Spruce Ridge Capital Inc. Investor Communications

Transcription

1 Spruce Ridge Capital Inc. Investor Communications December 23, Month Period- Ended September 30, 2014 Financial Results and Update Please find enclosed the unaudited financial results for the 3- months ended September 30, Financial Highlights Please note that we have changed our year- end to March 31, therefore these statements are interim. Since our last update, there have been no material changes to our financial position. Statement of Loss and Deficit During the 3- month and 6- month period- ended September 30, 2014, Spruce incurred losses of $68,351, and $123,198 respectively. In this quarter, the majority of the expenses incurred were a result of management services and operating expenses of $48,991. This amount includes audit and tax fees of $15,000. The remaining portion of expenses consists of trustee and director fees. Balance Sheet Assets have increased mainly due to the capitalized accretion expense. As stated in our previous shareholder communication, this accretion expense relates to the interest on the debt associated to the land, therefore it is classified as a development cost. For the 3- month and 6- month period- ended September 30, 2014, a total of $204,867 and $409,733 respectively, of accretion have been capitalized to the land. This accretion along with $28,047 in pre- development costs has increased our land value from $10.97 million (as at March 31, 2014) to $11.41 million. On the other side, liabilities have also increased as a result of the accretion expense of the discount on the bonds payable and bond purchase warrants. This discount is calculated at 12% per annum and is capitalized to the land. Shareholders equity has decreased overall as a result of the deficit during the 3- month and 6- month period by $56,991 and $95,976 respectively. Operational Update We continue to obtain studies and reports on our lands as part of our first phase of planning. CivicWorks Planning & Design has conducted a formal site inspection and have provided reconnaissance reports for ground and well water, all of which have been completed at the commercial level. They have also conducted an abandoned well search on our lands; fortunately all studies indicate that no abandoned wells exist on our lands. Going into 2015, we will continue with our water research, as the

2 next step is to conduct a master drainage plan study. Our biophysical impact assessment timeline has been extended into spring in order to assess the presence of any sensitive plants. As noted previously, we will continue to work with CivicWorks and share our updates as they progress. 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 Spruce Ridge Capital Inc. Financial Statements (Unaudited) For the period from July 1, 2014 September 30, 2014

4 Spruce Ridge Capital Inc. Statement of Financial Position As at September 30, 2014 September March 31, 30, Assets $ $ Current Assets Land held for development (note 4) 11,408,818 10,971,038 Cash and Cash equivalents 188, ,090 Accounts Receivable - 3,827 Prepaid and Other Assets 13,233 1,380 11,610,633 11,278,334 11,610,633 11,278,334 Liabilities and Shareholders Equity Liabilities Bonds (note 6) 6,596,882 6,187,149 Future income taxes 659, ,600 Director Fees Payable (note 10) 50,000 50,000 Accounts Payable and Accrued Liabilities 18, Loan Payable (note 5) - - 7,325,532 6,870,036 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 (446,682) (323,485) 4,285,101 4,408,298 11,610,633 11,278,334 Commitments (note 9) The accompanying notes are an integral part of these financial statements

5 Spruce Ridge Capital Inc. Statement of Operations and Deficit For the period from July 1, 2014 to September 30, 2014 For the three month period ended Sept 30, 2014 For the six month period ended Sept 30, 2014 For the period from May 3, 2013 to March 31, 2014 $ $ $ Expenses Management services and operating 48,991 80, ,598 Director fees (note 10) 4,000 8,000 50,000 Interest and finance fees (note 5) ,858 General meeting - - 5,609 Legal ,640 Transfer agent and trustee 4,000 7,088 14,780 Loss before income taxes 56,991 95, ,485 Future income tax recovery 11,360 27,222 49,000 Net Loss, being deficit end of period 68, , ,485

6 Spruce Ridge Capital Inc. Statement of Cash Flows For the period from July 1, 2014 to September 30, 2014 For the six month periodended September 30, 2014 For the period from May 3, 2013 to March 31, 2014 Operating Activities Net Loss (123,198) (323,485) Increase (Decrease) items not involving cash Future income tax recovery 27,222 49,000 Net change in non-cash operating working capital accounts: Accounts receivable 3,827 4,534 Prepaid expenses (11,853) 26,186 Accounts payable and accrued liabilities 18,541 (6,619) Director fees payable - 50,000 (85,461) (200,383) 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 (28,047) (9,823) Increase in cash (113,508) 289,795 Cash, beginning of period 302,090 12,295 Cash, end of period 188, ,090

7 Spruce Ridge Capital Inc. 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 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

8 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 payable. 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.

9 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 deficit 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) 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

10 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 September March 31, 30, Land held for development acres $11,408,818 $10,971,038 Capitalized costs $28,047 in development costs and $345,212 of accretion of discount on bonds payable [note 6(a)] have been capitalized to the land for the six-month period-ended September 30, $64,521 of accretion of discount on bond purchase warrants payable [note 6(b)] have been capitalized to the land for the six-month period-ended September 30, 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 $60,110,099, 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 65 bonds issued before financial reorganization 49,197,600 Accrued interest to August 24, ,664,226 Accounts payable paid by way of Class A Bonds issued in accordance with the financial reorganization 221,015 $ 62,082,841 Conversion of bonds to Class A common shares (note 3) (1,972,742) Face and redemption value, Class A Bonds issued 60,110,099 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)

11 Balance, May 3, ,622,000 Accretion of discount on bonds payable 632,889 Bond Purchase Warrants issued [note 6(b)] 900,000 Accretion of bond purchase warrant [note 6(b)] 32,260 Balance, March 31, ,187,149 Accretion of discount on bonds payable 345,212 Accretion of bond purchase warrant [note 6(b)] 64,521 Balance, September 30, ,596,882 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 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. 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 (95,976) Combined federal and provincial tax rate 25% Expected income tax recovery (23,994) $ Non- taxable portion related to future debt forgiveness 51,216 Future income tax 27,222

12 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. Annually, directors will be paid $4,000 per fiscal year going forward.

13 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 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.