Westaim : 2021 Second Quarter Report

Second Quarter Report to Shareholders

for the quarter ended June 30, 2021

The Westaim Corporation

Management's Discussion and Analysis

Three and six months ended June 30, 2021

(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)

TABLE OF CONTENTS

1. THE COMPANY
2. OVERVIEW OF PERFORMANCE
3. INVESTMENTS
4. 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-GAAPMEASURES
16. CAUTIONARY NOTE REGARDING FUTURE ORIENTED FINANCIAL INFORMATION

The "Company" in this Management's Discussion and Analysis ("MD&A") refers to The Westaim Corporation ("Westaim") on a consolidated basis. This MD&A, which has been approved by the Board of Directors of Westaim, should be read in conjunction with the Company's unaudited consolidated financial statements including notes for the three and six months ended June 30, 2021 and 2020 as set out on pages 36 to 59 of this quarterly report. Financial data in this MD&A has been derived from the unaudited consolidated financial statements for the three and six months ended June 30, 2021 and 2020 and is intended to enable the reader to assess the Company's results of operations for the three and six months ended June 30, 2021 and financial condition as at June 30, 2021. The Company reports its consolidated financial statements using accounting policies consistent with International Financial Reporting Standards ("IFRS"). All currency amounts are in United States dollars ("US$"), the functional and presentation currency of the Company, unless otherwise indicated. Canadian dollars are referenced as C$. The following commentary is current as of August 19, 2021. Additional information relating to the Company is available on the System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com. Certain comparative figures have been reclassified to conform to the presentation of the current year, and certain totals, subtotals and percentages may not reconcile due to rounding.

IFRS for Investment Entities

The Company qualifies as an investment entity under IFRS and uses fair value as the key measure to monitor and evaluate its primary investments. The Company reports its financial results in accordance with IFRS applicable to investment entities.

Functional and Presentation Currency

The US$ is the functional and presentation currency of the Company. International Accounting Standard 21 "The Effects of Changes in Foreign Exchange Rates" describes functional currency as the currency of the primary economic environment in which an entity operates. A significant majority of the Company's revenues and costs are earned and incurred in US$, respectively.

Non-GAAP Measures

The Company uses both IFRS and non-generally accepted accounting principles ("non-GAAP") measures to assess performance. The Company cautions readers about non-GAAP measures that do not have a standardized meaning under IFRS and are unlikely to be comparable to similar measures used by other companies. Management believes these measures allow for a more complete understanding of the underlying business. These measures are used to monitor the Company's results and should not be viewed as a substitute for those determined in accordance with IFRS. Reconciliations of such measures to the most comparable IFRS figures are contained in Section 15, Non-GAAPMeasures of this MD&A.

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.

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The Westaim Corporation

Management's Discussion and Analysis

Three and six months ended June 30, 2021

(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)

Cautionary Statement Regarding Financial Information of Skyward Specialty Insurance Group Inc.

Select financial information concerning Skyward Specialty Insurance Group Inc. ("Skyward Specialty") (the "Skyward Specialty Financial Information") contained in this MD&A is unaudited and has been derived from the unaudited consolidated financial statements of Skyward Specialty for the three and six months ended June 30, 2021 and 2020, which have been prepared in accordance with United States generally accepted accounting principles ("US GAAP"). Such statements are the responsibility of the management of Skyward Specialty. The Skyward Specialty Financial Information, including any Skyward Specialty non-GAAP measures contained therein, has not been reconciled to IFRS and so may not be comparable to the financial information of issuers that present their financial information in accordance with IFRS.

The Skyward Specialty Financial Information should be read in conjunction with the Company's historical financial statements including the notes thereto and the related MD&A as well as the Company's other public filings.

The Skyward Specialty Financial Information has been provided solely by Skyward Specialty. Although Westaim has no knowledge that would indicate that any of the Skyward Specialty Financial Information contained herein is untrue or otherwise misleading, neither Westaim nor any of its directors or officers assumes any responsibility for the accuracy or completeness of such information, or for any failure by Skyward Specialty to disclose to Westaim events or facts which may have occurred or which may affect the significance or accuracy of any such financial information but which are unknown to Westaim.

Westaim disclaims and excludes all liability (to the extent permitted by law), for losses, claims, damages, demands, costs and expenses of whatever nature arising in any way out of or in connection with the Skyward Specialty Financial Information, its accuracy, completeness or by reason of reliance by any person on any of it.

Cautionary Statement Regarding Financial Information of the Arena FINCOs and Arena Investors

Select financial information concerning the Arena FINCOs (as hereinafter defined) and Arena Investors (as hereinafter defined) (the "Arena Financial Information") contained in this MD&A is unaudited and has been derived from the unaudited financial statements of the Arena FINCOs and Arena Investors for the three and six months ended June 30, 2021 and 2020 which have been prepared in accordance with either IFRS or US GAAP. Such statements are the responsibility of the management of the Arena FINCOs and Arena Investors. The Arena Financial Information, including any Arena FINCOs and Arena Investors non-GAAP measures contained therein, may not be reconciled to IFRS and so may not be comparable to the financial information of issuers that present their financial information in accordance with IFRS.

The Arena Financial Information should be read in conjunction with the Company's historical financial statements including the notes thereto and the related MD&A as well as the Company's other public filings.

The Arena Financial Information has been primarily provided by the management of the Arena FINCOs and Arena Investors. Although Westaim has no knowledge that would indicate that any of the Arena Financial Information contained herein is untrue or otherwise misleading, neither Westaim nor any of its directors or officers assumes any responsibility for the accuracy or completeness of such information, or for any failure by the Arena FINCOs and Arena Investors to disclose to Westaim events or facts which may have occurred or which may affect the significance or accuracy of any such financial information but which are unknown to Westaim.

Westaim disclaims and excludes all liability (to the extent permitted by law), for losses, claims, damages, demands, costs and expenses of whatever nature arising in any way out of or in connection with the Arena Financial Information, its accuracy, completeness or by reason of reliance by any person on any of it.

Future Oriented Financial Information

This MD&A may contain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from these forward-looking statements as a result of various factors, including those discussed hereinafter, and in the Company's Annual Information Form dated March 25, 2021 for its fiscal year ended December 31, 2020 which is available on SEDAR at www.sedar.com. Please refer to Section 16, Cautionary Note Regarding Future Oriented Financial Information of this MD&A.

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The Westaim Corporation

Management's Discussion and Analysis

Three and six months ended June 30, 2021

(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)

1. THE COMPANY
   The Westaim Corporation (TSXV: WED) is a Canadian investment company specializing in providing long-term capital to businesses operating primarily within the global financial services industry. The Company invests, directly and indirectly, through acquisitions, joint ventures and other arrangements, with the objective of providing its shareholders with capital appreciation and real wealth preservation.
   Westaim's strategy is to pursue investment opportunities with a focus towards the global financial services industry and grow shareholder value over the long term. The Company's principal investments consist of Skyward Specialty, the Arena FINCOs and Arena Investors. See discussion in Section 3, Investments of this MD&A for additional information on these investments.
2. OVERVIEW OF PERFORMANCE

Highlights		Three months ended June 30		Six months ended June 30
		2021		2020		2021		2020
Revenue and net change in unrealized value of investments	$	10.5	$	3.7	$	23.2	$	(20.1)
Net recovery of expenses (expenses)		0.4		(3.7)		(3.2)		(0.4)
Income tax expense		-		(0.1)		-		(0.1)
GAAP profit (loss) and comprehensive income (loss)	$	10.9	$	(0.1)	$	20.0	$	(20.6)
Adjusted profit (loss) and comprehensive income (loss)
excluding unusual items1	$	11.6	$	4.8	$	20.7	$	(0.8)
GAAP earnings (loss) per share - basic	$	0.08	$	-	$	0.14	$	(0.14)
GAAP earnings (loss) per share - diluted	$	0.08	$	-	$	0.14	$	(0.15)
Adjusted earnings (loss) per share - diluted1	$	0.08	$	0.03	$	0.14	$	(0.02)
At June 30:
Shareholders' equity	$	340.5	$	334.3	$	340.5	$	334.3
Number of common shares outstanding		143,186,718		143,186,718		143,186,718		143,186,718
Book value per fully diluted share - in US$1	$	2.38	$	2.32	$	2.38	$	2.32
Book value per fully diluted share - in C$1	$	2.95	$	3.15	$	2.95	$	3.15

1 Non-GAAP measure. See Section 15, Non-GAAPMeasures of this MD&A. Period end exchange rates: 1.24095 at June 30, 2021 and 1.35865 at June 30, 2020.

Three months ended June 30, 2021 and 2020

The Company reported a profit and comprehensive profit of $10.9 for the three months ended June 30, 2021 (2020 - loss and comprehensive loss of $0.1).

Revenue and net change in unrealized value of investments for the three months ended June 30, 2021 was an increase of $10.5 (2020 - $3.7) and consisted of interest income of $0.3 (2020 - $0.2), advisory fees of $0.3 (2020 - $0.3), an increase of $7.6 in the unrealized value of the Company's investments in private entities (2020 - $3.6 ), an increase in unrealized value of other investments of $0.1 (2020 - nominal) and the Company's share of profit of its associates (as hereinafter defined) of $2.2 (2020 - loss of $0.4).

Net recovery of expenses for the three months ended June 30, 2021 of $0.4 (2020 - expenses of $3.7) consisted of salaries and benefits of $1.2 (2020 - $0.9), general, administrative and other expenses of $0.2 (2020 - $0.1), professional fees of $0.2 (2020 - $0.3), site restoration provision recovery of $2.6 (2020 - nominal), share-based compensation expense of $0.1 (2020 - $1.1), a foreign exchange loss of $0.4 (2020 - $0.6), interest on preferred securities of $0.5 (2020 - $0.4) and an unrealized gain resulting from a change in the fair value of the vested Warrants (as hereinafter defined) of $0.4 (2020 - loss of $0.3).

The Company reported income tax expense for the three months ended June 30, 2021 of $nil (2020 - $0.1).

Six months ended June 30, 2021 and 2020

The Company reported a profit and comprehensive profit of $20.0 for the six months ended June 30, 2021 (2020 - loss and comprehensive loss of $20.6).

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The Westaim Corporation

Management's Discussion and Analysis

Three and six months ended June 30, 2021

(Currency amounts in millions of United States dollars except per share data, unless otherwise indicated)

1. OVERVIEW OF PERFORMANCE (continued)
   Revenue and net change in unrealized value of investments for the six months ended June 30, 2021 was an increase of $23.2 (2020 - decrease of $20.1) and consisted of interest income of $0.7 (2020 - $0.6), dividend income paid to the Company from the Arena FINCOs (as hereinafter defined) of $nil (2020 - $22.7), advisory fees of $0.5 (2020 - $0.5), an increase of $18.6 in the unrealized value of the Company's investments in private entities before dividends paid of $nil (2020 - a decrease in the unrealized value of $42.7, which was $20.0 before dividends paid of $22.7), an increase in unrealized value of other investments of $0.2 (2020 - nominal) and the Company's share of profit of its associates (as hereinafter defined) of $3.2 (2020 - loss of $1.2).
   Net expenses for the six months ended June 30, 2021 of $3.2 (2020 - $0.4) consisted of salaries and benefits of $2.4 (2020 - $1.8), general, administrative and other expenses of $0.4 (2020 - $0.4), professional fees of $0.5 (2020 - $0.7), site restoration provision recovery of $2.6 (2020 - provision expense of $0.1), share-based compensation expense of $0.8 (2020 - recovery of $1.2), a foreign exchange loss of $0.8 (2020 - gain of $1.0), interest on preferred securities of $1.0 (2020 - $0.9) and an unrealized gain resulting from a change in the fair value of the vested Warrants (as hereinafter defined) of $0.1 (2020 - $1.3).
   The Company reported income tax expense for the six months ended June 30, 2021 of $nil (2020 - $0.1).
2. INVESTMENTS
   The Company's investments in private entities and associates are included under investments in the consolidated statements of financial position. The Company's principal investments consist of its investments in Skyward Specialty, the Arena FINCOs and Arena Investors as follows:

		Place of	Principal place	Ownership interest	Ownership interest
		establishment	of business	at June 30, 2021	at December 31, 2020
Investment in private entities:
-	Skyward Specialty	Delaware, U.S.	Texas, U.S.	44.0% owned by the Company	44.5% owned by the Company
-	Arena FINCOs (as	Delaware, U.S.	New York, U.S.	100% owned by the Company	100% owned by the Company
	hereinafter defined)
Investment in associates:
-	Arena Investors (as	Delaware, U.S.	New York, U.S.	51% beneficially owned the Company 1	51% beneficially owned the Company 1
	hereinafter defined)

1 Legal equity ownership is 100%, and beneficial ownership denotes profit percentage subject to change over time pursuant to the earn-in rights granted to Bernard Partners, LLC ("BP LLC") described below under "Investment in Arena Investors".

For additional information on the Company's corporate structure, see the Company's Annual Information Form dated March 25, 2021 for its fiscal year ended December 31, 2020 which is available on SEDAR at www.sedar.com.

Skyward Specialty

The Company owns a significant interest in Skyward Specialty, a U.S. based diversified specialty property & casualty insurance holding company that underwrites select property, casualty, surety, and accident and health insurance coverages through its insurance and reinsurance subsidiaries. The Company's investment in Skyward Specialty is recorded in investments in private entities under investments in the Company's consolidated financial statements.

Arena FINCOs

The Arena FINCOs include specialty finance companies that primarily purchase fundamentals-based,asset-oriented credit investments for their own account and a company that facilitates the origination of fundamentals-based,asset-oriented credit investments for its own account and/or possible future sale to specialty finance companies, clients of Arena Investors and/or other third parties. Fundamentals-based,asset-oriented credit investments refer to loans or credit arrangements which are generally secured by assets. Fundamentals-based,asset-oriented lenders and investors manage their risk and exposure by carefully assessing the value of the assets securing the loan or investment, receiving periodic and frequent reports on collateral value and the status of those assets, and tracking the financial performance of borrowers. The Company's investments in the Arena FINCOs are recorded as investments in private entities included under investments in the Company's consolidated financial statements.

Arena Investors

Arena Investors Group Holdings, LLC ("AIGH"), through its subsidiaries, operates as an investment manager offering clients access to fundamentals- based, asset-oriented credit investments. AIGH is the sole limited partner of Arena Investors, LP, a limited partnership established to carry on the third-party investment management business. The Company's investment in Arena Investors is accounted for using the equity method and consists of investments in corporations or limited partnerships where the Company has significant influence.

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