Ten Peaks Coffee Company Inc.
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Management’s Discussion and Analysis
This Management’s Discussion & Analysis (“MD&A”) of Ten Peaks Coffee Company Inc. (“Ten Peaks” or the
“Company”), dated as of August 6, 2015, provides a review of the financial results for the three and six
months ended June 30, 2015 relative to the comparable period of 2014. The three-month period represents
the second quarter (“Q2”) of our 2015 fiscal year. This MD&A should be read in conjunction with the
Company’s condensed consolidated interim financial statements for the period ended June 30, 2015, as well
as the audited consolidated financial statements for the year ended December 31, 2014, which are available
at www.sedar.com.
All financial information is presented in Canadian dollars, unless otherwise specified.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements, including statements regarding the future success of our
business and market opportunities. Forward-looking statements typically contain words such as “believes”,
“expects”, “anticipates”, “continue”, “could”, “indicates”, “plans”, “will”, “intends”, “may”, “projects”,
“schedule”, “would” or similar expressions suggesting future outcomes or events, although not all forwardlooking statements contain these identifying words. Examples of such statements include, but are not
limited to, statements concerning: (i) expectations regarding Ten Peaks’ future success in various geographic
markets; (ii) future financial results including anticipated future sales and processing volumes; (iii) future
dividends; (iv) the expected actions of the third parties described herein; (v) factors affecting the coffee
market including supplies and commodity pricing; and (vi) the business and financial outlook of Ten Peaks.
In addition, this MD&A contains financial outlook information that is intended to provide general guidance
for readers based on our current estimates, but which is based on numerous assumptions and may prove to
be incorrect. Therefore, such financial outlook information should not be relied upon by readers. These
statements are neither promises nor guarantees, but involve known and unknown risks and uncertainties
that may cause our actual results, level of activity, performance or achievements to be materially different
from any future results, levels of activity, performance or achievements expressed in or implied by these
statements. These risks include, but are not limited to, risks related to processing volumes and sales growth,
operating results, supply of coffee, general industry conditions, commodity price risks, technology,
competition, foreign exchange rates, construction timing, costs and financing of capital projects, general
economic conditions and those factors described herein under the heading ‘Risks & Uncertainties’.
The forward-looking statements contained herein are also based on assumptions that we believe are current
and reasonable, including but not limited to, assumptions regarding: (i) trends in certain market segments
and the economic climate generally; (ii) the financial strength of our customers; (iii) the value of the
Canadian dollar versus the US dollar; (iv) the expected financial and operating performance of Ten Peaks
going forward; and (v) the expected level of dividends payable to shareholders. We cannot assure readers
that actual results will be consistent with the statements contained in this MD&A. The forward-looking
statements and financial outlook information contained herein are made as of the date of this MD&A and
are expressly qualified in their entirety by this cautionary statement. Except to the extent required by
applicable securities law, Ten Peaks undertakes no obligation to publicly update or revise any such
statements to reflect any change in our expectations or in events, conditions, or circumstances on which any
such statements may be based, or that may affect the likelihood that actual results will differ from those
described herein.
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EXECUTIVE SUMMARY
Ten Peaks generated strong financial and operating results in the first half of 2015, as we continued to
execute on our business plan, win market share and increase our global presence. Demand for coffees
decaffeinated using the SWISS WATER® Process remained strong, driving double-digit year-over-year growth
in our six-month processing volumes, revenue, and EBITDA.
A trucking strike at the Port Metro Vancouver during March 2014 skewed our results last year, with
processing volumes and financial results lower in the first quarter and higher in the second quarter than
they otherwise would have been. As a result, we believe that the most relevant comparative period is the six
months ended June 30, 2014.
All of our business segments experienced substantial growth during the first half of fiscal 2015. Volumes to
our national accounts grew by 23%, while shipments to our specialty regional customers grew by 15%. The
significant year-over-year growth in sales to our national accounts is due to increased orders from existing
customers and to large customer wins that occurred late last year. Sales to our higher-margin specialty
regional customers continued to record double-digit growth, reflecting growing demand for our premium
quality coffees from that market segment.
First half processing volumes rose by 20%, driving a 42% increase in revenue and 53% increase in EBITDA,
year-over-year. Geographically, our volumes were up moderately in Canada and significantly in both the US
and internationally. Our gains in the first half of fiscal 2015 are a result of our multi-faceted growth strategy,
which has consistently driven volume gains in each of the past four years.
Our strong sales volumes helped mitigate the effect of a downward trending coffee commodity price, or
NY’C’, which declined by 21% from US$1.66 per lb at the beginning of this year to US$1.31 per lb by the end
of the second quarter. Approximately half the coffee we decaffeinate is sold to customers based on the
current commodity price, such that a declining NY’C’ will lead to a decrease in our revenues. Movement in
the US dollar (“US$”) also influences our revenues, as 75% of our year-to-date sales were in US$. During the
first half of this year, the strong US$ had a positive influence on our revenue, with the average US-Canadian
dollar exchange rate up by 13% from the same period last year.
First half revenues increased by 42% to $41.8 million. All three of our revenue categories – process revenue,
green coffee revenue and distribution revenue – recorded double digit year-over-year gains. The revenue
increases were largely related to our high volume growth, as well as a strengthening US$.
Gross profit declined by $1.0 million or 17% year-over-year, as higher coffee prices in earlier periods (when
we purchased the coffees that we sold during the first half of this year) increased our cost of sales for the
current period. In addition, we buy coffee in US$ and resell it to certain national accounts in Canadian
dollars. The rising US$ in the first 6 months of this year drove up the green coffee costs for these sales. We
buy US$ forward contracts to mitigate the currency risk on these orders, as is further discussed below.
Our risk mitigation practices effectively offset the currency and commodity price swings that reduced our
gross profit year to date. We recorded net gains on our coffee futures contracts of $1.7 million in the first six
months of this year, compared to net losses of $1.4 million during the same period last year. We also
realized gains on forward contracts to buy US$ in respect of coffee purchases for resale in Canadian dollars.
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We enter into coffee futures contracts and currency forward contracts in order to mitigate the effects of
changes in the NY’C’ on our EBITDA and net income. However, as we do not use hedge accounting, these
gains are recorded under ‘Gains and Losses on Derivative Instruments’ instead of being reflected in our gross
profit. In addition, gains and losses on derivatives in any particular quarter are not perfectly matched to cost
of sales in that quarter. Our hedges reflect the market values at the end of the accounting period, whereas
cost of sales reflects costs when our coffees were price-fixed and received into inventory (generally 1 to 2
quarters prior). The volatility in gross profit and earnings due to this timing difference reduces naturally over
2 to 3 quarters, as inventory is sold and replaced.
Our realized gains on forward contracts to buy US$ in respect of green coffee purchases were offset by
realized losses on forward contacts to sell US$ in respect of our US$ revenues. In addition, unrealized losses
of $0.8 million (related to forward contracts that will mature up to 24 months after period end) reduced our
net income in the first six months of 2015. Unrealized losses on foreign exchange forward contracts are noncash items, as we are not required to cover changes in the value of these contracts until the contracts
mature.
EBITDA increased to $4.0 million during the first half of fiscal 2015, up from $2.6 million for the same period
last year. The gain was driven by our strong revenue growth and net gains on commodity futures, partially
offset by increased cost of sales and operating expenses. Net income for the first half of the year was $1.1
million, unchanged from the same period last year.
We generated $4.5 million in cash from operations before changes in working capital accounts, compared to
$1.6 million in the same period last year. We used $1.2 million for changes in working capital, $0.6 million
for capital expenditures, $0.3 million to repay debt and $0.8 million to pay dividends during the first half of
this year. Our net debt (bank indebtedness less cash on hand) declined by $1.3 million from the end of fiscal
2014.
In July 2015, we completed an equity offering of 2,000,000 common shares, raising net proceeds of
approximately $16.3 million. As was indicated in the prospectus for the equity offering (which is available on
www.sedar.com), the proceeds are expected to be used to finance capacity expansion initiatives at our
current facility, and to fund the construction of a new facility and/or production line, which should begin in
2016. In the near term, excess capital will be used to pay down debt.
BUSINESS OVERVIEW
Ten Peaks is a leading specialty coffee company doing business through two wholly owned subsidiaries,
Swiss Water Decaffeinated Coffee Company, Inc. (“SWDCC”) and Seaforth Supply Chain Solutions Inc.
(“Seaforth”). SWDCC is a premium green coffee decaffeinator located in Burnaby, BC. SWDCC employs the
proprietary SWISS WATER® Process to decaffeinate green coffee without the use of chemicals, leveraging
science-based systems and controls to produce coffee that is 99.9% caffeine free. We believe that the
SWISS WATER® Process is the world’s only 100% chemical free water process for third-party coffee
decaffeination. It is certified organic by the Organic Crop Improvement Association, and is also the world’s
only consumer-branded decaffeination process. This is our primary business, and the financial results of Ten
Peaks are dependent upon the results of SWDCC.
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Seaforth provides a complete range of green coffee logistics services including devanning coffee received
from origin; inspecting, weighing and sampling coffees; and storing, handling and preparing green coffee for
outbound shipments. Seaforth provides all of SWDCC’s local green coffee handling and storage services. In
addition, Seaforth handles and stores coffees for several other coffee importers and brokers, and is the main
green coffee handling and storage company in Metro Vancouver. Seaforth is organically certified by Ecocert
Canada.
As at June 30, 2015, the condensed consolidated interim financial statements of Ten Peaks included the
accounts of Ten Peaks; our wholly owned subsidiaries SWDCC and Seaforth; and two wholly owned
subsidiaries of SWDCC, Swiss Water Decaffeinated Coffee Company USA, Inc., and Swiss Water Process
Marketing Services Inc. Inter-company accounts and transactions have been eliminated on consolidation.
Ten Peaks’ shares trade on the Toronto Stock Exchange under the symbol ‘TPK’. At June 30, 2015, there
were 6,735,099 shares outstanding. As at the date of this report and after the equity offering noted above,
there were 8,735,099 shares issued and outstanding (see ‘Subsequent Events’, below).
Swiss Water Decaffeinated Coffee Company’s Business
We carry an inventory of premium-grade Arabica coffees that we purchase from the specialty green coffee
trade, decaffeinate and then sell to our customers (our “regular” or “non-toll” business). Revenue from our
regular business includes both processing revenue and green coffee cost recovery revenue.
We also decaffeinate coffee owned by our customers for a processing fee under toll arrangements (our
“toll” business). The value of the coffee processed under toll arrangements does not form part of our
inventory, our revenue or our cost of sales. Revenue from toll arrangements consists entirely of processing
revenue. For the first half of this year, approximately 18% of the coffee we processed was under toll
arrangements, with the balance being regular business.
Our cost of sales is comprised primarily of the cost of green coffee purchased for our regular business, and
the plant labour and other processing costs directly associated with our production facility. This incorporates
an allocation of fixed overhead costs, which includes depreciation of our production equipment and
amortization of our proprietary process technology.
For our regular business, we work with coffee importers to source premium-grade green coffees from
coffee-producing countries located in Central and South America, Africa and Asia. The purchase price is
based on the New York ‘C’ (“NY‘C’”) coffee commodity price on the IntercontinentalExchange, plus a quality
differential. The NY‘C’ component typically makes up more than 80% of the total cost of green coffee, while
the quality differential typically accounts for less than 20%. Both the NY‘C’ price and the quality differential
fluctuate in response to fundamental commodity factors that affect supply and demand.
Commodity Futures
We use derivative instruments to help offset the effect of movements in the NY’C’ component of coffee
pricing between the time we commit to purchase green coffee at a fixed price and the time we sell
decaffeinated green coffee to our customers. Our commodity price risk mitigation strategy requires us to
short sell a futures contract for one lot (37,500 lbs) of coffee on the IntercontinentalExchange whenever we
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agree to buy one lot of coffee from a supplier at a fixed price. The short sale protects us from changes in the
price of coffee while purchase orders are outstanding and while we hold the coffee in inventory. An increase
(decrease) in the NY’C’ price will generate an increase (decrease) in the value of the coffee we hold in
inventory, and an equivalent decrease (increase) in the value of the derivative instrument. As coffee is sold,
the short sales are covered by purchasing offsetting long contracts on the IntercontinentalExchange.
There is no open market to hedge the quality differential component of our green coffee cost. Therefore, in
periods of rising differential markets, we may experience a differential cost recovery gain, and in periods of
falling differential markets, we may experience a differential cost recovery loss.
Volatility in the NY’C’ generates gains or losses on the derivative financial instruments that we hold.
Although these gains and losses offset corresponding losses or gains in the value of the inventory we hold,
International Financial Reporting Standards (“IFRS”) do not allow us to mark our inventory to market. As
such, gains in the value of our inventory that result from increases in the NY’C’ are not reflected on our
statement of financial position, nor in our profitability through our statement of operations, until sold.
Conversely, under IFRS the fair value of the commodity futures contracts must be recorded on our
statement of financial position, and changes in fair value from one period to the next are recorded as
unrealized gains and losses on derivative instruments on our statement of operations. As a result, even
though holding derivative financial instruments in respect of our commodity purchases is a prudent risk
management strategy, it can result in significant swings in our reported income in any period, since a
substantial portion of our current assets are invested in coffee commodities.
The chart below shows the movement in the NY’C’ since June 28, 2013:
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As shown in the chart above, the NY’C’ rose sharply at the beginning of 2014 and remained relatively high
through most of the year, before falling steadily through the first quarter of 2015 and leveling off in the
second quarter. The sharp rise in the NY’C’ was related to a severe drought in Brazil, which created market
uncertainty about the overall quality and quantity of Brazilian coffee that would be available in both 2014
and 2015 (due to drought damage to the coffee trees). However, these concerns were largely alleviated
through January and February 2015, as significant seasonal rains arrived as expected. In addition, rising
coffee exports from Brazil and upward revisions to coffee crop estimates have eased market concerns. As a
result, coffee prices have declined to more historical levels through the first half of this year.
The NY’C’ averaged US$1.34 in the second quarter of 2015, down by 28% from Q2 2014. For the six months
ended June 30, 2015, the average NY’C’ was US$1.43, down by 15% from the first half of 2014. The rise and
fall of the NY’C’ affects our revenues and our cost of sales, as it increases or decreases the value of green
coffee included in both. Green coffee revenues and costs of sales are also affected by the proportionate mix
of our business segments, the quality differentials for the specified coffees, and the US-Canadian dollar
exchange rate.
Currency Forwards
Coffee is traded in US dollars (“US$”), as buyers and sellers reference the NY’C’ coffee price when entering
into contracts. As a result, the majority of our revenues are denominated in US$, while a significant portion
of our expenses and cash outflows occur in Canadian dollars. Therefore, our financial results are affected by
any significant fluctuation in US-Canadian dollar exchange rates. In accordance with our foreign exchange
risk management policy, we use financial instruments to manage our currency risk based on estimates of our
net US$ cash flows up to 24 months in advance. We purchase forward contracts to sell US$ at fixed future
dates and exchange rates. This enables us to more reliably predict how much Canadian currency we will
receive for our US$ sales. Cash flows in the immediate 12-month period are hedged at a higher percentage
of expected future cash flows than those farther out, reflecting greater uncertainty in the 13 to 24-month
period. As our assumptions about the timing and amount of US$ cash flows change over time, we enter into
offsetting forward contracts to buy US$ as required to eliminate any over-hedged positions in accordance
with our risk management policy.
In addition, our risk management policies require us to enter into forward contracts to purchase US$ when
we have large, predictable outlays of US$ for upcoming expenses or purchase commitments. This allows us
to fix the exchange rate for purchases or expenses, as applicable, at the time the commitment is entered
into.
With cash flows hedged in this manner, we can make informed decisions about capital and operating
expenditures. However, as we do not use hedge accounting, our currency hedging practices can result in
significant volatility in our reported net income. This is because our US$ revenues and expenses are
recognized at the exchange rates in effect at the time sales are made or expenses incurred (rather than at
the exchange rate implied by the derivative instrument). At the same time, IFRS requires us to mark our
derivative instruments to market at each financial statement date, with changes in the value of these
instruments being recognized in income during the period. This means that in an environment where the
US$ has appreciated relative to the Canadian dollar, our revenue would increase. Concurrently, we would
recognize offsetting losses on our currency hedges, which appear on our statement of income and
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comprehensive income under ‘Gain/(Loss) on derivative financial instruments’. Realized gains or losses on
derivative financial instruments relate to contracts that have been settled in the period, while unrealized
gains or losses relate to contracts which mature in future periods.
The chart below illustrates the US–Canadian dollar exchange rates since June 28, 2013:
The US$ averaged $1.23 in Q2 2015, up by 13% from an average of $1.09 in Q2 2014. In the first half of
2015, the US$ averaged $1.24, an increase of 13% over the same period last year. The stronger US$
contributed to an increase in our revenues, as 75% of our sales for the year-to-date were generated in US
dollars.
OPERATING RESULTS
Sales and Processing Volumes
Our sales volumes have grown at an increasing rate over the past four years, as we gain market share in
Canada, the US and internationally. This growth trend continued into the first half of fiscal 2015, with
processing volumes for the second quarter up by 14% over Q2 2014, and up by 20% for the first half of the
year. During Q2 2015, volumes with our specialty regional accounts increased by 4% and volumes to our
national accounts increased by 20%. For the six months ended June 30, 2015, we recorded year-over-year
growth of 15% to our specialty regional accounts and 23% to our national accounts.
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As noted above, a strike at the Port Metro Vancouver in March 2014 skewed our volumes for the first half of
last year, reducing the orders we were able to ship in Q1 and shifting some shipments to the second quarter.
As a result, we believe that the most relevant comparative period is the six months ended June 30, 2014.
As our total revenues can be influenced considerably by changes in the NY’C’, we monitor and report our
sales 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. It rises and falls with the NY’C’. “Distribution revenue” consists of shipping,
handling and warehousing charges billed to our customers. It typically rises with processing volumes and
with the growth of Seaforth’s business.
Our revenue by category for the indicated periods was as follows:
(In $000s)
(unaudited)
Process revenue
$
Green revenue
3 months ended
6 months ended
6 months ended
June 30, 2015
June 30, 2014
June 30, 2015
June 30, 2014
4,863
$
14,421
Distribution revenue
Total
3 months ended
959
$
20,242
3,856
$
11,402
740
$
15,998
9,578
$
30,311
1,899
$
41,788
7,353
20,793
1,334
$
29,480
During 2015, our second quarter sales totaled $20.2 million, an increase of $4.2 million, or 27%, over the
same period in 2014. Process revenue increased by $1.0 million, or 26%, driven by higher processing
volumes and a stronger US$. Green revenue increased by $3.0 million, or 26%, due to a rising US$ and
higher sales volumes. Distribution revenue was up by $0.2 million, or 30%, reflecting growth of Seaforth’s
business and our increased volumes.
In the first half of this year, revenue totaled $41.8 million, up by $12.3 million, or 42%, over the same period
last year. Process revenue rose by 30% to $9.6 million, while green revenue increased by $9.5 million, or
46%. Green revenue was up in part due to orders from national accounts which were price-fixed at a higher
NY’C’ last fiscal year. Distribution revenue was up by $0.6 million, or 42%, reflecting the expansion of
Seaforth’s business and our increased shipments.
Cost of Sales
Cost of sales includes the cost of green coffee purchased for our regular business, and the plant labour and
other processing costs directly associated with our production facility. This incorporates an allocation of
fixed overhead costs, which includes depreciation of our production equipment and amortization of our
proprietary process technology. In addition, cost of sales includes the costs of operating Seaforth’s
warehouses.
For Q2 2015, our cost of sales totaled $18.3 million, up by 45% over the same period in 2014. The increase
was mainly related to higher green coffee costs, which were driven by the growth in our volumes, the higher
NY’C’ in prior periods (when the coffees were purchased), and the stronger US$. It also includes higher
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freight charges, which increased with the growth in our shipments to the United States and outside of North
America.
For the first half of 2015, our cost of sales rose by 55% to $37.2 million. As with the second quarter, the
increase was driven by our volume growth, a relatively high NY’C’ (when the coffees were purchased), and
the stronger US$. Higher freight charges, which increased in conjunction with our volume growth and
market expansion, also contributed to the year-over-year increase in our six-month cost of sales.
Gross Profit
Gross profit decreased by 42% in the second quarter of 2015 to $2.0 million and by 17% to $4.6 million in
the first half of fiscal 2015. In both periods, the lower gross profit reflects the declining NY’C’ and the
stronger US$.
Approximately half the coffee we decaffeinate is sold to customers based on the current NY’C’; when the
NY’C’ falls over an extended period of time, these coffees are sold at a lower commodity price than we paid
for them. In addition, we buy coffee in US$ and resell it to certain national accounts in Canadian dollars. The
rising US$ in the first 6 months of this year drove up the green coffee costs for these sales. We enter into
commodity futures contracts and currency forward contracts to offset the impact of these market
movements on our earnings and cash flows. However, as we do not use hedge accounting, the offsetting
gains are recorded under ‘Gains and Losses on Derivative Financial Instruments’ rather than in gross profit.
Sales and Marketing Expenses
Sales and marketing expenses include compensation and other personnel-related expenses for sales and
marketing staff, consumer and trade advertising and promotion costs, as well as related travel expenses.
Sales and marketing expenses were $0.4 million for the three months ended June 30, 2015, which was up by
$0.1 million compared to the second quarter of 2014.
First half sales and marketing expenses totaled $1.0 million, up by 46% over the same period last year. In
both periods, the increase was related to additional market research and advertising, which began in Q4
2014 in support of the SWISS WATER® brand, as well as the addition of sales and customer service resources
part way through 2014.
Occupancy Expenses
Occupancy expenses include the cost of renting administration offices. Occupancy costs were up somewhat
for the second quarter and first half of fiscal 2015, as we opened a new sales office in Seattle, WA in Q2
2014. Our Seattle location gives us greater presence in the US, which is a key strategic market for expanding
our business.
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
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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 rose by 59% to $1.3 million for the second quarter compared to $0.8 million for the
same period in 2014. For the six months ended June 30, 2015, administration expenses were $2.5 million,
up by 43% over the first half of last year. In both periods, the increase reflects higher stock-based
compensation expenses due to a significant increase in our share price, increased staffing and staff-related
expenditures, as well as higher professional fees.
Finance Income / Expenses
Finance income reflects the charges we bill to customers for financing coffee inventories. Finance expenses
include interest costs on bank debt and other borrowings, and the accretion expense on our asset
retirement obligation.
Finance income and finance expenses were relatively unchanged compared to the same periods last year.
Gains and Losses on Derivative Financial Instruments
We enter into commodity futures and foreign exchange forward contracts to manage the effect of changes
in the NY’C’ and US dollar exchange rates on our business. We record both realized and unrealized gains
and losses on foreign currency forward contracts and coffee futures contracts as gains and losses on
derivative financial instruments on our statement of income. These are based on marked-to-market
calculations at the end of the relevant reporting period. Realized gains (losses) on derivative financial
instruments are incurred when the instruments mature during the period. In contrast, unrealized gains and
losses represent the change in the fair value of the derivative financial instruments that mature in future
periods. The amount of any unrealized gain or loss may change before the underlying financial instrument is
actually liquidated.
Realized gains (losses) on foreign exchange forward contracts increase (decrease) both our reported net
income and our cash from operations in the relevant period. Unrealized gains and losses on foreign
exchange derivative instruments are non-cash charges, and only affect our reported net income in the
relevant period.
For coffee futures, it is the overall value of our derivative contracts on the IntercontinentalExchange that
drives cash inflows and outflows for the period. Unlike foreign exchange forward contracts, decreases in the
fair value of outstanding futures contracts generate unrealized losses which must be funded on a daily basis.
These mark-to-market losses take the form of margin calls, which we fund through increased bank
indebtedness. If a change in the NY’C’ results in gains on these contracts, we can recoup the cash on
account for the excess over the current margin requirements. Thus, realized and unrealized gains and losses
on coffee futures contracts affect both our cash flows and our earnings in any reporting period.
While our coffee futures and currency forward contacts provide effective economic hedges, it should be
noted that gains and losses on derivative instruments in any particular quarter are not perfectly matched to
the hedged item (revenues or inventory) in that quarter. Our commodity futures contracts reflect the
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market value of the NY’C’, our purchase commitments for coffee and our inventory at the end of the
accounting period, whereas cost of sales reflects the cost of coffee in Canadian dollars when it was received
into inventory, which is generally determined 1 to 2 quarters prior to the sale. The volatility in our financial
results due to this timing difference reduces naturally over 2 to 3 quarters, as inventory is sold and replaced.
Similarly, our currency forwards reflect our forecasted future US$ revenues for each month as well as the
forecasted timing of receipt of coffee. Actual US$ revenues and receipt of coffees into inventory may vary
from forecasts.
For the second quarter, we recorded $1.1 million in realized gains on our futures contracts, compared with
realized losses of $1.8 million in the same quarter in 2014. We also recorded $0.9 million in unrealized
losses on coffee futures in Q2, compared to $1.7 million in unrealized gains in the second quarter of 2014.
The net effect was that we recognized $0.2 million in net gains on futures contracts during the second
quarter of 2015, compared to a net loss of $0.1 million in Q2 2014.
We recorded realized losses of $0.2 million on our foreign currency derivatives in the second quarter of
2015, compared to a loss of $0.1 million in the same quarter of 2014. We recorded unrealized gains of $0.3
million on foreign exchange forward contracts in Q2 2015, compared to $0.4 million in unrealized gains in
Q2 last year. The net effect was a gain on foreign exchange contracts of $0.1 million, compared to gains of
$0.3 million for the same period last year.
For the first half of this year, we realized $2.0 million in gains in our commodity futures contracts, compared
to realized losses of $2.3 million for the first half of last year. We also recorded $0.3 million in unrealized
losses on our futures contracts, compared to $0.9 million in unrealized gains in 2014. The net effect was a
year-to-date gain of $1.7 million on commodity futures contracts, compared to net losses of $1.4 million for
the first six months of last year.
For the first half of both 2015 and 2014, we recorded no realized gains or losses on our foreign currency
derivatives. Realized gains on our forward contracts to buy US$ in respect of coffee purchases (for coffee
which is resold in Canadian dollars) were offset by realized losses on forward contracts to sell US$ related to
US$ revenues. This year, we recorded $0.8 million in unrealized losses on foreign currency derivatives,
compared to no unrealized gains or losses in the first half of last year.
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. This is separate from foreign exchange forward contracts, which are reported
under ‘Gains and Losses on Derivative Financial Instruments’ above.
We recorded foreign exchange losses of $0.1 million for the three months ended June 30, 2015, compared
with gains of $0.2 million in Q2 2014.
For the first half of this year, we recorded a loss on foreign exchange of $0.4 million, compared with losses
of $33 thousand for the same period last year. The loss in the current period reflects the strengthening of
the US$, which increased our US$ denominated liabilities when converted to Canadian dollars on June 30,
2015.
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Income Before Taxes and Net Income
In the second quarter, we recorded income before taxes of $0.4 million, compared to $2.5 million for the
same period in 2014. Deferred income taxes reduced our net income by $0.1 million for the quarter.
Deferred income taxes arise mainly from temporary differences between the depreciation and amortization
expenses deducted for accounting purposes, and the capital cost allowances deducted for tax purposes, as
well as changes in corporate income tax rates as adjusted for substantively enacted higher future tax rates.
The latter are offset by the tax benefit of loss carry forwards recognized. Overall, we recorded net income
of $0.3 million for the quarter, compared to $1.8 million for the same period in 2014.
For the first half of 2015, our income before taxes was $1.4 million, compared to $1.6 million for the same
period last year. Our six-month net income was reduced by deferred income taxes of $0.3 million. As a
result, we recorded net income of $1.1 million this year, which remains unchanged from the same period
last year.
Basic and Diluted Earnings per Share
Basic earnings per share is calculated by dividing net income by the basic weighted average number of
shares outstanding during the period. Similarly, diluted earnings per share is calculated by dividing net
income adjusted for the effects of all dilutive potential common shares, by the diluted weighted average
number of shares outstanding. As our potential common shares are anti-dilutive, there is no difference
between basic and diluted earnings under IFRS.
For the quarter ended June 30, 2015, basic and diluted earnings per share were both $0.05, compared to
$0.27 for the same period last year. In the first quarter of 2015, the basic and diluted weighted average
number of shares outstanding were 6,735,099 and 6,880,297, compared to 6,675,254 and 6,876,746
respectively in Q2 2014.
For the six months ended June 30, 2015, basic and diluted earnings per share were $0.16, compared to
$0.17 in 2014. During the first half, the basic and diluted weighted average number of shares outstanding
were 6,735,099 and 6,866,164, compared to 6,675,254 and 6,875,153 respectively last year.
Non-IFRS Measures
EBITDA is often used by publicly traded companies as a measure of cash from operations, as it excludes
financing costs, taxation and non-cash items. The reporting of EBITDA is intended to assist readers in the
performance of their own financial analysis. However, since this measure does not have a standardized
meaning prescribed by IFRS, it is unlikely to be comparable to similar measures presented by other entities.
EBITDA
We define EBITDA as net income before interest, depreciation, amortization, impairments, share-based
compensation, gains/losses on foreign exchange, gains/losses on disposal of capital equipment, unrealized
gains/losses on foreign exchange forward contracts and provision for income taxes. Our definition of
EBITDA reflects realized gains and losses on foreign exchange forward contracts, which offset the currency
Ten Peaks Coffee Company Inc.
13
risk of our US$ denominated revenues and of our coffee purchases which are resold in Canadian dollars. It
also includes gains and losses on coffee as it is sold, together with the offsetting gains and losses on the
commodity futures trading account.
We use EBITDA as one measure of our financial performance. It is a calculation of cash from operations
independent of changes in working capital balances, and thus complements cash flows from operations as
reported on the statement of changes in financial position. As we do not use hedge accounting, our reported
results under IFRS are heavily influenced by changes in the closing market values of the NY’C’ and the USCanadian dollar exchange rate, and thus can be difficult to interpret quarter by quarter. Our measure of
EBITDA takes the cash flow impact of our currency and commodity hedges into account, and it represents
cash flows that we can reasonably forecast and affect through growth initiatives and operational cost
controls.
The reconciliation of net income to EBITDA is as follows:
(In $000s)
(unaudited)
3 months ended
June 30, 2015
Income for the period
Income taxes
$
311
105
Income before tax
Finance income
Finance expenses
Depreciation & amortization
Unrealized (gain) loss on foreign exchange forward contracts
Loss (gain) on foreign exchange
Share-based compensation
EBITDA
$
3 months ended
June 30, 2014
$
1,820
722
6 months ended
June 30, 2015
$
1,068
347
6 months ended
June 30, 2014
$
1,147
470
416
2,542
1,415
1,617
(19)
44
386
(309)
97
352
967
(21)
56
371
(359)
(161)
71
2,499
(65)
103
780
825
446
513
4,017
(35)
89
729
(14)
33
203
2,622
$
$
$
EBITDA for the second quarter was $1.0 million, compared to $2.5 million in Q2 2014. EBITDA for the first
half of this year totaled $4.0 million, compared to $2.6 million for the same period last year. The increase for
the six-month period reflects higher sales volumes and gains on commodity futures contracts, partially
offset by increased cost of sales and operating costs.
Quarterly Information / Seasonality
The following table summarizes results for each of the eight most recently completed fiscal quarters:
(In $000s except per share amounts)
(unaudited)
Q2
2015
Sales
Gross profit
(1)
EBITDA
Net income
Per share
(1)
Q1
2015
Q4
2014
Q3
2014
Q2
2014
Q1
2014
Q4
2013
Q3
2013
20,242
1,986
21,547
2,602
19,456
3,221
17,244
2,588
15,998
3,437
13,482
2,116
15,794
1,949
13,217
1,354
967
311
3,043
758
3,109
1,672
1,342
199
2,499
1,920
123
(673)
1,201
343
1,067
561
0.14
0.05
0.45
0.11
0.47
0.25
0.20
0.03
0.37
0.27
0.02
(0.10)
0.18
0.05
0.16
0.08
(2)
EBITDA - basic and diluted
Net income - basic and diluted
Ten Peaks Coffee Company Inc.
14
(1) EBITDA is defined in the section on ‘Non-IFRS Measures’ along with details of its calculation.
(2) Per-share calculations are based on the weighted average number of shares outstanding during the period.
There is a seasonality factor in the specialty coffee industry, with fourth quarter sales volumes typically
being the strongest.
Liquidity and Capital Resources
Cash Flow from Operations
For the six months ended June 30, 2015, we generated $4.5 million in cash from operations before changes
in non-cash working capital, compared to $1.6 million in 2014.
Changes in non-cash working capital accounts used $1.2 million in the first half of this year, compared to
$4.5 million last year. Lower accounts receivable generated $0.4 million, while increases in inventory used
$1.7 million for working capital.
Overall, cash generated from operating activities was $3.3 million for the six months ended June 30, 2015,
compared to cash used of $3.0 million during the same period last year.
Investing Activities
First half capital expenditures were $0.6 million, compared to $0.4 million in the same period last year.
Purchases of capital equipment vary from year to year, based on the needs of the business. This year’s
capital costs include investments in preliminary engineering in support of our expansion plans (see the
’Outlook‘ section below for more information).
Financing Activities
During the six months ended June 30, 2015, we paid $0.8 million in dividends to shareholders, which was
unchanged from the same period last year.
Our bank debt (when converted to Canadian dollars) increased in 2015, reflecting the appreciation of the
US$, partially offset by a reduction in our US$ debt outstanding in the period. We use US$ denominated
LIBOR loans when possible to reduce our interest expense. As a result, the amount owing increased when
converted to Canadian dollars on June 30, 2015. As at June 30, 2015, our net debt (bank indebtedness less
cash on hand) was $5.6 million. This represents a decrease of $1.3 million since January 1, 2015.
Credit Facilities and Liquidity
Our current credit facilities include a $14.5 million revolving operating line of credit and a $1.5 million
revolving swing line, each of which bears an interest rate of prime plus 0.75%. Any US$ denominated debt
under the revolving operating line of credit or swing line can be financed using LIBOR loans at the LIBOR rate
plus 2.35% per annum.
Ten Peaks Coffee Company Inc.
15
In addition, we have a US$4.0 million foreign exchange and commodity futures contract facility, which
allows us to enter into spot, forward and other foreign exchange rate transactions and commodity futures
transactions with our bank with a maximum term of up to 24 months.
Our facilities are collateralized by a general security agreement over all of the assets of Ten Peaks and a
floating hypothecation agreement over cash balances.
We have certain bank covenants which relate to the maintenance of specified financial ratios and we were
in compliance with all covenants as at June 30, 2015.
Inventory
The quantity of inventory we held during the first half of the year increased by 22% over December 31,
2014, which is consistent with the growth in processing volumes we recorded for the period. The value of
inventory increased by 12% to $15.7 million for the same period, which reflects the increase in total lbs held
and the appreciation of the US$, partially offset by a lower NY’C’.
Contractual Obligations
The following table sets forth our contractual obligations and commitments as at June 30, 2015:
(In $000s)
(unaudited)
Total Less than 1 year
Operating leases
(1)
4-5 Years
$
3,654 $
1,008 $
2,646 $
-
$
32,204
35,858 $
31,583
32,591 $
621
3,267 $
-
(2)
Purchase obligations
Total contractual obligations
1-3 Years
Over 5 Years
$
-
$
-
(1) Minimum obligations for our facilities for the current lease terms.
(2) Represents outstanding coffee and natural gas purchase commitments.
SWDCC leases a facility which houses its decaffeination plant and offices. The current lease term expires in
2018. After 2018, the lease on the decaffeination facility can be renewed at SWDCC’s option for one
additional 5-year term.
In Q1 2015, Seaforth consolidated its operations into a single warehouse facility, the lease for which expires
on June 30, 2019. During the quarter, a lease for a separate facility was terminated effective May 31, 2015.
Swiss Water Decaffeinated Coffee Company USA, Inc. holds a lease for its Seattle sales office, which expires
on March 31, 2017.
Off-Balance Sheet Arrangements
Ten Peaks has no off-balance sheet arrangements.
Ten Peaks Coffee Company Inc.
16
Related Party Transactions
We provide toll decaffeination services and/or sell finished goods to, and purchase raw material inventory
from, companies that are related to two Ten Peaks Directors, Roland Veit and Alton McEwen1. For Q2 2015,
sales to and purchases from a company controlled by Mr. Veit were $0.4 million (June 30, 2014 - $0.2
million) and $1.1 million (June 30, 2014 - $0.4 million), respectively. For Q2 2015, sales to and purchases
from a company affiliated with Mr. McEwen were $0.6 million (June 30, 2014 - $0.2 million) and nil (June 30,
2014 - $0.1 million), respectively. For the six months ended June 30, 2015, sales to and purchase from a
company controlled by Mr. Veit were $0.7 million (June 30, 2014 - $0.4 million), and $1.9 million (June 30,
2014 - $0.7 million), respectively. For the six months ended June 30, 2015, sales to and purchases from a
company affiliated with Mr. McEwen were $0.9 million (June 30, 2014 - $0.5 million), and $0.3 million (June
30, 2014 - $0.5 million), respectively.
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 June
30, 2015, our accounts receivable balances with these companies were $20 thousand (December 31, 2014 –
$0.2 million) and our accounts payable balances with these companies were $0.5 million (December 31,
2014 - $0.2 million).
OUTLOOK
We expect our annual consolidated volumes to increase by about 10% to 14% over 2014, owing to steadily
rising demand for our premium quality coffees.
SWDCC has recorded strong gains in processing volumes for each of the past four years. The growth is
related to several factors, including a significant investment of resources to ensure that our proprietary,
100% chemical-free SWISS WATER® Process completely preserves the distinct taste and characteristics of
premium coffees, while removing 99.9% of the caffeine. Our unique ability to produce “amazing coffee
without caffeine” has positioned SWDCC to capitalize on increased global demand for fine coffees, as well as
to serve the rapidly growing “super premium” or “third wave” coffee market. In addition to providing
excellent decaffeinated coffees that are virtually indistinguishable from their caffeinated counterparts,
SWDCC offers an exceptional range of service programs which focus on adding real value to our customers’
businesses. As a result, we have consistently won new accounts, while steadily increasing volumes delivered
to our existing customers.
The steady growth in our processing volumes over the past few years makes it necessary to invest in
additional production capacity in order to ensure that we can continue to meet demand for our coffees.
Accordingly, in the second quarter of 2015, we began work on expanding the production capacity at
SWDCC’s current decaffeination facility in Burnaby, BC. This initiative was announced in May 2015, and is
expected to be completed in the first quarter of 2016.
1
Mr. McEwen was a director and officer of a company that SWDCC does business with. He retired from the Board of
Directors at Ten Peaks’ Annual General Meeting of shareholders in June 2015.
Ten Peaks Coffee Company Inc.
17
During the second quarter, we also completed the preliminary engineering for a new facility, including a new
decaffeination production line. We expect to begin construction of the new facility (at a new location)
within the next nine months. Construction is expected to take approximately 18 months.
Both of these initiatives are expected to be financed in part by an equity offering which we completed after
quarter end, with estimated net proceeds of $16.3 million (see ‘Subsequent Events’ below). In addition, we
anticipate funding the new facility and production line with long-term debt, as well as with cash from
operations. In the near term (before construction of the new facility begins), we will use part of the
proceeds to reduce our debt.
RISKS AND UNCERTAINTIES
Ten Peaks’ ability to pay dividends is dependent upon the earnings and cash flow generated from SWDCC’s
operations, as well as our current and planned future investments in capital equipment. Cash from
operations may fluctuate with the performance of the business, which can be susceptible to a number of
risks. These risks may include, but are not limited to, foreign exchange fluctuations, labour relations, coffee
prices (notwithstanding hedging programs, as exact hedging correlation is not attainable), the availability of
coffee, competition from existing chemical and other natural or chemical free coffee decaffeinators,
competition from new entrants with alternate processing methods or agricultural technologies,
environmental and regulatory risks, terms of credit agreements, commodity futures losses, ability to
maintain organic certification, adequacy of insurance, dependence on key personnel, product liability,
uncollectable debts, and general economic downturns. The future effect of these risks and uncertainties
cannot be quantified or predicted. In addition, SWDCC leases the building that houses its decaffeination
lines. The lease is renewable at its option under an additional term which, if exercised, would expire in
2023. The lease also provides for an additional 5-year renewal term (to 2028), subject to the express
approval of the landlord. Any plans to relocate the production equipment would result in significant capital
expenditures and the payment of the asset retirement obligation (currently recorded as a long-term liability
on our financial statements).
FINANCIAL INSTRUMENTS
All financial instruments, including derivatives, are included on the consolidated statement of financial
position and are measured either at fair value or at amortized cost. Cash and accounts receivable are
designated as “loans and receivables” and measured at amortized cost. Bank indebtedness, accounts
payable and accrued liabilities, and dividends payable to shareholders are designated as “other financial
liabilities” and measured at amortized cost.
Derivative financial instruments are included on the consolidated statement of financial position and
measured at fair value. For derivatives that qualify as hedging instruments, unrealized gains or losses are
included either in other comprehensive income or on the statement of financial position, depending on
whether it is a ‘cash flow hedge’ or a ‘fair value hedge’. Derivatives that do not qualify as hedging
instruments are designated as held-for-trading and unrealized gains and losses are reported in earnings. We
do not have any derivatives that qualify as hedging instruments.
We measure our coffee futures contracts at fair value based on their quoted market prices on the
IntercontinentalExchange. Similarly, we measure our outstanding foreign exchange forward contracts at fair
Ten Peaks Coffee Company Inc.
18
value based on quoted market prices for comparable contracts. The fair values represent the amounts we
would have received from a counterparty to settle the contracts at the market rates in effect at the financial
statement date. Any related unrealized gains or losses are reported in the statement of income and
comprehensive income in the period.
We had neither available-for-sale nor held-to-maturity instruments during the six-month period ended June
30, 2015.
Foreign Exchange and Coffee Hedging
We use derivative financial instruments to manage price risks associated with our coffee inventories, as well
as foreign currency futures to manage risks associated with changes in the value of the US dollar (the
primary currency for coffee sales) relative to the Canadian dollar. These instruments are used as economic
hedges. We choose not to account for these derivative financial instruments under hedge accounting as the
requirements are onerous and provide no incremental economic benefit. As a consequence, our derivative
financial instruments are measured at fair value and marked-to-market at the end of each period.
Consequently, we are unable to defer unrealized gains and losses on these instruments related to future
transactions, even though the NY’C’ and currency exchange rates underlying the marked-to-market
calculations may change before the hedge instruments are actually liquidated.
Commodity Price Risk
We utilize futures contracts to manage our commodity price exposure. We buy and sell coffee futures
contracts on the IntercontinentalExchange in order to offset our inventory position and fix the input cost of
green coffee.
As at June 30, 2015, we had futures contracts to buy 1.2 million lbs of green coffee with a notional value of
US$1.6 million, and contracts to sell 4.8 million lbs of green coffee with a notional value of US$6.4 million
(December 31, 2014 – buy 2.0 million lbs with a notional value of US$3.3 million, and sell 4.2 million lbs with
a notional value of US$6.9 million), with the furthest contract maturing in March 2016. The net notional
value of the contracts outstanding at June 30, 2015 was approximately US$4.8 million.
The following table describes the realized and unrealized gain and loss on coffee futures contracts
recognized in the consolidated statements of operations:
(In $000s)
(unaudited)
3 months ended
June 30, 2015
Realized (gain) loss
Unrealized (gain) loss
$
$
(1,073) $
866
(207) $
3 months ended
June 30, 2014
1,814 $
(1,712)
102 $
6 months ended
June 30, 2015
(2,026) $
310
(1,716) $
6 months ended
June 30, 2014
2,280
(906)
1,374
At June 30, 2015, the net derivative assets related to these contracts was $1.1 million (December 31, 2014:
$0.9 million) and was comprised of derivatives on account, including margin. We estimated a 1 percent
Ten Peaks Coffee Company Inc.
19
change in the mark-to-market rate applied to the futures contracts as at June 30, 2015 would have resulted
in an estimated $60,000 change in income before taxes.
Foreign Currency Risk
We realize a significant portion of our sales in US dollars. We enter into forward exchange contracts to
manage our exposure to currency rate fluctuations and to minimize the effect of exchange rate fluctuations
on business decisions in the current operating year. These contracts relate to our future net cash flows in
US$ from sales. In addition, we enter into forward contracts to purchase US$ for coffee that we resell in
Canadian dollars.
At June 30, 2015, we had forward currency contracts to buy US$8.3 million and sell US$20.5 million
(December 31, 2014: buy US$4.5 million and sell US$18.3 million) from July 2015 through to June 2017 at
various Canadian exchange rates ranging from $1.0492 to $1.2812. The net notional value of the contracts
outstanding at June 30, 2015 was approximately US$12.2 million.
The following table describes the realized and unrealized gain and loss on foreign currency forward
contracts in the consolidated statement of operations:
(In $000s)
(unaudited)
3 months ended
June 30, 2015
Realized loss
Unrealized (gain) loss
$
$
176 $
(309)
(133) $
3 months ended
June 30, 2014
52 $
(359)
(307) $
6 months ended
June 30, 2015
3 $
825
828 $
6 months ended
June 30, 2014
8
(14)
(6)
At June 30, 2015, the net derivative liabilities related to these contracts was $1.6 million (December 31,
2014: liabilities of $0.8 million). We estimates a 100 basis point change in the US$ exchange rate relative to
the Canadian dollar under forward foreign exchange contracts would have resulted in an estimated
$112,000 change in income before taxes.
CRITICAL ACCOUNTING ESTIMATES
Measurement Uncertainty
The preparation of financial statements in accordance with IFRS requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Estimates are used when accounting for provisions for uncollectible accounts receivable, the
estimated useful life of long-lived assets and their amortization rates, provisions for inventory obsolescence,
the net realizable value of inventories, asset retirement obligations, impairment assessments for long-lived
assets, share-based compensation and income taxes. Actual results may be different from these estimates.
Ten Peaks Coffee Company Inc.
20
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.
Following is a discussion of certain estimates that were critical accounting estimates in the current or prior
period.
Inventories
In estimating the net realizable value of inventories, we take into account the most reliable evidence
available at the times the estimates are made. Ten Peaks’ core business is subject to volatility in the coffee
commodity price which fluctuates in response to fundamental commodity factors that affect supply, such as
weather and political policies in major coffee-producing countries, and demand, such as the economic
growth of major coffee-consuming countries.
In Q2 2015, we decreased our provision for inventory by $29,000 to reflect adjustments to estimated net
realizable value. Our provision as at June 30, 2015 is $13 thousand (December 31, 2014 - $42 thousand). In
any given year, the estimated provision reflects the current value of the NY’C’ even though we have
offsetting coffee hedges that would mitigate the cash flow impact of having to sell coffee at the current
market price. The replacement differential is also taken into account by origin and quality of coffee for each
type of coffee in our inventory, as are costs to convert raw goods to finished goods. The provision is based
on the downside risk for each type and quality of coffee, and does not take into account the fact that we
may be able to sell certain coffees in our inventory at a higher market price than book value.
CHANGES IN ACCOUNTING STANDARDS
The following amendments to accounting standards and interpretations have been issued and became
effective on January 1, 2015:
•
•
IFRS 7 (Amendment): Outlines the disclosures when applying IFRS 9, the new financial instruments
standard, which will become effective for annual periods beginning on or after January 1, 2015.
IFRSs (Amendment): The Annual Improvements to IFRSs 2010-2012 and 2011-2013 become
effective for annual periods beginning on or after July 1, 2014.
We have adopted these amended standards and interpretations, and we assessed that there was no impact
on our condensed consolidated interim financial statements.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
As management, we maintain disclosure controls and procedures designed to provide reasonable assurance
that information required to be disclosed in our annual filings, interim filings and other reports filed or
submitted under securities legislation are recorded, processed, summarized, and reported within the
required time periods. The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), after
evaluating the effectiveness of our disclosure controls and procedures as of June 30, 2015, have concluded
that disclosure controls and procedures, as of such date, were effective to provide reasonable assurance
that information required to be disclosed by us that we file or submit, is (i) recorded, processed,
summarized and reported within the time periods as required, and (ii) accumulated and made known to
management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
Ten Peaks Coffee Company Inc.
21
Management is responsible for establishing and maintaining adequate internal controls over financial
reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with IFRS. Under the supervision
and with the participation of management, including the CEO and CFO, we conducted an evaluation of the
design and effectiveness of our ICFR as of June 30, 2015, based on the original framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO 1992”). Based on this
evaluation, we have concluded that, as of June 30, 2015, Ten Peaks maintained effective ICFR.
While we believe that the current disclosure controls and procedures and ICFR provide a reasonable level of
assurance of achieving their objectives, it cannot be expected that existing disclosure controls and
procedures or internal financial controls will prevent all human error and circumvention or overriding of the
controls and procedures. A control system, no matter how well conceived or operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met.
There were no changes in our ICFR that occurred during the period beginning on April 1, 2015 and ended on
June 30, 2015 that have materially affected, or are reasonably likely to materially affect, Ten Peaks’ ICFR.
In 2013, the Committee of Sponsoring Organizations of the Treadway Commission released an updated
framework of internal control (“COSO 2013”). The new framework lists 17 principles (previously listed as
fundamental concepts under the original framework) which are organized into five components. COSO 2013
provides additional guidance with respect to risk assessment, requires consideration of how outsourced
service providers are monitored, and includes IT considerations in 14 of the 17 principles. We are currently
updating our control framework to COSO 2013, with a view to having this completed by the end of 2015.
SUBSEQUENT EVENTS
Equity Issue
On July 6, 2015, we announced that we had entered into an agreement with a syndicate of underwriters led
by Cormark Securities Inc., and including CIBC World Markets Inc. and PI Financial Corp., pursuant to which
they agreed to purchase, on a bought deal basis, 2,000,000 common shares at a price of $8.80 per share (the
“Offering”), for aggregate gross proceeds of approximately $17,600,000. The Offering closed on July 28,
2015. We also agreed to grant to the underwriters an option to purchase up to an additional 300,000
common shares from the treasury at the offering price exercisable at any time, in whole or in part, until the
date that is 30 days following the closing of the Offering. The net proceeds of the Offering are expected to
be used for growth opportunities including a plant expansion and/or construction of a new facility and
general working capital.
Payment of Dividend
Ten Peaks paid an eligible dividend of $0.0625 per share on July 15, 2015 to shareholders of record on June
30, 2015.
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