SPoT COFFEE (CANADA) LTD.

MANAGEMENT DISCUSSION & ANALYSIS

For The Years Ended December 31, 2019 and 2018

This Management's Discussion and Analysis (MD&A) is intended to help the reader understand SPoT Coffee (Canada) Ltd's operations, financial performance, and the present and future business environment. This MD&A, which has been prepared as of July 16, 2020, should be read in conjunction with SPoT's consolidated financial statements for the year ended December 31, 2019.

References to "SPoT" or "the Company" refer to SPoT Coffee (Canada) Ltd. and its share of consolidated subsidiaries and joint ventures, unless the context indicates otherwise. All amounts are in Canadian dollars, unless otherwise indicated.

Securities regulators encourage companies to disclose forward-looking information to help investors understand a company's future prospects. This discussion contains statements about SPoT's future financial condition, results of operations and business.

All statements in this MD&A, other than statements of historical fact, that address future acquisitions and events or developments that SPoT expects to occur, are forward-looking statements. Although SPoT believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include industry-related risks, regulatory approvals, and continued availability of capital and financing and general economic, market or business conditions. Specific factors that would impact the Company's ability to execute its growth plan include, amongst others, availability of expansionary capital, potential inability to locate and secure new café sites in locations that the Company believes to be attractive, obstacles to hiring and training qualified operating personnel in the local market, delay or cancelation of new site development by developers and landlords, which may become increasingly common during periods of economic uncertainty or tight credit, difficulty managing construction and development costs of new cafés at affordable levels, particularly in competitive markets, difficulty negotiating leases with acceptable terms, any shortage of construction materials and labor or lack of availability of, or inability to obtain, adequate supplies of ingredients that meet the Company's quality standards. Except as required by applicable securities requirements, the Company undertakes no obligation to update forward-looking statements if circumstances or management estimates or opinions should change, The reader is cautioned not to place undue reliance on forward-looking statements.

This MD&A contains the term "Earnings Before Interest, Taxes, Depreciation and Amortization" ("EBITDA"), which should not be considered as an alternative to, or more meaningful than, net earnings or cash flow from operating activities as determined in accordance with International Financial Reporting Standards ("IFRS"), as an indication of the Company's performance. This term does not have a standardized meaning prescribed by IFRS and SPoT's determination of EBITDA may not be comparable to that reported by other operating companies. Management uses EBITDA, among other measures, to assess the operating performance of the ongoing business without the effect of depreciation and amortization expenses. The Company excludes depreciation and amortization expenses, accruals, and other one-time, non-recurring expenses because they largely depend on the accounting methods and assumptions a company uses, as well as non-operating factors.

SPoT Coffee

SPoT designs, builds, operates and franchises community-oriented cafés that provide customers with the highest quality service, signature made-to order meals, and the world's finest in-house roasted gourmet coffee. Each SPoT café is distinctively designed to complement the unique attributes of the local neighborhood, which creates a warm and friendly gathering place for the surrounding community.

SPoT's commercial business focuses on retail stores, business accounts and third-party resellers including grocery stores and other food and beverage retail chains, hotels and other hospitality service providers. The company has has ecommerce component to its official website, www.spotcoffee.com, which features a variety of SPoT's gourmet coffee and other products.

Café Overview

Currently, SPoT has twenty-five (25) corporate-owned, franchise, licensed cafés and three (3) new franchise locations being negotiated, developed and constructed. All corporate and franchise cafés are EBITDA positive and generating sustainable cash flows as of the publication date of this document.

Franchise Business Model

SPoT received franchise registration approval from the State of New York on February 27, 2015. The Company adopted the franchise business model after proof of concept and after it had completed the development of the necessary infrastructure upon which it can build a successful franchise program. This infrastructure includes, among other things, successful and streamlined café procedures, training manuals, operation manuals and financial reporting systems. This franchise program will accelerate the development of new cafés as well as build and grow the SPoT Coffee brand in the regional market of the State of New York and neighbouring states. The SPoT franchise model is designed around the distinguishing design and economic features of a SPoT café that attribute to its successful operation. Management is confident that the Company can continue to build its current success throughout its franchises, as well as among various communities and their neighbourhoods in Upstate New York and the neighbouring states, by adhering to the strict café location selection criteria that it has put in place.

SPoT Express, a quick service version of the Company's full-size café, is still at the forefront of SPoT's anticipated franchise growth alternatives. SPoT franchise cafés and Express locations will continue to leverage SPoT's existing geographic footprint in Western New York, expanding east across New York State as the company continues to partner with local builders to focus on prime real estate. In order to provide maximum support for its franchising business, SPoT has added new departments including Facilities Maintenance and Procurement and Human Resources.

Corporate Business Model

Although the company is firmly focused on franchise growth, the addition of new corporate flagship stores in new territories is still a priority for SPoT as it expands. The company's extensive experience in operating cafés allows it to make the best possible decisions regarding location assessment and selection, staffing and promotion. Whenever new corporate locations are identified and selected, SPoT plans to ensure that the communities chosen to host SPoT cafés can support multiple cafés in order to preserve the option of growing locally via franchise in the future.

Growth Plans

Presently, SPoT enjoys very strong brand awareness in Upstate and Western New York, and the company plans to capitalize on its success in its core market by expanding regionally throughout the American northeast. New target territories such as the states of Massachusetts and Vermont have been identified and are being researched. In order to capitalize on inquiries from potential franchisees looking to purchase, build and operate more than one café location under the banners of multiple asset management firms, SPoT announced that it is now accepting inquiries concerning multi-unit franchise purchases up to a total of five (5) units.

Overview of the Business (Current Operations)

Debt Reduction

During fiscal 2019, the Company further reduced the amount owing on the convertible debenture held by Ridley Park Inc. by $75,000.

Credit Facilities

In fiscal 2019, the Company utilized the credit facilities approved by underwriters of KeyBank NA:

US $300,000 (Canadian $400,000) Flex Line of Credit facility that is revolving for 3 years after which time it will term out for 7-year term loan, and;
An Evergreen Line of Credit Facility of US $200,000 (Canadian $265,000)

These credit facilities will provide SPoT with an additional layer of financial security as it moves forward with its accelerated brand marketing and franchise programs during 2020.

Renovations

In keeping with its policy of maintaining a high standard of ambience, cleanliness and functionality, SPoT has been making key renovations to its café locations across the State of New York. Spot has been making key renovations to its Spot Clarence and Spot Orchard Park cafés. Minor renovations at several café locations were undertaken, including the reintroduction of SPoT's classical retro furniture including couches and Tiffany lamps. Furthermore, new promotions highlighting the extensive renovations performed last year at SPoT Coffee Rochester have been launched in order to inform local customers of the changes. Also, SPoT has undertaken upgrades to its café patios.

Trellis Marketing Program

Spot Coffee has entered into an agreement with Trellis Marketing Inc. to provide ongoing marketing services related to a comprehensive long-term marketing campaign with the following objectives:

1. Increase and maximize café revenue;
1. Strengthen the Spot digital infrastructure by improving local listings, website, and SEO;
1. Expand the Company's franchise footprint throughout NYS and northwest USA with a strategic digital marketing campaign designed to drive franchise inquiries;
1. Increase awareness and drive sales for specific promotions;
1. Strengthen the positioning of Spot as Your Neighborhood Café with video and messaging that resonates with all demographics;
1. Intensify and coordinate Social Media presence;
1. Strengthen the connection between Spot and the surrounding communities;
1. Improve branding to reflect the total hospitality experience and offerings of a Spot café.

SPoT has been running 5 second, 15 second and 30 second commercials created by Trellis throughout Western New York. The Company's commercials are available for viewing at www.tmxmatrix.com/company/spp.

Catering

SPoT's catering program is now offered at all of its cafés, including all corporate and franchise locations. The revenue generated by this program has been noticeably increasing and is being promoted through direct and online marketing campaigns.

Ecommerce/Retail

Online marketing and sales of coffee, the company's core product, is available through its website, www.spotcoffee.com, and delivery is available throughout the United States. The Company has added new retail products to its online store and is continuing to grow its online sales.

New POS System

SPoT has completed the installation and testing of Toast, its new POS (point of sale) system. Toast, Inc. is a cloudbased restaurant software company based in Boston, Massachusetts. The company provides a restaurant management system built on the Android operating system. SPoT has adopted it in order to take advantage of the efficiencies that new cloud-based POS systems provide, including backend management via mobile devices. Associated hardware includes a receipt printer, cash drawer, kitchen display screen, and magstripe card reader.

Results of Operations

Overall Performance

The Company had consolidated net loss of $2,534,163 for the year ended December 31, 2019 which is up significantly from the $272,295 net loss of 2018. The key drivers behind the net loss include a $1,746,615 write off of loans receivable that were deemed uncollectible by management, non-cash depreciation expense related to the transition to IFRS 16 of $511,341 and a $204,839 interest charge on a lease liability again related to the transition to IFRS 16. SPoT remained focused expense control and believes the continued growth of the Company will offset investments made to centralize overhead costs.

For the year ended December 31, 2019, the Company's gross profit (measured as revenue less cost of sales) amounted to $6,161,250 (December 31, 2018 - $6,130,128). The Company's gross margins (measured as gross profit over revenue) for the year ended December 31, 2019 was 72% (December 31, 2018 - 72%).

Revenue

The Company's revenue for the year ended December 31, 2019 was $8,592,157 (December 31, 2018 - $8,497,107).

Cost of Sales

The Company's cost of sales for the year ended December 31, 2019 were $2,430,907 (December 31, 2018 - $2,366,979). The cost of sales represents 28% of the total revenue for the year ended December 31, 2019 (December 31, 2018 - 28%). The Company continues to reduce its costs as a result of its implementation of a streamlined system to optimize waste control at the café level.

Operating Expenses

Salaries and wages increased by $32,361 in 2019.

Occupancy costs decreased to $538,411 compared to total costs of $1,172,479 in 2018. The decrease relates solely to the Company's transition to IFRS 16 which now mandates that all leases be capitalized. This corresponds to the increase in interest on lease liabilities and depreciation on the right-of-use assets. It includes rent, insurance, building maintenance, utilities and janitorial expenses.

Office and general expenses remained relatively the same as in 2018. These expenses relate to supplies, maintenance, telephone and shipping expenses at the café level. SPoT continues to closely monitor its day-to-day operations at both the corporate and café level.

Professional and consulting fees increased to $329,164 from $285,383 in 2018. Most of these fees relate to public communications, legal, accounting and audit advisory expenses associated with the Company's listing requirements, operations, franchise licensing registration and café development activities.

Travel expenses increased to $157,335 compared to $108,015 in 2018. The fees relate to business development and expansion.

Interest and accretion expenses decreased to $121,136 from $181,238 in 2018 respectively. This is related to the Company's demand grid note, convertible debenture and subordinated debt.

Credit card fees and bank charges increased to $222,940 from $199,618 in 2018, respectively. This is related to the credit card transactions in sales.

Depreciation costs decreased to $215,842 from $314,557 in 2018. Depreciation begins when the asset is available for use and capable of operating in the manner intended by management.

Liquidity and Capital Resources

During fiscal 2019, 7,546,150 warrants were exercised; 5,846,150 at $0.075 per share for gross proceeds of $438,461, and 1,700,000 at $0.08 per share for gross proceeds of $136,000.

In October 2018, 810,000 common shares were issued at $0.10 per share for service provided of $81,000.

During the year ended December 31, 2018, 1,100,000 stock options were exercised at $0.05 per share for gross proceeds of $82,500.

Long Term Debt and Other Long-Term Commitments

In December 2019, the Company started to raise $1,000,000 of financing in the form of secured subordinated convertible debentures. The debentures have a two (2) year term and annual coupon equivalent to 6% annualized interest on the principal amount. The debentures are convertible into shares of the Company at the end of the two-year period which starts on the day of closing of the debenture raise. No interest shall be payable until the end of the two-year period and the total accumulated interest will also be converted into shares of the Company at market rates on that day. The fair value of the debentures will be determined on the day of close. As at December 31, 2019, the Company had raised $26,000 ($793,000 at the date of the filing of this report).

There have been no other new long-term debt or long-term commitments since December 31, 2018

Off Balance Sheet Arrangements

As at December 31, 2019, SPoT had no off balance sheet arrangements, such as guaranteed contracts, contingent interests in assets transferred to an entity, derivative instrument obligations, or any instruments that could trigger financing, market or credit risk to SPoT.

Transactions with Related Parties

Key management compensation

The Company entered into the following compensation with key management personnel, which are defined by IAS 24, Related Party Disclosures, as those persons having authority and responsibility for planning, directing and controlling the activities of the Company, including directors and management.

	December 31, 2019			December 31, 2018
	Officers	Directors	Total	Officers	Directors	Total
	$	$	$	$	$	$
Salaries and wages	258,816	243,312	502,128	249,608	234,600	484,208
Consulting fees	-	76,339	76,339	-	165,404	165,404
	258,816	319,651	578,467	249,608	400,004	649,612

Related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Balances and transactions between the Company and its subsidiary have been eliminated on consolidation and are not disclosed in this note. Details of the transactions between the Company and other related parties are disclosed below.

Related party balances included in the statement of financial position, incurred with companies with common directors and officers of the Company are as follows:

	December 31, 2019	December 31, 2018
Advances to related parties:
Advances to franchisees	$1,237,307	$886,661
Advances to associate	509,308	-
Advances to director	-	218,943
	$1,746,615	$1,105,604
Provision on advances to related parties	(1,746,615)	-
	-	$1,105,604
Advance from related parties
Advances from associate	$ -	$7,500
Advances from franchisees	-	618
	$ -	$8,118

Disclosure of Outstanding Share Data

As at December 31, 2019, the Company had 135,408,170 common shares issued and outstanding.

An additional 1,280,244 common shares are issuable upon exercise of outstanding stock options granted to employees and directors pursuant to the Company's stock option plan, as well the exercise of the outstanding warrants. Accordingly, SPoT would have 136,688,414 shares outstanding on a fully diluted basis.

On June 30, 2020, 75,250 warrants were not exercised and expired.

Critical Accounting Estimates

The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates, judgements and assumptions that affect the application of accounting policies. Additionally, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results may differ from these estimates.

Certain estimates, such as those related to valuation of inventories, impairment of property and equipment, valuation of debt conversion options and derivatives, depend upon subjective or complex judgments about matters that may be uncertain, and changes in those estimates could materially impact the consolidated financial statements. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Change in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

The key sources of estimation uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year, are discussed below

Identification of Cash-Generating Unit ("CGU")

Identification of an asset's cash-generating unit under International Accounting Standards ("IAS") 36, Impairment of Assets, involves judgement. CGUs are the lowest level of assets that cash inflows are independent of other assets. In determining CGUs, the Company considered the internal reporting, including the level at which financial forecasts were prepared and monitored, and the significant assets relating to the Company's products and services required to generate cash inflows.

Impairment of Depreciable Assets

At the end of each reporting period, the Company assesses whether there is any indication of impairment for its depreciable assets. If any such indication exists, then the Company will perform an impairment test. The impairment test is to compare the asset's carrying amount and its recoverable amount, where the recoverable amount is defined as the higher of the assets fair value less costs to sell of disposal and its value-in-use. Under the value-in-use calculation, the expected future cash flows from the asset are discounted to their net present value, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset is estimated to be less than the carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is an impairment loss, which is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

Share-based Payments

Under the Company's stock option plan, all stock options granted have graded vesting periods and exercisable up to five years from the date of grant. Each tranche of an award with graded vesting period is considered a separate grant at each vest date for the calculation of fair value, and the resulting fair value is amortized over the vesting period of the respective tranches. The fair value of the options granted is measured using the Black-Scholes option pricing model taking into account the terms and conditions upon which the options were granted, the estimated volatility, estimated risk-free rate and estimated forfeitures.

The amount recognized for goods or services received during the vesting period shall be based on the best available estimate of the number of equity instruments anticipated to vest. The Company shall revise that estimate, if necessary, if subsequent information indicates that the number of share options anticipated to vest differs from previous estimates. On vesting date, the Company shall revise the estimate to equal the number of equity instruments that ultimately vested. After vesting date, the Company shall make no subsequent adjustment to total equity for goods or services received if the share options are later forfeited at the end of the share option's life.

Useful Lives of Depreciable Assets

The Company estimates the useful lives for an item of depreciable assets to its significant parts and depreciates separately each such part. Management reviews the useful lives of depreciable assets and their significant parts at each reporting date based on the expected utility of the assets to the Company. Actual results, however, may vary due to a variety of factors including technical obsolescence.

Valuation of Convertible Debentures

The convertible debentures were separated into their liability and equity components or derivative liability component at the date of issue, in accordance with the substance of the contractual agreements. The conversion options require an estimation of the fair value of a similar liability that doesn't have an associated equity component by using a suitable discount rate at initial recognition and each extension date. The carrying amount of the conversion options is then determined by deducting the fair value of the financial liability from the fair value of the convertible debenture.

Valuation of Stock Options and Warrants

The warrants attached with common shares and stock options require an estimation of the fair value at initial recognition. Management uses the Black-Scholes option pricing model to estimate the fair value of stock options and warrants.

Leases

The application of IFRS 16 requires significant judgements and certain key estimations to be made. Critical judgements required in the application of IFRS 16 include determining whether it is reasonably certain that an extension or termination option will be exercised; determining the appropriate rate to discount lease payments; and assessing whether a right-of-use asset is impaired.

Financial Instruments and Other Instruments

The Company's financial instruments consist of cash, accounts receivable, leases receivable, advances to related parties, bank overdraft, accounts payable and accrued liabilities, advances from related parties, demand grid note, finance leases, lease liabilities, loans payable and convertible debentures.

Management does not believe these financial instruments expose SPoT to any significant interest, liquidity, currency or credit risks arising from these financial instruments. The fair market value of these financial instruments is as stated in the consolidated financial statements for the year ended December 31, 2019 and 2018.

Summary of Quarterly Results

There were no dividends paid in the last eight quarters.

	2019 Q4	2019 Q3	2019 Q2	2019 Q1	2018 Q4	2018 Q3	2018 Q2	2018 Q1
Revenue from
operations	2,026,306	2,394,231	2,312,430	1,859,190	1,661,596	2,470,048	2,409,735	1,955,728
Cost of Sales	624,476	637,518	647,852	521,061	17,495	813,989	927,304	608,191

Net Income (Loss)	(1,929,991)	(243,943)	(228,508)	(131,721)	(370,758)	136,218	(136,613)	98,358
Total assets	4,430,286	2,908,652	2,595,881	2,684,938	2,682,760	2,493,247	2,251,376	2,203,024
Long-term Liabilities	2,909,089	631,236	237,935	249,641	264,121	251,384	248,254	232,124

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Spot Coffee (Canada) Ltd. Management Reports 2020