Spruce  Ridge  Capital  Inc.    Investor  Communications        May  11th,  2015    3-­‐Month  Period-­‐Ended  December  31st,  2014  Financial  Results  and  Update    Please  find  enclosed  the  unaudited  financial  results  for  the  3-­‐months  ended  December  31st,  2014.    Financial  Highlights  During  the  3-­‐month  and  9-­‐month  period-­‐ended  December  31st,  2014,  there  were  no  material  changes  in  the  financial  statements.  Spruce  incurred  losses  of  $42,113  and  $138,089  respectively,  this  is  reflected  in  the  decrease  in  Shareholders’  Equity  on  the  balance  sheet.  The  majority  of  the  expenses  incurred  were  a  result  of  management  services  and  operating  expenses  of  $34,113.  The  remaining  portion  of  expenses  consists  of  trustee  and  director  fees.        Assets  continue  to  increase  due  to  the  capitalized  accretion  expense.  As  stated  in  our  previous  shareholder  communications,  this  accretion  expense  relates  to  the  12%  interest  on  the  debt  associated  to  the  land,  therefore  it  is  classified  as  a  development  cost.  For  the  3-­‐month  and  9-­‐month  period-­‐ended  December  31st,  2014,  a  total  of  $204,867  and  $614,599  respectively,  of  accretion  have  been  capitalized  to  the  land.  This  accretion  along  with  $40,423  in  pre-­‐development  costs  has  increased  our  land  value  from  $10.97  million  (as  at  March  31st,  2014)  to  $11.63  million.      Operational  Update  CivicWorks  Planning  &  Design  have  completed  their  preliminary  ground  water  assessment  and  confirmed  that  the  volumes  of  water  required  are  supported  within  the  formation  on  our  lands,  and  that  the  quality  of  water  is  acceptable.  They  have  started  building  concepts  of  cluster  development  and  will  refine  these  concepts  after  receiving  a  Preliminary  Stormwater  Management  Plan  (SWMP).  We  have  recently  engaged  LGN  Consulting  Engineering  Ltd  to  conduct  our  SWMP.  The  SWMP  will  aide  us  by  providing  a  high  level  analysis  to  determining  the  preliminary  sizing  of  any  stormwater  storage  facilities  and  will  outline  the  drainage  philosophy  for  the  development.        We  continue  to  develop  relationships  with  our  neighbours  and  as  presented  at  the  Annual  General  Meeting  (AGM)  on  February  26th,  2015,  we  are  progressing  on  building  a  long-­‐term  partnership  with  the  Cross  Conservation.  We  have  presented  to  the  Cross  Conservation  the  concept  of  residential  cluster  development  surrounded  by  nature  and  hiking  trails.  The  concept  serves  as  a  protective  barrier  to  the  Cross  Conservation  and  the  existing  wildlife  corridors.  We  will  continue  to  build  this  concept  along  with  our  relationship  with  the  Cross  Conservation.  

Also  noted  in  our  AGM  presentation,  we  will  continue  to  refine  our  development  concepts  as  well  as  submit  application  for  approval  to  the  MD  of  Foothills  within  the  next  12-­‐18  months.  To  bring  the  planning  and  application  process  to  fruition,  we  will  be  looking  to  raise  additional  equity  in  the  near  term  and  will  be  seeking  interest  to  participate  from  current  shareholders  as  well  as  third  party  investors.      If  you  have  any  questions  or  concerns,  please  don’t  hesitate  to  contact  our  investor  relations  manager  Rob  Petersen  by  email  –  robp@wheelhousesupport.ca  or  by  phone  (403)  266-­‐9316.        Respectfully,            Jay  Simmons    Chairman  and  CEO  Spruce  Ridge  Capital  Inc.                

Spruce Ridge Capital Inc. Financial Statements (Unaudited) For the period from October 1, 2014 – December 31, 2014

Spruce Ridge Capital Inc. Statement of Financial Position As at December 31, 2014

     

December 31, 2014

March 31, 2014

Assets $    

$  

       Current Assets      Land held for development (note 4)  11,626,060    

   10,971,038    

Cash and Cash equivalents  130,732      

 302,090    Accounts Receivable  -­‐        

   3,826    

Prepaid and Other Assets  7,438      

 1,380    

 11,764,230    

   11,278,334    

 11,764,230    

   11,278,334    

Liabilities and Shareholders Equity      Liabilities      

     Bonds (note 6)  6,801,748      

 6,187,149    Future income taxes  674,902       632,600  Director Fees Payable (note 10)  50,000    

   50,000    

Accounts Payable and Accrued Liabilities  9,673      

 287    Loan Payable (note 5)  -­‐    

   -­‐    

 7,536,323    

   6,870,036    

Shareholders Equity:      Common shares (note 8)  1,972,742    

   1,972,742    

Share purchase warrants (note 8)  100,000      

 100,000    Restructuring account (note 3)  2,659,041    

   2,659,041    

Deficit  (503,876)    

 (323,485)  

 4,227,907    

   4,408,298    

   11,764,230    

   11,278,334    

Commitments (note 9)  

The accompanying notes are an integral part of these financial statements  

     

Spruce Ridge Capital Inc. Statement of Operations and Deficit For the period from October 1 – December 31, 2014

 

 

For the three month period ended Dec 31, 2014

For the nine month period ended Dec 31, 2014

 

For the period from May 3, 2013 to March 31, 2014

     

$    

$    

$  

         Expenses          Management services and operating  34,113    

   115,001    

   114,598    

Director fees (note 10)  4,000      

 12,000      

 50,000    Interest and finance fees (note 5)  -­‐        

   -­‐        

   50,858    

General meeting  -­‐          

 -­‐          

 5,609    Legal  -­‐        

   -­‐        

   38,640    

Transfer agent and trustee  4,000      

 11,088      

 14,780    Loss before income taxes  42,113    

   138,089    

   274,485    

                 Future income tax recovery  15,080    

   42,302    

   49,000    

Net Loss, being deficit end of period  57,193      

 180,391      

 323,485    

Spruce Ridge Capital Inc. Statement of Cash Flows

For the period from April 1 – December 31, 2014

 

For the nine month period-ended December 31, 2014

For the period from May 3, 2013 to March 31, 2014

Operating Activities      Net Loss  (180,391)  

   (323,485)  

Increase (Decrease) items not involving cash      Future income tax recovery  42,302    

   49,000    

Net change in non-cash operating working capital accounts:      Accounts receivable  3,826    

   4,534    

Prepaid expenses  (6,058)    

 26,186    Accounts payable and accrued liabilities  9,386    

   (6,619)  

Director fees payable  -­‐          

 50,000    

   (130,935)  

   (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    

 -­‐        

   500,000    

Investing Activities      Additions to land held for development  (40,423)  

   (9,823)  

     Increase in cash  (171,358)    

 289,795    

       Cash, beginning of period  302,090      

 12,295    Cash, end of period  130,732    

   302,090    

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, 2012. 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, 2012. 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, 2013. 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

Spruce Ridge Capital Inc. Notes to Financial Statements economic conditions anticipated to prevail in the market area. The ultimate net realizable value of the Land is dependent upon future market and economic conditions.

b) Financial instruments The Company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions that are measured at the exchange amount. The Company subsequently measures all of its financial assets and financial liabilities at amortized cost. Financial assets measured at amortized cost include cash and accounts receivable. Financial liabilities measured at amortized cost include accounts payable and accrued liabilities, director fees payable, loan payable, and bonds 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 long-term 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.

Spruce Ridge Capital Inc. Notes to Financial Statements By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.

3 Plan of Arrangement and Financial Reorganization On January 28, 2013, the Company’s Bondholders (note 1) approved a Plan of Arrangement pursuant to the Companies Creditors Arrangements Act (the “Plan”), which was implemented on May 3, 2013. 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    

Spruce Ridge Capital Inc. Notes to Financial Statements The assets and liabilities have been adjusted to their estimated fair value at May 3, 2013. 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 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

           

December 31, 2014

March 31, 2014

Land held for development  

924.77 acres $11,626,060  

$10,971,038 Capitalized costs $40,423 in development costs and $517,818 of accretion of discount on bonds payable [note 6(a)] have been capitalized to the land for the nine-month period-ended December 31, 2014. $96,781 of accretion of discount on bond purchase warrants payable [note 6(b)] have been capitalized to the land for the nine-month period-ended December 31, 2014.

5 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, 2013. 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, 2013. 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 11th, 2013 the Company renewed the loan to November 15, 2013. 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, 2014.

6 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, 2017. 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:

Spruce Ridge Capital Inc. Notes to Financial Statements

 $  

Face  value  of  65  bonds  issued  before  financial  reorganization    49,197,600    Accrued  interst  to  August  24,  2012    12,664,225    

Accounts  payable  paid  by  way  of  Class  A  Bonds  issued  in  accordance  with  the  financial  reorganization    221,015    

   62,082,840    Conversion  of  bonds  to  Class  A  common  shares  (note  3)    (1,972,742)  

Face  and  redemption  value,  Class  A  Bonds  issued    60,110,098    Adjustment  to  fair  value,  being  residual  value  of  net  assets    (52,266,120)  Adjustment  to  reflect  deemed  market  rate  of  12%  per  annum    (3,221,979)  Balance,  May  3,  2013    4,621,999    Accretion  of  discount  on  bonds  payable      632,890    Bond  Purchase  Warrants  issued  [note  6(b)]    900,000    Accretion  of  bond  purchase  warrant  [note  6(b)]    32,260    Balance,  March  31,  2014    6,187,149    Accretion  of  discount  on  bonds  payable      517,818    Accretion  of  bond  purchase  warrant  [note  6(b)]    96,781    

Balance  December  31,  2014    6,801,748     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 ha d 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.

Spruce Ridge Capital Inc. Notes to Financial Statements

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    (138,090)  Combined  federal  and  provincial  tax  rate   25%  Expected  income  tax  recovery    (34,523)  Non-­‐taxable  portion  related  to  future  debt  forgiveness    76,825    

Future  income  tax    42,302     The Company’s non-capital losses expire in the following years:

 $  

2032    52,646,290    2033   49,624  

   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, 2014. 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.

Spruce Ridge Capital Inc. Notes to Financial Statements

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 2013. 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.

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.