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SWISS WATER DECAFFEINATED COFFEE INC.
2020 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, 2020
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 18, 2021, provides a review of the financial results for the three
months and the year ended December 31, 2020 relative to the comparable period of 2019. The three-month
period represents the fourth quarter (“Q4”) of our 2020 fiscal year. This MD&A should be read in conjunction
with Swiss Water’s audited consolidated financial statements for the year ended December 31, 2020, and in
conjunction with the Annual Information Form (“AIF”), 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,
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 (“US$”); (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; (vii) the potential impact of the COVID-19 pandemic. 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, 2020
EXECUTIVE SUMMARY
For the year ended December 31, 2020, Swiss Water’s revenues, operating income, and net income remained
flat when compared to 2020. These results were achieved despite the ongoing impact of the COVID-19
pandemic. Year-to-date volume continued to recover and closed only 6% lower than last year. In the first
three months of 2020, our volumes were negatively affected by a significant increase in commodity futures
prices for coffee in late 2019. The negative impact of this persisted through the first quarter. Since then,
volumes have recovered more strongly than expected in this COVID-19 environment, and this performance is
largely a reflection of our well-diversified customer base. Q4 volume was down by only 4% versus Q4 2019.
The primary change in our business following the emergence of the COVID-19 pandemic continues to be the
customer mix. Our large commercial roasters and specialty roasters with a grocery presence continue to drive
our volumes. At the beginning of the pandemic, we experienced strong volume demands from those
customers that supplied the retail grocery trade. Consumer hoarding and pantry loading created a short-term
demand peak. Over the course of the second half of the year, strong grocery demand continued but at a
slower pace than when the pandemic started. Shuttered restaurants and out-of-home specialty coffee shops
started to reopen toward the end of the second quarter, and this trend has partially contributed to our volume
recovery in the last half of the year.
Gross profit was impacted by higher green coffee prices, increased depreciation charges and higher operating
expenses following the commissioning of our new Delta manufacturing facility and change in customer mix.
In Q4 2020, Swiss Water’s revenue, gross profit, operating income and net income all decreased versus Q4
2019.
We are currently well positioned with green coffee inventory and will be able to react to short-term demand
increases as trading conditions strengthen. We remain in close contact with our customers, however, it is
clear that many of our food service partners remain cautious regarding when their trading activity will return
to pre-pandemic levels.
In $000s except per share amounts
(unaudited)
Sales
Gross Profit
Operating income
Net income (loss)
EBITDA1
EBITDA excluding the impact of IFRS 16-Leases2
Net income (loss) – basic3
Net income (loss) – diluted3
3 months ended December 31,
2019
25,023
2020
24,512 $
$
Year ended December 31,
2019
97,230
2020
97,571 $
2,861
126
(320)
1,888
1,186
(0.04) $
(0.04) $
4,106
539
716
1,454
797
0.08
0.08
15,652
5,137
2,949
9,759
7,042
$
$
0.32 $
0.25 $
16,494
5,162
2,944
10,350
7,344
0.32
0.32
$
$
$
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. Diluted earnings per share take into
account shares that may be issued upon conversion of convertible debt and RSUs as well as the impact on earnings from changes in the fair market
value of the embedded option in the convertible debt and conversion of RSUs.
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, 2020
Operational highlights
Total volumes in the fourth quarter and year ended December 31, 2020 declined by 4% and 6%,
respectively, compared to the same periods in 2019. Although we have been negatively impacted by the
pandemic, our volumes have proven to be more resilient than we originally anticipated. Encouragingly we
recorded 6% volume growth within our Asia Pacific region in 2020.
Our largest geographical market by volume in Q4 continued to be the United States, followed by Canada,
Europe and other international markets. By dollar value, for the year ended December 31, 2020, 49% of
our sales were to customers in the United States, 31% were to Canada, and the remaining 20% were to
other countries. Our international business continues to expand and we anticipate revenues from our
European and Asia-Pacific markets will continue to increase in both dollar and percentage terms.
Swiss Water’s operations have been deemed essential services during the pandemic, and as such, we have
maintained our best efforts to supply decaffeinated coffee to food manufacturers and retailers who are
supporting consumers around the world. During these unprecedented times, Swiss Water has remained
committed to continuing our decaffeination process and operations, while prioritizing safety for our
customers, vendors and employees. To protect our stakeholders, we have implemented best health
practices and social distancing in our production facilities, warehouses and offices as recommended by
the appropriate health authorities.
In September 2020, we successfully completed the first production run of commercial-grade coffee from
our Delta, B.C. facility. This marked the final step in the startup of the initial processing line at our new,
technically advanced decaffeination facility and the culmination of a three-year effort to develop
additional capacity to service the growing demand for our sustainably sourced, chemical free
decaffeinated coffees. For the first time in its history Swiss Water is shipping decaffeinated from two
production facilities.
Financial highlights
2020 revenue remained relatively flat, increasing by $0.3 million to $97.6 million. Despite the drop in
volumes in Q1 of 2020 as mentioned above, our business remains resilient and growth has been steady.
For the year ended December 31, 2020, gross profit decreased by $0.8 million to $15.7 million. The
reduction in year-to-date gross profit was driven by higher green coffee prices, increased depreciation
incremental operating expenses following the commissioning of our new Delta
charges and
manufacturing facility. These increases were not unexpected and were partially offset by improvements
in customer sales mix and supply chain efficiencies within our Seaforth subsidiary.
For the year ended December 31, 2020, operating income and net income remained relatively flat at $5.1
million and $2.9 million when compared to the same period last year. The year-over-year difference
reflects the combination of changes in gross profit, and both operating and non-operating expenses. This
year non-operating expense was reduced by the revaluation of an embedded derivative as a result of
Swiss Water’s lower share price, offset by a slight loss on risk management activities.
EBITDA decreased by $0.6 million, or 6%, to $9.8 million for the year ended December 31, 2020, when
compared to the same period in 2019. EBITDA, excluding the impact of IFRS 16, decreased by $0.3 million,
or 4%, to $7.0 million for the year 2020, compared to the same periods in 2019, and increased by $0.4
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, 2020
million, or 49%, to $1.2 million in Q4, and. The adverse movement in EBITDA was expected and reflects a
softening of coffee quality differential gains in the second half of 2020.
OUTLOOK
The Company is limiting guidance for the 2021 fiscal year due to the ongoing uncertainty of the effect of the
COVID-19 pandemic. During the early stages of the pandemic, we experienced strong short term volume pull
from customers that service the retail grocery trade as consumers loaded their pantries in anticipation of
quarantines and supply disruptions, or simply consumed their coffee at home. The at-home coffee market
has remained strong but has leveled off from the initial spike in demand. We expect this trend to continue
for the immediate future, unless there is a significant change in COVID-19 infection rates.
Meanwhile, we expect customers who serve the out-of-home coffee market through cafes and restaurants to
continue to recover from the serious disruption they experienced due to the widespread or targeted food-
service shutdowns implemented to combat surges in the number of COVID-19 cases. In the second half of
2020 many countries partially lifted their lockdowns and our sales into the out-of-home channel began to
recover.
Many countries and regions have started to successfully roll out COVID-19 vaccination programs. These
include a number of states and major cities in the USA, which is our largest geographical segment. We are
cautiously optimistic that these actions will reduce the scale of subsequent COVID-19 outbreaks and lower
the risk of future lockdowns in some of our most important markets. It is particularly encouraging that the
Company’s sales volumes in Asia Pacific grew by 6% in 2020, and accelerated to 14% growth in Q4 2020. This
region has been acknowledged to have managed the control of the COVID-19 pandemic relatively well, and
we are hopeful that the region's growth is a leading indicator of how our volume will rebound in North America
and Europe as COVID-19 infection rates fall in these regions.
Despite signs of recovery uncertainty persists. The global recovery from the COVID-19 pandemic, and the
rollout of the vaccine is unlikely to be without a challenge. Given this ambiguity, we cannot reliably predict
the ultimate impact that the COVID-19 pandemic will have on our business, particularly within the out-of-
home market. Accordingly, the risk remains that Swiss Water may continue to report sales volumes that
under-index recent year trends. However, after a stronger than expected second half of 2020 we are
cautiously optimistic that our volumes will remain resilient in 2021.
Operationally, Swiss Water has continued to run both Burnaby production lines on a 24/7 basis throughout
2020. In September, we announced the completion of our first production run of commercial-grade coffee
from our Delta, B.C. facility. Delta is currently run on a 24/7 basis. As we move through 2021 we expect to
migrate a significant proportion of production volume to Delta and reduce some of the pressure on our
Burnaby assets.
Both Swiss Water and Seaforth have remained open and fully resourced to supply customers since the
beginning of the pandemic. From the outset of the pandemic, we have taken precautions within each of our
operating sites to ensure appropriate personal protective equipment has been available to employees and
contractors, and that ongoing deep cleaning by internal and third-party suppliers have been performed with
increased frequency. During the early stages of the pandemic, we initiated a brief shutdown of one of our
operating lines to mitigate the possible risk of a province-wide work stoppage. During this period, we took
the opportunity to complete scheduled maintenance on this line, and it was quickly brought back into service
when this was completed. In 2021 we will remain focused on maintaining these high standards and utilizing
our assets responsibly.
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, 2020
As noted previously, in Q2 of this year, the landlord of our Burnaby manufacturing site provided formal notice
that our lease would not be extended beyond June 2023. Accordingly, we are in the advanced stages of
planning for the construction of an additional production facility, including a second production line, at our
Delta location with a targeted completion date before the 2023 deadline in Burnaby. An additional production
line is required to ensure the capacity to process expected volume upon the conclusion of our Burnaby lease
and to provide additional capacity for intermediate term growth. Based on engineering reports from a third-
party engineering firm, when both are completed, the two lines in Delta are expected to have a targeted
endpoint capacity at least 40% greater than the current existing capacity of the two lines at our Burnaby site.
The preliminary cost estimate from our third-party engineering firm for the design and construction of a new
production facility in Delta is approximately $45.0 million plus commissioning costs, which are expected to be
approximately $2.0 million. These estimates are preliminary and like all major design and construction
projects are highly dependent on local and global economic factors impacting construction. These include,
without limitation, changes in labour, commodity and materials pricing, trade policies, and supply chain issues.
In addition, the continuing impact of the worldwide COVID-19 pandemic is unknown and could impact the
timing and costs of the proposed project. We are now in the process of finalizing financing plans for the
project.
BUSINESS OVERVIEW
Swiss Water Decaffeinated Coffee Inc. is a premium green coffee decaffeinator located in Burnaby and in
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
brokers, and is the main green coffee handling and storage company in Metro Vancouver. Seaforth is
organically certified by Ecocert Canada.
Swiss Water’s shares trade on the Toronto Stock Exchange under the symbol ‘SWP’. As at the date of this
report, 9,129,673 shares were issued and outstanding.
Swiss Water Decaffeinated Coffee’s Business
We carry an inventory of premium-grade Arabica coffees that we purchase from the specialty green coffee
trade, decaffeinate and then sell to our customers (our “Regular” or “Non-Toll” business). Revenue from our
Regular business includes both processing revenue and green coffee cost recovery revenue.
We also decaffeinate coffee owned by our customers for a processing fee under toll arrangements (our “toll”
business). The value of the coffee processed under toll arrangements does not form part of our inventory,
our revenue or our cost of sales. Revenue from toll arrangements consists entirely of processing revenue.
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
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, 2020
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
US$/C$ Exchange Rates
As noted above, the majority of our (“C$”) revenues are generated in US dollars (“US$”), 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. The chart below illustrates the US$ to Canadian dollar (“C$”) exchange rates for the last eight
quarters:
6 | P a g e o f t h e M D & A
$1.18$1.21$1.24$1.27$1.30$1.33$1.36$1.39$1.42$1.4531-Dec-1831-Jan-1928-Feb-1931-Mar-1930-Apr-1931-May-1930-Jun-1931-Jul-1931-Aug-1930-Sep-1931-Oct-1930-Nov-1931-Dec-1931-Jan-2029-Feb-2031-Mar-2030-Apr-2031-May-2030-Jun-2031-Jul-2031-Aug-2030-Sep-2031-Oct-2030-Nov-2031-Dec-20US Dollars to Canadian Dollars Bank of Canada Noon RatesDec 31, 2018 to Dec 31, 2020
SWISS WATER DECAFFEINATED COFFEE INC.
Management Discussion and Analysis
For the year ended December 31, 2020
In Q4 2020, the US$ averaged C$1.30, a decrease from C$1.32 over the same period in 2019. In 2020, the
US$ averaged C$1.34, a slight increase of 1% over the same period last year. During 2020 the US$ ranged
between C$1.27 and C$1.45 (2019: between C$1.30 and C$1.36). When the US$ depreciates (appreciates),
it decreases (increases) our gross profit on green coffee revenues.
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 (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:
7 | P a g e o f t h e M D & A
$0.80$1.00$1.20$1.40$1.6031-Dec-1831-Jan-1928-Feb-1931-Mar-1930-Apr-1931-May-1930-Jun-1931-Jul-1931-Aug-1930-Sep-1931-Oct-1930-Nov-1931-Dec-1931-Jan-2029-Feb-2031-Mar-2030-Apr-2031-May-2030-Jun-2031-Jul-2031-Aug-2030-Sep-2031-Oct-2030-Nov-2031-Dec-20NY'C' Close (US$/lb)IntercontinentalExchangeDec 31, 2018 to Dec 31, 2020
SWISS WATER DECAFFEINATED COFFEE INC.
Management Discussion and Analysis
For the year ended December 31, 2020
In Q4 2020, the NY’C’ averaged US$1.14/lb compared to an average of US$1.12/lb in Q4 2019. For 2020, the
NY’C averaged US$1.11/lb, compared to US$1.01/lb for 2019. 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, our
customers tend to add to their inventories.
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 a 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.
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 contributes 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
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, 2020
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 three decaffeination production lines. This enables
us to align our production capacity with changes in demand throughout the year. We are able to better
control our variable cost by operating a reduced number of lines when demand is lower and all lines when
demand is higher. In Q3 2020 we initiated production from our new processing facility in Delta, B.C. In
prior years we completed an efficiency enhancement project in Q2 2018 to increase capacity at our
Burnaby operating facility and in 2016, we expanded the capacity of one of our production lines, which
enabled us to meet near-term growth in demand for our products. The construction of our fourth
processing line 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.
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 capital which was used
to fund the construction of our third production line (housed in the new production facility noted above).
This production line was commissioned in 2020. In 2021, we will continue to revisit our budgets and
financing strategy to ensure that we have sufficient funds to execute on our business strategy. This will
include initiating the construction of our fourth production line at our Delta, B.C. location. 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.
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, 2020
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, when compared
one period to period, shipments to roasters are more stable when compared to shipments to importers.
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. Our revenue by category for the indicated period was:
(In $000s)
(unaudited)
Process revenue
Green revenue
Distribution revenue
Total revenue
3 months ended December 31,
2019
2020
6,726 $
15,951
1,835
$
6,895
16,278
1,850
Year ended December 31,
2019
26,852
63,047
7,331
2020
26,079 $
64,299
7,193
24,512 $
25,023
$
97,571 $
97,230
$
$
For the quarter ended December 31, 2020, sales totaled $24.5 million, a decrease of $0.5 million, or 2%,
compared to the same quarter in 2019. Sales for the year 2020 totaled $97.6 million, an increase of $0.3
million, or 0.4%, over the same period last year.
Our sales in the fourth quarter and in 2020 by revenue category are as follows:
Process revenue decreased slightly by $0.2 million, or 2% in Q4, and decreased by $0.8 million, or 3% in
2020. Decreases in both periods reflect a slight decrease in our processing volumes and a lower average
US$ exchange rate.
Green revenue decreased by $0.3 million, or 2% in Q4, and increased by $1.3 million, or 2% in 2020. These
movements are mainly due to green coffee sales volume decrease or increase offset by a lower or higher
coffee futures price, NY’C’, in such periods.
Distribution revenue remained broadly flat in Q4, and decreased by $0.1 million, or 2% in 2020. Variability
in distribution revenue has been driven by lower shipment volumes and some COVID-19 related
disruption in the supply chain.
The sales volume performance in the fourth quarter and in 2020 by geographical segment are as follows:
Sales volume in North America decreased by 3% in Q4, and by 6% in 2020,
Sales volume in Europe decreased by 48% in Q4, and by 24% in 2020,
Sales volume in Asia Pacific increased by 14% in Q4, and by 6% in 2020.
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, 2020
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 $0.7 million, or 4%, to $21.7 million this year compared to the
same period in 2019, driven by an increase in the cost of green coffee and depreciation of our Delta
manufacturing facility. Additional depreciation expense from the Delta manufacturing facility was $0.5
million for the quarter and $1.0 million for the year. For the year 2020, our cost of sales was $81.9 million,
up by $1.2 million, or 1%, over the same period last year. The increase is broadly the result of higher
production costs associated with operating in two locations, increased depreciation and annual labour cost
inflation, partially offset by a decrease in green coffee costs, which is a significant portion of our cost of sales.
Gross Profit
Gross profit decreased by 30% to $2.8 million for the fourth quarter of this year, mainly due to a softening of
coffee quality differentials and lower sales volumes. Gross profit for the year 2020 decreased by 5% to $15.7
million, compared to the same period last year. Full year results have been impacted by lower than expected
sales volume, short-term differential margin losses, higher depreciation expense, offset by improved supply
chain efficiencies including benefits from the consolidation of our Seaforth warehouses, and lower natural
gas costs.
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 2020 totaled $1.4 million. This is a decrease of $0.7 million, or 33%, compared
to the same period last year. Administration expenses for the year 2020 decreased by 15% to $6.1 million.
The reduction was largely due to lower cost recovery of share-based compensation costs, which are based on
Swiss Water’s share price. During the year 2020, our share price dropped. This resulted in an estimated stock-
based compensation cost recovery whereas, in 2019, an expense was recorded. Administration expenses
were also lower due to reduced travel costs and less recruitment activity.
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 and social media communications exhibiting and sponsorship at key industry events.
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, 2020
Sales and marketing expenses were down by $0.2 million, or 11%, to $1.4 million in Q4 2020, and up by $0.2
million, or 6%, to $4.4 million for 2020, compared to the same periods in 2019. The increase was driven by
timing differences in advertising and marketing campaign activities.
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 $0.9 million for the three months ended December 31, 2020, and $2.6 million
for the year ended December 31, 2020, respectively, compared to net finance income of $0.2 million and
finance expense of $1.4 million in the same periods last year. The lower interest income from short-term
investments maturing in 2020 combined with 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 $0.2 million and $0.8 million
recognized during the three months and the year ended December 31, 2020 compared to $0.1 million and
$0.4 million in December 31, 2019.
During the construction phase of our Delta facility, interest expense related to the construction loan and the
Delta lease was 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’, below). 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, 2020, we recorded a gain of $0.3 million and $0.1
million respectively, compared to a gain of $0.4 million and $1.4 million recorded for the same periods in
2019.
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 loss of $0.1 million in the fourth quarter of 2020 and a
gain of $1.3 million for the year-to-date, compared to losses of $0.01 million and $0.8 million, respectively, in
the same periods of last year. The fluctuations are due to Swiss Water’s share price and the risk-free interest
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, 2020
rate that are used as inputs in the Black Scholes model. During the year, our share price and risk-free interest
rate dropped.
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 $0.04 million, compared to a $0.2 foreign
exchange loss in the same period of last year. The full year amount for 2020 was a gain of $0.02 million
compared to a loss of $0.4 million in the same period of 2019.
Income Before Taxes and Net Income
In the fourth quarter of 2020, we recorded a loss before taxes of $0.6 million, compared to a gain of $0.9
million in the same period in 2019. Current and deferred income tax recovery increased our net income by
$0.3 million for the quarter, compared to an expense of $0.2 million in Q4 2019. 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 loss of $0.3 million in Q4 2020,
compared to $0.7 million net income in the same quarter last year.
We recorded a pre-tax income of $4.0 million in 2019 and 2020. This was reduced by income tax expenses of
$1.1 million in both 2019 and 2020. Overall, we recorded a net income of $2.9 million for the year-to-date
2020 and 2019.
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 2020 was a gain of $1.8 million, compared to a gain of $0.7 million in the same period of 2019.
Other comprehensive income, net of tax, for 2020 was a gain of $1.4 million, compared to $1.9 million in the
same period of 2019. 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).
For the three months ended and year ended December 31, 2019, potential common shares issuable under
the RSU Plan and common shares issuable for the convertible debenture were anti-dilutive and excluded from
the dilution calculation.
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, 2020
For the three months period ended December 31, 2020, potential common shares issuable under the RSU
Plan and common shares issuable for the convertible debenture were anti-dilutive and excluded from the
dilution calculation.
For the year ended December 31, 2020, all potential common shares issuable under the RSU Plan were anti-
dilutive and excluded from the dilution calculation and common shares issuable for the convertible debenture
were dilutive, hence included in the dilution calculation.
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 (loss) attributable to shareholders
Weighted average number of shares
Basic earnings (loss) per share
Diluted earnings (loss) per share
Net income (loss) attributable to shareholders
Interest on convertible debenture
Gain on fair value adjustment of the embedded option
Net income (loss) 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 (loss) per share
$
$
$
$
3 months ended December 31,
2019
2020
Year ended December 31,
2019
2020
(320)
9,078,780
$
716 $
2,949 $
9,061,210
9,076,188
2,944
9,061,210
(0.04)
$
0.08 $
0.32 $
0.32
(320)
-
-
716
-
-
2,949
1,145
(1,328)
(320)
9,078,780
-
9,078,780
(0.04)
$
$
716 $
2,766 $
9,061,210
-
9,061,210
9,076,188
1,818,182
10,894,370
0.08 $
0.25 $
2,944
-
-
2,944
9,061,210
-
9,061,210
0.32
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.
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 Q4 2020 was $1.9 million, up by 30% compared to Q4 2019. EBITDA excluding the effect of IFRS 16
for the three months ended December 31, 2020 was $1.2 million, up by 49% compared to Q4 2019. EBITDA
for 2020 was $9.8 million, down by 6% compared to the same period in 2019. EBITDA excluding the effect of
IFRS 16 for 2020 was $7.0 million, down by 4% compared to the same period in 2019. Operationally, the
change in EBITDA was driven by revenue growth, successful efforts across the Company to enhance cost
recovery, an increased financial contribution from Seaforth and lower costs for natural gas. These gains were
offset by lower sales volumes, an increase in green coffee costs and annual increases in labour costs.
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, 2020
The reconciliation of net income to EBITDA is as follows:
(In $000s)
(unaudited)
3 months ended December 31,
2019
2020
Year ended December 31,
2019
2020
Income (loss) for the period
Income taxes
Income before tax
Finance income
Finance expenses
Depreciation & amortization
Unrealized gain on foreign exchange forward contracts
Fair value loss (gain) on the embedded option
(Gain) 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
$
$
$
$
(320)
(323)
(643)
(118)
1,061
1,653
(371)
72
43
192
1,889
(700)
1,189
$
$
$
$
716
193
909
(134)
(85)
804
(488)
12
190
246
1,454
(657)
797
$
$
$
$
2,949 $
1,058
4,007 $
(488)
3,087
4,677
(48)
(1,328)
(19)
(129)
9,759 $
(2,717)
7,042 $
2,944
1,059
4,003
(511)
1,911
3,697
(830)
770
425
885
10,350
(3,006)
7,344
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 on foreign exchange forward contracts
3 months ended December 31,
2019
2020
Year ended December 31,
2019
2020
$
126
$
539
$
5,137 $
5,162
1,653
192
289
(371)
804
246
353
(488)
1,454
(657)
797
4,677
(129)
122
3,697
885
1436
1,436
(48)
(830)
$
$
9,759 $
(2,717)
7,042 $
10,350
(3,006)
7,344
EBITDA
Impact of IFRS 16, which was adopted in the year 2019
EBITDA excluding the impact of IFRS 16
$
$
1,889
(700)
1,189
$
$
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, 2020
QUARTERLY INFORMATION / SEASONALITY
There is an element of seasonality in our business, in that the second half of the year tends to have higher
volumes and revenues. The pandemic masked the typical seasonality pattern in 2020.
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
2020
2020
24,350 24,512 24,862
3,431
2,861
4,018
606
126
1,287
2,036
1,888
2,513
1,335
1,186
1,798
106
(320)
737
Q2
2020
26,380
5,154
2,370
3,194
2,536
1,716
Q1
2020
21,817
4,206
2,035
2,640
1,981
1,448
Q4
2019
25,023
4,106
539
1,454
797
716
Q3
2019
23,645
4,737
2,291
3,485
2,696
884
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)
0.08
0.06
(0.04)
(0.04)
0.01
0.01
0.19
0.19
0.16
0.02
0.08
0.08
0.10
0.10
0.15
0.14
-
-
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.
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 4
Per share, basic 3
Net income
EBITDA1
EBITDA excluding impact of IFRS 162
Dividends declared
Per share, diluted 3
Net income
EBITDA 1
EBITDA excluding impact of IFRS 162
December 31,
2020
December 31,
2019
December 31,
2018
139,233
70,262
97,571
2,949
9,759
7,042
566
0.32
1.08
0.78
-
0.25
0.90
0.65
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
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.
4 Dividend paid in 2020 was for dividend declared in Q4 2019.
Our total assets and our total long-term liabilities increased in each of the last two years as we were building
our new production facility in Delta, which is now complete, and they increased due to the adoption of IFRS
16 – Leases. Our new state of the art production facility in Delta, BC, for which construction commenced in
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, 2020
2016, increased our total assets by $7.8 million in 2020 and by $24.8 million in 2019, 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.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
For the three months and year ended December 31, 2020, we generated $3.2 million and $4.4 million,
respectively, in net cash from operating activities, compared to $0.7 million and $7.4 million generated in the
same periods in 2019.
Investing Activities
Cash outflows in investing activities for Q4 2020 were $0.4 million, compared to cash outflows of $4.1 million
in Q4 2019. Cash outflows from investing activities for 2020 were $12.5 million, compared to cash outflows
of $18.7 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.
Financing Activities
During the year ended December 31, 2020, Swiss Water paid $0.6 million in dividends to shareholders
compared to $2.3 million in 2019. In 2019, we received proceeds from our construction loan in the amount
$10.6 million which were used to pay for costs of our new production plant in Delta. No proceeds were
received from the construction loan in 2020 as the company had already reached its loan capacity. Also, in
the year 2020, we received proceeds (net of repayment) of $6.3 million from our credit facility to pay for
operational and capital initiatives compared to $3.5 million in 2019.
Inventory
Our inventory increased in value by 4% and in volumes decreased by 3% between December 31, 2019 and
December 31, 2020. The increase reflects a higher NY’C’ in the current year.
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, 2020 was a
gain of $1.1 million compared to a gain of $1.3 million at the end of 2019.
Accounts Receivable
Our accounts receivable increased by $0.8 million, or 6%, between December 31, 2019 and December 31,
2020 compared to an increase of $0.3 million, or 2%, between December 31, 2018 and December 31, 2019.
89% of Swiss Water accounts receivable are current as at December 31, 2020. 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 $30.0 million. The Credit Facility’s
Borrowing Base margins eligible inventories and accounts receivable, commodity hedging account equity
margin plus its market-to-market gains, which are netted against any losses in the commodity account and
foreign exchange contract facility. Amounts can be drawn in either Canadian or in US$ dollars and can be
borrowed, repaid, and re-borrowed to fund operations, capital expansions, letters of credit and for general
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, 2020
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. Swiss Water has
pledged substantially all of our assets, except for assets pledged to BDC under the Term Loan (see below,
Construction Loan).
In addition, as a part of the Credit Facility, we have an 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 and creditor covenants that relate to the maintenance of specified financial ratios and
we were in compliance with all covenants in the years 2019 and 2020.
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, 2020, 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, 2020:
(In $000s)
(unaudited)
Long-term debt1
Financing leases2
Credit facility3
Purchase obligations4
Total contractual obligations
Total
Less than 1 year
2-3 years
4-5 years
$
$
35,083
12,153
10,021
52,587
$
109,844
$
918
2,809
-
52,587
56,314
$
18,333
4,917
10,021
-
$
$
3,333
2,497
-
-
$
33,271
$
5,830
$
14,429
Over 5
years
12,499
1,930
-
-
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.
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, 2020
Swiss Water leases the following offices, warehouses and equipment:
On August 26, 2016, we 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 our 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.
Seaforth leases a warehouse in Delta and the lease 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 sales office in France which expires in October 2027.
Swiss Water leases a facility in Burnaby that houses its decaffeination plant and offices. The lease expires in
May 2023.
Swiss Water Decaffeinated Coffee Company USA, Inc. leases a sales office in Seattle, Washington, which
expires in October 2022.
Seaforth leases a truck. The lease expires in April 2023.
Swiss Water leases various office equipment with expiring dates of October 2024 and January 2025.
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,
2019
2020
479 $
3,891 $
957
3,843
$
$
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, 2020, our accounts receivable balance with this company was $0.04 million (December 31,
2019: $0.01 million) while our accounts payable balance with this company was $0.3 million (December 31,
2019: $0.5 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.
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, 2020
RISKS AND UNCERTAINTIES
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, liquidity risk and timing and costs of
capital projects including the construction of the second line at the Delta facility and general economic
downturns. These risks and how Swiss Water manages them are described in the AIF. The future effect of
these risks and uncertainties cannot be quantified or predicted.
Swiss Water’s operations may be negatively impacted in the event of a local or global outbreak of disease,
such as the novel coronavirus, COVID-19 outbreak pandemic declared in March 2020. 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.
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
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, 2020
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.
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.
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, 2020
Asset Retirement Obligation
The undiscounted future value of the asset retirement obligation (“ARO”) with respect to our leased
decaffeination facilities is estimated at $1.5 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,
2020, Swiss Water and its subsidiaries had combined non-capital tax loss carryforwards totaling $20.8 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.
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 2020, the Company
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, 2020
estimated and recorded $1.6 million in interest expense (2019: $1.5 million) and paid $1.0 million (2019: $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,
2019
2020
$
$
3.06 $
8.25 $
2.78 years
48%
0.25%
0.00%
6.92
8.25
3.78 years
31%
1.68%
3.61%
The preparation of consolidated financial statements requires that the Company’s management make
assumptions and estimates on its finance leases. 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 assessment of the likelihood of exercising options, and estimation of the fair value of the
leased properties at lease inception.
Impairment
Property, 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. During 2020, the Company received notification from the landlord of the Lake City Way lease that they
will not renew the lease after 2023. The location houses two production lines, of which one is anticipated to
have utility past the year 2023, and therefore is depreciated beyond the life of the lease. The Company
continues to pursue options to utilize assets from this production line in future operations. As a result, the
Company tested our property, plant and equipment for impairment in accordance with IAS 36, Impairment
of Assets, using a fair value less cost to sell method and determined that no write-down of property, plant
and equipment was required.
CHANGES IN ACCOUNTING STANDARDS
The following standard became effective for annual periods beginning on or after January 1, 2020. The
adoption of these revised standards by the Company did not have a material impact on its condensed
consolidated interim financial statements.
o
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 relationships
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, 2020
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.
There are a number of changes in accounting standards not yet effective. The Company does not
anticipate a material impact on its financial statements:
o
o
IAS 1 amendments address the classification of liabilities between current and non-current.
IFRS 17 new standard on accounting for insurance contracts, replacing IFRS 4.
HEDGE ACCOUNTING
There is a risk related to unpredictability over coffee commodity prices and foreign exchange rates. To
minimize these risks, we follow our risk management program, which is carried out under two policies
approved by the Board of Directors: the Foreign Exchange Risk Management Policy and the Commodity Price
Risk Management Policy. With the use of derivative financial instruments we hedge potential adverse effects
on our financial performance and cash flows. Under the risk management program we enter into three types
of hedges and each type is discussed below:
1) Commodity price risk hedges on coffee purchase commitments and coffee inventory (“commodity
hedges”);
2) Currency risk hedges related to US$ denominated future process revenues (“revenue hedges”); and
3) Currency risk hedges related to US$ denominated purchases of green coffee (“purchase hedges”).
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
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, 2020
matures, the realized gain/loss on that contract is reclassed from accumulated other comprehensive income
to process revenue.
Purchase 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 hedge accounting allows for 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 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 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, 2020, the Company had futures
contracts to buy 2.5 million lbs of green coffee with a notional value of US$3.0 million, and contracts to sell
6.6 million lbs of green coffee with a notional value of US$7.9 million. The furthest contract matures in
September 2021 (2019: 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$8.3 million).
25 | P a g e o f t h e M D & A
SWISS WATER DECAFFEINATED COFFEE INC.
Management Discussion and Analysis
For the year ended December 31, 2020
Foreign Currency Risk
We realize a significant portion of our revenues in US$, 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.
As at December 31, 2020, the Company had forward currency contracts to buy US$5.6 million and sell US$51.0
million (2019: buy US$3.8 million and sell US$53.0 million) from January 2021 through to February 2025 at
various Canadian exchange rates ranging from $1.2147 to $1.3626.
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, 2020, 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, 2020, 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,
2020, 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, 2020 and ended on December 31, 2020 that have
materially affected or are reasonably likely to materially affect, Swiss Water’s ICFR.
SUBSEQUENT EVENTS
On February 23, 2021, a total of 50,893 of the outstanding RSUs vested and were converted to common
shares, pursuant to the 2011 Restricted Share Unit Plan as amended on June 25, 2019.
26 | P a g e o f t h e M D & A
SWISS WATER DECAFFEINATED COFFEE INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2020
SWP Q4 cover_Layout 1 20-03-20 10:56 AM Page 2
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 Financial Position as at(Tabular amounts are in thousands of Canadian dollars)AssetsNoteCurrent assetsCash$2,749 $6,739 Accounts receivable615,422 14,588 Inventories718,660 17,872 Prepaid expenses and other receivables830 679 Income tax receivable12- 14 Derivative assets and hedged firm commitments8, 241,380 1,428 Total current assets39,041 41,320 Non-current assetsReceivables 6219 230 Property, plant and equipment998,124 94,125 Intangible assets10640 904 Deferred tax assets12138 302 Derivative assets 8, 241,071 - Total non-current assets100,192 95,561 Total assets$139,233 $136,881 Liabilities and shareholders' equityCurrent liabilitiesAccounts payable $9,367 $11,103 Accrued liabilities2,698 6,489 Borrowings11918 84 Income tax payable1235 - Dividend payable17- 566 Other liabilities13632 1,004 Lease liabilities141,688 1,525 Derivative liabilities and hedged firm commitments8, 24639 1,165 Total current liabilities15,977 21,936 Non-current liabilitiesOther liabilities 13108 253 Borrowings1142,067 35,742 Lease liabilities 1421,729 23,385 Asset retirement obligation151,415 1,343 Deferred tax liabilities124,486 3,179 Derivative liabilities 8, 11.2, 24457 2,543 Total non-current liabilities70,262 66,445 Total liabilities86,239 88,381 Shareholders' equityShare capital16$43,710 $43,591 Retained earnings8,151 5,202 Accumulated other comprehensive income (loss)714 (646) Share-based compensation reserve419 353 Total equity52,994 48,500 Total liabilities and shareholders' equity$139,233 $136,881 Commitments (Note 25)Approved on behalf of the Board(signed) "Donald Tringali", Director (signed) "Frank Dennis", DirectorDecember 31, 2020December 31, 2019
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 Income for the Years Ended(Tabular amounts are in thousands of Canadian dollars, except for per share amounts)NoteRevenue18,23$97,571 $97,230 Cost of sales(81,919) (80,736) Gross profit15,652 16,494 Operating expensesAdministration expenses(6,121) (7,184) Sales and marketing expenses(4,394) (4,148) Total operating expenses(10,515) (11,332) Operating income5,137 5,162 Non-operating or otherGain on risk management activities122 1,436 11.21,328 (770) Finance income488 511 Finance expense(3,087) (1,911) Gain (loss) on foreign exchange19 (425) Total non-operating or other(1,130) (1,159) Income before tax4,007 4,003 Income tax expense12(1,058) (1,059) Net income $2,949 $2,944 Basic earnings per share21$0.32 $0.32 Diluted earnings per share21$0.25 $0.32 Gain (loss) on fair value on embedded optionDecember 31, 2020December 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 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 $2,949 $2,944 Other comprehensive income, net of taxItems that may be subsequently reclassified to income:Unrealized gain Derivatives designated as cash flow hedges - currency risk hedges on US$ future revenue1,344 2,154 Items reclassified to income:Realized loss Derivatives designated as cash flow hedges - currency risk hedges on US$ future revenue, recognized in revenue545 410 Other comprehensive income related to hedging activities1,889 2,564 Tax expense on other comprehensive income relating to hedging activities(510) (694) Cumulative translation adjustment(19) (4) Other comprehensive income, net of tax1,360 1,866 Net income and other comprehensive income$4,309 $4,810 Consolidated Statements of Changes in EquityShare capitalShare-basedAccumulated other compensationcomprehensive Note SharesAmountreserveincomeBalance at December 31, 20189,061,210 $43,591 $154 $(2,512) $4,523 $45,756 Share-based compensation- - 199 - - 199 Dividends 17- - - - (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 Balance at December 31, 20199,061,210 43,591 353 (646) 5,202 48,500 Shares issued for restricted share units17,570 119 (119) - - - Share-based compensation- - 185 - - 185 Net income and other comprehensive income - - - 1,360 2,949 4,309 Balance at December 31, 20209,078,780 $43,710 $419 $714 $8,151 $52,994 Total equity Retained earnings December 31, 2019December 31, 2020
SWISS WATER DECAFFEINATED COFFEE INC.
– The accompanying notes form an integral part of these consolidated financial statements. –
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Consolidated Statements of Cash Flows For the Years Ended(Tabular amounts are in thousands of Canadian dollars)NoteOperating activitiesNet income$2,949 $2,944 Items not affecting cash:Depreciation and amortization4,677 3,697 Share-based compensation (recovery) expense(129) 885 Unrealized gain on risk management activities(48) (830) Unrealized (gain) loss on fair value adjustment ofembedded option(1,328) 771 Finance income(488) (511) Finance expense3,087 1,911 Income tax expense1,058 1,059 Other(3) (51) 9,775 9,875 Change in non-cash working capital relating to operating activities22(2,534) 658 Net cash generated from operations7,241 10,533 Interest received411 511 Interest paid22(3,232) (2,858) Income taxes paid(48) (738) Net cash generated from operating activities4,372 7,448 Investing activitiesAdditions to plant and equipment(12,535) (18,714) Net cash used in investing activities22(12,535) (18,714) Financing activitiesDividends paid(566) (2,265) Payment of lease liabilities(1,508) (1,825) Repayments of credit facility(5,300) - Proceeds from credit facility11,600 3,500 Financing costs11.3(53) (341) Proceeds from construction loan- 10,600 Net cash generated from financing activities4,173 9,669 Decrease in cash and cash equivalents(3,990) (1,597) Cash and cash equivalents, beginning of the year6,739 8,336 Cash and cash equivalents, end of the year$2,749 $6,739 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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 7750 Beedie
Way, Delta, British Columbia, V4G 0A5, Canada.
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 Company USA, Inc. (“SWUS”), an entity registered in the 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 (“IASB”). 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, 2020 were approved for
issuance by the Company’s Directors on March 17, 2021. There were no significant non-adjusting events
that occurred between the reporting date and the date of authorization except as disclosed in Note 26.
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
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.
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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, 2020. The adoption of these revised standards by the Company did not have a material
impact on its condensed consolidated interim financial statements.
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 relationships
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.
3.5
Changes in accounting standards not yet effective
These standards are effective for periods beginning after January 1, 2021 and the Company does not
anticipate material impact on its financial statements:
IAS 1 amendments address the classification of liabilities between current and non-current.
IFRS 9/ IAS 39 and IFRS 7 (phase 2) Amended to address issues arising from the implementation
of interest rate benchmark reform, including the replacement of one benchmark with an
alternative one; IFRS 17 new standard on accounting for insurance contracts, replacing IFRS 4,
Insurance Contracts.
3.6
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief
operating decision makers, the Chief Executive Officer and the Chief Financial Officer. 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. The chief decision makers
examine the Company’s performance and operating activities of the single business segment from
reported geographic perspective.
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
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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
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. Property,
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
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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 property, plant and equipment are as follows:
Buildings
Right of use assets
Leasehold improvements
Production machinery and equipment
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
5 to 35 years
10 years
5 years
5 years
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
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.
For additional policies related to Right-of-use assets, refer to ‘Lease liabilities and right of use assets’.
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
Property, 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.
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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. The Company identified an impairment indicator for one of the productions
lines in the Burnaby location due to our lease at that location not being renewed past June 2023. As such,
the Company tested our property, plant and equipment for impairment in accordance with IAS 36,
Impairment of Assets, using a fair value less cost to sell method and determined that no write-down of
property, plant and equipment was required.
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:
a) those to be measured subsequently at fair value (either through other comprehensive income or
through profit or loss) and
b) 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).
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.
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
c) Accounts payable, credit facilities, the debt portion of the convertible debenture, the construction
loan, borrowings 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, “gains/losses on fair value on embedded option” are gains
or losses on the 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:
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
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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
Recognition and measurement
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.
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 until the hedged expected future
cash flows affect profit or loss; at which time, the gains/losses are reclassified to the consolidated
statement of income. 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 other comprehensive income
in the costs of hedging reserve within equity.
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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 derivative financial instruments as hedging instruments and the change in fair
value of designated coffee inventory and hedged firm commitments as hedged items in a fair value
relationship to manage the risk of changes in benchmark commodity prices, as described under
‘Commodity price risk hedges’.
As well, the Company designates derivative financial instruments as hedging instruments and the change
in fair value of designated purchase commitments as hedged items in a fair value hedge relationship to
manage the risk of changes in foreign exchange, as described under ‘Currency risk hedges’.
The Company also designates derivative financial instruments as hedging instruments and designates
highly probable forecasted sales revenue as hedged items in a cash flow hedge relationship to manage
the foreign exchange risk associated with the cash flows of highly probable forecast transactions, as
described under ‘Currency risk hedges’.
a) Commodity price risk hedges
Commodity price risk hedges relate to 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 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.
b) Currency risk hedges
Currency risk hedges related to US$ denominated future process revenue:
The Company enters into forward contracts to sell US$ at future dates to hedge the foreign
exchange cash flow variability of expected US$ from 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.
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
Currency risk hedges related to US$ denominated purchases:
The Company enters into forward contracts to buy US dollars (US$) for significant purchase
commitments, such as green coffee inventory which, once decaffeinated, is sold at a fixed
Canadian dollar (C$) price. To mitigate the exposure to changing margin on these transactions
arising from fluctuations in the US$/C$ exchange rate, the Company enters into US$ forward
purchase contracts which economically lock in the US$/C$ exchange rate and effectively locks in
the C$ cost of inventory to be sold at the fixed C$ amount.
At each period end, currency risk hedges on US$ purchases are 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.
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 Lease 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
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.
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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
addition, the right-of-use asset is reduced by impairment losses, if any identified, and adjusted for certain
remeasurements of the lease liability.
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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.
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
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.
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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 carry forwards 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.
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
IFRS 15 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.
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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 the 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.
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”).
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SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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
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
23 | P a g e
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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,
2020 management determined that the useful lives represent the expected utility of the assets to the
Company. For some equipment the useful life could exceed the number of years of the life of the related
building and lease as equipment life is based on the expected utility of those specific assets.
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,
inflation rates, discount rates, and the expected costs that would be paid to a third party to remove
equipment.
The amount recognized as a provision is the best estimate of the consideration required to settle the
present obligation at the end of the reporting period, taking into account the risks and uncertainties
surrounding the obligation. When the final determination of such obligation amounts differs from the
recognized provisions, the Company’s financial statements will be impacted.
4.3
Income taxes
The Company computes income taxes using the liability method, under which deferred income taxes are
provided for the temporary differences between the financial reporting bases and the tax bases of the
Company’s assets and liabilities. Deferred tax assets and liabilities are measured using the enacted and
substantively enacted income tax rates that are expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Deferred tax assets also reflect estimates of the recoverability of non-capital loss carry forwards. The
Company has recognized the benefit of loss carry forwards to the extent that it is probable that taxable
income will be available in the future against which the non-capital loss carry forwards can be utilized.
The financial reporting bases of the Company’s assets reflect the useful lives of depreciable assets, as well
as the carrying amounts of assets with indefinite useful lives. Accordingly, management estimates that
impact the carrying amounts of depreciable and non-depreciable assets also have an impact on deferred
income tax assets and liabilities.
4.4
Convertible Debenture
Management estimates the interest rate on a similar instrument of comparable credit status and providing
for substantially the same cash flows, on the same terms, but without the equity conversion option in the
calculation of the fair value of the liability portion of the convertible debenture upon initial recognition.
Management also estimates the fair values of the derivative liability related to the convertible debenture
24 | P a g e
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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 11.2.
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 and payments of 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.
During the year ended December 31, 2019 quarterly dividends were declared on a level basis in order to
smooth out normal seasonal fluctuations that occurred over the course of the year. During the year ended
December 31, 2020, no dividends were declared.
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 24. The Company monitors lifetime expected credit losses using the
simplified approach which is determined based on historic and adjusted relevant forward-looking
information. The Company’s customers have a negligible default rate and the Company’s experience both
in frequency and amount of losses are low. As a result, the expected credit losses provision as at December
31, 2020 and December 31, 2019 is de minimis.
7.
INVENTORIES
During the year ended December 31, 2020, the cost of inventories recognized in cost of sales was $76.1
million (2019: $75.4 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 $0.09
million during the year (2019: $0.05 million).
25 | P a g e
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
8.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company’s derivative financial instruments are carried at fair value through profit or loss as follows:
The Company’s derivative financial instruments are carried at fair value through other comprehensive
income as follows:
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, 2020 the Company included in construction in progress $0.5 million
(2019: $0.8 million) of depreciation expense for right of use of assets, $0.4 million (2019: $0.8 million) of
financing costs related to lease liabilities, $0.6 million (2019: $0.7 million) of interest expense on the
construction loan and $0.1 million (2019: $0.5 million) of asset retirement obligations.
During the third quarter of 2020, the Company commenced producing decaffeinated coffee at the new
Delta manufacturing facility. As such, the Company transferred $64.2 million of costs from construction in
progress to building, leasehold improvements and production machinery. Management determined that
the estimated useful lives for the production machinery, buildings, leasehold improvements, equipment
26 | P a g e
Raw materials$6,436 $9,081 Finished goods10,442 6,819 Carbon501 568 Packaging159 113 Hedge accounting component1,122 1,291 $18,660 $17,872 December 31, 2020December 31, 2019Coffee futures contracts, net$505 $576 US Dollar forward contracts, current(52) 41 US Dollar forward contracts, long-term- (37) Derivative financial liability, convertible debentureNote 11.2(352) (1,680) $101 $(1,100) December 31, 2020December 31, 2019US Dollar forward contracts, current$(10) $(107) US Dollar forward contracts, long-term967 (825) $957 $(932) December 31, 2020December 31, 2019Property, plant and equipment$76,295 $70,125 Right-of-use assets21,829 24,000 $98,124 $94,125 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
and furniture range between 5 and 35 years. As at December 31, 2020, the majority of the construction
in progress are costs related to the construction of a second line at the new Delta location.
During the year ended December 31, 2020, depreciation expense of $2.5 million (2019: $1.4 million) was
charged to cost of sales and $0.2 million (2019: $0.1 million) was included in administrative expenses.
During 2020, the Company received notification from the landlord of the Lake City Way lease that they
will not renew the lease after 2023. The location houses two production lines, of which one is anticipated
to have utility past the year 2023, and therefore is depreciated beyond the life of the lease. The Company
continues to pursue options to utilize this production line in future operations. As a result, the Company
tested the property, plant and equipment for impairment in accordance with IAS 36, Impairment of Assets,
using a fair value less cost to sell method and determined that no write-down of property, plant and
equipment was required. No other impairment loss was recognized for the years ended December 31,
2020 and 2019.
9.2 Right-of-use assets
The Company has adopted IFRS 16 retrospectively from January 1, 2019. 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
27 | P a g e
BuildingsCostJanuary 1, 2020$34,440 $1,601 $5,160 $853 $212 $57,705 $99,971 Additions67 - 84 52 5 8,660 8,868 Disposals(12) - - - - - (12) Transfers48,507 12,279 3,302 161 31 (64,280) - December 31, 2020$83,002 $13,880 $8,546 $1,066 $248 $2,085 $108,827 Accumulated depreciationJanuary 1, 2020$(25,000) $(14) $(4,043) $(639) $(150) $- $(29,846) Depreciation(1,757) (337) (474) (110) (20) - (2,698) Disposals12 - - - - - 12 December 31, 2020$(26,745) $(351) $(4,517) $(749) $(170) $- $(32,532) December 31, 2020$56,257 $13,529 $4,029 $317 $78 $2,085 $76,295 BuildingsCostJanuary 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 TotalMachinery andLeaseholdComputerFurniture andConstructionequipmentimprovementsequipmentfixturesin progressequipmentimprovementsequipmentfixturesin progressTotalConstructionMachinery andLeaseholdComputerFurniture and
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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, 2020, depreciation expense of $1.4 million (2019: $1.8 million) was
charged to cost of sales and $0.3 million (2019: $0.2 million) was included in administrative expenses.
There was no impairment loss recognized for the year ended December 31, 2020 (2019: $nil).
10.
INTANGIBLE ASSETS
For the year ended December 31, 2020, amortization expense of $0.2 million (2019: $0.2 million) relating
to proprietary process technology (“PPT”) has been charged to cost of sales and $0.02 million (2019: $0.02
million) relating to brand was included in administrative expenses. There was no impairment loss
recognized for the years ended December 31, 2020 and 2019.
28 | P a g e
EquipmentCostBalance at January 1, 2020$110 $25,814 $25,924 Additions97 - 97 Remeasurement$- $(77) (77) Balance at December 31, 2020$207 $25,737 $25,944 Accumulated depreciationBalance at January 1, 2020$(26) $(1,898) $(1,924) Depreciation(42) (2,149) (2,191) Balance at December 31, 2020$(68) $(4,047) $(4,115) Balance at December 31, 2020$139 $21,690 $21,829 EquipmentPropertyTotalCostBalance 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 PropertyTotal
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
11. BORROWINGS
In addition to the ‘Foreign exchange facility guarantee’, the Company’s borrowings and credit facility are
as follows. As at and during year ended December 31, 2020, the Company was in compliance with all
covenants.
11.1 Construction loan
During the year ended December 31, 2018, the Company entered into a term loan facility (“Term Loan”)
with the Business Development Bank of Canada (“BDC”) 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.
29 | P a g e
CostBalance January 1, 2020$3,246 $1,000 $4,246 Balance December 31, 2020$3,246 $1,000 $4,246 AmortizationBalance January 1, 2020$(2,405) $(937) $(3,342) Amortization(245) (19) (264) Balance December 31, 2020$(2,650) $(956) $(3,606) Balance at December 31, 2020$596 $44 $640 PPTBrandTotalCostBalance January 1, 2019$3,246 $1,000 $4,246 Balance December 31, 20193,246 $1,000 $4,246 AmortizationBalance January 1, 2019$(2,161) $(918) $(3,079) Amortization(244) (19) (263) Balance December 31, 2019$(2,405) $(937) $(3,342) Balance December 31, 2019$841 $63 $904 PPTBrandTotalConstruction loan Note 11.120,083 20,084 Convertible debentureNote 11.213,102 12,560 Credit facilityNote 11.3$9,800 $3,182 Borrowings, total$42,985 $35,826 Less current portionConstruction loan Note 11.1$(918) $(84) Borrowings, non-current$42,067 $35,742 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
As of December 31, 2020, the loan amount outstanding was as follows:
Finance expense
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.
Security
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.
11.2 Convertible debenture
On October 11, 2016, the Company issued an unsecured subordinated convertible debenture for gross
proceeds of $15.0 million. The convertible debenture is due on October 11, 2023. In 2016, the Company
paid financing costs of $0.5 million in respect of issuing the convertible debenture.
The Company uses the residual value method to allocate the fair value of the convertible debenture
between the liability component and the derivative liability.
Liability component of the convertible debenture
The liability component of the convertible debenture was initially measured at a fair value of $11.2 million,
which represents the present value of the contractually determined stream of cash flows discounted at
the prevailing market interest rate at that time applicable to instruments of comparable credit status and
providing substantially the same cash flows, on the same terms, but without derivative components, of
12.15% per annum. As at December 31, 2020 the liability component was $13.1 million (2019: $12.6
million).
Finance expense
The convertible debenture bears interest at a rate of 6.85% per annum to be paid quarterly in arrears.
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. 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.
30 | P a g e
Construction loan, current918 84 Construction loan, non-current19,165 20,000 $20,083 $20,084 December 31, 2020December 31, 2019Balance, open$20,084 $9,415 Additions- 10,600 Interest charged992 733 Interest paid(993) (664) Balance, end$20,083 $20,084 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
Conversion
The convertible debenture is convertible into common shares of the Company at a conversion price of
$8.25 per common share. 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.
Derivative financial liability component embedded in the convertible debenture
Under the residual value method, as at December 31, 2020, the derivative liabilities include the fair value
of the derivative liability embedded in the convertible debenture in the amount of $0.4 million (2019: $1.7
million). During the year ended December 31, 2020, this revaluation resulted in a gain of $1.3 million
being recorded in the statement of income (2019: losses of $0.8 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:
11.3 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 below) and $30.0
million.
During the year ended December 31, 2020, the Company incurred $0.05 million (2019: $0.3 million) in
financing transaction costs in connection with the Credit Facility which were recorded as deferred
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Balance, open$12,560 $12,082 Interest charged1,569 1,506 Interest paid(1,027) (1,028) Balance, end$13,102 $12,560 December 31, 2020December 31, 2019Balance, open$1,680 $910 Change in fair valuation of derivative embedded option (1,328) 770 Balance, end$352 $1,680 December 31, 2020December 31, 2019Share price $ 3.06 $ 6.92 Exercise price $ 8.25 $ 8.25 Option life2.78 years3.78 yearsVolatility48%31%Risk-free interest rate0.25%1.68%Dividend yield0.00%3.61%December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
financing transaction costs in the non-current period of loans and borrowings. These transaction costs are
amortized until the Credit Facility’s maturity date.
The amounts drawn on the credit facility are 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, 2020, the
Credit Facility is comprised of:
Finance expense
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. For the
year ended December 31, 2020, finance expenses on the credit facility were as follows:
The finance costs and the effective interest rate based on the average balance drawn were as follows:
Security
The Company has pledged substantially all of its assets, except for assets pledged to BDC under the Term
Loan (see Note 11.1), 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.
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Credit Facility$10,021 $3,506 Less unamortized transaction costs(221) (324) $ 9,800$ 3,182December 31, 2020December 31, 2019Balance, open$3,182 $- Advances11,600 3,500 Repayments(5,300) - Fees and interest charged315 6 Interest paid(100) - Financing transaction costs(53) (341) Amortized financing transaction costs156 17 Balance, end$9,800 $3,182 December 31, 2020December 31, 2019Weighted average daily balance$9,232 $1,795 Finance costs$253 6 Number of days outstanding365 22 Effective interest rate%2.74 %5.46 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
Borrowing base
The Credit Facility’s Borrowing Base margins eligible inventories and accounts receivable, commodity
hedging account equity margin plus its market-to-market gains, which are netted against any losses in the
commodity account and foreign exchange contract facility. Amounts can be drawn in either Canadian or
in US$ 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, 2020, the Company’s borrowing availability was as follows:
Foreign exchange and commodity futures contract facilities
As part of the Credit Facility, the Company has an 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.
11.4 Foreign exchange facility guarantee
On June 1, 2020, the Company entered into a foreign exchange facility guarantee to cover margin
requirements in relation to the foreign exchange facility. On August 4, 2020, the Company’s Credit Facility
Lender amended the credit agreement to recognize the foreign exchange facility guarantee provided by
the third party. The facility guarantees a maximum aggregate liability of up to $6.0 million and it is valid
until May 31, 2021. This guarantee provides additional borrowing capacity within the referenced credit
facility.
12.
INCOME TAXES
12.1
Income tax expense
For the year ended December 31, 2020, tax expense on other comprehensive income related to hedging
activities was $0.5 million (2019: $0.7 million).
12.2 Current income tax receivable and payable
As at December 31, 2020 income tax payable was $0.04 million (2019: receivable $0.01 million).
33 | P a g e
Gross borrowing base availability$15,028 $17,554 Advances, repayments, fees and interest(10,021) (3,506) Outstanding letters of credit(300) (300) Interests and fees accrued 35 - $ 4,742$ 13,748December 31, 2020December 31, 2019Current income tax (recovery) expense$- $(60) Deferred tax expense1,058 1,119 Total income tax expense$1,058 $1,059 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
12.3 Reconciliation
Income tax expense for the year can be reconciled to the accounting profit as follows:
12.4 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:
During the year ended December 31, 2020, the Company collected $0.08 million (2019: $0.02 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 $21.0 million non-capital tax losses carry forwards as the end of December 31, 2020,
which will begin to expire in 2039. Seaforth has non-capital tax loss carry forwards of $0.06 million, which
will begin to expire in 2038.
13. 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:
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Statutory rate27%27%Income before tax$4,007 $4,003 Income tax calculated at applicable tax rates$1,082 $1,081 Non-deductible expenses(20) (12) Foreign tax rate differential(4) (10) Income tax expense$1,058 $1,059 December 31, 2020December 31, 2019 Goodwill and intangibles Property plant and equipment Financing issuance costs and other ARO Lease Liability Share based compen-sation Derivative liability and convertible debenture Other compre-hensive income Tax Losses Total Balance at January 1, 2019683$ (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)$ Balance at January 1, 2020682$ (11,529)$ 41$ 334$ 6,674$ 339$ (629)$ 237$ 974$ (2,877)$ To income tax expense2 (5,180) 70 48 (358) (139) (122) (510) 4,718 (1,471) Balance at December 31, 2020684$ (16,709)$ 111$ 382$ 6,316$ 200$ (751)$ (273)$ 5,692$ (4,348)$ Other liabilities, current$632 $1,004 Other liabilities, non-current108 253 $ 740$ 1,257December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
14. LEASE LIABILITIES
14.1 Lease liabilities
Lease liabilities are as follows:
The Company leases the following offices, warehouses and equipment:
Swiss Water leases a build-to-suit production facility in Delta. 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.
Seaforth leases a warehouse in Delta and the lease 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 sales office in France which expires in October 2027.
Swiss Water leases a facility in Burnaby that houses its decaffeination plant and offices. The lease
expires in May 2023. There are no options to renew the lease.
Swiss Water Decaffeinated Coffee Company USA, Inc. leases a sales office in Seattle, Washington,
which expires in October 2022.
Seaforth leases a truck. The lease expires in April 2023.
Swiss Water leases various office equipment with expiring dates of October 2024 and January 2025.
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 that
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%.
14.3 Amounts recognized in the statement of net income and statement of cash flows
During the year ended December 31, 2020, finance expense of $0.4 million (2019: $0.8 million) related to
a lease was added to construction in progress. Also, during the year, a gain of 0.01 million was recognized
upon the termination of a lease (2019: $0.03 million).
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Lease liabilities, current$1,688 $1,525 Lease liabilities, non-current21,729 23,385 $23,417 $24,910 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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, 2020, the minimum payments under leases liabilities are as follows:
15. ASSET RETIREMENT OBLIGATION (ARO)
The Company estimates the total undiscounted amount of any cash flows required to settle its ARO is
approximately $1.5 million. Of that amount $0.8 million, is estimated to be incurred on or about the expiry
of a lease in 2023 and $0.7 million is estimated to be incurred on or about the year 2038. As at December
31, 2020, the Company has a long-term liability ARO of $1.4 million (2019: $1.3 million), reflecting the
present value of the ARO using credit adjusted risk-free rates between 0.25% and 1.21%.
16. 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, 2020, there were 9,078,780 common shares issued and outstanding.
16.1 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
36 | P a g e
Balance, open$24,910 $- Initial application of IFRS 16, January 1, 2019- 19,133 Additions97 7,788 Remeasurement(77) - Terminations(5) (186) Finance expense1,209 1,181 Lease cash payments(2,717) (3,006) Balance, end$23,417 $24,910 December 31, 2019December 31, 2020No later than 1 year$2,809 Later than 1 year and no later than 5 years7,414 Later than 5 years1,930 $12,153 December 31, 2020Balance, open$1,343 $802 Additions- 535 Remeasurement52 - Interest accretion20 6 Balance, end$1,415 $1,343 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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 $3.20. The Company values the RSUs using the volume based weighted average share price
(“VWAP”). VWAP is based on the Canadian dollar trading price of the Company’s common shares on the
Toronto Stock Exchange for the five trading days immediately preceding that relevant date, calculated by
dividing the total value by the total volume of common shares traded, according to the RSU Plan.
The movement in RSUs for the years ended December 31, 2020 and December 31, 2019 was as follows:
16.2 Deferred share units
The Company has a deferred share unit plan (the “DSU Plan”) in order to issue deferred share units
(“DSUs”) to non-employee directors (collectively, “participants”) of Swiss Water. The DSU Plan was
adopted to allow participants the opportunity to defer compensation and encourage a sense of ownership
in Swiss Water. Under the DSU Plan, participants may elect to defer compensation and receive DSUs equal
to the value of the deferred compensation.
The first DSUs were issued in April 2012. The number of DSUs was determined by dividing the amount of
deferred compensation by the Fair Market Value (“FMV”). The FMV of DSUs is defined in the DSU Plan as
the weighted average closing price of Swiss Water shares for the five business days immediately preceding
the relevant date.
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Number of RSUsAverage remaining vesting period (years)Performance basedBalance at January 1, 2019122,734 5.01$ 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 Balance at January 1, 2020224,836 7.07$ 1.40 RSUs granted121,140 2.95$ 2.15 NoRSUs issued for dividends2,098 6.70$ 0.67 NoRSUs cash-settled(23,654) 6.28$ - NoRSUs exercised(17,570) 6.28$ - NoBalance at December 31, 2020306,850 2.88$ 1.26 Volume based weighted average share price
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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 whenever
dividends are paid to shareholders.
The movement in DSUs for the years ended December 31, 2020, and December 31, 2019, was as follows:
17. DIVIDENDS
There were no dividends declared during the year ended December 31, 2020 (2019: $2.3 million).
18. REVENUE
18.1 Disaggregation of revenue
Revenue disaggregated by geographical markets is disclosed in Note 23. 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, 2020 and 2019:
18.2 Contract balances
As at December 31, 2020 the accounts receivable balance of $15.4 million (2019: $14.6 million) consists
of amounts due from customer contracts and reflects the Company’s right to a consideration that is
unconditional. The Company did not have other contract assets or liabilities from contracts with
customers.
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Number of DSUsPerformance basedBalance at January 1, 201995,239 4.97$ DSUs issued 31,028 5.85$ NoBalance at December 31, 2019126,267 6.92$ Balance at January 1, 2020126,267 6.92$ DSUs issued 55,340 3.33$ NoDSUs redeemed(10,289) 2.99$ NoBalance at December 31, 2020171,318 3.06$ Weighted average share price Decaffeinated coffee sales$83,417$82,929Decaffeination services6,8626,896Distribution7,2927,405$97,571$97,230December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
19. 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.
20. 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.
20.1 Compensation of Key Management Personnel
The remuneration of directors and key management personnel during the year was as follows:
20.2 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, 2020, the Company had the following balances receivable from and payable to a
company that is related to a director:
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Short-term benefits$10,635 $9,757 Long-term benefits(129) 868 Post-employment benefits1,001 813 $11,507 $11,438 December 31, 2019December 31, 2020Short-term benefits$2,149 $2,330 Long-term benefits(193) 742 Post-employment benefits240 118 $2,196 $3,190 December 31, 2019December 31, 2020Sales$479 $957 Purchases of raw materials$3,891 $3,843 December 31, 2020December 31, 2019Accounts receivable$40 $11 Accounts payable$279 $518 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
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.
20.3 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. As at December 31, 2020,
the receivable balance was $0.04 million (2019: $0.1 million).
21. BASIC AND DILUTED EARNINGS PER SHARE (“EPS”)
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. Basic and
dilutive earnings per share are as follows:
Potential common shares are antidilutive when their conversion to common shares increases earnings per
share or decreases loss per share from continuing operations. Antidilutive potential common shares are
excluded from weighted average number of shares outstanding for the purposes of calculating the diluted
earnings per share. The following potential common shares are antidilutive and are therefore excluded
from the weighted average number of common shares outstanding for the purposes of calculating the
diluted earnings per share:
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Basic earnings per shareNet income attributable to shareholders$2,949 $2,944 Weighted average number of shares9,076,188 9,061,210 Basic earnings per share$0.32 $0.32 Diluted earnings per shareNet income attributable to shareholders$2,949 $2,944 Interest on convertible debenture1,145 - Gain on fair value adjustment of embedded option(1,328) - Net income after effect of diluted securities$2,766 $2,944 Weighted average number of shares - basic9,076,188 9,061,210 Effect of diluted securities: convertible debenture1,818,182 - Weighted average number of shares - diluted10,894,370 9,061,210 Diluted earnings per share$0.25 $0.32 December 31, 2020December 31, 2019December 31, 2020December 31, 2019Weighted average number of RSUs granted253,056 224,502 Convertible debenture- 1,818,182 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
22. 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.
Changes in non-cash working capital are as follows:
During the year ended December 31, 2020, interest paid includes $0.6 million of interest on the
construction loan and $0.4 million of interest on lease liabilities which were capitalized throughout the
year during the construction phase of the new facility (2019: $0.7 million and $0.8 million).
As at December 31, 2020, a $2.5 million (2019: $7.7 million) in additions to construction in progress was
accrued in accounts payable and accrued liabilities. These are investing transactions that did not require
the use of the Company’s cash or cash equivalents.
Also, during the year the Company capitalized $0.5 million of depreciation related to right-of-use assets
and $0.05 million of asset retirement obligation (2019: $0.8 million and $0.5 million).
Lease payments for a short-term lease not included in the measurement of the lease liability are classified
as cash flows from operating activities. The Company has classified the principal portion of lease payments
within financing activities and the interest portion within operating activities.
23. SEGMENT REPORTING
The Company’s sales are primarily generated by the decaffeination of green coffee segment and in three
geographic areas: Canada, the United States and other international markets. The Company’s revenue
from external customers and its non-current assets (excluding deferred tax assets), by location, are
detailed below.
23.1 Revenue
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Accounts receivable$(757) $(261) Inventories(956) (2,141) Other assets and liabilities(531) 683Prepaid expenses and other receivables(151) 593Accounts payable and accrued liabilities61 2,981 Derivative assets, liabilities and hedged firm commitments at fair value through profit and loss(200) (1,197) $(2,534) $658 December 31, 2019December 31, 2020Canada$29,907 $33,282 United States47,664 46,104 International and other20,000 17,844 $97,571 $97,230 December 31, 2019December 31, 2020
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
23.2 Non-current assets (excluding deferred tax assets)
24. FINANCIAL RISK MANAGEMENT
The Company’s exposure to and management of financial risks related COVID-19, commodity, foreign
exchange, interest rates, credit liquidity and other risks.
The Company’s risk management program focuses on the unpredictability of coffee 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. Commodity and foreign exchange risk management is carried out under the Foreign Exchange
Risk management Policy and the Commodity Price risk Management Policy, both approved by the Board
of Directors. In addition, the Company monitors other financial risks on a regular basis as discussed below.
24.1 Risks related to COVID-19
In March 2020, the World Health Organization declared a global pandemic known as COVID-19. As a result
of measures taken by governments to curb the spread of COVID-19, many countries have entered into an
economic recession since the second quarter of 2020. During 2020 Swiss Water was deemed an essential
service and continued to operate largely uninterrupted despite the pandemic with appropriate protocols
in place to protect the safety and health of employees. During the early stages of the pandemic, we
experienced strong short term volume pull from customers that service the retail grocery trade as
consumers loaded their pantries in anticipation of quarantines and supply disruptions, or simply
consumed their coffee at home. Also, the demand for coffee shifted between customer types. This
pandemic may continue to impact the demand for our products and services in the near term as well as
impact the supply chain. 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.
24.2 Commodity price risk hedges
Commodity price risk hedges on purchase commitments and inventory
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, 2020, the Company had
futures contracts to buy 2.5 million lbs of green coffee with a notional value of US$3.0 million, and
contracts to sell 6.6 million lbs of green coffee with a notional value of US$7.9 million. The furthest
contract matures in September 2021 (2019: 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).
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Canada$99,651 $94,786 United States207 263 Europe196 210 $100,054 $95,259 December 31, 2020December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
The following tables provide a summary of commodity hedges designated as hedging instruments:
24.3 Foreign exchange currency risk hedges
The Company realizes a significant portion of its revenues in US$, 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.
As at December 31, 2020, the Company had forward currency contracts to buy US$5.6 million and sell
US$51.0 million (2019: buy US$3.8 million and sell US$53.0 million) from January 2021 through to
February 2025 at various Canadian exchange rates ranging from $1.2147 to $1.3626.
The following tables provide a summary of amounts related to foreign currency forward contracts
designated as hedging instruments. Not included in the tables below are fair value changes for swap and
other contracts, as these are not designated hedge instruments.
Currency risk hedges related to US$ sales
As at December 31, 2020, the Company designated as hedging instruments US$38.7 million in forward
contracts to sell US dollars, which relate to highly probable forecasted sales revenue, (2019: US$35.9
million).
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Carrying amount of hedging instrumentsFair value hedgeNominal amount of hedging instruments (in US$'000)$4,935 $3,665 hedging instrument is located Derivative Assets$515 $576 Derivative Liabilities10 - Changes in fair value used for calculating hedge ineffectiveness- - Fair value hedgeand coffee inventoryand coffee inventoryNominal amount of hedged item (in '000 lbs)4,019 3,031 Inventories & hedgedInventories & hedgedhedged item is located firm commitmentsfirm commitmentsAssets $ 1,288 $ 1,617 Liabilities 190 730 Changes in fair value used for calculating hedge ineffectiveness - - December 31, 2019Commodity price risk Coffee futuresCommodity price risk Coffee futuresDecember 31, 2019Purchase commitments Line items in the statement of financial position where December 31, 2020Purchase commitments Line item 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, 2020
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
Currency risk hedges related to US$ purchases
As at December 31, 2020, the Company designated as hedging instruments US$5.6 million in forward
contracts to buy US dollars, which relate to coffee purchases (2019: US$3.8 million).
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Carrying amount of hedging instrumentsCashflow hedgeNominal amount of hedging instruments (in US$'000)$38,709 $35,870 hedging instrument is located Derivative Assets$1,226 $39 Derivative Liabilities269 971 - - Cashflow hedgeNominal amount of hedged item (in US$'000)$ 38,709 $ 35,870 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 957 (932)December 31, 2019Currency riskForeign currency forwardsCurrency riskForeign currency forwardsDecember 31, 2020December 31, 2019Currency riskForeign currency forwardsCurrency riskForeign currency forwardsLine items in the statement of financial position where Changes in fair value used for calculating hedge ineffectivenessAccumulated amount of fair value hedge adjustment on hedged item included in the carrying amount of the hedged items December 31, 2020Line items in the statement of financial position where Carrying amount of hedging instrumentsFair value hedgeForeign currencyForeign currency purchase forwards purchase forwardsNominal amount of hedging instruments (in US$'000)$5,646 $3,797 Line item in the statement of financial position where hedging instrument is located Derivative Liabilities263 140 Changes in fair value used for calculating hedge ineffectiveness- - Fair value hedgeFirm purchase commitmentsFirm purchase commitments& inventories& inventoriesNominal amount of hedged item (in US$'000)$5,646 $3,797 Line item in the statement of financial position where (cid:10)Inventories & hedgedInventories & hedgedhedged item is located firm commitmentsfirm commitmentsAssets $ 323 $ 157 Changes in fair value used for calculating hedge ineffectiveness - - December 31, 2020Accumulated amount of fair value hedge adjustment on hedged item included in the carrying amount of the hedged items December 31, 2020December 31, 2019December 31, 2019
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
24.4
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
interest rate risk related to its credit facilities, a 1% increase in the Canadian prime rate loan, holding all
other variables constant, would result in a $0.09 million decrease to the income before taxes. There is no
interest rate risk on the convertible debenture and construction loan as the interest rates are fixed.
24.5 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. A customer’s credit check is
performed in advance of providing credit to a customer and by reviewing their external credit ratings and
interviewing customer’s reputable vendors and then reviewed annually.
For the year ended December 31, 2020, revenues from three major customers of $31.7 million (2019:
$32.2 million) represented 32% (2019: 33%) of total revenues for the year. Three major customers
represented 58% of total accounts receivable as at December 31, 2020 (2019: 53%).
The Company had 11% of its accounts receivable past due but not impaired as at December 31, 2020
(2019: 13%). Of the past due accounts receivable, 92% are 1-30 days past due (2019: 92%), while 8% are
over 31 days past due (2019: 8%).
The Company manages the credit risk related to its derivative financial instruments by entering into such
contracts only with high credit quality institutions.
24.6 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:
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2022 to 2023Accounts payable$9,367 $9,367 $- $- $- Other liabilities740 631 108 - - Lease liabilities23,417 2,809 4,917 2,497 1,930 Credit Facility10,021 - 10,021 - - Construction loan and interest20,083 918 3,333 3,333 12,499 Convertible debenture13,102 - 15,000 - - Total $76,730 $13,725 $33,379 $5,830 $14,429 Carrying AmountContractual Cash FlowsThereafter2024 to 20252021December 31, 2020
SWISS WATER DECAFFEINATED COFFEE INC.
Notes to the Consolidated Financial Statements
For the Year ended December 31, 2020
(Tabular amounts are in thousands of Canadian dollars, except share and per share amounts)
24.7 Fair value of financial instruments
Financial instruments that are measured at fair value are categorized as follows. During the year ended
December 31, 2020, there were no transfers between level 1 and 2 instruments.
25. 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,
2020, these contracts related to the purchase of green coffee in the amount of $44.2 million (2019: $31.5
million), and natural gas purchase commitments in the amount of $0.2 million (2019: $0.5 million), and
capital purchases commitments of $8.2 million (2019: $2.8 million). Of these contracts, $52.6 million will
become payable within twelve months from December 31, 2020.
26. SUBSEQUENT EVENTS
On February 23, 2021, a total of 50,893 of the outstanding RSUs vested and were converted to common
shares, pursuant to the 2011 Restricted Share Unit Plan as amended on June 25, 2019.
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Financial assetsCash$2,749 $2,749 $- $- Derivative assets1,962 514 1,448 - $4,711 $3,263 $1,448 $- Financial liabilitiesDerivative liabilities$906 $10 $896 $- Credit facility10,021 - 10,021 - Construction loan 20,083 - 20,083 - Other liabilities740 - 740 - $31,750 $10 $31,740 $- Level 3December 31, 2020Level 1Level 2Financial assetsCash$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 $- Level 3December 31, 2019Level 1Level 2
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TSX: SWP