Spruce Ridge Capital Inc. Investor Communications

Transcription

1 Investor Communications Year-End Audited Financial Results and Update August 11, 2016 Enclosed, please find the financial statements for the year-ended March 31, Operational Update Furthering our development efforts with Civicworks, we have engaged engineers and landscape architects to create preliminary plans that will evaluate servicing options and community planning prior to presenting an area structure plan and land-use application to the County. Moving forward, the engineers will be evaluating alternatives for preliminary servicing such as water, wastewater, storm water as well as road access. The completed studies thus far include a preliminary Ground Feasibility Assessment, Biophysical Inventory Assessment, Draft Storm Water Management Plan, LIDAR (Light Detection and Ranging) Assessment, and a Phase 1 Environmental Assessment. A Calgary-based landscape architect has been retained to begin the first phases of a community development plan that stems from the preliminary conservation planning previously done by Randall Arendt. This further planning will include the character pieces such as parks and pathways to be presented in the land use application. The goal of the landscape architect is to develop a sense of place for the community and the land development project. Our aim is to have these studies completed by the Fall of 2016, in order to engage our community stakeholders for input. In order to align with our vision, it is critical that we involve the community to help shape the draft plan before it is completed. Management will remain engaged throughout these studies, and will be diligent in evaluating the options presented. March 31 st, 2016 Audited Year-End Financial Results Statement of Loss and Deficit At March 31 st, 2016, Spruce incurred losses before taxes of $223,520 over the fiscal year. The losses incurred increased by approximately 20% from the previous year. This increase was as a result of legal fees, interest and finance fees paid on the loan advance, as well as costs incurred from our cloud based client management software which was added in the year. Balance Sheet Land held for development has increased by $922,953 (an increase of 8%)over the year to a total of $12.55 million as a result of the accretion of discounts on bonds payable by $814,117, as well as capitalized development costs of $129,907, net of rental revenues of $(21,071). Accounts receivable of $10,125 are rents outstanding which have been collected subsequent to year-end.. Prepaid expenses and other assets of $4,482 consist of insurance and trustee fees. Accounts Payable of $164,668 includes client communications, legal expenses, and capitalized development costs. All accounts have been paid subsequent to year-end. Our bond liability has increased to approximately $7.6 million as a result of the accretion of discounts on the bonds. The bonds will have a fair value of $12 million at maturity. Shareholder s equity has decreased by $307,079 as a result of the deficit during the year.

2 Investor Communications The bonds are due to mature in December, 2017; therefore, management will be assessing the alternatives available for bondholders. An extension or conversion to equity may be required in order to provide time to realize the potential value in the lands. Further details on the alternatives will be discussed and presented to the bondholders in the near future. Outlook As previously stated, we are committed to working with the community to lead the way for future development that seeks to enhance and protect the area. However, this commitment is not without its many obstacles. We are aware that the planning process and the subsequent approval processes will require diligent efforts from all parties. In addition, we remain focused on finding opportunities to work with the Cross Conservation and will continue to meet with members to devise a mutually beneficial plan. In the meantime, we are encouraged by the progress and will remain focused on completing the plan to put forward to Council by the end of the year. 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 (Audited) For the year-ended March 31, 2016

4 Collins Barrow Calgary LLP 1400 First Alberta Place th Avenue SW Calgary, Alberta T2P 3R5 Canada T: ( ) F: ( ) calgary@collinsbarrow.com Independent Auditors' Report To the Shareholders Spruce Ridge Capital Inc. We have audited the accompanying financial statements of Spruce Ridge Capital Inc., which comprise the statement of financial position as at March 31, 2016, and the statements of operations and retained earnings and cash flows for the year then ended, 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 audit. We conducted our audit 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 owned by Collins Barrow National Cooperative Incorporated and are used under license.

5 We believe that the audit evidence we have obtained 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 position of Spruce Ridge Capital Inc. as at March 31, 2016, and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for private enterprises. Calgary, Canada July 26, 2016 CHARTERED PROFESSIONAL ACCOUNTANTS

6 Statement of Financial Position As at March 31 Assets Current Assets $ $ Land held for development (note 3) 12,554,587 11,631,634 Cash (note 12) 13,196 68,923 Accounts receivable 10,125 3,029 Prepaid expenses and other assets 4,482 2,642 12,582,390 11,706,228 12,582,390 11,706,228 Liabilities and Shareholders Equity Liabilities Bonds (note 4) 7,598,428 6,784,310 Future income taxes (note 5) 772, ,727 Director fees payable (note 8) 50,000 50,000 Accounts payable and accrued liabilities (note 8) 164,668 16,246 Loan payable (note 11(b)) 137,142-8,722,524 7,539,283 Shareholders Equity: Common shares (note 6) 1,972,742 1,972,742 Share purchase warrants (note 6) 100, ,000 Retained earnings 1,787,124 2,094,203 3,859,866 4,166,945 12,582,390 11,706,228 Commitments (note 7) Subsequent events (note 12) Approval by the Board,, Director, Director The accompanying notes are an integral part of these financial statements

7 Statement of Operations and Retained Earnings For the year-ended March 31 Expenses $ $ Management services and operating (note 7, 11(a)) 150, ,658 Interest and finance fees 17,245 - Legal fees 9,330 - Director fees (note 8) 16,000 16,000 Professional fees 15,500 15,480 Transfer agent and trustee 15,018 15,088 Loss before income taxes (223,520) (185,226 ) Future income tax (note 5) 83,559 56,127 Net Loss (307,079) (241,353) Retained earnings, beginning of year 2,094,203 2,335,556 Retained earnings, end of year 1,787,124 2,094,203

8 Statement of Cash Flows For the year-ended March Cash provided by (used in): Operating Activities $ $ Net Loss (307,079) (241,353) Add item not affecting cash: Future income tax 83,559 56,127 Change in non-cash operating working capital: Accounts receivable (7,096) 797 Prepaid expenses and other assets (1,840) (1,262) Accounts payable and accrued liabilities 148,422 15,959 Additions to land held for development (108,835) (63,435) (192,869) (233,167) Financing Activities Loan advances 125,000 - Loan repayment - - Interest Payable on loan advance 12, ,142 - Decrease in cash (55,727) (233,167) Cash, beginning of year 68, ,090 Cash, end of year 13,196 68,923

9 Notes to Financial Statements March 31, 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.

10 Notes to Financial Statements March 31, 2016 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.

11 Notes to Financial Statements March 31, Land held for development Land held for development acres $12,554,587 $11,631,634 Capitalized costs $129,907 ( $63,435) in development costs and $689,528 ( $491,181) of accretion of discount on bonds payable [note 4(a)] have been capitalized to the land as at March 31, $124,589 ( $105,980) of accretion of discount on bond purchase warrants payable [note 4(b)] have been capitalized to the land as at March 31, $(21,071) ( $Nil) in incidental revenues have been capitalized to the land for the year-ended 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 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

12 Notes to Financial Statements March 31, 2016 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: Loss before income taxes $ (223,520) $ (185,226) Combined federal and provincial tax rate 26.5% 25% Expected income tax recovery (59,233) (46,306) Non-taxable portion related to future debt forgiveness 142, ,433 Future income tax $ 83,559 $ 56,127 The Company s non-capital losses expire in the following years: 2032 $ 52,646, , , ,619 $ 53,201,910

13 Notes to Financial Statements March 31, 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 March 31, 2016 and 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 year-ended March 31, 2016, the Company paid director fees of $16,000 ( $16,000), of which, $12,000 ( $4,000) remains in accounts payable and accrued liabilities.

14 Notes to Financial Statements March 31, 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.

15 Notes to Financial Statements March 31, 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 year-ended March 31, 2016, $120,000 ( $120,000) has been included in management services and operating expenses. b) Loan Payable A company managed by a director of Spruce Ridge Capital Inc., Dale M. Simmons Holdings ( DMS ), 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 and is repayable on maturity on June 29, The loan payable is inclusive of a 2% administration fee of $2,000. Accrued interest of $12,142 at March 31, 2016 is included in the total loan payable of $137, Subsequent Events The Company received the first advance of $628,054 on the credit facility on April 1, Subsequent to year-end, the loan payable (note 11) and interest accrued were repaid in full on April 28, 2016.