Spruce Ridge Capital Inc. Investor Communications

Transcription

1 Investor Communications Year- End Financial Results and Update July 16 th, 2014 The beginning of 2014 has marked a new chapter for Spruce Ridge Capital Inc. ( Spruce ). We have completed a restructuring of the company, injected more capital into the business, introduced new management as well as new members to the Board of Directors. This year will be a pivotal milestone in our research and planning process, but before we go any further, I would like to take a look back. Please find enclosed the audited financial results for the period from May 3, 2013 to March 31, Financial Highlights Please note that these financials pertain to a period that was largely under the administration of previous management, as Simmons Financial Holdings Corp. ( SFHC ) was appointed on January 15, These statements have been reported to be consistent with what was elected in the previous statements; in order to reclassify our deficit into a restructuring account and have the Plan of Arrangement accounted for as a financial reorganization, our financials have been prepared in accordance with the Accounting Standards for Private Entities (ASPE). Statement of Loss and Deficit During the restructuring period from May 3, 2013 to March 31, 2014, Spruce incurred net losses of $323,485. At our interim reporting period at December 31, 2013, the company had incurred net losses of $650,659 that included an accretion expense of $460,283. We have reclassified this expense because interest on debt related to the land classifies as a development cost, therefore it has since been capitalized to increase the cost base of the land, reducing the amount of losses incurred for the period. The same treatment was applied to the property tax expense of $9,516 reported at interim. Management services and operating expenses of $114,598 include a combination of CCAA costs, consulting during the restructuring of Spruce, and management fees. Director fees have been recognized as a long- term liability as payment will be deferred until the land assets are sold. Legal fees include costs incurred from the SFHC investment and interest and finance fees include interest charges of the loan payable. Federal and provincial tax rates have been applied to Spruce s loss before income taxes at 25%, resulting in a provision for income taxes of $(68,621). This results in a future income tax recovery of $49,000.

2 Balance Sheet Upon implementation of the Plan of Arrangement, on May , pursuant to the CCAA process, Spruce foreclosed on the development lands, which we had previously provided a mortgage on, to Spruce Ridge Estates Inc. ( Estates ), a related company. This was a result of Estates having defaulted on their mortgage. As per the notes in the financial statements (note 3), the plan of arrangement recognized the amount due from Estates of $62,563,701. The cost base of the lands held for development was recorded at the fair market value of $10,296,065. Assets have increased primarily due to the reclassification of accretion and property tax costs capitalized into land value as well as the residual cash raised from the SFHC investment. Since the reorganization, a total of $665,149 of discount accretion on bonds payable have been capitalized to the land for the period May 3, 2013 to March 31, This accretion along with $9,824 in development costs has increased Spruce s land value from $10.30 million to $10.97 million. At May 3, 2013, the value of the bonds reflect three items; the conversion to common shares, the residual fair value of the net assets and the discount relating to the interest- free component of the bonds. Liabilities have since increased as a result of the issuance of $900,000 worth of bond purchase warrants as well as the accretion of the discount on the bonds payable and bond purchase warrants, calculated at 12% per annum, capitalized to the land. The loan payable of $500,000 at May 3, 2013 was repaid in full on December 23, 2013 by capital raised through the SFHC investment. Interest, finance and renewal fees and legal costs relating to the loan were $50,640. Shareholders equity has increased from the issuance of $100,000 of share purchase warrants, but has decreased overall as a result of the deficit during the period. Operational Update After the reorganization of Spruce, the company is now in a strong strategic position to execute on a long- range plan. Our objective for 2014 has been to make headway on the initial site planning process. Since our previous communication, Spruce has engaged Civicworks Planning & Design to assist with the review of current and emerging municipal policies, initial site planning and coordination of pre- development studies. Civicworks Planning & Design has vast experience in the area, especially dealing with the Municipal District of Foothills. Over the next 12 months, we plan to achieve significant progress with pre- design, performing studies, and identifying issues. Factors of consideration while planning will be the wildlife corridor, the dark skies policy surrounding the Rothney Observatory, water and wastewater and the scenic vistas of the Cowboy Trail.

3 We have been getting to know our neigbours to better review our position for future low- density development plans. Recently, we have had the pleasure to tour the 4,800 acres of land just east of our property known as the Ann & Sandy Cross Conservation Area. The Cross Conservation has a mandate to foster the protection of habitat for the native species of wildlife and being so close in proximity, we understand the importance of aligning our interests with theirs. We want to ensure that the wildlife coming through our corridors; big cats, elk, deer, porcupines, black bears and more, are protected. We look forward to reaching out to other large landowners to further develop our plans. If you have any questions or concerns, please don t hesitate to contact our investor relations manager Rob Petersen by robp@wheelhousesupport.ca or by phone (403) Respectfully, Jay Simmons Chairman and CEO Spruce Ridge Capital Inc.

4 Financial Statements (Audited) For the period from May 3, 2013 to March 31, 2014

5 Collins Barrow Calgary LLP 1400 First Alberta Place th Avenue S.W. Calgary, Alberta, Canada T2P 3R5 Independent Auditors' Report T F calgary@collinsbarrow.com To the Shareholders Spruce Ridge Capital Inc. We have audited the accompanying financial statements of Spruce Ridge Capital Inc., which comprise the balance sheets as at March 31, 2014 and May 3, 2013, and the statements of loss and deficit and cash flows for the period from May 3, 2013 to March 31, 2014, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. This office is independently owned and operated by Collins Barrow Calgary LLP. The Collins Barrow trademarks are used under license.

6 We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial positions of Spruce Ridge Capital Inc. as at March 31, 2014 and May 3, 2013, and the results of its operations and its cash flows for the period from May 3, 2013 to March 31, 2014 in accordance with Canadian accounting standards for private enterprises. Emphasis of Matter We draw attention to note 3 to the financial statements which describes the plan of arrangement and financial reorganization that was completed by Spruce Ridge Capital Inc. on May 3, Our opinion is not qualified with respect to this matter. Calgary, Canada June 18, 2014 CHARTERED ACCOUNTANTS

7 Balance Sheets March 31, May 3, Assets $ $ Land held for development (note 4) 10,971,038 10,296,065 Cash 302,090 12,295 Accounts Receivable 3,826 8,361 Prepaid and Other Assets 1,380 27,566 11,278,334 10,344,287 Liabilities and Shareholders Equity Liabilities Bonds (note 6) 6,187,149 4,621,999 Future income taxes 632, ,600 Director Fees Payable (note 10) 50,000 Accounts Payable and Accrued Liabilities 287 6,905 Loan Payable (note 5) 500,000 6,870,036 5,712,504 Shareholders Equity: Common shares (note 8) 1,972,742 1,972,742 Share purchase warrants (note 8) 100,000 Restructuring account (note 3) 2,659,041 2,659,041 Deficit (323,485) 4,408,298 4,631,783 11,278,334 10,344,287 Commitments (note 9)

8 Statement of Loss and Deficit For the period from May 3, 2013 to March 31, 2014 For the period from May 3, 2013 to March 31, 2014 Expenses Management services and operating 114,598 Director fees (note 10) 50,000 Interest and finance fees (note 5) 50,858 General meeting 5,609 Legal 38,640 Transfer agent and trustee 14,780 Loss before income taxes 274,485 Future income tax (note 7) 49,000 Net Loss, being deficit end of period 323,485 $

9 Statement of Cash Flows For the period from May 3, 2013 to March 31, 2014 For the period from May 3, 2013 to March 31, 2014 $ Operating Activities Net Loss (323,485) Increase in items not involving cash Future income tax 49,000 Net change in non-cash operating working capital accounts: Accounts receivable 4,535 Prepaid expenses 26,186 Accounts payable and accrued liabilities (6,618) Director fees payable 50,000 (200,382) Financing Activities: Loan advances 150,000 Loan repayment (650,000) Issuance of bond purchase warrants 900,000 Issuance of share purchase warrants 100, ,000 Investing Activities Additions to land held for development (9,823) Increase in cash 289,795 Cash, beginning of period 12,295 Cash, end of period 302,090

10 Notes to Financial Statements 1 Nature of Operations Spruce Ridge Capital Inc. ( Capital or the Company ) was incorporated on September 6, 2007 for the purposes of acquiring land for development. The Company raised $49.2 million from approximately 1,800 investors (the Bondholders ) by issuing 6% bonds which matured on December 31, Capital advanced $42.7 million (the Loans ) to Spruce Ridge Estates Inc. ( Estates ), a related company by common ownership, for the purposes of acquiring development lands located in Calgary, Alberta and for development costs. Estates acquired the development lands for $64.7 million from a related company, and granted a mortgage on those lands to Capital, and a $22 million mortgage to the related company. Capital paid approximately $4.7 million of commissions, legal and other costs relating to the issuance of the Bonds, and advanced an additional $1.8 million to Estates to fund development costs. Due to market delays in the development of the lands and lack of working capital, Capital was unable to generate revenue and could not meet repayment obligations to the Bondholders and filed for creditor protection under the Companies Creditors Arrangements Act on August 24, A Plan of Arrangement was approved by the Bondholders on January 28, 2013, approved by the Court on February 4, 2013 and implemented on May 3, The balance sheet at May 3, 2013 has been prepared on the date the plan of arrangement was implemented (note 3). The Company has applied the provisions of CPA Canada Handbook section 1625 Comprehensive Revaluation of Assets and Liabilities as a result of the financial reorganization. The development of the lands remains the Company s primary purpose. 2 Significant Accounting Policies The financial statements were prepared in accordance with Canadian Accounting Standards for private enterprises and include the following significant accounting policies: a) Land held for development Land held for development (the Land ) was initially recognized at fair value based on independent appraisal as a result of implementation of the Plan of Arrangement, and subsequently has been measured at the lower of cost and net realizable value of the land. Costs capitalized to the Land held for development include all direct costs relating to the projects, carrying costs including interest on debt used to finance project acquisitions, overhead costs, property taxes and land acquisition costs. Indirect servicing and land costs are allocated to each phase of a land development on a net developable acre basis. Total costs within a phase are allocated to individual units based on anticipated selling prices. Net realizable value Management assesses whether any indicators of impairment circumstances exist. When such indicators are present, management determines the net realizable value of inventory based on the projected undiscounted future net cash flow after development and selling costs over the life of the project. If the future undiscounted cash flows are less than the carrying amount, the inventory is considered to be impaired and is then written down to the net realizable value. When the circumstance that previously caused inventories to be written down below cost no longer exists or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of the write down is reversed. These projections take into account the specific business plan for the project and management s best estimate of the most probable set of

11 Notes to Financial Statements economic conditions anticipated to prevail in the market area. The ultimate net realizable value of the Land is dependent upon future market and economic conditions. b) Financial instruments The Company initially measures its financial assets and liabilities at fair value, except for certain non-arm s length transactions that are measured at the exchange amount. The Company subsequently measures all of its financial assets and financial liabilities at amortized cost. Financial assets measured at amortized cost include cash and accounts receivable. Financial liabilities measured at amortized cost include accounts payable and accrued liabilities, director fees payable, loan payable, and bonds. Impairment Financial assets measured at cost or amortized cost are tested for impairment, when there are indicators that the asset may be impaired. The amount of the write-down, if any, is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account. The reversal may be recorded provided it is no greater than the amount that had been previously reported as a reduction in the asset and it does not exceed original cost. The amount of the reversal is recognized in net income. Transaction costs Financial instruments, that are subsequently measured at cost or amortized cost, are adjusted by the transaction costs and financing fees that are directly attributable to their origination, issuance or assumption. Long-term debt is also reduced by financing fees and any debt premiums or discounts. The Company uses the effective interest method to amortize these adjustments to longterm debt. c) Income taxes The Company provides for future income taxes by using the asset and liability method. Under this method, future income tax assets and liabilities are computed for temporary differences between the carrying value and tax bases for assets and liabilities and the benefit of tax losses available to be carried forward to reduce taxable income in future years that are likely to be realized. Future tax assets and liabilities are calculated using enacted or substantially enacted tax laws and rates expected to be applicable to the periods in which the differences are expected to affect taxable income. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. d) Measurement uncertainty and use of estimates The preparation of financial statements requires management to make estimates and assumptions 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 periods. Actual results could differ from those estimates. The valuation of land held for development is based on an independent appraiser s best estimates of the future estimated selling price. The valuation of bonds payable including the bond purchase warrants is based on the estimated valuation of land held for development and management s estimate of the appropriate interest rate for similar debt. The valuation of future income taxes are based on anticipated future tax rates in the period of reversal of timing differences.

12 Notes to Financial Statements By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant. 3 Plan of Arrangement and Financial Reorganization On January 28, 2013, the Company s Bondholders (note 1) approved a Plan of Arrangement pursuant to the Companies Creditors Arrangements Act (the Plan ), which was implemented on May 3, The main components of the Plan included: Capital foreclosed on the development lands and title was transferred from Estates. The related company mortgage of $22 million was struck from title. Consideration was extinguishment of the Loans principal and accrued interest of approximately $62.6 million; The common shares that were issued and outstanding prior to implementation of the Plan of Arrangement were cancelled; The existing 6% bonds were exchanged for new Class A, non-interest bearing bonds having stated value of $60 million and new common shares having stated value of $1.97 million. As a result, the Bondholders now hold 100% of the issued common shares of Capital. A new Board of Directors was appointed. The Plan of Arrangement has been accounted for as a financial reorganization as at May 3, 2013 in accordance with CPA Canada Handbook section 1625 Comprehensive Revaluation of Assets and Liabilities. The Company s assets and liabilities have been adjusted to reflect the values established during the financial reorganization. The retained earnings has been reclassified to the restructuring account and the Company commenced accounting as of May 3, 2013 on a fresh start basis. The effect of the financial reorganization on the balance sheet accounts is as follows: Prior to Financial Reorganization Assets (Liabilities/Equity) (Unaudited) After Financial Reorganization Assets (Liabilities/Equity) Restructuring $ $ $ Amounts due from Spruce Ridge Estates Inc. 62,563,701 (62,563,701) Land held for development 10,296,065 10,296,065 Bonds payable (62,082,841) (4,622,000) 57,460,841 Accounts payable and accrued liabilities (268,878) 268,878 Future income taxes (583,600) (583,600) Share capital new common shares issued (1,972,742) (1,972,742) Share capital old common shares cancelled (1,000) 1,000 Pre reorganization retained earnings (215,327) 215,327 Restructuring costs (463,027) (463,027) (4,345) 2,654,696 2,659,041 The assets and liabilities have been adjusted to their estimated fair value at May 3, The fair market value of the land is based on its independently appraised value less estimated selling costs. The stated value of the bonds have been reduced first to reflect the conversion to new common shares, secondly to reflect the residual fair value of the net assets of the Company, and third to reflect the discount relating to the interest-free component of the bonds. Accounts payable and

13 Notes to Financial Statements accrued liabilities have been written down to reflect a partial conversion to bonds and a write-off for amounts not claimed in the CCAA claims process. Future income taxes reflect the net tax effect of the differences between the accounting bases and tax bases of the assets and liabilities. The revaluation adjustments are classified to restructuring and included in shareholders equity. 4 Land Held for Development March 31, May 3, Land held for development acres $10,971,038 $10,296,065 Capitalized costs $9,823 in development costs and $632,890 of accretion of discount on bonds payable [note 6(a)] have been capitalized to the land for the period May 3, 2013 to March 31, $32,260 of accretion of discount on bond purchase warrants payable [note 6(b)] have been capitalized to the land for the period of May 3, 2013 to March 31, Loan payable The Company had a $1,250,000 line of credit with a third party private lender, of which $500,000 was drawn on January 11, The credit facility carried at 12% per annum, was secured by a first charge on the land held for development and matured on July 11, The facility could be renewed in six-month renewal terms until July 11, 2014 with financing fees of 1.5% of the principal balance at each renewal. On July 11 th, 2013 the Company renewed the loan to November 15, On December 23, 2013 the loan was paid in full. Interest, finance and renewal fees and legal costs totalling $50,640 were paid during the period from May 3, 2013 to March 31, Bonds payable and Bond purchase warrants a) Bonds Payable On May 3, 2013 the Company issued non-interest bearing Class A Bonds to replace the 6% bonds previously issued, in connection with the Plan (note 3). The Class A Bonds are redeemable at the option of the Company in whole or in part at any time prior to maturity. The Class A Bonds face and redemption values are $60,110,098, are subject to excluded asset provisions in the Bond Indenture, are secured by a fixed mortgage on the lands and mature December 31, The Bond Indenture provides for the establishment of an Excluded Asset Account upon the sale or other realization of the assets of the Company whereby the first $2,000,000 of net proceeds from the realization of assets shall be deposited to the Excluded Asset Account for use by the Company as determined by the Board of Directors and shall not be subject to the fixed charge of the Class A Bonds. The Class A Bonds have been recorded at their estimated fair value determined as follows:

14 Notes to Financial Statements $ Face value of 6% bonds issued before financial reorganization 49,197,600 Accrued interest to August 24, ,664,225 Accounts payable paid by way of Class A Bonds issued in accordance with the financial reorganization 221,015 62,082,840 Conversion of bonds to Class A common shares (note 3) (1,972,742) Face and redemption value, Class A Bonds issued 60,110,098 Adjustment to fair value, being residual value of net assets (52,266,120) Adjustment to reflect deemed market rate of 12% per annum (3,221,979) Balance, May 3, ,621,999 Accretion of discount on bonds payable 632,890 Bond purchase warrants issued [note 6(b)] 900,000 Accretion of bond purchase warrant [note 6(b)] 32,260 Balance, March 31, ,187,149 b) Bond purchase warrants On December 23, 2013, the Company issued $900,000 of Bond Purchase Warrants (the Bond Warrants ) for cash consideration of $900,000. The holders are entitled to receive, upon exercise of the Bond Warrants, $6,029,400 of Class A Bonds, identical to existing Class A Bonds. In accordance with investment agreements related to the issue of the Bond Warrants, the Company is required to establish Bond Warrant Reserve Accounts to which the Company, in the event that a distribution is made on the Class A Bonds, will deposit the amount that would be payable to the holders of the Bond Warrants had those warrants been exercised and the underlying Class A Bonds issued. Concurrent with the granting of the Bond Warrants, the Company entered into a Management Agreement (note 9) with Simmons Financial Holdings Corporation ( SFHC ). In the event that the Management Agreement is terminated by the Company prior to the expiry of its original term (with certain exceptions), the holders may put the Bond Warrants back to the Company and require the Company to purchase the Bond Warrants at a repurchase price equal to their fair value plus the amounts in the Bond Warrant Reserve accounts. The Company may, at its option, if required to repurchase the Bond Warrants, pay the purchase price by cash payment, cash payment to be funded by the sale of a portion of the Land held for development within 180 days, or by transfer of title to a portion of the Land held for development which has a fair market value in the amount of the repurchase price. The accretion of the discount on bond purchase warrants payable of $32,260, calculated at a rate of 12% per annum, was capitalized to land held for development. 7 Income taxes The provision for income taxes differs from the result that would have been obtained by applying the combined federal and provincial tax rates ( %) to the Company s loss before income taxes. The differences result from the following: $ Loss before income taxes (274,485) Expected income tax recovery at statutory rates 25% (68,621) Income inclusion arising from debt forgiveness 117,621 Future income tax 49,000

15 Notes to Financial Statements The Company s non-capital losses expire in the following years: $ ,646, ,624 52,695,914 8 Common shares and Share purchase warrants a) Common shares An unlimited number of common shares have been authorized for issuance, of which, 1,972,742 common shares at a stated value of 1,972,742 have been issued as at May 3, 2013 and March 31, Each share is entitled to one vote per share. b) Share purchase warrants On December 23, 2013, the Company issued $100,000 of Share purchase warrants (the Share Warrants ) for cash consideration of $100,000. The holders are entitled to receive, upon exercise of the Share Warrants, 197,878 common shares. In accordance with investment agreements related to the issue of the Share Warrants, the Company is required to establish Share Warrant Reserve Accounts to which the Company, in the event that a distribution is made on common shares, will deposit the amount that would be payable to the holders of the Share Warrants had those warrants been exercised and the underlying common shares issued. Concurrent with the granting of the Share Warrants, the Company entered into a Management Agreement with SFHC (note 9). In the event that the Management Agreement is terminated by the Company prior to the expiry of its original term (with certain exceptions), the holders may put the Share Warrants back to the Company and require the Company to purchase the Share Warrants at a repurchase price equal to their fair value plus the amounts in the Share Warrant Reserve accounts. The Company may, at its option, if required to repurchase the Share Warrants, pay the purchase price by cash payment, cash payment to be funded by the sale of a portion of the Land held for development within 180 days, or by transfer of title of a portion of the Land held for development which has a fair market value in the amount of the repurchase price. 9 Commitments On December 23, 2013, the Company entered into a Management Agreement with SFHC to provide management services for the next three years. In accordance with the Management Agreement, SFHC is to be paid a base annual management fee of $120,000. SFHC is entitled to an incentive fee equal to 25% of the appreciation in net asset value (as defined in the Management Agreement) upon the sale or partial sale of the land held for development and on termination of the Management Agreement. The Company may at its option pay the incentive fee by cash payment to be funded by the sale of a portion of the land held for development within 180 days, or by transfer of title to a portion of the land which has a fair market value equal to the incentive fee. In addition, provided that the Management Agreement is in effect at the time of sale, SFHC is entitled to a 5% commission on the sale of the Land held for development and in that circumstance SFHC shall be responsible for all commissions payable to third parties. 10 Director fees The Company has agreed to pay director fees of $50,000 for The directors have agreed to defer receipt of those fees until the land assets are sold.

16 Notes to Financial Statements 11 Financial Instruments The Company is exposed to the following significant financial risks: a) Credit risk The Company is exposed to credit risk associated with cash. The risk is mitigated as the cash is maintained with a major financial institution. The maximum exposure to credit risk is represented by the carrying amount of cash on the balance sheet. b) Interest rate risk Interest rate price risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. The fair value of bonds payable including bond purchase warrants are subject to changes in estimated market rates. As rates increase, the fair value of the liability will decrease and vice versa. c) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company is exposed to the risk that there will be insufficient working capital to meet obligations. The Company is managing the risk by regular monitoring of bank balances and by not incurring long-term financial instruments, excepting the bonds payable.