2016 Annual Report
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2016 ANNUAL REPORT Ten Peaks Coffee Company Inc. To our Shareholders, If you’re a coffee lover, you’ve probably noticed that there are a lot more ways to enjoy great coffee these days. There’s the traditional drip-brewed, French press and espresso- based coffee drinks. There’s newer alternatives like “pour-over”, “chemex”, “aeropress” and “siphon” coffees (the production of which strongly resembles a very cool science experiment, complete with lava and lasers). And then there’s “cold brews”, a smooth, naturally sweet coffee made by steeping coarsely ground beans in cold, filtered water for 12 to 14 hours. Cold brewing has become so popular in recent years that it’s spawned an entire sub-category of specialty coffee drinks, including “nitro” cold brews served on tap. While the means are varied, the goal is the same; to create and serve really delicious coffee. We certainly love our coffee, but we also know that too much caffeine can be detrimental – to our mood, our sense of well-being or to our sleep patterns - especially when consumed late in the day. Until quite recently, that meant most people cut off their coffee intake by 2 pm. Our mission is to change that behaviour, both for the enjoyment of coffee consumers and for the profitability of our customers. With today’s broad proliferation of coffee formats and caffeine levels, there’s a wonderful opportunity to bring consumers through an all-day coffee experience, while enabling our customers to sell more coffee drinks and growing the entire coffee category around the world. Mornings mean caffeinated coffee and the pleasant kick-start associated with a strong brew. Then, in the afternoon, or after dinner, a fast-growing group of consumers is choosing decaffeinated coffee, simply because they enjoy the coffee-drinking experience. Those popular siphon, aeropress and cold brew coffees I mentioned earlier? They’re just as good decaffeinated and you don’t have to limit yourself to one cup to preserve a good night’s sleep. For the retail trade, the recent rise in consumer demand for decaffeinated coffees is a real game-changer. Café owners already have the equipment, the knowledge and the space required to make and sell great coffee. But now, instead of seeing a sharp drop in coffee sales after the noon hour, they’re seeing a shift toward later-day sales. Increasingly, thanks to premium decaffeinated coffees like ours, consumers are enjoying (and retailers are selling) “one more cup” – a welcome market trend that helps offset the high fixed costs associated with operating a coffee shop. Increased demand for delicious decaffeinated coffee drinks also creates an opportunity for retailers to charge a little bit more per cup. Producing our excellent, 100% chemical free SWISS WATER® Process decaffeinated coffees involves specialized expertise, state- of-the-art capital equipment and intensive labour to move the coffee in and out of Vancouver. This makes it more expensive to buy than regular coffee, with retailers often choosing to absorb the associated costs rather than charge their customers more for coffee that’s “missing” caffeine. Today’s consumers view decaf differently. For them, choosing great tasting coffee that’s free of caffeine often means reduced anxiety, avoiding the “jitters”, or a better night’s sleep. They see premium decaffeinated coffee as a value-add and they’re happy to pay an extra five or ten cents per cup for the clear benefits it delivers. Many coffee retailers are also noticing a change in how consumers make their purchasing decisions. Taste, quite naturally, is nearly always the number one consideration. But consumers also seek out products that are “clean” (i.e. unpolluted by chemicals), businesses that demonstrate a genuine passion for their work, and brands that are committed to social and environmental sustainability. SWISS WATER® Process decaffeinated coffees tick every box, positioning our retail partners to win the approval of savvy customers who pay close attention to the values behind the product and who reward good companies with their shopping dollars. So, what’s driving this shift in attitude? A shift in the consumers themselves. Today’s most avid decaf drinkers are millennials, or people aged 18 to 37. That’s a big change from our target market of 20 years ago, which comprised aging baby boomers, pregnant women and people who had been advised by their doctor to avoid caffeine. It also bodes well for our future as, at 1.8 billion strong, millennials are now the world’s biggest generation. They spend more than $2.5 trillion annually, will make up 75% of the global workforce by 2025, and lead gourmet coffee consumption, with people aged 18 to 24 the number one consumers of decaffeinated coffee. This is a market that can change the coffee category for years to come. Join us for that ride as we help people have “one more” delicious cup of coffee. Sincerely, Frank Dennis President and CEO Ten Peaks Coffee Company Inc. Ten Peaks Coffee Company Inc. 1 Management’s Discussion and Analysis – Amended and Restated This Management’s Discussion & Analysis (“MD&A”) of Ten Peaks Coffee Company Inc. (“Ten Peaks” or the “Company”), dated as of April 21, 2017, provides a review of the financial results for the three and 12 months ended December 31, 2016 relative to the comparable periods of 2015. The three-month period represents the fourth quarter (“Q4”) of our 2016 fiscal year. This MD&A should be read in conjunction with the Company’s amended and restated consolidated financial statements for the year ended December 31, 2016, and the Annual Information Form, both of which are available at www.sedar.com . Subsequent to the issuance of the previously filed consolidated financial statements (filed on SEDAR on March 15, 2017), management discovered an error relating to the amount of unrealized gain on derivative financial instruments presented within cash from operating activities before changes in non-cash working capital accounts . The financial statements have been amended and restated and refiled to correct this error. The correction of such error resulted in a decrease in unrealized loss (gain) on derivative financial instruments and the corresponding subtotal before change in non-cash working capital relating to operating activities of $3.5 million, and a corresponding increase of $3.5 million in change in non-cash working capital relating to operating activities. The restatement did not impact net cash from operating activities, or any other cash flows for the years presented. Importantly, the restatement only affected the consolidated statement of cash flows. There was no change to the consolidated statements of financial position, income, comprehensive income or the changes in equity for the years presented, and there was no impact on basic or diluted earnings per share in the period. All figures in this MD&A have been restated to reflect the restatement. All financial information is presented in Canadian dollars, unless otherwise specified. FORWARD-LOOKING STATEMENTS This MD&A contains forward-looking statements, including statements regarding the future success of our business and market opportunities. Forward-looking statements typically contain words such as “believes”, “expects”, “anticipates”, “continue”, “could”, “indicates”, “plans”, “will”, “intends”, “may”, “projects”, “schedule”, “would” or similar expressions suggesting future outcomes or events, although not all forward- looking statements contain these identifying words. Examples of such statements include, but are not limited to, statements concerning: (i) expectations regarding Ten Peaks’ future success in various geographic markets; (ii) future financial results including anticipated future sales and processing volumes; (iii) future dividends; (iv) the expected actions of the third parties described herein; (v) factors affecting the coffee market including supplies and commodity pricing; and (vi) the business and financial outlook of Ten Peaks. In addition, this MD&A contains financial outlook information that is intended to provide general guidance for readers based on our current estimates, but which is based on numerous assumptions and may prove to be incorrect. Therefore, such financial outlook information should not be relied upon by readers. These statements are neither promises nor guarantees, but involve known and unknown risks and uncertainties that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed in or implied by these statements. These risks include, but are not limited to, risks related to processing volumes and sales growth, operating results, supply of coffee, general industry conditions, commodity price risks, technology, competition, foreign exchange rates, construction timing, costs and financing of capital projects, general economic conditions and those factors described herein under the heading ‘Risks & Uncertainties’. Ten Peaks Coffee Company Inc. 2 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.