit facility with third party lenders with a commitment amount of $25.0 expiring on September 30, 2024. Unpaid principal amounts under the revolving credit facility will bear interest at the 3-month Secured Overnight Finance Rate (“SOFR”) plus 3.06161%. Additionally, an unused facility fee accrues at a rate of 0.50% per annum and is payable monthly in arrears. At December 31, 2023 and 2022, there were draws of $19.5 and $2.6 outstanding, respectively. 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. 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 income (loss) 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 2022 2023 Year ended December 31 2022 2023 $ 6.0 (4.3) (1.3) 0.4 (1.0) - (0.2) (0.8) $ 1.9 (5.5) (1.1) (4.7) (1.0) 0.1 (0.4) (6.0) $ 6.6 (2.7) (4.8) (0.9) (3.9) (0.1) (0.9) (5.8) $ 5.2 2.4 (4.1) 3.5 (4.3) (0.4) (1.0) (2.2) (0.1) $ (0.9) (0.1) (6.1) $ (0.2) $ (6.0) (0.2) (2.4) $ The Net Return on the investment portfolios of the Arena FINCOs was -0.5% and -3.7% for the three months and year ended December 31, 2023, respectively, and -3.6% and -1.6% for the three months and year ended December 31, 2022, respectively. See Section 15, Non-GAAP Measures of this MD&A. - 14 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 3. INVESTMENTS (continued) C. INVESTMENT IN ARENA Changes in the Company’s investment in associates are summarized as follows: Investment in Arena Opening balance The Company’s share Arena’s comprehensive income The Company’s share of cash and non-cash distributions from Arena Ending balance Three months ended December 31 2022 2023 Year ended December 31 2022 2023 $ 28.8 0.6 (1.8) $ 27.6 $ 26.8 0.1 - $ 26.9 $ 26.9 4.5 (3.8) $ 27.6 $ 26.2 0.7 - $ 26.9 Arena Investors generates revenues primarily from Management Fees, Incentive Fees and Asset Servicing Fees. “Management Fees” are the fees generally calculated on Arena Investors’ various segregated client accounts and private pooled investment vehicles, as a percentage of either committed investing capital inclusive of profits earned, or total assets inclusive of financing, and the fees generally calculated on the Arena FINCOs, as a percentage of committed investing capital inclusive of profits earned but excluding financing. “Incentive Fees” are the fees generally calculated as a percentage of net profits earned by clients of Arena Investors, including the Arena FINCOs, as of the end of each fiscal year 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 including the Arena FINCOs. AIS leverages its intellectual capital to provide non-investment advisory services primarily for third parties. At December 31, 2023, Arena Investors had committed assets under management (“AUM”) of approximately $3.2 billion (December 31, 2022: $3.5 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, 2023, AUM included the net assets of the Arena FINCOs and the Company’s investment in ASOF LP of approximately $150 (December 31, 2022: $163). (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 Associate Agreements. At December 31, 2023 and 2022, the Company’s equity ownership and profit sharing percentage of Arena was 51%. (ii) Accounting for Arena The Company has a revolving loan to Arena (the “Arena Revolving Loan”) with a limit of $35 at December 31, 2023 (December 31, 2022 - $35) in order to continue funding growth initiatives and working capital needs of Arena. The loan facility matures on March 31, 2025 and bore an interest rate of 5.60% per annum through to March 31, 2023 and increased to 7.25% per annum on April 1, 2023. Arena had drawn down the loan facility by $24 at December 31, 2023 (December 31, 2022 - $24). The loan facility is secured by all the assets of Arena. The Company’s investment in Arena is accounted for using the equity method. The carrying amount of the Company’s investment in Arena was $27.6 and $26.9 at December 31, 2023 and 2022, respectively. The Company’s 51% share of Arena’s comprehensive income that amounted to $0.6 and $4.5 for the three months and year ended December 31, 2023, respectively, and a share of Arena’s comprehensive income that amounted to $0.1 and $0.7 for the three months and year ended December 31, 2022, respectively, was reported under “Net results of investments” in the consolidated statements of profit and comprehensive income. - 15 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 3. INVESTMENTS (continued) (iii) Arena Supplementary Financial Measures for the three months and year ended December 31, 2023 and 2022 The Company considers certain financial results of Arena 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 set out below is unaudited and has been derived from the audited financial statements of AIGH for the years ended December 31, 2023 and 2022 and the unaudited financial statements of AIGH for the three months ended December 31, 2023 and 2022, which have been prepared in accordance with US GAAP. Such statements are the responsibility of the management of Arena. Arena presents their performance results as Arena Investors’ fee related earnings (“FRE”), Arena Investors’ net incentive fees, and AIS EBITDA. Arena’s 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 from Arena’s Statement of Financial Position Cash and cash equivalents Restricted cash Arena’s Revolving Loan from the Company Other net assets (liabilities) Net assets Less: net assets attributable to non-controlling interests Net assets attributable to Arena Company’s share of Arena’s net assets Arena’s Revolving Loan from the Company Carrying amount of the Company’s investment in Arena December 31, 2023 $ 8.1 16.7 (24.0) 10.4 11.2 4.5 $ 6.7 $ 3.6 24.0 $ 27.6 December 31, 2022 $ 4.8 28.2 (24.0) (3.2) 5.8 0.2 $ 5.6 $ 2.9 24.0 $ 26.9 Restricted cash includes deposits received in advance for pre-funded work fees and prepaid deposits primarily from investment loans. Supplementary Financial Measures from Arena’s Statement of Income and Other Comprehensive Income Three months ended December 31 20221 2023 Year ended December 31 20221 2023 Arena Investors Management fees Asset servicing fees Other income Total recurring revenue Operating expenses allocated to recurring revenue Fee related earnings Incentive fees Incentive fees compensation expense Net incentive fees Arena Investors’ EBITDA Arena Institutional Services AIS revenue AIS operating expenses Employee profit share AIS EBITDA AIGH general and administrative costs AIGH other income and expenses Total Arena EBITDA Depreciation Revolving loan interest expense paid to the Company Taxes Net income attributable to Arena Company’s share of Arena’s comprehensive income (51%) $ 7.6 2.7 0.4 10.7 (10.2) 0.5 3.1 (0.6) 2.5 3.0 (1.6) (0.1) 0.4 (1.3) (0.3) (0.4) 1.0 - (0.4) 0.5 $ 1.1 $ 0.6 $ 8.3 2.3 0.9 11.5 (10.3) 1.2 (0.6) 1.1 0.5 1.7 0.6 (0.8) (0.2) (0.4) (0.2) (0.3) 0.8 (0.1) (0.3) (0.1) $ 0.3 $ 0.1 $ 30.8 11.0 1.0 42.8 (40.6) 2.2 8.8 (4.5) 4.3 6.5 11.5 (1.5) (4.3) 5.7 (0.8) (1.3) 10.1 (0.3) (1.6) 0.5 $ 8.7 $ 4.5 $ 31.9 10.6 0.8 43.3 (35.0) 8.3 4.3 (6.2) (1.9) 6.4 0.6 (1.2) (0.2) (0.8) (0.8) (1.5) 3.3 (0.2) (1.3) (0.3) $ 1.5 $ 0.7 1 Adjusted to conform to the presentation of the current period financial statements. - 16 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 $3.0 and $3.2 at December 31, 2023 and 2022, respectively, is included under investments in the consolidated statements of financial position. The Company’s decrease in the value on its investment in ASOF LP was $0.1 and $0.2 in the three months and year ended December 31, 2023, respectively, and a decrease of a nominal amount in each of the three months and year ended December 31, 2022. 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. On July 17, 2023, the Company redeemed and delisted all of the 5,000,000 Preferred Securities and paid C$50 million (equivalent to $37.9), plus all accrued and unpaid interest thereon. In connection with the redemption: (a) the Company and Fairfax terminated the governance agreement dated June 2, 2017 between the parties; (b) Fairfax surrendered and disposed of, without any further consideration, all of the Warrants, which were immediately cancelled by the Company; and (c) Westaim paid a $0.1 work fee to Fairfax. The C$ 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, 2023 of $nil (December 31, 2022 - $36.9). See Note 6, Preferred Securities in the Notes to the Financial Statements. Canadian Dollar Currency Forward Contracts The Company had entered into Canadian dollar forward contracts to reduce the currency exposure arising from the liabilities denominated in Canadian dollars including the Preferred Securities. On June 14, 2023, the Company settled its C$ exchange forward contract to purchase C$50 million and the Company is no longer party to any C$ exchange forward contract. During the three months and year ended December 31, 2023, the Company’s C$ forward contracts resulted in foreign exchange gain of $nil and $0.3, respectively. During the three months and year ended December 31, 2022, the Company’s C$ forward contracts resulted in foreign exchange gain of $0.8 and a foreign exchange loss of $3.0, respectively. See Note 7, C$ Exchange Forward Contracts in the Notes to the Financial Statements. The Company has not designated these Canadian dollar currency forward contracts as accounting hedges. Derivative Warrant Liability In conjunction with the purchase by Fairfax of C$50 million in Preferred Securities on June 2, 2017, Westaim issued to Fairfax 14,285,715 warrants to purchase Common Shares (the “Warrants”) at a strike price of C$3.50, with all of the Warrants having vested on June 2, 2017. On July 17, 2023, in connection with the redemption of the Preferred Securities, Fairfax surrendered and disposed of, without any further consideration, all of the Warrants, which were immediately cancelled by the Company. The Warrants were subject to a cashless exercise at the discretion of Fairfax and were classified as a derivative liability and measured at FVTPL. At December 31, 2023, a liability of $nil (December 31, 2022 - $0.1) has been reported in the consolidated statements of financial position. See Note 8, Derivative Warrant Liability in the Notes to the Financial Statements. - 17 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 Share-based compensation Foreign exchange (loss) gain Interest on preferred securities Derivative warrant gain Income taxes (expense) recovery Three months ended December 31 2022 2023 Year ended December 31 2022 2023 $ $ $ 1.6 - 0.2 1.8 51.5 (12.2) (0.2) (0.5) (2.9) (0.3) - - (16.1) (2.1) $ $ 0.3 0.5 0.3 1.1 34.0 $ $ 3.7 4.4 0.5 8.6 $ $ 204.2 1.3 8.4 1.0 10.7 16.7 (1.2) (0.2) (0.2) (0.2) (0.2) (0.5) - $ (2.5) 0.2 $ (16.0) (0.9) (1.5) (6.7) (0.6) (1.0) 0.1 (26.6) (2.3) (4.8) (0.9) (1.5) (0.9) 0.1 (1.9) 0.1 $ (9.8) 0.4 Profit and comprehensive income $ 35.1 $ 32.8 $ 183.9 $ 18.0 5.1 Revenue In the three months ended December 31, 2023, the Company earned interest on loans made to Arena of $0.4 (2022 - $0.3), earned interest on bank balances of $1.2 (2022 – a nominal amount), received dividends paid to the Company from the Arena FINCOs of $nil (2022 - $0.5), and earned advisory fees from Skyward Specialty of $nil (2022 - $0.1) and from the Arena FINCOs and Arena of $0.2 (2022 - $0.2). In the year ended December 31, 2023, the Company earned interest on loans made to Arena of $1.6 (2022 - $1.3), earned interest on bank balances of $2.1 (2022 – a nominal amount), received dividends paid to the Company from the Arena FINCOs of $4.4 (2022 - $8.4), and earned advisory fees from Skyward Specialty of a nominal amount (2022 - $0.5) and from the Arena FINCOs and Arena of $0.5 (2022 - $0.5). 5.2 Net Results of Investments In the three months ended December 31, 2023, the net results of investments of $51.5 (2022 – $34.0) consisted of an increase of $51.9 in the value of the investment in Skyward Specialty (2022 – $40.5), a decrease of $0.9 in the value of the investments in the Arena FINCOs (2022 – decrease of $6.6, which was a decrease of $6.1 before dividends paid of $0.5), the Company’s share of Arena’s comprehensive income of $0.6 (2022 – $0.1) and a decrease in the value of the Company’s investment in ASOF LP of $0.1 (2022 – a decrease of a nominal amount). In the year ended December 31, 2023, the net results of investments of $204.2 (2022 – $16.7) consisted of an increase of $210.3 in the value of the investment in Skyward Specialty (2022 – $26.8), a decrease of $10.4 in the value of the investments in the Arena FINCOs, which was a decrease of $6.0 before dividends paid of $4.4 (2022 – decrease of $10.8, which was a decrease of $2.4 before dividends paid of $8.4), the Company’s share of Arena’s comprehensive income of $4.5 (2022 – $0.7) and a decrease in the value of the Company’s investment in ASOF LP of $0.2 (2022 – decrease of a nominal amount). See discussion in Section 3, Investments of this MD&A. - 18 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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, 2023 were higher than the corresponding periods in the prior year due to special bonuses awarded with regards to the realized gains reported in the Company’s investment in Skyward Specialty. General, administrative and other expenses in the three months and year ended December 31, 2023 were comparable to the corresponding periods in the prior year. Professional fees increased by $0.3 in the three months ended December 31, 2023 when compared to the corresponding period in the prior year due to certain expenses relating to non-recurring consultation and legal fees. Professional fees for the year ended December 31, 2023 were comparable to the corresponding period in the prior year. Changes in share-based compensation expense from period to period result from the issuance of restricted share units (“RSUs”) and stock appreciation rights (“SARs”) to Westaim management, and deferred share units (“DSUs”) to directors in lieu of director fees, as well as movement in the Company’s share price which affects the per unit valuation of outstanding RSUs and DSUs. See Section 8, Liquidity and Capital Resources of this MD&A for additional information on the Company’s share-based compensation plans. The Company, from time to time, holds C$ 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 contracts 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, 2023 and 2022: Foreign exchange (losses) gains relating to: - Liabilities for RSUs and DSUs - Preferred securities - Canadian dollar currency forward contracts and cash balance Three months ended December 31 2022 2023 Year ended December 31 2022 2023 $ (0.3) - - $ (0.3) $ (0.2) (0.8) 0.8 $ (0.2) $ (0.2) (1.0) 0.6 $ (0.6) $ 0.5 2.6 (3.0) $ 0.1 - 19 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 Income taxes receivable Other assets Investments Deferred tax asset Liabilities Accounts payable and accrued liabilities Income taxes payable Preferred securities Derivative warrant liability Deferred tax liability Shareholders’ equity Total liabilities and shareholders’ equity 6.1 Cash December 31, 2023 December 31, 2022 $ $ $ $ 135.0 0.5 1.0 414.3 1.0 551.8 31.3 1.0 - - 1.2 33.5 518.3 551.8 $ $ $ $ 3.4 - 0.6 409.1 0.2 413.3 12.9 0.2 36.9 0.1 - 50.1 363.2 413.3 At December 31, 2023, the Company had cash of $135.0 (December 31, 2022 - $3.4). 6.2 Income taxes receivable At December 31, 2023, the Company had an income taxes receivable of $0.5 for its United States federal and state current year income taxes (December 31, 2022 - $nil). 6.3 Other Assets At December 31, 2023, the Company had other assets of $1.0 (December 31, 2022 - $0.6). Other assets at December 31, 2023, included right of use asset of $0.1 (December 31, 2022 - $0.3), and other receivables of $0.9 (December 31, 2022 - $0.3). See Note 3, Other Assets in the Notes to the Financial Statements. 6.4 Investments Investments were $414.3 and $409.1 at December 31, 2023 and 2022, respectively, and consisted of the investments in: Skyward Specialty, the Arena FINCOs, Arena, and ASOF LP. The Company’s investment in Skyward Specialty, which is accounted for at FVTPL, was determined to be $236.5 and $218.9 at December 31, 2023 and 2022, 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 $147.2 and $160.1 at December 31, 2023 and 2022, respectively. See discussion in Section 3, Investment in the Arena FINCOs of this MD&A. The Company’s investment in Arena, which is accounted for using the equity method, was determined to be $27.6 and $26.9 at December 31, 2023 and 2022, respectively. See discussion in Section 3, Investment in Arena of this MD&A. The Company’s investment in ASOF LP, which is accounted for at FVTPL, was determined to be $3.0 and $3.2 at December 31, 2023 and 2022, respectively. See discussion in Section 3, Investment in ASOF LP of this MD&A. - 20 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 6. ANALYSIS OF FINANCIAL POSITION (continued) 6.5 Deferred Tax Asset At December 31, 2023, the Company reported a deferred tax asset of $1.0 (December 31, 2022 – $0.2) primarily related to recognized 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. See Note 2(k), Summary of Material Accounting Policies Income Taxes and Note 13, Income Taxes in the Notes to Financial Statements. 6.6 Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities were $31.3 at December 31, 2023 (December 31, 2022 - $12.9). Accounts payable and accrued liabilities at December 31, 2023 included liabilities related to accrued employee bonuses of $13.2 (December 31, 2022 - $2.4), RSUs of $9.3 (December 31, 2022 - $5.8), DSUs of $2.9 (December 31, 2022 - $2.6), SARs of $1.9 (December 31, 2022 - $nil), lease liability of $0.1 (December 31, 2022 - $0.3), interest accrued on the Preferred Securities of $nil (December 31, 2022 - $0.5), fair value of Canadian dollar currency forward contract of $nil (December 31, 2022 - $0.5), liability for automatic share purchase plan (“ASPP”) under the NCIB of $2.4 (December 31, 2022 - $nil) and other accrued liabilities of $1.5 (December 31, 2022 - $0.8). See Note 3, Other Assets in the Notes to the Financial Statements for additional information on the lease liability. See Note 5, Accounts Payable and Other Accrued Liabilities in the Notes to the Financial Statements for additional information on the ASPP. See Section 8, Liquidity and Capital Resources of this MD&A for additional information on the Company’s share-based compensation plans. 6.7 Income Taxes Payable At December 31, 2023, the Company had an income taxes payable of $1.0 for its Canadian and United States current year income taxes (December 31, 2022 - $0.2). 6.8 Preferred Securities At December 31, 2023, the Company had no Preferred Securities outstanding and, as a result, the Preferred Securities liability was $nil. See discussion in Section 4, Financing of this MD&A. At December 31, 2022, the C$50 million principal amount of the Preferred Securities outstanding at that time was converted to US$ at the period end exchange rate, resulting in a carrying amount of the Preferred Securities of $36.9. 6.9 Derivative Warrant Liability At December 31, 2023, the Company had no Warrants outstanding and, as a result, the Derivative Warrant Liability was $nil. See discussion in Section 4, Financing of this MD&A. At December 31, 2022, a liability of $0.1 representing the estimated fair value of the vested Warrants had been accrued in the interim consolidated statements of financial position. 6.10 Deferred Tax Liability At December 31, 2023, the Company reported a deferred tax liability of $1.2 (December 31, 2022 – $nil) primarily related to recognized temporary differences of its Canadian taxable income and it is probable that taxable profits will be available against which those temporary differences can be utilized. See Note 2(k), Summary of Material Accounting Policies Income Taxes and Note 13, Income Taxes in the Notes to Financial Statements. 6.11 Shareholders’ Equity The details of shareholders’ equity are as follows: Share capital Contributed surplus Accumulated other comprehensive loss Retained earnings (deficit) Shareholders’ equity - 21 - $ December 31, 2023 353.8 13.7 (2.2) 153.0 518.3 $ $ December 31, 2022 378.6 17.7 (2.2) (30.9) 363.2 $ The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 6. ANALYSIS OF FINANCIAL POSITION (continued) Share Capital Westaim had 131,757,285 Common Shares outstanding at December 31, 2023 and 141,386,718 Common Shares outstanding at December 31, 2022. In the three months and year ended December 31, 2023, Westaim acquired and canceled 3,761,100 and 9,896,178, respectively, Common Shares that it had acquired at a net cost of $10.1 and $26.4, respectively through its normal course issuer bid (“NCIB”). 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 NCIB. In the three months ended December 31, 2023, the Company issued 26,442 Common Shares through the exercise of 26,442 of the Company’s stock options for proceeds of $0.1 which increased share capital. In the year ended December 31, 2023, the Company issued 266,745 Common Shares through the exercise and net exercise of 2,779,382 of the Company’s stock options increasing share capital by $1.6 and decreasing contributed surplus. There were no options exercised for the three months and year ended December 31, 2022. See discussion in Section 8, Liquidity and Capital Resources, Share Based Compensation Plans of this MD&A and Note 10, Share Capital in the Notes to the Financial Statements. Contributed Surplus The Company had $13.7 in contributed surplus at December 31, 2023 and $17.7 at December 31, 2022. The decrease of $4.0 in the year ended December 31, 2023, in contributed surplus was $1.6 to record the settlement of 2,779,382 of the Company’s stock options, which increased share capital noted above, and $2.4 to establish the ASPP liability. See discussion in Section 8, Liquidity and Capital Resources, Share Based Compensation Plans of this MD&A and Note 10, Share Capital in the Notes to the Financial Statements. For details on the ASPP, see Note 5, Accounts Payable and Other Accrued Liabilities in the Notes to the Financial Statements. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss of $2.2 at December 31, 2023 and 2022, was comprised of the cumulative exchange differences from currency translation as a result of a change in presentation currency from the C$ to the US$ on August 31, 2015. Retained Earnings The increase in the retained earnings to $153.0 at December 31, 2023 from a deficit of $30.9 at December 31, 2022 is the result of the profit and comprehensive income for the year ended December 31, 2023. 7. OUTLOOK With the Arena platform largely built (product suite, geographies, IT systems, investment capability), its more than 180 people across seven global offices and operating in twenty countries are poised to deploy committed capital within Arena Investors and intellectual capital within Arena Institutional Services 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 continued 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 and effectively manages its investment portfolio to result in improved investment returns. Skyward Specialty has an AM Best rating “A-“ with a Positive 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 will continue to evaluate opportunities to monetize its investments and use the proceeds to acquire its shares. The Company will also continue 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 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. - 22 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 8. LIQUIDITY AND CAPITAL RESOURCES (continued) 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, 2023, Westaim had 131,757,285 Common Shares outstanding (December 31, 2022 – 141,386,718), with a stated capital of $353.8 (December 31, 2022 - $378.6). There were no Class A or Class B preferred shares outstanding at December 31, 2023 or 2022. See Note 10, Share Capital in the Notes to the Financial Statements. Dividends No dividends were paid by the Company in the three months or year ended December 31, 2023 and 2022. Share-based Compensation Plans Westaim’s long-term equity incentive plan (the “Incentive Plan”) provides for grants of RSUs, DSUs, SARs 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 RSUs outstanding, shall not exceed 10% of the aggregate number of Common Shares outstanding. As the DSUs and SARs are settled solely in cash, they are not included in this 10% limitation. Westaim had 7,597,513 stock options outstanding at December 31, 2023 at strike prices ranging from C$3.00 to C$3.10 (December 31, 2022 - 10,428,337 stock options outstanding at strike prices ranging from C$3.00 to C$3.25). During the three months ended December 31, 2023, 26,442 stock options were exercised and the Company received $0.1 and issued 26,442 Common Shares to the option holder. During the year ended December 31, 2023, 2,779,382 stock options were exercised or net exercised and the Company received $0.1 and issued 266,745 Common Shares to the option holders. Also, during the year ended December 31, 2023, 51,442 stock options were forfeited by a former employee. There were no stock options exercised or forfeited in the year ended December 31, 2022. Westaim had 3,455,198 RSUs outstanding at December 31, 2023 (December 31, 2022 – 2,975,198 RSUs). In the year ended December 31, 2023, 480,000 RSUs were issued to certain members of the Company’s management. There were no RSUs issued in the year ended December 31, 2022. 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 settled in the three months or year ended December 31, 2023 and 2022. At December 31, 2023, 1,027,583 DSUs were vested and outstanding (December 31, 2022 – 1,355,133 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 year ended December 31, 2023, 485,787 DSUs were settled for $1.2 in cash paid to a former director of the Company. In the three months ended December 31, 2023 and 2022, and in the year ended December 31, 2022, no DSUs were settled. At December 31, 2023, 4,338,530 SARs were vested and outstanding (December 31, 2022 – nil SARs). These SARs were issued to certain management of Westaim which vested immediately and will be paid out solely in cash for the amount that the Westaim trading price at the time of exercise, if any, is in excess of the SARs strike price of C$3.83. At December 31, 2023, accounts payable and accrued liabilities included amounts related to RSUs of $9.3 (December 31, 2022 - $5.8), DSUs of $2.9 (December 31, 2022 - $2.6) and SARs of $1.9 (December 31, 2022 - $nil). 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”. - 23 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 8. LIQUIDITY AND CAPITAL RESOURCES (continued) 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, 2023 Financial assets: Cash Other assets (excluding capital, right-of-use and deferred tax assets) Investments Total financial assets Financial obligations: Other liabilities (excluding lease, ASPP and deferred tax liabilities) Total financial obligations Net financial assets December 31, 2022 Financial assets: Cash Other assets (excluding capital, right-of-use and deferred tax assets) Investments Total financial assets Financial obligations: Other liabilities (excluding lease and derivative warrant 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 Total $ 135.0 $ - $ - $ 135.0 1.4 - 136.4 - 24.0 24.0 - 390.3 390.3 1.4 414.3 550.7 15.7 15.7 $ 120.7 1.9 1.9 $ 22.1 12.2 12.2 $ 378.1 29.8 29.8 $ 520.9 One year or less One to five years No specific date / later than five years Total $ 3.4 $ - $ - $ 3.4 0.3 - 3.7 - 24.0 24.0 - 385.1 385.1 0.3 409.1 412.8 4.4 - 4.4 $ (0.7) - - - $ 24.0 8.4 36.9 45.3 $ 339.8 12.8 36.9 49.7 $ 363.1 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. See Note 12, Related Party Transactions in the Notes to the Financial Statements. - 24 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) 10. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS Preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions, some of which relate to matters that are uncertain. As more information becomes known, these estimates and assumptions could change and thus have a material impact on the Company’s financial condition and results of operations in the future. The Company has established detailed policies and control procedures that are intended to ensure that management’s judgments and estimates are well controlled, independently reviewed and consistently applied from period to period. Management believes that its estimates for determining the valuation of the Company’s assets and liabilities are appropriate. Management used the trading price of the publicly traded shares at the close of the reporting period 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 and ASOF LP at December 31, 2023. Management determined that these valuation techniques produced the best indicator of the fair value of the Company’s investments measured at FVTPL at December 31, 2023. The significant unobservable inputs used in the valuation of the Arena FINCOs at December 31, 2023 was the equity of the entities at December 31, 2023 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, deferred tax assets and deferred tax liabilities. 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, 2023 and 2022. 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 Material Accounting Policies in the Notes to the Financial Statements. At December 31, 2023, there were no new pronouncements that impacted the Company. 12. QUARTERLY FINANCIAL INFORMATION Revenue Increase (decrease) in value of investments, less dividends Net expenses Income taxes (expense) recovery Profit (loss) and comprehensive income (loss) Q4 2023 $ 1.8 Q3 2023 $ 1.1 Q2 2023 $ 3.3 Q1 2023 $ 2.4 Q4 2022 $ 1.1 Q3 2022 $ 3.4 Q2 2022 $ 3.2 Q1 2022 $ 3.0 51.5 (16.1) (2.1) $ 35.1 23.7 (1.8) - $ 23.0 32.6 (4.7) 0.1 $ 31.3 96.4 (4.0) (0.3) $ 94.5 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 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, share-based compensation is 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. A detailed description of the risk factors associated with the Company and its business is contained in the Company’s Annual Information Form for its fiscal year ended December 31, 2022, which is available on SEDAR+ at www.sedarplus.ca, as same may be modified or superseded by a subsequently filed Annual Information Form. - 25 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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, 2023 Corporate Private Investments Real Estate Private Investments Structured Finance and Assets Other Securities Investments by Strategy Corporate Private Investments Real Estate Private Investments Structured Finance and Assets Other Securities Number of positions 25 40 47 109 221 Number of positions 24 36 49 188 297 Cost $ 49.8 50.8 56.8 38.1 195.5 $ $ Fair value 52.9 53.3 56.1 29.7 192.0 $ Cost $ 50.1 47.0 59.1 44.0 200.2 $ $ Fair value 60.2 45.8 55.2 37.8 199.0 $ Percentage of investments at fair value 27.6% 27.8% 29.2% 15.4% 100.0% % Debt investments 6.3% 20.2% 22.5% 6.4% 55.4% % Equity, hard assets and real estate owned investments 21.3% 7.6% 6.7% 9.0% 44.6% December 31, 2022 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% 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, 2023 December 31, 2022 Loans / Private Assets North America Europe Asia/Pacific Latin America Other Securities 1 North America Asia/Pacific Europe Latin America Other 1 Net of short positions. Cost Fair value $ 104.9 35.6 14.7 2.2 157.4 $ 105.2 42.7 12.0 2.4 162.3 25.6 2.5 9.9 0.1 - 38.1 21.0 1.8 7.0 (0.1) - 29.7 Percentage of investments at fair value 54.8% 22.2% 6.3% 1.3% 84.6% 10.9% 0.9% 3.6% 0.0% 0.0% 15.4% 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 56.2% 17.6% 6.3% 0.9% 81.0% 15.4% 2.0% 1.5% 0.0% 0.1% 19.0% $ 195.5 $ 192.0 100.0% $ 200.2 $199.0 100.0% - 26 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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, 2023 December 31, 2022 Cost Fair value Percentage of investments at fair value 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 Multi-Family Structured Finance and Assets Lease/Equipment Other Assets Consumer Assets $ - 9.4 2.4 1.4 20.2 14.2 2.2 49.8 2.6 17.4 5.9 5.6 4.1 - 5.1 9.8 0.3 50.8 0.5 40.0 16.3 56.8 $ - 6.8 2.9 0.8 22.3 17.6 2.5 52.9 2.8 19.9 7.5 3.6 3.4 - 5.1 10.7 0.3 53.3 1.1 40.0 15.0 56.1 Total Loans / Private Assets 157.4 162.3 Other Securities (2) Basic Materials Biotechnology Business Services Consumer Products Diversified Energy Financial Services Foreign Exchange Forwards/Options Fund Investment Healthcare Services Industrial Information Technology Interest Rate Derivatives Mining Oil and Gas Other Assets Real Estate Retail Technology Telecommunications - 1.5 3.4 9.2 2.0 - 2.7 - 3.0 1.6 4.8 0.3 0.4 0.1 1.1 - 0.6 - 7.0 0.4 38.1 $ 195.5 - 2.2 3.7 5.7 2.1 - 2.6 (1.2) 3.7 1.8 4.3 - 0.1 0.1 1.3 0.1 0.8 - 2.0 0.4 29.7 $ 192.0 0.0% 3.6% 1.5% 0.4% 11.6% 9.2% 1.3% 27.6% 1.4% 10.4% 3.9% 1.9% 1.8% 0.0% 2.6% 5.6% 0.2% 27.8% 0.6% 20.8% 7.8% 29.2% 84.6% 0.0% 1.2% 1.9% 2.9% 1.1% 0.0% 1.4% (0.6)% 1.9% 0.9% 2.2% 0.0% 0.1% 0.0% 0.7% 0.0% 0.4% 0.0% 1.1% 0.2% 15.4% 100.0% $ 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 55.2 156.2 161.2 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% 0.0% 23.0% 1.3% 18.4% 8.1% 27.8% 81.0% 1.1% 0.4% 0.0% 4.5% 3.9% 0.2% 1.2% (0.5)% 1.8% 0.4% 1.1% 0.6% 0.2% 0.1% 0.7% 0.0% 0.4% 0.1% 1.7% 1.1% 19.0% 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. - 27 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (Currency amounts in millions of United States dollars except per share data, unless otherwise indicated) December 31, 2023 Total coupon (including PIK) (2) LTV (3) n/a (4) n/a (4) n/a (4) n/a (4) 6.47% 16.35% 10.00% 12.00% 12.00% 14.50% 15.85% 8.75% 14.00% n/a (4) 19.35% 10.00% n/a (4) 10.00% 10.00% n/a (4) n/a (11) n/a (4) n/a (4) 10.00% 12.00% n/a (9) 11.64% n/a (4) n/a (4) n/a (4) n/a (4) n/a (11) 49.3% 76.5% 22.7% 40.9% 50.1% 37.7% 45.7% 53.7% n/a (4) 100%+ 1.8% n/a (4) 0.3% 0.9% n/a (4) 43.0% n/a (4) n/a (4) 0.8% 3.8% n/a (9) 43.5% 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-3349 CPC-5143EQY CPC-7277 CPC-7871 CPC-4985 CPC-6859 CPC-5325 CPC-9129 CPC-7312 CPC-2170 CPC-5889 CPC-2397 CPC-7677 CPC-6677 CPC-7312EQY CPC-5914 CPC-5913 CPC-5830 CPC-1010 CPC-6374 CPC-9140 CPC-6373 CPC-5856 CPC-3083 Subtotal / Weighted average % Other Assets Oil & Gas Business Services Oil & Gas Consumer Products Retail Oil & Gas Business Services Oil & Gas Retail Business Services Oil & Gas Consumer Products Financial Services Financial Services Business Services Business Services Business Services Business Services Business Services Oil & Gas Business Services Business Services Business Services Business Services Business Services Principal (1) Investments at cost Investments at fair value Geographic location Collateral 13.8 11.5 6.1 2.6 2.0 2.1 1.3 1.1 3.2 0.8 0.9 1.7 0.6 1.1 0.4 0.3 0.3 0.2 0.2 0.2 0.2 0.0 0.2 0.1 0.1 0.0 51.0 14.2 11.7 6.1 2.6 2.0 1.4 1.3 1.1 3.2 0.8 0.6 1.2 0.4 1.0 0.4 0.3 0.3 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.0 49.8 Europe North America Asia Pacific North America Asia Pacific North America North America Asia Pacific North America Europe North America North America North America North America North America Europe North America Europe Europe Europe North America Europe North America Europe Europe North America Equity Equity Equity Hard Asset 1st Lien 1st Lien 1st Lien 1st Lien 1st Lien 1st Lien 1st Lien 1st Lien 1st Lien Equity 1st Lien 1st Lien Equity 1st Lien 1st Lien Equity 1st Lien Equity Equity 1st Lien 1st Lien Equity 17.6 16.2 2.9 2.5 2.4 1.7 1.7 1.4 1.0 0.8 0.8 0.7 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.0 52.9 - 28 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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, 2023 Investments by industry Principal (1) Investments at cost Investments at fair value Geographic location Collateral Total coupon (including PIK) (2) Ref. no. Real Estate Private Investments RECPC-6932 RECPC-9082 RECPC-2277 Hospitality Hospitality Land - Commercial Development Retail Residential Hospitality Land - Multi-Family Development Residential Residential Commercial Land - Commercial Development Residential Land - Multi-Family Development Land - Single-Family Development Hospitality Hospitality Land - Single-Family Development Residential Hospitality Land - Commercial Development Commercial Hospitality Retail Residential Land - Single-Family Development Hospitality Land - Commercial Development Commercial Residential Land - Single-Family Development Multi-Family Residential Land - Single-Family Development Land - Single-Family Development Commercial Residential Land - Single-Family Development Residential Land - Commercial Development Land - Commercial Development Residential Land - Single-Family Development Land - Single-Family Development RECPC-8192 RECPC-7586 RECPC-8135 RECPC-2683 RECPC-7488 RECPC-4220 RECPC-8031 RECPC-5905 RECPC-9232 RECPC-8795 RECPC-6996 RECPC-6592 RECPC-2560 RECPC-6506TL1 RECPC-6854 RECPC-7027 RECPC-8888 RECPC-7554 RECPC-8433 RECPC-7654 RECPC-9390 RECPC-6995 RECPC-6129 RECPC-2592 RECPC-6384EQ RECPC-9006 RECPC-8040 RECPC-7826 RECPC-7390 RECPC-6505 RECPC-6242 RECPC-8843 RECPC-9087 RECPC-8118 RECPC-8682 RECPC-1047 RECPC-1015 RECPC-8417 RECPC-9238 RECPC-9372 5.4 4.9 3.3 4.5 2.4 2.3 4.5 1.3 2.5 1.2 1.2 1.1 1.1 1.0 0.9 1.4 1.2 0.7 0.7 0.8 0.6 0.5 0.6 0.5 0.5 0.6 0.4 0.3 0.3 0.3 0.3 0.3 0.5 0.5 0.2 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0 6.4 4.9 3.3 4.5 2.4 2.2 4.5 1.7 2.5 1.4 1.2 1.1 1.1 0.9 0.9 1.4 1.2 0.7 0.7 0.8 0.7 0.5 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.5 0.5 0.2 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0 8.1 4.9 4.9 4.5 2.9 2.7 2.5 2.2 2.1 1.4 1.2 1.2 1.1 Europe North America North America 1st Mortgage 1st Mortgage 1st Mortgage North America Europe Europe North America Asia Pacific North America Europe North America 1st Mortgage 1st Mortgage Real Property Real Property 1st Mortgage Real Property Real Property 1st Mortgage Europe North America Real Property 1st Mortgage 18.49% 12.10% 24.00% 10.82% 12.50% n/a (6) n/a (6) 13.00% n/a (6) n/a (6) 19.92% n/a (6) 25.00% LTV (3) 100%+ 53.9% 100%+ 52.5% 88.2% n/a (6) n/a (6) 81.7% n/a (6) n/a (6) 67.6% n/a (6) 42.5% 1.1 Asia Pacific 1st Mortgage 19.80% 68.8% 1.1 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.6 0.5 0.5 0.5 0.5 0.4 0.3 0.3 0.3 0.3 0.2 North America North America Asia Pacific 1st Mortgage Real Property 1st Mortgage Europe Europe North America 1st Mortgage Real Property 1st Mortgage Europe Europe North America Europe Asia Pacific Real Property Real Property 1st Mortgage Real Property 1st Mortgage North America North America 1st Mortgage 1st Mortgage North America Europe North America Asset Pool 1st Lien 1st Mortgage Europe North America Asia Pacific Real Property 1st Mortgage 1st Mortgage 11.82% n/a (6) 8.00% 17.87% n/a (6) 15.34% n/a (6) n/a (6) 11.50% n/a (6) 12.00% 14.00% n/a (6) n/a (4) 16.55% 16.31% n/a (6) 20.00% 12.00% 30.1% n/a (6) 100%+ 60.4% n/a (6) 34.5% n/a (6) n/a (6) 12.1% n/a (6) 51.4% 73.2% n/a (6) n/a (4) 59.2% 48.1% n/a (6) 100%+ 51.4% 0.2 Asia Pacific 1st Mortgage 13.63% 100%+ 0.2 0.2 0.2 0.1 0.1 Europe Europe Asia Pacific 1st Lien Real Property 1st Mortgage Europe North America Real Property 1st Mortgage 18.90% n/a (6) 15.12% n/a (6) 15.00% 55.6% n/a (6) 100%+ n/a (6) 53.0% 0.0 North America Real Property n/a (6) n/a (6) 0.0 0.0 Asia Pacific Asia Pacific 1st Mortgage 1st Lien 12.00% n/a (11) 51.4% 51.4% 0.0 Asia Pacific 1st Lien 13.63% 100%+ Subtotal / Weighted average % 49.5 50.8 53.3 16.09% 78.2% - 29 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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, 2023 Investments by industry Ref. no. Structured Finance and Assets Other Assets SF-2239 Other Assets CI-4898 Other Assets CI-8707 Consumer CA-5898 Other Assets CI-6785 Other Assets CI-2651 Consumer CA-7474 Consumer CA-4946 Consumer CA-6444 Other Assets SF-8578 Other Assets CI-3045 Other Assets CI-5177 Other Assets CI-1999EQ Other Assets CI-5554A Other Assets CPC-7227EQY Other Assets CI-8399 Other Assets SF-7254 Consumer CA-5596C Lease/Equipment CI-2201 Other Assets CI-6750 Other Assets CI-3978 Consumer CA-6154 Other Assets CI-6648TL Other Assets SF-7242 Consumer CA-4718 Other Assets CI-2000 Other Assets CI-7442 Other Assets CI-8104 Consumer CA-7092 Other Assets CI-6565 Consumer CA-7491 Other Assets CI-1520 Other Assets CI-1035 Other Assets CI-6004 Consumer CA-5596 Other Assets CI-4967 Consumer CA-6288 Other Assets CI-7166 Other Assets CI-7492 Other Assets CI-2064 Consumer CA-8621 Other Assets CI-6253 Other Assets CI-7985 Other Assets SF-5396 Other Assets CA-6328 Consumer CA-8720 Consumer CA-4727 Consumer CA-2729 Lease/Equipment CI-6006 Consumer CA-1052F Consumer CA-1052S Other Assets CI-2686 Other Assets CI-1018 Other Assets CI-8048 Consumer CA-7573 Other Assets CI-7721 CI-1999 Other Assets Subtotal / Weighted average % Principal (1) Investments at cost Investments at fair value Geographic location Collateral Total coupon (including PIK) (2) 4.4 4.0 2.3 2.7 3.3 4.0 1.8 2.1 1.9 1.6 1.0 0.8 3.0 1.7 1.3 1.2 1.1 1.1 0.5 0.9 1.8 0.8 0.8 0.8 0.4 1.0 0.7 0.6 0.6 0.5 0.2 0.2 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.0 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.0 2.6 1.5 0.4 0.2 0.0 0.0 0.0 0.0 57.0 5.1 4.0 2.3 2.6 3.0 4.3 1.8 2.1 1.9 1.5 1.0 0.8 3.0 1.3 1.3 1.2 1.1 1.1 0.5 0.9 1.8 0.8 0.8 0.8 0.4 1.0 0.7 0.6 0.6 0.5 0.0 0.2 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.0 0.2 0.2 0.2 0.2 0.2 0.1 0.0 0.1 0.0 2.6 1.5 0.4 0.2 0.0 0.0 0.0 0.0 56.8 North America North America North America North America North America North America North America North America Latin America North America North America North America North America North America North America North America North America North America North America Europe North America Europe North America North America North America North America North America North America North America North America North America North America North America Latin America North America North America North America North America North America North America North America North America 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 5.3 4.1 3.5 3.2 3.0 2.8 2.4 2.1 2.1 2.1 2.0 1.7 1.5 1.4 1.4 1.2 1.1 1.1 1.0 0.9 0.8 0.8 0.8 0.8 0.8 0.7 0.7 0.7 0.7 0.5 0.5 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 56.1 1st Lien 1st Lien Asset Pool Asset Pool 1st Lien Hard Asset Asset Pool 1st Lien Asset Pool 1st Lien Asset Pool Hard Asset Equity 1st Lien Equity 1st Lien 1st Lien Asset Pool Hard Asset 1st Lien Hard Asset 1st Lien 1st Lien 1st Lien Asset Pool Equity Hard Asset Hard Asset 1st Lien 1st Lien Asset Pool 1st Lien 1st Lien Hard Asset Asset Pool Hard Asset 1st Lien Hard Asset Hard Asset Equity Asset Pool 1st Lien 1st Lien 1st Lien 1st Lien Asset Pool 1st Lien 1st Lien 1st Lien 1st Lien 1st Lien Equity 1st Lien Hard Asset Asset Pool 1st Lien 1st Lien n/a (11) 18.37% n/a (7) n/a (7) 13.50% n/a (4) n/a (7) 20.39% n/a (7) 18.66% n/a (11) n/a (4) n/a (14) 10.00% n/a (4) 13.85% 27.00% n/a (7) n/a (12) 24.00% n/a (12) 18.50% 16.20% 17.38% n/a (7) n/a (9) n/a (4) n/a (4) 9.00% 18.00% n/a (7) n/a (8) 0.00% n/a (4) n/a (7) n/a (4) 10.00% n/a (4) n/a (4) n/a (4) n/a (7) 7.88% 15.00% 18.66% 12.00% n/a (7) 29.00% n/a (11) 13.97% 15.00% n/a (5) n/a (4) 0.00% n/a (4) n/a (7) 7.88% n/a (10) 16.91% LTV (3) 8.6% 41.5% n/a (7) n/a (7) 70.1% n/a (4) n/a (7) 100%+ n/a (7) 17.6% 63.3% n/a (4) n/a (14) 73.6% n/a (4) 58.3% 82.2% n/a (7) n/a (12) 62.2% n/a (12) 61.8% 62.2% 79.7% n/a (7) n/a (9) n/a (4) n/a (4) 73.4% 62.2% n/a (7) 47.8% 100.0% n/a (4) n/a (7) n/a (4) 31.2% n/a (4) n/a (4) n/a (4) n/a (7) 100%+ 62.2% 87.0% 83.1% n/a (7) 66.0% 100.0% 91.1% 100.0% 100.0% n/a (4) 100.0% n/a (4) n/a (7) 100%+ n/a (10) 54.0% Total / Weighted average % $ 157.5 $ 157.4 $ 162.3 15.57% 64.7% - 30 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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: 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 SOFR 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, 2023. 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, 2023. 4 5 6 Investment is not a loan. Stated coupon and LTV are not applicable. Interest not accrued on loans purchased as non-performing. Investment represents owned real estate either purchased or acquired through a lender default. Metric is not available. 7 Investment represents an unsecured credit pool purchase with no stated interest rate and no LTV. 8 This investment represents a claim against proceeds subject to a litigation result whereby the FINCOs are not accruing interest. 9 Investment is an equity investment. Stated coupon and LTV are not applicable. Investment is in maturity default where the Company and its partners acquired the borrower in bankruptcy. Metric is not applicable. 10 11 State coupon and/or LTV are not applicable. 12 Investment is an aircraft purchase and is not a loan. - 31 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 - 32 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 Investments by industry 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 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% 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% 0.4 Asia Pacific 1st Mortgage 12.00% 40.0% 0.4 Asia Pacific 1st Mortgage 9.18% 88.0% 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 n/a (9) 24.00% 18.00% n/a (9) n/a (9) 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 11.00% 77.0% 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 n/a (9) 15.00% 12.00% n/a (9) n/a (9) 53.0% 40.0% n/a (9) 13.59% 67.5% Ref. no. Real Estate Private Investments RECPC-6932 RECPC-1068S4 RECPC-2277 Hospitality Residential Land - Commercial 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-8192 RECPC-7586 RECPC-2683 RECPC-7654 RECPC-4220 RECPC-7488 RECPC-8135 RECPC-2592 RECPC-2560 RECPC-7319 RECPC-5905 RECPC-6592 RECPC-6996 RECPC-7027 RECPC-7390 RECPC-6506TL1 RECPC-6854 RECPC-5476 RECPC-6384EQ RECPC-6194 RECPC-6995 RECPC-6242 RECPC-7554 RECPC-6129 RECPC-8622 RECPC-6334 RECPC-4698 RECPC-6505 RECPC-8118 RECPC-6048 RECPC-1047 RECPC-8417 RECPC-1015 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 - 33 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 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 Total coupon (including PIK) (2) 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 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% LTV (3) 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% - 34 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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: 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. Investment is not a loan. Metric is not applicable. 4 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 - 35 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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 ASPP liability 2 Derivative warrant liability 3 Assumed proceeds of exercised in-the-money options 4 Number of Common Shares: Number of Common Shares outstanding Adjustments for assumed exercise of: Outstanding RSUs 1 In-the-money options 4 Adjusted number of Common Shares Book value per share - in US$ Book value per share - in C$ 5 Westaim TSXV closing share price - in C$ December 31, 2023 December 31, 2022 $ 518.3 $ 363.2 9.3 2.4 - 17.5 547.5 5.8 - 0.1 - 369.1 $ $ 131,757,285 141,386,718 3,455,198 7,597,513 142,809,996 $ $ $ 3.83 5.08 3.76 2,975,198 - 144,361,916 $ $ $ 2.56 3.46 2.63 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 5, Accounts Payable and Other Accrued Liabilities in the Notes to the Financial Statements. Shareholders’ equity per IFRS was reduced by the liability required for the maximum amount that would be required to settle the ASPP. 3 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. There were no outstanding Vested Warrants at December 31, 2023. Vested Warrants were not included in the adjusted number of Common Shares at December 31, 2022 as none of them were in-the-money. 4 See Note 11, Share-based Compensation in the Notes to the Financial Statements. Adjustments were made for all of the options outstanding at December 31, 2023, since they were in-the-money. No adjustments were made for options at December 31, 2022, 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. 5 Book value per share converted from US$ to C$ at period end exchange rates. Period end exchange rates: 1.32405 at December 31, 2023, and 1.35360 at December 31, 2022. (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. - 36 - The Westaim Corporation Management’s Discussion and Analysis Year ended December 31, 2023 (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; expectations regarding the Company’s assets and liabilities; the Company using the proceeds of its investments to acquire Common Shares; 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; the Company’s cash flow; liquidity and financing risks; 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 (“PFIC”) for U.S. federal income tax purposes that may affect Westaim’s U.S. shareholders; market turmoil, risk of volatile markets and market disruption risk; exposure to epidemics and/or pandemics; Company employee error or misconduct; cybersecurity risks; 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; unexpected changes in the interpretation of Skyward Specialty’s coverage or claims; Skyward Specialty receiving reimbursement for claims by reinsurers on a timely basis; Skyward Specialty’s ability to pay claims accurately and timely; severe weather conditions, including the effects of climate change, catastrophes, pandemics as well as man-made events; plan administrators; Skyward Specialty’s reliance on renewal of existing insurance contracts; the effect of environmental, social and governance (“ESG”) matters on Skyward Specialty’s business; the effect of any changes in accounting practices and future pronouncements on Skyward Specialty’s business; adverse economic factors; the cyclical nature of the insurance industry on Skyward Specialty’s business; the performance of Skyward Specialty’s investment portfolio; Skyward Specialty meeting liquidity requirements; 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 receive dividends from its subsidiaries; 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 future capital requirements; the loss by Skyward Specialty of key personnel or an inability to attract and retain qualified personnel; Skyward Specialty’s reliance on information technology and telecommunications systems; Skyward Specialty’s ability to manage growth effectively; the effect of litigation on Skyward Specialty; Skyward Specialty’s reliance on vendor relationships; Skyward Specialty’s reliance on its intellectual property rights and 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; Arena’s ability to mitigate operational and due diligence risks; the subjective nature of the valuation of the Arena FINCOs’ investments; Arena’s ability to mitigate litigation- related and other legal-related risks; Arena’s ability to find appropriate investment opportunities; Arena’s ability to successfully navigate and secure compliance with regulations applicable to it and its business; Arena’s ability to mitigate private litigation risks; Arena’s ability to manage conflicts of interest; the effects of a decrease in revenues as a result of significant redemptions in AUM on Arena Investor’s business; the investment performance of Arena Investors; Arena Investors’ investment in illiquid investments; Arena’s ability to retain qualified management staff; Arena’s ability to mitigate the risk of employee misconduct and employee error; the effect of epidemics, pandemics, outbreaks of disease and public health issues on Arena’s business; effect of market conditions on the Arena FINCOs; Arena’s ability to implement effective risk management systems; dependence by the Arena FINCOs on the creditworthiness of borrowers; the ability of the Arena FINCOs to mitigate the risk of default by and bankruptcy of a borrower; the ability of the Arena FINCOs to adequately obtain, perfect and secure loans; the ability of the Arena FINCOs to limit the need for enforcement or liquidation procedures; the ability of the Arena FINCOs to protect against fraud; the Arena FINCOs’ ability to realize profits; the Arena FINCOs’ investment in illiquid investments; loan concentration; 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 FINCOs’ use of leverage; 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. - 37 - March 27, 2024 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL INFORMATION The accompanying consolidated financial statements including the notes thereto have been prepared by, and are the responsibility of, the management of The Westaim Corporation. This responsibility includes selecting appropriate accounting policies and making estimates and informed judgments based on the anticipated impact of current transactions, events and trends, consistent with International Financial Reporting Standards. The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and internal control. In meeting our responsibility for the reliability and timeliness of financial information, the Company maintains and relies upon a comprehensive system of internal controls including organizational, procedural and disclosure controls. The Audit Committee, which is comprised of three Directors, all of whom are independent, meets with management as well as the external auditors to satisfy itself that management is properly discharging its financial reporting responsibilities and to review the consolidated financial statements and the report of the auditors. It reports its findings to the Board of Directors who approve the consolidated financial statements. The accompanying consolidated financial statements have been audited by Deloitte LLP, the independent auditors, in accordance with 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. 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(cid:100)(cid:346)(cid:286)(cid:3)(cid:286)(cid:374)(cid:336)(cid:258)(cid:336)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:393)(cid:258)(cid:396)(cid:410)(cid:374)(cid:286)(cid:396)(cid:3)(cid:381)(cid:374)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:258)(cid:437)(cid:282)(cid:349)(cid:410)(cid:3)(cid:396)(cid:286)(cid:400)(cid:437)(cid:367)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)(cid:349)(cid:374)(cid:3)(cid:410)(cid:346)(cid:349)(cid:400)(cid:3)(cid:349)(cid:374)(cid:282)(cid:286)(cid:393)(cid:286)(cid:374)(cid:282)(cid:286)(cid:374)(cid:410)(cid:3)(cid:258)(cid:437)(cid:282)(cid:349)(cid:410)(cid:381)(cid:396)(cid:859)(cid:400)(cid:3)(cid:396)(cid:286)(cid:393)(cid:381)(cid:396)(cid:410)(cid:3)(cid:349)(cid:400)(cid:3)(cid:28)(cid:396)(cid:349)(cid:272)(cid:3)(cid:62)(cid:286)(cid:381)(cid:393)(cid:381)(cid:367)(cid:282)(cid:856)(cid:3) (cid:3) (cid:876)(cid:400)(cid:876)(cid:3)(cid:24)(cid:286)(cid:367)(cid:381)(cid:349)(cid:410)(cid:410)(cid:286)(cid:3)(cid:62)(cid:62)(cid:87)(cid:3) (cid:3) (cid:18)(cid:346)(cid:258)(cid:396)(cid:410)(cid:286)(cid:396)(cid:286)(cid:282)(cid:3)(cid:87)(cid:396)(cid:381)(cid:296)(cid:286)(cid:400)(cid:400)(cid:349)(cid:381)(cid:374)(cid:258)(cid:367)(cid:3)(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:258)(cid:374)(cid:410)(cid:400)(cid:3) (cid:62)(cid:349)(cid:272)(cid:286)(cid:374)(cid:400)(cid:286)(cid:282)(cid:3)(cid:87)(cid:437)(cid:271)(cid:367)(cid:349)(cid:272)(cid:3)(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:258)(cid:374)(cid:410)(cid:400)(cid:3)(cid:3) (cid:68)(cid:258)(cid:396)(cid:272)(cid:346)(cid:3)(cid:1006)(cid:1011)(cid:853)(cid:3)(cid:1006)(cid:1004)(cid:1006)(cid:1008)(cid:3) (cid:3) (cid:3) - 42 - 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 (note 4) Investment in ASOF LP (note 4) Deferred tax asset (note 13) LIABILITIES Accounts payable and accrued liabilities (note 5) Income taxes 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) Retained earnings (deficit) December 31 2023 December 31 2022 $ $ $ $ $ 135,032 494 988 236,470 147,234 27,536 3,024 414,264 1,043 551,821 31,269 1,004 - - 1,202 33,475 $ $ 3,434 - 552 218,879 160,113 26,957 3,179 409,128 178 413,292 12,940 245 36,939 94 - 50,218 353,843 13,745 (2,227) 152,985 518,346 551,821 $ 378,563 17,735 (2,227) (30,997) 363,074 413,292 The accompanying notes are an integral part of these consolidated financial statements. Approved on behalf of the Board Ian W. Delaney Director John W. Gildner Director - 43 - The Westaim Corporation Consolidated Statements of Profit 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 value of investment in Skyward Specialty (note 4) Decrease in value of investment in Arena FINCOs, less dividends (note 4) Share of income from investment in Arena (note 4) Decrease in value of investment in ASOF LP (note 4) Net expenses Salaries and benefits General, administrative and other Professional fees Share-based compensation expense (note 11) Foreign exchange loss (gain) Interest on preferred securities (note 6) Derivative warrant gain (note 8) Profit before income taxes Income taxes (expense) recovery (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. - 44 - Year Ended December 31 2023 2022 $ $ 3,754 4,400 473 8,627 210,255 (10,379) 4,437 (155) 204,158 15,914 930 1,445 6,703 600 1,010 (98) 26,504 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 $ $ $ 186,281 (2,299) 17,604 357 183,982 $ 17,961 1.33 $ 1.32 $ 0.13 0.12 138,299,601 142,394,672 141,901,513 144,876,711 The Westaim Corporation Consolidated Statements of Changes in Equity Year ended December 31, 2023 (thousands of United States dollars) Share Capital Contributed Surplus Accumulated Other Comprehensive Loss Retained Earnings (Deficit) Total Equity Balance at January 1, 2023 $ 378,563 $ 17,735 $ (2,227) $ (30,997) $ 363,074 Cancellation of common shares (note 10) Automatic stock purchase plan ("ASPP") (note 5) Shares issued from exercise of stock options (note 10) Exercise and net exercise of stock options (note 10) Profit and comprehensive income (26,386) - 102 1,564 - - (2,426) - (1,564) - - - - - - - - - - 183,982 (26,386) (2,426) 102 - 183,982 Balance at December 31, 2023 $ 353,843 $ 13,745 $ (2,227) $ 152,985 $ 518,346 Year ended December 31, 2022 (thousands of United States dollars) Share Capital Contributed Surplus Accumulated Other Comprehensive Loss Retained Earnings (Deficit) Total Equity Balance at January 1, 2022 Cancellation of common shares (note 10) Profit and comprehensive income Balance at December 31, 2022 $ $ 381,127 $ 17,735 $ (2,227) $ (48,958) $ 347,677 (2,564) - - - - - - 17,961 (2,564) 17,961 378,563 $ 17,735 $ (2,227) $ (30,997) $ 363,074 The accompanying notes are an integral part of these consolidated financial statements. - 45 - The Westaim Corporation Consolidated Cash Flow Statements (thousands of United States dollars) Operating activities Profit Increase in value of investment in Skyward Specialty (note 4) Decrease in value of investment in Arena FINCOs, less dividends (note 4) Share of income from investment in Arena (note 4) Decrease in value of investment in ASOF LP (note 4) Share-based compensation expense (note 11) Share-based compensation payments (note 11) Depreciation and amortization Unrealized foreign exchange loss (gain) Derivative warrant gain (note 8) Change in income taxes 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 Receipt from dissolution of HIIG Partnership (note 4) Proceeds from partial sale of Skyward Specialty common shares (note 4) Return of capital from investments in Arena FINCOs (note 4) Distribution received from Arena Cash provided from investing activities Financing activities Settlement of Preferred Securities (note 6) Purchase and cancellation of Common Shares (note 10) Proceeds from exercise of options and issuance of Common Shares (note 10) Cash used in financing activities Net increase (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. - 46 - Year Ended December 31 2023 2022 $ 183,982 (210,255) 10,379 (4,437) 155 6,703 (1,187) 137 688 (98) 734 (571) 10,678 (3,092) 449 192,215 2,500 3,726 198,890 (37,916) (26,386) 102 (64,200) 131,598 3,434 135,032 $ 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 1,476 $ 1,932 $ $ $ The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (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 27, 2024. These consolidated financial statements include the accounts of Westaim and its wholly owned subsidiaries, Westaim HIIG GP Inc. (“HIIG GP”), Arena Finance Company II Inc. (“AFCII”) and The Westaim Corporation of America (“WCA”) and are collectively referred to as the “Company”. Westaim is a Canadian investment company specializing in providing long-term capital to businesses operating primarily within the global financial services industry. The Company’s principal investments consist of Skyward Specialty Insurance Group, Inc. (“Skyward Specialty”), Arena FINCOs (as defined in note 4) and Arena (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 Material Accounting Policies The material 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 follows the material accounting policies included under IAS 1 “Presentation of Financial Statements” which states, effective for annual reporting periods beginning on or after 1 January 2023, an entity shall disclose material accounting policy information. Accounting policy information is material if, when considered together with other information included in the Company’s financial statements, it can reasonably be expected to influence decisions that the primary users of its financial statements make on the basis of those financial statements. 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 and is reported under “Investment in Arena” in the consolidated statements of financial position, with the Company’s share of comprehensive income of Arena 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$, respectively. (c) Use of estimates The preparation of financial statements requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and changes in estimates are recorded in the reporting period in which - 47 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 2 Summary of Material Accounting Policies (continued) they are determined. Key estimates include the fair value of investments classified as FVTPL, fair value of share-based compensation, fair value of derivative warrant liability, and deferred tax assets and liabilities. (d) Judgments made by management Key areas where management has made difficult, complex or subjective judgments in the process of applying the Company’s accounting policies, often as a result of matters that are inherently uncertain, include determining that the Company meets the definition of an investment entity under IFRS 10, valuation techniques for fair value determination of investments classified as FVTPL, applying the equity method of accounting for associates and determining that the Company’s functional currency is the US$. 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 C$ exchange forward contracts to manage C$ currency exposures arising from C$ denominated transactions. The Company has not designated any C$ exchange forward contracts as accounting hedges. Any resulting C$ exchange gain or loss arising from the C$ 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, 2023 and 2022, the Company’s cash consisted of cash on deposit in both C$ and US$ in Canada at Canadian Imperial Bank of Commerce and in the US at Citibank. (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 - 48 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 2 Summary of Material Accounting Policies (continued) lease term. 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 was initially recorded at cost and subsequently adjusted to recognize the Company’s share of comprehensive income of Arena, any dividends and/or distributions received from Arena, and the balance of the Company’s revolving loan to Arena. Investments in public entities are valued at unadjusted published quotes for identical investments exchanged in active markets. 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 valuation results are reviewed with the audit committee as part of its review of the Company’s consolidated financial statements. (k) Income taxes Income taxes expense is recognized in the consolidated statements of profit and comprehensive income. Current taxes, based on taxable income in countries where the Company operates, may differ from tax expense (recovery) included in 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 assets is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Income tax assets and liabilities are offset when the Company intends to settle on a net basis and there is a legally enforceable right to do so. - 49 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 2 Summary of Material 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. When the Company enters into an issuer automatic purchase plan agreement (“ASPP”) that is effective during the reporting period, the Company records an increase or decrease in contributed surplus for the maximum amount that would be required to settle the ASPP at the end of the reporting period. (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 end of 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”), Restricted Share Units (“RSUs”), and Stock Appreciation Rights (“SARs”) are recorded as liabilities at fair value at each reporting date. DSUs and RSUs fair values are re-measured with reference to the fair value of the Company’s stock price and the number of units that have vested. SARs fair value is re-measured using the Black-Scholes Method to determine fair value. When a change in value occurs, it is recognized in share-based compensation expense and foreign exchange loss (gain) in the applicable financial period. (p) Earnings per share Basic earnings per share is calculated by dividing profit and comprehensive income 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 and comprehensive income 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. For the purpose of calculating diluted earnings per share, the Company assumes the exercise of dilutive options. The assumed proceeds from these options shall be regarded as having been received from the issue of Common Shares at the average market price of the Common Shares during the period. The difference between the number of Common Shares issued and the number of Common Shares that would have been issued at the average market price of Common Shares during the period are treated as an issue of Common Shares for no consideration. 3 Other Assets Other assets consist of the following: Capital assets Right of use asset Accounts receivable and other - 50 - $ December 31, 2023 8 116 864 988 $ $ December 31, 2022 19 242 291 552 $ The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (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 $116 and $242 at December 31, 2023 and 2022, respectively. The depreciation on the right of use asset was $126 in each of the years ended December 31, 2023 and 2022. The lease liability recorded for the Company’s office premises was $128 and $261 at December 31, 2023 and 2022, respectively. The lease payments were $142 and $132 in the years ended December 31, 2023 and 2022, respectively, and the interest expense on the lease liability was $3 and $5 in the years ended December 31, 2023 and 2022, respectively. The Company recorded an unrealized foreign exchange loss relating to the lease liability of $5 in the year ended December 31, 2023, and an unrealized foreign exchange gain relating to the lease liability of $25 in the year ended December 31, 2022. 4 Investments The Company’s principal investments consist of its investment in Skyward Specialty, Arena FINCOs and Arena. Investments in Skyward Specialty and Arena FINCOs are measured at FVTPL and the investment in Arena is accounted for using the equity method. Place of establishment Principal place of business Ownership interest at December 31, 2023 Ownership interest at December 31, 2022 Skyward Specialty Arena FINCOs Arena Delaware, U.S. Delaware, U.S. Delaware, U.S. 1 See “Investment in Skyward Specialty” as described below for details of the Company’s ownership in Skyward Specialty. 2 Legal equity ownership is 51% (December 31, 2022 - 51%) denotes profit percentage subject to change over time pursuant to the earn-in rights granted to Bernard Partners, 17.5% owned by the Company1 100% owned by the Company 51% owned by the Company2 43.8% owned by the Company1 100% owned by the Company 51% owned by the Company2 Texas, U.S. New York, U.S. New York, U.S. LLC (“BP LLC") described below under “Investment in Associates”. 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. - 51 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (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, 2023 - Skyward Specialty - Arena FINCOs - ASOF LP December 31, 2022 - Skyward Specialty - Arena FINCOs - ASOF LP Fair value Level 1 Level 2 Level 3 $ 236,470 147,234 3,024 $ 386,728 $ 236,470 $ - - $ 236,470 $ Fair value Level 1 Level 2 $ 218,879 160,113 3,179 $ 382,171 $ $ - - - - $ $ - - - - - - - - $ - 147,234 3,024 $ 150,258 Level 3 $ 218,879 160,113 3,179 $ 382,171 During the year ended December 31, 2023, the Company’s investment in Skyward Specialty transferred from a Level 3 investment to a Level 1, and there were no transfers among Levels 1, 2 and 3 for the Company’s investments in Arena FINCOs or ASOF LP. During the year ended December 31, 2022, there were no transfers among Levels 1, 2 and 3. The Company’s investment in Skyward Specialty became a Level 1 investment as a result of the availability of quoted prices in an active market following the closing of Skyward Specialty’s initial public offering (the “IPO”), which took place on January 18, 2023. In connection with the IPO, the Skyward Specialty common shares became listed on the Nasdaq Global Select Market under the ticker symbol “SKWD”. Investment in Skyward Specialty The Company’s investment in Skyward Specialty consists of the following: Year ended December 31, 2023 Proceeds from sale of Skyward Specialty common shares Net change in unrealized gain in value of investment Realized gain in value of investment Opening Balance Net increase in value of investment Dissolution of HIIG Partnership Ending Balance Company’s share of Skyward Specialty common shares held by the HIIG Partnership $ 109,227 $ - $ - $ 63,278 $ 63,278 $ (172,505) $ - Company’s share of other net assets of the HIIG Partnership Skyward Specialty common shares held directly by the Company 372 - - 77 77 (449) - 109,280 $ 218,879 (192,215) 118,512 $ (192,215) $ 118,512 28,388 $ 91,743 146,900 $ 210,255 $ 172,505 $ (449) 236,470 $ 236,470 Year ended December 31, 2022 Proceeds from sale of Skyward Specialty common shares Realized gain in value of investment Net change in unrealized gain (loss) in value of investment Net increase (decrease) in value of investment Opening Balance Dissolution of HIIG Partnership Ending Balance Company’s share of Skyward Specialty common shares held by the HIIG Partnership $ 95,785 $ - $ - $ 13,442 $ 13,442 $ - $ 109,227 Company’s share of other net assets of the HIIG Partnership Skyward Specialty convertible preferred shares held directly by the Company 394 - - (22) (22) - 372 95,832 $ 192,011 - $ - - $ - 13,448 $ 26,868 13,448 $ 26,868 - $ - 109,280 $ 218,879 - 52 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 4 Investments (continued) At December 31, 2023, the Company’s $236,470 valuation of its investment in Skyward Specialty consisted solely of the 6,979,639 Skyward Specialty common shares held directly by the Company. At December 31, 2022, the Company’s $218,879 valuation of its investment in Skyward Specialty consisted of the aggregate fair value of: (i) 7,281,780 Skyward Specialty common shares held by the HIIG Partnership of $109,227, (ii) its share of the other net assets of the HIIG Partnership of $372, and (iii) Skyward Specialty convertible preferred shares held directly by the Company, which were convertible into 7,285,359 Skyward Specialty common shares, of $109,280. On January 18, 2023, Skyward Specialty closed the IPO. With the closing of the IPO, the Skyward Specialty convertible preferred shares, including those which the Company owned, automatically converted into Skyward Specialty shares of common stock. On June 12, 2023, Skyward Specialty closed its underwritten secondary public offering (the “Skyward Specialty Secondary Offering”). Under the Skyward Specialty Secondary Offering, Westaim sold 3,850,000 Skyward Specialty common shares at a price to the public of $23.00 per Skyward Specialty common share (the “Secondary Offering Price”). The underwriters also exercised in full their option to purchase an additional 577,500 Skyward Specialty common shares from the selling stockholders at the Secondary Offering Price, of which 137,500 Skyward Specialty common shares were sold by Westaim. The proceeds to Westaim from the 3,987,500 Skyward Specialty common shares it sold, less underwriting commissions of 4.75%, were $87,356. The accounting cost for the Skyward Specialty common shares sold, which the Company had held directly, was $24,084 and resulted in the Company recognizing an accounting realized gain of $63,272. On July 31, 2023, the HIIG Partnership expired pursuant to the terms of HIIG Partnership’s limited partnership agreement, originally made as of March 12, 2014 and amended and restated as of June 27, 2014 and as further amended on November 10, 2022. Accordingly, on July 31, 2023, the HIIG Partnership was dissolved and distributed its net assets to its limited partners, resulting in the Company (in its capacity as limited partner) receiving 7,281,780 Skyward Specialty common shares and $449 in cash. On November 20, 2023, Skyward Specialty closed its upsized follow-on offering (the “Skyward Specialty Upsized Follow-On Offering”). Under the Skyward Specialty Upsized Follow-On Offering, Westaim sold 3,600,000 Skyward Specialty common shares at a price to the public of $30.50 per Skyward Specialty common share. The proceeds to Westaim from the 3,600,000 Skyward Specialty common shares it sold, less underwriting commissions of 4.5%, were $104,859. The accounting cost for the Skyward Specialty common shares sold was $49,619 and resulted in the Company recognizing an accounting realized gain of $55,240. The Company, through HIIG GP, had a management services agreement with Skyward Specialty (the “Skyward Specialty MSA”), whereby HIIG GP was entitled to receive from Skyward Specialty an advisory fee of $500 annually. The Skyward Specialty MSA automatically terminated with the closing of the IPO of Skyward Specialty on January 18, 2023. The Company earned advisory fees of $23 and $500 from Skyward Specialty in the years ended December 31, 2023 and 2022, respectively. FVTPL The investment in Skyward Specialty is classified at Level 1 of the fair value hierarchy and is accounted for at FVTPL. The fair value of the Company’s investment in Skyward Specialty was determined to be $236,470 at December 31, 2023 and $218,879 at December 31, 2022. At December 31, 2023, the Company’s estimated fair value of Skyward Specialty common shares held by the Company was supported by the SKWD closing trading price on the last trading day of 2023. At December 31, 2023, the Company’s investment in Skyward Specialty of $236,470 consisted of 6,979,639 Skyward Specialty common shares held directly by the Company at $33.88 per share. At December 31, 2022, the Company used 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 IPO. Westaim’s management selected $15.00 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. The Company recorded a net realized and unrealized increase in the value on its investment in Skyward Specialty of $210,255 and an unrealized gain of $26,868 in the years ended December 31, 2023 and 2022, respectively, in the consolidated statements of profit and comprehensive income. 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. , - 53 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 4 Investments (continued) 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, 2023 would have increased by approximately $6,980 (December 31, 2022 - $14,567) and the change in the value of investment in Skyward Specialty for the year ended December 31, 2023 would have increased by approximately $6,980 (for the year ended December 31, 2022 - $14,567). If the value of a Skyward Specialty common share at December 31, 2023 was lower by $1.00 per share, an opposite effect would have resulted. Investment in the Arena FINCOs The Company owns a 100% interest in the Arena FINCOs and exercises control over the businesses of the Arena FINCOs. 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 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 in value before dividends Dividends paid by the Arena FINCOs to the Company Ending balance FVTPL Year ended December 31 2022 2023 $ 172,866 $ 160,113 (1,900) (2,500) (2,503) (5,979) (8,350) (4,400) $ 160,113 $ 147,234 The Company’s investment in the Arena FINCOs is classified at Level 3 of the fair value hierarchy and is accounted for at FVTPL. The fair value of the Company’s investment in the Arena FINCOs was determined to be $147,234 at December 31, 2023 and $160,113 at December 31, 2022. 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, 2023 in the amount of $147,234 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, 2023. This same valuation technique was used to determine the fair value of the Company’s investment in the Arena FINCOs of $160,113 at December 31, 2022. The significant unobservable inputs used in the valuation of the Arena FINCOs at December 31, 2023 were the aggregate equity of the Arena FINCOs at December 31, 2023 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, 2023, as described below (December 31, 2022 – 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: (cid:120) (cid:120) 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 - 54 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 4 Investments (continued) 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. (cid:120) 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. (cid:120) 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. (cid:120) 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 value of its investment in the Arena FINCOs of $5,979 before dividends paid of $4,400 in the year ended December 31, 2023, in the consolidated statements of profit and comprehensive income. In addition, the Arena FINCOs returned capital in the amount of $2,500 in the year ended December 31, 2023. The Company recorded a decrease in the 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 addition, the Arena FINCOs returned capital in the amount of $1,900 in the year ended December 31, 2022. 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, 2023 was higher by $1,000, the fair value of the Company’s investment in the Arena FINCOs at December 31, 2023 would have increased by $1,000 (December 31, 2022 - $1,000) and the change in the value of the investment in the Arena FINCOs for the year ended December 31, 2023 would have increased by $1,000 (for the year ended December 31, 2022 - $1,000). If the equity of the Arena FINCOs at December 31, 2023 was lower by $1,000, an opposite effect would have resulted. Investment in Arena Arena Investors Group Holdings, LLC (“AIGH” or “Arena”), a private company, operates two businesses, Arena Investors and Arena Institutional Services (“AIS”). Arena Investors is 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. Arena Investors provides investment services to third-party clients consisting of but not limited to institutional clients, insurance companies, private investment funds, other pooled investment vehicles, and the Arena FINCOs. AIS provides non-investment advisory services for Arena and third parties. On August 31, 2015, agreements were entered into between the Company and BP LLC in respect of Arena (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 - 55 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 4 Investments (continued) percentage in Arena and share up to 75% of the profit of Arena based on achieving certain assets under management (“AUM”) and cash flow (measured by the margin of trailing twelve months earnings before interest, income taxes, depreciation and amortization to trailing twelve month revenues) thresholds in accordance with the Associate Agreements. At December 31, 2023 and 2022, the Company’s equity ownership of Arena and its profit sharing percentage was 51%. 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. The Company’s investment in Arena 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: Financial information of Arena: Assets Liabilities Net assets Less: net assets attributable to non-controlling interests Net assets attributable to Arena Company’s share Arena Revolving Loan with the Company Carrying amount of the Company’s investment in Arena Financial information of Arena: Revenue and other investment gains (losses) Operating expenses 1 Net Income Other comprehensive loss Comprehensive income Comprehensive income attributable to non-controlling interests Comprehensive income attributable to Arena December 31, 2023 December 31, 2022 $ 81,877 (70,656) 11,221 4,458 $ 6,763 $ 3,536 24,000 $ 27,536 $ 86,525 (80,798) 5,727 178 $ 5,549 $ 2,957 24,000 $ 26,957 Year ended December 31 2022 2023 $ 64,033 (51,020) 13,013 (34) 12,979 $ 48,727 (47,011) 1,716 - 1,716 4,280 $ 8,699 178 $ 1,538 Company’s share of comprehensive income of Arena (51%) 1 Includes interest expense on the Arena’s Revolving Loan granted by the Company of $1,642 and $1,344 in the years ended December 31, 2023 and 2022, respectively. $ 4,437 $ 783 The following table shows the continuity of the carrying amount of the Company’s investment in Arena: Carrying amount of investment in Arena: Opening balance Company’s share of income and other comprehensive loss of Arena (51%) Company’s share of cash and non-cash distributions from Arena to members Ending balance Year ended December 31 2022 2023 $ 26,957 $ 26,174 4,437 783 (3,858) $ 27,536 - $ 26,957 The Company has a revolving loan to Arena (the “Arena Revolving Loan”) with a limit of $35,000 at December 31, 2023 (December 31, 2022 - $35,000) in order to continue funding growth initiatives and working capital needs of Arena. The loan facility matures on March 31, 2025 and bore an interest rate of 5.60% per annum through to March 31, 2023 and increased to 7.25% per annum effective on April 1, 2023. Arena had drawn down the loan facility by $24,000 at December 31, 2023 (December 31, 2022 - $24,000). The loan facility is secured by all the assets of Arena. The Company earned and received interest on the Arena Revolving Loan of $1,642 and $1,344 for the years ended December 31, 2023 and 2022, respectively, which was reported under “Interest income” in the consolidated statements of profit and comprehensive income. - 56 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 4 Investments (continued) The Company’s 51% share of comprehensive income of Arena was $4,437 and $783 in the years ended December 31, 2023 and 2022, respectively, which was reported under “Share of income from investment in Arena” in the consolidated statements of profit and comprehensive income. 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, 2023 and 2022, the fair value of the Company’s minority interest in ASOF LP was determined by Arena Investors to be $3,024 and $3,179, respectively. The Company reported a decrease in the value of its investment in ASOF LP of $155 and $43 in the years ended December 31, 2023 and 2022, respectively, which was reported under “Decrease in value of investment in ASOF LP” in the consolidated statements of profit and comprehensive income. 5 Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following: RSUs (note 11) DSUs (note 11) SARs (note 11) Lease liability (note 3) Interest on Preferred Securities (note 6) C$ exchange forward contract payable (note 7) ASPP liability Other accounts payable and accrued liabilities Ending balance $ December 31, 2023 9,285 2,918 1,909 128 - - 2,426 14,603 31,269 $ $ December 31, 2022 5,781 2,633 - 261 466 478 - 3,321 12,940 $ Effective on October 1, 2023, in connection with the normal course issuer bid (“NCIB”), the Company established an ASPP, whereby Common Shares may be repurchased at the discretion of the third-party broker to the ASPP using commercially reasonable efforts and subject to trading parameters set out in the ASPP. At December 31, 2023, the Company recorded an other current liability of $2,426 representing the maximum amount that would be required to settle the purchase price with respect to all of the Common Shares which have or may be purchased under the ASPP with a corresponding decrease in contributed surplus. See note 17, subsequent events. 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 governed by the terms of an indenture dated June 2, 2017 between, inter alia, Westaim and Computershare Trust Company of Canada (the “Indenture”). On June 2, 2017, the Company closed the subscription by Fairfax of C$50 million of Preferred Securities (the “Fairfax Financing”). On July 17, 2023, the Company redeemed and delisted all of the 5,000,000 Preferred Securities for C$ 50 million ($37,916), plus all accrued and unpaid interest thereon. In connection with the redemption: (a) the Company and Fairfax terminated the governance agreement dated June 2, 2017 between the parties; (b) Fairfax surrendered and disposed of, without any further consideration, all of the Warrants, which were immediately cancelled by the Company; and (c) Westaim paid a $100 work fee to Fairfax. As a result, there were no Preferred Securities outstanding at December 31, 2023 (December 31, 2022: 5,000,000 Preferred Securities). The Preferred Securities were denominated in C$, each issuable for a principal amount of C$10 and carry interest at a rate of 5% per annum. The Preferred Securities were subordinate secured securities that would mature on May 26, 2116 but were redeemable by Westaim, in whole or in part, at the sole discretion of the Company at any time on or after June 2, 2022 at a price equal to C$10 per Preferred Security, plus all accrued and unpaid interest up to the date of redemption. The Preferred Securities liability was translated into US$ at rates of exchange at the end of each reporting period and any resulting foreign exchange gain or loss was included in the consolidated statements of profit and comprehensive income. The carrying amount of the Preferred Securities, which approximated fair value, was $nil and $36,939 at December 31, 2023 and 2022, respectively. The Company recorded an - 57 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 6 Preferred Securities (continued) unrealized foreign exchange loss relating to the Preferred Securities of $977 and an unrealized foreign exchange gain relating to the Preferred Securities of $2,615 in the years ended December 31, 2023 and 2022, respectively. Interest expense on the Preferred Securities amounted to $1,010 and $1,900 in the years ended December 31, 2023 and 2022, respectively. Accrued interest expense was $nil and $466 at December 31, 2023 and 2022, respectively, and was reported under accounts payable and accrued liabilities in the consolidated statements of financial position. 7 C$ Exchange Forward Contracts The Company had entered into Canadian dollar forward contracts to reduce the currency exposure arising from the liabilities denominated in Canadian dollars including the Preferred Securities. On June 14, 2023, the Company settled its C$ exchange forward contract to purchase C$50 million and the Company is no longer party to any C$ exchange forward contract. The Company’s C$ exchange forward contracts to purchase C$50 million resulted in foreign exchange gain of $344 in the year ended December 31, 2023, and a foreign exchange loss of $3,008 for the year ended December 31, 2022, and was reported under foreign exchange loss (gain) in the consolidated statements of profit and comprehensive income. The Company has not designated these C$ exchange forward contracts as accounting hedges. At December 31, 2023, the Company has no C$ exchange forward contract and, as a result, a C$ exchange forward contract payable of $nil. At December 31, 2022, a C$ exchange forward contract payable of $478 was recorded under accounts payable and accrued liabilities in the consolidated statements of financial position. 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 on June 2, 2017. On July 17, 2023, in connection with the redemption of the Preferred Securities, Fairfax surrendered and disposed of, without any further consideration, all of the Warrants, which were immediately cancelled by the Company. Changes to the derivative warrant liability are as follows: Opening balance Change in fair value – (gain) Unrealized foreign exchange – loss (gain) Ending balance $ December 31, 2023 94 (98) 4 - $ $ December 31, 2022 156 (57) (5) 94 $ At December 31, 2023, the Company has no Warrants outstanding and reported a derivative warrant liability of $nil. At December 31, 2022, the Company reported the fair value of the vested Warrants of $94 using the Monte Carlo pricing model assuming no dividends are paid on the Common Shares, a risk-free interest rate of 4.37%, an expiration date between January 1, 2023 and June 2, 2024, a volatility of the underlying Common Shares of 24.87%, a closing price of the Common Shares of C$2.63 and a strike price of C$3.50. The Company recorded a gain resulting from a change in the fair value of the vested Warrants of $98 and $57 in the years ended December 31, 2023 and 2022, respectively. The Company also recorded a foreign exchange loss with respect to the vested Warrants of $4 in the year ended December 31, 2023, and a foreign exchange gain with respect to the vested Warrants of $5 in the year ended December 31, 2022, under foreign exchange loss (gain) in the consolidated statements of profit and comprehensive income. 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, 2023, the Company had a total commitment of $253 for future occupancy cost payments including payments due not later than one year of $253 and payments due later than one year of $nil. 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. - 58 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 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, 2023, Westaim had 131,757,285 Common Shares issued and outstanding (December 31, 2022 – 141,386,718), with a stated capital of $353,843 (December 31, 2022 - $378,563). In the year ended December 31, 2023, Westaim acquired and canceled 9,896,178 Common Shares at a cost of $26,386, through its normal course issuer bids. In the year ended December 31, 2022, Westaim cancelled 1,300,000 Common Shares that it had acquired at a cost of $2,564 through its prior NCIB. In the year ended December 31, 2023, Westaim issued 266,745 Common Shares to option holders through the exercise and net exercise of 2,779,382 of the Company’s stock options for proceeds of $102 with an equity book value of $1,564 which increased share capital and decreased contributed surplus. See note 11 for share-based compensation, stock options. The NCIB, which was approved by the TSXV, provides that Westaim may, during the 12-month period commencing October 1, 2023 and ending September 30, 2024, purchase up to 11,400,000 Common Shares in total, representing approximately 10% of Westaim’s public float and not more than approximately 2,700,000 Common Shares within a 30-day period. The NCIB for the 12-month period which commenced October 1, 2022 and ended September 30, 2023, provided that Westaim could purchase up to 11,005,494 Common Shares in total and not more than 2,827,734 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. See note 17 for subsequent events. 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, 2023 and 2022. 11 Share-based Compensation Westaim’s long-term equity incentive plan (the “Incentive Plan”) provides for grants of RSUs, DSUs, SARs 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 13,175,728 at December 31, 2023 (December 31, 2022 – 14,138,671). 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 and SARs 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 Settled options Forfeited options Ending balance Options vested at end of period Year ended December 31, 2023 Year ended December 31, 2022 Number 10,428,337 (2,779,382) (51,442) 7,597,513 7,597,513 Weighted Average Exercise Price C$ C$ C$ C$ C$ 3.10 3.25 3.05 3.05 3.05 Number 10,428,337 - - 10,428,337 10,428,337 Weighted Average Exercise Price C$ C$ C$ C$ C$ 3.10 - - 3.10 3.10 December 31, 2023 Exercise prices 3.10 C$ 3.00 C$ Number of stock options outstanding 3,790,000 3,807,513 7,597,513 Weighted Average Remaining Contractual Life (years) 1.05 0.25 0.65 Outstanding Weighted Average Exercise Price C$ C$ C$ 3.10 3.00 3.05 Number of stock options vested 3,790,000 3,807,513 7,597,513 Vested Weighted Average Exercise Price C$ C$ C$ 3.10 3.00 3.05 - 59 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 11 Share-based Compensation (continued) 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 C$ C$ C$ C$ 3.10 3.00 3.25 3.10 On April 1, 2016, 2,752,940 options were granted to certain officers and employees of Westaim (the “2016 Options”). Subject to the terms of the Option Plan (including extensions for options expiring during Company blackout periods), the 2016 Options had a term of seven years, vested in three equal instalments on April 1, 2017, April 1, 2018 and April 1, 2019, and had an exercise price of C$3.25. The fair value of the 2016 Options 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 August 23, 2023, 17,647 of the 2016 Options were exercised and the Company received $42 and issued 17,647 Common Shares to the option holder. On August 24, 2023, the 2,735,293 remaining 2016 Options were net exercised (issuance of Common Shares representing the in-the-money value of the 2016 Options at the time of exercise, as more fully set out in the Option Plan) resulting in the issuance of an aggregate of 222,656 Common Shares to the option holders. As a result, at December 31, 2023, there are no 2016 Options outstanding. On April 3, 2017, 3,860,397 options were granted to certain officers and employees of Westaim (the “2017 Options”). Subject to the terms of the Option Plan, the 2017 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 2017 Options 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. In January 2023, 26,442 of the 2017 Options were forfeited by a prior employee. On December 28, 2023, 26,442 of the 2017 Options were exercised, the Company received $60 and issued 26,442 Common Shares to the option holder. As a result, at December 31, 2023, there are 3,807,513 of the 2017 Options outstanding. On January 18, 2018, 3,815,000 options were granted to certain officers and employees of Westaim (the “2018 Options”). Subject to the terms of the Option Plan, the 2018 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 2018 Options 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. In January 2023, 25,000 of the 2018 Options were forfeited by a prior employee. As a result, at December 31, 2023, there are 3,790,000 of the 2018 Options outstanding. No options were granted or issued in the years ended December 31, 2023 or 2022. 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 years ended December 31, 2023 and 2022. 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 Granted Ending balance Year ended December 31 2022 2,975,198 - 2,975,198 2023 2,975,198 480,000 3,455,198 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, 2023, all of these RSUs have vested, of which 325,000 RSUs have been exercised and 2,050,000 RSUs were outstanding. - 60 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 11 Share-based Compensation (continued) 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, 2023, all of these RSUs have vested and none have been exercised. On January 23, 2023, an additional 480,000 RSUs were granted to certain officers and employees of Westaim. These RSUs vest in three equal instalments on January 23, 2024, September 30, 2024 and September 30, 2025 and have a term of fifteen years from date of issue. At December 31, 2023, none of these RSUs have vested or have been settled. There were 3,455,198 RSUs outstanding at December 31, 2023 (December 31, 2022 - 2,975,198). In the year ended December 31, 2023, 480,000 RSUs were granted. There were no RSUs granted in the year ended December 31, 2022. There were no RSUs settled in the years ended December 31, 2023 and 2022. Compensation expenses relating to RSUs, including the impact of the change in the market value of the Common Shares, was an expense of $3,356 and $258 in the years ended December 31, 2023 and 2022, respectively. The Company also recorded an unrealized foreign exchange loss with respect to the RSUs of $148 in the year ended December 31, 2023 and an unrealized foreign exchange gain with respect to the RSUs $361 in the year ended December 31, 2022, under foreign exchange loss (gain) in the consolidated statements of profit and comprehensive income. At December 31, 2023, a liability of $9,285 (December 31, 2022 - $5,781) 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 Exercised Ending balance Year ended December 31 2022 2023 1,093,603 1,355,133 261,530 158,237 - (485,787) 1,355,133 1,027,583 The Company issued 158,237 DSUs in the year ended December 31, 2023, in lieu of director fees of $398, and issued 261,530 DSUs in the year ended December 31, 2022, in lieu of director fees of $497. In the year ended December 31, 2023, 485,787 DSUs were exercised for cash of $1,187 paid to a former director of the Company. In the year ended December 31, 2022, no DSUs were exercised. Compensation expenses relating to DSUs, including the impact of the change in the market value of the Common Shares was an expense of $1,433 and $616 in the years ended December 31, 2023 and 2022, respectively. The Company also recorded an unrealized foreign exchange loss with respect to the DSUs of $39 in the year ended December 31, 2023, and an unrealized foreign exchange gain with respect to the DSUs of $146 in the year ended December 31, 2022, under foreign exchange loss (gain) in the consolidated statements of profit and comprehensive income. At December 31, 2023, a liability of $2,918 (December 31, 2022 - $2,633) had been accrued with respect to outstanding DSUs in the consolidated statements of financial position. Stock Appreciation Rights - SARs are issued to certain employees of Westaim which vest immediately and are paid out solely in cash for the amount that the trading price of the Common Shares at the time of exercise is in excess of the SARs strike price. On December 28, 2023, 4,338,530 SARs were issued to certain officers and employees of Westaim (the “2023 SARs”). The fair value of the 2023 SARs when issued was $2,164 estimated using the Black-Scholes model assuming no dividends are paid on the Common Shares, a risk- free interest rate of 3.72%, expiry on December 15, 2026, a volatility of 17.32%, and a grant date share price of C$3.83 converted to US$ at an exchange rate of $1.32120. On December 31, 2023, the 2023 SARs had a fair value of $1,909 which were estimated using the Black-Scholes model assuming no dividends are paid on the Common Shares, a risk-free interest rate of 3.68%, expiry on December 15, 2026, a volatility of 16.38%, and a grant date share price of C$3.83 converted to US$ at an exchange rate of $1.32405. - 61 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 11 Share-based Compensation (continued) Compensation expenses relating to SARs, including the impact of the change in the market value of the Common Shares was an expense of $1,914 and $nil in the years ended December 31, 2023 and 2022, respectively. The Company also recorded an unrealized foreign exchange gain with respect to the SARs of $5 and $nil in the years ended December 31, 2023 and 2022, respectively, under foreign exchange loss (gain) in the consolidated statements of profit and comprehensive income. At December 31, 2023, a liability of $1,909 (December 31, 2022 - $nil) had been accrued with respect to outstanding SARs 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 2022 2023 4,120 14,623 874 7,039 4,994 21,662 $ $ 1 Salaries and benefits include director fees paid in cash of $147 and $110 in the years ended December 31, 2023 and 2022, respectively. The Company received dividends from the Arena FINCOs in the amount of $4,400 and $8,350 in the years ended December 31, 2023 and 2022, respectively. Arena FINCOs returned capital to the Company in the amount of $2,500 and $1,900 in the years ended December 31, 2023 and 2022, respectively. The Company earned and received interest on the Arena Revolving Loan of $1,642 and $1,344 in the years ended December 31, 2023 and 2022, respectively. Interest on the Arena 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 $23 and $500 from Skyward Specialty in the years ended December 31, 2023 and 2022, respectively. The Company earned advisory fees of $200 and $250 from the Arena FINCOs and Arena, respectively, in each of the years ended December 31, 2023 and 2022. Advisory fees are included in fee income in the consolidated statements of profit and comprehensive income. 13 Income Taxes The following is a reconciliation of income taxes calculated at the statutory income tax rate to the income taxes expense included in the consolidated statements of profit and comprehensive income: Profit before income taxes Statutory income tax rates Income taxes at statutory income tax rates Variations due to: Non-taxable portion of unrealized increase on investments classified as FVTPL Taxable gain on sale of Skyward Specialty common shares Taxable gain from foreign currency settlement of Preferred Securities Taxable gains (losses) allocated from the HIIG Partnership Net non-taxable and non-deductible items Difference between statutory and foreign tax rates Change in unrecognized tax losses and investment and minimum tax credits Income taxes expense (recovery) - 62 - Year ended December 31 2022 2023 $ 17,604 $ 186,281 26.5% 26.5% 4,665 49,364 (27,034) 22,318 202 20 (186) 53 (2,638) - - (7) (2,500) 22 (42,438) $ 2,299 101 $ (357) The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 13 Income Taxes (continued) At December 31, 2023, a current income taxes receivable of $494 (December 31, 2022 - $nil), current income taxes payable of $1,004 (December 31, 2022 - $245), a deferred tax asset of $1,043 (December 31, 2022 – $178), and a deferred tax liability of $1,202 (December 31, 2022 - $nil) were recorded in the consolidated statements of financial position. At December 31, 2022, the realization of any additional Canadian income tax benefits was not probable, and the following had not been recognized in the calculation of the Company’s deferred income tax assets: Non-capital loss carry-forwards Capital loss carry-forwards Corporate minimum tax credits Investment tax credits 14 Earnings per Share December 31, 2023 December 31, 2022 $ 52,776 5,367 350 1,668 $ - - - - Westaim had 7,597,513 stock options, 3,455,198 RSUs and no Warrants outstanding at December 31, 2023. At December 31, 2022, Westaim had 10,428,337 stock options, 2,975,198 RSUs and 14,285,715 Warrants outstanding. The stock options for the years ended December 31, 2023, were included in the calculation of diluted earnings per share as they were dilutive, and the stock options for the years ended December 31, 2022, were excluded as they were not dilutive. There were no Warrants outstanding at December 31, 2023, and the Warrants for the year ended December 31, 2022, were excluded in the calculation of diluted earnings per share as they were not dilutive. The RSUs for the years ended December 31, 2023 and 2022, 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 expense (recovery) and related foreign exchange Profit and comprehensive income on a diluted basis Weighted average number of Common Shares outstanding Dilutive impact of in-the-money options (treasury method) 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, 2023 was 131,757,285 (December 31, 2022 - 141,386,718). 15 Capital Management Westaim’s capital currently consists of the Preferred Securities and Common Shares. Year ended December 31 2023 2022 $ 183,982 138,299,601 $ 1.33 $ 17,961 141,901,513 $ 0.13 $ 183,982 3,504 $ 187,486 $ 17,961 (103) $ 17,858 138,299,601 668,805 3,426,266 141,901,513 - 2,974,198 142,394,672 $ 1.32 144,876,711 $ 0.12 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. - 63 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 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, 2023 consists of short-term financial assets and financial liabilities with maturities of less than one year, and investments in Skyward Specialty, Arena FINCOs, Arena, and ASOF LP. The most significant identified risks which arise from holding financial instruments include credit risk, liquidity risk, currency risk, interest rate risk and equity risk. The Company has a comprehensive risk management framework to monitor, evaluate and manage the risks assumed in conducting its business. Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company’s credit risk arises primarily from its cash and cash equivalents. The Company manages such risk by maintaining bank accounts with Schedule 1 banks in Canada and a major bank in the United States. Liquidity risk Liquidity risk is the risk that the Company may not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous. The Company has made investments in level 3 investments classified as FVTPL and investments in 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, 2023, the Company’s short-term financial liabilities amounted to $18,033 (December 31, 2022 - $4,510), and the Company has access to cash and other resources to meet these financial obligations. Currency risk The Company’s C$ 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. During the year ended December 31, 2023, the Company’s C$ exchange forward contracts and its Canadian dollar bank balance have been effective at reducing a significant portion of the risk associated with changes in the C$ currency exchange. At December 31, 2023, it is estimated a 10% strengthening of the C$ against the US$ would have increased the foreign exchange loss by approximately $2,104 and $835 in the years ended December 31, 2023 and 2022, respectively. A similar weakening of the C$ 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 or loans receivable. 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 Since the close of Skyward Specialty’s IPO on January 18, 2023, there has been an active market for the Company’s investment in Skyward Specialty common shares. There is no active market for the Company’s Level 3 investments. The Company holds its 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. - 64 - The Westaim Corporation Notes to Consolidated Financial Statements For the years ended December 31, 2023 and 2022 (Currency amounts in thousands of United States dollars except per share data, unless otherwise indicated) 17 Subsequent Events Subsequent to December 31, 2023, through to the close of trading on March 26, 2024, Westaim acquired 2,575,700 Common Shares at a cost of $7,155, which includes a provision for Canadian public company 2% net share buy-back tax which became effective January 1, 2024, through the 2023 NCIB. These acquired Common Shares were automatically canceled. As of March 27, 2024, Westaim has 129,181,585 outstanding Common Shares as a result of these share purchases. In connection with the 2023 NCIB, the Company established an ASPP, whereby Common Shares may be repurchased at the discretion of the third-party broker to the ASPP using commercially reasonable efforts and subject to the trading parameters set out in the ASPP. On January 1, 2024, in preparation for the upcoming blackout period, the Company delivered to the broker an addendum to the ASPP pursuant to which the maximum cost for the shares acquired under the ASPP would be $21,635. - 65 - (cid:3) (cid:94)(cid:44)(cid:4)(cid:90)(cid:28)(cid:44)(cid:75)(cid:62)(cid:24)(cid:28)(cid:90)(cid:3)(cid:47)(cid:69)(cid:38)(cid:75)(cid:90)(cid:68)(cid:4)(cid:100)(cid:47)(cid:75)(cid:69)(cid:3) (cid:3) BOARD OF DIRECTORS Lisa Mazzocco 2, 3, 6 Lead Director, The Westaim Corporation Independent Consultant Ian W. Delaney 3 Executive Chair, The Westaim Corporation John W. Gildner 1, 2, 3, 4 Independent Businessman J. Cameron MacDonald Michael Siegel 2, 3 Chief Executive Officer, Legeis Capital, LLC Kevin E. Parker 1, 2, 3, 5 Managing Partner, Sustainable Insight Capital Management Bruce V. Walter 1, 3 Chairman, Nunavut Iron Ore, 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 16th, 2024 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 2500 Westchester Avenue, Suite 401 Purchase, New York 10577 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, 2023 were 131,757,285 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 - 66 - THE WESTAIM CORPORATION 70 York Street, Suite 1700 Toronto, Ontario, Canada M5J 1S9 www.westaim.com info@westaim.com 

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