Spruce Ridge Capital Inc. Investor Communications

Transcription

1 Investor Communications Q2 Financial Results and Update November 28, 2016 Enclosed, please find the financial statements for the quarter-ended September 30 th, September 30 th, 2016 Second Quarter Financial Results Statement of Loss and Deficit Spruce incurred losses of $67,309 before taxes for the three-month period ending September 30 th, Operating expenses of $33,971 were lower in the three-month period when compared to the same quarter in 2015; however, interest and finance fees increased as a result of the credit facility obtained to fund the preliminary planning of the land development. Statement of Financial Position Land held for development has increased to $13.06 million as a result of the $455,906 accretion of discounts on bonds payable, $76,854 capitalized expenditures net of incidental rental revenues of $25,000. Cash has decreased since last quarter to $191,025, and the interest reserve has a balance of $82,046. Prepaid expenses of $18,648 include payments made for trustee fees as well as insurance. Total liabilities increased to $9,768,079. Of this total liability, $8 million is a result of our bond liability, which has increased due to the accretion of discounts on the bonds. The mortgage payable balance of $729,006 pertains to the credit facility as mentioned previously. Overall, our retained earnings have decreased to $3.59 million. The debt to equity ratio, and debt servicing coverages remain in line with our bank covenants. Operational Update Management has prepared extensively for the municipal approval process. The formal parts of this process begin in the next month as management leads a public consultation, which is required before submitting an application to Council. Relying on the studies and concepts created thus far, we will be sharing the key principles driving our development decisions and our overall vision for the project. These principles take into consideration the environmental impacts, traffic impact and water and waste water alternatives. The open house is intended to be a collaborative process with an objective of seeking consensus on the key principles and gathering input from community members; their feedback will impact our design process as we prepare to submit our final application for an Area Structure Plan amendment to the MD of Foothills for approval. In addition to our community outreach efforts, we have begun the rebranding process for the development to better reflect our proposed conservation by design community. As part of the rebranding efforts, the management agreement with Simmons Financial Holdings Corp (SFHC) has also been transferred to Durum Capital Inc., a wholly-owned management company of SFHC. Durum Capital currently manages 320 acres of development land and over 225,000 sqft of industrial space. Durum Capital is comprised of the same management team that has jointly operated SFHC for the past nine years. Though the management team itself will remain the same, Durum Capital provides a strategic foundation from which to build a new brand.

2 Investor Communications Financial Outlook A review of the financial statements presents an obvious requirement for capital in the near term. Management estimates the financial need to be in the range of $2 to $3 million in order to complete the Area Structure Plan amendment and Land Use application. For the capital requirements to be met, Management will move forward with a restructuring process as outlined below. The business is currently structured as a corporation where investors own both common shares and bonds valued at a significant discount to their original face value. This makes for a capital structure that is unnecessarily complicated, resulting in a barrier to attracting new capital to the business. Accordingly, the Board of Directors has requested that management proceed with an alternative structure whereby investors will exchange their bonds and common shares for units in a Mutual Fund Trust. This exchange will leave the business with a simple clear structure that will ultimately be easier to finance. A rights offering will also be pursued whereby existing unitholders are provided the opportunity to acquire new shares in the business at the current low valuation. Only after our existing investors are provided the opportunity to invest will we permit new investors to participate. We have been advised that this new structure will enable the investors who own shares and bonds directly as opposed to within a registered account the opportunity to recognize tax losses which could be quite valuable. Further details on the restructuring and rights offering will be provided over the next few months. 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.

3 Financial Statements (Unaudited) For the period from July 1,

4 Statement of Financial Position As at Assets September 30, 2016 March 31, 2016 Current Assets $ $ Land held for development (note 3) 13,062,347 12,554,587 Cash 191,025 13,196 Interest Reserve 82,046 - Accounts receivable 4,498 10,125 Prepaid expenses and other assets 18,648 4,482 13,358,564 12,582,390 13,358,564 12,582,390 Liabilities and Shareholders Equity Liabilities Bonds (note 4) 8,054,333 7,598,428 Future income taxes (note 5) 891, ,286 Mortgage Payable 729,006 - Director fees payable (note 8) 50,000 50,000 Accounts payable and accrued liabilities 43, ,668 Loan payable (note 11(b)) - 137,142 9,768,079 8,722,524 Shareholders Equity: Common shares (note 6) 1,972,742 1,972,742 Share purchase warrants (note 6) 100, ,000 Retained earnings 1,517,743 1,787,124 3,590,485 3,859,866 13,358,564 12,582,390 Commitments (note 7) The accompanying notes are an integral part of these financial statements

5 Statement of Operations and Retained Earnings For the 3 and 6 month period ended Three Months Ended Six Months Ended 30-Sept Sept Sept Sept-15 $ $ $ $ Expenses Management services and operating (note 7, 11) 33,971 35,438 75,664 66,817 Interest and finance fees 13,551 3,115 25,252 5,116 Legal Fees 4, ,649 3,486 Director fees (note 8) 4,000 4,000 8,000 8,000 Professional Fees 7,500 15,000 21,000 18,000 Transfer agent and trustee 4,030 3,619 8,102 7,554 Loss before income taxes 67,309 62, , ,973 Future income tax (note 5) 21,500 9, ,714 23,639 Net Loss 88,809 71, , ,612 Retained earnings, beginning of period 3,679,294 4,106,313 3,859,866 4,166,945 Retained earnings, end of period 3,590,485 4,034,333 3,590,485 4,034,333

6 Statement of Cash Flows For the 6 month period ended September 30, 2016 September 30, 2015 Cash provided by (used in): Operating Activities $ $ Net Loss (269,381) (132,612) Add item not affecting cash: Future income tax 118,714 23,639 Change in non-cash operating working capital: Accounts receivable 5,627 (2,241) Prepaid expenses and other assets (14,166) (10,130) Accounts payable and accrued liabilities (120,928) 31,527 Additions to land held for development (51,855) (62,846) Interest Reserve (82,046) - (414,035) (152,663) Financing Activities Loan advances - 100,000 Loan repayment (125,000) - Interest repayment on loan advance (12,142) - Mortgage advance 729, , ,000 Increase in cash 177,829 (52,663) Cash, beginning of period 13,196 68,923 Cash, end of period 191,025 16,260

7 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 ( the Plan ) was approved by the Bondholders on January 28, 2013, approved by the Court on February 4, 2013 and implemented on May 3, 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 of the Plan, and subsequently has been measured at the lower of cost and net realizable value. Costs capitalized to the Land 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 when circumstances exist. When such indicators are present, management determines the net realizable value of the Land 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 its net realizable value. When the circumstance that previously caused the Land 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 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.

8 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 bonds payable. c) Income taxes The Company provides for future income taxes by using the future taxes 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 net realizable value of land held for development is based on an independent appraiser s best estimates of the future estimated selling price. The valuation of future income taxes are based on anticipated future tax rates in the period of reversal of timing differences. 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.

9 3 Land held for development Sept 30, 2016 March 31, 2016 Land held for development acres $13,062,347 $12,554,587 Capitalized costs $76,854 ( $129,907) in development costs and $386,136 ( $689,528) of accretion of discount on bonds payable [note 4(a)] have been capitalized to the land as at. $69,770 (2016 -$124,589) of accretion of discount on bond purchase warrants payable [note 4(b)] have been capitalized to the land as at $(25,000) ( $(21,071)) in incidental revenues have been capitalized to the land for the period-ended 4 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 of Arrangement. 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 $60,110,099, 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: 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 (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 4(b)] 900,000 Accretion of bond purchase warrant [note 4(b)] 32,260 Balance, March 31, ,187,149 Accretion of discount on bonds payable 491,181 Accretion of bond purchase warrant [note 4(b)] 105,980 Balance, March 31, ,784,310 Accretion of discount on bonds payable 689,528 Accretion of bond purchase warrant [note 4(b)] 124,589 Balance March 31, ,598,427

10 Accretion of discount on bonds payable 386,136 Accretion of bond purchase warrant [note 4(b)] 69,770 Balance $ 8,054,333 b) Bonds 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 7) 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. 5 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: April 1 Sept April 1 Mar 30, , 2016 Loss before income taxes $ (150,667) $ (223,520) Combined federal and provincial tax rate 26.5% 26.5% Expected income tax recovery (39,927) (59,233) Non-taxable portion related to future debt forgiveness 59, ,792 Future income tax $ 19,947 $ 83,559 The Company s non-capital losses expire in the following years: 2032 $ 52,646, , , ,619 $ 53,201,910

11 6 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. 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 7). 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. 7 Commitments On December 23, 2013, the Company entered into a Management Agreement with SFHC to provide management services for the three years ending December 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. 8 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. During the period-ended September 30, 2016, the Company paid director fees of $8,000 ( $16,000), which is currently in accounts payable and accrued liabilities.

12 9 Financial Instruments The Company is exposed to the following financial risks: a) Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. 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 statement of financial position. b) Interest rate risk Interest rate 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. The loan payable and credit facility (note 10) possess interest rate risks for the Company which result principally from debt at fixed interest rates, thus exposing the Company to fair value interest rate risk. 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 the Company s future cash flow requirements. The Company also mitigates these risks by having access to undrawn credit facilities. In addition, the company is able to defer the repayment of management fees to SFHC if there is insufficient working capital. The management fees can either be settled through the issuance of additional common shares or by converting the outstanding amounts to a promissory note that bears interest at 12%, based on SFHC s discretion. 10 Credit Facility On January 29, 2016, the Company signed a commitment letter for a credit facility for $1 million at an annual rate of interest equal to Prime plus 2.00%, to finance the soft costs for future development. The credit facility is due on demand and is to be reviewed on July 31, It is secured by a general security agreement providing first charge on the land and security on interest in all present and after acquired property, as well as a personal guarantee by a director of the Company of $1,000,000. The application fee included a $5,000 financing fee paid out to the credit facility. The financial covenants of the credit facility include the annual requirements for the total debt to equity ratio to be no greater than 3.00:1, and an annual debt service coverage ratio of no less than 1.25:1. The default of any such covenants would result in a demand of immediate payment of all credits in full, together with any outstanding accrued interest.

13 11 Related Party Transactions a) Management fees A company controlled and managed by a director of Spruce Ridge Capital Inc., charged the Company management fees of $10,000 per month. For the period-ended, $60,000 ( $60,000) has been included in management services and operating expenses. b) Loan Payable A company managed by a director of Spruce Ridge Capital Inc., advanced the company $100,000 on June 30, 2015, bearing interest at 12% per annum. An additional advance of $25,000 was provided to the Company on November 19, 2015, bearing interest at 12% per annum. The loan is unsecured and bears interest at 12% per annum; on April 27, 2016 the loan was repaid in full. The loan payable is inclusive of a 2% administration fee of $2,000. Accrued interest of $13,211 at April 27, 2016 is included in the total loan payable of $138,211.