Andrew Peller Limited — Interim / Quarterly Report 2022

Nov 11, 2021

Andrew Peller Limited

Condensed Interim Consolidated Financial Statements

September 30, 2021

ANDREW PELLER LIMITED

Condensed Consolidated Balance Sheets

Unaudited

These financial statements have not been reviewed by our auditors

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September 30 March 31
2021 2021
(in thousands of Canadian dollars) $ $
Assets
Current Assets
Cash 12,613 2,737
Accounts receivable 30,829 28,896
Inventory 180,113 178,727
Biological assets 4,406 2,815
Prepaid expenses and other assets 6,511 4,879
Income taxes receivable 5,436 5,973
Current portion of derivative financial instruments (note 7) 222 -
Assets held for sale (note 9) - 1,275
240,130 225,302
Property, plant, and equipment 224,761 223,931
Intangible assets 41,162 39,650
Goodwill 53,638 53,638
559,691 542,521
Liabilities
Current Liabilities
Accounts payable and accrued liabilities 62,079 46,487
Dividends payable 2,587 2,404
Current portion of lease obligations 3,877 3,826
Current portion of derivative financial instruments (note 7) 1,415 1,901
69,958 54,618
Long-term debt 170,369 174,544
Long-term derivative financial instruments (note 7) - 717
Lease obligations 13,071 13,987
Post-employment benefit obligations 3,015 3,316
Deferred income taxes 30,507 29,765
286,920 276,947
Shareholders' Equity
Capital stock (note 8) 27,290 27,020
Contributed surplus 5,166 4,950
Retained earnings 243,183 236,773
Accumulated other comprehensive loss (2,868) (3,169)
272,771 265,574
559,691 542,521
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Events after the reporting period (note 11)

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

ANDREW PELLER LIMITED

Condensed Consolidated Statements of Earnings

Unaudited

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For the three For the three For the six For the six
These financial statements have not been reviewed by our auditors months ended months ended months ended months ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
(in thousands of Canadian dollars, except per share amounts) $ $ $ $
Sales 99,224 104,410 191,621 202,850
Cost of goods sold (note 4) 56,816 60,245 111,952 115,958
Amortization of plant and equipment used in production 2,411 2,616 4,516 5,217
Gross profit 39,997 41,549 75,153 81,675
Selling and administration (note 4) 26,587 21,727 51,935 41,884
Amortization of plant, equipment, and intangibles used in selling and
administration 2,862 1,844 5,871 3,497
Interest 2,478 1,813 4,751 3,852
Net unrealized (gain) loss on derivative financial instruments (note 7) (1,037) (540) (1,425) 191
Gain on sale of land and property (note 9) (7,518) - (7,518) -
Other expense 26 195 367 881
Earnings before income taxes 16,599 16,510 21,172 31,370
Income taxes
Current 3,059 4,804 4,155 8,943
Deferred 450 (968) 637 (1,449)
3,509 3,836 4,792 7,494
Net earnings for the period 13,090 12,674 16,380 23,876
Net earnings per share
Basic
Class A shares 0.31 0.30 0.39 0.56
Class B shares 0.27 0.26 0.34 0.49
Diluted
Class A shares 0.31 0.30 0.38 0.56
Class B shares 0.27 0.26 0.33 0.49
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The accompanying notes are an integral part of these condensed interim consolidated financial statements.

ANDREW PELLER LIMITED

Condensed Consolidated Statements of Comprehensive Income Unaudited These financial statements have not been reviewed by our auditors September 30, 2021 (in thousands of Canadian dollars) $ Net earnings for the period 13,090 Items that are never reclassified to net earnings Net actuarial gains (losses) on post-employment benefit plans (37) Deferred income taxes 10 Other comprehensive income (loss) for the year (27) Net comprehensive income for the period 13,063 For the three months ended	September 30, 2020 $ 12,674 3 (1) 2 12,676 For the three months ended	September 30, 2021 $ 16,380 406 (105) 301 16,681 For the six months ended	September 30, 2020 $ 23,876 (1,424) 370 (1,054) 22,822 For the six months ended

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

ANDREW PELLER LIMITED

Condensed Consolidated Statements of Changes in Equity For the six months ended September 30, 2021 and 2020

Unaudited

These financial statements have not been reviewed by our auditors

(in thousands of Canadian dollars, except per share amounts)

Balance at April 1, 2020 Net earnings for the period Net actuarial losses (net of deferred tax recovery) Net comprehensive income for the period Share-based compensation (note 10) Dividends (Class A $0.1076 per share, Class B $0.0936 per share) Balance at September 30, 2020 Balance at April 1, 2021 Net earnings for the period Net actuarial gains (net of deferred tax provision) Net comprehensive income for the period Repurchase and cancellation of class A non-voting shares (note 8) Exercise of share options and issuance of Class A non-voting shares (note 10) Share-based compensation (note 10) Dividends (Class A $0.123 per share, Class B $0.107 per share) Balance at September 30, 2021

Capital stock Contributed surplus Retained earnings Accumulated other comprehensive loss Total shareholders' equity $ $ $ $ $ 26,014 4,834 218,265 (3,588) 245,525 - - - 23,876 - 23,876 - - - (1,054) (1,054) - - 23,876 (1,054) 22,822 - 567 - - 567 - - (4,580) - (4,580) 26,014 5,401 237,561 (4,642) 264,334 27,020 4,950 236,773 (3,169) 265,574 - - 16,380 - 16,380 - - - 301 301 - - 16,380 301 16,681 (449) - (4,761) - (5,210) 719 (719) - - - - 935 - - 935 - - (5,209) - (5,209) 27,290 5,166 243,183 (2,868) 272,771

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

ANDREW PELLER LIMITED Condensed Consolidated Statements of Cash Flows

Unaudited These financial statements have not been reviewed by our auditors

(in thousands of Canadian dollars) Cash provided by (used in) Operating activities Net earnings for the period Adjustments for: Loss (gain) on disposal of PP&E and intangibles Amortization of plant, equipment, and intangible assets Amortization of deferred financing costs Interest expense Provision for income taxes Post-employment benefits Net unrealized loss (gain) on derivative financial instruments Share-based compensation Interest paid Income taxes paid Changes in non-cash working capital items related to operations (note 5) Investing activities Proceeds from disposal of property, plant and equipment Purchase of property, plant and equipment Purchase of intangibles Financing activities Decrease in bank indebtedness Principal payments on lease obligations Repayment of long-term debt Drawings on long-term debt Repurchase and cancellation of class A non-voting shares Dividends paid Increase in cash during the period Cash, beginning of period Cash, end of period	September 30, 2021 $ 16,380 (7,518) 10,387 15 4,751 4,792 105 (1,425) 809 (3,665) (3,618) 21,013 9,243 30,256 8,793 (8,510) (3,442) (3,159) - (1,985) (17,000) 12,000 (5,210) (5,026) (17,221) 9,876 2,737 12,613 For the six months ended	September 30, 2020 $ 23,876 616 8,714 - 3,852 7,494 (36) 191 381 (3,713) (5,651) 35,724 5,464 41,188 - (3,655) (9,701) (13,356) (16,632) (1,700) (4,924) - - (4,576) (27,832) - - - For the six months ended

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)

1 Nature of operations

Andrew Peller Limited (the “Company”) produces and markets wine, spirits, craft beer and wine related products. The Company’s products are produced and sold predominantly in Canada. The Company is incorporated under the Canada Business Corporations Act and is domiciled in Canada. The address of its head office is 697 South Service Road, Grimsby, Ontario, L3M 4E8.

The COVID-19 pandemic has continued to impact the financial results of the Company as government-mandated closures of restaurants and hospitality businesses and restricted international travel remained in place for part of the six-month period ended September 30, 2021. Uncertainty resulting from the ongoing pandemic will continue to depend on future developments, including the duration of the pandemic and its impact on the overall economy and related advisories and restrictions.

2 Significant accounting policies

(A) Basis of presentation

These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of condensed interim financial statements, including International Accounting Standard (“IAS”) 34 – Interim Financial Reporting. The condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the years ended March 31, 2021 and 2020, which have been prepared in accordance with IFRS as issued by the IASB.

The note disclosures for these condensed interim consolidated financial statements only present material changes to the disclosure found in the Company’s audited consolidated financial statements for the years ended March 31, 2021 and 2020. Changes to the Company’s accounting policies from those disclosed in its consolidated financial statements for the years ended March 31, 2021 and 2020 are described in note 2 (B), recently adopted accounting pronouncements.

These condensed interim consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency and dollar amounts have been rounded to the nearest thousand, except per share amounts.

These condensed interim consolidated financial statements were approved by the Board of Directors on November 10, 2021.

(B) Recently adopted accounting pronouncements

IFRS 16, Leases

This standard has been amended to provide lessees with an optional exemption from assessing whether a rent concession related to COVID-19 is a lease modification. This amendment is effective for annual periods beginning on or after June 1, 2020. At this time, the Company has not received rent concessions related to COVID-19 and therefore, this amendment has not had an impact on the consolidated financial statements.

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Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)

London Inter-bank Offered Rate (LIBOR) reform with amendments to IFRS 9, IFRS 7, Financial Instruments: Disclosures and IFRS 16.

In August 2020, the IASB issued Interest Rate Benchmark Reform Phase 2 (the Reform Phase 2), which complemented the Reform Phase 1 and amended various standards requiring interest rates or interest rate calculations. The Reform Phase 2 provides guidance on the impacts on the financial statements after the LIBOR reform and its replacement with alternative benchmark rates. The amendments are effective for annual periods beginning on or after January 1, 2021. The adoption of these amendments did not have a significant impact on the consolidated financial statements.

(C) Recently issued accounting pronouncements

IAS 16, Property, Plant and Equipment

This standard has been amended to prohibit an entity from deducting from the cost of an item of property, plant and equipment any proceeds received from selling items produced while the entity is preparing the asset for its intended use, clarify that an entity is “testing whether the asset is functioning properly” when it assesses the technical and physical performance of the asset and require certain related disclosures. The amendments are effective for annual periods beginning on or after January 1, 2022. The Company has not yet assessed the impact of the amendments on the consolidated financial statements.

IAS 37, Provisions

This standard has been amended to clarify that, before a separate provision for an onerous contract is established, an entity recognizes an impairment loss that has occurred on assets used in fulfilling the contract, rather than on assets dedicated to that contract and to clarify the meaning of costs to fulfil a contract. The amendments are effective for annual periods beginning on or after January 1, 2022. The Company has not yet assessed the impact of the amendments on the consolidated financial statements.

IFRS 9, Financial Instruments

This standard has been amended to address which fees should be included in the 10% test for derecognition of financial liabilities. This amendment is effective for annual periods beginning on or after January 1, 2022. The Company has not yet assessed the impact of the amendment on the consolidated financial statements.

IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors

This standard has been amended to clarify the classification of liabilities as current or non-current depending on the rights that exist at the end of the reporting period. Classification is unaffected by the expectations of the entity or events after the reporting date. The amendment also clarifies the meaning of settlement of a liability. This amendment is effective for annual periods beginning on or after January 1, 2023. The Company has not yet assessed the impact of the amendment on the consolidated financial statements.

IAS 12, Income Taxes

This standard has been amended to require companies to recognize deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. The Company has not yet assessed the impact of the amendment on the consolidated financial statements.

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Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)

3 Seasonality

The second and third quarters of the Company’s fiscal year are historically the largest due to increased activity at the Company's estate properties and increased consumer purchasing of the Company’s products during the holiday season. However, the COVID-19 pandemic may cause unusual fluctuations in the Company’s results and consequently, quarterly results for fiscal 2022 may not follow historical trends.

4 Expenses

The nature of the expenses included in selling and administration and cost of goods sold are as follows:

Raw materials and consumables Employee compensation and benefits Advertising, promotion and distribution Occupancy Repairs and maintenance Other external charges	For the three months ended September 30, 2021 For the three months ended September 30, 2020 For the six months ended September 30, 2021 For the six months ended September 30, 2020 $ 42,933 $ 46,334 $ 84,702 $ 89,745 21,639 19,103 41,968 38,100 8,449 5,488 16,363 10,301 2,161 3,036 4,065 5,377 2,091 1,921 4,035 2,793 6,130 6,090 12,754 11,526
	$83,403 $81,972 $163,887 $157,842

5 Non-cash working capital items

The change in non-cash working capital items related to operations is comprised of the change in the following items:

Accounts receivable Inventory Biological assets Prepaid expenses and other assets Accounts payable and accrued liabilities	For the six months ended September 30, 2021 For the six months ended September 30, 2020 $ (1,933) $ 4,177 (1,386) 4,180 (1,591) (3,150) (1,632) (1,425) 15,785 1,682
	$9,243$5,464

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Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)

6 Related parties and management compensation

The compensation expense recorded for directors and members of the Executive Management Team of the Company was $1,733 (2020 - $1,754) for the three months ended September 30, 2021 and $3,367 (2020 - $3,068) for the six months ended September 30, 2021. The compensation expense consists of amounts that will primarily be settled within twelve months of being earned.

7 Financial instruments

Fair value

The fair value of accounts receivable, accounts payable and accrued liabilities and dividends payable approximates their carrying values because of the short-term maturity of these instruments.

The fair value of bank indebtedness and long-term debt is equivalent to the carrying value because the variable interest rate is comparable to market rates. The fair value of the interest rate swaps used to fix the interest rate on long-term debt is included in the current and long-term derivative financial instruments in the condensed consolidated balance sheets.

The fair value of foreign exchange forward contracts is determined based on the difference between the contract rate and the forward rate at the date of valuation and is included in the current portion of derivative financial instruments in the condensed consolidated balance sheets.

The fair value of interest rate swaps is determined based on the difference between the fixed interest rate in the contract that will be paid by the Company and the forward curve of the floating interest rates that are expected to be paid by the counterparty. The fair values of foreign exchange forward contracts and the interest rate swaps are adjusted to reflect any changes in the Company’s or the counterparty’s credit risk.

Fair value estimates are made at a specific point in time, using available information about the instrument. These estimates are subjective in nature and often cannot be determined with precision.

The net unrealized (gain) loss on derivative financial instruments is comprised of:

Unrealized gains on interest rate swaps Unrealized (gains) losses on foreign exchange forward contracts	For the three months ended September 30, 2021 For the three months ended September 30, 2020 For the six months ended September 30, 2021 For the six months ended September 30, 2020 $ (403) $ (370) $ (899) $ (382) (634) (170) (526) 573
	$ (1,037) $ (540) $ (1,425) $191

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Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)

The fair value measurements of the Company’s financial instruments are classified in the hierarchy below according to the significance of the inputs used in making the fair value measurements.

Interest rate swap liability Foreign exchange forward contracts asset Interest rate swap liability Foreign exchange forward contracts liability	September 30, 2021
	Quoted prices in active markets for identical assets (Level 1) Significant observable inputs other than quoted prices (Level 2) Significant unobservable inputs (Level 3) $ - $ 1,415 $ - - (222) - March 31, 2021
	Quoted prices in active markets for identical assets (Level 1) Significant observable inputs other than quoted prices (Level 2) Significant unobservable inputs (Level 3) $ - $ 2,314 $ - - 304 -

There were no transfers of financial instruments between levels during the quarter.

8 Normal course issuer bid

On March 4, 2021, the Company announced its normal course issuer bid (the “NCIB”) to repurchase for cancellation up to 1,773,896 Class A non-voting common shares, representing 5% of Class A non-voting common shares issued and outstanding as at the close of markets on February 25, 2021, during the 12-month period from March 8, 2021 to March 7, 2022.

The total number of Class A non-voting common shares repurchased for cancellation under the NCIB during the six-month period ended September 30, 2021 amounted to 598,600 Class A non-voting common shares, at a weighted average price of $8.70 per Class A non-voting common share, for a total cash consideration of $5,210. For the six-month period ended September 30, 2021, the Company’s share capital was reduced by $449 and the remaining $4,761 was accounted for as a decrease to retained earnings.

9 Sale of land and property

During 2020, the Company listed for sale plant assets in Port Coquitlam, British Columbia, as a result of the consolidation of production assets. The assets listed for sale had a net book value of $1,275. On September 28, 2021, the Company completed the sale of the assets for total consideration, net of selling costs, of $8,793 resulting in a realized gain on sale of $7,518.

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Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)

10 Share based compensation

On September 13, 2017, the Company established a share based compensation plan comprised of stock options, performance share units (PSUs), restricted share units (RSUs) and deferred share units (DSUs). The impact of the share based compensation expense recorded for the six months ended September 30, 2021 and 2020 is summarized as follows:

1,316,499 stock options (March 31, 2021 – 1,041,800) (a) 292,731 performance share units (March 31, 2021 – 218,562) (b) 62,750 restricted share units (March 31, 2021 – nil) (c) 57,799 deferred share units (March 31, 2021 – 65,669) (d)	For the six months ended September 30, 2021 For the six months ended September 30, 2020 $ 445 $ 286 343 95 21 - - -
	$809 $381

The stock options, PSUs, RSUs, and DSUs are equity settled and as such, the expense associated with these instruments is recorded as share based compensation expense through the condensed consolidated statements of earnings with a corresponding entry made to contributed surplus on the condensed consolidated balance sheets.

The maximum number of shares that may be issued under all share based compensation arrangements implemented by the Company, including the stock option plan, the PSU plan, the RSU plan and the DSU plan, may not exceed 10% of the total number of Class A non-voting common shares issued and outstanding from time to time. As at September 30, 2021, the Company had 3,217,918 Class A non-voting common shares reserved for issuance under the share based compensation arrangements.

a) Stock options

The Company has a stock option plan under which options to purchase Class A non-voting common shares may be granted to officers and employees of the Company. Options granted under the plan have an exercise price of not less than the volume weighted average trading price of the Class A non-voting common shares where they are listed for the five trading days prior to the date of the grant. Options granted vest in tranches, equally over a three-year period on each anniversary of the grant date, commencing on the first anniversary of the grant date.

Balance – Beginning of year Issued Forfeited Balance – End of year Exercisable	September 30, 2021 Number of options Weighted average exercise price per share $ 1,041,800 11.89 290,700 8.75 (16,001) (11.12)	September 30, 2020 Number of options Weighted average exercise price per share $ 765,200 14.19 494,900 9.29 (209,567) (14.08) 1,050,533 11.90 334,953 13.88
		Number of options 765,200 494,900 (209,567)
	1,316,499 11.20	1,050,533
	622,717 12.95	334,953

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Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)

For options granted during the three and six months ended September 30, 2021, the fair value was estimated on the grant date using the Black-Scholes fair value option pricing model using the following weighted average assumptions:

Weighted average fair value per share option	$1.89
Expected volatility(1)	24.68%
Dividend yield	2.19%
Risk-free interest rate	1.19%
Weighted average expected life in years	10

(1) Expected volatility was determined using historical volatility

b) PSU plan

The Company has established a PSU plan for employees and officers of the Company. PSUs represent the right to receive Class A non-voting common shares settled by the issuance of treasury shares or shares purchased on the open market. PSUs vest in full at the end of the third fiscal year after the grant date. The number of units that will vest is determined based on the achievement of certain performance conditions (i.e. financial targets) established by the Board of Directors and are adjusted by a factor, which ranges from 0.5 to 2.0, depending on the achievement of the targets established. Therefore, the number of units that will vest and be exchanged for Class A non-voting common shares may be higher or lower than the number of units originally granted to a participant.

Balance – Beginning of year Issued Exercised Forfeited Balance – End of year	September 30, 2021 Number of options Weighted average exercise price per share $ 218,562 12.44 125,320 8.75 (28,416) (17.16) (22,735) (15.97)	September 30, 2020 Number of options Weighted average exercise price per share $ 219,876 14.20 105,830 9.29 (44,419) (11.74) (60,405) (14.15) 220,882 12.46
	292,731 10.13

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Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)

c) RSU plan

The Company has established a RSU plan for employees and officers of the Company. RSUs represent the right to receive Class A non-voting common shares settled by the issuance of treasury shares or shares purchased on the open market. RSUs will vest ratably over the Restriction Period, as to one-third of the RSUs on each anniversary of the grant date, commencing on the first anniversary of the grant date.

Balance – Beginning of year Issued Balance – End of year	September 30, 2021 Number of options Weighted average exercise price per share $ - - 62,750 8.75	September 30, 2020
		Number of options Weighted average exercise price per share $ - - - -
	62,750 8.75	- -

d) DSU plan

The Company has established a DSU plan for employees, officers and Directors of the Company. DSUs represent the right to receive Class A non-voting common shares settled by the issuance of treasury shares or shares purchased on the open market. DSUs vest immediately but are only exercisable when the participant’s employment with the Company ceases, or when the participant is no longer a Director of the Company.

Subsequent to year end, the Board of Directors were offered director fees in the form of DSUs which resulted in a reclassification from accounts payable to contributed surplus in the year.

Balance – Beginning of year Issued Exercised Balance – End of year	September 30, 2021 Number of options Weighted average exercise price per share $ 65,669 14.40 12,770 9.35 (20,640) (11.19)	September 30, 2020
		Number of options Weighted average exercise price per share $ 72,459 17.19 19,840 9.48 (26,630) (18.22)
	57,799 14.43	65,669 14.40

11 Subsequent event

On November 10, 2021, the Company amended and restated its credit agreement with its lenders to amend its interest charge coverage ratio financial covenant for the three-month period ending December 31, 2021.

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