Swiss Water Decaffeinated Coffee
Annual Report 2019

Plain-text annual report

SWP Q4 cover_Layout 1 20-03-20 10:56 AM Page 1 SWISS WATER DECAFFEINATED COFFEE INC. 2019 ANNUAL REPORT SWP Q4 cover_Layout 1 20-03-20 10:56 AM Page 2 SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 MANAGEMENT DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis (“MD&A”) of Swiss Water Decaffeinated Coffee Inc. (“Swiss Water” or the “Company”), dated as of March 19, 2020, provides a review of the financial results for the three months and the year ended December 31, 2019 relative to the comparable period of 2018. The three-month period represents the fourth quarter (“Q4”) of our 2019 fiscal year. This MD&A should be read in conjunction with Swiss Water’s audited consolidated financial statements for the year ended December 31, 2019, and in conjunction with the Annual Information Form, which are available on 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 Swiss Water’s 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; (vi) the expected cost to complete the production facility and production line currently under construction; and (vii) the business and financial outlook of Swiss Water. In addition, this MD&A contains financial outlook information that is intended to provide general guidance for readers based on our current estimates, which 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, supply of utilities, general industry conditions, commodity price risks, COVID-19, 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 Swiss Water going forward; (v) the availability and expected terms and conditions of debt facilities; and (vi) 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, Swiss Water 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. 1 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 EXECUTIVE SUMMARY For the three months and year ended December 31, 2019, Swiss Water recorded significantly higher processing volumes and revenues. Volume growth remained strong in all trading regions and continued to accelerate rapidly in Europe and other international markets. We also continued to grow our market share versus our competitors, increased our gross profit, and invested in organizational change initiatives that will generate operational efficiencies going forward, all while remaining focused on producing high-quality premium decaffeinated coffee. To drive future growth, we are committed to expanding our presence in Europe and increasing awareness and adoption of the Swiss Water brand by targeting specific customer groups in North America. A summary of our financial results is shown in the table below: In $000s except per share amounts (unaudited) Sales Gross Profit Operating income Net income EBITDA1 EBITDA excluding the impact of IFRS 16-Leases2 Net income – basic3 Net income – diluted3 3 months ended December 31, 2018 22,979 2019 25,023 $ $ Year ended December 31, 2018 89,939 2019 97,230 $ 4,106 539 716 1,454 797 3,686 1,618 919 2,050 2,050 16,494 5,162 2,944 10,350 7,344 0.08 $ 0.08 $ 0.10 0.03 $ $ 0.32 $ 0.32 $ 14,921 5,631 4,531 7,745 7,745 0.50 0.35 $ $ $ 1 EBITDA is defined in the ‘Non-IFRS Measures’ section of this MD&A and is a “Non-GAAP Financial Measure” as defined by CSA Staff Notice 52-306. 2 EBITDA excluding the impact of IFRS 16 - Leases is defined as EBITDA, less lease payments made during the year. 3 Per-share calculations are based on the weighted average number of shares outstanding during the periods. Operational highlights  Total shipped volumes reported strong growth momentum throughout 2019. Shipped volumes in the fourth quarter and for the year grew by 18% and 16% respectively, when compared to the same periods in 2018. We continue to win new business as coffee industry participants migrate away from chemical decaffeination processes. In addition, since the beginning of 2019, we have seen an acceleration of underlying volume growth from existing customers. At the same time, our global reach has continued to expand. Swiss Water now exports to 60 different countries, and we ship volume to customers on every continent.  Fourth quarter shipments to roasters remained flat but were up by 10% for the full year, when compared to the same periods in 2018. Shipments to importers were up by 61% in Q4 and 32% for the full year. The growth in roaster and importer volumes continues to reflect gains in market share due, in part, to a reduction in global chemical free decaffeination capacity following the shutdown of two legacy CO2 plants operated by competitors in 2018.  Shipped volumes to our specialty accounts increased by 7% in the fourth quarter and by 8% for the year, compared to the same periods in 2018. Increasing recognition of the Swiss Water brand, and specifically greater recognition in Europe, is helping drive increased business within this growing industry segment.  Shipments to our commercial accounts increased by 25% in the fourth quarter and by 22% for the full year, compared to the same periods in 2018. Increasing consumer awareness and demand for 2 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 decaffeinated coffee, combined with the reduced availability of chemical free decaffeination capacity is helping drive this growth.  Swiss Water’s European subsidiary was formally incorporated in January 2019 helping drive a rapid acceleration in our performance in this region throughout the year. Our European shipped volumes grew by 170% in Q4, and by 97% for the year. This exceptional growth trajectory was largely due to our success in winning new customers and trading partners on the continent. At the same time, we are also experiencing strong underlying growth with our legacy customers in Europe.  Our largest geographical market by volume in Q4 and for the year continued to be the United States, followed by Canada, Europe and other international markets. By dollar value, for the year ended December 31, 2019, 48% of our sales were to customers in the United States, 34% were to Canada, and the remaining 18% were to other countries. As we continue to expand our business in Europe, we anticipate revenues from our international markets to increase in both dollar and percentage terms. Financial highlights  Revenue increased by 9% to $25 million in the fourth quarter and improved by 8% to $97.2 million for the full 2019 year. The increased revenue in both periods was primarily due to the strong growth in our processing volumes. A higher average US dollar (“US$”) exchange rate, as well as increases in green coffee sales volumes, offset by a lower coffee futures price (“NY’C’”), also contributed to the improvement.  Gross profit for Q4 was $4.1 million, a $0.4 million increase over the fourth quarter of 2018. Our Q4 gross profit in 2019 was positively impacted by increased overall process volumes and a higher proportion of regular volumes in our sales mix. Improved supply chain efficiencies and our ongoing efforts to control operating costs also contributed. These enhancements were partially diluted by the impact of higher labour costs. Full year 2019 gross profit increased to $16.5 million from $14.9 million in 2018. The improvement in annual gross profit was achieved despite the need to absorb much higher than expected energy costs. This was due to a temporary spike in the price for natural gas resulting from a pipeline explosion in October 2018. This significantly reduced gas supply in British Columbia during Q1 2019.  Operating expenses were up by 73% to $3.6 million in the fourth quarter and increased by 22% to $11.3 million for the year, when compared to the same periods in 2018. It’s noteworthy that in Q4 2018 we received a one-off payment in relation to the Canadian Scientific Research and Experimental Development (SRED) programme. The absence of a similar benefit in Q4 2019 was a material driver of the year-over- year increase in operating expense. In addition, higher occupancy expenses were recorded in Q4 2019 as we commenced use of the office space in our new production facility in Delta, British Columbia. On an annualized basis inflationary pressure on operating expenses was driven by a number of one-time expenses. These included: costs associated with restructuring of our sales and marketing function; investments in capacity enhancement projects; increased research and development activity; higher professional fees; and moving costs due to the consolidation of warehousing activities by our Seaforth Supply Chain Solutions subsidiary.  Operating income decreased by $1.1million, or 67%, to $0.5 million in the fourth quarter and decreased by $0.5 million, or 8%, to $5.1 million for the year, compared to the same periods last year. 3 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019  Fourth quarter net income was $0.7 million compared to $0.9 million in Q4 2018. Full year 2019 net income was $2.9 million, compared to $4.5 million in 2018. The improvement in annual gross profit we achieved in 2019 was offset by higher operating and non-operating expenses. The increase in non- operating expenses was driven by a loss on risk management activities and the revaluation of an embedded derivative, as well higher finance expenses following the adoption of IFRS 16 - Leases.  EBITDA decreased by $0.6 million, or 29%, to $1.5 million in the fourth quarter and increased by $2.6 million, or 25%, to $10.4 million for the full year, when compared to the same periods in 2018. The increase in annual EBITDA was largely due to the adoption of new accounting standards related to leases: IFRS 16 – Leases. Compared to 2018, EBITDA, excluding the impact of IFRS 16, decreased by $1.3 million, or 61%, to $0.8 million in Q4, and decreased by $0.4 million, or 5%, to $7.3 million for the full year. Operationally, the change in EBITDA was driven by strong growth in processing volumes, ongoing efforts across the Company to enhance cost recovery and an increased financial contribution from Seaforth, our supply chain subsidiary. These gains were offset by a series of one-time expenses. These were specifically related to relocation costs, a temporary increase in natural gas costs, investment in sales team initiatives, research and development and a lower refund from a research and development incentive programme.  During Q4 2019 the Company entered into an asset-based credit facility with a Canadian bank. The available balance of the credit facility is based on the lower of the Borrowing Base margins of eligible assets, and $30.0 million. This credit facility replaced two former credit facilities and can be drawn on to fund operational and capital initiatives. OUTLOOK Looking ahead, we are targeting to record a strong year-over-year increase in annual volume once again in 2020. During 2019, we achieved strong growth in volumes shipped to roasters, importers and commercial accounts. This positive trend is a reflection of our success in winning business with new roasters and increasing our business with existing customers who have grown their distribution locations or expanded their product offerings. Furthermore, we continue to see an acceleration of customers converting from chemical decaffeination to our chemical free process. Recognition of the Swiss Water brand continues to develop within our expanding portfolio of customers and with coffee consumers in North America and overseas. Swiss Water now exports coffees to 60 countries and to all continents across the globe. We also expect the increased marketing and sales investments we have made, and continue to make will drive further gains in brand recognition and customer conversion going forward. In the more immediate term, we are closely monitoring the impact of the COVID-19 pandemic on our operations. The situation is dynamic and changing day-to-day so its ultimate impact on Swiss Water is difficult to predict. To date, the impact has been restricted to inflationary pressure on outbound freight rates to Asia. This is being driven by a fall in shipping traffic across the Pacific Ocean and a resulting reduction in container availability for our exports to this region. Looking forward, we may experience disruptions to business operations if a significant number of our employees, or those of our customers or suppliers, are quarantined and unable to work. We will continue to closely monitor the situation and initiate risk management and mitigation procedures as needed. Construction of our new Swiss Water® Process decaffeination facility, which is located in Delta, British Columbia, Canada, is nearly completed. Initially, this facility will house one new production line, although the 4 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 site is large enough to accommodate further expansion as conversion to chemical free decaffeination accelerates. During the fourth quarter of 2019, we commenced the use of the office and administration portion of the new facility and began commissioning of the new production line. This process is going well and we anticipate producing commercial-grade decaffeinated coffee during the second quarter of 2020. Expansion of our new Delta site is likely to become necessary sooner than we had previously anticipated. In mid February of 2020, ownership of our legacy production site in Burnaby, BC changed hands. While our lease on this property, which expires in June 2023, provides for an additional five-year extension (to 2028), this is at the sole discretion of the landlord. Under the terms of the lease, the landlord has until June 2021 to inform us of their intentions – just two years before we have to vacate should an extension not be granted. In assessing the impact of this change of ownership, we have concluded that the potential risk it poses to our ability to continue operations at the Burnaby site beyond 2023 is unacceptable. Accordingly, in order to provide the capacity we will need to meet future demand for our coffees, we are moving forward with analysis to build a second production line in Delta before the lease in Burnaby expires. To meet the more immediate growth in demand, we completed an efficiency enhancement project in Q2 of 2018 that successfully increased the capacity of our original facility in Burnaby, BC. Since then, we have continued to pursue further optimization opportunities at this plant. These changes, together with the capacity that was added at the same facility in 2016, are expected to be sufficient to meet anticipated growth in demand for our premium Swiss Water® Process coffees until the new production line is fully operational. As part of an ongoing evaluation of our cost structure with the goal of increasing overall margins, we are continuing to review and optimize cost recovery opportunities for both Swiss Water and our Seaforth Supply Chain Solutions Inc. (“Seaforth”) subsidiary. While Seaforth’s operating costs rose substantially in the first half of 2018 due to a warehouse expansion, there has been a notable reduction in operating costs in the subsequent six quarters. During the third quarter of 2019, we successfully consolidated all of Seaforth’s operations onto one expanded site. This should significantly improve operating efficiency going forward. Notably, Seaforth made a materially positive contribution to the improvement in our gross profit in 2019. Decaffeinated coffee continues its strong, positive growth trend, in both North America and in Europe. We believe that this is driven by a combination of factors, including the premiumization of the coffee market and broader consumer access to high quality decaffeinated coffee. The 18-39 year old age group leads decaffeinated coffee consumption, a trend that has maintained over the past six years1. This demographic in particular wants to enjoy great-tasting coffee throughout the day without worrying about the potential side effects of excess caffeine. Younger consumers are also more aware and concerned about artificial ingredients and chemicals in the processing of their food and beverages—and expect transparency from brands. As a result, we have experienced increased demand for our sustainable Swiss Water® Process, which is certified Organic and uses zero chemical solvents. Demand for sustainability is increasing with consumer packaged goods sales of products marketed as sustainable growing 5.6x faster than those that were not. 2 Furthermore, 43% of 1 National Coffee Association 2019 Coffee Drinking Trends 2 NYU Stern Center for Sustinable Business, Sustainable Share Index™: Research on IRI Purchasing Data (2013-2018), March 11, 2019 5 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 consumers say they are more likely to buy coffee that is Certified Organic, and 49% of consumers say they’re more likely to buy coffee if it is grown in an environmentally sustainable way. 1 The health and environmental hazards associated with methylene chloride (the primary chemical used by our competitors to decaffeinate coffee) continues to garner media attention3 and growing public concern. It’s worth noting that the U.S. Environmental Protection Agency has banned the substance in paint removers4. We believe this rise in awareness is helping to drive consumer demand for, and customer conversion to, our 100% chemical free coffees. Accordingly, we will continue to proactively invest in messaging activities to convey the many benefits of the Swiss Water® Process. Over the near future, our primary focus will be to position Swiss Water to maintain our current growth momentum and enhance our operating margins. The new European sales office we opened in Q1 of 2019 is now enabling us to much better serve customers in the EU, the world’s largest decaffeinated coffee market. This strategy is clearly bearing fruit as our European business grew by 97% through 2019 when compared to 2018. In parallel, we are enhancing our ability to target specific customer groups in the United States. Developing our European and US sales teams has increased our expenses somewhat over the last several quarters. However, we expect these initiatives will enable us to generate increased volume in the longer term and to help drive major account wins. As converting large customers to Swiss Water® Process coffees typically takes many months, we believe that continuing to strengthen our sales capability is a critical part of our preparation to ramp up orders and win new business as we complete the commissioning of our new production facility currently underway. Going forward, we will continue to invest in our production infrastructure and human resources to prepare for the significant growth that we anticipate in the future. BUSINESS OVERVIEW What we do Swiss Water is a premium green coffee decaffeinator located in Burnaby and Delta, British Columbia. We employ the proprietary Swiss Water® Process to decaffeinate green coffee without the use of chemical solvents, leveraging science-based systems and controls to produce coffee that is 99.9% caffeine free. Our process is certified organic by the Organic Crop Improvement Association and is the world’s only consumer- branded decaffeination process. Decaffeinating premium green coffee without the use of harmful chemical solvents is our primary business. Our Seaforth subsidiary 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 Swiss Water’s local green coffee handling and storage services. In addition, Seaforth handles and stores coffees for several other coffee importers and 3 The Washington Post published an article titled “EPA bans consumer use of deadly paint stripper, in rare step” on March 15, 2019 citing deaths being caused by the chemical methylene chloride. In 2018, 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 4 United States Environmental Protection Agency Regulation of Paint and Coating Removal for Consumer Use: Methylene Chloride (https://www.regulations.gov/document?D=EPA_FRDOC_0001-23648) 6 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 brokers, and is the main green coffee handling and storage company in Metro Vancouver. Seaforth is organically certified by Ecocert Canada. Swiss Water name and TSX symbol In the prior year, on September 28, 2018, Swiss Water changed its corporate name from Ten Peaks Coffee Company Inc. to Swiss Water Decaffeinated Coffee Inc. The name change was undertaken in order to better leverage the considerable brand equity in the “Swiss Water” name, as well as the related trademarks and intellectual property of the Swiss Water® Process. Swiss Water’s shares trade on the Toronto Stock Exchange under the symbol ‘SWP’, formerly TPK. As at the date of this report 9,078,780 shares were issued and outstanding. Swiss Water Decaffeinated Coffee 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. 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 Intercontinental Exchange, 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. 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 Futures Prices – We buy and sell coffees based on the NY’C’ plus 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’ futures 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 7 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 (decrease) as we replace coffee at higher prices. Our accounts receivable and our accounts payable also rise and fall with the NY’C’. 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. The chart below shows the movement in the NY’C’ for the last eight quarters: In Q4 2019, the NY’C’ averaged US$1.12/lb compared to an average of US$1.09/lb in Q4 2018. For 2019, the NY’C averaged US$1.01/lb, compared to US$1.12/lb for 2018. The rise and fall of the NY’C’ affects our volume of shipments, our revenues and our cost of sales. In an upward trending market, our customers tend to consume their inventories rather than build them. When the NY’C’ declines over a sustained period (as it has for the past 12 months), our customers tend to add to their inventories.  US$/C$ Exchange Rates – As noted above, the majority of our revenues are generated in US dollars, while a significant portion of our costs is 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 the Canadian dollar. A long-term depreciation of the Canadian dollar will improve our long-term profitability and cash generation. 8 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 The chart below illustrates the US$ to Canadian dollar (“C$”) exchange rates for the last eight quarters: In Q4 2019, the US$ averaged C$1.32, remaining flat over the same period in 2018. In 2019, the US$ averaged C$1.33, an increase of 2% over the same period last year. During 2019 the US$ ranged between C$1.30 and 1.36 (2018: between C$1.23 and C$1.36). When the US$ depreciates (appreciates), it decreases (increases) our gross profit on green coffee revenues. Internal Factors  Sustainability and Environmental Responsibility – The Swiss Water® Process is a 100% chemical free 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).  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. 9 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019  Process Consistency – 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 few years. We believe that ensuring employee safety leads to improved employee retention and morale, increased efficiency and lower operating costs. 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. As discussed above, we completed an efficiency enhancement project in Q2 2018 to increase capacity at our current operating facility and 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. Construction of the new facility in Delta will enable us to meet our long term growth ambition.  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. 10 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019  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 – In 2015, 2016, 2018, and 2019 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). In 2020, we will continue to revisit our budgets and financing strategy to ensure that we have sufficient funds to execute on our business strategy. We expect to utilize internally generated and external funds to finance the capital costs associated with the new production facility and its future growth.  Management Expertise – Swiss Water 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 business. OPERATING RESULTS Revenue We 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 Swiss Water, 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 than those to importers from period to period. We also 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 volumes increase. “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 our processing volumes and with the growth of Seaforth’s business. 11 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 Our revenue by category for the indicated periods was: (In $000s) (unaudited) Process revenue Green revenue Distribution revenue Total revenue 3 months ended December 31, 2018 2019 6,895 $ 16,278 1,850 $ 5,974 15,406 1,599 Year ended December 31, 2018 23,894 60,197 5,848 2019 26,852 $ 63,047 7,331 25,023 $ 22,979 $ 97,230 $ 89,939 $ $ For the quarter ended December 31, 2019, sales totaled $25.0 million, an increase of $2.0 million, or 9%, compared to the same quarter in 2018. Sales for the year 2019 totaled $97.2 million, an increase of $7.3 million, or 8%, over the same period last year. The increases in our sales in the fourth quarter and in 2019 by revenue category are as follows:  Process revenue increased by $0.9 million, or 15% in Q4, and increased by $3.0 million, or 12% in 2019. Increases in both periods reflect growth in our processing volumes and a higher average US$ exchange rate.  Green revenue increased by $0.9 million, or 6% in Q4, and increased by $2.9 million, or 5% in 2019. These increases were due to growth in green coffee sales volumes, offset by a lower coffee futures price, NY’C’, in such periods.  Distribution revenue rose by $0.3 million, or 16% in Q4, and increased by $1.5 million, or 25% in 2019. Enhanced distribution revenue has been driven by increased volumes of stored coffee, and revenue management initiatives. The increases in our sales volume in the fourth quarter and in 2019 by geographical segment are as follows:    Sales volume in North America increased by 4% in Q4, and by 6% in 2019, Sales volume in Europe increased by 116% in Q4, and by 97% in 2019, Sales volume in Asia Pacific increased by 54% in Q4, and by 54% in 2019. The increases in sales volumes by geographical segment are consistent with our strategic efforts to leverage existing relationships with customers in North America while establishing a sales presence in France to enhance sales growth and penetration in the European market. 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. The 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. Our fourth quarter cost of sales increased by $1.6 million, or 8%, to $20.9 million this year compared to the same period in 2018. For 2019, our cost of sales was $80.7 million, up by $5.7 million, or 8%, over the same period last year. The increase is broadly the result of higher variable production costs associated with the growth in production volumes and annual labour cost inflation, partially offset by a decrease in green coffee costs, which is a significant portion of our cost of sales. 12 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 In 2019, we also absorbed higher natural gas costs as a result of a spike in the spot market for natural gas, due to a pipeline explosion in October 2018 and a polar vortex (extended period of abnormally cold weather) in March 2019 which significantly reduced the supply of gas. Natural gas prices normalized in the second to fourth quarter of 2019. Gross Profit Gross profit increased by 11% to $4.1 million for the fourth quarter of this year, as higher revenues more than offset the increases in our cost of sales. Gross profit for the year 2019 increased by 11% to $16.5 million, compared to the same period last year, despite the impact of higher energy costs in Q1 2019. Full year results have been positively impacted by increased processing volumes, revenue management initiatives, and leveraging enhanced cost recovery, without compromising the quality of our coffee. 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 for Q4 2019 totaled $1.8 million. This is an increase of $0.9 million, or 103%, compared to the same period last year. Administration expenses for the year 2019 increased by 29% to $6.9 million. Throughout the year the increase to administrative expenses largely reflects costs incurred to support strategic growth initiatives for 2019, salary inflation as a consequence of our annual cost of living adjustment, moving costs as we consolidated Seaforth’s operation into one location in Delta, and increased research and development expenditures in Q2 2019. In addition, in Q4 2018 we benefited from a Canadian Scientific Research and Experimental Development incentive tax credit of $0.4 million, while for the same period in 2019 the amount was not significant. Sales and Marketing Expenses Sales and marketing expenses include compensation and other personnel-related expenses for sales and marketing staff, consumer initiatives, trade advertising and promotion costs, as well as related travel expenses. We invest in research regarding the behavior of decaffeinated coffee consumers. These insights enable us to create effective consumer advertising programmes, and they form a cornerstone of the consultative services we provide to our customers. We also aim to grow brand awareness with both the coffee trade and consumers. We employ a range of marketing activities to achieve this, including digital and print advertising, social media communications and trade show exhibiting and sponsorship at key industry events. Sales and marketing expenses were up by $0.4 million, or 36%, to $1.5 million in Q4 2019, and by $0.4 million, or 9%, to $4.1 million for 2019, compared to the same periods in 2018. The increases in both periods were driven by initiatives in Europe and the United States. Specifically, higher investment in brand awareness activities, and in support of our strategic growth initiatives. Occupancy Expenses Occupancy expenses include the cost of renting offices for sales, marketing and administrative use. Occupancy costs for the fourth quarter and 2019 increased by $0.2 million in Q4 2019, and increased by $0.1 13 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 million for the full year. In 2019 we experienced higher costs for occupancy expenses, as in Q4 2019 we commenced use of the administrative office at our new production facility in Delta, British Columbia. 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 credit facilities and bank debt, other borrowings, the accretion expense on our asset retirement obligation, interest expense on a convertible debenture and interest expense on finance leases. The net finance expense was $0.2 million for the three months ended December 31, 2019, and $1.4 million for the year ended December 31, 2019, respectively, compared to net finance expense of $0.2 million and $0.9 million in the same periods last year. The lower interest income from short-term investments maturing in 2019 combined with the interest expenses on a convertible debenture and interest expense on finance leases, due to the adoption of IFRS 16 in 2019, accounted for the majority of the changes. 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%, causing the amortization of the bond discount to change over time. The adoption of IFRS 16 – Leases in 2019 resulted in interest expenses of $0.1 million and $0.4 million recognized during the three months and the year ended December 31, 2019, while there was no such cost in 2018. During the construction phase of our Delta facility, interest expense related to the construction loan and the Delta lease is capitalized in the property, plant and equipment. Gains and Losses on Risk Management Activities Under 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 (loss) 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 and the year ended December 31, 2019, we recorded a gain of $0.4 million and $1.4 million respectively, compared to a loss of $0.6 million and $0.01 million recorded for the same periods in 2018. Fair Value Adjustment on Embedded Option Swiss Water entered into a convertible debenture in October 2016. Under IFRS, this instrument is deemed to contain an embedded option that 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 losses of $0.01 million in the fourth quarter of 2019 and $0.8 million for the year-to-date, compared to gains of $0.8 million and $1.8 million, respectively, in the same periods of last year. 14 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 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 $0.2 million, compared to $ 0.04 foreign exchange gain or in the same period last year. The full year amount for 2019 was a loss of $0.4 million compared to a loss of $0.3 million in the same period of 2018. Income Before Taxes and Net Income In the fourth quarter of 2019, we recorded income before taxes of $0.9 million, compared to $1.6 million in the same period in 2018. Current and deferred income tax reduced our net income by $0.2 million for the quarter, compared to $0.7 million in Q4 2018. 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 is offset by the tax benefit of loss carryforwards recognized. Overall, we recorded a net income of $0.7 million in Q4 2019, compared to $0.9 million in the same quarter last year. For 2019, we recorded pre-tax income of $4.0 million, down from $6.2 million in 2018. This was reduced by income tax expenses of $1.1 million, compared to income tax expense of $1.7 million in the same period last year. Overall, we recorded net income of $2.9 million for the year-to-date, compared to $4.5 million a year ago. Other Comprehensive Income 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 of 2019 was a gain of $0.7 million, compared to a loss of $2.6 million in the same period of 2018. Other comprehensive income, net of tax, for 2019 was a gain of $1.9 million, compared to a loss of $4.0 million in the same period of 2018. In both periods, the increases and decreases are related to fluctuations in the value of the Canadian dollar versus the US dollar. Basic and Diluted Earnings per Share Basic earnings per share are calculated by dividing net income by the basic weighted average number of shares outstanding during the period. Similarly, diluted earnings per share are 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 the fourth quarter and the year 2019, both potential common shares issuable under the RSU Plan and common shares issuable for the convertible debenture are anti-dilutive and therefore excluded from the calculation of diluted earnings per share in such periods. In comparison, for the same periods of 2018, only potential common shares issuable under the RSU Plan are anti-dilutive and excluded from the calculation. 15 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 The calculations of basic and diluted earnings per share for the current and prior periods are shown in the following table: (In 000s except for per share data) (unaudited) Basic earnings per share Net income attributable to shareholders Weighted average number of shares Basic earnings per share Diluted earnings per share Net income attributable to shareholders Interest on convertible debenture Gain on fair value adjustment of the embedded option Net income after effect of diluted securities Weighted average number of shares – basic Effect of diluted securities: convertible debenture Weighted average number of shares - diluted Diluted earnings per share QUARTERLY INFORMATION / SEASONALITY 3 months ended December 31, 2018 2019 Year ended December 31, 2018 2019 716 9,061,210 $ 919 $ 2,944 $ 9,061,210 9,061,210 4,531 9,058,149 0.08 $ 0.10 $ 0.32 $ 0.50 716 - - 919 272 (813) 2,944 - - 716 9,061,210 - 9,061,210 0.08 $ $ 378 $ 2,944 $ 9,061,210 1,818,182 10,879,392 9,061,210 - 9,061,210 0.03 $ 0.32 $ 4,531 1,063 (1,799) 3,795 9,058,149 1,818,182 10,876,331 0.35 $ $ $ $ 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: In $000s except for per share amounts (unaudited) Sales Gross Profit Operating income EBITDA1 EBITDA excluding IFRS 162 Net income (loss) Per Share3 Net income (loss) - basic Net income (loss) - diluted 8 Quarter Average Q3 Q4 2019 2019 23,396 25,023 23,645 4,737 4,106 2,291 539 3,485 1,454 2,696 797 884 716 3,927 1,349 2,261 1,886 934 Q2 2019 24,392 4,106 1,356 3,097 2,278 1,353 Q1 2019 24,170 3,544 976 2,312 1,573 (9) Q4 2018 22,979 3,686 1,618 2,050 2,050 919 Q3 2018 23,087 4,439 1,927 2,717 2,717 1,828 Q2 2018 22,658 3,952 1,528 1,868 1,868 1,294 Q1 2018 21,215 2,842 555 1,106 1,106 489 0.10 0.08 0.08 0.08 0.10 0.10 0.15 0.14 (0.00) (0.00) 0.10 0.03 0.20 0.18 0.14 0.10 0.05 0.03 1 EBITDA is defined in the ‘Non-IFRS Measures’ section of this MD&A and is a “Non-GAAP Financial Measure” as defined by CSA Staff Notice 52-306. 2 EBITDA excluding the impact of IFRS 16 - Leases is defined as EBITDA, less lease payments made during the year. 3 Per-share calculations are based on the weighted average number of shares outstanding during the periods. There is an element of seasonality in our business, in that the second half of the year tends to have higher volumes and revenues. NON-IFRS MEASURES EBITDA and EBITDA which excludes the impact of IFRS 16 - Leases 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. 16 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 We define EBITDA as net income before interest, depreciation, amortization, impairments, share-based compensation, gains/losses on foreign exchange, gains/losses on disposal of property and 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. EBITDA for the three months ended December 31, 2019 was $1.5 million, down by 29% compared to Q4 2018. For the year, EBITDA increased by 34% to $10.4 million, compared to the same period in 2018. In 2019, we adopted IFRS 16 – Leases, without restating comparative amounts for the year 2018, as permitted by the standard. For the year ended December 31, 2019, the adoption of IFRS 16 resulted in the recognition of $1.9 million in depreciation expense and $0.4 million in interest expense, which are costs that are not included in the calculation of EBITDA. In the prior year 2018, these leases were classified as operating leases, under IAS 17 – Leases, and their related minimum lease payments were recognized as a part of EBITDA. For the three months ended December 31, 2019 EBITDA, which excludes the impact of IFRS 16, was $0.8 million, down by 61% compared to Q4 2018. For the year, EBITDA excluding the impact of IFRS 16 decreased by 5% to $7.3 million, compared to the same period in 2018. Operationally, the change in EBITDA was driven by strong growth in processing volumes, successful and continuous efforts across the Company to enhance cost recovery and an increased financial contribution from Seaforth. The positive impacts were offset by moving cost as leases concluded and we consolidated Seaforth’s operations in Delta, a temporary increase to natural gas in the first two quarters of 2019, a strategic investment in sales team and initiatives, research and development for efficiencies and a lower 2019 refund from Canadian scientific research and experimental development incentive tax credit. The reconciliation of net income to EBITDA is as follows: (In $000s) (unaudited) 3 months ended December 31, 2018 2019 Year ended December 31, 2018 2019 Income for the period Income taxes Income before tax Finance income Finance expenses Depreciation & amortization Unrealized (gain) loss on foreign exchange forward contracts Fair value loss (gain) on the embedded option Loss on foreign exchange Share-based compensation EBITDA Impact of IFRS 16, which was adopted in the year 2019 EBITDA excluding the impact of IFRS 16 $ $ $ $ 716 193 909 (134) (85) 804 (488) 12 190 246 1,454 (657) 797 $ $ $ $ 919 718 1,637 (143) 373 426 626 (813) (38) (18) 2,050 - 2,050 $ $ $ $ 2,944 $ 1,059 4,003 $ (511) 1,911 3,697 (830) 4,531 1,689 6,220 (530) 1,457 1,689 188 770 425 885 10,350 $ (3,006) 7,344 $ (1,799) 278 242 7,745 - 7,745 17 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 To help readers better understand our financial results, the following table shows the reconciliation of operating income to EBITDA: (In $000s) (unaudited) 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 3 months ended December 31, 2018 2019 Year ended December 31, 2018 2019 $ 539 $ 1,618 $ 5,162 $ 5,631 804 246 353 426 (18) (602) 3,697 885 1436 1,436 1,689 242 (5) (488) 626 (830) 188 EBITDA Impact of IFRS 16, which was adopted in the year 2019 EBITDA excluding the impact of IFRS 16 $ $ 1,454 $ (657) 797 $ 2,050 - 2,050 $ $ 10,350 $ (3,006) 7,344 $ 7,745 - 7,745 SELECTED ANNUAL INFORMATION (In $000s except per share amounts) (unaudited) Balance Sheet Total assets Total non-current liabilities Income Statement Revenue Net income EBITDA1 EBITDA excluding impact of IFRS 162 Dividends paid Per share, basic 3 Net income EBITDA1 EBITDA excluding impact of IFRS 162 Dividends paid Per share, diluted 3 Net income EBITDA 1 EBITDA excluding impact of IFRS 162 December 31, 2019 December 31, 2018 December 31, 2017 136,881 66,445 97,230 2,944 10,350 7,344 2,265 0.32 1.14 0.81 0.25 0.32 1.14 0.81 86,881 27284 27,284 89,939 4,531 7,745 7,745 2,262 0.50 0.85 0.85 0.25 0.35 0.71 0.71 72,848 19,497 83,755 4,160 6,923 6,923 2,260 0.46 0.77 0.77 0.25 0.42 0.64 0.64 1 EBITDA is defined in the ‘Non-IFRS Measures’ section of this MD&A and is a “Non-GAAP Financial Measure” as defined by CSA Staff Notice 52-306. 2 EBITDA excluding the impact of IFRS 16 - Leases is defined as EBITDA, less lease payments made during the year. 3 Per-share calculations are based on the weighted average number of shares outstanding during the periods. Our total assets and our total long-term liabilities increased in each of the last two years as we are investing in constructing a new production facility and due to the adoption of IFRS 16 – Leases. Our new state of the art production facility in Delta, BC, for which construction commenced in 2016, increased our total assets by $24.8 million in 2019 and by $23.9 million in 2018, respectively (see ‘Outlook’ section, above). IFRS 16 – Leases was adopted in the year 2019, which resulted in an increase of $24.0 million to total assets. Total long-term liabilities increased in both years consistently with the additions to our new plant and the new IFRS 16. 18 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 LIQUIDITY AND CAPITAL RESOURCES Operating activities For the three months and year ended December 31, 2019, we generated $0.7 million and $7.4 million, respectively, in net cash from operating activities, compared to $2.5 million and $5.7 million generated in the same periods in 2018. In 2019, we adopted IFRS 16 – Leases, and as required by the new standard, for the three and year ended December 31, 2019, we accounted for lease liability payments of $0.4 million and $1.8 million, respectively, as cash outflows under financing activities. These cash outflows were reported under operating activities in 2018. Investing Activities Cash outflows in investing activities for Q4 2019 were $4.1 million, compared to cash outflows of $10.4 million in Q4 2018. Cash outflows from investing activities for 2019 were $18.7 million, compared to cash outflows of $14.0 million in the same period last year. In both years the majority of cash outflows were for capital expenditures related to our plant expansion in Delta, BC. In 2018 proceeds from short-term investments were $7.0 million while there were no such investments made in 2019. Financing Activities During the year ended December 31, 2019, Swiss Water paid $2.3 million in dividends to shareholders. This is unchanged from 2018. Throughout the years 2019 and 2018 we received proceeds from our construction loan in the amount of $10.6 million and $9.4 million, respectively, which were used to pay for costs of our new production plant in Delta. Also, in the year 2019, we drew $3.5 million from our new credit facility to pay for operational and capital initiatives. In accordance with IFRS 16 – Leases, which was adopted in 2019, our financing cash outflows include amounts for lease payments, which, in the year 2019, were $1.8 million and $nil in 2018. In 2018, such principal portion of the lease payments were disclosed in cash flows from operating activities. Inventory Our inventory increased in value by 29% and in volume by 19% between December 31, 2018 and December 31, 2019. The increase reflects a higher NY’C’ in the current year, as well as an increase in volume in raw materials albeit a decrease in finished goods inventory. Under hedge accounting, gains and losses on derivative instruments for coffee to be sold in future periods are recorded in inventory. The hedge accounting component of inventory as at December 31, 2019 was a gain of $1.3 million compared to a loss of $0.6 million at the end of 2018. Accounts Receivable Our accounts receivable increased by $0.3 million, or 2%, between December 31, 2018 and December 31, 2019 compared to an increase of $2.2 million, or 18%, between December 31, 2017 and December 31, 2018. 87% of Swiss Water accounts receivable are current as at December 31, 2019. The majority of the past due amounts were collected shortly after the year end. Credit Facilities and Liquidity On October 18, 2019, Swiss Water entered into a revolving credit facility agreement (“Credit Facility”), with a Canadian Bank, for borrowings up to the lower of the Borrowing Base and $30.0 million. The Credit Facility’s Borrowing Base margins eligible inventories and accounts receivable, commodity hedging account equity 19 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 margin plus its market-to-market gains, which are netted against any losses in the commodity account and foreign exchange contract facility. Amounts can be drawn in either Canadian or in US$ dollars and can be borrowed, repaid, and re-borrowed to fund operations, capital expansions, letters of credit and for general corporate purposes. The maturity date is October 18, 2022, however, we can repay the Credit Facility at any time on or before the maturity date as long as the outstanding balance is not in excess of the borrowing base. The maturity date can be extended, subject to the lenders’ approval. The Credit Facility has multiple interest rate options that are based on the Canadian Prime Rate, Base Rate, LIBO Rate, Bankers’ Acceptance Rate plus an acceptance fee, in addition to an Applicable Margin for each of these rates. Fees apply to outstanding letters of credit and the unused portion of the credit. The Company has pledged substantially all of its assets, except for assets pledged to BDC under the Term Loan (see below, Construction Loan). This Credit Facility replaced two former credit facilities, the $14.5 million revolving operating line of credit and the $1.5 million swing operating line of credit. In addition, as a part of the Credit Facility, we have a US$8.0 million foreign exchange and commodity futures contract facility, which 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 general security agreements over all of the assets of Swiss Water and a floating hypothecation agreement over cash balances. We have certain bank covenants that relate to the maintenance of specified financial ratios and we were in compliance with all covenants in the years 2018 and 2019. Construction Loan In Q4 2018, the Company completed a transaction with the Business Development Bank of Canada (“BDC”) for a term loan facility (“Term Loan”) of up to $20.0 million. The purpose of the Term Loan is to assist in the financing of new equipment for the facility being built in Delta, British Columbia. The Term Loan bears interest at 4.95% per annum over 12 years with principal repayment commencing on July 1, 2021. The Term Loan matures on June 1, 2033. Only interest will be paid on the outstanding balance on a monthly basis prior to July 1, 2021. The Term Loan is secured by a general security agreement and a first security interest on all existing equipment and machinery plus new equipment and machinery financed with the Term Loan. Seaforth has provided a guarantee for the Term Loan. As of December 31, 2019, the loan amount outstanding was $20.0 million with interest accrued of $0.08 million. Contractual Obligations The following table sets forth our contractual obligations and commitments as at December 31, 2019: (In $000s) (unaudited) Long-term debt1 Financing leases2 Credit facility3 Purchase obligations4 Total contractual obligations $ 35,000 14,747 3,506 34,762 Total Less than 1 year 2-3 years 4-5 years Over 5 years $ - $ 2,501 5,591 3,506 417 $ 18,333 $ 3,282 - - 14,166 3,176 - - 2,698 - 34,345 37,043 $ 88,015 $ $ 12,015 $ 21,615 $ 17,342 1 Long-term debt represents the principal amounts of the convertible debenture and construction loan. 2 Minimum obligations for our finance leases. 3 Credit facility matures in 2022. 4 Purchase obligations represent outstanding capital, coffee and natural gas purchase commitments. 20 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 Swiss Water leases a facility that houses its decaffeination plant and offices. The current lease term expires in 2023. Beyond expiry in 2023, the landlord has to approve any subsequent renewal of the lease. In Q1 2019, Seaforth entered into an agreement to lease an additional warehouse facility, which commenced in April 2019 and expires in June 2027. Seaforth’s two warehouse leases expired in June and September 2019. Following these changes, Seaforth’s operations were consolidated into one warehouse location by the end of Q4 2019. Seaforth also leases equipment, for which the lease expires in April 2023. Swiss Water Decaffeinated Coffee Company USA, Inc. leases two sales offices in Seattle, Washington, one of which expires in March 2020, while the second one was entered into in Q4 2019 and it expires in October 2022. Swiss Water Decaffeinated Coffee Europe SARL leases a sales office in France, which expires in October 2027. In 2016, Swiss Water 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 Swiss Water’s option in five-year increments up to a total of 30 years. The lease commenced in July 2018. Under the lease, Swiss Water 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. OFF-BALANCE SHEET ARRANGEMENTS Swiss Water 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 one of Swiss Water’s Directors, Roland Veit. The following table summarizes related party sales and purchases during the periods: (In $000s) (unaudited) Income for the period Purchases of raw materials Year ended December 31, 2018 2019 957 $ 3,843 $ 393 5,957 $ $ 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, 2019, our accounts receivable balance with this company was $0.01 million (December 31, 2018: $0.01 million) while our accounts payable balance with this company was $0.5 million (December 31, 2018: $0.3 million). On March 16, 2017, a subsidiary of Swiss Water 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. 21 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 RISKS AND UNCERTAINTIES Swiss Water’s dividend policy is at the discretion of the Board of Directors and its ability to pay dividends dependent upon the earnings and cash flow generated from Swiss Water’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, Swiss Water leases the building in Burnaby, BC, that houses two decaffeination lines. The lease on this facility expires in 2023 and provides for an additional five-year renewal term (to 2028), subject to the approval of the landlord. The ownership of this facility changed in mid February of 2020. Following this change, the probability of a lease renewal being granted was re-assessed. Swiss Water has concluded that the renewal risk has increased, and believes the likelihood of a lease renewal beyond 2023 is now much more uncertain. Relocating the existing 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). Swiss Water’s operations may be negatively impacted in the event of a local or global outbreak of disease, such as the recent novel coronavirus, COVID-19 outbreak. Swiss Water may experience disruptions to its business operations if a significant number of its employees, or those of its customers or suppliers, are quarantined and unable to work. There may be significant disruptions and delays in our ongoing business or in the start-up procedures at our new facility, in Delta, BC. A pandemic may impact demand for our products and services and the capability of our supply chains. It may also impact expected credit losses on our amounts due from customers and whether the entity continues to meet the criteria for hedge accounting. For example, if a hedged forecast transaction is no longer highly probable to occur, hedge accounting would be discontinued. 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 an absolute, assurance that all the applicable risks and their expected impacts on Swiss Water are considered. 22 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 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. 23 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES Measurement of 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. Effective January 1, 2019, we adopted IFRS 16 Leases in accounting for leases of our offices, warehouses, and equipment. Estimates and assumptions were made and applied, including the useful lives of right-of-use assets and the implicit borrowing rates. The useful lives of right-of-use assets are estimated to be the length of the related lease terms, ranging from 2 to 20 years. The weighted average implicit borrowing rate is 4.92% per annum which was based on borrowing rates available to the Company. 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”) with respect to our leased decaffeination facilities is estimated at $1.6 million. This estimate assumes that we relocate from the current locations upon expiry of the lease renewal term in 2023 for Line 1 and Line 2, and the expiry of lease, before renewal in 2038 for Line 3. Further, the estimate reflects the expected costs of vacating the leased facility in 2023 and 2038, 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. Income Taxes 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 carryforwards. We have recognized the benefit of loss carryforwards to the extent that it is probable that taxable income will be available in the future against which our non-capital loss carryforwards can be utilized. As at December 31, 2019, Swiss Water and its subsidiaries had combined non-capital tax loss carryforwards totaling $2.2 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. 24 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 Convertible Debenture with Embedded Derivatives On October 11, 2016, the Company issued an unsecured subordinated convertible debenture for gross proceeds of $15.0 million. 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. Subject to reaching specific thresholds in the covenant, the interest rate increases to 7.85% per annum to be paid quarterly in arrears. 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, Swiss Water had the option to pay interest-in-kind for the first two years. If elected, this option would have increased the principal sum by the interest owing. This option was not elected. The convertible debenture also includes a Net Share Settlement feature that allows Swiss Water, 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 2019, the Company estimated and recorded $1.5 million in interest expense (2018: $1.5 million) and paid $1.0 million (2018: $1.0 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 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 Leases Year ended December 31, 2018 2019 $ $ 6.92 $ 8.25 $ 3.78 years 31% 1.68% 3.61% 4.97 8.25 4.78 years 37% 1.88% 5.03% The preparation of consolidated financial statements requires that the Company’s management make assumptions and estimates on the classification of operating and finance leases. When assessing the classification of a lease agreement, certain estimates and assumptions need to be made and applied, which include, but are not limited to, the determination of the expected lease term and minimum lease payments, 25 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 the assessment of the likelihood of exercising options, and estimation of the fair value of the leased properties at lease inception. CHANGES IN ACCOUNTING STANDARDS The following standard became effective for annual periods beginning on or after January 1, 2019.  IFRS 16: Leases: replaces IAS 17, IFRIC 4, SIC-15, and SIC-27. IFRS 16 introduces a single, on-balance sheet accounting model for lessees that is similar to the former finance lease accounting, with limited exceptions for short-term leases or leases of low-value assets. Lessees recognize a right-of-use asset representing its rights to use the underlying asset and a lease liability representing its obligation to make lease payments. Lessees also recognize a depreciation charge for right-of-use assets and interest expense on lease liabilities. A lessee can choose to apply IFRS 16 using either a full retrospective or a modified retrospective approach. We have applied IFRS 16 using the modified retrospective approach, the simplified transition approach, without restating comparative amounts for the year 2018, prior to the first adoption. The right-of-use assets and liabilities for property and equipment leases are measured on transition as if the new rules had always been applied. At the time of adoption, as at January 1, 2019, the Company recognized $19.1 million in new right-of-use assets and lease liabilities for its office, warehouse and equipment leases. Additional disclosures have been included in Swiss Water’s audited consolidated financial statements for the year ended December 31, 2019. We have adopted the following amended standards, and we assessed that there was no material impact on our condensed consolidated interim financial statements:  Annual Improvements to IFRS Standards 2015–2017 Cycle: IFRS 3 Business Combinations; IFRS 9: Financial Instruments: prepayment features with negative compensation; IFRS 11: Joint arrangement; IAS 12: Income taxes: amendments related to recognition of current and deferred tax related to dividends; IAS 19: Employee Benefits: amendments to plan amendment, curtailment or settlement; IAS 23: Borrowing costs: amendments related to recognition of borrowing costs eligible for capitalization; IFRIC 23: Uncertainty over Income Tax Treatments: clarifies the application of recognition and measurement required per IAS 12: Income taxes, where there is uncertainty over income taxes; IFRS 10: Consolidated Financial Statements and IAS 28: Investments in Associates and Joint Ventures. A number of new standards are effective for annual periods beginning on or after January 1, 2020. The Company has not yet adopted any of these new and amended standards or interpretations. Of those standards that are not yet effective, we do not anticipate a material impact on the Company’s financial statements in the period of initial application. HEDGE ACCOUNTING We adopted the hedge accounting provisions of IFRS 9 on January 1, 2016, in order to reduce volatility in our financial results, by better matching our accounting practices to our hedging practices. We did not change our risk management strategies with the adoption of hedge accounting. The economic impact of our hedges is unchanged from before January 1, 2016, even though the accounting for these derivative instruments has changed. 26 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 We enter into three types of hedges: 1) Commodity price risk hedges on our coffee purchase commitments and inventory (“commodity hedges”); 2) Foreign currency risk hedges on future US$ process revenues (“revenue hedges”); and 3) Customer-specific foreign 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 buy green coffee, the contract specifies that the purchase price will be based, in part, on the future (to-be-determined) coffee 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 risk by selling short a futures contract on the Intercontinental Exchange. 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 Intercontinental Exchange. 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 12-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 reclassed 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 C$ price pursuant to a customer-specific contract. To mitigate the exposure to margin changes 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 27 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 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. 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. 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 or future cash flows will fluctuate as a result of changes in commodity prices. Swiss Water utilizes futures contracts to manage our commodity price exposure and also buys and sells futures contracts for coffee on the Intercontinental Exchange in order to offset our inventory position and fix the input cost of green coffee. As at December 31, 2019, we had futures contracts to buy 3.6 million lbs of green coffee with a notional value of US$4.7 million, and contracts to sell 6.6 million lbs of green coffee with a notional value of US$8.3 million. The furthest contract matures in September 2020 (December 31, 2018: buy 4.5 million lbs of green coffee with a notional value of US$4.7 million, and contracts to sell 4.7 million lbs of green coffee with a notional value of US$4.7 million). Foreign Currency Risk We realize a significant portion of our sales in US$ dollars and we purchase green coffee in US$ which is, in some cases, sold to customers in C$ 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 C$ dollars. At December 31, 2019, we had forward currency contracts to buy US$3.8 million and sell US$53.0 million (December 31, 2018: buy US$6.6 million and sell US$65.0 million) from January 2020 through to September 2023 at various Canadian exchange rates ranging from $1.2147 to $1.3482. 28 | P a g e o f t h e M D & A SWISS WATER DECAFFEINATED COFFEE INC. Management Discussion and Analysis For the year ended December 31, 2019 INTERNAL CONTROLS OVER FINANCIAL REPORTING & DISCLOSURE CONTROLS AND PROCEDURES The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of Swiss Water 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, we conducted an evaluation of the design and effectiveness of our ICFR as of December 31, 2019, 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 CFO concluded that, as of December 31, 2019, Swiss Water’s ICFR was effective. The CEO and 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 Swiss Water’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The CEO and CFO evaluated or caused to be evaluated under supervision, the effectiveness of our disclosure controls and procedures and based on this evaluation, the CEO and CFO concluded that, as of December 31, 2019, Swiss Water’s disclosure controls and procedures were effective. There were no changes in our ICFR that occurred during the period beginning on January 1, 2019 and ended on December 31, 2019 that have materially affected or are reasonably likely to materially affect, Swiss Water’s ICFR. SUBSEQUENT EVENTS On January 15, 2020, Swiss Water paid an eligible dividend in the amount of $0.6 million ($0.0625 per share) to shareholders of record on December 31, 2019. On February 14, 2020, the ownership of the company’s leased facility in Burnaby, BC changed. The terms of the lease agreement on this property remain unchanged. On February 24, 2020, a total of 17,570 of the outstanding RSUs vested and were converted to common shares, pursuant to the 2011 Restricted Share Unit Plan as amended on June 18, 2019. On March 18, 2020, Swiss Water’s Board of Directors decided to suspend future dividends in preparation to build a second production line in Delta, BC. In March 2020, the World Health Organization declared a global pandemic known as COVID-19*. The impacts on global commerce are expected to be far reaching. For Swiss Water, the pandemic may impact demand for the company’s products and services in the near term and may disrupt its supply chains. It may also impact expected credit losses on amounts due from customers and whether Swiss Water continues to meet the criteria for hedge accounting. For example, if a hedged forecast transaction is no longer highly probable to occur, hedge accounting is discontinued. * Under IAS 10, Events after the reporting period, events such as this are considered to be non-adjusting subsequent events. The impacts to the Company are not determinable at the date of these financial statements, however, they could be material and include impairments of receivables, inventory and liquidity. 29 | P a g e o f t h e M D & A SWP Q4 cover_Layout 1 20-03-20 10:56 AM Page 2 SWISS WATER DECAFFEINATED COFFEE INC. CONSOLIDATED FINANCIAL STATEMENTS For the Year Ended December 31, 2019 Independent auditor’s report To the Shareholders of Swiss Water Decaffeinated Coffee Inc. Our opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Swiss Water Decaffeinated Coffee Inc. and its subsidiaries (together, the Company) as at December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). What we have audited The Company’s consolidated financial statements comprise: ● ● ● ● ●  the consolidated statements of financial position as at December 31, 2019 and 2018; the consolidated statements of income for the years then ended; the consolidated statements of comprehensive income for the years then ended; the consolidated statements of changes in equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. 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. Other information Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: ● ● ● ● ● ● Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Robert Coard. (signed) PricewaterhouseCoopers LLP Chartered Professional Accountants Vancouver, British Columbia March 19, 2020 SWISS WATER DECAFFEINATED COFFEE INC. – The accompanying notes form an integral part of these consolidated financial statements. – 5 | P a g e Consolidated Statements of Financial Position as at(Tabular amounts are in thousands of Canadian dollars)December 31, 2019December 31, 2018AssetsNoteCurrent assetsCash and cash equivalents$6,739 $8,336 Accounts receivable614,588 14,313 Inventories717,872 13,851 Prepaid expenses and other receivables679 1,272 Income tax receivable1114 - Derivative assets and hedged firm commitments8, 261,428 1,497 Total current assets41,320 39,269 Non-current assetsReceivables 6230 235 Property, plant and equipment994,125 46,035 Intangible assets10904 1,167 Deferred tax assets11302 175 Total non-current assets95,561 47,612 Total assets$136,881 $86,881 Liabilities and shareholders' equityCurrent liabilitiesAccounts payable$11,103 $6,558 Accrued liabilities6,573 3,397 Income tax payable11- 783 Dividend payable19, 28566 566 Other liabilities121,004 473 Lease liabilities141,525 - Derivative liabilities and hedged firm commitments8, 261,165 2,064 Total current liabilities21,936 13,841 Non-current liabilitiesOther liabilities 12253 105 Credit facility133,182 - Construction loan 1520,000 9,400 Convertible debenture1612,560 12,082 Lease liabilities 1423,385 - Asset retirement obligation171,343 802 Deferred tax liabilities113,179 1,243 Derivative liabilities 8, 16, 262,543 3,652 Total non-current liabilities66,445 27,284 Total liabilities88,381 41,125 Shareholders' equityShare capital18$43,591 $43,591 Retained earnings5,202 4,523 Accumulated other comprehensive loss(646) (2,512) Share-based compensation reserve353 154 Total equity48,500 45,756 Total liabilities and shareholders' equity$136,881 $86,881 Commitments (Note 27)Subsequent events (Note 28)Approved on behalf of the Board(signed) "David Rowntree", Director (signed) "Frank Dennis", Director SWISS WATER DECAFFEINATED COFFEE INC. – The accompanying notes form an integral part of these consolidated financial statements. – 6 | P a g e Consolidated Statements of Income for the Years Ended(Tabular amounts are in thousands of Canadian dollars, except for per share amounts)NoteDecember 31, 2019December 31, 2018Revenue20, 25$97,230 $89,939 Cost of sales(80,736) (75,018) Gross profit16,494 14,921 Operating expensesAdministration expenses(6,949) (5,371) Sales and marketing expenses(4,148) (3,790) Occupancy expenses(235) (129) Total operating expenses(11,332) (9,290) Operating income5,162 5,631 Non-operating or otherGain (loss) on risk management activities1,436 (5) (Loss) gain on fair value on embedded option16(770) 1,799 Finance income511 530 Finance expense(1,911) (1,457) Loss on foreign exchange(425) (278) Total non-operating or other(1,159) 589 Income before tax4,003 6,220 Income tax expense11(1,059) (1,689) Net income$2,944 $4,531 Basic earnings per share23$0.32 $0.50 Diluted earnings per share23$0.32 $0.35 SWISS WATER DECAFFEINATED COFFEE INC. – The accompanying notes form an integral part of these consolidated financial statements. – 7 | P a g e Consolidated Statements of Comprehensive Income and Consolidated Statements of Changes in Equity(Tabular amounts are in thousands of Canadian dollars)Consolidated Statements of Comprehensive IncomeFor the Years EndedNet income$2,944 $4,531 Other comprehensive income, net of taxItems that may be subsequently reclassified to income:Unrealized gain (loss)Derivatives designated as cash flow hedges - currency risk hedges on US$ future revenue2,154 (4,675) Items reclassified to income:Realized loss (gain)Derivatives designated as cash flow hedges - currency risk hedges on US$ future revenue, recognized in revenue410 (790) Other comprehensive income (loss) related to hedging activities2,564 (5,465) Tax (expense) recovery on other comprehensive income relating to hedging activities(694) 1,460 Cumulative translation adjustment(4) 8 Other comprehensive income (loss), net of tax1,866 (3,997) Net income and other comprehensive income$4,810 $534 Consolidated Statements of Changes in EquityShare capitalShare-basedAccumulated other compensationcomprehensive Note SharesAmountreserveincomeBalance at December 31, 20179,038,862 $43,496 $140 $1,485 $2,257 $47,378 Shares issued for restricted share units22,348 95 (95) - - - Share-based compensation- - 109 - - 109 Dividends 19- - - - (2,265) (2,265) Net income and other comprehensive income (loss)- - - (3,997) 4,531 534 Balance at December 31, 20189,061,210 $43,591 $154 $(2,512) $4,523 $45,756 Balance at December 31, 20189,061,210 43,591 154 (2,512) 4,523 45,756 Share-based compensation- - 199 - - 199 Dividends 19- - - - (2,265) (2,265) Net income and other comprehensive income- - - 1,866 2,944 4,810 Balance at December 31, 20199,061,210 $43,591 $353 $(646) $5,202 $48,500 Total equity Retained earnings December 31, 2018December 31, 2019 SWISS WATER DECAFFEINATED COFFEE INC. – The accompanying notes form an integral part of these consolidated financial statements. – 8 | P a g e Consolidated Statements of Cash Flows For the Years Ended(Tabular amounts are in thousands of Canadian dollars)NoteOperating activitiesNet income$2,944 $4,531 Items not affecting cash:Depreciation and amortization3,697 1,689 Share-based compensation expense885 242 Unrealized (gain) loss on risk management activities(830) 188 Unrealized loss (gain) on fair value adjustment ofembedded option771 (1,799) Payment of restricted share units settled in cash- (199) Finance income(511) (530) Finance expense1,911 1,457 Income tax expense1,059 1,689 Other(51) 29 9,875 7,297 Change in non-cash working capital relating to operating activities24658 (723) Net cash generated from operations10,533 6,574 Interest received511 610 Interest paid24(2,858) (1,033) Income taxes paid(738) (477) Net cash generated from operating activities7,448 5,674 Investing activitiesProceeds from short-term investments- 7,067 Additions to plant and equipment(18,714) (21,029) Net cash used in investing activities24(18,714) (13,962) Financing activitiesDividends paid(2,265) (2,262) Payment of lease liabilities(1,825) - Proceeds from credit facility133,500 - Financing costs13(341) - Proceeds from construction loan10,600 9,400 Net cash generated from financing activities9,669 7,138 Decreasein cash and cash equivalents(1,597) (1,150) Cash and cash equivalents, beginning of the year8,336 9,486 Cash and cash equivalents, end of the year$6,739 $8,336 December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 1. NATURE OF BUSINESS Swiss Water Decaffeinated Coffee Inc., (“Swiss Water” or the “Company”), is an entity incorporated under the Canada Business Corporations Act (“CBCA”). The common shares of the Company are listed on the Toronto Stock Exchange under the symbol ‘SWP’. The Company’s head office is located at 3131 Lake City Way, Burnaby, British Columbia, V5A 3A3, Canada. On September 28, 2018, Ten Peaks Coffee Company Inc. amalgamated with its 100% owned subsidiary Swiss Water Decaffeinated Coffee Company Inc. As a result of the amalgamation, Ten Peaks Coffee Company Inc. remained as the successor entity and concurrently the Company changed its name to Swiss Water Decaffeinated Coffee Inc. Swiss Water is primarily involved in the decaffeination of green coffee without the use of chemicals by employing the proprietary SWISS WATER® Process. The Company leverages science-based systems and quality controls to produce coffee that is 99.9% caffeine free. Swiss Water owns all of the interests of Seaforth Supply Chain Solutions Inc. (“Seaforth”), which is incorporated under CBCA and operates in Delta, British Columbia, Canada; Swiss Water Decaffeinated Coffee USA, Inc. (“SWUS”), an entity registered in Washington State, USA, and; Swiss Water Decaffeinated Coffee Europe SARL (“SWEU”), an entity registered in Bordeaux, France. Seaforth provides a complete range of green coffee handling and storage services, while SWUS and SWEU act as marketing and sales companies and they do not have significant assets. 2. BASIS OF PREPARATION These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. IFRS comprises IFRSs, International Accounting Standards (“IAS”), and interpretations issued by the IFRS Interpretations Committee (“IFRIC”) and the former Standing Interpretations Committee (“SIC”). These consolidated financial statements for the year ended December 31, 2019 were approved for issuance by the Company’s Directors on March 18, 2020. There were no significant non-adjusting events that occurred between the reporting date and the date of authorization except as disclosed in Note 28. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies used in the preparation of these consolidated financial statements are as follows: 3.1 Basis of measurement The consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments that are measured at fair values at the end of each reporting period. Historical cost is based on the fair value of the consideration given in exchange for assets. 3.2 Currency of presentation These consolidated financial statements are presented in Canadian dollars. Except for per share amounts, all amounts are expressed in thousands of Canadian dollars, unless otherwise stated. References to US$ are to United States dollars. 3.3 Basis of consolidation The consolidated financial statements include the accounts 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 9 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 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. 3.4 New and amended standards adopted by the Company The following amendments to accounting standards became effective for annual periods beginning on or after January 1, 2019. The adoption of IFRS 16: Leases: had a material impact on the Company’s consolidated financial statements and the impact is described in note 3.14 Leases as the lessee. The adoption of these revised standards by the Company did not have a material impact on its consolidated financial statements.  Annual Improvements to IFRS Standards 2015–2017 Cycle: IFRS 3 Business Combinations; IFRS 9: Financial Instruments: prepayment features with negative compensation; IFRS 11: Joint arrangement; IAS 12: Income taxes: amendments related to recognition of current and deferred tax related to dividends; IAS 19: Employee Benefits: amendments to plan amendment, curtailment or settlement; IAS 23: Borrowing costs: amendments related to recognition of borrowing costs eligible for capitalization; IFRIC 23: Uncertainty over Income Tax Treatments: clarifies the application of recognition and measurement required per IAS 12: Income taxes, where there is uncertainty over income taxes; IFRS 10: Consolidated Financial Statements and IAS 28: Investments in Associates and Joint Ventures. 3.5 Changes in accounting standards not yet effective A number of new and amended standards are effective for annual periods beginning on or after January 1, 2020. The Company has not yet adopted any of these new and amended standards or interpretations. Of those standards that are not yet effective, the Company does not expect the adoption of these standards and amendments to have a material impact on the Company’s financial statements in the period of initial application.  IFRS 9/ IAS 39 and IFRS 7 relate to interest benchmark reform and has amendments that provide temporary relief from applying specific hedge accounting requirement to hedging relations ships directly affected by IBOR reform and that required certain disclosures; IAS 1 and IAS 8 redefined materiality; IFRS 3 was amended to revise the definition of a business; Conceptual Framework replaces the conceptual framework for financial reporting issued by IASB in September 2010. These standards are effective or periods beginning after January 1, 2020. 3.6 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision makers. 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. 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. 10 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 3.7 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”). The functional and presentation currency of Swiss Water is the Canadian dollar. The functional currencies of the USA and the European subsidiaries are the United States dollar and the Euro, respectively. Foreign currency transactions Foreign currency transactions and balances are translated as follows: (i) monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars at the exchange rate prevailing at the reporting date; (ii) 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; (iii) 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; and (iv) 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 net income and presented in the Consolidated Statement of Income in accordance with the nature of the transactions to which the foreign currency gains and losses relate, in the period in which they occur. Foreign operations Foreign operations are translated from their functional currencies into Canadian dollars on consolidation as follows: (i) 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; (ii) 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); (iii) share capital for each statement of financial position presented are translated at historical rate; and (iv) 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. 3.8 Cash and cash equivalents Cash and cash equivalents include cash on hand, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in on the statement of financial position. 3.9 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 direct materials, as well 11 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 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. 3.10 Property, plant and equipment The Company leases facilities that house its production facility, offices and warehouse facilities. Plant and equipment are carried at acquisition cost or manufacturing cost less depreciation and impairment losses. Historical cost includes expenditures that are directly attributable to the acquisition of the items, costs related to interest on the lease liability and depreciation of right of use assets relating to leased properties. Cost may also include asset retirement obligation and transfers from the equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. 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 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 property, plant and equipment in the course of construction are classified as construction-in-progress. Such items are transferred to the appropriate category of property, plant and equipment when they are completed and ready for use as intended. 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 Right of use assets Warehouse and office equipment Computer hardware and software Furniture and fixtures to the expiry of the lease renewal option or lease term to the expiry of the lease renewal option or lease term to the expiry of the lease renewal option or lease term 10 years 5 years 5 years During the prior year ended December 31, 2018, the Company reviewed the useful lives of its production lines which includes several production machines that had different remaining useful lives. Management determined that the useful lives of certain production machines were longer than originally estimated, and as a result extended the estimated useful lives of these production machines by up to 18 years. At the time of change in the estimate, these assets had a net book value of approximately $6.0 million. The financial impact of the change in estimate was a reduction in depreciation expense of $0.7 million for the year ended December 31, 2018. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s 12 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. 3.11 Intangible assets Proprietary process technology (“PPT”) PPT represents intangible assets of Swiss Water 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. Brand Swiss Water’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. 3.12 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. 3.13 Financial instruments IFRS 9 requires the classification and measurement of financial assets and for all recognized financial assets to be measured at amortized cost or fair value in subsequent accounting periods following initial recognition. IFRS 9 also outlines the treatment of 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. Classification 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 (“FVPL”) (irrevocable election at the time of recognition). 13 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are 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: a) 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. b) Accounts receivable and other receivables are recognized initially at fair value and subsequently are classified as assets at amortized cost using the effective interest rate method, less loss allowance. Interest income is recorded in the consolidated statement of income, as applicable. c) 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. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months and it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Recognition and de-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. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership. Measurement At initial recognition, the Company measures a financial asset at its fair value, plus, in the case of a financial asset or liability not at FVPL, 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 FVPL 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. Debt instruments Subsequent measurement of debt instruments depends on the Company’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the Company classifies its debt instruments: 14 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) a) Amortized cost: Assets that are held for the collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains and losses. Impairment losses are presented as a separate line item in the statement of profit or loss. b) FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income (FVOCI). Movements in the carrying amount are taken through other comprehensive income (“OCI”), except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss and recognized in other gains/(losses). Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains/(losses) and impairment expenses are presented as a separate line item in the statement of profit or loss. c) FVPL: Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognized in profit or loss and presented net within other gains/(losses) in the period in which it arises. 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 and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. 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 the initial recognition of the receivables. Derivatives and Hedging Activities Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured 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 certain derivatives as either: a) hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedges) b) hedges of a particular risk associated with the cash flows of recognized assets and liabilities and highly probable forecast transactions (cash flow hedges), or c) hedges of a net investment in a foreign operation (net investment 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. 15 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) Cash flow hedges that qualify for hedge accounting The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the cash flow hedge reserve within equity. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss. When option contracts are used to hedge forecast transactions, the group designates only the intrinsic value of the options as the hedging instrument. Gains or losses relating to the effective portion of the change in the intrinsic value of the options are recognized in the cash flow hedge reserve within equity. The changes in the time value of the options that relate to the hedged item (‘aligned time value’) are recognized within OCI in the costs of hedging reserve within equity. Commodity and Currency risk hedges The Company applied hedge accounting 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. 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, as described under Commodity Price Risk 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, as described under Currency Risk Hedges. Commodity price risk hedges on purchase commitments and inventory ("commodity hedges"): 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 NY’C’), the Company enters into an offsetting short position on the Intercontinental Exchange. 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. At each period end, commodity price risk hedges are remeasured 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$ 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. 16 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) At each period end, currency risk hedges on US$ purchases are remeasured 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 the 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 remeasured 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: a) Level 1 – valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities; b) 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 c) Level 3 – valuation techniques using inputs for the asset or liability that are not based on observable market data (unobservable inputs). 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. 3.14 Leases liabilities and right of use assets Adoption of IFRS 16 Leases IFRS 16 introduces a single, on-balance sheet accounting model for lessees that is similar to the former finance lease accounting, with limited exceptions for short-term leases or leases of low-value assets. Lessees recognize a right-of-use asset representing its rights to use the underlying asset and a lease liability representing its obligation to make lease payments. IFRS 16 replaces existing leases guidance, including 17 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) IAS 17, Leases, IFRIC 4: Determining whether an Arrangement contains a Lease, SIC-15: Operating Leases – Incentives and SIC-27: Evaluating the Substance of Transactions Involving the Legal Form of a Lease. As a lessee, the Company can choose to apply IFRS 16 using either a full retrospective or a modified retrospective approach. Effective January 1, 2019, the Company applied IFRS 16 using the modified retrospective approach, the simplified transition approach, without restating comparative amounts for the year 2018, prior to the first adoption. The right-of-use assets and liabilities for property and equipment leases are measured on transition as if the new rules had always been applied. The expedients used were: not separating non-lease components, excluding short-term leases, and not re-assessing contracts at inception, but rather just applying IFRS 16 to operating leases as at December 31, 2018. At the time of adoption, as at January 1, 2019, the Company recognized $19.1 million in new right-of-use assets and lease liabilities for its office, warehouse and equipment leases. Management judgement and estimates over leases The preparation of consolidated financial statements requires that the Company’s management makes assumptions and estimates on the classification of leases. When assessing the classification of a lease agreement, certain estimates and assumptions need to be made and applied, which include, but are not limited to, the determination of the expected lease term and minimum lease payments, implicit borrowing rate, the assessment of the likelihood of exercising options, and estimation of the fair value of the leased property at lease inception. Lease policy applicable from January 1, 2019 At the inception of a lease contract, the Company assesses whether the contract is or contains a lease. A contract is, or contains, a lease if the contract conveys that right of control of the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company assesses whether: (i) the contract involves the use of an identified asset; (ii) the Company has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period, and; (iii) the Company has the right to direct the use of the asset. The Company has determined that contracts for its offices, warehouses, and select equipment contain a lease. At inception or on a reassessment of a contract that contains a lease component, the Company allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices. However, for the leases of land and buildings, the Company has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component. The Company presents right-of-use assets in Property, plant and equipment and related liabilities in Lease liabilities. The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term plus expected renewal options which are available to the Company. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In 18 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) addition, the right-of-use asset is reduced by impairment losses, if any identified, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, and if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. Lease payments included in the measurement of the lease liability comprise of: (i) fixed payments; (ii) variable lease payments that depend on an index rate, initially measured using the index as at the commencement date; (iii) amounts expected to be payable under a residual value guarantee, and : (iv) the exercise price under purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Company is reasonably certain not to terminate early. The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases of machinery that have a lease term of 12 months or less and leases of low-value assets. The Company recognizes these lease payments as an expense on a straight-line basis over the lease term. The Company recognizes a depreciation charge for right-of-use assets and interest expense on lease liabilities in the consolidated income statement. On the statement of cash flows, the Company includes repayments of the principal portion of the lease liabilities under financing activities whereas before the implementation of IFRS 16 they were included in cash flows from operations. The interest portion of the lease continues to be classified within cash flows from operating activities. Lease payments for short-term leases, lease payment for leases of low-value assets that are not included in the measurement of the lease liability are classified as cash flows from operating activities. Lease policy applicable before January 1, 2019 The comparative information for leases is prepared based on the accounting policies that the Company had applied under IAS 17 and IFRIC 4. The office, warehouse and equipment leases were classified as operating leases and were not recognized in the Company’s statement of financial position. Prior to the adoption IFRS 16, the Company recognized operating lease expense, in the statement of income, on a straight-line basis over the term of the lease. 3.15 Current and deferred income taxes Income tax expense or credit 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 expense or credit 19 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current 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, using the liability method, 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 the 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 carryforwards can be utilized. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Current and deferred tax is recognized in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. 3.16 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. 20 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are 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. 3.17 Revenue recognition Effective January 1, 2018, Swiss Water adopted IFRS 15 retrospectively. There was no impact on retained earnings as of January 1, 2018. The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer – so the notion of control replaced the former notion of risks and rewards. The standard requires revenue recognition to follow a five-step model of identifying contracts, separating performance obligations, determining and allocating the transaction price, and recognizing the revenue as each performance obligation is satisfied. The Company’s primary sources of revenue are proceeds from sales of Swiss Water’s decaffeinated coffee and from services provided to decaffeinate customer’s owned coffee. Swiss Water’s revenue is measured based on consideration agreed on in contracts with customers and is recognized when the Company transfers control over products and services to the customer either at a point in time or over time. For all revenue contracts, no significant judgements are made with respect to evaluating the timing of satisfaction of performance obligations, transaction prices, and amounts allocated to performance obligations. Consideration amounts are not variable. Payment terms are typically between 30 and 60 days, apart from select customers where payment terms are extended. For contracts with extended payment terms, the Company charges customers an insignificant financing component. Warranty, returns or refunds do not apply to the Company. Revenue is disaggregated based on the customer’s geographic region as described in segmented reporting accounting policy. Also, the revenue, from contracts with customers, is disaggregated by major products and services: decaffeinated coffee sales, decaffeination services, and distribution. Decaffeinated coffee sales Decaffeinated coffee sales are the amounts that are charged to customers for the sale of decaffeinated coffee. The performance obligation is satisfied at a point in time when a customer obtains control of the product, which is when decaffeinated coffee is picked-up by or delivered to the customer. Decaffeination services Decaffeination services represent the amount charged to customers for the service to decaffeinate customer-owned coffee. The performance obligation is to provide the service, which is satisfied over time. Distribution Distribution revenue consists of shipping, handling and warehousing charges billed to customers. The performance obligation is satisfied over time as services are provided, which is at the same time as these services are consumed. Former revenue recognition standard Under the former standard, IAS 18, applicable before January 1, 2018, revenue was measured at the fair value of the consideration received or receivable. Revenue was reduced for estimated customer returns, rebates and other similar allowances. Revenue was recognized when all the following conditions were satisfied: (i) persuasive evidence of an arrangement exists; (ii) the goods are shipped; (iii) title has passed 21 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) to the customer; (iv) the price has been substantively determined, and; (v) collection is reasonably assured. 3.18 Employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave that are expected to be settled wholly within 12 months after the end of the period in which the employees render the related services are recognized in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liabilities are presented as current employee benefit obligations on the statement of financial position. 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. 3.19 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 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 becomes due. At the end of each reporting period until the liability is settled, and at the date of 22 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 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. 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 remeasures 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 Swiss Water shares for the five trading days immediately preceding the relevant date. 3.20 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. 4. MANAGEMENT JUDGMENTS AND ESTIMATION UNCERTAINTY Judgment is used by management in selecting accounting policies, the determination of functional currency, the identification of cash generating units (“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. 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. As at December 31, 2019 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. 23 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 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 reporting period using the Black-Scholes option pricing model which requires management estimates. Details of these can be found in Note 16. 4.5 Leases and right of use assets The preparation of consolidated financial statements requires that the Company’s management makes assumptions and estimates on the classification of operating and finance leases. When assessing the classification of a lease agreement, certain estimates and assumptions need to be made and applied, which include, but are not limited to, the determination of the expected lease term and minimum lease payments, the discount rate/implicit borrowing rate, the assessment of the likelihood of exercising options, and estimation of the fair value of the leased property at lease inception. 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 Swiss Water 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 Swiss Water’s 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. 24 | P a g e SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 6. ACCOUNTS RECEIVABLE Accounts receivable are amounts due from customers for goods sold or services performed in the ordinary course of business. Information about the Company’s exposure to foreign currency risk, interest rate risk and credit risk can be found in Note 26. The Company's accounts receivable has been reviewed for indicators of impairment. Accounts receivable as at December 31, 2019 and December 31, 2018 are recorded net of expected credit losses of $ nil. Non-current receivables include a $0.1 million (2018: $0.1 million) balance due from a related party, refer to Note 22. 7. INVENTORIES During the year ended December 31, 2019, the cost of inventories recognized in cost of sales was $75.4 million (2018: $68.0 million). The hedge accounting component represents the derivative adjustment related to designated hedges for inventory on hand as at each period. The inventory provision was $0.05 million during the year (2018: $0.03 million). 8. DERIVATIVE FINANCIAL INSTRUMENTS – assets (liabilities) The Company’s derivative financial instruments were carried at fair value through profit or loss as follows: The Company’s derivative financial instruments were carried at fair value through other comprehensive income as follows: 25 | P a g e Accounts receivable$14,588 $14,313 Non-current receivables $230 $235 December 31, 2019December 31, 2018Raw materials$9,081 $6,718 Finished goods6,819 7,252 Carbon568 360 Packaging113 109 Hedge accounting component1,291 (588) $17,872 $13,851 December 31, 2019December 31, 2018Coffee futures contracts, net$576 $495 US Dollar forward contracts, current41 (193) US Dollar forward contracts, long-term(37) (300) Derivative financial liability, convertible debenture(1,680) (910) $(1,100) $(908) December 31, 2019December 31, 2018US Dollar forward contracts, current$(107) $(876) US Dollar forward contracts, long-term(825) (2,442) $(932) $(3,318) December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment comprise owned and leased right-of-use assets. 9.1 Property, plant and equipment During the year ended December 31, 2019 the Company included in construction in progress $0.8 million (2018: $nil) of depreciation expense for right of use of assets, $0.8 million (2018: $nil) of financing costs related to lease liabilities, $0.7 million (2018: $0.02 million) of interest expense on the construction loan and $0.5 million (2018: $nil) of asset retirement obligations. For the year ended December 31, 2019, depreciation expense of $1.4 million (2018: $1.3 million) has been charged to cost of sales and $0.1 million (2018: $0.1 million) was included in administrative expenses. There was no impairment loss recognized for the years ended December 31, 2019 and 2018. 26 | P a g e Property, plant and equipment$70,125 $46,035 Right-of-use assets24,000 - $94,125 $46,035 December 31, 2019December 31, 2018 BuildingCostJanuary 1, 2019$34,025 $- $5,127 $1,285 $196 $34,329 $74,962 Additions8 90 72 1 36 25,383 25,590 Disposals(30) - (63) (468) (20) - (581) Transfers437 1,511 24 35 - (2,007) - December 31, 2019$34,440 $1,601 $5,160 $853 $212 $57,705 $99,971 Accumulated depreciationJanuary 1, 2019$(23,981) $- $(3,791) $(999) $(156) $- $(28,927) Depreciation(1,031) (14) (314) (108) (14) - (1,481) Disposals12 - 62 468 20 - 562 December 31, 2019$(25,000) $(14) $(4,043) $(639) $(150) $- $(29,846) December 31, 2019$9,440 $1,587 $1,117 $214 $62 $57,705 $70,125 BuildingCostJanuary 1, 2018$33,744 $- $5,113 $1,204 $189 $10,660 $50,910 Additions108 - 22 38 7 23,948 24,123 Disposals(61) - (8) (2) - - (71) Transfers234 - - 45 - (279) - December 31, 2018$34,025 $- $5,127 $1,285 $196 $34,329 $74,962 Accumulated depreciationJanuary 1, 2018$(23,061) $- $(3,501) $(862) $(145) $- $(27,569) Depreciation(981) - (298) (139) (11) - (1,429) Disposals61 - 8 2 - - 71 December 31, 2018$(23,981) $- $(3,791) $(999) $(156) $- $(28,927) December 31, 2018$10,044 $- $1,336 $286 $40 $34,329 $46,035 Machinery andLeaseholdComputerFurniture andequipmentimprovementequipmentfixturesin progressTotalConstructionTotalMachinery andLeaseholdComputerFurniture andConstructionequipmentimprovementequipmentfixturesin progress SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 9.2 Right-of-use assets The Company has adopted IFRS 16 retrospectively from January 1, 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognized in the opening balance, on the statement of financial position, on January 1, 2019. The right- of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the statement of financial position as at December 31, 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of the initial application. For the year ended December 31, 2019, depreciation expense of $1.8 million (2018: $nil) was charged to cost of sales and $0.2 million (2018: $nil) was included in administrative expenses. There was no impairment loss recognized for the year ended December 31, 2019 (2018: $nil). 10. INTANGIBLE ASSETS For the year ended December 31, 2019, amortization expense of $0.2 million (2018: $0.2 million) relating to proprietary process technology (“PPT”) has been charged to cost of sales and $0.02 million (2018: $0.02 million) relating to brand was included in administrative expenses. There was no impairment loss recognized for the years ended December 31, 2019 and 2018. 27 | P a g e EquipmentCostBalance at January 1, 2019$110 $19,023 $19,133 Additions- 7,788 7,788 Disposals- (997) (997) Balance at December 31, 2019$110 $25,814 $25,924 Accumulated depreciationBalance at January 1, 2019$- $- $- Depreciation(26) (2,734) (2,760) Disposals- 836 836 Balance at December 31, 2019$(26) $(1,898) $(1,924) Balance at December 31, 2019$84 $23,916 $24,000 PropertyTotalCostBalance January 1, 2019$3,246 $1,000 $4,246 Balance December 31, 2019$3,246 $1,000 $4,246 AmortizationBalance January 1, 2019$(2,161) $(918) $(3,079) Amortization(247) (16) (263) Balance December 31, 2019$(2,408) $(934) $(3,342) Balance at December 31, 2019$838 $66 $904 PPTBrandTotal SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 11. INCOME TAXES 11.1 Income tax expense For the year ended December 31, 2019, tax recovery on other comprehensive income related to hedging activities was $0.7 million (2018: $1.5 million expense). 11.2 Reconciliation Income tax expense for the year can be reconciled to the accounting profit as follows: 11.3 Current income tax receivable and payable As at December 31, 2019 income tax receivable was $0.01 million (2018: payable $0.8 million). 11.4 Deferred income tax assets (liabilities) Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. The movement in deferred income tax assets and liabilities during the year was as follows: 28 | P a g e CostBalance January 1, 2018$3,246 $1,000 $4,246 Balance December 31, 20183,246 1,000 4,246 AmortizationBalance January 1, 2018$(1,920) $(899) $(2,819) Amortization(241) (19) (260) Balance December 31, 2018$(2,161) $(918) $(3,079) Balance at December 31, 2018$1,085 $82 $1,167 PPTBrandTotalCurrent income tax (recovery) expense$(60) $1,103 Deferred tax expense1,119 586 Total income tax expense$1,059 $1,689 December 31, 2019December 31, 2018Statutory rate27%27%Income before tax$4,003 $6,220 Income tax calculated at applicable tax rates$1,081 $1,679 Non-deductible expenses(12) 18 Foreign tax rate differential(10) (8) Income tax expense$1,059 $1,689 December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) During the year ended December 31, 2019, the Company collected $0.02 million (2018: $0.4 million) related to Canadian Scientific Research and Experimental Development, a Canadian Government tax incentive program and it is included in the Administrative expenses. Swiss Water has $2.2 million non-capital tax losses carry forwards as the end of December 31, 2019, while Seaforth has non-capital tax loss carry forwards of $0.7 million, which will begin to expire in 2033. 12. OTHER LIABILITIES Other liabilities balances represent the fair value of the deferred share units (“DSUs”) and the cash-settled portion of the restricted share units (“RSUs”) outstanding as follows: 13. CREDIT FACILITY Credit Facility On October 18, 2019, Swiss Water entered into a revolving credit facility agreement (“Credit Facility”), with a Canadian Bank, for borrowings up to the lower of the Borrowing Base (defined herein) and $30.0 million. The Credit Facility’s Borrowing Base margins eligible inventories and accounts receivable, commodity hedging account equity margin plus its market-to-market gains, which are netted against any losses in the commodity account and foreign exchange contract facility. Amounts can be drawn in either Canadian or in US$ dollars and can be borrowed, repaid, and re-borrowed to fund operations, capital expansions, letters of credit and for general corporate purposes. As at December 31, 2019, the Company’s borrowing availability was calculated as follows: 29 | P a g e Goodwill and intangibles Property plant and equipment Financing issuance costs and other ARO Lease Liability Share based compen-sation Derivative liability and convertible debenture Other compre-hensive income Tax Losses Total Balance at January 1, 2018692$ (2,723)$ 225$ 217$ - 172$ (171)$ (532)$ 178$ (1,942)$ To income tax expense(9) (54) (88) - - (16) (408) 1,461 (12) 874 Balance at December 31, 2018683$ (2,777)$ 137$ 217$ - 156$ (579)$ 929$ 166$ (1,068)$ Balance at January 1, 2019683$ (2,777)$ 137$ 217$ - 156$ (579)$ 929$ 166$ (1,068)$ To income tax expense(1) (8,752) (96) 117 6,674 183 (50) (692) 808 (1,809) Balance at December 31, 2019682$ (11,529)$ 41$ 334$ 6,674$ 339$ (629)$ 237$ 974$ (2,877)$ Other liabilities, current$1,004 $473 Other liabilities, non-current253 105 $ 1,257$ 578December 31, 2019December 31, 2018Gross borrowing base availability$17,554 Advances, fees and interest(3,506) Outstanding letters of credit(300) $ 13,748December 31, 2019 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) The Credit Facility is classified in the consolidated statement of financial position as a part of non-current liabilities as the Company is not required to repay any balance outstanding until the maturity date of October 18, 2022, as long as the outstanding balance is not in excess of the Borrowing Base. The maturity date can be extended, subject to lenders’ approval. As at December 31, 2019, the Credit Facility was comprised of: The Credit Facility has multiple interest rate options that are based on the Canadian Prime Rate, Base Rate, LIBO Rate, Bankers’ Acceptance Rate plus an acceptance fee, in addition to an Applicable Margin for each of these rates. Fees apply to outstanding letters of credit and the unused portion of the credit. The finance costs for the year ended December 31, 2019 and the effective interest rate based on the average balance drawn were as follows: The Company incurred $0.3 million in financing transaction costs in connection with the Credit Facility which were recorded as deferred financing transaction costs in the non-current period of loans and borrowings. These transactions costs are amortized until the Credit Facility’s maturity date. The Company has pledged substantially all of its assets, except for assets pledged to BDC under the Term Loan (see Note 15), as a collateral for the Credit Facility, including a first priority security interest over all inventory, accounts receivable, excess margin and gains on the commodity account, gains in the foreign exchange line of credit and other assets of the Company. As at and during the fiscal period ended December 31, 2019, the Company was in compliance with all covenants. This Credit Facility replaced two former credit facilities, a $14.5 million revolving operating line of credit and a $1.5 million swing operating line of credit, where Canadian denominated borrowings were subject to an interest at the bank’s prime lending rate plus 0.75% per annum while the US$ denominated revolving operation line of credit was subject to LIBOR plus 2.35% per annum. The Company was in compliance with the former credit facilities during the years 2018 and 2019. 30 | P a g e Credit facility, current$3,506 Less unamortized transaction costs(324) $ 3,182December 31, 2019Weighted average daily balance$1,795 Finance costs$6 Number of days outsanding22 Effective interest rate%5.46 December 31, 2019Balance, open$- $n/aAdvances3,500 n/aFees and interest6 n/aFinancing transaction costs(341) n/aAmortized financing transaction costs17 n/aBalance, end$3,182 $- December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) Foreign exchange and commodity futures contract facility As part of the Credit Facility, 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. 14. LEASE LIABILITIES 14.1 Lease liabilities Lease liabilities are as follows: The Company leases the following offices, warehouses and equipment:  On August 26, 2016, Swiss Water 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 the Company’s option in five-year increments up to a total of 30 years. The lease commenced in July 2018. Under the lease, the Company 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.  Swiss Water leases a sales office in France which expires in October 2027.  On January 15, 2019, Seaforth entered into an agreement to lease a warehouse facility. The lease commenced on April 1, 2019 and expires in June 2027. The Company has two options to renew the lease for an additional term of five years each.  Swiss Water leases a facility that houses its decaffeination plant and offices. The lease expires in May 2023. Beyond expiry in 2023, the landlord has to approve any subsequent renewal of the lease.  Seaforth leases a truck. The lease expires in April 2023.  Swiss Water Decaffeinated Coffee Company USA, Inc. leases two sales offices in Seattle, Washington, one of which expires in March 2020, while the second one expires in October 2022.  Seaforth’s two warehouse leases expired in June and September 2019. 14.2 Adjustments recognized on the adoption of IFRS 16 On adoption of IFRS 16, the Company recognized $19.1 million in lease liabilities in relation to leases which had previously been classified as operating leases under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments plus anticipated exercise of renewal options that are at the discretion of the Company, discounted using the incremental borrowing rate as of January 1, 2019. The weighted average incremental borrowing rate applied to the lease liabilities at inception was 4.92%. 31 | P a g e Lease liability, current$1,525 $- Lease liability, non - current23,385 - $24,910 $- December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) A reconciliation between the amount of the lease liability recognized as at the date of initial application and operating lease commitments disclosed as at December 31, 2018 is as follows: 14.3 Amounts recognized in the statement of net income and statement of cash flows During the year, finance expense in the amount of $0.8 million (2018: nil) related to a lease was added to construction in progress. Also, during the year a gain of 0.03 million was recognized upon the termination of a lease (2018: nil). From the total of lease cash payments, the portion relating to finance expense is recognized in the operating activities while the principal portion of lease payments is recognized in the financing component of statement of cash flows. 14.4 Minimum lease payments As at December 31, 2019, the minimum payments under leases liabilities are as follows: 15. CONSTRUCTION LOAN Business Development Bank (BDC) loan During the year ended December 31, 2018, the Company entered into a term loan facility with the Business Development Bank of Canada (“Term Loan”) of up to $20.0 million. The purpose of the Term Loan is to assist in the financing of new equipment for the facility being built in Delta, British Columbia. Principal repayments commence on July 1, 2021 and are repaid in equal monthly installments until the Term Loan maturity date of June 1, 2033. 32 | P a g e Operating lease commitments as at December 31, 2018$8,451 Effect of discounts using incremental borrowing rates (4.55%-4.95%)(10,010) Extension and termination options reasonably certain to be exercised20,692 Balance at initial application on January 1, 2019$19,133 Total Balance January 1, 2019$19,133 Additions7,788 Terminations(186) Finance expense1,181 Lease cash payments(3,006) Balance at December 31, 2019$24,910 TotalNo later than 1 year$2,698 Later than 1 year and no later than 5 years8,873 Later than 5 years3,176 $14,747 December 31, 2019 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) As of December 31, 2019, the loan amount outstanding was as follows: The Term Loan bears interest at 4.95% per annum over twelve years. Interest is based on the outstanding loan balance and is paid monthly. The Term Loan is secured by a general security agreement and a first security interest on all existing equipment and machinery plus new equipment and machinery financed with the Term Loan. Seaforth provided a guarantee for the Term Loan. Landlord construction loan During the year ended December 31, 2018 the Company fully repaid a $6.1 million construction loan and $0.1 million in related interest that was due to the landlord. The construction loan pertained to accrued construction costs for a new building that houses the new production plant in Delta BC. Interest on that construction loan was capitalized during the construction phase. 16. CONVERTIBLE DEBENTURE On October 11, 2016, the Company issued an unsecured subordinated convertible debenture for gross proceeds of $15.0 million. 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 6.85% interest rate is subject to reaching specific covenant thresholds, in excess of these, the interest rate increases to 7.85% per annum. 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, Swiss Water had the option to pay interest- in-kind for the first two years. If elected, this option would have increased the principal sum by the interest owing. The Company chose not to elect to pay interest-in-kind. The convertible debenture also includes a net share settlement feature that allows Swiss Water, 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. 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 33 | P a g e Accrued interest in accrued liabilities$84 $15 Construction loan in non-current liabilities20,000 9,400 $20,084 $9,415 December 31, 2019December 31, 2018Balance, open$9,415 $- Additions10,600 9,400 Interest charged733 15 Interest paid(664) - Balance, end$20,084 $9,415 December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 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. The Company uses the residual value method to allocate the fair value of the convertible debenture between the liability component and the derivative liability. Under this method, as at December 31, 2019, the derivative liabilities include the fair value of the derivative liability related to the convertible debenture in the amount of $1.7 million (2018: $0.9 million). During the year ended December 31, 2019, this revaluation resulted in losses of $0.8 million being recorded in the statement of income (2018: gain of $1.8 million). 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 were: 17. ASSET RETIREMENT OBLIGATION (“ARO”) The Company estimates the total undiscounted amount of any cash flows required to settle its ARO is approximately $1.6 million. Of that amount $0.9 million, is estimated to be incurred on or about the expiry of a lease renewal term in 2023 and $0.7 million is estimated to be incurred on or about the year 2038. As at December 31, 2019, the Company has a long-term liability ARO of $1.3 million (2018: $0.8 million), reflecting the present value of the ARO using credit adjusted risk-free rates between 1.25% and 1.76%. 18. SHARE CAPITAL Swiss Water 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, 2019, there were 9,061,210 common shares issued and outstanding. 34 | P a g e Balance, open$12,082 $11,658 Interest charged1,506 1,452 Interest paid(1,028) (1,028) Balance, end$12,560 $12,082 December 31, 2019December 31, 2018Balance, open$910 $2,709 Change in fair valuation of derivative embedded option 770 (1,799) Balance, end$1,680 $910 December 31, 2019December 31, 2018Share price $ 6.92 $ 4.97 Exercise price $ 8.25 $ 8.25 Option life3.78 years4.78 yearsVolatility31%37%Risk-free interest rate1.68%1.88%Dividend yield3.61%5.03%December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 18.1 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 Swiss Water or its subsidiaries. The RSU Plan is administered by the Board of Directors, which sets the terms of incentive awards under the RSU Plan. On June 19, 2019, Swiss Water shareholders approved an increase in the number of common shares available for issuance under the 2011 Restricted Share Unit Plan as amended in June 2019. The increase is from a maximum of 333,760 common shares to a maximum of 815,509 common shares. These grants vest on the third anniversary of issuance (with certain exceptions) provided the grant recipient is still employed by Swiss Water 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 Swiss Water 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 that uses the higher of the then-current share price and $3.20. The movement in RSUs for the years ended December 31, 2019 and December 31, 2018 was as follows: 18.2 Deferred share units The Company has a deferred share unit plan (the “DSU Plan”) in order to issue deferred share units (“DSUs”) to non-employee directors (collectively, “participants”) of Swiss Water. The DSU Plan was adopted to allow participants the opportunity to defer compensation and encourage a sense of ownership in Swiss Water. Under the DSU Plan, participants may elect to defer compensation and receive DSUs equal to the value of the deferred compensation. The first DSUs were issued in April 2012. The number of DSUs was determined by dividing the amount of deferred compensation by the Fair Market Value (“FMV”). The FMV of DSUs is defined in the DSU Plan as 35 | P a g e Number of RSUsAverage remaining vesting period (years)Performance basedBalance at January 1, 2018100,783 6.58$ 1.15 RSUs granted91,000 6.35$ 2.15 NoRSUs issued for dividends4,891 6.08$ 1.75 NoRSUs cash-settled(28,304) 7.04$ - RSUs exercised(22,348) 7.04$ - RSUs forfeited(23,288) 6.25$ - NoBalance at December 31, 2018122,734 5.01$ 1.83 Balance at January 1, 2019122,734 5.01$ 1.83 RSUs granted98,000 5.06$ 2.15 NoRSUs issued for dividends8,142 6.05$ 1.30 NoRSUs forfeited(4,040) 6.32$ - NoBalance at December 31, 2019224,836 7.07$ 1.40 Volume based weighted average share price SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) the weighted average closing price of Swiss Water shares for the five business days immediately preceding the relevant date. Upon the occurrence of a 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 the number of DSUs held by that participant and the FMV 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, 2019, and December 31, 2018, was as follows: 19. DIVIDENDS For the year ended December 31, 2019, the Company declared quarterly eligible dividends to shareholders totaling $2.3 million or $0.25 per share (2018: $2.3 million or $0.25 per share) of which, the fourth quarterly dividend in the amount of $0.6 million was payable at December 31, 2019 (2018: $0.6 million). 20. REVENUE 20.1 Disaggregation of revenue Revenue disaggregated by geographical markets is disclosed in Note 25. The Company also disaggregates revenue by major products and services: decaffeinated coffee sales, decaffeination services, and distribution with the following results for the years ended December 31, 2019 and 2018: 20.2 Contract balances As at December 31, 2019 the accounts receivable balance of $14.6 million (2018: $14.3 million) consists of amounts due from customer contracts and reflects the Company’s right to a consideration that is unconditional. The Company did not have other contract assets or liabilities from contracts with customers. 36 | P a g e Number of DSUsPerformance basedBalance at January 1, 201870,574 6.60$ DSUs issued 24,665 6.23$ NoBalance at December 31, 201895,239 4.97$ Balance at January 1, 201995,239 4.97$ DSUs issued 31,028 5.85$ NoBalance at December 31, 2019126,267 6.92$ Weighted average share price Decaffeinated coffee sales$82,929$78,974Decaffeination services6,8965,117Distribution7,4055,848$97,230$89,939December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 21. EMPLOYEE BENEFITS EXPENSES Expenses recognized for employee benefits are detailed below: Short-term benefits comprise 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. 22. 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 identified in the Nature of Business Note 1) are discussed below. All intercompany transactions, balances, income and expenses are eliminated on consolidation. 22.1 Compensation of Key Management Personnel The remuneration of directors and key management personnel during the year was as follows: 22.2 Trading transactions During the year, the Company entered into the following transactions with a company that is related to a director: As at December 31, 2019, the Company had the following balances receivable from and payable to a company that is related to a director: 37 | P a g e Short-term benefits$9,757 $8,525 Long-term benefits868 254 Post-employment benefits813 701 $11,438 $9,483 December 31, 2019December 31, 2018Short-term benefits$2,330 $1,725 Long-term benefits742 207 Post-employment benefits118 71 $3,190 $2,003 December 31, 2019December 31, 2018Sales$957 $393 Purchases of raw materials$3,843 $5,957 December 31, 2019December 31, 2018Accounts receivable$11 $5 Accounts payable$518 $310 December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) These transactions were in the normal course of operations and were measured at the fair value of the consideration or receivable, which was established and agreed to by both parties. 22.3 Promissory note 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. 23. BASIC AND DILUTED EARNINGS PER SHARE (“EPS”) 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: 24. 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. 38 | P a g e Basic earnings per shareNet income attributable to shareholders$2,944 $4,531 Weighted average number of shares9,061,210 9,058,149 Basic earnings per share$0.32 $0.50 Diluted earnings per shareNet income attributable to shareholders$2,944 $4,531 Interest on convertible debenture- 1,063 Gain on fair value adjustment of embedded option- (1,799) Net income after effect of diluted securities$2,944 $3,795 Weighted average number of shares - basic9,061,210 9,058,149 Effect of diluted securities: convertible debenture- 1,818,182 Weighted average number of shares - diluted9,061,210 10,876,331 Diluted earnings per share$0.32 $0.35 December 31, 2019December 31, 2018December 31, 2019December 31, 2018Weighted average number of RSUs granted224,502 95,437 Convertible debenture1,818,182 - December 31, 2018December 31, 2019 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) Changes in non-cash working capital are as follows: Interest paid includes $0.7 million of interest on the construction loan and $0.8 million of interest on lease liabilities which were capitalized throughout the year during the construction phase of the new facility (2018: $nil and $nil). For the year ended December 31, 2019, a $7.7 million (2018: $3.7 million) in additions to construction in progress was accrued in accounts payable and accrued liabilities. Also, during the year the Company capitalized $0.8 million of depreciation related to right-of-use assets and $0.5 million of asset retirement obligation (2018: $nil and $nil). These are investing transactions which did not require the use of the Company’s cash or cash equivalents. During the year ended December 31, 2018 the Company fully repaid a $6.1 million construction loan and related $0.1 million in interest that was due to the landlord. This construction loan was incurred during the construction of a building that houses the new production plant. Lease payments for a short-term lease not included in the measurement of the lease liability are classified as cash flows from operating activities. The Company has classified the principal portion of lease payments within financing activities and the interest portion within operating activities. Proceeds from the credit facility were $3.5million and the Company paid $0.3 million in financing costs to obtain the credit facility (2018: $nil and nil, respectively). 25. SEGMENT REPORTING The Company’s sales are primarily generated by the decaffeination of green coffee segment and in three geographic areas: Canada, the United States and other international markets. The Company’s revenue from external customers and its non-current assets (excluding deferred tax assets), by location, are detailed below. 25.1 Revenue 39 | P a g e Accounts receivable$(261) $(2,160) Inventories(2,141) 1,433 Other assets and liabilities683 6 Prepaid expenses and other receivables593 (322) Accounts payable and accrued liabilities2,981 1,535 Derivative assets and liabilities and hedged firm commitments at fair value through profit and loss(1,197) (1,215) $658 $(723) December 31, 2018December 31, 2019Canada$33,282 $32,217 United States46,104 45,558 International and other17,844 12,164 $97,230 $89,939 December 31, 2018December 31, 2019 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 25.2 Non-current assets (excluding deferred tax assets) 26. FINANCIAL RISK MANAGEMENT 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. 26.1 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. The Company utilizes futures contracts to manage its commodity price exposure. The Company buys and sells futures contracts for coffee on the Intercontinental Exchange in order to offset its inventory position and fix the input cost of green coffee. As at December 31, 2019, the Company had futures contracts to buy 3.6 million lbs of green coffee with a notional value of US$4.7 million, and contracts to sell 6.6 million lbs of green coffee with a notional value of US$8.3 million. The furthest contract matures in September 2020 (2018: buy 4.5 million lbs of green coffee with a notional value of US$4.7 million, and contracts to sell 4.7 million lbs of green coffee with a notional value of US$4.7 million). The following tables provide a summary of commodity hedges designated as hedging instruments: 40 | P a g e Canada$94,786 $47,334 United States263 103 Europe210 - $95,259 $47,437 December 31, 2019December 31, 2018Carrying amount of hedging instrumentsFair value hedgeNominal amount of hedging instruments (in US$'000)$3,665 $10 hedging instrument is located Derivative Assets$576 $495 Derivative Liabilities- - Changes in fair value used for calculating hedge ineffectiveness- - December 31, 2018Commodity price risk Coffee futuresCommodity price risk Coffee futuresDecember 31, 2019Line item in the statement of financial position where SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 26.2 Foreign currency risk The Company realizes a significant portion of its sales in US$, 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 net 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. As at December 31, 2019, the Company had forward currency contracts to buy US$3.8 million and sell US$53.0 million (2018: buy US$6.6 million and sell US$65.0 million) from January 2020 through to September 2023 at various Canadian exchange rates ranging from $1.2147 to $1.3482. The following tables provide a summary of amounts related to foreign currency forward contracts designated as hedging instruments. Not included in tables below are fair value changes for swap contracts, as these are not designated hedge instruments. Currency risk hedges on US$ purchases As at December 31, 2019, the Company designated as hedging instruments US$3.8 million in forward contracts to buy US dollars, which relate to coffee purchases (2018: US$6.6 million). 41 | P a g e Fair value hedgeand coffee inventoryand coffee inventoryNominal amount of hedged item (in '000 lbs)3,031 245 Inventories & hedgedInventories & hedgedhedged item is located firm commitmentsfirm commitmentsAssets $ 1,617 $ 614 Liabilities 730 791 Changes in fair value used for calculating hedge ineffectiveness - - December 31, 2018Purchase commitments Line items in the statement of financial position where Purchase commitments Accumulated amount of fair value hedge adjustment on hedged item included in the carrying amount of the hedged items December 31, 2019Carrying amount of hedging instrumentsFair value hedgeForeign currencyForeign currency purchase forwards purchase forwardsNominal amount of hedging instruments (in US$'000)$3,797 $6,593 Line item in the statement of financial position where hedging instrument is located Derivative Assets$- $385 Derivative Liabilities140 - Changes in fair value used for calculating hedge ineffectiveness- - December 31, 2019December 31, 2018 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) Currency risk on hedge on US$ future revenue: As at December 31, 2019, the Company designated as hedging instruments US$35.9 million in forward contracts to sell US dollars, which relate to highly probable forecasted sales revenue, (2018: US$47.1 million). 26.3 Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The Company believes that interest rate risk is low as all cash equivalents and short-term investments are made in fixed-rate instruments. The Company does have some interest rate risk related to its credit facility; however, the obligations are small enough that any exposure is not material at this time. There is no interest rate risk on the convertible debenture and construction loan as the interest rates are fixed. 42 | P a g e Fair value hedgeFirm purchase commitmentsFirm purchase commitments& inventories& inventoriesNominal amount of hedged item (in US$'000)$3,797 $6,593 Line item in the statement of financial position whereInventories & hedgedInventories & hedgedhedged item is located firm commitmentsfirm commitmentsAssets 157 - Liabilities - 404 Changes in fair value used for calculating hedge ineffectiveness - - Accumulated amount of fair value hedge adjustment on hedged item included in the carrying amount of the hedged items December 31, 2019December 31, 2018Carrying amount of hedging instrumentsCashflow hedgeNominal amount of hedging instruments (in US$'000)$35,870 $47,111 hedging instrument is located Derivative Assets39 4 Derivative Liabilities971 3,322 - - December 31, 2019December 31, 2018Currency riskForeign currency forwardsCurrency riskForeign currency forwardsChanges in fair value used for calculating hedge ineffectivenessLine items in the statement of financial position where Cashflow hedgeNominal amount of hedged item (in US$'000) 35,870 47,111 Accumulated other Accumulated other hedged item is located comprehensive incomecomprehensive incomeAssets n/a n/a Liabilities n/a n/a Changes in fair value used for calculating hedge ineffectiveness - - Cashflow hedge reserve (932) (3,496)December 31, 2018Currency riskForeign currency forwardsCurrency riskForeign currency forwardsLine items in the statement of financial position where Accumulated amount of fair value hedge adjustment on hedged item included in the carrying amount of the hedged items December 31, 2019 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 26.4 Credit risk The Company is exposed to credit risk with respect to its cash and cash equivalents, accounts receivable, and derivative financial instruments. The Company does not have significant credit risk related to cash and cash equivalents 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, 2019, revenues from three major customers of $32.2 million (2018: $32.0 million) represented 33% (2018: 36%) of total revenues for the year. Three major customers represented 53% of total accounts receivable as at December 31, 2019 (2018: 43%). The Company had 13% of its accounts receivable past due but not impaired as at December 31, 2019 (2018: 19%). Of the past due accounts receivable, 92% are 1-30 days past due (2018: 91%), while 8% are over 31 days past due (2018: 9%). The Company manages the credit risk related to its derivative financial instruments by entering into such contracts only with high credit quality institutions. 26.5 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: 26.6 Fair value of financial instruments Financial instruments that are measured at fair value are categorized as follows. During the year ended December 31, 2019, there were no transfers between level 1 and 2 instruments. 43 | P a g e 2021 to 2022Accounts payable$11,103 $11,103 $- $- $- Credit facility3,500 - 3,500 - - Other liabilities1,257 1,004 253 - - Lease liabilities24,910 2,698 5,591 3,282 3,176 Construction loan 20,000 - 2,500 3,333 14,167 Convertible debenture12,560 - - 15,000 - Total $73,330 $14,805 $11,844 $21,615 $17,343 Carrying AmountContractual Cash FlowsThereafter2023 to 20242020December 31, 2019 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) 27. COMMITMENTS In addition to lease liabilities, the Company has the following 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, 2019, these contracts related to the purchase of green coffee in the amount of $31.5 million (2018: $37.6 million), and natural gas purchase commitments in the amount of $0.5 million (2018: $0.1 million), and capital purchases commitments of $2.8million (2018: $2.4 million). A $34.0 million of these contracts will become payable within twelve months from December 31, 2019. 28. SUBSEQUENT EVENTS On January 15, 2020, the Company paid an eligible dividend in the amount of $0.6 million ($0.0625 per share) to shareholders of record on December 31, 2019. On February 24, 2020, a total of 17,570 of the outstanding RSUs vested and were converted to common shares, pursuant to the 2011 Restricted Share Unit Plan as amended on June 18, 2019. In March 2020, the World Health Organization declared a global pandemic known as COVID-19*. The expected impacts on global commerce are expected to be far reaching. This will impact demand for our products and services in the near term and will impact our supply chains. It may also impact expected credit losses on our amounts due from customers and whether the entity continues to meet the criteria for hedge accounting. For example, if a hedged forecast transaction is no longer highly probable to occur, hedge accounting is discontinued. 44 | P a g e Financial assetsCash and cash equivalents$6,739 $6,739 $- $- Derivative assets945 576 369 - $7,684 $7,315 $369 $- Financial liabilitiesDerivative liabilities$2,978 $- $2,978 $- Credit facility3,182 - 3,182 - Construction loan 20,000 - 20,000 - Other liabilities1,257 - 1,257 - $27,417 $- $27,417 $- Financial assetsCash and cash equivalents$8,336 $8,336 $- $- Derivative assets883 495 388 - $9,219 $8,831 $388 $- Financial liabilitiesDerivative liabilities$5,109 $- $5,109 $- Other liabilities578 - 578 - $5,687 $- $5,687 $- Level 3Level 3December 31, 2018Level 1Level 2December 31, 2019Level 1Level 2 SWISS WATER DECAFFEINATED COFFEE INC. Notes to the Consolidated Financial Statements For the Year ended December 31, 2019 (Tabular amounts are in thousands of Canadian dollars) *Under IAS 10, Events after the reporting period, events such as this are considered to be non-adjusting subsequent events. The impacts to the Company are not determinable at the date of these financial statements, however they could be material and include impairments of receivables, inventory and liquidity. 45 | P a g e SWP Q4 cover_Layout 1 20-03-20 10:56 AM Page 3 SWP Q4 cover_Layout 1 20-03-20 10:56 AM Page 4 www.investor.swisswater.com TSX: SWP 

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