loan agreement relating to its fixed charge and total guaranteed debt to EBITDA ratios.
However, the loan has not been reclassified as a current liability as the lender has advised that
they do not currently intend to exercise their right to call the debt within one year from the
balance sheet date.”
[98]
The 2014 Financial Statements refer to the amount owed by ARO to the Polards
pursuant to the Earnout Agreement under the section dealing with liabilities87F[88]. They
indicate it as a “contingent consideration” of $1,500,00088F[89].
[99]
This contingent consideration is described as follows89F[90]:
“On October 11, 2013, the company’s wholly-owned subsidiary (9281-5745 Québec Inc.)
acquired the total operating assets of A.R.C. Account Recovery Corporation in
addition to all outstanding shares of 9286-1103 Québec Inc., A.R.C. Account Recovery (U.S.A.)
Corporation LLC and A.R.C. Accounts Recovery Nevada Inc. for an amount of $7,500,000
paid as follows: $6,000,000 payable in cash on October 11, 2013, and a conditional
balance of sale of $1,500,000, bearing interest at 5% and payable in three equal
annual payments from the date of issuance of the August 31, 2014 financial
statements. According to the agreement, the contingent consideration is subject to
certain adjustment clauses based on the financial and non-financial performance
of the acquired business. The fair value of the contingent consideration was
calculated at $1,500,000 by discounting the present value of future cash flows over a three
year period at a rate of 5%.
The transaction was financed by a $6,500,000 loan, bearing interest at 8% and repayable in 60
monthly instalments of $108,333 […].”
[Emphasis added.]
[100] As such, ARO’s Financial Statements recognize that the $1,500,000 liability amount is a
conditional “balance of sale” subject to certain adjustment clauses based solely on the financial
revenues) and non-financial (staff retention) of ARC’s former operations. There is no reference
(
that the balance of sale is to be adjusted, reduced or eliminated by ARO’s non-compliance with
certain financial ratios. The 2014 Financial Statements also recognize that the “fair value” of the
contingent consideration is calculated at $1,500,000.
[101] Despite the fact that ARO was aware that it was not in compliance with the Schedule B
Financial Ratios on August 31, 2014, there is no reference whatsoever in the 2014 Financial
Statements that either the first instalment of one third or the entire amount of the Adjusted
Earnout Amount was extinguished as a liability. On the contrary, the 2014 Financial Statements
indicate that the Adjusted Earnout Amount is owed and constitutes a liability of ARO that bears
interest at the rate of 5%.
3
.11.2 ARO’s 2015 Financial Statements
[102] ARO states, and the Polards do not contest, that on August 31, 2015, ARO was again
non-compliant with the Schedule B Financial Ratios90F[91]. Regarding the Adjusted Earnout
Amount, ARO’s 2015 Financial Statements again refer to it as a “contingent consideration” of
$
1,500,000 under its section of “liabilities”. Again, it is described in the following terms:
“On October 11, 2013, the company’s wholly-owned subsidiary (9281-5745 Québec Inc.)
acquired the total operating assets of A.R.C. Account Recovery Corporation in
addition to all outstanding shares of 9286-1103 Québec Inc., A.R.C. Account Recovery (U.S.A.)
Corporation LLC and A.R.C. Accounts Recovery Nevada Inc. for an amount of $7,500,000
paid as follows: $6,000,000 payable in cash on October 11, 2013, and a conditional
balance of sale of $1,500,000, bearing interest at 5% and payable in three equal
annual payments from the date of issuance of the August 31, 2014 financial
statements. According to the agreement, the contingent consideration is subject to
certain adjustment clauses based on the financial and non-financial performance
of the acquired business. The fair value of the contingent consideration was
calculated at $1,500,000 by discounting the present value of future cash flows over a three
year period at a rate of 5%. As at August 31, 2015, a settlement amount for the contingent
consideration has not yet been agreed.