The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Part II, Item 8, of this Report. Our actual results could differ materially from those contained in forward-looking statements due to a number of factors, including those discussed in Forward-Looking Statements, “Risk Factors” in Part I, Item 1A, and elsewhere in this Report.
Till has engaged an investment adviser to facilitate the sale of Holdings. There can be no assurance that the process will result in any transaction.
In accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), the assets and liabilities of Holdings have been classified as held for sale on Till's Balance Sheets and the operations attributed to Holdings have been classified as discontinued operations on Till's Statements of Income (Loss). As required by U.S. GAAP, a loss of $1,554,910 was realized in 2017 as a result of the decision to sell Holdings, including estimated costs related thereto.
The discussion of our financial condition and results of operations that follows is intended to provide summarized information to assist the reader in understating our consolidated financial statements, as well as to provide explanations as regards the primary factors that accounted for those financial statement changes between 2017 and 2016. This discussion should be read in conjunction with Till’s consolidated financial statements that appear in Item 8 of this Report.
The following table summarizes Till’s consolidated results of operations for 2017 and 2016:
Consolidated Results of Operations for the Years Ended December 31, 2017 and 2016
The decrease in general and administrative expenses from $1.7 million in 2016 to $1.5 million in 2017 was primarily due to lower professional fees in 2017 as compared to 2016.
The decrease in foreign exchange (gain) loss from a gain of $0.3 million in 2016 to a loss of $0.1 million in 2017 was due primarily to payments received on the Canadian dollar denominated note receivable during 2017. The foreign exchange gain in 2016 was primarily related to the Canadian dollar denominated note receivable.
The decrease in income tax (expense) benefit from a benefit of $0.2 million in 2016 to an expense of $0.1 million in 2017 was due primarily to Canadian withholding tax on non-arms-length interest payments from SPD to RRL in 2017.
The Promissory note receivable was collected in the 2nd quarter of 2017. As such, there was no receivable at December 31, 2017 as compared to $2.4 million at December 31, 2016.
The decrease in other assets from $2.1 million at December 31, 2016 to $1.1 million at December 31, 2017 is due primarily to a reduction in the carrying value of mineral properties resulting from the receipt of option payments and collection of a note receivable included in other assets during 2017.
The increase in liabilities held for sale from $20.4 million at December 31, 2016 to $51.0 million at December 31, 2017 is primarily related to Omega including a new specialty insurance program underwritten by Omega during 2017, growth in other Omega insurance programs, and premiums written related to program renewals occurring during 2017.
The decrease in net cash provided by investing activities from $10.0 million in 2016 to $4.6 million in 2017 is primarily due to net proceeds from the net sale of investments of $3.1 million in 2017 compared to $10.5 million in 2016, partially offset by proceeds from the sale of mineral properties of $1.2 million in 2017 compared to $0.2 million in 2016.
The information contained in Notes 20 and 21 to the Consolidated Financial Statements in Part II, Item 8, of this Report includes a description of the liquidity and capital resources that is incorporated by reference herein.
As of December 31, 2017, Till did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
The information contained in Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Report includes a description of recent accounting pronouncements, including Till’s expected dates of adoption and the estimated effects on Till’s results of operations and financial condition, and is incorporated by reference herein.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016
We have audited the accompanying consolidated balance sheets of Till Capital Ltd. (a Bermuda corporation) and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income (loss) and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Till Capital Ltd. ("Till") was incorporated under the laws of Bermuda in August 2012 under the name Resource Holdings Ltd. In March 2014, Resource Holdings Ltd. changed its name to Till Capital Ltd. in accordance with Till's bye-laws and Section 10 of the Bermuda Companies Act 1981, as amended (the "Companies Act"). Till is an exempted holding company with its principal place of business and registered office at Crawford House, 50 Cedar Avenue, Hamilton HM11, Bermuda. Till's registered agent is Compass Administration Services Ltd.
Holdings was acquired by Till in May 2015. Till's management and board of directors believe that the sale of Holdings will allow Till to focus on increasing shareholder value and its original business strategy. Till has engaged an investment adviser to facilitate the sale of Holdings. There can be no assurance that the process will result in any transaction.
The significant accounting policies used in the accompanying consolidated financial statements are as follows:
The accompanying consolidated financial statements include the accounts of Till, its wholly-owned subsidiaries, and other entities in which Till has, or had, a controlling interest (a "controlled subsidiary"). None of Till's controlled subsidiaries are variable interest entities. Non-controlled minority interests in the consolidated financial statements are separately identified in the consolidated balance sheets and statements of income (loss) and comprehensive income (loss). All inter-company accounts and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Amounts in the accompanying consolidated financial statements represent Till’s best estimates and assumptions; however, the actual amounts could differ materially from those estimates. Till’s principal use of estimates and assumptions include fair value determination of certain investments and other than temporary impairment, valuation of derivative instruments, valuation of mineral rights and mining properties, valuation of purchased intangibles, assessment of goodwill impairment, projection of unpaid loss and loss expense adjustment reserves, assessment of reinsurance recoverable including any provision for uncollectible reinsurance, and valuation of deferred tax assets.
The fair values of quoted investments are determined based on the closing prices on the last business day of the reporting period from recognized exchanges (e.g., NASDAQ, the New York Stock Exchange, etc.), recognized indices, or pricing vendors. Securities that do not have quoted prices available in active markets are valued using observable inputs such as quoted prices in inactive markets, quoted prices in active markets for similar instruments, benchmark interest rates, broker quotes, and other relevant inputs. Till’s estimate of fair value corresponds with the interest rate environment that existed as of the close of business on December 31, 2017 and 2016, respectively.
Because of their short-term nature, the carrying amounts for cash and cash equivalents, accrued investment income, and reinsurance recoverables approximate their fair values.
Once a policy, or reinsurance agreement, has been classified as an insurance contract, it remains classified as an insurance contract for the remainder of its lifetime.
Insurance premiums written and insurance premiums earned may also include various adjustments that occur during the accounting period for premiums receivable with respect to business written in prior periods.
Assumption reinsurance includes retroactive loss portfolio transfer contracts. Premiums are received from other insurance companies and those premiums are reported as revenue over the estimated period of runoff of the underlying insurance portfolio. At the same time, the actuarially determined estimate of unpaid losses, including loss adjustment expenses, the impact of any existing reinsurance on the portfolio transferred, and other costs of the transaction, are also reported over the estimated period of runoff of the underlying insurance portfolio assumed.
Deferred policy acquisition costs (“DPAC”) are reviewed regularly for recoverability from unearned premiums, including investment income thereon. A premium deficiency, i.e., unrecoverable DPAC, occurs to the extent that unearned premiums plus anticipated investment income are not considered adequate to cover all DPAC and related insurance claims and expenses, and would be recognized in the period the deficiency is identified. Till has determined that no premium deficiency existed at December 31, 2017 or 2016.
Reinsurance receivable represents balances due from reinsurance companies for paid losses and unpaid premiums due from the reinsurer. In the event that losses are incurred that are recoverable under its reinsurance program, Till records amounts recoverable from its reinsurers on paid losses plus an estimate of amounts recoverable on unpaid losses. As is the case with the estimate of unpaid losses and loss adjustment expenses, Till's estimate of amounts recoverable on unpaid losses and loss adjustment expenses is a function of Till’s liability for unpaid losses and loss adjustment expenses associated with the reinsured policies; therefore, those amounts can change in conjunction with any changes to the estimate of unpaid losses and loss adjustment expenses. The estimate of amounts recoverable from reinsurers on unpaid losses and loss adjustment expenses may change at any point in the future because of its relation to Till’s reserves for unpaid losses and loss adjustment expenses, which change could vary significantly from the initial estimates.
Reinsurance receivable is reported net of uncollectible reinsurance determined based on a review of the financial conditions of the reinsurers and other factors. At December 31, 2017 and 2016, there was no provision for uncollectable reinsurance.
Till’s insurance subsidiaries front and also assume a portion or all of the insurance risk of other insurance companies. The reinsurance payables include premiums due to reinsurers and amounts payable for paid losses and loss adjustment expenses under assumption contracts. In the event of a loss related to assumption business that is incurred but not yet settled or paid, the related reserve is included in the unpaid loss and loss adjustment expense amounts.
Goodwill represents the excess of the cost of acquisitions over the fair value of net assets acquired and is not amortized. Goodwill is subject to evaluation for impairment using a fair value based test. That evaluation is performed annually, during the fourth quarter or more frequently if facts and circumstances warrant. Till uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If required following the qualitative assessment, the first step in the goodwill impairment test involves comparing the fair value of each of its reporting units to the carrying value of those reporting units. If the carrying value of a reporting unit exceeds the fair value of the reporting unit, Till is required to proceed to the second step. In the second step, the fair value of the reporting unit would be allocated to the assets (including unrecognized intangibles) and liabilities of the reporting unit, with any residual representing the implied fair value of goodwill. An impairment loss would be recognized if, and to the extent that, the carrying value of goodwill exceeded the implied value. Till reviews amortizable intangible assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. If Till concludes that an impairment exists, the carrying amount is reduced to fair value.
Till assesses the recoverability of long-lived assets when events or circumstances indicate that the assets might have become impaired. Till determines whether the assets can be recovered from undiscounted future cash flows and, if not recoverable, Till recognizes the impairment by reducing the carrying value to fair value. Recoverability of long-lived assets is dependent on, among other things, Till’s ability to maintain profitability, so as to be able to meet its obligations when they become due. No such impairment was recognized in 2016 or 2017.
Basic income (loss) per share is computed by dividing net income (loss) attributable to restricted voting shares by the weighted average number of shares outstanding during the reporting period. Diluted income (loss) per share is computed similar to basic income (loss) per share computation except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of stock options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and warrants were exercised and that the proceeds from such exercises were used to acquire common stock at the average market price during the reporting periods. In periods of loss, all unexercised options and warrants are considered antidilutive.
In May 2014, the Financial Accounting and Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that represents the consideration that the entity expects to be entitled to in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Topic 606 is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Till has evaluated the impact of the new guidance on its consolidated financial statements and has concluded that the new guidance did not have a significant impact on its financial statements.
In January 2016, the FASB issued ASU Topic 2016-01, Financial Statements - Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that requires equity investments to be measured at fair value with changes in fair value recognized in income, use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument- specific credit risk, and eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Topic 825-10 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. Till is assessing the impact of adopting this accounting standard on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU Topic 2016-09, Compensation-Stock Compensation (Topic 718), that requires recognition of the excess tax benefits or deficiencies of share-based awards through net income rather than through additional paid-in capital. Additionally, the guidance allows for an election to account for forfeitures related to share-based payments either as they occur or through an estimation method. Till adopted this guidance beginning in the first quarter of 2017 and it did not have a significant impact on its consolidated financial statements.
Based on the planned sale of Holdings, as described in Note 2, Holdings is classified as assets and liabilities held for sale and is measured at the lower of its carrying amount or fair value less costs to sell. As such, as of December 31, 2017, Holdings assets and liabilities were valued at $57,793,025 and $50,999,935, respectively, which resulted in a valuation loss of $1,554,910 for the year ended December 31, 2017. The comparative assets and liabilities of Holdings as of December 31, 2017 and 2016 were as follows:
In the second quarter of 2015, Till's controlled subsidiary, Silver Predator Corp. ("SPD"), of which Till, through its wholly-owned subsidiary, Resource Re Ltd. ("RRL"), owns 64% of the outstanding shares, announced its intention to realize value from some of its assets by initiating a process to sell all, or part, of the tangible and mineral property assets at some of its properties in Nevada. SPD’s Board of Directors and management committed to a plan to sell Springer Mining Company ("SMC") and the Taylor Mill. Since initiating that process, active negotiations have been held related to those assets. However, there can be no assurance that the process will result in any transaction.
Till held a promissory note receivable from Golden Predator Mining Corp. ("GPY") with an original face amount of Cdn$3,753,332 (US$2,570,950). That promissory note bore interest at 6% per annum to June 1, 2016, 8% per annum to June 1, 2017, 10% per annum to June 1, 2018, and 12% thereafter.
Total held for trading investments included in assets held for sale at December 31, 2017 was $-0-.
The net gain (loss) from held for trading investments was $(230,062) and $1,303,368 for the years ended December 31, 2017 and 2016, respectively.
The following table presents information about Till’s investments included in assets held for sale measured at fair value on a recurring basis.
Unrealized investment losses on available for sale investments, excluding assets held for sale
The following table presents an aging of Till’s unrealized investment losses on available for sale investments by investment class as of December 31, 2017 and December 31, 2016, excluding assets held for sale.
Till, through RRL, has an investment in IG Copper LLC (“IGC”) that is accounted for under the equity method of accounting that is summarized as follows:
Claims frequency information is not available, nor deemed informative, for the Omega business due to the varied, and specialized, nature of the business that Omega writes and assumes.
The following table presents premiums written, change in unearned premiums, and premiums earned included in income (loss) from discontinued operations (Note 17).
The following table is a summary of property, plant, and equipment:
In April 2017, SPD, Till’s 64% owned subsidiary, entered into an option agreement (the “Taylor Agreement”) with Montego Resource Inc. (“Montego”) pursuant to which Montego has the right to acquire from SPD certain mining claims located in Nevada, USA commonly referred to as the Taylor Silver Property (the “Taylor Property”).
• 6 months from Closing: $100,000 cash and 300,000 common shares
Under the terms of the Carlin Vanadium Agreement, Optionee can acquire the Carlin Vanadium Property in consideration for the completion of a series of cash payments totaling $2,000,000, incurring expenditures of at least $475,000 on the Carlin Vanadium Property, and granting a 2% NSR to GPUS on the Carlin Vanadium Property. Upon completion of the payments, expenditures, and issuance of the 2% NSR, Optionee will hold a 100% interest in the Carlin Vanadium Property. Optionee has the right to purchase all or half of the NSR for $4 million for the entire 2% NSR or $2 million for 1% (half of the NSR). That right expires at the end of the option period in June 2022.
The payments, expenditures, and NSR grant must be completed in accordance with the following schedule:
• On or before December 15, 2018: Expenditures of an aggregate of $125,000
• On or before December 15, 2019: Expenditures of an aggregate of $225,000
• On or before December 15, 2021: Expenditures of an additional $250,000 (unless option is exercised)
• On or before 60 months from Closing: Expenditures of an additional $122,000 (unless option is exercised)
• On or before 60 months from Closing: $2,000,000 cash less any cash payments, not including expenditures
• On or before 60 months from Closing: Grant of 2% NSR to GPUS subject to purchase by Optionee
The significant components of Till's deferred income tax items are as follows:
The fair value of all compensatory options granted is estimated on the grant date using the BlackScholesMerton option pricing model. The weighted average assumptions used in calculating the fair values are as follows:
The warrants and options outstanding in the following table are shown with historical amounts:
On December 1, 2016, Till announced that it had renewed its normal course issuer bid ("NCIB"). Under the NCIB, Till had approval to bid for up to 262,860 of its common shares, representing 10% of the 2,628,600 shares that represented Till's public float at that date. Till's Board of Directors believed that market prices for Till's common shares did not give full effect to their underlying value and that the purchase of common shares under the NCIB would increase the proportionate share interest of, and be advantageous to, all remaining shareholders. Till also believed the NCIB purchases would provide increased liquidity to shareholders who would like to sell their shares. Purchases subject to the NCIB were carried out pursuant to open market transactions through the facilities of the TSXV/NASDAQ by Canaccord Genuity Corp. on behalf of Till. During 2016, Till purchased 138,400 common shares for $563,629 through the NCIB program of which 79,000 were returned to treasury and canceled in 2016 and the remaining 59,400 common shares were returned to treasury and canceled in December 2017.
In April 2014, Till acquired American Bullion Royalty Corp. in a reverse takeover by way of a plan of arrangement (the “Arrangement”). Effective December 31, 2014, Till completed a quasi-reorganization that, among other consequences, restated and reduced the then common stock and paid-in capital and eliminated the historical deficit and the accumulated other comprehensive loss.
Till's revenue from continuing operations is attributed to the following geographical areas:
Till is party to service agreements with SPD whereby Till provides accounting and corporate communications services on a cost-plus recovery basis. Till charged SPD $36,000 for each of the years ended December 31, 2017 and 2016, for those services.
• Maximizing long-term shareholder value by optimizing capital generated and used by Till.
Till views capital as a scarce and strategic resource. That resource protects the financial well-being of the organization, and is also critical in enabling Till to pursue strategic business opportunities. Adequate capital also acts as a safeguard against possible unexpected losses, and as a basis for confidence in Till by shareholders, policyholders, creditors, and others. For the purpose of capital management, Till has defined capital as shareholders’ equity, excluding accumulated other comprehensive income ("AOCI"). Capital is monitored by Till's Board of Directors. Till's insurance subsidiaries are subject to minimum capital requirements that, in the case of RRL, is $1 million, and, in the case of Omega, the Minimum Capital Test ("MCT") is calculated based on guidelines established by OSFI. Those amounts are not available to satisfy liabilities of Till or other subsidiaries. Both RRL and Omega are in compliance with regulatory capital requirements.
RRL and Omega follow accounting practices prescribed or permitted by their respective regulators, Bermuda and Canada, respectively. Statutory accounting practices applicable to RRL differ from U.S. GAAP in certain areas, the most significant being that statutory accounting practices:
• Require that certain investments be recorded at cost or amortized cost and allows bonds to be carried at amortized cost or fair value based on an independent rating.
Omega principally underwrites insurance lines of business that include personal property, commercial property, and liability lines of business. The various coverages underwritten have specific insurance contracts that set forth the specific insurance risk exposures, including the duration of the coverage, Omega is exposed to certain risks defined in the insurance contracts, usually for durations of one to twelve months.
Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying claim liabilities and in accordance with the reinsurance contracts. Although Omega has reinsurance arrangements in effect, Omega is not relieved of its obligations to its policyholders and, thus, a credit risk exposure exists with respect to such reinsurance arrangements.
The following table sets forth the unpaid losses and LAE by line of business (Note 7):
Liquidity risk is the risk that Till is unable to meet its financial obligations as they come due. Till manages this risk by continuous monitoring of its working capital to determine that its cash, cash equivalents, and investments exceed its estimated obligations.
The following tables summarize the terms to maturity of Till's investments and liabilities as of December 31, 2017: