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Marley SpoonSECOND CUP LTD.— ANNUAL REPORT 2015 VISION —— To be the coffee brand most passionately committed to quality and innovation. CONTENTS Letter from the Chairman Letter from the President & CEO Revitalizing the Network Driving Innovation 2015 Newsmaker of the Year A Look at 2016 Financial Highlights Management’s Discussion & Analysis Audited Financial Statements Notes to the Financial Statements Shareholder Information 2 3 5 13 17 19 23 24 42 47 73 1 SECOND CUP LTD.—ANNUAL REPORT / 2015 LETTER FROM THE CHAIRMAN We wish we could wave a magic wand to create instant results, but it takes time to transform culture. Thankfully, this is happening at Second Cup where the foundation is solidifying and now capable of supporting profitable growth. After many years of slow but steady erosion, Second Cup has been steered through enormous positive change that commenced two years ago. With a renewed commitment to provide the best coffee offering for Canadian consumers, in stores operated by successful franchisees… the transformation is stunning. The first two years involved serious costs which we believe will yield significant long-term value creation. Today the store portfolio is smaller but stronger. Most of the weakest stores have been closed. The company has assumed ownership of many others that exhibit potential for a successful future. Second Cup is committed to an asset light franchise business model, and will benefit greatly when these corporate stores are franchised to inspired owner operators. Today, Second Cup has a terrific management team that is working well together and has capacity to grow. The quality of the products offered, and operating standards continue to improve. We now operate a growing number of new and renovated stores that are truly world class and positioned to succeed in the coming years. Most importantly, the positive change in culture is palpable. Trust between franchisees and franchisor is building and there is a shared desire to win, not just survive. While so many good things are happening at Second Cup, I wish they could happen faster. Ultimately, shareholder value will be created through successful growth, not just fixing the foundation. To that end, Alix Box and her team are taking steps to accelerate our progress. Based on what I have seen, I am optimistic that we will see materially improved performance in the latter half of this year. Michael Bregman Chairman 2 SECOND CUP LTD.—ANNUAL REPORT / 2015 LETTER FROM THE PRESIDENT & CEO Second Cup had an ambitious agenda in 2015. We launched a number of key strategic initiatives to redefine Second Cup as the coffee brand most passionately committed to quality and innovation. Most importantly, we have begun the process of re- energizing our franchisees and the network of stores. At our recent annual convention, many franchisees shared their individual stories of success; how by embracing the transformation, they experienced marked improvements in sales. We ended 2015 on an encouraging note: in the 4th quarter of 2015 we returned to positive earnings, and posted positive same store sales for the first time since 2012. Our term debt has been reduced by $5 million, and our cash balance exceeded $3 million at year end. These are strong indicators that we are making progress toward our goals. We are hopeful that these trends will continue to improve. The reinvention of our café experience is critical to our transformation. Late in 2014 we launched the “Café of the Future” concept in a prime and competitive location in Toronto. The café experienced tremendous sales growth finishing the year at +48% sales versus the prior year. With the strong performance of this first location and positive feedback from customers, and franchisees, the new café concept roll out began in the summer. Franchisees that have transitioned to the new model have experienced healthy increases in unit performance, re-energized their staff and have attracted a broader mix of customers. I am excited by the roll out of the new café concept and the momentum we are gaining in refranchising cafés to high caliber franchisees. Early in the year we had to assume ownership of sub-standard cafés to help propel our turnaround, and this had a negative impact on short-term profitability. The number of corporate stores is being reduced and we are returning to an asset light model. In April of 2015 we launched our Second Cup Coffee Co. Rewards program. Central to this program is a mobile app that includes a payment solution. The Rewards program has been instrumental in driving customer frequency and loyalty and is recognized by franchisees as an important business driver. Loyalty sales currently account for approximately 20% of sales and we plan for substantial increases. One of our key strategies in transforming Second Cup is to offer superior quality coffee and food. As the Canadian specialty coffee company, bringing the best coffees in the world to our customers is at the core of our brand. In 2015 we reinvented our cold coffee category with the introduction of authentic frappés, made with a fresh shot of our celebrated Espresso Forte. We have reviewed every step of the coffee process from farm to the cup, and made improvements everywhere possible. The result is taking our great coffee to even greater levels of excellence. On the food side, the premium bakery program using “best in class” local bakeries - is a key differentiator for Second Cup, and is now in approximately 80% of cafés across the country. Food sales are increasing. Food innovation and growing food sales continue to be a priority in 2016. One of the clearest signs that we are transforming the culture of the company is the expanded role played by the Franchisee Advisory Council. The Advisory council is a group of six franchisees, elected by their peers, to work with and advise Second Cup on all major initiatives. The Council is integral in making decisions regarding the marketing coop fund, and is increasingly viewed by the franchise community as a key stakeholder in helping drive the company forward. While we are seeing progress, we still face significant challenges, and our transformation will take somewhat longer than we had hoped. Much more work remains to be done. We continue to focus on executing our strategic initiatives, recruiting the best possible franchisees, and expanding the store network in a disciplined fashion, while continuing to grow store sales and improve profitability, for both franchisees and the company. Transformations are not easy and they require tremendous commitment and collaboration. I thank the Board of Directors for their ongoing support and guidance this past year. I also thank our entire network of franchisees for their continued confidence in our plan of transformation and renewal. Finally I want to acknowledge and thank my management team for their incredible hard work and passion for the revitalization of Second Cup Coffee Co. Alix Box President & CEO 3 SECOND CUP LTD.—ANNUAL REPORT / 2015 4 Revitalizing the NetworkSECOND CUP LTD.—ANNUAL REPORT / 2015 REVITALIZING THE NETWORK New Café Roll Out Begins Gaining momentum. With tremendous success delivered from the first reimagined café at King and John in Toronto, this became a key milestone for the revitalization of Second Cup. In 2015, the expansion of this proven model began with rollouts in Montreal, Quebec, and in Red Deer, Alberta. This new café concept reflects our passion for coffee in an authentic, creative and collaborative way. SECOND CUP LTD.— ANNUAL REPORT / 2015 5 “We needed a radical change to regain our customers and to attract new ones, and that is exactly what we have been doing with these renovations.” — Alix Box, President & CEO of Second Cup Ltd. King & John, Toronto 6 Revitalizing the NetworkSECOND CUP LTD.—ANNUAL REPORT / 2015 Commerce Court, Toronto Franchisees Harry, Becky, Gemma Sidhu and Kartik Behl, with Alix Box and Michael Bregman 7 Revitalizing the NetworkSECOND CUP LTD.—ANNUAL REPORT / 2015 Franchisees are excited to be a part of the coffee revolution. “Our team is positive that the new look and feel at Second Cup Coffee Co. is headed in the right direction, and we are all anticipating great things for our future. We are thrilled to have the doors to our new café officially open, and are excited to share the experiences with our loyal customers, as well as the many new customers we will gain!” —The Morrisons, Franchise Owners of Second Cup Coffee Co. in Red Deer, Alberta. Gasoline Alley, Red Deer First New Concept Drive-Thru Franchisees: The Morrisons 8 Jewish General Hospital, Montreal Franchisees: May Abdulhadi, Sabih Abdulhadi, Karen Diaz Revitalizing the NetworkSECOND CUP LTD.—ANNUAL REPORT / 2015 Franchisees are excited to be a part of the new café of the future. The Franchisee of the Latin Quarter shop, Daniel Di Maurizio, eagerly expressed his enthusiasm. He has been working with Second Cup since the arrival of the chain in Quebec in 1993. “After 22 years, it’s good to question things. It was now or never; we needed a radical change,” Daniel Di Maurizio, Franchise Owner of Second Cup Coffee Co. in Montreal, Quebec. Rue Saint-Denis, Montreal Franchisee: Daniel Di Maurizio 9 Revitalizing the NetworkSECOND CUP LTD.—ANNUAL REPORT / 2015 “ We want Canadians to fall in love again with Second Cup,’’ Alix Box, President & CEO of Second Cup. SEPTEMBER 2, 2015 “ Steampunk, the coffee of the future by Second Cup” SEPTEMBER 3, 2015 “ The idea is not to become the biggest (chain of coffee shops), but to become the best... It’s a question of quality first and foremost.” Alix Box, President & CEO of Second Cup. SEPTEMBER 1, 2015 10 Revitalizing the NetworkSECOND CUP LTD.—ANNUAL REPORT / 2015 Boul St-Laurent, Montreal Franchisee: Yana Chlumsky “My sister Dana and I are thrilled with our new café. The energy is incredible, our customers and baristas love it and we truly feel like we are part of the Second Cup of the future.” — Yana Chlumsky, Franchise Owner of Second Cup Coffee Co. in Montreal, Quebec. 11 Revitalizing the NetworkSECOND CUP LTD.—ANNUAL REPORT / 2015 12 Driving InnovationSECOND CUP LTD.—ANNUAL REPORT / 2015 DRIVING INNOVATION Creating the ultimate coffee experience Innovative food, beverage and experiences. We have made Second Cup Coffee Co. a more personal experience through the launch of our Second Cup Coffee Co. Rewards program. With our loyalty program we also leveraged technology with the introduction of our mobile app, digital payment and Apple® Watch app. The program has been instrumental in driving customer loyalty and frequency. Food and beverage innovation was also a key focus in 2015. With the re-invention of our cold beverage category we delivered more authentic and coffee forward beverages – Frappés and Iced Red Eyes. Our premium bakery program launched in approximately 80% of our cafés across Canada using best in class, local bakeries. In 2016 we will bring even more excitement to our cafés, with innovative, superior quality food and beverage offerings to share with coffee lovers across Canada. SECOND CUP LTD.— ANNUAL REPORT / 2015 13 LAUNCH OF SECOND CUP COFFEE CO. REWARDS A more rewarding experience. The launch of our loyalty program represents another pivotal milestone in the company’s brand revolution and commitment to delivering the ultimate coffee experience to Canadians. The Rewards program allows members to earn points for every dollar spent at Second Cup, providing exceptional value as reward levels are quickly reached. Members can even use the app on their Apple® Watch, making Second Cup Coffee Co. one of the first Canadian companies to debut an app for the new device. Apple, the Apple logo, and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. Apple Watch is a trademark of Apple Inc. App Store is a service mark of Apple Inc. Join. Earn. Enjoy FREE coffee. The new Rewards program and mobile app embody our commitment to creating a premium, personalized brand experience for our customers. Introduced in April 2015, the Second Cup Coffee Co. Rewards program has been instrumental in driving customer frequency and loyalty. At year end this accounted for approximately 17% of sales and exceeded first year targets for member enrollment. 14 Driving InnovationSECOND CUP LTD.—ANNUAL REPORT / 2015 PREMIUM QUALITY BAKED GOODS Hand-made locally, delivered fresh daily. Daily, fresh baked goods are created in our local bakeries to deliver artfully hand-baked products, created with meticulously selected ingredients that you can pronounce! Now available in approximately 80% of cafés nationally. National Post rave reviews. We sent over some of our new premium quality baked goods to National Post staffers for a tasting… they loved them! “This brownie is freakin’ delicious”. National Post - March 23rd, 2015 15 Driving InnovationSECOND CUP LTD.—ANNUAL REPORT / 2015 BEVERAGE INNOVATION Re-inventing the cold coffee category. We welcomed in the warmer weather with the introduction of our authentic Frappés, made with a fresh shot of our Espresso Forte. Available in four flavours, the Frappés quickly became a customer favourite. Our iced coffee also saw innovation with the introduction of the bold Iced Red Eye—our iced coffee with a shot of Espresso Forte. Franchisee: Lesley Hardy 16 Driving InnovationSECOND CUP LTD.—ANNUAL REPORT / 2015 O N T A R I O Restaurant News 2015 NEWSMAKER OF THE YEAR Award recognizing special achievements and positive effects A transformative opportunity. “Our whole proposition in our three-year plan is to be the best specialty coffee offering with a focus on quality, excellence and the individual customer experience.” —Alix Box, President & CEO of Second Cup Ltd. 17 SECOND CUP LTD.—ANNUAL REPORT / 2015 “The product innovation, Rewards program and collaborative spirit have been good for our business. Our customers and our cafés really experienced the positive impact of the transformation this year and this has re-energized the franchisees.” — Paul Kieley, multi-unit Second Cup Franchisee since 1997 and member of the Franchisee Advisory Council. 18 A Look at 2016SECOND CUP LTD.—ANNUAL REPORT / 2015 A LOOK AT 2016 Superior Quality and Innovation Continues The Canadian specialty coffee company. Coffee and food innovation will continue to be a priority in 2016. We are taking our coffee to even greater levels of excellence by making improvements at every step possible from farm to cup. Our premium bakery program, through “best in class” local bakeries, will be delivering signature bakery items like our Hot Chocolate Cookie made with our famous Second Cup Hot Chocolate. We are confident that our customers will love our new food and coffees. SECOND CUP LTD.— ANNUAL REPORT / 2015 19 SHARING A CANADIAN TRADITION WITH NEW CANADIANS Hot chocolate and skating. As the only Canadian specialty coffee company, we created the Welcome to Canada skating party for new Canadians. On February 20th, 2016, along with CultureLink and Elvis Stojko, we introduced over 500 new Canadians to our favourite tradition - hot chocolate and skating! It was a morning filled with great community spirit! Alix Box, President & CEO of Second Cup Ltd. Elvis Stojko, Canadian Olympic Figure Skater Ibrahim Absiye, Executive Director of CultureLink 20 A Look at 2016SECOND CUP LTD.—ANNUAL REPORT / 2015 EMBRACING THE TRANSFORMATION, TOGETHER 2016 President’s Club Franchisees Annual Franchisee Convention – Montreal, Quebec 21 A Look at 2016SECOND CUP LTD.—ANNUAL REPORT / 2015 22 SECOND CUP LTD.—ANNUAL REPORT / 2015 SHAREHOLDER INFORMATION THE SECOND CUP LTD. Board of Directors THE SECOND CUP LTD. Senior Management Team Michael Bregman (1) (2) Chairman Alix Box Stephen Kelley (1) Alton McEwen (2) Rael Merson (1) Alan Simpson (2) Committees of the Board (1) Audit Committee (2) Governance, Human Resources and Compensation Committee Alix Box President and Chief Executive Officer Barbara Mallon Vice President, Finance and Chief Financial Officer Vanda Provato Vice President, Marketing and Category Chris Sonnen Vice President, Coffee Experience Audra Wosik Vice President, Franchising Ted Tai Vice President, Operations CORPORATE HEAD OFFICE The Second Cup Ltd. 6303 Airport Road, 2nd Floor Mississauga, Ontario Canada L4V 1R8 Registrar and Transfer Agent Computershare Trust Company of Canada Auditors PricewaterhouseCoopers LLP Market Information Shares Listed: Toronto Stock Exchange Symbol: SCU Investor Enquiries Barbara Mallon Vice President, Finance and Chief Financial Officer Tel: (905) 362-1824 Fax: (905) 362-1121 E-mail: investor@secondcup.com Website www.secondcup.com 73 SECOND CUP LTD.—ANNUAL REPORT / 2015
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