Unaudited Condensed Interim Financial Statements

Transcription

1 Unaudited Condensed Interim Financial Statements For the three months ended March 31, 2012 NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS Section 4.3(3) of National Instrument , Continuous Disclosure Obligations, provides that if an auditor has not performed a review of the interim financial statements, the interim financial statements must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The Corporation s external auditors have not performed a review of these interim financial statements of Q1 Report Unaudited Interim Financial Statements 1

2 Statements of Financial Position ASSETS March 31, 2012 December 31, 2011 Land development costs (note 4) 972, ,230 Land held for development (note 5) 25,033,623 25,033,623 Deferred tax asset 274,306 - Other receivable 1,586 17,924 GST recoverable 3, Cash 1,416,010 1,865,890 TOTAL ASSETS 27,701,351 27,309,907 LIABILITIES Debentures payable (note 6) 20,623,441 20,556,979 Interest payable (note 6) 630, ,961 Trade payables and accrued liabilities 51,594 38,847 Due to related parties (note 9) 7, ,474 TOTAL LIABILITIES 21,312,744 21,006,261 SHAREHOLDER S EQUITY Share capital (note 10) 6,935,900 6,844,025 Accumulated deficit (547,293) (540,379) TOTAL EQUITY 6,388,607 6,303,646 TOTAL LIABILITIES & EQUITY 27,701,351 27,309,907 The accompanying notes to the interim financial statements are an integral part of these statements Q1 Report Unaudited Interim Financial Statements

3 Statement of Comprehensive Loss REVENUE Three months ended March 31, 2012 Interest income 4,815 EXPENSES Asset management fees (note 9) 133,975 Servicing fees (note 9) 32,459 Directors fees (note 9) 13,032 Professional fees 8,375 Office and other expenses 6, ,160 NET LOSS BEFORE TAXES (189,345) Current tax expense (note 11) - Deferred tax recovery (note 11) 182,431 NET LOSS AND COMPREHENSIVE LOSS (6,914) Basic and diluted earnings per share 0.00 The accompanying notes to the interim financial statements are an integral part of these statements Q1 Report Unaudited Interim Financial Statements 3

4 Statement of Changes in Shareholder s Equity Class A Voting Common Shares Class B Non-voting Common Shares Accumulated Deficit Total # of Shares # of Shares Balance August 24, Shares issued for cash - - 2,800,000 7,000,000-7,000,000 Share issuance costs (367,500) - (367,500) Shares issued in exchange for land , , ,425 Net loss and comprehensive loss (540,379) (540,379) Balance December 31, ,889,256 6,843,925 (540,379) 6,303,646 Net loss and comprehensive loss (6,914) (6,914) Tax effect of share issuance costs (note 11) ,875-91,875 Balance March 31, ,889,256 6,935,800 (547,293) 6,388,607 The accompanying notes to the interim financial statements are an integral part of these statements Q1 Report Unaudited Interim Financial Statements

5 Statement of Cash Flows CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Three months ended March 31, 2012 Loss for the period (6,914) Items not affecting cash Deferred tax recovery (182,431) Changes in non-cash working capital items Increase in land development costs (note 4) (513,401) Decrease in other receivable 16,338 Increase in GST recoverable (3,493) Increase in interest payable (note 6) 427,451 Increase in trade payables and other liabilities 12,747 Decrease in due to related parties (note 9) (200,177) (449,880) Decrease in cash (449,880) Cash Beginning of period 1,865,890 Cash End of period 1,416,010 SUPPLEMENTAL CASH FLOW INFORMATION Cash interest received 3,229 The accompanying notes to the interim financial statements are an integral part of these statements Q1 Report Unaudited Interim Financial Statements 5

6 1. Nature of Business (the Corporation ) was incorporated under the laws of the province of Alberta on August 24, The Corporation was formed to provide subscribers with the opportunity to participate in the development of the approximately acre Yellowhead property located in Edmonton, Alberta (the Property ) through the purchase of units in the Corporation. Each unit issued by the Corporation ( Unit ) through its initial public offering ( IPO ) was comprised of a 7.50 principal amount of offering debenture and one Class B non-voting share ( Class B share ) at a price of 2.50 per share. The Corporation intends to preserve the capital investment of the purchasers of Units in the Corporation and provide cash distributions on the Units by executing the following four step strategy: a) acquire the Property; b) obtain letters of intent or expressions of interest from vertical developers and other industrial end users to purchase acreage to be serviced in each of the two planned phases of the development of the Property before construction commences on that phase; c) construct municipal services infrastructure on the Property in phases to provide a controlled supply of serviced acreage to the marketplace; and d) use the revenue from the sale of the serviced acreage to repay construction loans and other obligations of the Corporation and then pay the remainder to the holders of the offering debentures and Class B shares by paying the interest and principal on the offering debentures and by declaring a dividend or dividends on the Class B shares and/or winding up the Corporation and distributing its assets to the holders of the Class B shares. Distributions by the Corporation are neither guaranteed nor will they be paid in a steady or stable stream. The amount and timing of any distributions will be at the sole discretion of the Corporation and only after the Corporation has paid or reserved funds for its expenses, liabilities and commitments (other than with respect to the offering debentures), including (i) the fees payable to Walton Asset Management L.P. ( WAM ) and Walton Development and Management L.P. ( WDM ) (including the performance fee see note 9), and (ii) any amounts outstanding, on a phase by phase basis, under the construction loans required to develop the Property. The performance fee is only payable provided that the investors of Units in the Corporation have received cash payments or distributions equal to per Unit, plus a cumulative compounded priority return thereon equal to 8% per annum. The registered office and principal place of business is 23rd floor, 605 5th Avenue SW, Calgary, Alberta, T2P 3H5. These financial statements were authorized by the board of directors on May 22, The board of directors have the power to amend and reissue the financial statements Q1 Report Notes to Unaudited Interim Financial Statements

7 2. Basis of Preparation These condensed interim financial statements, including comparatives, have been prepared in accordance with IAS 34: Interim Financial Reporting and using accounting policies that are consistent with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). They do not include all of the information required for full annual financial statements and should be read in conjunction with the Corporation s audited annual financial statements for the year ended December 31, The Corporation s financial statements have been prepared on the historical cost basis, except for certain financial instruments which are initially measured at fair value. The statement of financial position has been prepared using a liquidity based presentation because the operating cycle of the Corporation revolves around the sale of land, the timing of which is uncertain. As a result, presentation based on liquidity is considered by management to provide information that is more reliable and relevant to the users of the financial statements. With the exception of land development costs (note 4), land held for development (note 5) and debentures payable (note 6), all assets and liabilities are current in nature and are expected to be settled in less than twelve months. 3. Accounting Policies The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and equity, the disclosure of contingencies at the date of the financial statements, and the reported amounts of revenue and expenses during the period. The estimates, assumptions and accounting policies used in the preparation of these financial statements are consistent with those which were disclosed in the Corporation s audited financial statements for the year ended December 31, Q1 Report Notes to Unaudited Interim Financial Statements 7

8 4. Land Development Costs The following table provides a breakdown of costs capitalized to land development costs by nature. March 31, 2012 December 31, 2011 Financing 700, ,719 Planning 213, ,511 Land Development 52,655 - Legal 4,690 - Project Management (note 9) 1, , ,230 The timing of lot sales is uncertain because it is dictated by the timing of cash receipts by the Corporation, which is influenced by factors that are beyond the control of management, namely market demand for industrial business lots. As a result, while a portion of land development costs could be current in nature, it is not possible for management to reasonably estimate the portion that will be realized within the next twelve months. 5. Land Held for Development Land held for development consists of the Corporation s 100% interest in the Property which was acquired during the 2011 year. The acquisition of the Property was completed through the payment of 24,187,922 for a 96.6% interest the Property and the issuance of 89,256 units to Walton International Group Inc. ( WIGI ) for an equivalent value of 845,701 for the remaining 3.4% of the Property. The timing of lot sales is uncertain because it is dictated by the timing of cash receipts by the Corporation, which is influenced by factors that are beyond the control of management, namely market demand for industrial business lots. As a result, while a portion of land held for development could be current in nature, it is not possible for management to reasonably estimate the portion that will be realized within the next twelve months Q1 Report Notes to Unaudited Interim Financial Statements

9 6. Debentures Payable and Interest Payable Debentures payable is comprised of the debentures which were issued by the Corporation as part of its IPO and in exchange for WIGI s interest in the Property. These debentures are unsecured and bear interest at a rate of 8%. Interest on the debentures is calculated based on the face value of the debentures on September 30, and is payable annually on December 31. The debentures mature on December 31, 2014 at a face value of 7.50, although the maturity date can be extended by the Corporation at its sole discretion until December 31, The Corporation may also, in its sole discretion, (i) repay all or any portion of the principal amount of, or interest under, the debentures payable through the issuance of Class B shares, (ii) evidence its obligation to pay all or any portion of the interest under the debentures through the issuance of Interest debentures, and/or (iii) convert all or any principal amount of the offering debentures into Class B shares. The following table reconciles the change in debentures payable. Three months ended March 31, 2012 August 24, 2011 to December 31, 2011 Balance August 24, ,556,979 - Debentures issued through the IPO - 19,897,500 Debentures issued in exchange for land - 634,275 Non-cash interest on the debentures 66,462 25,204 Balance End of period 20,623,441 20,556,979 The debentures payable issued by the Corporation bear interest at a rate of 8% per annum. Interest is calculated based on the face value of the debentures payable as at September 30 of each year, and is payable on December 31. The following table reconciles the change in interest payable. Three months ended March 31, 2012 August 24, 2011 to December 31, 2011 Balance August 24, ,961 - Accrued interest on the debentures payable 427, ,961 Balance End of period 630, , Q1 Report Notes to Unaudited Interim Financial Statements 9

10 7. Project Debt The Corporation has a 29.6 million construction loan with a Canadian Financial institution to help finance Phase 1 of the project. The construction loan consists of a 27.1 million non-revolving loan facility and a 2.5 million letter of credit facility. The non-revolving loan facility is available to finance the construction costs for Phase 1 of the project, while the letters of credit act as security for the completion of certain obligations pursuant to development agreements to be signed with the City of Edmonton. This letter of credit typically declines as the Corporation s development obligations with the City of Edmonton are completed, through a series of staged reductions over a period of years and are ultimately extinguished when the municipality has issued final acceptance certificates. The construction loan is due on demand and bears interest at a rate of prime % although no interest is payable on this loan until the interest reserve set out in the loan agreement is fully utilized. The lender reserves the right to stop advancing from the interest reserve account in the event of construction delays, slower than projected sales performances, or cost overruns. The construction loan is partially guaranteed by WIGI and is also secured by a first priority security interest in all present and after acquired personal property of the Corporation, a floating charge over all of the Corporation s present and after acquired real and other property, and a first fixed and specific demand collateral land mortgage over the Property. As at March 31, 2012, the 2.5 million letter of credit has not been issued and no amounts have been drawn on the construction loan. The Corporation and WIGI were in compliance with all covenants under the construction loan as at March 31, Financial Instruments The Corporation s financial instruments consist of other receivable, cash, debentures payable, interest payable, trade payables and accrued liabilities, and amounts due to related parties. With the exception of debentures payable, the fair value of these financial instruments approximate their carrying value due to the short-term nature of these items. The fair value of debentures payable approximates the carrying amount because the interest rate on the debentures approximates the interest rate on debentures issued by comparable entities Q1 Report Notes to Unaudited Interim Financial Statements

11 a) Risk overview The Corporation s financial instruments and the nature of the risks to which they may be subject are as set out in the following table. Other receivable Risk Credit Liquidity Interest rate Currency X Cash X X Debentures Payable X X Interest payable X Trade payables and accrued Liabilities Due to related parties X X b) 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. Credit risk arises from cash held with banks and other receivable. While the maximum exposure to credit risk is equal to the carrying value of these financial instruments, management believes the Corporation s exposure to credit risk is minimal for the following reasons: Other receivable The balance of the other receivable outstanding is typically not material and is settled in accordance with the terms of contract. As a result, the Corporation s exposure to credit risk associated with the other receivable is not material. The balance of other receivable at March 31, 2012 of 1,586 (December 31, ,924) was outstanding less than 90 days and is considered collectible by the Corporation. Cash - Cash is on deposit with a major financial institution, which substantially minimizes its exposure to credit risk Q1 Report Notes to Unaudited Interim Financial Statements 11

12 c) Liquidity risk Liquidity risk arises from the possibility that the Corporation will encounter difficulties in meeting its financial obligations as they become due. The Corporation manages its liquidity risk by continuously monitoring the adequacy of its capital resources (see note 13) and by managing cash receipts and payments. The liabilities which expose the Corporation to liquidity risk are as follows: Trade payables and accrued liabilities, and due to related parties These liabilities are a result of the normal operations of the Corporation and are current in nature. Management considers exposure to liquidity risk from these financial instruments to be minimal because the balances owing at March 31, 2012 will be funded by cash held by the Corporation. The obligations relating to such future commitments will be funded through a combination of future revenues generated by the Corporation and the capital resources available to the Corporation. Debentures payable and interest payable The Corporation manages the liquidity risk associated with the debentures payable by continuously monitoring its working capital to ensure it has sufficient capital to fund the annual interest payments due on the debentures payable. Such capital is derived from a combination of future revenues generated by the Corporation, and the capital resources available to the Corporation, as disclosed in note 13. The debentures have a maturity date of December 31, 2014, however, the maturity date can be extended to December 31, 2016 at the sole discretion of the Corporation. The Corporation intends to repay the debentures payable through future revenues generated by the Corporation. Maturity Analysis of liabilities As at March 31, 2012 < 90 days Between 91 days and 1 year > 1 year Total Debentures payable () ,623,441 20,623,441 Interest payable () - 630, ,412 Trade payables and accrued liabilities () 41,834 9,760-51,594 Due to related parties () 7, ,297 Maturity Analysis of liabilities As at December 31, 2011 < 90 days Between 91 days and 1 year > 1 year Total Debentures payable () ,556,979 20,556,979 Due to related parties () 207, ,474 Interest payable () - 202, ,961 Trade payables and accrued liabilities () 10,847 28,000-38, Q1 Report Notes to Unaudited Interim Financial Statements

13 d) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market interest rates. The financial instruments of the Corporation which give rise to interest rate risk are as follows: Cash - Changes in market interest rates will cause fluctuations in the future interest earned on cash balances. Any resulting impact on the Corporation s financial results would not be considered material. Debentures payable - The debentures payable have a fixed 8% interest rate and, as a result, do not expose the Corporation to any interest rate risk. e) Currency risk The Corporation does not engage in foreign currency dominated transactions. As a result, it has no exposure to currency risk. 9. Related Party Transactions WIGI, WDM, Alberta Ltd. and WAM are all related to the Corporation by virtue of common management. The balances due to these related parties as at March 31, 2012 and December 31, 2011 are outlined in the table below. With the exception of the development fee payable to WDM and any amounts payable to WAM for the servicing fee, these amounts are unsecured, due on demand, bear no interest and have no fixed terms of repayment. The development fee payable to WDM is payable within 60 days of quarter-end. The servicing fee which is paid to WAM for distribution to the Corporation s agents is payable semi-annually. March 31, 2012 December 31, 2011 Walton International Group Inc. 5, ,382 Walton Development & Management L.P. 1, Alberta Inc. - 10,000 Walton Asset Management L.P , ,474 The following transactions entered into between the related parties during the period were under terms and conditions agreed upon between the parties Q1 Report Notes to Unaudited Interim Financial Statements 13

14 Walton Asset Management L.P. In accordance with the terms of the Management Services Agreement between the Corporation and WAM, WAM will provide management and administrative services to the Corporation in return for an annual management fee equal to: i) from November 18, 2011 until the earlier of the date of termination of the Management Services Agreement and December 31, 2014, 2% of the aggregate of: a. the net proceeds raised from the IPO of 26,110,000, calculated as the gross proceeds raised of 28,000,000, net of agency fees of 1,470,000 and organizational costs of 420,000; and b. the product of the number of Units issued by the Corporation to WIGI in exchange for its interest in the Property multiplied by which was equal to 832,312; and ii.) thereafter, from January 1, 2015 until the termination date of the Management Services Agreement, an amount equal to 2% of the book value of the Property. Also in accordance with the Management Services Agreement, commencing on November 18, 2011 and continuing until the earlier of the dissolution of the Corporation and December 31, 2014, the Corporation will pay to WAM a servicing fee equal to 0.50% annually of the net proceeds for each Unit sold under the IPO. WAM is then responsible for paying the servicing fee to the Corporation s agents. The servicing fee is calculated from the date of the applicable closing, calculated semi-annually and paid as soon as practicable after that date. During the first quarter of 2012, the Corporation incurred total management fees of 133,975. During the first quarter of 2012, the Corporation incurred total servicing fees of 32,459, which were paid to WAM for distribution to the Corporation s agents. Walton Development and Management L.P. In accordance with the terms of the Project Management Agreement between the Corporation and WDM, the fees and costs for services provided by WDM are divided into the following two categories: i.) WDM will receive a development fee, plus applicable taxes, equal to 2% of certain development costs incurred in the calendar quarter, payable within 60-days of the end of such quarter. ii.) WDM will receive a performance fee, plus applicable taxes, equal to 25% of cash distributions after all investors of Units in the Corporation have received cash payments or other distributions equal to per Unit, plus an 8% cumulative compounded priority return. The priority return is calculated on that amount, reduced by any cash payments or distributions by the Corporation. During the first quarter of 2012, the Corporation incurred development fees of 1,053. No performance fee was incurred by the Corporation during the first quarter of 2012 because the 10 per Unit amount and the cumulative compounded priority return have not been received by the investors of Units in the Corporation Q1 Report Notes to Unaudited Interim Financial Statements

15 As at March 31, 2012, 1,663 (December 31, nil) the balance owing to WDM was comprised of the amounts payable for the development fee. Walton International Group Inc. As at March 31, 2012, the Corporation owed to WIGI 5,634 (December 31, ,382). The balances outstanding as at March 31, 2012 and December 31, 2011 were comprised of costs that were initially funded by WIGI on behalf of the Corporation but are reimbursable by the Corporation Alberta Ltd. The balance due to Alberta Ltd. as at March 31, 2012 was nil (December 31, ,000). The balance outstanding as at December 31, 2011 was in respect of a land deposit which was initially paid on behalf of the Corporation by Alberta Ltd., but was reimbursable by the Corporation. Key Management Compensation Key management personnel are comprised of the Corporation s directors and executive officers. The total compensation expense incurred by the Corporation relating to its directors was as follows: Three months ended March 31, 2012 Director fees 13,032 All services performed for the Corporation by its executive officers are governed by the Management Services Agreement. The annual management fee that WAM receives under the Management Services Agreement has been disclosed above Q1 Report Notes to Unaudited Interim Financial Statements 15

16 10. Share Capital Authorized Unlimited Class A shares Unlimited Class B shares Outstanding March 31, 2012 December 31, 2011 Number of units Amount Number of units Amount Class A Shares Class B Shares issued through the initial public offering Class B Shares issued in exchange for land held for development 2,800,000 7,000,000 2,800,000 7,000,000 89, ,425 89, ,425 Share issuance costs - (367,500) - (367,500) Tax effect of share issuance costs 91,875 (367,500) 2,889,356 6,935,900 2,889,356 6,844,025 All Class A shares of the Corporation are held by Alberta Ltd., which is a related party of the Corporation by virtue of common management. Per Share Amount Basic net loss per share is calculated by dividing the Corporation s net loss by the weighted average number of shares outstanding. Class A shares outstanding have not been included in the weighted average shares outstanding because the Class A shares do not participate in the profits or losses of the Corporation. The weighted average number of shares outstanding during the first quarter was 2,889,256. Diluted EPS is calculated by adjusting the Corporation s weighted average number of shares outstanding to assume conversion of all dilutive potential shares. As the Corporation has the right to convert any portion of the debentures payable into Class B shares, this conversion feature could result in potentially dilutive shares in the determination of the weighted average diluted shares outstanding. For the first quarter of 2012, the potentially dilutive shares were nil because the Corporation generated a net loss during the quarter Q1 Report Notes to Unaudited Interim Financial Statements

17 Share Issuance Price The Class A shares issued and outstanding of the Corporation were issued at a price of 1/share. The Class B shares issued and outstanding of the Corporation were issued at a price of 2.50/share. 11. Income Taxes The income tax recovery recognized by the Corporation during the period ended March 31, 2012 was comprised of the following: Three months ended March 31, 2012 Current tax - Deferred tax recovery 182,431 Income tax recovery 182,431 The tax recovery on the Corporation s net loss before tax differs from the amount that would arise using the weighted average tax rate applicable to losses as follows: Three months ended March 31, 2012 Net loss before tax 189,345 Applicable tax rate 25% Expected deferred tax recovery 47,336 Tax effects of: Share issuance costs and organizational costs 14,018 Origination and reversal of timing differences (18,927) De-recognition of valuation allowance from prior year 140,004 Income tax recovery 182, Q1 Report Notes to Unaudited Interim Financial Statements 17

18 Deferred income tax assets are a result of temporary differences between the carrying amount of assets and liabilities in the financial statements and their carrying amount for income tax purposes, as well as the recognition of tax losses. The table below reconciles the change in the deferred tax asset. Three months ended March 31, 2012 August 24, 2011 to December 31, 2011 Deferred Tax Asset Beginning of period - - Recognition of tax losses from current year 70,832 44,119 Change due to origination and reversal of temporary differences 61,835 97,520 Decrease/(Increase) in valuation allowance 141,639 (141,639) Deferred Tax Asset - End of period 274,306 - As outlined in the Corporation s accounting policies, deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which temporary differences and prior year tax losses can be utilized. The nature of the Corporation s business is such that until the sale of lots commences, any revenue generated by the Corporation is not significant. Management feels that based on the level of commitments received for the purchase of serviced lots and the anticipated costs required to complete the development of those serviced lots, the Corporation will be able to recover all previously incurred tax losses before the expiry date of those tax losses. The full amount of the deferred tax asset is non-current because it is not expected to be recovered within twelve months Q1 Report Notes to Unaudited Interim Financial Statements

19 12. Commitments The following table presents future commitments of the Corporation under the Management Services and Agreement (note 9) over the next three years. It does not include the performance fee payable to WAM under the Management Services Agreement, which is determined at the time land sales are completed. Servicing fee Management fee Total , , , , , , , , , ,191 1,482,563 1,841,754 The commitment for the management fee will extend for the length of the project, however, after December 31, 2014, it is calculated based on the book value of the Property at the end of the previous calendar quarter, which cannot be reasonably estimated at this time. 13. Capital Management The Corporation has two sources of capital to finance its operations: i) As at March 31, 2012, the Corporation s capital resources consisted of cash which the Corporation raised through the IPO. Out of the net proceeds of 26.1 million raised through the IPO, approximately 24 million was used to acquire the Property. The remaining cash on hand will be used by the Corporation to pay for its ongoing administrative and operating expenses, management fee, development fee, pre-development costs, grading costs, construction costs and other expenses of the Corporation. As at March 31, 2012, the Corporation had total cash on hand of 1,416,010 (December 31, ,865,890). ii) The Corporation has a construction loan with a Canadian financial institution to help finance Phase 1 of the project. The construction loan consists of a 27.1 million non-revolving loan facility and 2.5 million letter of credit facility. The total amount drawn on the construction loan at March 31, 2012 was nil (December 31, nil) and no letters of credit had been issued. It is anticipated that further construction loans will be required to fund the costs of development for Phase 2 of the project. Management regularly reviews the levels of its capital resources to determine if sufficient capital is available to fund the ongoing costs of the Corporation over the next twelve months. As at March 31, 2012, sufficient capital exists to fund the Corporation s activities for at least the next 12 months Q1 Report Notes to Unaudited Interim Financial Statements 19

20 The Corporation is not subject to any externally imposed financial covenants. 14. Subsequent Event On April 26, 2012, the Corporation amended the terms of the construction loan to increase the letters of credit from 2.5 million to 3.5 million Q1 Report Notes to Unaudited Interim Financial Statements