2017 ANNUAL REPORT
Ten Peaks Coffee Company Inc.
Ten Peaks Coffee Company Inc.
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Management’s Discussion and Analysis
This Management’s Discussion & Analysis (“MD&A”) of Ten Peaks Coffee Company Inc. (“Ten Peaks” or the
“Company”), dated as of March 20, 2018, provides a review of the financial results for the three and 12 months
ended December 31, 2017 relative to the comparable periods of 2016. The three-month period represents the
fourth quarter (“Q4”) of our 2017 fiscal year. This MD&A should be read in conjunction with Ten Peaks’ audited
consolidated financial statements for the year ended December 31, 2017, which are available at
www.sedar.com.
All financial information is presented in Canadian dollars, unless otherwise specified.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements, including statements regarding the future success of our
business and market opportunities. Forward-looking statements typically contain words such as “believes”,
“expects”, “anticipates”, “continue”, “could”, “indicates”, “plans”, “will”, “intends”, “may”, “projects”,
“schedule”, “would” or similar expressions suggesting future outcomes or events, although not all forward-
looking statements contain these identifying words. Examples of such statements include, but are not limited
to, statements concerning: (i) expectations regarding Ten Peaks’ future success in various geographic markets;
(ii) future financial results including anticipated future sales and processing volumes; (iii) future dividends; (iv)
the expected actions of the third parties described herein; (v) factors affecting the coffee market including
supplies and commodity pricing; and (vi) the business and financial outlook of Ten Peaks. In addition, this
MD&A contains financial outlook information that is intended to provide general guidance for readers based
on our current estimates, but which is based on numerous assumptions and may prove to be incorrect.
Therefore, such financial outlook information should not be relied upon by readers. These statements are
neither promises nor guarantees but involve known and unknown risks and uncertainties that may cause our
actual results, level of activity, performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed in or implied by these statements. These risks
include, but are not limited to, risks related to processing volumes and sales growth, operating results, supply
of coffee, general industry conditions, commodity price risks, technology, competition, foreign exchange
rates, construction timing, costs and financing of capital projects, general economic conditions and those
factors described herein under the heading ‘Risks & Uncertainties’.
The forward-looking statements contained herein are also based on assumptions that we believe are current
and reasonable, including but not limited to, assumptions regarding: (i) trends in certain market segments and
the economic climate generally; (ii) the financial strength of our customers; (iii) the value of the Canadian
dollar versus the US dollar; (iv) the expected financial and operating performance of Ten Peaks going forward;
and (v) the expected level of dividends payable to shareholders. We cannot assure readers that actual results
will be consistent with the statements contained in this MD&A. The forward-looking statements and financial
outlook information contained herein are made as of the date of this MD&A and are expressly qualified in
their entirety by this cautionary statement. Except to the extent required by applicable securities law, Ten
Peaks undertakes no obligation to publicly update or revise any such statements to reflect any change in our
expectations or in events, conditions, or circumstances on which any such statements may be based, or that
may affect the likelihood that actual results will differ from those described herein.
Ten Peaks Coffee Company Inc.
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EXECUTIVE SUMMARY
During 2017, we recorded record volumes and revenues, as well as year-over-year improvements in our
financial results. Strong growth in the first nine months of the year was offset somewhat in the fourth quarter,
as anticipated. A summary of our financial results is shown in the table below:
In $000s except per share amounts
3 months ended
December 31, 2017
3 months ended
December 31, 2016
12 months ended
December 31, 2017
12 months ended
December 31, 2016
Revenue
Gross profit
Operating income
Net income
EBITDA 1
Per share:
Earnings per share,2 basic
Earnings per share,2 diluted
Dividend declared
$
$
$
20,662
3,178
958
(380)
1,334
(0.04)
$
(0.04)
0.0625
$
22,449
3,215
1,526
1,328
1,998
0.15
$
0.15
0.0625
$
$
83,755
12,590
4,812
4,160
6,923
0.46
0.42
0.25
81,927
12,050
5,017
4,149
5,772
0.46
0.46
0.25
1 EBITDA is defined under ‘Non-IFRS Measures’ of this MD&A, which is a “Non-GAAP Financial Measure” as defined by CSA Staff Notice 52-306.
2 Per-share calculations are based on the weighted average number of shares outstanding during the period.
Our improved financial results for the year ended December 31, 2017 primarily reflect our higher volumes, as
we continued to gain market share against our competitors. More importantly, our full year volumes were
the highest in SWDCC’s history, growing by 5% over 2016 with a slight year-over-year decline in the fourth
quarter volumes of 2%. Q4 2016 represented the highest quarterly volume in SWDCC’s history until the third
quarter of 2017, when a new company record was set for quarterly volumes.
Shipments to roasters increased by 6% for the fourth quarter and by 2% for the full year, while shipments to
importers decreased by 17% in Q4 and increased by 11% in the full year, compared to the same periods last
year. Volumes to our specialty accounts grew by 4% in the fourth quarter and by 9% for the full year.
Shipments to our commercial accounts decreased by 5% in the fourth quarter, while 12-month shipments to
commercial accounts rose by 2%.
Revenue for the fourth quarter decreased by 8% to $20.7 million, primarily due to a lower coffee commodity
price, or New York ‘C’ (NY’C’), compared to the same quarter of 2016. Revenue for the full year rose by 2% to
$83.8 million. Revenue grew in all three categories in 2017, primarily due to the higher volume of shipments.
Gross profit declined by 1%, to $3.2 million in the fourth quarter. Seaforth’s warehousing business grew faster
than anticipated in 2017, which resulted in increased warehouse, transportation and labour costs being
incurred during the fourth quarter to alleviate backlogs. For the full year, gross profit rose by $0.5 million, or
4%, to $12.6 million. The increase was mainly related to higher process revenue, which grew with our
increased volumes.
Operating expenses increased in the fourth quarter and for the full year by $0.5 million and $0.7 million, or
31% and 11%, respectively. For both periods, the year-over-year increase reflects higher staffing and staff-
related expenses including stock-based compensation.
Operating income was down by $0.6 million, or 37%, to $1.0 million for the fourth quarter. For the full year,
operating income declined by $0.2 million, or 4%, to $4.8 million.
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Two non-cash items – a loss on foreign exchange and a loss on the fair value of the embedded option – reduced
earnings by $1.1 million in the fourth quarter. Overall, we recorded a net loss of $0.4 million in the period,
compared to net income of $1.3 million in Q4 2016. For the full year, net income totaled $4.2 million. This was
unchanged from 2016, as the increases in our gross profit, gains on risk management activities, and a gain on
the embedded option were offset by higher operating costs and financing costs.
EBITDA for the fourth quarter decreased by $0.7 million, or 33%, to $1.3 million, owing to increased operating
costs and reduced gains on risk management activities. For the full year, EBITDA increased by $1.2 million, or
20%, to $6.9 million. The increase for 2017 was driven by higher volumes and operating income, as well as
improved performance on our risk management activities.
BUSINESS OVERVIEW
Ten Peaks is a leading specialty coffee company doing business through two wholly owned subsidiaries, Swiss
Water Decaffeinated Coffee Company Inc. (“SWDCC”) and Seaforth Supply Chain Solutions Inc. (“Seaforth”).
SWDCC is a premium green coffee decaffeinator located in Burnaby, BC, Canada. SWDCC employs the
proprietary SWISS WATER® Process to decaffeinate green coffee without the use of chemicals, leveraging
science-based systems and controls to produce coffee that is 99.9% caffeine free. We believe that the SWISS
WATER® Process is the world’s only 100% chemical free water process for third-party coffee decaffeination.
It is certified organic by the Organic Crop Improvement Association and is also the world’s only consumer-
branded decaffeination process. Decaffeinating without the use of chemicals is our primary business and the
financial results of Ten Peaks are dependent upon the results of SWDCC.
Seaforth provides a complete range of green coffee logistics services including devanning coffee received from
origin; inspecting, weighing and sampling coffees; and storing, handling and preparing green coffee for
outbound shipments. Seaforth provides all of SWDCC’s local green coffee handling and storage services. In
addition, Seaforth handles and stores coffees for several other coffee importers and brokers, and is the main
green coffee handling and storage company in Metro Vancouver. Seaforth is organically certified by Ecocert
Canada.
As at December 31, 2017, the consolidated financial statements of Ten Peaks included the accounts of Ten
Peaks; our wholly owned subsidiaries SWDCC and Seaforth; and two wholly owned subsidiaries of SWDCC,
Swiss Water Decaffeinated Coffee Company USA, Inc., and Swiss Water Process Marketing Services Inc. At the
end of 2017, Swiss Water Process Marketing Services Inc. was dissolved and its assets and liabilities were
assumed by SWDCC. Inter-company accounts and transactions have been eliminated on consolidation.
Ten Peaks’ shares trade on the Toronto Stock Exchange under the symbol ‘TPK’. As at the date of this report
9,061,210 shares were issued and outstanding.
Swiss Water Decaffeinated Coffee Company’s Business
We carry an inventory of premium-grade Arabica coffees that we purchase from the specialty green coffee
trade, decaffeinate and then sell to our customers (our “regular” or “non-toll” business). Revenue from our
regular business includes both processing revenue and green coffee cost recovery revenue.
We also decaffeinate coffee owned by our customers for a processing fee under toll arrangements (our “toll”
business). The value of the coffee processed under toll arrangements does not form part of our inventory,
our revenue or our cost of sales. Revenue from toll arrangements consists entirely of processing revenue. In
2017, 22% of the coffee we processed was under toll arrangements, with the balance being regular green
coffee sales.
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Our cost of sales is comprised primarily of the cost of green coffee purchased for our regular business, plant
labour and other processing costs directly associated with our production facility. This incorporates an
allocation of fixed overhead costs, which includes depreciation of our production equipment and amortization
of our proprietary process technology.
For our regular business, we work with coffee importers to source premium-grade green coffees from coffee-
producing countries located in Central and South America, Africa and Asia. The purchase price is based on the
NY‘C’ coffee futures price on the IntercontinentalExchange, plus a quality differential. The NY‘C’ component
typically makes up more than 80% of the total cost of green coffee, while the quality differential typically
accounts for less than 20%. Both the NY‘C’ price and the quality differential fluctuate in response to
fundamental commodity factors that affect supply and demand.
Business Strategy
SWDCC seeks to maintain and enhance profitability and cash flows from operations by pursuing the following
business strategies:
• Offer Superior Quality, 100% Chemical Free Decaffeinated Coffees – We support our premium brand
position by offering superior quality coffees. This starts with buying premium Arabica coffees from
top exporters and importers, as the quality of the green coffee directly affects the quality of the
finished product. We then ensure the quality and integrity of the original green coffee is maintained
throughout our proprietary production process. We operate under the Food Safety Systems
Certification (FSSC) 22000 that manages our food safety, as well as HACCP (Hazard Analysis Critical
Control Points) and quality assurance programs. In addition, our proprietary carbon management
technology captures caffeine while protecting the coffee’s body and flavour characteristics. Finally,
because we control all aspects of caffeine removal, we can ensure that our process remains 100%
chemical free and that our carbon and our green coffee extract never come into contact with
methylene chloride. We believe this is an important and relevant competitive distinction that
underscores the integrity of our chemical free positioning.
• Continuously Improve our Production Process – We are committed to continuous improvement
throughout our production process, and to leading the coffee industry in the science of
decaffeination. This allows us to further enhance our proprietary process and provide superior quality
coffees to our customers. Through Six Sigma methodologies, statistical process controls and lean
manufacturing initiatives, we have dramatically improved our production process, thereby improving
our production efficiencies, while reducing defects. In addition, these improvements have allowed us
to make tangible improvements to the quality of the coffee we process. SWISS WATER® Process
decaffeinated green coffees now more closely resemble regular green coffees, which makes it much
easier to visually gauge roast level and stage during the roasting process. Additionally, improvements
we have made to our proprietary carbon renewal process have resulted in notable improvements at
the “cupping”, or tasting table. Due to better retention of chlorogenic and amino acids (naturally
occurring acids and antioxidants in green coffee which form a key part of a coffee’s taste profile) our
coffees have better body and flavour than ever before.
• Create Consumer Demand by Developing Brand Awareness - Strong brand awareness levels, premium
quality and consumer demand encourage retailers to carry decaffeinated coffee products bearing the
SWISS WATER® Process brand name. Therefore, we strategically invest in a range of cost-effective
initiatives designed to enhance awareness of the SWISS WATER® Process brand and our chemical free
proposition, and to increase demand at the consumer level. These activities include regionally
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targeted media campaigns; public relations; customer co-marketing events; social media; and website
management.
•
Leverage Higher Margin Selling Proposition to Retailers – As health-aware consumers are willing to
pay a premium for healthy food options, coffee retailers can improve their margins - particularly on a
by-cup or by-drink basis – simply by switching to chemical free SWISS WATER® Process coffees. This
makes our sales proposition very attractive and is a key leverage point in our business development
program with major roaster retailers and premium street retail accounts. In addition to higher
margins, these retailers are ideally positioned to benefit from the significant value-added elements of
the SWISS WATER® Process brand. These include our ongoing efforts to build brand awareness,
consultative selling, extensive merchandising programs, and web-based merchandising material
fulfillment and customer education tools.
Business and Geographic Segments
During the year ended December 31, 2017, our only business segment was the decaffeination of green coffee.
Due to its relatively small size, results of our Seaforth coffee-handling subsidiary are not separated out for
reporting purposes. Our largest geographical market by volume was the United States, followed by Canada,
and other international markets. By dollar value, 46% of our sales were to customers located in the United
States, 42% were to Canada, and the remaining 12% were to other countries.
Commodity Futures
We use derivative instruments to offset the effect of movements in the NY’C’ component of coffee pricing
between the time we commit to purchase green coffee at a fixed price and the time we sell decaffeinated
green coffee to our customers. Our commodity price risk mitigation strategy requires us to short sell a futures
contract for one lot (37,500 lbs) of coffee on the IntercontinentalExchange whenever we agree to buy one lot
of coffee from a supplier at a fixed price. The short sale protects us from changes in the price of coffee while
purchase orders are outstanding and while we hold the coffee in inventory. An increase (decrease) in the NY’C’
price will generate an increase (decrease) in the value of the coffee we hold in inventory, and an equivalent
decrease (increase) in the value of the derivative instrument. As coffee is sold, the short sales are covered by
purchasing offsetting long contracts on the IntercontinentalExchange.
There is no open market to hedge the quality differential component of our green coffee cost. Therefore, in
periods of rising differential markets, we may experience a differential cost recovery gain, and in periods of
falling differential markets, we may experience a differential cost recovery loss.
Volatility in the NY’C’ generates gains or losses on the derivative financial instruments that we hold. These
gains and losses offset corresponding losses or gains in the value of the inventory we hold. In 2016, we
adopted hedge accounting under International Financial Reporting Standards (“IFRS”), which now allows us
to match gains and losses on our derivative financial instruments with the underlying hedged item (e.g.
inventory and purchase commitments).
The chart below shows the movement in the NY’C’ for the last eight quarters:
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NY'C' Close (US$/lb)
IntercontinentalExchange
December 31, 2015 to December 31, 2017
$1.80
$1.70
$1.60
$1.50
$1.40
$1.30
$1.20
$1.10
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In 2017, the NY’C’ averaged US$1.25 in the fourth quarter and US$1.33 for the year, compared to an average
of US$1.52 in Q4 2016 and US$1.36 in 2016. The rise and fall of the NY’C’ affects our volume of shipments,
our revenues and our cost of sales. After the NY’C’ reached a seven-year low in January 2016, it rose steadily
through the year before peaking in November 2016. In an upward trending market, our customers tend to
consume their inventories rather than build them. Subsequently, the NY’C’ fell sharply in December, closing
2016 at US$1.37 per pound. During 2017, the NY’C’ declined gradually in the first two quarters, rose somewhat
in the third quarter and fell again in the fourth quarter, closing the year at US$1.26 per pound. When the NY’C’
declines over a sustained period, our customers tend to add to their inventories.
Currency Forwards
Coffee is traded in US$, as buyers and sellers reference the NY’C’ coffee price when entering into contracts.
As a result, the majority of our revenues are denominated in US$, while a significant portion of our expenses
and cash outflows occur in Canadian dollars (“C$”). Therefore, our financial results are affected by any
significant fluctuation in US$/C$ exchange rates. In accordance with our foreign exchange risk management
policy, we use financial instruments to manage our currency risk based on estimates of our net US$ cash flows
up to 60 months in advance. We purchase forward contracts to sell US$ at fixed future dates and exchange
rates. This enables us to more reliably predict how much Canadian currency we will receive for our US$ sales.
Cash flows in the immediate 12-month period are hedged at a higher percentage of expected future cash
flows than those farther out, reflecting greater uncertainty in the 13 to 60-month period. In accordance with
our risk management policy, as our assumptions about the timing and amount of US$ cash flows change over
time, we enter into offsetting forward contracts to buy US$ as required to eliminate any over-hedged
positions.
In addition, our risk management policies require us to enter into forward contracts to purchase US$ when
we have large, predictable outlays of US$ for upcoming expenses or purchase commitments. This allows us
to fix the exchange rate for purchases or expenses, as applicable, at the time the commitment is entered into.
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The chart below illustrates the US$/C$ exchange rates for the last eight quarters:
US Dollars to Canadian Dollars
Bank of Canada Noon Rates
December 31, 2015 to December 31, 2017
$1.50
$1.45
$1.40
$1.35
$1.30
$1.25
$1.20
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In Q4 2017, the US$ averaged $1.27 Canadian, a decrease of 5% over the same period in 2016. For the full
year, the US$ averaged $1.30 Canadian, which was 2% lower than in 2016. The US$/C$ exchange rate was
relatively stable in the first five months of last year, before declining rapidly between May and the end of
August. When the US$ declines rapidly, it reduces our gross profit on green coffee revenues, as we sell our
coffee at a lower US$ than we purchased it for.
KEY PERFORMANCE DRIVERS
The following key performance drivers are critical to the successful implementation of our strategy and ability
to improve profitability and cash from operations:
External Factors
• Coffee Commodity Prices – We buy and sell coffees based on the NY’C’ and the quality differentials
for specified coffees, both of which rise and fall in response to changes in supply and demand. We
manage our exposure to changes in the NY’C’ coffee price on the value of our inventories through a
commodity hedging program (discussed under ‘Hedge Accounting’ below), but cannot hedge our
exposure to changes in quality differentials.
In addition to the price risks associated with holding coffee inventories, our revenue and cost of sales
are affected by changes in the underlying commodity price. Commodity price increases (decreases)
raise (lower) the green coffee cost recovery revenue generated through our non-toll business, as well
as the costs of green coffee sold to customers to generate sales.
Changes in the NY’C’ also affect our statement of financial position, and the amount of working capital
we use in our business. When coffee prices rise (fall), our inventory values gradually increase
(decrease) as we replace coffee at higher prices. Our accounts receivable and our accounts payable
also rise and fall with the NY’C’.
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Finally, there is no open market to hedge the quality differential component of our green coffee cost.
We sell coffee at replacement quality differentials, and as such, in a period of falling (rising)
differentials we will generate differential cost recovery losses (gains), as green coffee revenues will
be less than (exceed) green coffee costs.
• US$/C$ Exchange Rates – As noted above, the majority of our revenues are generated in US dollars,
while a significant portion of our costs are paid in Canadian dollars. We therefore have exposure to
changes in the US$/C$ exchange rates. This is managed, in part, through derivative financial
instruments. All other factors being equal, our profitability and cash from operations will be higher
when the US dollar appreciates relative to Canadian dollar. A long-term depreciation of the Canadian
dollar will improve our long-term profitability and cash generation.
Internal Factors
• Processing Volumes – Our decaffeination facility generates a certain level of fixed operating costs that
are incurred regardless of the volume of coffee processed. Accordingly, our profitability and cash from
operations will increase as processing volumes increase. Processing volume is a key performance
indicator (“KPI”) that we monitor continuously.
• Process Consistency – As discussed in the ‘Business Strategy’ section above, we manage our
operations in order to reduce variability in production and drive continuous improvement. Production
consistency results in improved product quality. We have developed a number of KPIs designed to
monitor process consistency, and have set targets for continuous process improvement.
• Product Quality – Quality control is a key part of our operations. We operate under the Food Safety
Systems Certification (FSSC) 22000, which manages our food safety, as well as HACCP (Hazard Analysis
Critical Control Points) and quality assurance programs. All green coffees delivered to our processing
facility are weighed and inspected and are subject to rigorous internal quality-control evaluations.
Each lot of green coffee processed is monitored throughout the decaffeination process, and a
certificate of analysis is prepared for each lot. A sample from each production lot is also roasted,
brewed and cupped to ensure quality. In addition, our focus on reducing the size of production lots
and increasing inventory turnover results in fresher coffee being provided to our customers.
Production batch size and inventory turns are two other KPIs that we monitor regularly.
• Order Fulfillment – Our integrated supply chain management strategy includes maintaining
inventories of finished goods at various coffee warehouses throughout North America, and of raw
goods for improved inventory replenishment times. Our order fulfillment rates are monitored
regularly. An improved order fulfillment rate has contributed to our volume growth and improved
customer service levels.
• Employee Safety – We are focused on operating our business in a safe manner, and reducing the
likelihood that employees will be injured at work. We track employee safety metrics by department,
and our safety committee proactively seeks ways to reduce the risks inherent in our operating
environment. While we cannot completely eliminate workplace incidents or accidents, we have
significantly reduced the number of safety-related incidents over the past four years. We are proud
of the fact that SWDCC has not had a lost-time incident in more than four years. We believe that
ensuring employee safety leads to improved employee retention and morale, increased efficiency and
lower operating costs.
• Sustainability and Environmental Responsibility – The SWISS WATER® Process is a 100% chemical free
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decaffeination process that enables us to consistently deliver high-quality coffee. Our approach to
sustainability is to continually improve and innovate this process to be more efficient by actively
managing resource usage in a safe and environmentally responsible manner. In addition to carefully
managing our operations, we take steps to ensure sustainable coffee supply by purchasing sustainably
certified coffees and organic coffees. We promote social sustainability by participating in programs
within the coffee industry that advance the health of women and their families living in coffee-growing
communities (Grounds for Health) and that foster research-based approaches to advancing coffee
cultivation (World Coffee Research).
CAPACITY TO DELIVER RESULTS
The following resources allow us to deliver on our business strategy:
• Proprietary Chemical Free Production Lines – We have two decaffeination production lines. This
enables us to align our production capacity with changes in demand throughout the year. We operate
one line when demand is lower, and both lines when demand is higher, giving us better control over
our variable costs. In 2016, we expanded the capacity of one of our production lines, which enables
us to meet near-term growth in demand for our products. Longer term, we have announced plans to
construct a new processing plant, which will house a third production line once it is complete.
Construction of the new facility is expected to be complete by the end of 2018, and the new
production line is expected to be operational in the second quarter of 2019.
• Consumer Branding as the Premium, 100% Chemical Free Method of Decaffeinating Green Coffee –
We have been successful in establishing our brand as a leading chemical free processor of green
decaffeinated coffee. Consumers and participants in the coffee trade are increasingly aware of the
value of the chemical free SWISS WATER® Process due to its quality and taste. We believe that there
is significant potential to continue to broaden consumer awareness of the benefits of the SWISS
WATER® Process.
• Established Customer Base - The SWISS WATER® Process has an established customer base across
North America and in many international markets. Our customers include some of North America’s
largest roasters, roaster-retailers and leading coffee brands.
• Broad Distribution Channels - Green coffee decaffeinated using the SWISS WATER® Process is sold
through the coffee market’s key distribution channels: roaster retailers, commercial roasters and
coffee importers. This diversity ensures that we access all key segments of the specialty coffee trade
and consumer coffee markets.
• Working Capital and Expansion Capital – We believe we have sufficient lines of credit available to
invest in the inventory and working capital required to execute on our business strategy. In 2015 and
2016, we raised equity and debt which is being used to fund the construction of our third production
line (to be housed in the new production facility noted above).
• Management Expertise - Ten Peaks is highly regarded in the coffee industry for our senior
management team’s substantial experience, our close attention to consumer trends in the specialty
coffee market, and our in-depth knowledge of green and roasted coffee. In particular, our intense
focus on premium product quality and commitment to science-driven insight is well recognized. To
maximize these strengths, we have invested significant resources in enhancing our team’s industry-
related skills and talents over the past few years. Going forward, we intend to leverage our
exceptional experience with, and knowledge of, the specialty coffee industry to continue to build our
Ten Peaks Coffee Company Inc.
10
business.
SELECTED ANNUAL INFORMATION
(In $000s except per share amounts)
December 31, 2017 December 31, 2016 December 31, 2015
Balance Sheet
Total assets
Total long-term liabilities
Income Statement
Sales
EBITDA(1)
Net income
Dividends paid
Per share, basic(2)
EBITDA(1)
Net income
Dividends paid
Per share, diluted(2)
EBITDA(1)
Net income
72,848
67,899
57,688
19,497
17,733
3,070
83,755
81,927
83,641
6,923
5,772
8,034
4,160
4,149
1,312
2,260
2,256
1,824
0.77
0.64
1.04
0.46
0.46
0.17
0.25
0.25
0.25
0.64
0.63
1.04
0.42
0.46
0.17
(1) EBITDA is defined in the section ‘Non-IFRS Financial Measures’ along with details of its calculation.
(2) Per-share calculations are based on the weighted average number of shares outstanding during the period.
Our total assets and our total liabilities have increased in each of the last two years following an equity offering
in 2015 and a convertible debenture offering in 2016. Proceeds from the equity offering in 2015 were used to
increase capacity of one production line in 2016, resulting in an increase in fixed assets, and repayment of
short-term debt. Proceeds from the debt and equity offerings are also being used to construct a new
production line, which will be housed in a new production facility that is currently under construction (see
‘Outlook’ section, below).
Of note, we adopted hedge accounting on January 1, 2016, and as such the operating results from 2015 are
not directly comparable to those in 2016 and 2017. Prior to the adoption of hedge accounting, we experienced
considerable volatility in our gross profit, net income and EBITDA numbers. Results of operations including
our revenues, net income and EBITDA are discussed in more detail below.
HEDGE ACCOUNTING
We adopted the hedge accounting provisions of IFRS 9 on January 1, 2016 because it better aligns with our
existing hedging strategies. The adoption of hedge accounting reduces the volatility in our financial results, by
better matching our accounting practices to our existing hedging practices. We have not changed our risk
management strategies with the adoption of hedge accounting. The economic impact of our hedges is
unchanged, even though the accounting for these derivative instruments has changed.
We enter into three types of hedges:
Ten Peaks Coffee Company Inc.
11
1) Commodity price risk hedges on our coffee purchase commitments and inventory (“commodity
hedges”);
2) Currency risk hedges on future US$ process revenues (“revenue hedges”); and
3) Customer-specific currency risk hedges on US$ purchases of green coffee (“customer-specific
hedges”).
Each type of hedge is discussed below.
Commodity Hedges:
When we enter into a purchase commitment to purchase green coffee, the contract specifies that the
purchase price will be determined in part based on the future (to-be-determined) futures price or NY’C’. We
agree on or ‘fix’ the NY’C’ price with the vendor on or before receiving the coffee into inventory. When we
bear the economic risk of a change in the commodity price, we offset this price risk by selling short a futures
contract on the IntercontinentalExchange. When we later sell such coffee at a fixed price to a customer, we
cover our short by going long on a futures contract on the IntercontinentalExchange. As we always have
inventory on hand, we are always net short futures contracts.
At each period-end, commodity hedges are re-measured to their fair value. Under hedge accounting, gains
/losses for hedged coffee purchase commitments and inventory are recorded in the statement of financial
position until such coffee is sold, at which time the gains/losses on our commodity hedges are recognized in
cost of sales. In this way, gains/losses on our commodity hedges are matched to our sales in the period.
Revenue Hedges:
We enter into forward contracts to sell US$ at future dates to hedge the foreign exchange cash flow variability
of expected US$ processing fee revenue up to 60 months in advance. The hedged process revenue includes
both process revenue from tolling arrangements (processing of customer-owned coffee) as well as the US$
processing fee layer of inventory sales agreements. This enables us to more reliably predict how much
Canadian currency we will receive for our US$ process revenue. Cash flows in the immediate twelve month
period are hedged at a higher percentage of expected future revenues than those farther out, reflecting
greater uncertainty in the 13- to 60-month period.
At each period end, revenue hedges are re-measured to their fair value. Under hedge accounting, unrealized
gains/losses for open revenue hedges are recorded in other comprehensive income. When a revenue hedge
matures, the realized gain/loss on that contract is recycled from accumulated other comprehensive income
to process revenue.
Customer-Specific Hedges:
We enter into forward contracts to buy US$ for green coffee inventory which, once decaffeinated, will be sold
at a fixed Canadian dollar (“C$”) price pursuant to a customer-specific contract. To mitigate the exposure to
changing margin on these transactions arising from fluctuations in the US$/C$ exchange rate, we enter into
US$ forward purchase contracts which economically lock in the US$/C$ exchange rate, and effectively locks
in the C$ cost of inventory to be sold at the fixed C$ amount.
The adoption of hedge accounting allows for better matching of US$ purchases with the associated
gains/losses on the forward contracts used to economically hedge these items. At each period-end, customer-
specific hedges are re-measured to their fair value. Under hedge accounting, the gains/losses on these hedges
Ten Peaks Coffee Company Inc.
12
are deferred on the statement of financial position until the inventory is sold, at which time the gains/losses
are recorded in cost of sales on the income statement.
OPERATING RESULTS
Processing Volumes and Revenue
We recorded another record year for processing volumes and revenues in 2017, with shipments growing by
5% over 2016. On a year-over-year basis, volumes grew in each of the first three quarters of 2017, then
declined marginally by 2% in Q4. The fourth quarter of 2016 was particularly strong, with volumes in that
quarter rising by 9% over the same period in 2015.
Growth in sales to our specialty customers led the way in both the fourth quarter and the full year. Volumes
to our specialty accounts increased by 4% in in Q4 2017 and by 9% for year, compared to the same periods of
2016. Fourth quarter shipments to our commercial accounts declined by 5% when compared to fourth quarter
of 2016, while full-year shipments to commercial accounts rose by 2%.
We also categorize our customers by the nature of their business: either coffee importers or roasters. Coffee
importers act like grocery stores to roasters, sourcing and importing green coffee from various origins and
carrying a selection of different origins and quality levels for roasters to choose from. Importers buy from us
in order to resell our coffees to roasters when and where they need it. Roasters are in the business of roasting
and packaging coffee for sale to consumers in their own coffee shops, or for home or office use. Roasters
either buy directly from SWDCC, or they buy from an importer. Roasters generally carry lower inventories, as
they tend to take delivery of green coffee shortly before roasting it. As such, shipments to roasters are more
stable from period to period.
Shipments to importers declined by 17% in Q4 2017, but rose by 11% for the full year. Shipments to roasters
increased by 6% in the fourth quarter and by 2% for the full year. In 2016, several months of rising green
coffee costs prompted importers to reduce their inventories and delay buying. In Q4 2016, the NY’C’ declined
quickly, prompting an influx of orders as importers rebuilt inventories. Importers continued to build
inventories through much of 2017, as the NY’C’ gradually declined.
We monitor and report our revenue in three categories. “Process revenue” represents the amount we charge
our customers for decaffeinating green coffee, and it generally increases as our processing volume increases.
“Green coffee cost recovery revenue”, or “green revenue”, is the amount we charge our customers for the
green coffee we purchase for decaffeination. “Distribution revenue” consists of shipping, handling and
warehousing charges billed to our customers. It typically rises with processing volumes and with the growth
of Seaforth’s business.
Our revenue by category for the indicated periods was as follows:
(In $000s)
(unaudited)
Process revenue
Green revenue
Distribution revenue
Total
3 months ended
December 31, 2017
5,652
13,800
1,210
$
3 months ended
December 31, 2016
5,712
15,661
1,076
$
12 months ended
December 31, 2017
21,781
57,177
4,797
$
12 months ended
December 31, 2016
20,671
57,038
4,218
20,662
$
22,449
$
83,755
$
81,927
$
$
Our fourth quarter sales totaled $20.7 million, a decrease $1.8 million, or 8%, compared to the same quarter
in 2016. Process revenue decreased by $0.1 million, or 1%, reflecting the decrease in sales to commercial
customers in the quarter, which was partially offset by hedging gains in the period. Green revenue decreased
Ten Peaks Coffee Company Inc.
13
by $1.9 million, or 12%, reflecting lower volumes and a drop in NY’C’ in the quarter. Distribution revenue rose
by $0.1 million, or 12%, due to growth in Seaforth’s business.
Annual sales totaled $83.8 million, an increase of $1.8 million, or 2%, over 2016. Process revenue increased
by 5%, which was in line with our higher volumes. Our revenue hedges contributed $0.9 million to process
revenue, offsetting the impact of a lower US$ in 2017. Green revenue remained flat, as higher sales volumes
were offset by a lower NY’C’. Distribution revenue rose by 14%, with the increase driven by higher volumes
and growth in Seaforth’s business.
Cost of Sales
Cost of sales includes the cost of green coffee purchased for our regular business, the plant labour and other
processing costs directly associated with our production facility, customer-specific hedges and commodity
hedges. Cost of sales incorporates an allocation of fixed overhead costs, which includes depreciation of our
production equipment and amortization of our proprietary process technology. In addition, cost of sales
includes the costs of operating Seaforth’s warehouses.
Cost of sales decreased during the fourth quarter by $1.8 million, or 9%, to $17.5 million. The decrease was
driven by lower green coffee costs owing to a lower NY’C’, as well as lower volumes in Q4 2017. For the full
year, cost of sales was $71.2 million, up by $1.3 million, or 2%, over 2016. The increase was driven by higher
volumes of shipments and a stronger US$ earlier in the year, mitigated by $0.9 million in commodity hedges
and in customer-specific hedges related to cost of sales.
Gross Profit
Gross profit decreased by 1% in the fourth quarter, with the decline in revenue slightly exceeding the increase
in cost of sales. Annual gross profit increased by $0.5 million, or 4%, over 2016 as our higher revenues and
shipments more than offset increases in our cost of sales.
Administration Expenses
Administration includes general management, inbound and outbound logistics, finance and accounting,
quality control and assurance, engineering, research and development, and other administrative or support
functions. Administration expenses include compensation expenses, travel and other personnel-related
expenses for administrative staff, directors’ fees, investor relations expenses, professional fees, depreciation
of office-related equipment, and amortization of the brand asset.
Administration expenses increased by $0.5 million, or 48%, to $1.5 million for the fourth quarter of 2017, and
by $0.6 million, or 13%, to $5.1 million for 2017. In both periods, the year-over-year increases reflect higher
staffing and staff-related expenses, including stock-based compensation expenses, as well as recruitment
expenses for positions filled late in the year.
Sales and Marketing Expenses
Sales and marketing expenses include compensation and other personnel-related expenses for sales and
marketing staff, consumer and trade advertising and promotion costs, as well as related travel expenses.
Sales and marketing expenses were up by $0.1 million, or 11%, to $0.7 million in Q4 2017, and by $0.2 million,
or 8%, to $2.6 million, for the full year. In 2017, we invested in increased marketing activities in support of
SWDCC’s strategic growth initiatives. These activities included an increased media presence, developing and
delivering digital consumer marketing content, and increased participation in international trade shows.
Ten Peaks Coffee Company Inc.
14
Occupancy Expenses
Occupancy expenses include the cost of renting offices for sales, marketing and administrative use.
Occupancy costs for the fourth quarter and full year were similar to the same periods in 2016.
Finance Expenses and Income
Finance income reflects the charges we bill to customers for financing coffee inventories and interest earned
on cash balances and short-term investments. Finance expenses include interest costs on bank debt, other
borrowings, the accretion expense on our asset retirement obligation and the interest expense on the
convertible debenture and construction loan.
Net finance expenses were $0.2 million and $0.8 million for the three months and year ended December 31,
2017, compared to net finance expense of $0.2 million and nil, respectively, in the same periods last year. In
2017, interest expense for the convertible debenture was $1.4 million, compared to $0.3 million in the prior
year. The convertible debenture was issued in Q4 2016, such that interest was incurred for only one quarter
that year. Interest on the convertible debenture is expensed at an effective interest rate of 12.15% (a rate
determined by management in accordance with IFRS), while the contractual interest paid on this loan is at a
rate of 6.85%. Interest expenses were partially offset by interest income of $0.6 million in 2017, compared to
$0.3 million in 2016.
Gains and Losses on Risk Management Activities
With the adoption of hedge accounting, gains or losses on designated hedges are included in either revenue
or cost of sales, held on the balance sheet or included in other comprehensive income for future transactions
(see ‘Hedge Accounting’, above). Thus, ‘Gain on risk management activities’ includes only those gains and
losses on derivative financial instruments or portions of such instruments that are not designated as hedging
instruments.
For the three months ended December 31, 2017, we recorded a gain of $0.4 million, while during same period
in 2016, the gain was $0.5 million. For the full year, we recorded a gain of $1.2 million compared to a gain of
$0.6 million for 2016.
Fair Value Adjustment on Embedded Option
Ten Peaks entered into a convertible debenture in October 2016. Under IFRS, this instrument is deemed to
contain an embedded option which must be revalued at each balance sheet date. The fair value of the
derivative liability was determined using the Black-Scholes Option Pricing Model. The variables and
assumptions used in computing the fair value are based on management’s best estimate at each balance sheet
date.
The revaluation on this embedded option resulted in a loss of $0.3 million and a gain of $0.6 million in the
fourth quarter and for the year, respectively (2016: nil and a loss of $nil).
Ten Peaks Coffee Company Inc.
15
Gains and Losses on Foreign Exchange
We realize gains and losses on transactions denominated in foreign currencies when they occur, and on assets
and liabilities denominated in foreign currencies when they are translated into Canadian dollars as at the
financial statement date.
During the fourth quarter, we recorded a loss on foreign exchange of $0.8 million, compared to a gain of $0.1
million for the same period in 2016. The rapid depreciation of the C$ late in the fourth quarter of 2017
contributed to the loss on foreign exchange. For the full year, we recorded no effective net foreign exchange
gain or loss, compared to a gain of $0.1 million in 2016.
Income Before Taxes and Net Income
In the fourth quarter, we recorded income before taxes of $0.1 million, compared to $1.9 million in the same
period of 2016. Current and deferred income taxes reduced net income in Q4 2017 by $0.5 million due to
reconciling items from prior periods, which were recorded in the fourth quarter. By comparison, current and
deferred income taxes reduced our net income by $0.6 million in Q4 2016. Deferred income taxes arise mainly
from temporary differences between the depreciation and amortization expenses deducted for accounting
purposes, and the capital cost allowances deducted for tax purposes, as well as changes in corporate income
tax rates as adjusted for substantively enacted higher future tax rates. The latter are offset by the tax benefit
of loss carry forwards recognized. Overall, we incurred a net loss of $0.4 million for the fourth quarter,
compared to net income of $1.3 million for the same period in 2016.
For the full year, we recorded pre-tax income of $5.8 million, up from $5.7 million in 2016. This was reduced
by income tax expenses of $1.6 million, unchanged from 2016. Overall, we earned net income of $4.2 million
for the full year, compared to $4.1 million in 2016.
Basic and Diluted Earnings per Share
Basic earnings per share is calculated by dividing net income by the basic weighted average number of shares
outstanding during the period. Similarly, diluted earnings per share is calculated by dividing net income
adjusted for the effects of all dilutive potential common shares, by the diluted weighted average number of
shares outstanding. For the purposes of the calculation, under IFRS we are required to assume that the
maximum number of shares issuable under the convertible debenture will be issued, even though the
debenture contains a net share settlement provision (which if exercised would result in far fewer shares being
issued).
In Q4 2017, the potential common shares issuable under the convertible debenture are anti-dilutive, and as
such they are excluded from the calculation of diluted earnings per share in the quarter. These potential
common shares are included in the calculation of the diluted earnings per share for 2017.
The calculations of basic and diluted earnings per share for the current and prior periods are shown in the
following table:
Ten Peaks Coffee Company Inc.
16
3 months ended
3 months ended
12 months ended
12 months ended
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Basic EPS:
Net income attributable to shareholders
Weighted average number of shares
Basic EPS
Diluted EPS:
Net income attributable to shareholders
Effect of diluted securities: RSUs
After tax effect of diluted securities if debenture converted:
Interest on convertible debenture
Loss (gain) on fair value adjustment of embedded option
Net income after effect of diluted securities
Weighted average number of shares - basic
Effect of diluted securities: RSUs
Effect of diluted securities: convertible debenture
Weighted average number of shares - diluted
Diluted EPS
Other Comprehensive Income
$
$
$
$
$
(380)
9,038,862
$
(0.04)
$
1,328
9,038,862
$
0.15
4,160
9,038,862
$
0.46
$
(380)
$
1,328
$
$
4,160
-
1,035
(604)
4,591
$
-
-
1,328
$
9,038,862
9,038,862
-
9,038,862
1,818,182
10,857,044
-
-
(380)
$
9,038,862
-
9,038,862
(0.04)
$
0.15
$
0.42
$
4,149
9,019,621
0.46
4,149
19
-
-
4,168
9,019,621
83,932
-
9,103,553
0.46
Gains or losses on our designated revenue hedges that will mature in future periods are recorded in other
comprehensive income, net of income tax expense. Other comprehensive income, net of tax for the fourth
quarter was a loss of $0.3 million, compared to a loss of $0.8 million in the same period of 2016. For the full
year, we reported accumulated gains in other comprehensive income of $1.1 million, compared to $0.4 million
in 2016. This amount fluctuates with the closing US$/C$ exchange rate each period-end.
Non-IFRS Measures
EBITDA
EBITDA is often used by publicly traded companies as a measure of cash from operations, as it excludes
financing costs, taxation and non-cash items. The reporting of EBITDA is intended to assist readers in the
performance of their own financial analysis. However, since this measure does not have a standardized
meaning prescribed by IFRS, it is unlikely to be comparable to similar measures presented by other entities.
We define EBITDA as net income before interest, depreciation, amortization, impairments, share-based
compensation, gains/losses on foreign exchange, gains/losses on disposal of capital equipment, fair value
adjustments on embedded options, and provision for income taxes. Our definition of EBITDA also excludes
unrealized gains and losses on the undesignated portion of foreign exchange forward contracts.
Ten Peaks Coffee Company Inc.
17
The reconciliation of net income to EBITDA is as follows:
(In $000s)
Income for the period
Income taxes
Income before tax
$
3 months ended
December 31, 2017
(380)
454
74
$
3 months ended
December 31, 2016
1,328
590
1,918
$
12 months ended
December 31, 2017
4,160
1,606
5,766
$
12 months ended
December 31, 2016
4,149
1,593
5,742
Finance income
Finance expenses
Depreciation & amortization
Unrealized gain on foreign exchange forward contracts
Fair value loss (gain) on embedded option
(Gain) loss of foreign exchange
Share-based compensation
(174)
368
583
(679)
305
751
106
(124)
316
596
(603)
(6)
(66)
(33)
(580)
1,414
2,172
(1,462)
(604)
6
211
EBITDA
$
1,334
$
1,998
$
6,923
$
(342)
346
2,053
(1,750)
(6)
(91)
(180)
5,772
In order to help readers better understand our financial results, the following table shows the reconciliation
of operating income to EBITDA:
(In $000s)
3 months ended
December 31, 2017
3 months ended
December 31, 2016
12 months ended
December 31, 2017
12 months ended
December 31, 2016
Operating income for the period
Add back:
Depreciation & amortization
Share-based compensation
Gain (loss) on risk management activities
Deduct:
Unrealized (gain) loss on foreign exchange forward contracts
EBITDA
$
$
958
$
1,525
$
4,812
$
583
106
366
(679)
1,334
596
(33)
519
(609)
1,998
2,172
211
1,190
(1,462)
6,923
5,017
2,053
(180)
638
(1,756)
5,772
EBITDA for the three months ended December 31, 2017 was $1.3 million, down by 33% compared to Q4 2016.
The year-over-year decrease was related to somewhat lower volumes, increased expenses and reduced gains
on risk management activities in Q4 2017. For the full year, EBITDA was $6.9 million, up by 20% from $5.8
million for 2016. Volume increases and improved performance on our risk management activities contributed
to the rise in EBITDA.
Quarterly Information / Seasonality
The following table summarizes results for each of the eight most recently completed fiscal quarters. For
comparative purposes, we have also provided the averages for the previous 8-quarter period:
Ten Peaks Coffee Company Inc.
18
In $000s except for per share amounts
8 Quarter
Average
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Q4
2016
Q3
2016
Q2
2016
Q1
2016
20,710
20,662
21,955
21,915
19,223
22,448
20,752
18,074
20,653
3,080
1,229
1,587
1,039
3,178
958
1,334
(380)
3,014
1,117
1,678
1,385
3,364
1,470
2,235
1,720
3,035
1,267
1,677
1,435
3,216
1,526
1,998
1,328
3,219
1,330
1,515
879
2,601
999
1,000
758
3,014
1,162
1,259
1,184
Sales
Gross Profit
Operating income
EBITDA1
Net income (loss)
Per Share2
Net income (loss) - basic
Net income (loss) - diluted
0.12
0.10
(0.04)
(0.04)
0.15
0.15
0.19
0.17
0.16
0.08
0.15
0.15
0.10
0.10
0.08
0.08
0.13
0.13
1 EBITDA is defined in the section on ‘Non-IFRS Financial Measures’ along with details of its calculation.
2 Per-share calculations are based on the weighted average number of shares outstanding during the period.
There is an element of seasonality in our business, in that the second half of the year tends to have higher
volumes and revenues.
Liquidity and Capital Resources
Cash Flow from Operations
For the 12 months ended December 31, 2017, we generated $1.7 million in net cash from operating activities,
compared to cash generation of $9.2 million in 2016. Income taxes paid reduced cash from operating activities
in the period by $0.9 million (2016: Nil). In addition, investments in inventory used $3.1 million in cash in
2017, compared to a generated cash inflow of $7.4 million in 2016. In 2017 and 2016, there was an increase
in accounts receivable which resulted in a decrease in our cash inflows of $0.4 million and $4.5 million,
respectively.
Investing Activities
Cash outflows relating to capital expenditures for 2017 were $8.1 million, compared to $5.3 million in 2016.
Capital costs for both years included investments in support of our capacity expansion.
In 2016, $12.7 million of cash outflows were related to the purchase of short-term investments, while in 2017,
proceeds from short-term investments were $5.6 million.
Financing Activities
During the 12 months ended December 31, 2017, we paid $2.3 million in dividends to shareholders. This is
unchanged from 2016.
Credit Facilities and Liquidity
Our current credit facilities include a $14.5 million revolving operating line of credit and a $1.5 million
revolving swing line, each of which bears an interest rate of prime plus 0.75%. Any US$-denominated debt
under the revolving operating line of credit or swing line can be financed using LIBOR loans at the LIBOR rate
plus 2.35% per annum.
Ten Peaks Coffee Company Inc.
19
In addition, we have a US$8.0 million foreign exchange and commodity futures contract facility. This allows us
to enter into spot, forward and other foreign exchange rate transactions with our bank with a maximum term
of 60 months.
Our facilities are collateralized by a general security agreement over all of the assets of Ten Peaks and a
floating hypothecation agreement over cash balances.
We have certain bank covenants which relate to the maintenance of specified financial ratios and we were in
compliance with all covenants as at December 31, 2017.
Inventory
Our inventory increased 27% by value and 54% by volume between December 31, 2016 and December 31,
2017. The increase reflects growth in both finished goods and raw materials inventory.
With the adoption of hedge accounting, gains/losses on derivative instruments for coffee to be sold in future
periods are now recorded in inventory. The hedge accounting component of inventory as at December 31,
2017 was a minor gain, compared to a loss of $0.6 million in 2016.
Accounts Receivable
Our accounts receivable increased by $0.4 million, or 4%, between December 31, 2016 and December 31,
2017. This compares to an increase of $4.5 million, or 63%, between December 31, 2015 and December 31,
2016. The increases reflect a trend in the coffee industry, in which large coffee roasters have demanded
longer accounts payable terms from their suppliers. As a result, we extended payment terms to a number of
our larger customers in 2016.
Contractual Obligations
The following table sets forth our contractual obligations and commitments as at December 31, 2017:
(In $000s)
Long-term debt (1)
Financing leases (2)
Operating leases (3)
Purchase obligations (4)
Total Less than 1 year 1-3 Years 4-5 Years Over 5 Years
$
15,845
$
28
$
113
$
113
$
15,591
5,696
3,103
32,984
786
1,691
32,875
2,210
1,412
109
2,210
-
-
491
-
-
Total contractual obligations
$
57,628
$
35,380
$
3,844
$
2,323
$
16,082
1 Long-term debt represents the principal amounts of the convertible debenture and construction loan.
2 Minimum obligations for our financing leases.
3 Minimum obligations for our operating leases.
4 Represents outstanding coffee and natural gas purchase commitments.
SWDCC leases a facility which houses its decaffeination plant and offices. The current lease term expires in
2018. SWDCC has already exercised its option to renew the lease on the decaffeination facility for one
additional five-year term until 2023.
Seaforth leases warehouses in two locations for its primary operations. These leases expire in June 2019 and
November 2019.
Ten Peaks Coffee Company Inc.
20
Swiss Water Decaffeinated Coffee Company USA, Inc. holds a lease for its Seattle, WA sales office, which
expires on March 31, 2020.
In 2016, SWDCC signed a lease agreement for a build-to-suit production facility. The lease has an initial term
of five years and can be renewed at SWDCC’s option in five-year increments up to a total of 30 years. The
lease will commence on the earlier of the date of opening of the SWDCC business in any part of the premises,
and the date of expiry of the fixturing period, which is estimated to be in May 2018. Under the lease, SWDCC
has multiple options to buy-out the lease starting at the end of the second five-year term. The buy-out value
will be equal to the fair market value of the property as determined by an appraisal process, subject to
specified maximum and minimum values.
The lease also includes a construction management agreement for the construction of a highly specialized
building to house the production plant. The landlord will finance a portion of the building, with loan payments
commencing on the earlier of substantial completion of construction and January 1, 2019. The loan is
repayable in equal monthly installments over 15 years and can be prepaid without penalty at any time. As at
the year ended December 31, 2017, Ten Peaks accrued a “Construction loan” to cover amounts due on work
completed to date, including accrued interest, in the amount of $0.8 million (2016: nil).
As at December 31, 2017, the Company’s capital commitments for the new facility located in Delta, BC were
$16.0 million.
Off-Balance Sheet Arrangements
Ten Peaks has no off-balance sheet arrangements.
Related Party Transactions
We provide toll decaffeination services and/or sell finished goods to, and purchase raw material inventory
from, a company that is related to Ten Peaks’ Director, Roland Veit.
The following table summarize related party sales and purchases during the periods:
(In $000s)
Sales
Purchases of raw materials
3 months ended
12 months ended
3 months ended
December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
$
764
$
4,509
$
$
12 months ended
390
1,266
303
6,934
33
1,903
$
$
$
$
All transactions were in the normal course of operations and were measured at the fair value of the
consideration received or receivable, which was established and agreed to by the related parties. As at
December 31, 2017, our accounts receivable balance with this company was nil (December 31, 2016: $0.1
million) while our accounts payable balance with this company was nil (December 31, 2016: $0.1 million).
On March 16, 2017, a subsidiary of Ten Peaks and a member of Key Management (the borrower) entered into
a promissory note in the amount of US$0.1 million. For as long as the borrower remains an employee, the
obligation to repay the principal is forgiven against current and future awards under the RSU Plan, by
forfeiture of awards. The loan is interest-free other than in the event of default, in which case the promissory
note shall bear simple interest at a rate of 10% per annum.
Ten Peaks Coffee Company Inc.
21
OUTLOOK
Overall, management expects double-digit volume increases in 2018. Demand for our premium quality
decaffeinated coffees is rising, due to a number of factors. First, the market for decaffeinated coffee is
expanding, with decaf being the fastest growing segment of the US coffee market1. Total decaffeinated coffee
sales are up year-over-year, with specialty decaffeinated coffee sales being particularly strong, especially in
out-of-home markets.
We believe this is due, in part, to the premiumization of the coffee market, as well as growing awareness and
consumption of premium decaffeinated coffee. In fact, the largest consumers of decaffeinated coffee are 18
to 24 year olds2, who want to drink great-tasting coffee all day long, without worrying about the potential side
effects of caffeine.
Additionally, younger consumers are more conscious of artificial ingredients and chemicals in the production
of their food and drink. As a result, we’ve seen increased demand for our methylene chloride free, sustainable
organically certified and conventional SWISS WATER® Process coffees, as more food companies now employ
our branded coffees to help them respond to this growing consumer demand.
More importantly, various media sources3 have recently underscored the health and environmental hazards
associated with methylene chloride (the primary chemical used by our competitors to decaffeinate coffee).
This has drawn attention to the real and perceived harmful effects of using chemicals to decaffeinate coffee.
At present, our marketing team is leveraging this increased consumer awareness, and highlighting the
availability of our premium quality, 100% chemical free coffees. We expect this rise in consumer awareness
to stimulate market pull for our coffees over the coming months and year ahead, and we will continue to
proactively employ positive messaging to accentuate our amazing coffees without caffeine.
In addition to consumer-driven trends, changes in the global decaffeination market are enhancing our growth
prospects. An older decaffeination plant in Europe closed in 2017, reducing the number of available chemical
free, third-party decaffeinators. We have already won some additional business from coffee companies
affected by this shutdown, and we expect additional growth in the future.
As we have noted previously, we are building a state-of-the-art production facility which will enable us to
meet the anticipated long-term growth in demand for our decaffeinated coffees. Construction of the new
facility, which is located in Delta, BC, began in May 2017 and is expected to be completed in 2018. Initially,
this facility will house one new production line, although the site is large enough for expansion well into the
future. The new production line is expected to be completed and commissioned in Q2 2019. The additional
capacity that was added in Q1 2016 at our current Burnaby, BC facility, together with additional de-
1 National Coffee Association 2017 Coffee Drinking Trends
2 National Coffee Association 2017 Coffee Drinking Trends
3 New York Times has published (https://www.nytimes.com/2017/10/21/us/epa-toxic-chemicals.html) and podcasted
https://www.nytimes.com/podcasts/the-daily?_r=0 a piece on EPA regulations, and they are highlighting methylene
chloride as a key chemical that isn’t, but should be, regulated, because it’s a hazard to people’s health.
Earlier this year, New Scientist published a report (https://www.newscientist.com/article/2138753-ozone-layer-
recovery-will-be-delayed-by-chemical-leaks/) about how methylene chloride is slowing the regeneration of the ozone
layer. This report was picked up by other media companies as well.
Ten Peaks Coffee Company Inc.
22
bottlenecking initiatives currently underway, is expected to be sufficient to fulfill expected business growth
until the new line is operational.
In short, our unbending commitment to 100% chemical free processing, and to preserving the unique quality
of fine coffees through the decaffeination process, are already well recognized, valued and respected by the
coffee trade and our customers, while attracting new supporters all the time. Accordingly, we believe our
reputation for excellence will continue to drive incremental growth in SWDCC’s decaffeination business in
2018 and beyond.
During the coming year, our primary focus will be to position SWDCC for steady future growth, which includes
securing new business to fill our current capacity and leveraging the production capacity that will be coming
online in 2019. In the second quarter of this year, we expect to open a European sales office, to better serve
customers in the largest decaffeinated coffee market in the world. In addition, we are expanding our ability
to target specific customer groups by selectively adding to our sales and marketing team. These initiatives will
increase our expenses somewhat, and are expected to generate increased sales orders in the second half of
this year. Overall, we expect our volume growth to exceed that achieved in 2017.
RISKS AND UNCERTAINTIES
Ten Peaks’ ability to pay dividends is dependent upon the earnings and cash flow generated from SWDCC’s
operations, as well as our current and planned future investments in capital equipment. Cash from operations
may fluctuate with the performance of the business, which can be susceptible to a number of risks. These
risks may include, but are not limited to, foreign exchange fluctuations, labour relations, coffee prices
(notwithstanding hedging programs, as exact hedging correlation is not attainable), the availability of coffee,
competition from existing chemical and other natural or chemical free coffee decaffeinators, competition
from new entrants with alternate processing methods or agricultural technologies, environmental and
regulatory risks, terms of credit agreements, commodity futures losses, ability to maintain organic
certification, adequacy of insurance, risks related to information technology, dependence on key personnel,
product liability, uncollectable debts, and general economic downturns. The future effect of these risks and
uncertainties cannot be quantified or predicted. In addition, SWDCC leases the building that houses its
decaffeination lines. The option to renew this lease for an additional five-year term has been exercised, with
the new lease term expiring in 2023. The lease also provides for an additional five-year renewal term (to
2028), subject to the express approval of the landlord. Any plans to relocate the production equipment would
result in significant capital expenditures and the payment of the asset retirement obligation (currently
recorded as a long-term liability on our financial statements).
ENVIRONMENTAL RISKS
The Canadian Securities Administrators (“CSA”) identifies five categories of risks: litigation, physical,
regulatory, reputational and business model, for which issuers are asked to identify material risks and if they
are reasonably likely to affect financial statements in the future.
Environmental matters relate to a broad range of issues, including those related to air, water, waste and land.
As a small company with limited human and financial resources, we focus on only those risks that we believe
could have a materially adverse impact on our operations and/or financial results within our planning horizon,
rather than seeking to identify all possible future risks. Risk assessment involves judgment, uncertainty and
estimates, which can provide only reasonable, rather than absolute, assurance that all the applicable risks and
their expected impacts on Ten Peaks are considered.
Ten Peaks Coffee Company Inc.
23
The most pervasive environmental risks that we face relate to the fact that we buy, sell and store an
agricultural commodity. The supply of green coffee can be impacted by numerous environmental conditions
such as frosts, drought, plant disease and insect damage, which can impact the quality and size of the coffee
crop. In addition, certain environmental conditions, such as excessive rains, can hamper crop harvesting. A
shortage of coffee can impact our processing volumes and revenues. We seek to mitigate the risks of coffee
shortages by maintaining an extensive list of coffee suppliers; by dealing with importers who themselves have
multiple suppliers rather than contracting directly with farmers or coffee co-operative organizations; by
maintaining up to three months of coffee inventories at any time; by developing and modifying coffee blends
that take into consideration coffee availability and cost from various coffee origins; and, by entering into
purchase contracts with suppliers for future delivery of coffee (rather than relying on ‘spot’ deliveries). In
addition, the coffee commodity price is closely tied to available supplies of coffee globally. We mitigate the
commodity price risk through our commodity price risk management policy.
Our leased facilities are located in the Metro Vancouver area of British Columbia. Vancouver is considered to
be at high risk of a major earthquake. Any significant earthquake in the vicinity could have a material impact
on our operations for a period of time, depending on the extent of the damage to the facilities, our equipment,
and the transportation infrastructure in the region. In short, a major earthquake could have a material
adverse impact on our revenues. We carry property and business interruption insurance, including
earthquake coverage, which would help offset the cash flow impact of such an event. In addition, we keep
some finished goods inventory in third-party coffee warehouses in other regions, and we would be able to sell
these finished goods even if our production and distribution of coffee were temporarily interrupted by an
earthquake. Nevertheless, the financial and operational impact of a major earthquake cannot be reasonably
predicted.
We are subject to a number of environmental laws and regulations related to our facilities in British Columbia,
which mandate, among other things, the maintenance of air and water quality. We routinely monitor our
compliance with these standards. Based on our compliance record and our maintenance programs, as well
as currently enacted laws and regulations, we do not believe that these regulatory risks are material.
We expect to incur increased costs for energy and water consumption over time. If we cannot pass on such
increased costs to our customers, our profitability may be adversely impacted.
We believe that all known environmental obligations and provisions have been appropriately reflected in our
financial statements. We have not identified any material litigation, reputational, or business model risks
related to environmental matters. Nevertheless, we may be subject to potential unknown or unforeseeable
environmental impacts arising from, or related to, our business. Costs associated with such issues could be
material.
We believe that the trend toward increased environmental awareness creates an opportunity for us to grow
our business, as consumers and coffee industry participants place greater emphasis on reducing their impact
on the environment. As one of the few chemical free decaffeinators in the world, we believe that an increased
focus on environmental matters will allow us to win more business away from decaffeinators that use
chemicals such as methylene chloride to decaffeinate coffee.
Ten Peaks Coffee Company Inc.
24
FINANCIAL INSTRUMENTS
We use financial instruments to mitigate economic risks associated with our business. The three types of
hedges we enter into, and the hedging instruments used, are discussed in more detail under ‘Hedge
Accounting’ above.
As of January 1, 2016, we classify our financial assets and financial liabilities in the following measurement
categories (i) those to be measured subsequently at fair value (either through other comprehensive income
or through profit or loss); and (ii) those to be measured at amortized cost. We have implemented the
following classifications for financial instruments other than derivatives:
• Cash and cash equivalents and short-term investments are classified as assets at fair value and any
period change in fair value is recorded through interest income in the consolidated statement of
income, as applicable.
• Accounts receivable and other receivables are classified as assets at amortized cost using the effective
interest rate method. Interest income is recorded in the consolidated statement of income, as
applicable.
• Accounts payable, credit facilities, the debt portion of the convertible debenture and other liabilities
are classified as other financial liabilities and are measured at amortized cost using the effective
interest rate method. Interest expense is recorded in the consolidated statement of income, as
applicable.
Commodity Price Risk
Commodity price risk is the risk that the fair value of inventory will fluctuate as a result of changes in
commodity prices. We utilize futures contracts to manage our commodity price exposure. We buy and sell
futures contracts for coffee on the IntercontinentalExchange in order to offset our inventory position and
future purchase commitments, and fix the input cost of green coffee. As at December 31, 2017 we had futures
contracts to buy 2.2 million lbs of green coffee with a notional value of US$2.7 million, and contracts to sell
4.5 million lbs of green coffee with a notional value of US$5.5 million (December 31, 2016 – buy 2.0 million
lbs with a notional value of US$ 2.7 million, and sell 6.4 million lbs with a notional value of US$8.8 million),
with the furthest contract maturing in December 2018. The net notional value of the contracts outstanding
at December 31, 2017 was approximately US$2.8 million (2016: US$6.1 million).
Foreign Currency Risk
We realize a significant portion of our sales in US dollars, and purchase green coffee in US$ which is, in some
cases, sold to customers in Canadian dollars. We enter into forward exchange contracts to manage our
exposure to currency rate fluctuations and to minimize the effect of exchange rate fluctuations on business
decisions. These contracts relate to our future net cash flows in US$ from sales. In addition, we enter into
forward contracts to purchase US$ for coffee that we resell in Canadian dollars.
At December 31, 2017, we had forward currency contracts to buy US$7.2 million and sell US$46.2 million
(December 31, 2016: buy US$9.5 million and sell US$42.7 million) from January 2018 through to December
2021 at various Canadian exchange rates ranging from $1.2147 to $1.3837. The net notional value of the
contracts outstanding at December 31, 2017 was approximately US$39.0 million (2016: US$33.2 million).
Ten Peaks Coffee Company Inc.
25
CRITICAL ACCOUNTING ESTIMATES
Measurement Uncertainty
The preparation of financial statements in accordance with IFRS requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Estimates are used when accounting for asset retirement obligations, share-based compensation and
convertible debt with embedded derivatives and income taxes. Actual results may be different from these
estimates.
An accounting estimate is deemed critical only if it requires us to make assumptions about matters that are
highly uncertain at the time the accounting estimate is made, and different estimates that we could have used
in the current period would have a material impact on our financial condition or results of operations.
Asset Retirement Obligation
The undiscounted future value of the asset retirement obligation (“ARO”) in respect of our leased
decaffeination facility is estimated at $0.9 million. This estimate assumes that we relocate from the current
location upon expiry of the third lease renewal term in 2023. Further, the estimate reflects the expected costs
of vacating the leased facility in 2023, having regard for the contract language in the lease, the expected useful
lives of our plant and equipment, and the expected costs that would be paid to a third party to remove
equipment.
Convertible Debenture with Embedded Derivatives
On October 11, 2016, the Company issued an unsecured subordinated convertible debenture for gross
proceeds of $15,000,000. The convertible debenture bears interest at a rate of 6.85% per annum to be paid
quarterly in arrears and is due on October 11, 2023. The convertible debenture is convertible into common
shares of the Company at a conversion price of $8.25 per common share. Under the terms of the agreement,
Ten Peaks has the option to pay interest-in-kind for the first two years. If elected, this option will increase the
principal sum by the interest owing. As of December 31, 2017, this option was not elected.
The convertible debenture also includes a Net Share Settlement feature that allows Ten Peaks, upon
conversion, to elect to pay cash equal to the face value of the convertible debenture and to issue common
shares equal to the excess value of the underlying equity above the face value of the convertible debenture.
If the Net Share Settlement option is elected, it will result in fewer common shares being issued. In 2016, the
Company paid financing costs of $0.5 million in respect of issuing the convertible debenture.
Under IFRS, we are required to estimate the interest rate on a similar instrument of comparable credit status
and providing for substantially the same cash flows, on the same terms, but without the equity conversion
option, in order to estimate the fair value of the liability portion of the convertible debenture upon initial
recognition. We have estimated the effective interest rate to be 12.15%, such that the fair value of the liability
component of the convertible debenture was initially measured at $11.2 million. During 2017, the company
estimated and recorded $1.4 million in interest expense (2016: $0.3 million) and paid $1.0 million (2016: $0.3
million).
We are also required to estimate the fair value of the embedded derivative liability related to the convertible
debenture at initial recognition, and at the end of each reporting period. We use the residual value method
to allocate the fair value of the convertible debenture between the liability component and the derivative
liability. Under this method, the value of the derivative liability was determined to be $3.3 million at inception.
The fair value of the derivative liability was determined using the Black-Scholes Option Pricing Model. The
Ten Peaks Coffee Company Inc.
26
variables and assumptions used in computing the fair value are based on management’s best estimate. The
value varies with different variables of certain subjective assumptions.
Inputs into the Black-Scholes Option Pricing Model to determine the fair value of the conversion option:
Share price
Exercise price
Option life
Volatility
Risk-free interest rate
Dividend yield
Income Taxes
December 31, 2017 December 31, 2016
$ 6.70
$ 8.25
5.79 years
40%
1.90%
3.73%
$ 7.37
$ 8.25
7 years
39%
0.92%
3.39%
We compute income taxes using the liability method, under which deferred income taxes are provided for the
temporary differences between the financial reporting bases and the tax bases of our assets and liabilities.
Deferred tax assets and liabilities are measured using the enacted and substantively enacted income tax rates
that are expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled.
Deferred tax assets also reflect estimates of the recoverability of non-capital loss carry forwards. We have
recognized the benefit of loss carry forwards to the extent that it is probable that taxable income will be
available in the future against which our non-capital loss carry forwards can be utilized. As at December 31,
2017, Ten Peaks and its subsidiaries had combined non-capital tax loss carry forwards totaling $0.6 million,
which can be used to reduce income taxes payable in future years.
The financial reporting bases of our assets reflect the useful lives of depreciable assets, as well as the carrying
amounts of assets with indefinite useful lives. Accordingly, management estimates that impact the carrying
amounts of depreciable and non-depreciable assets also have an impact on deferred income tax assets and
liabilities.
CHANGES IN ACCOUNTING STANDARDS
The following standards became effective for annual periods beginning on or after January 1, 2017, with
earlier application permitted.
•
•
•
IAS 7 Statement of Cash Flows: requires additional disclosures about changes in liabilities
arising from financing activities, including both changes arising from cash flows and non-cash
changes.
IAS 12 Income Taxes: implements a 'comprehensive balance sheet method' of accounting for
income taxes which recognizes both the current tax consequences of transactions and events
and the future tax consequences of the future recovery or settlement of the carrying amount
of an entity's assets and liabilities. IAS 12 clarifies the requirements for recognizing deferred
tax assets on unrealized loss, deferred tax where an asset is measured at fair value below the
assets tax base and certain other aspects of accounting for deferred tax assets.
Investment Entities: (Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12:
Disclosures of Interest in other entities, and IAS 28: Investments in Associates and joint
Ten Peaks Coffee Company Inc.
27
Ventures): to address issues that have arisen in the context of applying the consolidation
exception for investment entities.
•
IFRSs (Amendment): The Annual Improvements to IFRSs 2012-2016.
We have adopted these amended standards and interpretations, and we assessed that there was no impact
on our consolidated financial statements.
The following new standards, amendments to accounting standards and interpretations have been issued and
will be effective in future periods, with earlier adoption permitted:
•
•
•
•
•
IFRS 9 Financial Instruments: The Company has early adopted all of the requirements of IFRS
9 as of January 1, 2016.
IFRS 2: Share-based payment: contains amendments to classification and measurement of
share-based payment transactions. It is effective for annual periods beginning on or after
January 1, 2018.
IFRS 15: Revenue from Contracts with Customers: replaces IAS 11, IAS 18, IFRIC 13, IFRIC 15,
IFRIC 18 and SIC-31. IFRS 15 establishes principles to address the nature, amount, timing and
uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The
core principle of IFRS 15 is that revenue related to the transfer of promised goods or services
should be recognized when the control of the goods or services passes to customers. The
Company has evaluated the impact of applying IFRS 15, analyzing its toll revenue, regular
decaffeinated coffee sales and coffee handling agreements. The Company concluded there
is no material change in the timing of revenue recognized under the new standard as the point
of transfer of risk and reward for goods and services and transfer of control occurs at the same
time. In addition, IFRS 15 requires entities to apportion revenue earned from contracts to
distinct performance obligations on a relative standalone selling price basis. The impact of
this change on the amount of revenue recognized in a year is insignificant. IFRS 15 contains
additional presentation and disclosure requirements which are more detailed than the
current standards. Upon the adoption of IFRS 15, the Company will provide disclosures for
each of the Company's revenue streams to supplement the revenue data that is currently
presented in the segmented information disclosure. It is effective for annual periods
beginning on or after January 1, 2018.
IFRS 16: Leases: requires an application of control model to the identification of leases,
distinguishing between a lease and a service contract. Also, IFRS 16 introduces significant
changes to the accounting by lessees, introducing a single, on-balance sheet accounting
model that is similar to the current finance lease accounting, with limited exceptions for short-
term leases or leases of low value assets. A leasee can choose to apply IFRS 16 using either a
full retrospective or a modified retrospective approach. The Company plans to apply IFRS 16
at the date it becomes effective but has not yet selected a transition approach. It is effective
for annual periods beginning on or after January 1, 2019.
IFRIC 22: Foreign Currency Transactions and Advance Consideration: clarifies the appropriate
exchange rate to use on initial recognition of an asset, expense or income when advance
consideration is paid or received in a foreign currency. Management expects this IFRIC may
change the exchange rate used to translate advances received for revenue in a foreign
currency. The impact on the initial measurement of revenue would depend on the
Ten Peaks Coffee Company Inc.
28
movements in exchange rates. It is effective for annual periods beginning on or after January
1, 2018.
•
•
IAS 40 Investment Property: contains amendments to transfers of investment property. It is
effective for annual periods beginning on or after January 1, 2018.
IFRIC 23 Uncertainty over Income Tax Treatments: clarifies the application of recognition and
measurement requirements in IAS 12, Income taxes, where there is uncertainty over income
taxes. It is effective for annual periods beginning on or after January 1, 2019.
Other than IFRS 9 Financial Instruments (2014), which we early adopted on January 1, 2016, we have not yet
adopted any of these new and amended standards or interpretations, and we are currently assessing the
impact of adoption.
INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of Ten Peaks are responsible for
establishing and maintaining adequate internal control over financial reporting (“ICFR”) to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with IFRS. Under the supervision and with the participation of management,
including the CEO and CFO, we conducted an evaluation of the design and effectiveness of our ICFR as of
December 31, 2017, based on the updated framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO 2013”). Based on this assessment, the CEO and the CFO concluded that,
as of December 31, 2017, Ten Peaks’ ICFR were effective.
The CEO and the CFO are also responsible for establishing and maintaining adequate disclosure controls and
procedures. Disclosure controls and procedures are controls and other procedures designed to provide
reasonable assurance that information required to be disclosed in documents filed or submitted under
securities legislation is recorded, processed, summarized and reported within the time periods specified in
securities legislation and includes controls and procedures designed to ensure that information required to
be disclosed in documents filed or submitted under securities legislation is accumulated and communicated
to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
The CEO and the CFO evaluated, or caused to be evaluated under their supervision, the effectiveness of our
disclosure controls and procedures and based on this evaluation, the CEO and the CFO concluded that, as of
December 31, 2017, Ten Peaks’ disclosure controls and procedures were effective.
There were no changes in our ICFR that occurred during the period beginning on October 1, 2017 and ended
on December 31, 2017 have materially affected, or are reasonably likely to materially affect, Ten Peaks’ ICFR.
SUBSEQUENT EVENTS
On January 15, 2018, Ten Peaks paid an eligible dividend in the amount of $0.6 million ($0.0625 per share) to
shareholders of record on December 29, 2017.
On February 21, 2018 the Company issued 22,348 of shares pursuant to Restricted Share Unit Plan.
On March 19, 2018, Ten Peaks declared an eligible dividend of $0.0625 per share, to be paid on April 16, 2018
to shareholders of record on March 29, 2018.
CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2017
March 20, 2018
Independent Auditor’s Report
To the Shareholders of
Ten Peaks Coffee Company Inc.
We have audited the accompanying consolidated financial statements of Ten Peaks Coffee Company Inc.
and its subsidiaries, which comprise the consolidated statement of financial position as at December 31,
2017 and the consolidated statement of income, consolidated statement of comprehensive income,
consolidated statement of changes in equity, and consolidated statement of cash flows for the year then
ended, and the related notes, which comprise a summary of significant accounting policies and other
explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated 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 consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a
basis for our audit opinion.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers Place, 250 Howe Street, Suite 1400, Vancouver, British Columbia, Canada V6C 3S7
T: +1 604 806 7000, F: +1 604 806 7806
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Ten Peaks Coffee Company Inc. and its subsidiaries as at December 31, 2017 and their financial
performance and their cash flows for the year then ended in accordance with International Financial
Reporting Standards.
Other matter
The financial statements of the Company for the year ended December 31, 2016, were audited by another
auditor who expressed an unmodified opinion on those statements on April 21, 2017.
(Signed) “PricewaterhouseCoopers LLP”
Chartered Professional Accountants
Note
December 31, 2017
December 31, 2016
TEN PEAKS COFFEE COMPANY INC.
Consolidated Statements of Financial Position as at
(Tabular amounts in thousands of Canadian dollars)
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Inventories
Short-term investments
Prepaid expenses and other receivables
Derivative assets and hedged firm commitments
Total current assets
Non-current assets
Receivables
Plant and equipment
Intangible assets
Deferred tax assets
Derivative assets
Total non-current assets
Total assets
Liabilities and shareholders' equity
Current liabilities
Accounts payable
Accrued liabilities
Income tax payable
Other liabilities
Dividend payable
Derivative liabilities
Total current liabilities
Non-current liabilities
Convertible debenture
Other liabilities
Asset retirement obligation
Deferred tax liabilities
Construction loan
Derivative liabilities
Total non-current liabilities
Total liabilities
Shareholders' equity
Share capital
Retained earnings
Accumulated other comprehensive income
Share-based compensation reserve
Total equity
$
$
$
25
7
6
8
9, 23
7
10
11
12
9, 23
12
15
20
9, 23
14
15
16
12
24
9,14,23
17
9,486
12,127
14,671
7,067
1,031
1,244
45,626
230
23,341
1,427
1,484
740
27,222
72,848
2,639
1,844
105
591
565
229
5,973
11,658
45
802
3,426
844
2,722
19,497
25,470
43,496
2,257
1,485
140
47,378
72,848
$
$
$
$
12,497
11,707
11,574
12,700
524
95
49,097
-
16,278
1,687
837
-
18,802
67,899
2,392
1,166
405
488
565
815
5,831
11,283
81
797
1,676
-
3,896
17,733
23,564
43,496
357
419
63
44,335
67,899
Total liabilities and shareholders' equity
$
Commitments (Note 24)
Subsequent Events (Note 27)
Approved on behalf of the Board
(signed) "David Rowntree" , Director (signed) "Frank Dennis" , Director
– The accompanying notes form an integral part of these consolidated financial statements. –
Page 3
TEN PEAKS COFFEE COMPANY INC.
Consolidated Statements of Income
(Tabular amounts in thousands of Canadian dollars except per share amounts)
for the
Revenue
Cost of sales
Gross profit
Operating expenses
Administration expenses
Sales and marketing expenses
Occupancy expenses
Total operating expenses
Operating income
Non-operating or other
Gain on risk management activities
Fair value gain on embedded option
Finance income
Finance expense
(Loss) gain on foreign exchange
Total non-operating or other
Income before tax
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Note
12 months ended
December 31, 2017
12 months ended
December 31, 2016
$
$
83,755
(71,165)
12,590
(5,077)
(2,586)
(115)
(7,778)
4,812
1,190
604
580
(1,414)
(6)
954
5,766
(1,606)
4,160
0.46
0.42
$
$
$
23
14
12
22
22
$
$
$
81,927
(69,877)
12,050
(4,499)
(2,398)
(136)
(7,033)
5,017
632
6
342
(346)
91
725
5,742
(1,593)
4,149
0.46
0.46
– The accompanying notes form an integral part of these consolidated financial statements. –
Page 4
TEN PEAKS COFFEE COMPANY INC.
Consolidated Statements of Comprehensive Income and Consolidated Statements of Changes in Equity
(Tabular amounts in thousands of Canadian dollars)
Consolidated Statements of Comprehensive Income
for the
Net income
Other comprehensive income, net of tax
Items that may be subsequently reclassified to income:
Unrealized gains
Derivatives designated as cash flow hedges - currency risk hedges on US$ future revenue
Items reclassified to income:
Realized gains
Derivatives designated as cash flow hedges - currency risk hedges on US$ future revenue, recognized in revenue
Other comprehensive income related to hedging activities
Tax on other comprehensive income relating to hedging activities
Cumulative translation adjustment
Other comprehensive income, net of tax
Net income and other comprehensive income
Consolidated Statements of Changes in Equity
12 months ended
December 31, 2017
12 months ended
December 31, 2016
$
4,160
$
4,149
2,333
(931)
1,402
(384)
48
1,066
$
5,226
$
566
-
566
(147)
-
419
4,568
Share capital
Note
Shares
Amount
Share-based
compensation
reserve
Accumulated
other
comprehensive
income
Retained earnings
Total equity
Balance at December 31, 2015
9,011,566
$
43,448
$
72
$
-
$
(1,536)
$
Shares issued for restricted share units
Share-based compensation
Dividends
Net income and other comprehensive income
Balance at December 31, 2016
Share-based compensation
Dividends
Net income and other comprehensive income
20
20
27,296
-
-
-
48
-
-
-
(48)
39
-
-
9,038,862
$
43,496
$
63
$
-
-
-
-
-
-
77
-
-
-
-
-
419
419
-
-
1,066
-
-
(2,256)
4,149
$
357
$
-
(2,260)
4,160
Balance at December 31, 2017
9,038,862
$
43,496
$
140
$
1,485
$
2,257
$
41,984
-
-
39
(2,256)
4,568
44,335
77
(2,260)
5,226
47,378
– The accompanying notes form an integral part of these consolidated financial statements. –
Page 5
TEN PEAKS COFFEE COMPANY INC.
Consolidated Statements of Cash Flows
(Tabular amounts in thousands of Canadian dollars)
for the
Operating activities
Net income
Items not affecting cash:
12 months ended
December 31, 2017
12 months ended
December 31, 2016
Note
Restated Note 26
$
4,160
$
Depreciation and amortization
Share-based compensation expense (recovery)
Unrealized gain on risk management activities
Unrealized gain on fair value adjustment of embedded option
Payment of restricted and deferred share units settled in cash
Finance income
Finance expense
Income taxes expense
26
Change in non-cash working capital relating to operating activities
25, 26
Net cash generated from operations
Interest received
Interest paid
Income taxes paid
Net cash generated from operating activities
Investing activities
Proceeds from (purchase of) short-term investments
Additions to plant and equipment
Net cash used in investing activities
Financing activities
Dividends paid
Proceeds from convertible debenture, net of financing costs
Net cash (used in) generated from financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
2,172
211
(1,463)
(604)
(60)
(580)
1,414
1,606
6,856
(3,661)
3,195
500
(1,033)
(915)
1,747
5,633
(8,131)
(2,498)
(2,260)
-
(2,260)
(3,011)
12,497
4,149
2,053
(180)
(1,755)
(6)
(147)
(342)
346
1,593
5,711
3,357
9,068
337
(251)
-
9,154
(12,700)
(5,293)
(17,993)
(2,256)
14,527
12,271
3,432
9,065
Cash and cash equivalents, end of the year
$
9,486
$
12,497
– The accompanying notes form an integral part of these consolidated financial statements. –
Page 6
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
1.
NATURE OF BUSINESS
Ten Peaks Coffee Company Inc. (“Ten Peaks” or the “Company”) is a company incorporated under the
Canada Business Corporations Act. The common shares of the Company are listed on the Toronto Stock
Exchange under the symbol ‘TPK’. The Company’s registered office is located at 3131 Lake City Way,
Burnaby, British Columbia, V5A 3A3.
Ten Peaks is a leading specialty coffee company that owns all of the interests of Swiss Water
Decaffeinated Coffee Company Inc. (“SWDCC”), a British Columbia company, and Seaforth Supply Chain
Solutions Inc. (“Seaforth”), a company incorporated under the Canada Business Corporations Act.
SWDCC is a premium green coffee decaffeinator located in Burnaby, BC. SWDCC employs the
proprietary SWISS WATER® Process to decaffeinate green coffee without the use of chemicals,
leveraging science-based systems and controls to produce coffee that is 99.9% caffeine free. The SWISS
WATER® Process is certified organic by the Organic Crop Improvement Association and is the world’s
only branded decaffeination process. SWDCC purchases premium grade green coffee, which it
decaffeinates and offers for sale to coffee importers, coffee roasters and other customers (classified as
its “regular” or “non-toll” business). In addition, SWDCC decaffeinates green coffee that belongs to its
customers (classified as “toll” business). Coffee decaffeinated under toll arrangements is not included
in inventory, as SWDCC does not take title to these coffees. SWDCC is the primary operating entity of
the Company, and Ten Peaks results of operations are dependent upon those of this subsidiary.
SWDCC has a subsidiary, Swiss Water Decaffeinated Coffee Company USA, Inc., a Washington State
corporation that acts as a marketing and sales company. It does not have significant assets. At the end
of 2017, another subsidiary, Swiss Water Process Marketing Services Inc., a British Columbia company,
was dissolved and its assets and liabilities were assumed by SWDCC.
Seaforth provides a complete range of green coffee handling and storage services, including devanning
coffee received from origin; inspecting, weighing and sampling coffees; and storing, handling and
preparing green coffee for outbound shipments. Seaforth, which is certified organic by Ecocert Canada,
serves SWDCC and other coffee importers and brokers.
2.
BASIS OF PREPARATION
The Company’s consolidated financial statements for the years ended December 31, 2017 and
December 31, 2016 have been prepared in accordance with International Financial Reporting Standards
(“IFRSs”).
These consolidated financial statements are presented in Canadian dollars, the Company’s functional
currency.
The following standards became effective for annual periods beginning on or after January 1, 2017. The
adoption of the new and revised standards by the Company in 2017 did not have a material impact on
its consolidated financial statements apart from the adoption of IFRS 9 (2014) Financial Instruments,
which is discussed in Note 3.9.
Page 7
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
•
•
•
•
•
IFRS 9 Financial Instruments: The Company has early adopted all of the requirements of IFRS 9 as of
January 1, 2016.
IAS 7 Statement of Cash Flows: requires additional disclosures about changes in liabilities arising
from financing activities, including both changes arising from cash flows and non-cash changes.
IAS 12 Income Taxes: implements a 'comprehensive balance sheet method' of accounting for income
taxes which recognizes both the current tax consequences of transactions and events and the future
tax consequences of the future recovery or settlement of the carrying amount of an entity's assets
and liabilities. IAS 12 clarifies the requirements for recognizing deferred tax assets on unrealized
loss, deferred tax where an asset is measured at fair value below the assets tax base and certain
other aspects of accounting for deferred tax assets.
Investment Entities (Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12: Disclosures
of Interest in other entities, and IAS 28: Investments in Associates and joint Ventures): to address
issues that have arisen in the context of applying the consolidation exception for investment entities.
IFRSs (Amendment): The Annual Improvements to IFRSs 2012-2016.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these consolidated financial statements
are set out below.
3.1 Basis of preparation
The consolidated financial statements have been prepared on the historical cost basis except for
certain financial instruments that are measured at fair values, as explained in the accounting
policies below. Historical cost is based on the fair value of the consideration given in exchange
for assets.
These accounting policies have been used throughout all periods presented in these consolidated
financial statements.
3.2 Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and
its subsidiaries, all of which are wholly owned. Subsidiaries are all entities over which the
Company has the power to control the financial and operating policies generally accompanying a
shareholding of more than half of the voting rights. The existence and effect of potential voting
rights that are currently exercisable or convertible are considered when assessing whether the
Company controls another entity.
All intercompany transactions, balances, income and expenses are eliminated on consolidation.
3.3
Segment reporting
A business segment is a group of assets and operations engaged in providing products or services
that are subject to risks and returns that are different from those of other business segments.
A geographical segment reflects the provision of products or services within a particular economic
environment that is subject to risks and returns that are different from those of other economic
environments.
Page 8
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
The Company’s sales are primarily generated in a single business segment of decaffeination of
green coffee beans. As such, management reports operating activities for geographical
information only.
3.4
Foreign currency translation
Functional and presentation currency:
Items included in the consolidated financial statements of each of the Company’s subsidiaries are
measured using the currency of the primary economic environment in which each entity operates
(“the functional currency”). These consolidated financial statements are presented in Canadian
dollars, which has been determined to be the Ten Peaks Coffee Company Inc. functional and
presentation currency.
Transactions and balances:
Monetary assets and liabilities denominated in foreign currencies are translated to Canadian
dollars at the exchange rate prevailing at the reporting date.
Non-monetary items which are measured using historical cost in a foreign currency are translated
using the exchange rate at the date of the transaction. Non-monetary items that are measured at
fair value in a foreign currency are translated using the exchange rates at the date when the fair
value was determined. Resulting foreign exchange gains or losses are recognized in income.
Foreign currency transactions are translated into functional currency of the entity at the
exchange rates prevailing at the date of the transaction. Foreign exchange gains and losses are
recognized in profit or loss in the period in which they occur. Foreign operations are translated
from their functional currencies into Canadian dollars on consolidation as follows:
a) Assets and liabilities for each statement of financial position presented are translated at the
closing rate at the date of the statement of financial position;
b) Income and expenses for each statement of loss are translated at a quarterly average
exchange rate (unless this rate is not a reasonable approximation of the cumulative effect of
the rates prevailing on the transaction dates, in which case income and expenses are
translated at the dates of the transactions);
c) Share capital for each statement of financial position presented are translated at historical
rate; and
d) All resulting exchange differences are recognized in other comprehensive income as
cumulative translation adjustments.
Exchange differences that arise relating to long-term intercompany balances that form part of the
net investment in a foreign operation are also recognized in this separate component of equity
through other comprehensive income.
3.5
Inventories
Raw materials are stated at the lower of cost, determined on a specific identification basis, and
net realizable value, being the estimated selling price of finished goods less the estimated cost of
completion of the finished goods.
Finished goods are stated at the lower of cost and net realizable value. Cost of finished goods
includes all expenses directly attributable to the manufacturing process like direct labour and
Page 9
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
direct materials, as well as suitable portions of related fixed and variable production overheads,
based on normal operating capacity. Costs of ordinarily interchangeable items are assigned on a
first-in-first-out basis. Net realizable value is the estimated selling price in the ordinary course of
business, less applicable variable selling expenses.
3.6 Plant and equipment
The Company leases three facilities which house its production facility, offices and warehouse
facilities. All plant and equipment is carried at acquisition cost or manufacturing cost less
depreciation and impairment losses. Cost includes expenditures that are directly attributable to
the acquisition of the items. Subsequent costs are recognized in the asset’s carrying amount or
recognized as a separate asset, as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Company and the cost of the item can be
measured reliably. All other repairs and maintenance expenditures are recognized in the
statement of income and comprehensive income during the financial period in which they are
incurred.
Borrowing costs directly attributed to the construction of any qualifying asset are capitalized
during the period of time that is required to complete and prepare the asset for its intended use.
Major renovations are depreciated over the remaining useful life of the related asset or to the
date of the next major renovation, whichever is sooner.
The costs related to the plant and equipment in the course of construction are classified as
construction-in-progress. Such items are transferred to the appropriate category of plant and
equipment when it is completed and ready for intended use. Depreciation of these assets
commences when the asset is available for use.
Depreciation is recognized on a straight-line basis to allocate the cost or valuation of each asset
to its residual value over its estimated useful life commencing when the asset is ready for its
intended use. The estimated useful lives of plant and equipment are as follows:
Leasehold improvements
Production machinery
Assets under financial lease
Warehouse and office equipment
Computer hardware and software
Furniture and fixtures
to expiry of the lease renewal option or lease term
to expiry of the lease renewal option or lease term
to expiry of the lease renewal option or lease term
10 years
5 years
5 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each
reporting date.
3.7
Intangible assets
(a)
Proprietary process technology (“PPT”)
PPT represents intangible assets of SWDCC with a finite life and is carried at cost less
accumulated amortization. Amortization is recognized on a straight-line basis to allocate
the cost of PPT to its residual value over its estimated useful life of 14 years.
Page 10
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
(b)
Brand
SWDCC’s brand has a finite useful life and is carried at cost less accumulated amortization.
Amortization is recognized on a straight-line basis over its estimated useful life of 14 years.
3.8
Impairment of assets
Plant and equipment and intangible assets with finite lives and that are subject to depreciation or
amortization are tested for impairment indicators at the end of each reporting period. If any such
indicator exists, the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss.
An impairment loss is recognized for the amount by which the carrying amount of an asset or
cash generating unit (“CGU”) exceeds its recoverable amount. The Company has determined that
it has only one CGU and that all assets relate to that CGU. To determine the recoverable amount,
management estimates either the fair value less costs to sell, or the value-in-use based on the
present value of expected future cash flows from the CGU. In estimating the value-in-use,
management must determine the appropriate discount rate in order to calculate the present
value of those cash flows, as well as make certain assumptions about future profits which relate
to future events and circumstances. Discount factors are determined individually for each asset
or CGU and reflect their respective risk profiles as assessed by management. There were no
indicators of impairment during the year.
3.9
Financial instruments
The Company has early adopted IFRS 9 as issued in July 2014 with a date of initial application of
January 1, 2016. IFRS 9 introduces new requirements for the classification and measurement of
financial assets. IFRS 9 requires all recognized financial assets to be measured at amortized cost
or fair value in subsequent accounting periods following initial recognition. IFRS 9 also amends
the requirements around hedge accounting, and introduces a single, forward-looking expected
credit loss impairment model.
All financial assets, other than accounts receivable, are included in the measurement category of
fair value through profit and loss. There was no change to the measurement category for
financial liabilities at amortized cost.
Recognition
Financial assets and financial liabilities, including derivatives, are recognized on the consolidated
statement of financial position when the Company becomes a party to the financial instrument or
derivative contract.
Classification
From January 1, 2016, the Company classifies its financial assets and financial liabilities in the
following measurement categories i) those to be measured subsequently at fair value (either
through other comprehensive income or through profit or loss) and ii) those to be measured at
amortized cost. The classification of financial assets depends on the business model for managing
the financial assets and the contractual terms of the cash flows. Financial liabilities are classified
as those to be measured at amortized cost unless they are designated as those to be measured
subsequently at fair value through profit or loss (irrevocable election at the time of recognition).
Page 11
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
For assets and liabilities measured at fair value, gains and losses are either recorded in profit or
loss or other comprehensive income.
The Company reclassifies financial assets when and only when its business model for managing
those assets changes. Financial liabilities are not reclassified.
The Company has implemented the following classifications for financial instruments, other than
derivatives:
• Cash and cash equivalents and short-term investments are classified as assets at fair value
and any period change in fair value is recorded through interest income in the consolidated
statement of income, as applicable.
• Accounts receivable and other receivables are classified as assets at amortized cost using the
effective interest rate method. Interest income is recorded in the consolidated statement of
income, as applicable.
• Accounts payable, credit facilities, the debt portion of the convertible debenture, the
construction loan and other liabilities are classified as other financial liabilities and are
measured at amortized cost using the effective interest rate method. Interest expense is
recorded in the consolidated statement of income, as applicable.
With the adoption of hedge accounting, “gains/losses on risk management activities” reflects the
change in fair value of undesignated revenue hedges and gains or losses on designated hedging
instruments that are not otherwise recorded in the income statement with the hedged item
(revenue or cost of sales).
Also, with the adoption of hedge accounting, “fair value gains/losses on embedded option” are
gains or losses on embedded derivative in the convertible debenture debt instrument.
Measurement
All financial instruments are required to be measured at fair value on initial recognition, plus, in
the case of a financial asset or liability not at fair value through profit and loss, transaction costs
that are directly attributable to the acquisition or issue of the financial asset or liability.
Transaction costs of financial assets and financial liabilities carried at fair value through profit or
loss are expensed in profit and loss. Financial assets and financial liabilities with embedded
derivatives are considered in their entirety when determining whether their cash flows are solely
payment of principal and interest.
Financial assets that are held within a business model whose objective is to collect the
contractual cash flows, and that have contractual cash flows that are solely payments of principal
and interest on the principal outstanding are generally measured at amortized cost at the end of
the subsequent accounting periods. All other financial assets are measured at their fair values at
the end of the subsequent accounting periods, with any changes taken through profit and loss or
other comprehensive income. The requirements for classification and measurement of financial
liabilities largely carried forward existing requirements in IAS 39, Financial Instruments –
Recognition and Measurement, except that fair value changes due to credit risk for liabilities
designated at fair value through profit and loss would, under IFRS 9, generally be recorded in
other comprehensive income.
Page 12
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Impairment
The Company assesses all information available, including on a forward-looking basis, the
expected credit losses associated with its assets carried at amortized cost. The Company’s only
financial asset at amortized cost are accounts receivable and other receivables, for these the
Company applies the simplified approach as permitted by IFRS 9 which requires expected lifetime
credit losses to be recognized from initial recognition of the receivables.
Derivatives and Hedge Accounting
Derivatives are initially recognized at fair value on the date a derivative contract is entered into
and are subsequently re-measured to their fair value at the end of each reporting period. The
accounting for subsequent changes in fair value depends on whether the derivative is designated
as a hedging instrument, and if so, the nature of the item being hedged, and the type of hedge
relationship designated.
The Company designates derivatives as hedges for the risk of changes in fair value of the purchase
commitment due to changes in benchmark coffee commodity prices and foreign exchange as fair
value hedges.
The Company also designates derivatives as hedges of foreign exchange risk associated with the
cash flows of highly probable forecast transactions as cash flow hedges.
The Company documents at the inception of the hedging transaction the economic relationship
between hedging instruments and hedged items including whether the hedging instrument is
expected to offset changes in cash flows of hedged items. The Company documents its risk
management objective and strategy for undertaking various hedge transactions at the inception
of each hedging relationship.
The Company applied hedge accounting prospectively to economic hedges entered into in
accordance with its Foreign Exchange Risk Management Policy (FX Policy) and the Commodity
Price Risk Management Policy (Commodity Policy). Economically, the specific hedging activities
carried out under these policies by the Company are as follows:
Currency risk hedges on US$ purchases ("customer-specific hedges"):
The Company enters into forward contracts to buy US dollars (US$) for significant purchase
commitments, such as green coffee inventory which, once decaffeinated, is sold at a fixed
Canadian dollar (C$) price. To mitigate the exposure to changing margin on these transactions
arising from fluctuations in the US$/C$ exchange rate, the Company enters into US$ forward
purchase contracts which economically lock in the US$/C$ exchange rate, and effectively locks in
the C$ cost of inventory to be sold at the fixed C$ amount.
At each period end, currency risk hedges on US$ purchases are re-measured to their fair value.
Under hedge accounting, the effective portion of the gains (losses) will be held on the
consolidated statement of financial position until the inventory is received and subsequently sold,
at which time the gains (losses) will flow to cost of sales on the consolidated statement of
income.
Page 13
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Commodity price risk hedges on purchase commitments and inventory ("commodity hedges"):
the NY’C’),
When the Company enters into a purchase commitment to purchase green coffee and fixes the
New York ‘C’ (“NY’C”) price component (which it will later sell at a to-be-determined price based
on
the
IntercontinentalExchange. The Company monitors, on a macro basis, the amount of purchase
commitments and amount of inventory on hand for which the ultimate sale price is variable and
has not yet been fixed based on the NY’C’ and compares this to the amount of coffee covered by
future net short positions to determine whether the net short position requires adjustment.
the Company enters
into an offsetting
short position on
At each period end, commodity price risk hedges are re-measured to their fair value. Under
hedge accounting, the effective portion of the gains (losses) for price fixed hedged coffee
contracts and coffee inventory will be held on the consolidated statement of financial position
until inventory for such contracts is received and subsequently sold, at which time the gains
(losses) will flow to cost of sales on the consolidated statement of income.
Currency risk hedges on US$ future revenue ("revenue hedges"):
The Company enters into forward contracts to sell US$ at future dates to hedge the foreign
exchange cash flow variability of expected US$ processing fee revenue. The hedged processing
revenue includes both processing fee revenue from tolling arrangements (processing of customer
owned coffee) as well as the US$ processing fee layer of inventory sales agreements.
At each period end, currency risk hedges on US$ future revenues are re-measured to their fair
value. Under hedge accounting, unrealized gains (losses) for US$ forward contracts are
reclassified so that the impact on the consolidated statement of income is deferred through other
comprehensive income, until the hedge instrument matures, at which time the realized gain (loss)
is reflected in revenue on the consolidated statement of income.
On all hedges entered into, if the hedge ratio for risk management purposes is no longer optimal
but the risk management objective remains unchanged and the hedge continues to qualify for
hedge accounting, the hedge relationship will be rebalanced by adjusting either the volume of the
hedged instrument or the volume of the hedged item so that the hedge ratio aligns with the ratio
used for risk management purposes. Any hedge ineffectiveness is calculated and accounted for in
profit or loss at the time of the hedge relationship rebalancing.
Fair Value Hierarchy
The Company classifies and discloses the fair value measurements of its financial instruments
using a fair value hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following levels:
•
•
•
Level 1 – valuation based on quoted prices (unadjusted) in active markets for identical assets
or liabilities;
Level 2 – valuation techniques based on inputs other than quoted prices that are observable
for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);
and
Level 3 – valuation techniques using inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
Page 14
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist.
The Company classifies a financial instrument to the lowest level of the hierarchy for which a
significant input has been considered in measuring fair value.
3.10 Current and deferred income taxes
Income tax expense comprises current and deferred tax. Income tax expense is recognized in the
statement of income and comprehensive income except to the extent that it relates to items
recognized either in other comprehensive income or directly in equity.
The income tax charge is calculated on the basis of the tax laws enacted or substantively enacted
at the reporting date, and any adjustments to taxes payable in respect of previous years. The
Company periodically evaluates positions taken in tax returns with respect to situations in which
applicable tax regulation is subject to interpretation. It establishes provisions where appropriate
on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is recognized on temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the consolidated financial statements.
However, if the deferred income tax arises from initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the transaction affects neither
accounting nor taxable income or loss, it is not accounted for. Deferred income tax is determined
using tax rates (and laws) that have been enacted or substantively enacted by the reporting date
and are expected to apply when the related asset is realized or the liability is settled.
Deferred income tax assets are recognized only to the extent that it is probable that future
taxable income will be available against which temporary differences and non-capital loss carry
forwards can be utilized.
3.11 Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a
result of a past event, it is probable that it will lead to an outflow of economic resources from the
Company and amounts can be estimated reliably, although timing or amount of the outflow may
still be uncertain.
Provisions are measured at the present value of management’s best estimate of the expenditure
required to settle the present obligation at the reporting date, including the risks and
uncertainties associated with the present obligation. The discount rate used to determine the
present value reflects current market assessments of the time value of money and the increases
specific to the liability.
Any reimbursement that the Company can be virtually certain to collect from a third party with
respect to the obligation is recognized as a separate asset. However, this asset may not exceed
the amount of the related provision.
All provisions are reviewed at the end of each reporting period and adjusted or reversed to reflect
management’s current best estimate of the expenditure required to settle the present obligation
at the end of the reporting period. If it is no longer probable that an outflow of resources
embodying economic benefits will be required to settle the obligation, the provision is reversed.
Provisions are reduced by actual expenditures for which the provision was originally recognized.
Page 15
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Where discounting has been used, the carrying amount of a provision is accreted during the
period to reflect the passage of time.
3.12 Leases as the lessee
Leases where the lessor retains a significant portion of the risks and rewards of ownership are
classified as operating leases. Payments on operating lease agreements are recognized as an
expense on a straight-line basis over the lease term.
3.13 Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Revenue is
reduced for estimated customer returns, rebates and other similar allowances.
Revenue is recognized when all the following conditions are satisfied:
• persuasive evidence of an arrangement exists;
•
•
•
•
the goods are shipped;
title has passed to the customer;
the price has been substantively determined; and
collection is reasonably assured.
3.14 Employee benefits
The Company provides benefits to employees through a registered retirement savings plan
(“RRSP”). The Company contributes a percentage of earnings into an RRSP administered by an
independent entity. Ultimately, each employee manages his or her own RRSP within the scope of
the plan provided by the third-party administrator. The RRSP has no assurance of defined
benefits to employees, and as such the Company has no legal or constructive obligations to make
further contributions.
The Company also pays contributions to government pension insurance plans. The contributions
are recognized as employee benefit expenses when they are due.
3.15 Share-based compensation
The Company has a restricted share unit (“RSU”) plan for certain officers and employees and a
deferred share unit (“DSU”) plan for non-employee directors (collectively, “participants”).
The RSUs granted are compound financial instruments as they are expected to be settled using a
combination of cash and equity.
The equity-settled share-based compensation is measured at the fair value of the Company’s
common shares as at the grant date using a volume weighted average share price in accordance
with the terms of the RSU Plan. The fair value determined at the grant date is charged to income
on a straight-line basis over the vesting period, based on the estimate of the number of RSUs that
will eventually vest and be converted to common shares, with a corresponding increase in equity
(share-based compensation reserve). As necessary, the Company revises its estimate if
subsequent information indicates that the number of RSUs expected to vest differs from previous
estimates. On the vesting date, the Company revises the estimate to equal the number of equity
instruments that ultimately vested. The impact of the revision of estimates, if any, is recognized
Page 16
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
in income or expense such that the cumulative expense reflects the revised estimate, with a
corresponding adjustment to the share-based compensation reserve.
For cash-settled share-based compensation, a long-term liability is recognized, measured initially
at the fair value of the long-term liability using a volume weighted average share price. The
amount of the liability is charged to income on a straight-line basis over the vesting period, based
on the estimate of the number of RSUs that will eventually vest and be settled in cash. As
necessary, the Company revises its estimate if subsequent information indicates that the number
of RSUs expected to vest differs from previous estimates. On the vesting date, the Company
revises the estimate to equal to the number of RSUs that ultimately vested and are settled in
cash. The impact of the revision of estimates, if any, is recognized in income or expenses such
that the cumulative expense reflects the revised estimate, with a corresponding adjustment to
the long-term liability or current liability depends on the timing when the liability become due. At
the end of each reporting period until the liability is settled, and at the date of settlement, the fair
value of the liability is remeasured using a volume weighted average share price, with any change
in fair value recognized in income or expense for the year.
DSUs are issued to participants who elect to defer a portion of their current compensation in
exchange for DSUs. DSUs are classified as cash-settled share-based payment transactions as
participants receive cash following a Redemption Event. The DSUs do not contain any vesting
conditions or forfeiture provisions, as they are issued in exchange for deferred compensation.
The Company recognizes the expense and the liability to pay for the eventual redemption when
the DSUs are issued. Thereafter, the Company re-measures the liability at the end of each
reporting date and the date of settlement, with the difference recognized in income or expense
for the period. The fair value of DSUs is determined in accordance with the DSU Plan, which uses
the average closing price for Ten Peaks shares for the five trading days immediately preceding the
relevant date.
3.16 Earning per share (“EPS”)
The Company presents basic and diluted EPS for its common shares. Basic EPS is calculated by
dividing income or loss attributable to shareholders of the Company by the weighted average
number of common shares outstanding during the year. Diluted EPS is calculated by dividing
income or loss attributable to shareholders of the Company by the weighted average number of
common shares outstanding, adjusted for the effects of all dilutive potential common shares.
3.17 Application of revised IFRSs
The following new standards, amendments to accounting standards and interpretations have
been issued and will be effective in future periods, with earlier adoption permitted:
•
•
IFRS 2: Share based payment: contains amendments to classification and measurement of
share-based payment transactions. It is effective for annual periods beginning on or after
January 1, 2018.
IFRS 15: Revenue from Contracts with Customers: replaces IAS 11, IAS 18, IFRIC 13, IFRIC 15,
IFRIC 18 and SIC-31. IFRS 15 establishes principles to address the nature, amount, timing and
uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The
core principle of IFRS 15 is that revenue related to the transfer of promised goods or services
should be recognized when the control of the goods or services passes to customers. The
Page 17
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Company has evaluated the impact of applying IFRS 15, analyzing its toll revenue, regular
decaffeinated coffee sales and coffee handling agreements. The Company concluded there is
no material change in the timing of revenue recognized under the new standard as the point
of transfer of risk and reward for goods and services and transfer of control occurs at the
same time. In addition, IFRS 15 requires entities to apportion revenue earned from contracts
to distinct performance obligations on a relative standalone selling price basis. The impact of
this change on the amount of revenue recognized in a year is insignificant. IFRS 15 contains
additional presentation and disclosure requirements which are more detailed than the current
standards. Upon the adoption of IFRS 15, the Company will provide disclosures for each of the
Company's revenue streams to supplement the revenue data that is currently presented in the
segmented information disclosure. It is effective for annual periods beginning on or after
January 1, 2018.
IFRS 16: Leases: requires an application of control model to the identification of leases,
distinguishing between a lease and a service contract. Also, IFRS 16 introduces significant
changes to the accounting by lessees, introducing a single, on-balance sheet accounting model
that is similar to the current finance lease accounting, with limited exceptions for short-term
leases or leases of low value assets. A leasee can choose to apply IFRS 16 using either a full
retrospective or a modified retrospective approach. The Company plans to apply IFRS 16 as
at the date it becomes effective but has not yet selected a transition approach. It is effective
for annual periods beginning on or after January 1, 2019.
IFRIC 22: Foreign Currency Transactions and Advance Consideration: clarifies the appropriate
exchange rate to use on initial recognition of an asset, expense or income when advance
consideration is paid or received in a foreign currency. Management expects this IFRIC may
change the exchange rate used to translate advances received for revenue in a foreign
currency. The impact on the initial measurement of revenue would depend on the movements
in exchange rates. It is effective for annual periods beginning on or after January 1, 2018.
IAS 40 Investment Property: contains amendments to transfers of investment property. It is
effective for annual periods beginning on or after January 1, 2018.
IFRIC 23 Uncertainty over Income Tax Treatments: clarifies the application of recognition and
measurement requirements in IAS 12, Income taxes, where there is uncertainty over income
taxes. It is effective for annual periods beginning on or after January 1, 2019.
•
•
•
•
The Company has not yet adopted any of these new and amended standards or interpretations
and is currently assessing the impact of adoption.
4. MANAGEMENT JUDGMENTS AND ESTIMATION UNCERTAINTY
Judgment is used by management in selecting accounting policies, the determination of functional
currency, the identification of CGUs, and the identification of revenue streams. In addition, judgment is
often required in applying accounting policies, and in respect of items where the choice of a specific
policy, accounting estimate or assumption to be followed could materially affect the reported results or
net asset position of the Company should it later be determined that a different choice would be more
appropriate.
Page 18
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Management considers the accounting estimates and assumptions discussed below to be its critical
accounting estimates and accordingly, provides an explanation of each below. Actual results could
differ from those estimates and assumptions.
4.1 Useful lives of depreciable assets
Management reviews the useful lives of depreciable assets at each reporting date. At December
31, 2017 management determined that the useful lives represent the expected utility of the
assets to the Company.
4.2
Provision for asset retirement obligations
Analysis and estimates are performed by the Company in order to determine the amount of
restoration costs to be recognized as a provision in the Company’s consolidated financial
statements. The estimates consider the contract language in the lease, the expected useful lives
of the Company’s equipment, and the expected costs that would be paid to a third party to
remove equipment.
The amount recognized as a provision is the best estimate of the consideration required to settle
the present obligation at the end of the reporting period, taking into account the risks and
uncertainties surrounding the obligation. When the final determination of such obligation
amounts differs from the recognized provisions, the Company’s financial statements will be
impacted.
4.3
Income taxes
The Company computes income taxes using the liability method, under which deferred income
taxes are provided for the temporary differences between the financial reporting bases and the
tax bases of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured
using the enacted and substantively enacted income tax rates that are expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered
or settled.
Deferred tax assets also reflect estimates of the recoverability of non-capital loss carry forwards.
The Company has recognized the benefit of loss carry forwards to the extent that it is probable
that taxable income will be available in the future against which the non-capital loss carry
forwards can be utilized.
The financial reporting bases of the Company’s assets reflect the useful lives of depreciable
assets, as well as the carrying amounts of assets with indefinite useful lives. Accordingly,
management estimates that impact the carrying amounts of depreciable and non-depreciable
assets also have an impact on deferred income tax assets and liabilities.
4.4 Convertible Debenture
Management estimates the interest rate on a similar instrument of comparable credit status and
providing for substantially the same cash flows, on the same terms, but without the equity
conversion option in the calculation of the fair value of the liability portion of the convertible
debenture upon initial recognition. Management also estimates the fair values of the derivative
liability related to the convertible debenture at initial recognition and at the end of each
Page 19
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
reporting period using the Black-Scholes option pricing model which requires management
estimates. Details of these can be found in Note 14.
5.
CAPITAL MANAGEMENT
The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and
market confidence and to sustain the future development of the business. The Company manages its
capital structure and makes adjustments to it in light of changes in economic conditions and the risk
characteristics of the underlying assets. The Company considers its capital structure to include
shareholders’ equity and indebtedness. In order to maintain or adjust the capital structure, the
Company may from time to time issue common shares, issue additional debt, adjust its capital spending,
modify its dividend policy, and/or dispose of certain assets to manage current and projected debt levels.
The Company manages its capital in order to meet its growth objectives while continuing to pay
quarterly dividends to its shareholders. The dividend policy of Ten Peaks is subject to the discretion of
the Board of Directors, which reviews the level of dividends periodically on the basis of a number of
factors including Ten Peaks’ financial performance, future prospects, and the capital requirements of
the business. Quarterly dividends are paid on a level basis in order to smooth out normal seasonal
fluctuations that occur over the course of a year.
6.
INVENTORIES
Raw materials
Finished goods
Carbon
Packaging
Hedge accounting component
December 31, 2017
December 31, 2016
$
$
$
8,147
6,072
397
32
23
14,671
$
5,863
5,836
315
147
(587)
11,574
During the year ended December 31, 2017, the cost of inventories recognized in cost of sales was $68
million (2016: $65 million). The inventory provision was $0.08 million during the year (2016: $0.07
million).
7.
ACCOUNTS RECEIVABLE
Accounts receivable
Receivables, non-current
December 31, 2017 December 31, 2016
$
$
12,127
230
11,707
-
The Company's accounts receivable has been reviewed for indicators of impairment. No accounts were
found to be impaired and therefore no allowance for credit losses was provided as at December 31,
2017 and December 31, 2016. Non-current accounts receivable includes a $0.1 million balance due
from a related party, refer to Note 19.
Page 20
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
8.
SHORT-TERM INVESTMENTS
Short-term investments consist of guaranteed investment certificates with maturities greater than three
months and less than nine months from the day of their acquisition, with a fixed interest rate of 1.4%
(2016: 1.2% to 1.5%).
9.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s derivative financial instruments were carried at fair value through profit or loss as
follows:
Coffee futures contracts, net
US Dollar forward contracts, current
US Dollar forward contracts, long term
Derivative financial liability, convertible debenture
10.
PLANT AND EQUIPMENT
December 31, 2017 December 31, 2016
$
$
$
247
(3)
(13)
(2,709)
(2,478)
$
95
(815)
(582)
(3,314)
(4,616)
Machinery and
Leasehold
Computer
Furniture and
Construction
equipment
improvements
equipment
fixtures
in progress
Total
Cost
Balance January 1, 2017
Additions
Balance December 31, 2017
Accumulated depreciation
Balance January 1, 2017
Depreciation
Balance December 31, 2017
Balance, December 31, 2017
Cost
Balance January 1, 2016
Additions
Disposals
Transfers
Balance December 31, 2016
Accumulated depreciation
Balance January 1, 2016
Depreciation
Transfers
Balance December 31, 2016
Balance, December 31, 2016
$
$
$
$
$
$
$
$
$
$
33,557
187
33,744
(21,546)
(1,515)
(23,061)
10,683
28,284
-
(23)
5,296
33,557
(20,229)
(1,285)
(32)
(21,546)
12,011
$
$
$
$
$
$
$
$
$
5,052
61
5,113
(3,227)
(274)
(3,501)
1,612
4,952
63
-
37
5,052
(2,882)
(345)
-
(3,227)
1,825
$
$
$
$
$
$
$
$
$
1,062
142
1,204
(750)
(112)
(862)
342
998
-
-
64
1,062
(641)
(109)
-
(750)
312
$
$
$
$
$
$
$
$
$
181
8
189
(134)
(11)
(145)
44
304
-
-
(123)
181
(157)
(9)
32
(134)
47
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,083
8,577
10,660
10,660
2,127
5,230
-
(5,274)
2,083
-
-
-
-
-
-
-
$
2,083
$
41,935
8,975
50,910
(25,657)
(1,912)
(27,569)
23,341
36,665
5,293
(23)
-
41,935
(23,909)
(1,748)
-
(25,657)
16,278
Page 21
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
For the year ended December 31, 2017, depreciation expense of $1.8 million (2016: $1.7 million) has
been charged to cost of sales and $0.1 million (2016: $0.1 million) was included in administrative
expenses. There was no impairment loss recognized for the years ended December 31, 2017 and 2016.
11.
INTANGIBLE ASSETS
Cost
Balance January 1, 2017
Balance December 31, 2017
Amortization
Balance January 1, 2017
Amortization
Balance December 31, 2017
Carrying amount December 31, 2017
Cost
Balance January 1, 2016
Balance December 31, 2016
Amortization
Balance January 1, 2016
Amortization
Balance December 31, 2016
Carrying amount December 31, 2016
$
$
$
$
$
$
$
$
$
PPT
3,246
3,246
(1,680)
(240)
(1,920)
1,326
3,246
3,246
(1,440)
(240)
(1,680)
1,566
$
$
$
$
$
$
$
$
$
Brand
1,000
1,000
(879)
(20)
(899)
101
1,000
1,000
(859)
(20)
(879)
121
$
$
$
$
$
$
$
$
$
Total
4,246
4,246
(2,559)
(260)
(2,819)
1,427
4,246
4,246
(2,299)
(260)
(2,559)
1,687
For the year ended December 31, 2017, amortization expense of $0.2 million (2016: $0.2 million)
relating to proprietary process technology (“PPT”) has been charged to cost of sales and $0.02 million
(2016: $0.02 million) relating to Brand was included in administrative expenses. There was no
impairment loss recognized for the years ended December 31, 2017 and 2016.
12. TAX
12.1
Income tax expense
Current expense
Deferred tax expense
Total income tax expense
December 31, 2017
December 31, 2016
$
$
890
716
1,606
$
$
403
1,190
1,593
Page 22
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
12.2 Reconciliation
Income tax expense for the year can be reconciled to the accounting profit as follows:
Statutory rate
Income before tax
Income tax calculated at applicable tax rates
Non-deductible expenses
Foreign tax rate differential
Income tax expenses
December 31, 2017
December 31, 2016
26%
5,766
1,503
109
(6)
1,606
$
$
$
$
$
$
26%
5,742
1,493
88
12
1,593
12.3 Current income tax payable
Income tax payable
$
105
$
405
December 31, 2017
December 31, 2016
12.4 Deferred income tax assets (liabilities)
The movement in deferred income tax assets and liabilities during the year was as follows:
Goodwill
and
intangibles
$
698
(19)
Share and
debt issue
costs and
other
392
41
$
Property
plant and
equipment
(2,819)
193
$
ARO
182
25
Share based
compensation
$
360
16
Derivative
liability and
convertible
debenture
-
(123)
Other
comprehensive
income
-
(147)
Tax Losses
$
1,515
(1,153)
$
Total
328
(1,167)
Balance January 1, 2016
Expense (recovery)
Balance, December 31, 2016
$
679
$
433
(2,626)
$
207
$
376
(123)
(147)
$
362
(839)
Balance, January 1, 2017
Expense (recovery)
679
13
433
(208)
(2,626)
(97)
207
10
376
(204)
Balance, December 31, 2017
$
692
$
225
(2,723)
$
217
$
172
(123)
(48)
(171)
(147)
(385)
362
(184)
(532)
$
178
(839)
(1,103)
(1,942)
SWDCC has no non-capital tax losses carry forwards as the end of December 31, 2017. Ten Peaks
has non-capital tax loss carry forwards of $0.2 million which begin to expire in 2036. Seaforth has
non-capital tax loss carry forwards of $0.4 million that begin to expire in 2033.
13. CREDIT FACILITIES
The Company had no outstanding debt as at December 31, 2017 or December 31, 2016. As at
December 31, 2017, the company had the following credit facilities:
Page 23
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
a.
b.
a $14.5 million revolving operating line of credit which bears interest at the bank’s prime lending
rate plus 0.75% per annum; and
a $1.5 million swing operating line of credit which bears interest at the bank’s prime lending rate
plus 0.75% per annum.
Any US$ denominated debt under the revolving operating line of credit or swing line can be financed
using LIBOR loans at the LIBOR rate plus 2.35% per annum.
In addition, the Company has a US$8.0 million foreign exchange and commodity futures contract
facility, which allows the Company to enter into spot, forward and other foreign exchange rate
transactions and commodity futures transactions with the bank with a maximum term of up to 60
months.
These facilities are collateralized by a general security agreement over all of the assets of the Company
and a floating hypothecation agreement over cash balances.
As at December 31, 2017, the Company was in compliance with its debt covenants and had not made
use of any of its credit facilities.
14. CONVERTIBLE DEBENTURE
Balance, open
Proceeds from issuance
Debt issuance costs
Fair value of derivative
Interest charged
Interest paid
Balance, end
December 31, 2017 December 31, 2016
$
$
11,283
-
-
-
1,403
(1,028)
$
11,658
$
-
15,000
(473)
(3,319)
306
(231)
11,283
On October 11, 2016, the Company issued an unsecured subordinated convertible debenture for gross
proceeds of $15,000,000. The Convertible Debenture bears interest at a rate of 6.85% per annum to be
paid quarterly in arrears and is due on October 11, 2023.
The Convertible Debenture is convertible into Common Shares of the Company at a conversion price of
$8.25 per Common Share. Under the terms of the agreement, Ten Peaks has the option to pay interest-
in-kind for the first two years. If elected, this option will increase the principal sum by the interest
owing.
The Convertible Debenture also includes a net share settlement feature that allows Ten Peaks, upon
conversion, to elect to pay cash equal to the face value of the Convertible Debenture and to issue
Common Shares equal to the excess value of the underlying equity above the face value of the
Convertible Debenture. If the Net Share Settlement option is elected, it will result in fewer Common
Page 24
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Shares being issued. In 2016, the Company paid financing costs of $0.5 million in respect of issuing the
convertible debenture.
The liability component was initially measured at a fair value of $11.2 million, which represents the
present value of the contractually determined stream of cash flows discounted at the prevailing market
interest rate at that time applicable to instruments of comparable credit status and providing
substantially the same cash flows, on the same terms, but without derivative components, of 12.15%
per annum.
Balance, open
Fair value of derivative liability
Change in fair valuation of derivative embedded option
Balance, end
December 31, 2017 December 31, 2016
$
$
$
3,313
-
(604)
2,709
$
-
3,319
(6)
3,313
The Company uses the residual value method to allocate the fair value of the convertible debentures
between the liability component and the derivative liability. Under this method, as at balance sheet
date, the derivative liabilities include fair value of the derivative liability related to convertible
debenture in the amount of $2.7 million (2016: $3.3 million at inception). The fair value of the
derivative liability was determined using the Black-Scholes Option Pricing Model. The variables and
assumptions used in computing the fair value are based on management’s best estimate. The value
varies with different variables of certain subjective assumptions.
Inputs into the Black-Scholes Option Pricing Model to determine the fair value of the conversion option:
Share price
Exercise price
Option life
Volatility
Risk-free interest rate
Dividend yield
15. OTHER LIABILITIES
December 31, 2017 December 31, 2016
$ 6.70
$ 8.25
5.79 years
40%
1.90%
3.73%
$ 7.37
$ 8.25
7 years
39%
0.92%
3.39%
The balance represents the fair value of the deferred share units (“DSUs”) and of the cash-settled
portion of the restricted share units (“RSUs”) outstanding as follows:
December 31, 2017 December 31, 2016
Other liabilities, current
Other liabilities, non-current
$
$
591
45
636
488
81
569
Page 25
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
16. ASSET RETIREMENT OBLIGATION
The Company estimates the total undiscounted amount of any cash flows required to settle its ARO is
approximately $0.9 million, which will be incurred on or about the expiry of the third lease renewal
term in 2023. As at December 31, 2017, the Company has a long-term liability ARO of $0.8 million (2016:
$0.8 million), reflecting the present value of the ARO using a credit adjusted risk free rate of 1.90%.
17.
SHARE CAPITAL
Ten Peaks is authorized to issue an unlimited number of common shares. Each share is equally eligible
to receive dividends when declared and represents one vote at meetings of shareholders.
As of December 31, 2017, there were 9,038,862 (2016: 9,038,862), common shares, and 100,783 (2016:
48,285), restricted share units outstanding, respectively.
Restricted share units
The Company has a restricted share unit plan (“RSU Plan”) which allows it to grant RSUs to officers,
employees and consultants of Ten Peaks or its subsidiaries. The RSU Plan is administered by the Board
of Directors, which sets the terms of incentive awards under the RSU Plan. The maximum number of
common shares available for issue under the RSU Plan is 333,760, being 5% of the issued and
outstanding common shares of the Company as at the date it was approved by shareholders. These
grants vest on the third anniversary of issuance (with certain exceptions) provided the grant recipient is
still employed by Ten Peaks or one of its subsidiaries as at the date of vesting. Grants are forfeited (with
certain exceptions) if a recipient is no longer employed by Ten Peaks or one of its subsidiaries. Upon
vesting, each RSU converts to one common share. These grants allow participants to receive up to 50%
of the market value of the award in cash (instead of shares) upon vesting, in order to facilitate payment
of taxes owing on the awards. Any RSUs paid in cash are returned to the pool and may be re-issued,
subject to the maximum number of common shares available under RSU.
Periodically, the Company grants RSU awards. Each award is increased by the value of dividends paid to
shareholders during the vesting period, using a formula which uses the higher of the then-current share
price or $3.20.
The movement in RSUs for the years ended December 31, 2017 and December 31, 2016 is as follows:
Page 26
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Number of RSUs
Volume based
weighted average
share price
Average
remaining
vesting period
(years)
Performance
based
97,304
2,477
(3,136)
(21,064)
(27,296)
48,285
48,285
52,480
3,522
(3,504)
100,783
$
12.01
$
$
$
$
8.62
6.92
6.96
6.96
$
7.86
$
7.86
$
$
$
6.15
6.30
6.26
$
6.58
1.45
1.03
-
-
-
1.14
0.14
2.15
1.06
-
1.15
No
No
No
No
No
No
No
Balance at January 1, 2016
RSUs issued for dividends
RSUs forfeited
RSUs cash-settled
RSUs exercised
Balance at December 31, 2016
Balance at January 1, 2017
RSUs granted
RSUs issued for dividends
RSUs forfeited
Balance at December 31, 2017
Deferred share units
The Company has a deferred share unit plan (the “DSU Plan”) in order to issue deferred share units
(“DSUs”) to non-employee directors (collectively, “participants”) of Ten Peaks. The DSU Plan was
adopted to allow participants the opportunity to defer compensation and encourage a sense of
ownership in Ten Peaks. Under the DSU Plan, participants may elect to defer compensation and receive
DSUs equal to the value of the deferred compensation.
The first DSUs were issued in April 2012. The number of DSUs was determined by dividing the amount
of deferred compensation by the Fair Market Value. The Fair Market Value of DSUs is defined in the
DSU Plan as the weighted average closing price of Ten Peaks shares for the five business days
immediately preceding the relevant date.
Upon the occurrence of the Redemption Event, the affected participant will be entitled to receive a
lump sum cash payment, net of applicable withholding taxes, equal to the product of number of DSUs
held by that participant and the Fair Market Value on the date of the Redemption Event. The DSUs do
not contain any vesting conditions or forfeiture provisions, as they are issued in exchange for deferred
compensation.
Under the DSU Plan, outstanding DSUs as at the record date are increased by the Dividend Rate
whenever dividends are paid to shareholders.
The movement in DSUs for the years ended December 31, 2017 and December 31, 2016 is as follows:
Page 27
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Balance at January 1, 2016
DSUs issued
Balance at December 31, 2016
Balance at January 1, 2017
DSUs issued
DSUs exercised
Balance at December 31, 2017
Number of DSUs
Weighted average
share price
Performance
based
57,391
11,488
68,879
68,879
11,276
(9,581)
70,574
$
$
12.06
8.79
$
7.08
$
$
$
7.08
6.63
6.24
$
6.60
No
No
No
18. EMPLOYEE BENEFITS EXPENSES
Expenses recognized for employee benefits are detailed below:
Short-term benefits
Long-term benefits
Post-employment benefits
12 months ended
12 months ended
December 31, 2017 December 31, 2016
6,794
$
(180)
607
7,221
6,965
220
680
7,865
$
$
$
Short-term benefits are comprised of salaries, accrued bonuses, benefits and director fees. Long-term
benefits comprise share-based compensation under the RSU Plan and the DSU Plan.
Post-employment benefits are contributions to employee retirement accounts, as well as statutory
remittances related to post-employment benefits. These are recognized as an expense when
employees have rendered service entitling them to the contributions.
19. RELATED PARTY TRANSACTIONS
The Company’s related parties include its subsidiaries, key management personnel and a company
related to a director.
Details of transactions between the Company and related parties (other than its subsidiaries) are
discussed below. All intercompany transactions, balances, income and expenses are eliminated on
consolidation.
Compensation of Key Management Personnel
The remuneration of directors and key management personnel during the year was as follows:
Page 28
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Short-term benefits
Long-term benefits
Post-employment benefits
Promissory note
12 months ended
12 months ended
December 31, 2017 December 31, 2016
1,132
$
(181)
53
1,004
1,395
173
58
1,626
$
$
$
On March 16, 2017, a subsidiary of the Company and a member of key management (the “borrower”)
entered into a promissory note in the amount of US$0.1 million. For as long as the borrower remains an
employee, the obligation to repay the principal is forgiven against current and future awards under the
RSU Plan, by forfeiture of awards. The loan is interest free other than in the event of default, in which
case the promissory note shall bear simple interest at a rate of 10% per annum.
Trading transactions
During the year, the Company entered into the following transactions with a company that is related to
a director:
Sales
Purchases of raw materials
12 months ended
12 months ended
December 31, 2017 December 31, 2016
$
764
$
4,509
$
$
303
6,934
As at the balance sheet date, the Company had the following balances receivable from and payable to a
company that is related to director:
Accounts receivable
Accounts payable
December 31, 2017 December 31, 2016
$
$
$
$
15
-
121
94
These transactions were in the normal course of operations and were measured at the fair value of the
consideration received or receivable, which was established and agreed to by the related party.
20. DIVIDENDS
For the year ended December 31, 2017, the Company declared quarterly eligible dividends to
shareholders totaling $2.3 million or $0.25 per share (2016: $2.3 million or $0.25 per share) of which,
$0.6 million was payable at December 31, 2017 (2016: $0.6 million).
Page 29
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
21.
SEGMENT REPORTING
The Company’s sales are primarily generated in a single segment (decaffeination of green coffee) and in
three geographic areas – Canada, United States and other international markets.
The Company’s revenue from external customers and its non-current assets by location are detailed
below. Revenues:
Canada
United States
Other
Non-Current Assets (not including deferred tax assets):
Canada
United States
22. BASIC AND DILUTED EARNINGS PER SHARE
Basic EPS:
Net income attributable to shareholders
Weighted average number of shares
Basic EPS
Diluted EPS:
Net income attributable to shareholders
Effect of diluted securities: RSUs
After tax effect of diluted securities if debenture converted:
Interest on convertible debenture
Loss (gain) on fair value adjustment of embedded option
Net income after effect of diluted securities
Weighted average number of shares - basic
Effect of diluted securities: RSUs
Effect of diluted securities: convertible debenture
Weighted average number of shares - diluted
Diluted EPS
December 31, 2017
December 31, 2016
$
$
$
35,103
38,808
9,844
83,755
$
31,908
37,173
12,846
81,927
December 31, 2017 December 31, 2016
$
$
$
25,663
75
25,738
$
17,951
14
17,965
12 months ended
12 months ended
December 31, 2017
December 31, 2016
$
$
$
$
$
$
$
4,160
9,038,862
0.46
4,160
-
1,035
(604)
4,591
$
9,038,862
1,818,182
10,857,044
0.42
$
4,149
9,019,621
0.46
4,149
19
-
-
4,168
9,019,621
83,932
-
9,103,553
0.46
Page 30
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
The following potential common shares are anti-dilutive and are therefore excluded from the weighted
average number of common shares outstanding for the purposes of calculating the diluted earnings per
share:
Weighted average number of RSUs granted
Share units from the conversion of the convertible debenture
23.
FINANCIAL RISK MANAGEMENT
12 months ended
December 31, 2017
46,556
-
12 months ended
December 31, 2016
-
407,352
The Company’s risk management program focuses on the unpredictability of commodity prices and
foreign exchange rates, and seeks to minimize potential adverse effects on the Company’s financial
performance and cash flows. The Company uses derivative financial instruments to hedge these risk
exposures. In addition, the Company monitors other financial risks on a regular basis.
Risk management is carried out under policies approved by the Board of Directors. The Company’s
exposure to and management of financial risks is discussed in more detail below.
23.1 Commodity price risk
The Company buys and
Commodity price risk is the risk that the fair value of inventory will fluctuate as a result of changes
in commodity prices. The Company utilizes futures contracts to manage its commodity price
exposure.
the
sells
IntercontinentalExchange in order to offset its inventory position and fix the input cost of green
coffee. As at December 31, 2017, the Company had futures contracts to buy 2.2 million lbs of
green coffee with a notional value of US$2.7 million, and contracts to sell 4.5 million lbs of green
coffee with a notional value of US$5.5 million. The furthest contract matures in in December 2018
(December 31, 2016: buy 2.0 million lbs, with a notional value of US$2.7 million, and sell 6.4
million lbs with a notional value of US$8.8 million). The net notional value of the contracts
outstanding at December 31, 2017 was approximately US$2.8 million (2016: US$6.1 million).
futures contracts
for coffee on
The following tables provide a summary of commodity hedges designated as hedging
instruments:
Page 31
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Carrying amount of hedging instruments
December 31, 2017
December 31, 2016
Fair value hedge
Nominal amount of hedging instruments (in US$'000)
Line item in the statement of financial position where
hedging instrument is located
Assets
Liabilities
Changes in fair value used for calculating hedge ineffectiveness
$
$
Commodity price risk
Coffee futures
Commodity price risk
Coffee futures
2,804
$
6,055
Derivative Assets
Derivative Assets
$
247
-
-
497
-
-
Accumulated amount of fair value hedge adjustment on hedged
item included in the carrying amount of the hedged items
Fair value hedge
December 31, 2017
December 31, 2016
Purchase commitments Purchase commitments
and coffee inventory
and coffee inventory
Nominal amount of hedged item (in '000 lbs)
2,285
4,432
Line items in the statement of financial position where
hedged item is located
Assets
Liabilities
Changes in fair value used for calculating hedge ineffectiveness
Inventories & hedged
firm commitments
$ 28
128
-
Inventories & hedged
firm commitments
$ -
565
-
As at December 31, 2017 the Company has entered into contracts to hedge purchase
commitments, coffee inventory as well as sales agreements for net notional volumes of 2.3
million pounds of coffee (2016: 4.4 million).
23.2 Foreign currency risk
The Company realizes a significant portion of its sales in US$, and purchases green coffee in US$
which is, in some cases, sold to customers in Canadian dollars. The Company enters into forward
foreign currency contracts to manage its exposure to currency rate fluctuations and to minimize
the effect of exchange rate fluctuations on business decisions. These contracts relate to the
Company’s future cash flows in US$ from sales. In addition, the Company enters into forward
contracts to buy US$ for coffee that it resells in Canadian dollars.
At December 31, 2017, the Company had forward currency contracts to buy US$7.2 million and
sell US$46.2 million (2016: buy US$9.5 million and sell US$42.7 million) from January 2018
through to December 2021 at various Canadian exchange rates ranging from $1.2147 to $1.3837
from January 2018 through to December 2021. The net notional value of the contracts
outstanding at December 31, 2017 was approximately US$39.0 million (2016: US$33.2 million).
The following provides a summary of amounts related to foreign currency forward contracts
designated as hedging instruments.
Currency risk hedges on US$ purchases
As at December 31, 2017 the Company has entered into forward contracts, where from the
nominal value of US$7.2 million (2016: US$6.8 million), US$7.0 million (2016: US$6.8 million)
were designated as hedging instruments.
Page 32
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Carrying amount of hedging instruments
December 31, 2017
December 31, 2016
Fair value hedge
Nominal amount of hedging instruments (in US$'000)
Line item in the statement of financial position where
hedging instrument is located
Assets
Liabilities
Changes in fair value used for calculating hedge ineffectiveness
Accumulated amount of fair value hedge adjustment on hedged
item included in the carrying amount of the hedged items
Fair value hedge
Nominal amount of hedged item (in US$'000)
Line item in the statement of financial posiRon where
hedged item is located
Assets
Liabilities
Changes in fair value used for calculating hedge ineffectiveness
Currency risk on hedge on US$ future revenue
$
$
$
Foreign currency
purchase forwards
6,962
Derivative liabilities
-
229
-
$
$
Foreign currency
purchase forwards
6,773
Derivative assets
128
1
-
December 31, 2017
December 31, 2016
Firm purchase
commitments
& inventories
6,962
Inventories & hedged
firm commitments
380
-
-
$
Firm purchase
commitments
& inventories
6,773
Inventories & hedged
firm commitments
-
23
-
The Company also entered into forward contracts, where from the nominal value of US$46.2
million, US$34.0 million (2016: US$32.6 million) were designated to hedge future forecasted sales
revenue.
Page 33
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Carrying amount of hedging instruments
December 31, 2017
December 31, 2016
Cashflow hedge
Currency risk
Foreign currency
forwards
Currency risk
Foreign currency
forwards
Nominal amount of hedging instruments (in US$'000)
Line items in the statement of financial position where
hedging instrument is located
Assets
Liabilities
Changes in fair value used for calculating hedge ineffectiveness
$
34,015
$
32,560
Derivative assets and
Derivative liabilities
1,292
13
-
Derivative assets and
Derivative liabilities
59
1,144
-
Accumulated amount of fair value hedge adjustment on hedged
item included in the carrying amount of the hedged items
December 31, 2017
December 31, 2016
Cashflow hedge
Nominal amount of hedged item (in US$'000)
Line items in the statement of financial position where
hedged item is located
Assets
Liabilities
Changes in fair value used for calculating hedge ineffectiveness
Cashflow hedge reserve
Currency risk
Foreign currency
forwards
34,015
Accumulated other
Currency risk
Foreign currency
forwards
32,560
Accumulated other
comprehensive income comprehensive income
n/a
n/a
-
567
n/a
n/a
-
1,969
Not included in tables above are fair value changes for swap contracts, as these are not
designated hedge instruments.
23.3
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will
fluctuate due to changes in market interest rates. The Company believes that interest rate risk is
low as all cash equivalents and short-term investments are made in fixed rate instruments. The
Company does have some interest rate risk related to its credit facilities; however, the obligations
are small enough that any exposure is not material at this time. There is no interest rate risk on
the convertible debenture as the interest rate is fixed.
23.4 Credit risk
The Company is exposed to credit risk with respect to its cash and cash equivalents, short-term
investments, accounts receivable and derivative financial instruments.
The Company does not have significant credit risk related to cash and cash equivalents and short-
term investments as amounts are held with major financial institutions.
The Company follows a program of credit evaluations of customers and limits the amount of
credit extended when deemed necessary. For the year ended December 31, 2017, revenues from
three major customers of $29 million (2016: $31 million) represented 35% (2016: 38%) of total
Page 34
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
revenues for the year. These customers represented 47% of total accounts receivable as at
December 31, 2017 (2016: 34%).
The Company had 16% of its accounts receivable past due as at December 31, 2017 (December
31, 2016: 13%). Of the accounts receivable past due, 83% are 1-30 days past due (2016: 94%) and
17% are 31-60 days past due (2016: 6%).
The Company manages the credit risk related to its derivative financial instruments by entering
into such contracts only with high credit quality institutions.
23.5 Liquidity risk
The Company has in place a planning and budgeting process to assist in determining the funds
required to support the Company’s normal operating requirements on an ongoing basis and its
future plans. The Company ensures that there are sufficient committed financing facilities to
meet its short-term business requirements, taking into account its anticipated cash flows from
operations, its existing bank indebtedness and additional borrowing capacity. The Company has
maintained compliance with its banking covenants and remains able to satisfy its liabilities as they
become due. Non-derivative financial liabilities are as follows:
Carrying Amount
Contractual Cash Flows
December 31, 2017
2018
2019 to 2020
2021 to 2022
Thereafter
Accounts payable
Other liabilities
Construction loan
Convertible debenture
Total
$
$
$
2,639
636
844
11,658
$
2,639
591
28
-
$
-
45
113
-
$
-
-
113
-
15,777
$
3,258
$
158
$
113
$
-
-
590
15,000
15,590
23.6 Fair value of financial instruments
Financial instruments that are measured at fair value are categorized as follows:
Page 35
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
December 31, 2017
Level 1
Level 2
Level 3
Financial assets
Cash, cash equivalents and short-term investments $
Derivative assets
Financial liabilities
Derivative liabilities
Other liabilities
$
$
$
$
16,553
1,984
18,537
$
$
2,951
636
$
16,553
275
16,828
$
$
-
-
3,587
$
$
-
$
-
1,709
1,709
$
$
2,951
636
3,587
$
-
-
-
-
-
-
December 31, 2016
Level 1
Level 2
Level 3
Financial assets
Cash, cash equivalents and short-term investments $
Derivative assets
Financial liabilities
Derivative liabilities
$
$
$
$
25,197
95
25,292
$
$
25,197
95
$
-
-
25,292
$
$
-
4,711
4,711
$
$
$
-
$
-
4,711
4,711
$
$
-
-
-
-
-
During the year, there were no transfers between level 1 and 2 instruments.
24. COMMITMENTS AND CONSTRUCTION LOAN
24.1 Operating lease commitments
SWDCC leases a facility which houses its decaffeination plant and offices. SWDCC has exercised a
renewal option such that the lease will expire in 2023. Beyond 2023, the landlord has to approve
any subsequent renewal of the lease.
Seaforth leases a warehouse facility for its primary operations; the lease expires on June 30, 2019.
In November of 2017 Seaforth entered into an agreement to sub-lease a warehouse facility for a
two-year period to allow Seaforth’s meet significant growth in demand for third-party coffee
storage.
Swiss Water Decaffeinated Coffee Company USA, Inc. holds a lease for its Seattle, Washington,
sales office, which expires on March 31, 2020.
A summary of future minimum payments under these operating leases as at December 31, 2017
is as follows:
Minimum lease payments due:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
$
$
1,691
1,412
-
3,103
Page 36
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
24.2 Other lease commitments and Construction loan
On August 26, 2016, SWDCC signed a lease agreement for a build-to-suit production facility. The
lease has an initial term of five years, and can be renewed at SWDCC’s option in five-year
increments up to a total of 30 years. The lease will commence the earlier of the date of opening
of the SWDCC business in any part of the premises, and the date of expiry of the fixturing period,
which is estimated to be May 2018. Under the lease, SWDCC has multiple options to buy-out the
lease starting at the end of the second five-year term. The buy-out value will be equal to the fair
market value of the property as determined by an appraisal process, subject to specified
maximum and minimum values.
A summary of future minimum payments under this lease as at December 31, 2017 is as follows:
Minimum lease payments due:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
Construction loan
$
$
786
4,419
491
5,696
The lease on the build-to-suit production facility also includes a construction management
agreement for the construction of the highly specialized building to house the production plant.
The landlord will finance a portion of the building, with loan payments commencing on the earlier
of substantial completion of construction and January 1, 2019.
The loan is repayable in equal monthly installments over fifteen years, and can be repaid without
penalty at any time. Interest is calculated monthly on the total expended cost, at an annual rate
of RBC’s prime commercial lending rate for commercial loans in Canada plus 1.5%, compounded
semi-annually, up to the date of substantial completion of construction or up to December 31,
2018, whichever is earlier. Subsequently, the interest rate will be 8% per annum, compounded
semi-annually. As at December 31, 2017 the Company accrued $0.8 million for the construction
loan related to work done to date plus two months of interest (2016: nil). That interest is accrued
in construction in progress.
24.3 Other commitments
The Company has provided a standby letter of credit in the amount of $0.3 million as security to
the landlord.
The Company has, in the normal course of business, entered into various contracts. As at
December 31, 2017, these contracts related to the purchase of green coffee in the amount of
$33.0 million (2016: $34.0 million), and natural gas purchase commitments in the amount of $0.2
million (2016: $0.3 million). $32.9 million (2016: $34.2 million) of these contracts will become
Page 37
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
payable within twelve months from December 31, 2017. As at December 31, 2017 the Company's
capital commitments for the new facility's plant and equipment were $16 million.
25.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents comprise cash on hand together with short-term investments. These
investments consist of highly rated and liquid money market instruments with original maturities of
three months or less.
Cash
Cash equivalents
Changes in non-cash working capital.
Inventories
Accounts receivable
Other assets and liabilities
Accounts payable and accrued liabilities
Prepaid expenses and other receivables
Derivative assets at fair value through profit or loss
Derivative liabilities at fair value through profit or loss
December 31, 2017
December 31, 2016
$
$
619
7,685
9,486
$
$
6,490
6,007
12,497
12 months ended
December 31, 2017
$
(3,097)
(420)
(238)
927
(653)
(180)
-
$
12 months ended
December 31, 2016
Restated Note 26
7,387
(4,506)
-
276
(64)
259
5
$
(3,661)
$
3,357
Construction loan was used to fund a $0.8 million addition to Construction in progress. These are
financing and investing transactions which did not require the use of the Company’s cash or cash
equivalents.
26. RESTATEMENT OF CONSOLIDATED STATEMENT OF CASH FLOWS
Subsequent to the issuance of the previously filed consolidated financial statements, for the year ended
December 31, 2016, (filed on SEDAR on March 15, 2017), management discovered an error relating to
the amount of unrealized gain on derivative financial instruments presented within cash from operating
activities before changes in non-cash working capital accounts. The correction of such error resulted in a
decrease in unrealized loss (gain) on derivative financial instruments and the corresponding subtotal
before change in non-cash working capital relating to operating activities of $3.5 million, and a
corresponding increase of $3.5 million in change in non-cash working capital relating to operating
activities. The following identifies the error that was corrected by management for the year ended
December 31, 2016.
Page 38
TEN PEAKS COFFEE COMPANY INC.
Notes to the Consolidated Financial Statements
For the year ended December 31, 2017
(Tabular amounts in thousands of Canadian dollars)
Line Item on Cash Flow Statement ('000s)
As Reported
Adjustment
Adjusted
$
4,149
$
4,149
Net income for the year
Items not affecting cash
Depreciation and amortization
Unrealized loss (gain) on derivative financial instruments
Share-based compensation recovery
Payment of restricted share units settled in cash
Foreign exchange loss on cash held and on debt
Income taxes recognized in profit and loss
Finance expense recognized in profit and loss
Change in non-cash working capital relating to operating activities
Cash generated from operations
Interest received
Interest paid
2,053
1,761
(180)
(147)
2
1,593
4
9,235
(165)
9,070
337
(251)
2,053
(1,761)
(180)
(147)
2
1,593
4
5,713
3,357
9,070
337
(251)
$
9,156
(3,522)
(3,522)
3,522
-
-
-
-
Net cash generated from operating activities
$
9,156
The restatement did not impact net cash generated from operating activities, or any other cash flows
for the years presented. The restatement only affected the consolidated statement of cash flows. There
was no change to the consolidated statements of financial position, income, comprehensive income or
the changes in equity for the years presented, and there was no impact to basic and diluted earnings
per share.
27.
SUBSEQUENT EVENTS
These consolidated financial statements for the year ended December 31, 2017 were approved for
issuance on March 19, 2018. There were no significant non-adjusting events that occurred between the
reporting date and the date of authorization other than as noted below.
On January 15, 2018, the Company paid an eligible dividend in the amount of $0.6 million ($0.0625 per
share) to shareholders of record on December 29, 2017.
On February 21, 2018 the Company issued 22,348 of shares pursuant to its Restricted Share Unit Plan.
On March 19, 2018, the Company declared an eligible dividend of $0.0625 per share, to be paid on April
16, 2018 to shareholders of record on March 29, 2018.
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