Description

EXECUTIVE SUMMARY

In the fourth quarter of 2016, we recorded our highest ever quarterly processing volumes, with volumes growing by 9% over the same period the previous year. The volume growth was made possible by the capacity expansion project that we undertook in the first quarter of 2016, which enabled us to increase our processing rates. Overall, our financial results for the fourth quarter were very strong, with our volumes, revenues, gross profit, operating income, net income and EBITDA all up compared to the same period in 2015 (Brones).

Grind the Bean Decaffeinated Coffee Company’s Business

COMPANY OBJECTIVES

We carry an inventory of premium-grade Arabica coffees that we purchase from the specialty green coffee trade, decaffeinate and then sell to our customers (our “regular” or “non-toll” business). Revenue from our regular business includes both processing revenue and green coffee cost recovery revenue.

We also decaffeinate coffee owned by our customers for a processing fee under toll arrangements (our “toll” business). The value of the coffee processed under toll arrangements does not form part of our inventory, our revenue or our cost of sales. Revenue from toll arrangements consists entirely of processing revenue. In 2016, approximately 19% 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.

BUSINESS OVERVIEW

Our growth in the last quarter of 2016 largely offset the volume declines we recorded during the first nine months of the year. Overall, processing volumes declined by 2% for the full year, which was in line with the guidance we provided in our third quarter report. Our annual gross profit, operating income and net income were all up over 2015, “with margin expansion more than offsetting the slight decline in processing volumes”.

Product Processes[KA1] 

Ten Peaks is a leading specialty coffee company doing business through two wholly owned subsidiaries, Grind the Bean Decaffeinated Coffee Company, Inc. (“SWDCC”) and Seaforth Supply Chain Solutions Inc. (“Seaforth”). SWDCC is a premium green coffee decaffeinated located in Burnaby, BC. SWDCC employs the proprietary GRIND THE BEAN® 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 GRIND THE BEAN® Process is the world’s only 100% chemical free water process for third-party coffee decaffeination (Hohpe).

Option Pricing Model

Inputs into the Black-Scholes Option Pricing Model to determine the fair value of the conversion option:

Share price     $7.37

Exercise price $8.25

Option life        7 years

Volatility           39%[KA2] 

Commodity Futures[KA3] 

We use derivative instruments to offset the effect of movements in the NY’C’ component of coffee pricing between the time we commit to purchase green coffee at a fixed price and the time we sell decaffeinated green coffee to our customers. Our commodity price risk mitigation strategy requires us to short sell a futures contract for one lot (37,500 lbs) of coffee on the Intercontinental Exchange whenever we agree to buy one lot of coffee from a supplier at a fixed price. The short sale protects us from changes in the price of coffee while purchase orders are outstanding and while we hold the coffee in inventory.

Balance Sheet                                          Year End                                               Percent of Total

Total Assets                                            $67,899                                                 20%

Long-term Liabilities                                 $17,773                                                 18%

Sales                                                       $81,896                                                 35%

Net Income                                              $5,772                                                   10%

Dividends                                                $2,256                                                   8%