KP Tissue Inc. — Interim / Quarterly Report 2021

Aug 12, 2021

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KP TISSUE INC.

UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE 3-MONTH AND 6-MONTH PERIODS ENDED JUNE 30, 2021 AND JUNE 30, 2020

KP Tissue Inc. 2 Prologis Blvd., Suite 500, Mississauga, Ontario L5W 0G8

www.kptissueinc.com

KP Tissue Inc. Unaudited Condensed Statements of Financial Position

(tabular amounts are in thousands of Canadian dollars)

Assets Current assets Distributions receivable Receivable from Partnership Income tax recoverable Non-current assets Investment in associate (note 4) Total Assets Liabilities Current liabilities Dividend payable (note 6) Current portion of advances from Partnership (note 5) Income tax payable Non-current liabilities Deferred income taxes (note 5) Total liabilities Equity Common shares (note 6) Contributed surplus Deficit Accumulated other comprehensive income Total equity Total liabilities and equity Subsequent events (note 6)	June 30, 2021 $	December 31, 2020 $
	1,768 24 136	1,755 21 -
	1,928 76,078	1,776 69,537 71,313 1,755 874 1,722
	78,006
	1,768 897 -
	2,665 999	4,351 634
	3,664	4,985
	21,106 144,819 (103,510) 11,927	20,355 144,819 (111,907) 13,061
	74,342	66,328
	78,006	71,313

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

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KP Tissue Inc. Unaudited Condensed Statements of Comprehensive Income (Loss)

For the 3-month and 6-month periods ended June 30, 2021 and June 30, 2020

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

Equity income (loss) (note 4) Dilution gain (note 6) Income (loss) before income taxes Income taxes (note 5) Net income (loss) for the period Other comprehensive income (loss) net of tax expense (recovery) (note 7) Items that will not be reclassified to net income (loss): Remeasurements of pensions Remeasurements of post-retirement benefits Items that may be subsequently reclassified to net income (loss): Cumulative translation adjustment Total other comprehensive income (loss) for the period Comprehensive income (loss) for the period Basic earnings (loss) per share Weighted average number of shares outstanding	3-month period ended June 30, 2021 $	3-month period ended June 30, 2020 $ 2,925 231 3,156 3,279	6-month period ended June 30, 2021 $	6-month period ended June 30, 2020 $
	(1,002) 82		(1,347) 162	2,800 451
	(920) 313		(1,185) (1,160)	3,251 1,673
	(1,233)	(123)	(25)	1,578
	(443) (127) (589)	(12,347) (906) (1,950)	11,552 389 (1,134)	(3,655) (309) 2,131
	(1,159)	(15,203)	10,807	(1,833)
	(2,392)	(15,326)	10,782	(255)
	(0.13)	(0.01)	-	0.16
	9,817,731	9,689,578	9,798,757	9,672,481

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

2

KP Tissue Inc. Unaudited Condensed Statements of Changes in Equity

For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars, except share amounts)

As of January 1, 2020 Issuance of common shares (note 6) Dividends payable (note 6) Dividends paid (note 6) Fair value adjustment (note 6) Remeasurements of pensions Remeasurements of post-retirement benefits Cumulative translation adjustment Net income for the period As of June 30, 2020 As of January 1, 2021 Issuance of common shares (note 6) Dividends payable (note 6) Dividends paid (note 6) Fair value adjustment (note 6) Remeasurements of pensions Remeasurements of post-retirement benefits Cumulative translation adjustment Net loss for the period As of June 30, 2021	Common shares	Common shares	Contributed surplus $ 144,819 - - - - - - - -	Deficit $	Accumulated other comprehensive income Total equity $ $
	#	$
	9,626,153 68,676 - - - - - - -	18,997 679 - - (7) - - - -		(100,696) - (1,745) (1,739) 7 (3,655) (309) - 1,578	13,997 77,117 - 679 - (1,745) - (1,739) - - - (3,655) - (309) 2,131 2,131 - 1,578 16,128 74,057
	9,694,829	19,669	144,819	(106,559)
	9,751,771 71,967 - - - - - - -	20,355 761 - - (10) - - - -	144,819 - - - - - - - -	(111,907) - (1,768) (1,761) 10 11,552 389 - (25)	13,061 66,328 - 761 - (1,768) - (1,761) - - - 11,552 - 389 (1,134) (1,134) - (25)
	9,823,738	21,106	144,819	(103,510)	11,927 74,342

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

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KP Tissue Inc. Unaudited Condensed Statements of Cash Flows

For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars)

Cash flows from (used in) operating activities Net income (loss) for the period Items not affecting cash Equity (income) loss (note 4) Dilution gain (note 6) Income taxes (note 5) Total items not affecting cash Net change in non-cash working capital (note 9) Tax payments Tax Distribution received Advances received Net cash from (used in) operating activities Cash flows from investing activites Partnership unit distributions received Net cash from investing activities Cash flows used in financing activities (note 10) Dividends paid Net cash used in financing activities Increase (decrease) in cash and cash equivalents during the period Cash and cash equivalents - Beginning of period Cash and cash equivalents - End of period	6-month period ended June 30, 2021 $	6-month period ended June 30, 2020 $
	(25) 1,347 (162) (1,160)	1,578 (2,800) (451) 1,673 (1,578) 94 (1,235) 781 360
	25 (3) (2,632) 1,738 897
	-	-
	2,755	2,793
	2,755	2,793
	(2,755)	(2,793)
	(2,755)	(2,793)
	- -	- -
	-	-

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

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KP Tissue Inc. Notes to Unaudited Condensed Financial Statements

For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars, except share amounts)

1 General information

KP Tissue Inc. (KPT or the Corporation) was incorporated by articles of incorporation under the Canadian Business Corporations Act on October 1, 2012. As of June 30, 2021, the Corporation held a 14.6% (December 31, 2020 – 14.7%) interest in Kruger Products L.P. (KPLP or the Partnership), whose principal business is to produce, distribute, market and sell a wide range of disposable tissue products, including bathroom tissue, facial tissue, paper towels and napkins for both the consumer and away-from-home markets in North America. The Corporation’s headquarters are located in Mississauga, Ontario, Canada.

2 Basis of presentation

These unaudited condensed financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) applicable to the preparation of interim financial statements, including International Accounting Standards (IAS) 34 – Interim Financial Reporting as issued by the International Accounting Standards Board (IASB), and with interpretations of the International Financial Reporting Committee which the Canadian Accounting Standards Board has approved for incorporation into Part 1 of the CPA Canada Handbook - Accounting. These unaudited condensed financial statements should be read in conjunction with the annual audited financial statements of the Corporation for the year ended December 31, 2020.

These unaudited condensed financial statements were approved by the board of directors on August 11, 2021.

3 Critical accounting estimates and judgments

The preparation of these unaudited condensed financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities in the unaudited condensed financial statements and the disclosure of contingencies at the dates of the unaudited condensed statement of financial position, and the reported amounts of revenues and expenses during the reporting period. On a regular basis and with the information available, management reviews its estimates and judgements, including those related to fair value and the basis of accounting. Actual results could differ from those estimates. When adjustments become necessary, they are reported in earnings in the period in which they occur.

The estimates and judgement applied by management that most significantly affect the unaudited condensed financial statements are the same as the ones that applied to the annual audited financial statements for the year ended December 31, 2020, updated for the following:

COVID-19

During the 6-month period ended June 30, 2021, management considered the impact of COVID-19 on the Corporation’s critical accounting estimates and judgments, including the Corporation’s assessment of triggering events with respect to its impairment analysis for its investment in associate. Management concluded the future forecasts that support the investment value had not changed significantly and therefore no impairment adjustment was made for the 6-month period ended June 30, 2021. While management concluded that a triggering event did not occur during the 6-month period ended June 30, 2021, the length and severity of the COVID-19 pandemic could result in further impairment charges.

5

KP Tissue Inc. Notes to Unaudited Condensed Financial Statements

For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars, except share amounts)

4 Investment in associate

Changes in the carrying amount of the investment were as follows:

As of January 1, 2020 Investment in associate Share of income Depreciation of fair value increments Share of other comprehensive loss Dilution gain Tax Distribution Partnership unit distributions As of June 30, 2020 As of January 1, 2021 Investment in associate Share of income Depreciation of fair value increments Share of other comprehensive income Dilution gain Tax Distribution Partnership unit distributions As of June 30, 2021	$ 81,052 679 5,579 (2,779) (3,541) 451 (781) (3,484)
	77,176
	69,537 761 1,319 (2,666) 13,106 162 (2,612) (3,529)
	76,078

The equity income (loss) was comprised of the following components:

Share of income Depreciation of fair value increments	3-month period ended June 30, 2021 $	3-month period ended June 30, 2020 $	6-month period ended June 30, 2021 6-month period ended June 30, 2020 $ $ 1,319 5,579 (2,666) (2,779) (1,347) 2,800
	327 (1,329)	4,316 (1,391)
	(1,002)	2,925

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KP Tissue Inc. Notes to Unaudited Condensed Financial Statements For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars, except share amounts)

The following summarizes financial information about the assets, liabilities, revenue and net income of KPLP, in which the Corporation holds a 14.6% interest as of June 30, 2021 (December 31, 2020 – 14.7%). The financial information was derived from the unaudited condensed consolidated financial statements of KPLP for the 6-month period ended June 30, 2021. The assets and liabilities disclosed include the fair value adjustments made to the carrying amount of the assets and liabilities of the associate on its acquisition.

Current assets Non-current assets Liabilities to non-unitholders Partnership units liability Net assets Revenue Net income Other comprehensive income (loss) Total comprehensive income (loss)	KPLP basis of accounting $ 514,299 1,555,137 1,519,414 174,745 375,277 3-month period ended June 30, 2021 $ 339,361 2,247 (8,753) (6,506)	FV increment KPT basis of accounting $ $ - 514,299 369,143 1,924,280 - 1,519,414 - 174,745 6-month period ended June 30, 2021 $ 649,740 9,006 91,018 100,024 June 30, 2021

Current assets Non-current assets Liabilities to non-unitholders Partnership units liability Net assets Revenue Net income Other comprehensive loss Total comprehensive income (loss)		December 31, 2020
	KPLP basis of accounting $ 447,047 1,504,277 1,477,498 185,424 288,402 3-month period ended June 30, 2020 $ 386,763 28,904 (125,408) (96,504)	FV increment KPT basis of accounting $ $ - 447,047 388,562 1,892,839 - 1,477,498 - 185,424 6-month period ended June 30, 2020 $ 761,909 37,292 (25,816) 11,476

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KP Tissue Inc. Notes to Unaudited Condensed Financial Statements

For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars, except share amounts)

The following shows the reconciliation of KPT’s portion of KPLP equity to the investment recorded in KPT:

	June 30, 2021	December 31, 2020
	$	$
KPLP consolidated equity	375,277	288,402
Add back: Inception value of Partnership units liability	118,562	118,562
Less: Equity pertaining to Kruger Inc. and KPGP	(347,945)	(272,950)
Equity pertaining to KPT	145,894	134,014
Investment in associate recorded in KPT	76,078	69,537
Reconciling difference	69,816	64,477
Reconciling items since inception:
Equity issuance costs	(11,110)	(11,110)
Depreciation of FV increments	51,299	48,633
Currency translation adjustment in fair value increments	(2,907)	(3,130)
Tax Distribution	7,268	4,656
Gain on exercise of overallotment option	(375)	(375)
Dilution gain	(2,359)	(2,197)
Impairment in investment in associate	28,000	28,000
	-	-

With respect to KPT’s investment in KPLP, the liability of KPT for the debts, liabilities and other obligations of KPLP is limited to KPT’s capital contribution to KPLP.

5 Income taxes

The Corporation is required to pay income tax on its share of the taxable income of KPLP. The Corporation has not recognized at the date of acquisition the deferred tax assets and liabilities related to the differences between the accounting and tax basis of KPLP’s assets and liabilities. Accordingly, the Corporation is tracking the temporary differences that were subject to the initial recognition exemption and recognizes newly created temporary differences as they arise.

The major components of income taxes recognized in the unaudited condensed statement of comprehensive income (loss) were as follows:

Current tax expense Deferred tax expense (recovery)	3-month period ended June 30, 2021 $	3-month period ended June 30, 2020 $	6-month period ended June 30, 2021 6-month period ended June 30, 2020 $ $
	120 193	854 2,425	774 1,572 (1,934) 101
	313	3,279	(1,160) 1,673

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KP Tissue Inc. Notes to Unaudited Condensed Financial Statements

For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars, except share amounts)

Details of the provision for income taxes were as follows:

Income tax at statutory rate of 26% Permanent differences and other Dilution gain Taxed in hands of subsidiaries Realization of previously unrecognized tax attributes Change in basis of investment in associate	3-month period ended June 30, 2021 $	3-month period ended June 30, 2020 6-month period ended June 30, 2021 $ $ 820 (308) (44) (25) (60) (42) (268) 36 335 883 2,496 (1,704) 3,279 (1,160)	6-month period ended June 30, 2020 $
	(239) (14) (21) (40) 444 183		845 60 (117) (279) 704 460
	313		1,673

Components of the deferred income tax liability were as follows:

Deferred tax liability (asset) ROU assets and lease liabilities Pensions Partnership units liability Property, plant and equipment Other	June 30, 2021 December 31, 2020 $ $ (837) (829) (474) (1,084) (3,900) (3,692) 6,835 7,043 (625) (804) 999 634

The analysis of the deferred tax liability were as follows:

Deferred tax liabilities to be realized greater than 12 months	June 30, 2021 December 31, 2020 $ $ 999 634 999 634

In addition to the above, the Corporation has a deferred tax asset of $7.1 million (December 31, 2020 - $8.3 million) related to the Investment in associate which has not been recognized in the unaudited condensed financial statements for the 6-month period ended June 30, 2021.

9

KP Tissue Inc. Notes to Unaudited Condensed Financial Statements

For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars, except share amounts)

The movement in the deferred tax liability was as follows:

As of January 1, 2020 Charge to net income Charge to other comprehensive income - remeasurements of cumulative translation adjustment Charge to other comprehensive loss - remeasurements of post-retirement benefits Charge to other comprehensive loss - remeasurements of pensions As of June 30, 2020 As of January 1, 2021 Charge to net loss Charge to other comprehensive loss - remeasurements of cumulative translation adjustment Charge to other comprehensive income - remeasurements of post-retirement benefits Charge to other comprehensive income - remeasurements of pensions As of June 30, 2021	$ 3,158 101 318 (198) (1,828) 1,551
	634 (1,934) (169) 248 2,220
	999

Pursuant to the Tax Distribution as defined in the Partnership Agreement, on February 26, 2021, KPT received a Tax Distribution of $2.6 million from KPLP for purposes of settling its obligation for federal and provincial taxes, for the year ended December 31, 2020. The Tax Distribution was used to settle the outstanding advance to KPT in the amount of $0.9 million as of December 31, 2020. During the 6-month period ended June 30, 2021, pursuant to the Tax Distribution as defined in the Partnership Agreement, KPT received an advance from KPLP of $0.9 million to pay the monthly tax instalments. The advances are non-interest bearing and non-recourse in nature and are settled when the Tax Distribution is declared annually.

6 Dividends

During the 6-month periods ended June 30, 2021 and June 30, 2020, the Corporation paid a quarterly dividend of $0.18 per common share to shareholders. Pursuant to the Corporation Dividend Reinvestment Plan (DRIP), a portion of the dividend was reinvested by the shareholders, resulting in the Corporation issuing common shares. The proceeds were used to acquire additional units of KPLP. The dividends paid, the additional common shares issued at the share price, and the gross proceeds were as follows:

Dividend Payment Date			6-monthperiod ended June 30, 2021
	Dividends paid $	Share price $	Issuance of Common shares Gross proceeds # $ 32,921 352 39,046 409 71,967 761
January 15, 2021 April 15, 2021	1,755 1,761	10.70 10.47
	3,516

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KP Tissue Inc. Notes to Unaudited Condensed Financial Statements

For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars, except share amounts)

Dividend Payment Date	6-monthperiod ended June 30, 2020 Dividends paid Share price Issuance of Common shares Gross proceeds $ $ # $ 1,733 9.84 34,545 340 1,739 9.92 34,131 339 3,472 68,676 679	6-monthperiod ended June 30, 2020 Dividends paid Share price Issuance of Common shares Gross proceeds $ $ # $ 1,733 9.84 34,545 340 1,739 9.92 34,131 339 3,472 68,676 679
January 15, 2020 April 15, 2020		340 339 679

On July 15, 2021, the Corporation paid a dividend of $1.8 million to shareholders at $0.18 per common share. Pursuant to the Corporation DRIP, a portion of the dividend was reinvested by the shareholders, resulting in the Corporation issuing 35,366 common shares at a price of $10.32.

Subsequent to June 30, 2021, the Corporation declared a dividend of $0.18 per common share to shareholders, payable on October 15, 2021.

As a result of the DRIP and Kruger’s reinvestment of its distribution from KPLP in units of KPLP, a dilution gain of $0.2 million was recorded during the 6-month period ended June 30, 2021 (6-month period ended June 30, 2020 - $0.5 million).

7 Income tax recovery (expense) on other comprehensive income (loss)

Income tax recovery (expense) on other comprehensive income (loss) were as follows:

Items that will not be reclassified to net income (loss): Remeasurements of pensions Income tax recovery (expense) Net of income tax recovery (expense) Remeasurements of post-retirement Income tax recovery (expense) Net of income tax recovery (expense) Items that may be subsequently reclassified to net income (loss): Cumulative translation adjustment Income tax recovery (expense) Net of income tax recovery (expense) Total other comprehensive income (loss) for the period	3-month period ended June 30, 2021 $	3-month period ended June 30, 2020 $	6-month period ended June 30, 2021 6-month period ended June 30, 2020 $ $
	(527) 84	(15,473) 3,126	13,772 (5,483) (2,220) 1,828
	(443)	(12,347)	11,552 (3,655)
	(209) 82	(1,486) 580	637 (507) (248) 198
	(127)	(906)	389 (309)
	(677) 88	(2,242) 292	(1,303) 2,449 169 (318)
	(589)	(1,950)	(1,134) 2,131
	(1,159)	(15,203)	10,807 (1,833)

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KP Tissue Inc. Notes to Unaudited Condensed Financial Statements For the 6-month periods ended June 30, 2021 and June 30, 2020

(tabular amounts are in thousands of Canadian dollars, except share amounts)

8 Economic dependence

The Corporation was created to acquire, and its business is limited to holding, a limited partnership interest in KPLP, which is accounted for as an investment in an associate using the equity method of accounting. As such, the Corporation is economically dependent on KPLP and exposed to all the risks associated with the business of KPLP, including, but not limited to, liquidity risk.

9 Non-cash working capital

The change in non-cash working capital on the unaudited condensed statement of cash flows comprised the following:

Decrease (increase) in receivable from Partnership	6-month period ended June 30, 2021 6-month period ended June 30, 2020 $ $ (3) 94 (3) 94

10 Cash flows used in financing activities

The change in financing activities on the unaudited condensed statement of cash flows comprised the following:

Dividend payable Common shares Total Dividend payable Common shares Total	As of January 1, 2020 $	Dividends paid $	Movements not in financing activities $	As of June 30, 2020 $
	1,733 18,997	(3,472) 679	3,484 (7)	1,745 19,669
	20,730	(2,793)	3,477	21,414
	As of January 1, 2021 $	Dividends paid $	Movements not in financing activities $	As of June 30, 2021 $
	1,755 20,355	(3,516) 761	3,529 (10)	1,768 21,106
	22,110	(2,755)	3,519	22,874

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