Iroquois Valley Farms LLC
Iroquois Valley Farms LLC Financial Statements and Independent Auditors' Report December 31, 2015 and 2014
CONTENTS
Page INDEPENDENT AUDITORS' REPORT
3-4
FINANCIAL STATEMENTS Balance Sheets
5
Schedule of Investments - 2015
6
Schedule of Investments - 2014
7
Statements of Operations
8
Statements of Changes in Members' Equity
9
Statements of Cash Flows
10 - 11
Notes to Financial Statements
12 - 26
INDEPENDENT AUDITORS' REPORT
To the Board of Members of Iroquois Valley Farms LLC Evanston, Illinois Report on the Financial Statements We have audited the accompanying financial statements of Iroquois Valley Farms LLC which comprise the balance sheets and schedules of investments as of December 31, 2015 and 2014, and the related statements of operations, changes in members' equity, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we 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 auditor’s 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. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. (Continued)
To the Board of Members of Iroquois Valley Farms LLC Evanston, Illinois
(Continued)
Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Iroquois Valley Farms LLC as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. MILLER, COOPER & CO., LTD.
Certified Public Accountants Deerfield, Illinois February 15, 2016
FINANCIAL STATEMENTS
Iroquois Valley Farms LLC BALANCE SHEETS December 31, 2015 and 2014
ASSETS
2015
Investments in real estate, at fair value Cash and cash equivalents Rent receivable and other current assets Other long-term assets
2014
$
23,243,935 1,241,412 275,679 1,000
$
18,711,083 1,383,113 243,899 1,000
$
24,762,026
$
20,339,095
$
3,147,475 131,970 22,856 3,205,000
$
3,205,355 81,483 3,164 2,345,000
LIABILITIES AND MEMBERS' EQUITY Mortgages payable Accrued liabilities Accounts payable Notes payable, subordinated
MEMBERS’ EQUITY (membership interests outstanding of 133,660.916 and 106,139.079, respectively) $
The accompanying notes are an integral part of these statements. -5-
6,507,301
5,635,002
18,254,725
14,704,093
24,762,026
$
20,339,095
Iroquois Valley Farms LLC SCHEDULE OF INVESTMENTS - 2015 December 31, 2015
Carrying Amount
Cost
Percent of Total Investments
INVESTMENTS IN FARMLAND, DECEMBER 31, 2015 Denker Farm
$
1,518,448
Hedge Creek Farm
$
1,759,000
7.6 %
638,394
647,000
2.8
Iroquois Valley East and West Farms
1,206,908
2,108,000
9.1
Mary Ellen's Farm
1,055,461
1,009,000
4.3
Mooday and Jackman Farms
1,031,963
1,000,700
4.3
Old Oak Farm
936,940
940,000
4.0
One Bottom Farm
354,846
347,000
1.5
Pleasant Ridge Farm
525,496
549,000
2.4
Red Oak Farm
831,802
886,000
3.8
Rock Creek Farm
622,606
657,000
2.8
Shiawassee Farm
1,007,186
1,165,416
5.0
Sparta Woods Farm
1,032,345
963,000
4.1
Taconic Ridge Farm
323,087
335,000
1.4
Brindle Farm
504,441
517,000
2.2
Healing Ground Farm
127,001
127,001
0.5
Mystic River Farm
553,059
587,000
2.5
Union Fair Farm
501,625
405,755
1.8
Lakeville Farm
1,992,446
1,903,000
8.2
Two Roads Farm
2,469,090
2,579,445
11.1
717,856
717,856
3.1
Mackinaw Farm
1,017,128
1,017,128
4.4
Saginaw Bay Farm
1,610,902
1,610,902
7.0
Earlville Farm
401,266
401,266
1.7
Jubilee Farm
480,775
480,775
2.1
Yoder Farm
530,691
530,691
2.3
South Grove Farm
$
21,991,762
The accompanying notes are an integral part of this statement. -6-
$
23,243,935
100.00 %
Iroquois Valley Farms LLC SCHEDULE OF INVESTMENTS - 2014 December 31, 2014
Carrying Amount
Cost
Percent of Total Investments
INVESTMENTS IN FARMLAND, DECEMBER 31, 2014 Denker Farm
$
Hedge Creek Farm
1,518,448
$
1,691,000
9.0 %
638,394
663,000
3.5
Iroquois Valley East and West Farms
1,202,205
2,175,000
11.6
Mary Ellen's Farm
1,030,607
1,046,000
5.6
Mooday and Jackman Farms
1,030,963
1,100,000
5.9
Old Oak Farm
936,940
942,000
5.0
One Bottom Farm
354,846
364,000
1.9
Pleasant Ridge Farm
525,496
572,700
3.2
Red Oak Farm
831,802
862,000
4.6
Rock Creek Farm
622,606
673,000
3.6
Shiawassee Farm
971,770
1,130,000
6.0
Sparta Woods Farm
1,032,345
1,030,000
5.5
Taconic Ridge Farm
323,087
335,000
1.8
Brindle Farm
504,441
504,441
2.7
Healing Ground Farm
127,001
127,001
0.7
Mystic River Farm
553,059
553,059
3.0
Union Fair Farm
481,346
481,346
2.6
Lakeville Farm
1,992,446
1,992,446
10.6
Two Roads Farm
2,469,090
2,469,090
13.2
18,711,083
100.00 %
$ The accompanying notes are an integral part of this statement. -7-
17,146,892
$
Iroquois Valley Farms LLC STATEMENTS OF OPERATIONS For the years ended December 31, 2015 and December 31, 2014
2015 Rental income Lease reimbursements
$
Direct expenses Real estate taxes Insurance and other
Net rental income General and administrative expenses Interest expense Option-based compensation expense Operating income Net realized gain on investments in real estate Net unrealized loss on investments in real estate NET INCOME (LOSS)
$
The accompanying notes are an integral part of these statements. -8-
913,277 68,149
2014 $
635,623 35,902
981,426
671,525
99,427 28,416
55,264 6,543
127,843
61,807
853,583
609,718
476,824 186,617 99,321
347,444 144,343 74,124
90,821
43,807
(312,018)
10,344 (43,735)
(221,197) $
10,416
Iroquois Valley Farms LLC STATEMENTS OF CHANGES IN MEMBERS' EQUITY For the years ended December 31, 2015 and December 31, 2014
Members' equity, January 1, 2014
$
Net income
9,202,804 10,416
Contributions from members
5,506,704
Redemption of membership interests
(55,200)
Issuance of options as compensation
74,124
Syndication costs
(34,755)
Members' equity, December 31, 2014
14,704,093
Net loss
(221,197)
Contributions from members
3,906,048
Redemption of membership interests
(119,572)
Exercise of membership options, net of proceeds
(81,900)
Issuance of options as compensation
99,321
Syndication costs
(32,068)
Members' equity, December 31, 2015
$
The accompanying notes are an integral part of these statements. -9-
18,254,725
Iroquois Valley Farms LLC STATEMENTS OF CASH FLOWS For the years ended December 31, 2015 and December 31, 2014
2015 Cash flows from operating activities Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Net realized gain on investments in real estate Net unrealized loss on investments in real estate Option-based compensation expense Increase in assets Rent receivable and other current assets Increase in liabilities Accrued liabilities Accounts payable
$
Net cash provided by (used in) operating activities Cash flows from investing activities Acquisitions of investments in real estate Proceeds from sales of investments in real estate Net cash used in investing activities Cash flows from financing activities Repayments on mortgages payable Proceeds from notes payable Repayments of notes payable Proceeds from advances from members Repayments of advances from members Payment of syndication costs Contributions from members Redemption of membership interests Exercise of membership options, net of proceeds Net cash provided by financing activities NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(221,197) $
(10,344) 43,735 74,124
(31,780)
(216,227)
50,487 19,692
48,968 3,164
228,541
(46,164)
(4,844,870) -
(6,382,012) 333,129
(4,844,870)
(6,048,883)
(57,880) 1,010,000 (50,000) (32,068) 3,806,048 (119,572) (81,900)
(309,304) 1,960,000 250,000 (252,000) (34,755) 5,506,704 (55,200) -
4,474,628
7,065,445
1,383,113
Cash and cash equivalents, end of period
$
The accompanying notes are an integral part of these statements. -10-
10,416
312,018 99,321
(141,701)
Cash and cash equivalents, beginning of period
2014
1,241,412 $
970,398 412,715 1,383,113
Iroquois Valley Farms LLC STATEMENTS OF CASH FLOWS (Continued) For the years ended December 31, 2015 and December 31, 2014
2015
2014
$
154,873 $
151,857
Conversion of member advances to notes payable
$
-
385,000
Conversion of notes payable to membership units
$
100,000 $
Supplemental disclosure of cash flow information Cash paid for interest expense Supplemental disclosure of noncash transactions
The accompanying notes are an integral part of these statements. -11-
$
-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE A - NATURE OF OPERATIONS The Company is an Illinois limited liability company formed in 2007 for the purpose of investing in farmland that positively impacts local, sustainable, and organic agriculture. The farmland purchased by the Company is leased primarily to mid-size farm tenants who operate their own sustainable farm businesses. Investments made by the Company are raised with new debt or equity, generally from new investors. There are no outstanding capital commitments or management fees charged to the Company. NOTE B - SIGNIFICANT ACCOUNTING POLICIES 1.
Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. The Company follows the accounting and reporting guidance in Financial Accounting Standards Board Accounting Standards Codification 946.
2.
Investments Valuation and Fair Value of Financial Instruments Investments in real estate are carried at fair value. As of December 31, 2015 and 2014 fair value was determined by independent, certified appraisers for those properties owned for more than one year, which was the primary method used to value investments in real estate. The methods employed by the appraisers generally considered three methods: the sales comparison approach (which uses the market for comparable properties), income capitalization approach (which considers income - generating potential of the property and anticipated rate of return), and the cost approach. Properties are valued at cost during the year of acquisition, as management believes cost approximates market value given the close proximity of the acquisition dates to the balance sheet dates and the absence of any significant changes in market conditions. Fair value adjustments based on appraisals are shown as an unrealized gain or loss in the year of appraisal. Accordingly, included in the accompanying statements of operations for the years end December 31, 2015 and 2014 are unrealized losses of $312,018 and $43,735, respectively. The carrying amounts of financial instruments, including cash equivalents, rent receivable and other current assets, accrued liabilities, and accounts payable approximate fair value due to the short maturity of these instruments. The carrying amount of mortgages payable and subordinated notes payable approximate fair value since the fixed interest rates are based on current rates offered to the Company for debt with similar terms and maturities. -12-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.
Investments Valuation and Fair Value of Financial Instruments (Continued) It is the Company’s policy, in general, to measure nonfinancial assets and liabilities at fair value on a nonrecurring basis. These items are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (such as evidence of impairment) which, if material, are disclosed in the notes to these financial statements. Transaction costs are expensed as incurred. Total costs included in the statement of income for the year ended December 31, 2015 and 2014 approximated $77,000 and $52,000, respectively.
3.
Cash Equivalents The Company maintains cash balances with a lender which holds the mortgages on certain investments (see Note E). These cash equivalents are not restricted and can be withdrawn at any time without penalty.
4.
Variable Rent Receivable Variable rents receivable are estimates of tenant farmer obligations due to the Company in accordance with the variable farm revenue as stated in the lease agreements. These estimates are based on a calculation of farm revenues exceeding a certain price point per acre (as defined in the individual lease agreements) and the excess being partially due to the Company. Management individually reviews all variable rents receivable and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.
5.
Revenue Recognition Rental income is recognized when due as provided under the lease agreements with tenants. All leases between the Company and its tenants are classified as operating leases. Lease reimbursements represent real estate taxes and property insurance, which are billed to tenants pursuant to the terms of the lease. Lease reimbursements are recognized as earned in the same period the expenses are incurred.
-13-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (Continued) 6.
Income Taxes As a limited liability company, the Company's taxable income or loss is allocated to the members. Therefore, no provision or liability for federal income taxes has been included in the financial statements. The Company may be subject to certain state taxes. Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by taxing authorities. Management evaluated the Company's tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
7.
Option-Based Compensation Compensation expense relating to option-based payments is recognized in operations using a fair value measurement method. Under the fair value method, the estimated fair value of awards is charged to operations on a straight-line basis over the requisite service period, which is generally the vesting period.
8.
Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
-14-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (Continued) 8.
Use of Estimates (Continued) Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgments. The fair value of investments is considered a significant estimate given that they are based on valuation techniques in which one or more significant inputs are unobservable. The fair value of compensation expense related to membership options is considered a significant estimate due to the variability of estimates of expected life, risk-free interest rate, expected dividends, and volatility utilized in the calculation of fair value. While management's estimates of fair value of investments and compensation expense are reasonable, the actual results could differ and have a significant impact on the financial statements.
NOTE C - LIMITED LIABILITY COMPANY 1.
Allocations to Members Allocations of income, loss, and distributions to the members are based on the provisions of the Company's operating agreement. Interested parties should refer to the operating agreement for a more complete description of the Company's allocation provisions.
2.
Personal Assets and Liabilities In accordance with the generally accepted method of presenting limited liability company financial statements, the financial statements do not include the personal assets and liabilities of the members, including their distributions for any income tax liability.
NOTE D - REVOLVING LINES OF CREDIT The Company has two $500,000 line of credit facilities with the lender who services the mortgages (see Note E) which expire on May 1, 2016. There were no outstanding borrowings on the lines as of December 31, 2015 or 2014. Interest is payable monthly at the 30 day London InterBank Offered Rate (LIBOR) (0.24% at December 31, 2015) plus 2.50%. The lines are collateralized by the Company's Shiawassee and Sparta Woods farms.
-15-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE D - REVOLVING LINES OF CREDIT (Continued) The Company entered into another $1,000,000 line of credit with a different lender in October 2015 which expires on October 30, 2018. There were no outstanding borrowings on the line as of December 31, 2015. Interest is payable monthly at the bank's prime rate (4.50% at December 31, 2015, as defined in the agreement) reduced by an applicable margin (0.50%). The line is collateralized by the Lakeville Farm. The Company is subject to certain restrictive covenants. NOTE E - MORTGAGES PAYABLE Long-term debt at December 31, 2015 and 2014 consists of the following: 2015
2014
Mortgage note payable, in semi-annual installments of $24,437, including interest at a fixed rate of 4.10% through January 2023, with final maturity in January 2042. The note is collateralized by the Iroquois Valley East and West farms. $
558,108
Mortgage note payable, in semi-annual installments of $17,626, including interest at a fixed rate of 4.10% through January 2023, with final maturity in January 2042. The note is collateralized by the Denker farm.
566,503
572,394
Mortgage note payable, in semi-annual installments of $11,655, including interest at a fixed rate of 3.70% through September 2019, with final maturity in April 2043. The note is collateralized by the Old Oak farm.
400,118
408,393
Mortgage note payable, in semi-annual installments of $6,940, including interest at a fixed rate of 3.70% through October 2019, with a final maturity in April 2043. The note is collateralized by the Rock Creek farm.
238,262
243,189
-16-
$
569,533
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE E - MORTGAGES PAYABLE (Continued) 2015
2014
Mortgage note payable, in semi-annual installments of $8,653, including interest at a fixed rate of 3.70% through December 2019, with a final maturity in June 2043. The note is collateralized by the Hedge Creek farm. $
297,054
Mortgage note payable, in semi-annual installments of $10,191, including interest at a fixed rate of 4.10% through January 2023, with a final maturity in June 2043. The note is collateralized by the Red Oak farm.
334,289
340,826
Mortgage note payable, in semi-annual installments of $10,191, including interest at a fixed rate of 4.10% through February 2023, with a final maturity in June 2043. The note is collateralized by the Mooday and Jackman farms.
334,289
340,765
Mortgage note payable, in semi-annual installments of $4,803, including interest at a fixed rate of 4.15% through September 2020, with a final maturity in September 2043. The note is collateralized by Mary Ellen's Farm.
164,008
167,066
Mortgage note payable, in semi-annual installments of $7,102, including interest at a fixed rate of 3.50% through October 2018, with a final maturity in May 2044. The note is collateralized by Mary Ellen's farm.
254,844
259,992
$
-17-
3,147,475
$
$
303,197
3,205,355
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE E - MORTGAGES PAYABLE (Continued) Future debt maturities for the year ending December 31 are as follows: 2016 2017 2018 2019 2020 Thereafter
$
75,039 78,047 81,178 82,792 84,435 2,745,984
$
3,147,475
NOTE F - NOTES PAYABLE During 2015 and 2014, the Company borrowed through issuances of notes payable to finance the purchase of new real estate investment properties. Certain members had previously advanced $385,000 to the Company during 2014 and prior, which were converted to the series A - D notes payable during 2014. During 2015, a $100,000 series A note was converted to membership units as permitted under the terms of the agreement. The debt is categorized in five tranches of notes payable, series A - E. The notes payable are subordinated to the mortgages payable and any advances on the revolving lines of credit (see Notes D and E). Notes payable due from related parties aggregated approximately 50% of the total notes payable at December 31, 2015 and 2014. The notes have various original maturity dates from 2016 through 2026. At December 31, 2015 and 2014, notes payable consisted of the following: 2015 Series A notes payable, with interest due at 2.00% semi-annually, with principal due in full at maturity. The notes originally mature in January 2016. Interest expensed during 2015 and 2014 was approximately $7,000 and $1,000, respectively. The notes are uncollateralized. $
-18-
335,000
2014
$
430,000
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE F - NOTES PAYABLE (Continued) 2015 Series B notes payable, with interest due at 2.50% semi-annually, with principal due in full at maturity. The notes originally mature in January 2018. Interest expensed during 2015 and 2014 was approximately $13,000 and $1,000, respectively. The notes are uncollateralized. $
525,000
2014
$
175,000
Series C notes payable, with interest ranging from 2.50% to 3.00% annually, with principal due in full at maturity. The notes originally mature at various dates in 2020 and 2021. Interest expensed during 2015 and 2014 was approximately $33,000 and $1,000, respectively. The notes are uncollateralized.
1,255,000
805,000
Series D notes payable, with interest ranging from 3.00% to 3.50% annually, with principal due in full at maturity. The notes originally mature at various dates in 2022 and 2023. Interest expensed during 2015 and 2014 was approximately $34,000 and $4,000, respectively. The notes are uncollateralized.
1,040,000
935,000
Series E notes payable, with interest at 3.25% annually, with principal due in full at maturity. The notes originally mature in January 2026. Interest expensed during 2015 was approximately $1,000. The notes are uncollateralized.
50,000 $
-19-
3,205,000
$
2,345,000
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE F - NOTES PAYABLE (Continued) Future original maturities of the notes payable as of December 31, 2015 are as follows: 2016 2017 2018 2019 2020 Thereafter
$
335,000 525,000 1,030,000 1,315,000
$
3,205,000
NOTE G - RENTAL INCOME The Company leases its real estate to farm operators under five year variable cash lease agreements. The lease agreements include minimum base rent plus a variable component based on total farm revenues. Leases require the farm tenant to maintain federal crop insurance for the duration of the lease. Future minimum base rental payments for the year ending December 31 are as follows: 2016 2017 2018 2019 2020 Thereafter
$
659,618 662,103 527,110 424,735 218,121 6,519
$
2,498,206
-20-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE H - FAIR VALUE MEASUREMENTS Current accounting standards establish a framework for measuring fair value. That framework includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels: Level 1
Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes that its valuation methods (see Note B-2) are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
-21-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE H - FAIR VALUE MEASUREMENTS (Continued) The following tables summarize the changes in investments in real estate measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31, 2015 and 2014: Assets at Fair Value
Level 3 2015
2014
Balance at beginning of the year Acquisitions of investments in real estate Sales of investments in real estate Realized gain on sales of real estate, net Unrealized loss, net
$ 18,711,083 $ 12,695,591 4,844,870 6,382,012 (333,129) 10,344 (312,018) (43,735)
Balance at year end
$ 23,243,935
$ 18,711,083
NOTE I - MEMBERSHIP UNIT OPTION PLAN The Company provides for the grant of incentive options to purchase membership units to certain officers of the Company. The agreements allow the option holders to purchase membership units of the Company at a stated price during a specified period of time (generally 10 - 15 years). Option awards are generally granted with an exercise price equal to the fair market value of the membership units at the date of grant. Options generally vest over three years. The Company has granted options to certain staff members and consultants. In 2015, 3,500 options were granted and 1,950 options were exercised. The 1,950 exercised options were valued as of the exercise date at $81,900 based on the difference between the $100 exercise price of the options and $142 value of the membership units assessed at the date of exercise. The fair value of $81,900 was immediately redeemed and paid out (net) in cash to the option holders. In 2014, 3,800, options were granted and none were exercised.
-22-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE I - MEMBERSHIP UNIT OPTION PLAN (Continued) The fair value of each option is estimated on the date of grant based on the Black-Scholes option pricing model. An expected volatility factor was based on comparable farmland values and public companies and was used in computing the option-based compensation during 2015 and 2014. The annual rate of dividends is expressed as a dividend yield which is a constant percentage of the share price. The expected life of an option represents the period of time that an option is expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the 10-year U.S. Treasury note in effect at the time of grant (expected lives are 10 - 15 years). Option-based compensation recognized in the statements of operations was $99,321 and $74,124 for the years ended December 31, 2015 and 2014, respectively. The fair value of each option granted during previous years was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Expected life Risk-free interest rate Expected dividends Volatility
10 - 15 years 1.78% - 3.47% 0.00% 10% - 29%
-23-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE I - MEMBERSHIP UNIT OPTION PLAN (Continued) Membership unit option activity for the years ended December 31, 2015 and 2014 is as follows: Weighted Weighted Average Shares Average Remaining Subject to Exercise Contractual Option Price Term January 1, 2014 Granted Exercised Cancelled/forfeited
6,400 3,800 -
$
115.61 138.00
13 years 15 years
December 31, 2014 Granted Exercised Cancelled/forfeited
10,200 $ 3,500 (1,950) -
123.95 138.00 100.00
14 years 10 years
December 31, 2015
11,750
132.11
12 years
$
Exercisable at December 31, 2015
8,933
12 years
Exercisable at December 31, 2014
6,433
14 years
A total of 2,500 and 2,725 options vested during the years ended December 31, 2015 and 2014, respectively.
-24-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE J - FINANCIAL HIGHLIGHTS The internal rate of return was computed based on the actual dates of cash inflows (capital contributions) and outflows (cash distributions), and the net assets at the end of the period (residual value) of the members' equity as of each measurement date. The internal rate of return is presented "life to date" and is net of all expenses. The following ratios to average net assets are based upon the simple average net assets for the Company for the year ended December 31, 2015. 2015 Internal rate of return (life to date) Ratio to average net assets: Net investment income before membership unit-based compensation expense Net operating income General and administrative expenses
2014
11.9 %
13.5 %
1.2 % 0.6 % 2.9 %
1.0 % 0.4 % 2.9 %
NOTE K - CONCENTRATIONS OF RISK The Company maintains its cash balances at financial institutions located in the United States. These cash balances are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. The Company may, from time to time, have balances in excess of FDIC insured deposit limits. The Company also maintains cash balances with its lender (see Note B-3), which is not a federally insured institution. The Company's investments are significantly concentrated within holdings of agriculture within the United States. The general health of that industry could have a significant impact on the fair value of investments held by the Company. NOTE L – RECLASSIFICATIONS Certain reclassifications have been made to the 2014 financial statements to conform to the 2015 presentation.
-25-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE M – SUBSEQUENT EVENTS Management has evaluated subsequent events through February 15, 2016, the date that these financial statements were available to be issued. Management has determined that no events or transactions, other than those described below, have occurred subsequent to the balance sheet date that require disclosure in the financial statements. On February 4, 2016, the Company signed a purchase contract for 80 acres in Dekalb County, Illinois for approximately $800,000. The Company made an earnest money deposit of $78,000 with the purchase contract which was funded by existing cash balances. On February 9, 2016, the Company issued a first mortgage loan of $1,250,000 to a farm focused on diversified organic pastured raised meats. The loan is secured by 225 acres in Ford County, Illinois and guaranteed by the farm owners. The Company used cash on hand to fund the loan. Since the financial statement date of December 31, 2015 up to the report date, the Company has received approximately $1,400,000 in new equity contributions (reflecting approximately 9,600 membership interests) and issued $400,000 of notes payable under the various series outlined in Note F.
-26-
CONTENTS
Page INDEPENDENT AUDITORS' REPORT
3-4
FINANCIAL STATEMENTS Balance Sheets
5
Schedule of Investments - 2015
6
Schedule of Investments - 2014
7
Statements of Operations
8
Statements of Changes in Members' Equity
9
Statements of Cash Flows
10 - 11
Notes to Financial Statements
12 - 26
INDEPENDENT AUDITORS' REPORT
To the Board of Members of Iroquois Valley Farms LLC Evanston, Illinois Report on the Financial Statements We have audited the accompanying financial statements of Iroquois Valley Farms LLC which comprise the balance sheets and schedules of investments as of December 31, 2015 and 2014, and the related statements of operations, changes in members' equity, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we 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 auditor’s 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. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. (Continued)
To the Board of Members of Iroquois Valley Farms LLC Evanston, Illinois
(Continued)
Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Iroquois Valley Farms LLC as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. MILLER, COOPER & CO., LTD.
Certified Public Accountants Deerfield, Illinois February 15, 2016
FINANCIAL STATEMENTS
Iroquois Valley Farms LLC BALANCE SHEETS December 31, 2015 and 2014
ASSETS
2015
Investments in real estate, at fair value Cash and cash equivalents Rent receivable and other current assets Other long-term assets
2014
$
23,243,935 1,241,412 275,679 1,000
$
18,711,083 1,383,113 243,899 1,000
$
24,762,026
$
20,339,095
$
3,147,475 131,970 22,856 3,205,000
$
3,205,355 81,483 3,164 2,345,000
LIABILITIES AND MEMBERS' EQUITY Mortgages payable Accrued liabilities Accounts payable Notes payable, subordinated
MEMBERS’ EQUITY (membership interests outstanding of 133,660.916 and 106,139.079, respectively) $
The accompanying notes are an integral part of these statements. -5-
6,507,301
5,635,002
18,254,725
14,704,093
24,762,026
$
20,339,095
Iroquois Valley Farms LLC SCHEDULE OF INVESTMENTS - 2015 December 31, 2015
Carrying Amount
Cost
Percent of Total Investments
INVESTMENTS IN FARMLAND, DECEMBER 31, 2015 Denker Farm
$
1,518,448
Hedge Creek Farm
$
1,759,000
7.6 %
638,394
647,000
2.8
Iroquois Valley East and West Farms
1,206,908
2,108,000
9.1
Mary Ellen's Farm
1,055,461
1,009,000
4.3
Mooday and Jackman Farms
1,031,963
1,000,700
4.3
Old Oak Farm
936,940
940,000
4.0
One Bottom Farm
354,846
347,000
1.5
Pleasant Ridge Farm
525,496
549,000
2.4
Red Oak Farm
831,802
886,000
3.8
Rock Creek Farm
622,606
657,000
2.8
Shiawassee Farm
1,007,186
1,165,416
5.0
Sparta Woods Farm
1,032,345
963,000
4.1
Taconic Ridge Farm
323,087
335,000
1.4
Brindle Farm
504,441
517,000
2.2
Healing Ground Farm
127,001
127,001
0.5
Mystic River Farm
553,059
587,000
2.5
Union Fair Farm
501,625
405,755
1.8
Lakeville Farm
1,992,446
1,903,000
8.2
Two Roads Farm
2,469,090
2,579,445
11.1
717,856
717,856
3.1
Mackinaw Farm
1,017,128
1,017,128
4.4
Saginaw Bay Farm
1,610,902
1,610,902
7.0
Earlville Farm
401,266
401,266
1.7
Jubilee Farm
480,775
480,775
2.1
Yoder Farm
530,691
530,691
2.3
South Grove Farm
$
21,991,762
The accompanying notes are an integral part of this statement. -6-
$
23,243,935
100.00 %
Iroquois Valley Farms LLC SCHEDULE OF INVESTMENTS - 2014 December 31, 2014
Carrying Amount
Cost
Percent of Total Investments
INVESTMENTS IN FARMLAND, DECEMBER 31, 2014 Denker Farm
$
Hedge Creek Farm
1,518,448
$
1,691,000
9.0 %
638,394
663,000
3.5
Iroquois Valley East and West Farms
1,202,205
2,175,000
11.6
Mary Ellen's Farm
1,030,607
1,046,000
5.6
Mooday and Jackman Farms
1,030,963
1,100,000
5.9
Old Oak Farm
936,940
942,000
5.0
One Bottom Farm
354,846
364,000
1.9
Pleasant Ridge Farm
525,496
572,700
3.2
Red Oak Farm
831,802
862,000
4.6
Rock Creek Farm
622,606
673,000
3.6
Shiawassee Farm
971,770
1,130,000
6.0
Sparta Woods Farm
1,032,345
1,030,000
5.5
Taconic Ridge Farm
323,087
335,000
1.8
Brindle Farm
504,441
504,441
2.7
Healing Ground Farm
127,001
127,001
0.7
Mystic River Farm
553,059
553,059
3.0
Union Fair Farm
481,346
481,346
2.6
Lakeville Farm
1,992,446
1,992,446
10.6
Two Roads Farm
2,469,090
2,469,090
13.2
18,711,083
100.00 %
$ The accompanying notes are an integral part of this statement. -7-
17,146,892
$
Iroquois Valley Farms LLC STATEMENTS OF OPERATIONS For the years ended December 31, 2015 and December 31, 2014
2015 Rental income Lease reimbursements
$
Direct expenses Real estate taxes Insurance and other
Net rental income General and administrative expenses Interest expense Option-based compensation expense Operating income Net realized gain on investments in real estate Net unrealized loss on investments in real estate NET INCOME (LOSS)
$
The accompanying notes are an integral part of these statements. -8-
913,277 68,149
2014 $
635,623 35,902
981,426
671,525
99,427 28,416
55,264 6,543
127,843
61,807
853,583
609,718
476,824 186,617 99,321
347,444 144,343 74,124
90,821
43,807
(312,018)
10,344 (43,735)
(221,197) $
10,416
Iroquois Valley Farms LLC STATEMENTS OF CHANGES IN MEMBERS' EQUITY For the years ended December 31, 2015 and December 31, 2014
Members' equity, January 1, 2014
$
Net income
9,202,804 10,416
Contributions from members
5,506,704
Redemption of membership interests
(55,200)
Issuance of options as compensation
74,124
Syndication costs
(34,755)
Members' equity, December 31, 2014
14,704,093
Net loss
(221,197)
Contributions from members
3,906,048
Redemption of membership interests
(119,572)
Exercise of membership options, net of proceeds
(81,900)
Issuance of options as compensation
99,321
Syndication costs
(32,068)
Members' equity, December 31, 2015
$
The accompanying notes are an integral part of these statements. -9-
18,254,725
Iroquois Valley Farms LLC STATEMENTS OF CASH FLOWS For the years ended December 31, 2015 and December 31, 2014
2015 Cash flows from operating activities Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Net realized gain on investments in real estate Net unrealized loss on investments in real estate Option-based compensation expense Increase in assets Rent receivable and other current assets Increase in liabilities Accrued liabilities Accounts payable
$
Net cash provided by (used in) operating activities Cash flows from investing activities Acquisitions of investments in real estate Proceeds from sales of investments in real estate Net cash used in investing activities Cash flows from financing activities Repayments on mortgages payable Proceeds from notes payable Repayments of notes payable Proceeds from advances from members Repayments of advances from members Payment of syndication costs Contributions from members Redemption of membership interests Exercise of membership options, net of proceeds Net cash provided by financing activities NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(221,197) $
(10,344) 43,735 74,124
(31,780)
(216,227)
50,487 19,692
48,968 3,164
228,541
(46,164)
(4,844,870) -
(6,382,012) 333,129
(4,844,870)
(6,048,883)
(57,880) 1,010,000 (50,000) (32,068) 3,806,048 (119,572) (81,900)
(309,304) 1,960,000 250,000 (252,000) (34,755) 5,506,704 (55,200) -
4,474,628
7,065,445
1,383,113
Cash and cash equivalents, end of period
$
The accompanying notes are an integral part of these statements. -10-
10,416
312,018 99,321
(141,701)
Cash and cash equivalents, beginning of period
2014
1,241,412 $
970,398 412,715 1,383,113
Iroquois Valley Farms LLC STATEMENTS OF CASH FLOWS (Continued) For the years ended December 31, 2015 and December 31, 2014
2015
2014
$
154,873 $
151,857
Conversion of member advances to notes payable
$
-
385,000
Conversion of notes payable to membership units
$
100,000 $
Supplemental disclosure of cash flow information Cash paid for interest expense Supplemental disclosure of noncash transactions
The accompanying notes are an integral part of these statements. -11-
$
-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE A - NATURE OF OPERATIONS The Company is an Illinois limited liability company formed in 2007 for the purpose of investing in farmland that positively impacts local, sustainable, and organic agriculture. The farmland purchased by the Company is leased primarily to mid-size farm tenants who operate their own sustainable farm businesses. Investments made by the Company are raised with new debt or equity, generally from new investors. There are no outstanding capital commitments or management fees charged to the Company. NOTE B - SIGNIFICANT ACCOUNTING POLICIES 1.
Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. The Company follows the accounting and reporting guidance in Financial Accounting Standards Board Accounting Standards Codification 946.
2.
Investments Valuation and Fair Value of Financial Instruments Investments in real estate are carried at fair value. As of December 31, 2015 and 2014 fair value was determined by independent, certified appraisers for those properties owned for more than one year, which was the primary method used to value investments in real estate. The methods employed by the appraisers generally considered three methods: the sales comparison approach (which uses the market for comparable properties), income capitalization approach (which considers income - generating potential of the property and anticipated rate of return), and the cost approach. Properties are valued at cost during the year of acquisition, as management believes cost approximates market value given the close proximity of the acquisition dates to the balance sheet dates and the absence of any significant changes in market conditions. Fair value adjustments based on appraisals are shown as an unrealized gain or loss in the year of appraisal. Accordingly, included in the accompanying statements of operations for the years end December 31, 2015 and 2014 are unrealized losses of $312,018 and $43,735, respectively. The carrying amounts of financial instruments, including cash equivalents, rent receivable and other current assets, accrued liabilities, and accounts payable approximate fair value due to the short maturity of these instruments. The carrying amount of mortgages payable and subordinated notes payable approximate fair value since the fixed interest rates are based on current rates offered to the Company for debt with similar terms and maturities. -12-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.
Investments Valuation and Fair Value of Financial Instruments (Continued) It is the Company’s policy, in general, to measure nonfinancial assets and liabilities at fair value on a nonrecurring basis. These items are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (such as evidence of impairment) which, if material, are disclosed in the notes to these financial statements. Transaction costs are expensed as incurred. Total costs included in the statement of income for the year ended December 31, 2015 and 2014 approximated $77,000 and $52,000, respectively.
3.
Cash Equivalents The Company maintains cash balances with a lender which holds the mortgages on certain investments (see Note E). These cash equivalents are not restricted and can be withdrawn at any time without penalty.
4.
Variable Rent Receivable Variable rents receivable are estimates of tenant farmer obligations due to the Company in accordance with the variable farm revenue as stated in the lease agreements. These estimates are based on a calculation of farm revenues exceeding a certain price point per acre (as defined in the individual lease agreements) and the excess being partially due to the Company. Management individually reviews all variable rents receivable and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.
5.
Revenue Recognition Rental income is recognized when due as provided under the lease agreements with tenants. All leases between the Company and its tenants are classified as operating leases. Lease reimbursements represent real estate taxes and property insurance, which are billed to tenants pursuant to the terms of the lease. Lease reimbursements are recognized as earned in the same period the expenses are incurred.
-13-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (Continued) 6.
Income Taxes As a limited liability company, the Company's taxable income or loss is allocated to the members. Therefore, no provision or liability for federal income taxes has been included in the financial statements. The Company may be subject to certain state taxes. Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by taxing authorities. Management evaluated the Company's tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
7.
Option-Based Compensation Compensation expense relating to option-based payments is recognized in operations using a fair value measurement method. Under the fair value method, the estimated fair value of awards is charged to operations on a straight-line basis over the requisite service period, which is generally the vesting period.
8.
Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
-14-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (Continued) 8.
Use of Estimates (Continued) Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgments. The fair value of investments is considered a significant estimate given that they are based on valuation techniques in which one or more significant inputs are unobservable. The fair value of compensation expense related to membership options is considered a significant estimate due to the variability of estimates of expected life, risk-free interest rate, expected dividends, and volatility utilized in the calculation of fair value. While management's estimates of fair value of investments and compensation expense are reasonable, the actual results could differ and have a significant impact on the financial statements.
NOTE C - LIMITED LIABILITY COMPANY 1.
Allocations to Members Allocations of income, loss, and distributions to the members are based on the provisions of the Company's operating agreement. Interested parties should refer to the operating agreement for a more complete description of the Company's allocation provisions.
2.
Personal Assets and Liabilities In accordance with the generally accepted method of presenting limited liability company financial statements, the financial statements do not include the personal assets and liabilities of the members, including their distributions for any income tax liability.
NOTE D - REVOLVING LINES OF CREDIT The Company has two $500,000 line of credit facilities with the lender who services the mortgages (see Note E) which expire on May 1, 2016. There were no outstanding borrowings on the lines as of December 31, 2015 or 2014. Interest is payable monthly at the 30 day London InterBank Offered Rate (LIBOR) (0.24% at December 31, 2015) plus 2.50%. The lines are collateralized by the Company's Shiawassee and Sparta Woods farms.
-15-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE D - REVOLVING LINES OF CREDIT (Continued) The Company entered into another $1,000,000 line of credit with a different lender in October 2015 which expires on October 30, 2018. There were no outstanding borrowings on the line as of December 31, 2015. Interest is payable monthly at the bank's prime rate (4.50% at December 31, 2015, as defined in the agreement) reduced by an applicable margin (0.50%). The line is collateralized by the Lakeville Farm. The Company is subject to certain restrictive covenants. NOTE E - MORTGAGES PAYABLE Long-term debt at December 31, 2015 and 2014 consists of the following: 2015
2014
Mortgage note payable, in semi-annual installments of $24,437, including interest at a fixed rate of 4.10% through January 2023, with final maturity in January 2042. The note is collateralized by the Iroquois Valley East and West farms. $
558,108
Mortgage note payable, in semi-annual installments of $17,626, including interest at a fixed rate of 4.10% through January 2023, with final maturity in January 2042. The note is collateralized by the Denker farm.
566,503
572,394
Mortgage note payable, in semi-annual installments of $11,655, including interest at a fixed rate of 3.70% through September 2019, with final maturity in April 2043. The note is collateralized by the Old Oak farm.
400,118
408,393
Mortgage note payable, in semi-annual installments of $6,940, including interest at a fixed rate of 3.70% through October 2019, with a final maturity in April 2043. The note is collateralized by the Rock Creek farm.
238,262
243,189
-16-
$
569,533
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE E - MORTGAGES PAYABLE (Continued) 2015
2014
Mortgage note payable, in semi-annual installments of $8,653, including interest at a fixed rate of 3.70% through December 2019, with a final maturity in June 2043. The note is collateralized by the Hedge Creek farm. $
297,054
Mortgage note payable, in semi-annual installments of $10,191, including interest at a fixed rate of 4.10% through January 2023, with a final maturity in June 2043. The note is collateralized by the Red Oak farm.
334,289
340,826
Mortgage note payable, in semi-annual installments of $10,191, including interest at a fixed rate of 4.10% through February 2023, with a final maturity in June 2043. The note is collateralized by the Mooday and Jackman farms.
334,289
340,765
Mortgage note payable, in semi-annual installments of $4,803, including interest at a fixed rate of 4.15% through September 2020, with a final maturity in September 2043. The note is collateralized by Mary Ellen's Farm.
164,008
167,066
Mortgage note payable, in semi-annual installments of $7,102, including interest at a fixed rate of 3.50% through October 2018, with a final maturity in May 2044. The note is collateralized by Mary Ellen's farm.
254,844
259,992
$
-17-
3,147,475
$
$
303,197
3,205,355
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE E - MORTGAGES PAYABLE (Continued) Future debt maturities for the year ending December 31 are as follows: 2016 2017 2018 2019 2020 Thereafter
$
75,039 78,047 81,178 82,792 84,435 2,745,984
$
3,147,475
NOTE F - NOTES PAYABLE During 2015 and 2014, the Company borrowed through issuances of notes payable to finance the purchase of new real estate investment properties. Certain members had previously advanced $385,000 to the Company during 2014 and prior, which were converted to the series A - D notes payable during 2014. During 2015, a $100,000 series A note was converted to membership units as permitted under the terms of the agreement. The debt is categorized in five tranches of notes payable, series A - E. The notes payable are subordinated to the mortgages payable and any advances on the revolving lines of credit (see Notes D and E). Notes payable due from related parties aggregated approximately 50% of the total notes payable at December 31, 2015 and 2014. The notes have various original maturity dates from 2016 through 2026. At December 31, 2015 and 2014, notes payable consisted of the following: 2015 Series A notes payable, with interest due at 2.00% semi-annually, with principal due in full at maturity. The notes originally mature in January 2016. Interest expensed during 2015 and 2014 was approximately $7,000 and $1,000, respectively. The notes are uncollateralized. $
-18-
335,000
2014
$
430,000
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE F - NOTES PAYABLE (Continued) 2015 Series B notes payable, with interest due at 2.50% semi-annually, with principal due in full at maturity. The notes originally mature in January 2018. Interest expensed during 2015 and 2014 was approximately $13,000 and $1,000, respectively. The notes are uncollateralized. $
525,000
2014
$
175,000
Series C notes payable, with interest ranging from 2.50% to 3.00% annually, with principal due in full at maturity. The notes originally mature at various dates in 2020 and 2021. Interest expensed during 2015 and 2014 was approximately $33,000 and $1,000, respectively. The notes are uncollateralized.
1,255,000
805,000
Series D notes payable, with interest ranging from 3.00% to 3.50% annually, with principal due in full at maturity. The notes originally mature at various dates in 2022 and 2023. Interest expensed during 2015 and 2014 was approximately $34,000 and $4,000, respectively. The notes are uncollateralized.
1,040,000
935,000
Series E notes payable, with interest at 3.25% annually, with principal due in full at maturity. The notes originally mature in January 2026. Interest expensed during 2015 was approximately $1,000. The notes are uncollateralized.
50,000 $
-19-
3,205,000
$
2,345,000
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE F - NOTES PAYABLE (Continued) Future original maturities of the notes payable as of December 31, 2015 are as follows: 2016 2017 2018 2019 2020 Thereafter
$
335,000 525,000 1,030,000 1,315,000
$
3,205,000
NOTE G - RENTAL INCOME The Company leases its real estate to farm operators under five year variable cash lease agreements. The lease agreements include minimum base rent plus a variable component based on total farm revenues. Leases require the farm tenant to maintain federal crop insurance for the duration of the lease. Future minimum base rental payments for the year ending December 31 are as follows: 2016 2017 2018 2019 2020 Thereafter
$
659,618 662,103 527,110 424,735 218,121 6,519
$
2,498,206
-20-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE H - FAIR VALUE MEASUREMENTS Current accounting standards establish a framework for measuring fair value. That framework includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels: Level 1
Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes that its valuation methods (see Note B-2) are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
-21-
Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE H - FAIR VALUE MEASUREMENTS (Continued) The following tables summarize the changes in investments in real estate measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31, 2015 and 2014: Assets at Fair Value
Level 3 2015
2014
Balance at beginning of the year Acquisitions of investments in real estate Sales of investments in real estate Realized gain on sales of real estate, net Unrealized loss, net
$ 18,711,083 $ 12,695,591 4,844,870 6,382,012 (333,129) 10,344 (312,018) (43,735)
Balance at year end
$ 23,243,935
$ 18,711,083
NOTE I - MEMBERSHIP UNIT OPTION PLAN The Company provides for the grant of incentive options to purchase membership units to certain officers of the Company. The agreements allow the option holders to purchase membership units of the Company at a stated price during a specified period of time (generally 10 - 15 years). Option awards are generally granted with an exercise price equal to the fair market value of the membership units at the date of grant. Options generally vest over three years. The Company has granted options to certain staff members and consultants. In 2015, 3,500 options were granted and 1,950 options were exercised. The 1,950 exercised options were valued as of the exercise date at $81,900 based on the difference between the $100 exercise price of the options and $142 value of the membership units assessed at the date of exercise. The fair value of $81,900 was immediately redeemed and paid out (net) in cash to the option holders. In 2014, 3,800, options were granted and none were exercised.
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Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE I - MEMBERSHIP UNIT OPTION PLAN (Continued) The fair value of each option is estimated on the date of grant based on the Black-Scholes option pricing model. An expected volatility factor was based on comparable farmland values and public companies and was used in computing the option-based compensation during 2015 and 2014. The annual rate of dividends is expressed as a dividend yield which is a constant percentage of the share price. The expected life of an option represents the period of time that an option is expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the 10-year U.S. Treasury note in effect at the time of grant (expected lives are 10 - 15 years). Option-based compensation recognized in the statements of operations was $99,321 and $74,124 for the years ended December 31, 2015 and 2014, respectively. The fair value of each option granted during previous years was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Expected life Risk-free interest rate Expected dividends Volatility
10 - 15 years 1.78% - 3.47% 0.00% 10% - 29%
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Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE I - MEMBERSHIP UNIT OPTION PLAN (Continued) Membership unit option activity for the years ended December 31, 2015 and 2014 is as follows: Weighted Weighted Average Shares Average Remaining Subject to Exercise Contractual Option Price Term January 1, 2014 Granted Exercised Cancelled/forfeited
6,400 3,800 -
$
115.61 138.00
13 years 15 years
December 31, 2014 Granted Exercised Cancelled/forfeited
10,200 $ 3,500 (1,950) -
123.95 138.00 100.00
14 years 10 years
December 31, 2015
11,750
132.11
12 years
$
Exercisable at December 31, 2015
8,933
12 years
Exercisable at December 31, 2014
6,433
14 years
A total of 2,500 and 2,725 options vested during the years ended December 31, 2015 and 2014, respectively.
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Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE J - FINANCIAL HIGHLIGHTS The internal rate of return was computed based on the actual dates of cash inflows (capital contributions) and outflows (cash distributions), and the net assets at the end of the period (residual value) of the members' equity as of each measurement date. The internal rate of return is presented "life to date" and is net of all expenses. The following ratios to average net assets are based upon the simple average net assets for the Company for the year ended December 31, 2015. 2015 Internal rate of return (life to date) Ratio to average net assets: Net investment income before membership unit-based compensation expense Net operating income General and administrative expenses
2014
11.9 %
13.5 %
1.2 % 0.6 % 2.9 %
1.0 % 0.4 % 2.9 %
NOTE K - CONCENTRATIONS OF RISK The Company maintains its cash balances at financial institutions located in the United States. These cash balances are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. The Company may, from time to time, have balances in excess of FDIC insured deposit limits. The Company also maintains cash balances with its lender (see Note B-3), which is not a federally insured institution. The Company's investments are significantly concentrated within holdings of agriculture within the United States. The general health of that industry could have a significant impact on the fair value of investments held by the Company. NOTE L – RECLASSIFICATIONS Certain reclassifications have been made to the 2014 financial statements to conform to the 2015 presentation.
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Iroquois Valley Farms LLC NOTES TO FINANCIAL STATEMENTS December 31, 2015 and 2014
NOTE M – SUBSEQUENT EVENTS Management has evaluated subsequent events through February 15, 2016, the date that these financial statements were available to be issued. Management has determined that no events or transactions, other than those described below, have occurred subsequent to the balance sheet date that require disclosure in the financial statements. On February 4, 2016, the Company signed a purchase contract for 80 acres in Dekalb County, Illinois for approximately $800,000. The Company made an earnest money deposit of $78,000 with the purchase contract which was funded by existing cash balances. On February 9, 2016, the Company issued a first mortgage loan of $1,250,000 to a farm focused on diversified organic pastured raised meats. The loan is secured by 225 acres in Ford County, Illinois and guaranteed by the farm owners. The Company used cash on hand to fund the loan. Since the financial statement date of December 31, 2015 up to the report date, the Company has received approximately $1,400,000 in new equity contributions (reflecting approximately 9,600 membership interests) and issued $400,000 of notes payable under the various series outlined in Note F.
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