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EX-32.2 - EX-32.2 - DAVIDsTEA Inc.ex-32d2.htm
EX-32.1 - EX-32.1 - DAVIDsTEA Inc.ex-32d1.htm
EX-31.2 - EX-31.2 - DAVIDsTEA Inc.ex-31d2.htm
EX-31.1 - EX-31.1 - DAVIDsTEA Inc.ex-31d1.htm

 

 

 

FORM 10-Q

 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 


 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

For the quarterly period ended April 29, 2017.

 

 

OR

 

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

For the transition period from            to         

 

Commission file number 001-37404

 


 

 

DAVIDsTEA Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

 

Canada

 

98-1048842

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

5430 Ferrier

Mount-Royal, Québec, Canada, H4P 1M2

(Address of principal executive offices) (zip code)

 

(888) 873-0006

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Emerging growth company ☐

 

 

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐  NO ☒

 

As of June 6, 2017,  25,753,571 common shares of the registrant were outstanding.

 

 

 

 


 

DAVIDsTEA Inc.

 

TABLE OF CONTENTS

 

 

DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private issuer, the Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the United States Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers, although the Company is not required to do so.

 

In this quarterly report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CAD,” “CND$,” “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,” “US$” and “USD” mean U.S. dollars.

 

On June 2, 2017, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = $1.3500.

 

 

 

2


 

Part I. FINANCIAL INFORMATION

 

Item 1.    Consolidated Financial Statements

 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED BALANCE SHEETS

 

[Unaudited and in thousands of Canadian dollars]

 

 

 

 

 

 

 

 

 

 

    

 

    

As at

    

As at

 

 

 

 

 

April 29,
2017

 

January 28, 
2017

 

 

 

 

 

$

 

$

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

Cash

 

 

 

56,348

 

64,440

 

Accounts and other receivables

 

 

 

3,960

 

3,485

 

Inventories

 

[Note 5]

 

28,574

 

31,264

 

Income tax receivable

 

 

 

1,629

 

539

 

Prepaid expenses and deposits

 

 

 

8,159

 

5,659

 

Derivative financial instruments

 

[Note 14]

 

1,200

 

454

 

Total current assets

 

 

 

99,870

 

105,841

 

Property and equipment

 

 

 

51,407

 

51,160

 

Intangible assets

 

 

 

3,106

 

2,958

 

Deferred income tax assets

 

[Note 9]

 

13,522

 

14,375

 

Total assets

 

 

 

167,905

 

174,334

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

Trade and other payables

 

 

 

13,131

 

19,681

 

Deferred revenue

 

 

 

3,899

 

4,885

 

Current portion of provisions

 

[Note 6]

 

2,123

 

2,562

 

Total current liabilities

 

 

 

19,153

 

27,128

 

Deferred rent and lease inducements

 

 

 

7,908

 

7,824

 

Provisions

 

[Note 6]

 

5,369

 

5,932

 

Total liabilities

 

 

 

32,430

 

40,884

 

Equity

 

 

 

 

 

 

 

Share capital

 

[Note 8]

 

265,564

 

263,828

 

Contributed surplus

 

 

 

8,200

 

8,833

 

Deficit

 

 

 

(142,746)

 

(142,398)

 

Accumulated other comprehensive income

 

 

 

4,457

 

3,187

 

Total equity

 

 

 

135,475

 

133,450

 

 

 

 

 

167,905

 

174,334

 

 

See accompanying notes

3


 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)

 

AND COMPREHENSIVE INCOME (LOSS)

 

[Unaudited and in thousands of Canadian dollars, except share and per share information]

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

 

 

April 29, 
2017

 

April 30, 
2016

 

 

 

 

 

$

 

$

 

 

 

 

 

 

 

 

 

Sales

    

[Note 13]

    

48,669

    

44,469

 

Cost of sales

 

 

 

24,487

 

21,314

 

Gross profit

 

 

 

24,182

 

23,155

 

Selling, general and administration expenses

 

[Note 10]

 

24,153

 

21,119

 

Results from operating activities

 

 

 

29

 

2,036

 

Finance costs

 

 

 

131

 

17

 

Finance income

 

 

 

(136)

 

(121)

 

Income before income taxes

 

 

 

34

 

2,140

 

Provision for income tax

 

[Note 9]

 

396

 

626

 

Net income (loss)

 

 

 

(362)

 

1,514

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

Items to be reclassified subsequently to income:

 

 

 

 

 

 

 

Unrealized net gain (loss) on forward exchange contracts

 

[Note 14]

 

1,200

 

(4,197)

 

Realized net gain on forward exchange contracts reclassified to inventory

 

 

 

(453)

 

(968)

 

Provision for income tax recovery (income tax) on comprehensive income

 

 

 

(199)

 

1,371

 

Cumulative translation adjustment

 

 

 

722

 

(2,322)

 

Other comprehensive income (loss), net of tax

 

 

 

1,270

 

(6,116)

 

Total comprehensive income (loss)

 

 

 

908

 

(4,602)

 

Net income (loss) per share:

 

 

 

 

 

 

 

Basic

 

[Note 11]

 

(0.01)

 

0.06

 

Fully diluted

 

[Note 11]

 

(0.01)

 

0.06

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

— basic

 

[Note 11]

 

25,402,543

 

24,134,285

 

— fully diluted

 

[Note 11]

 

25,402,543

 

25,892,598

 

 

See accompanying notes

4


 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

[Unaudited and in thousands of Canadian dollars]

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

 

April 29, 
2017

 

April 30, 
2016

 

 

 

 

$

 

$

 

 

OPERATING ACTIVITIES

    

 

    

 

    

 

Net income (loss)

 

(362)

 

1,514

 

 

Items not affecting cash:

 

 

 

 

 

 

Depreciation of property and equipment

 

2,064

 

1,787

 

 

Amortization of intangible assets

 

282

 

161

 

 

Loss on disposal of property and equipment

 

 6

 

 —

 

 

Deferred rent

 

 3

 

280

 

 

Recovery for onerous contracts

 

(886)

 

 —

 

 

Stock-based compensation expense

 

574

 

316

 

 

Amortization of financing fees

 

20

 

18

 

 

Accretion on provisions

 

112

 

 —

 

 

Deferred income taxes (recovered)

 

1,000

 

(30)

 

 

 

 

2,813

 

4,046

 

 

Net change in other non-cash working capital balances related to operations

 

(9,474)

 

(4,834)

 

 

Cash flows related to operating activities

 

(6,661)

 

(788)

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from issuance of common shares pursuant to exercise of stock options

 

815

 

344

 

 

Cash flows related to financing activities

 

815

 

344

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

Additions to property and equipment

 

(1,821)

 

(2,846)

 

 

Additions to intangible assets

 

(425)

 

(156)

 

 

Cash flows related to investing activities

 

(2,246)

 

(3,002)

 

 

Decrease in cash during the period

 

(8,092)

 

(3,446)

 

 

Cash, beginning of period

 

64,440

 

72,514

 

 

Cash, end of period

 

56,348

 

69,068

 

 

Supplemental Information

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

 —

 

 —

 

 

Income taxes (classified as operating activity)

 

496

 

577

 

 

Cash received for:

 

 

 

 

 

 

Interest

 

160

 

120

 

 

Income taxes (classified as operating activity)

 

 —

 

344

 

 

 

See accompanying notes

 

5


 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF EQUITY

 

[Unaudited and in thousands of Canadian dollars]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

Accumulated Other Comprehensive Income

    

 

 

 

 

 

 

 

 

 

 

Accumulated

    

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative

 

Foreign

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Financial

 

Currency

 

Other

 

 

 

 

 

Share

 

Contributed

 

 

 

Instrument

 

Translation

 

Comprehensive

 

Total

 

 

 

Capital

 

Surplus

 

Deficit

 

Adjustment

 

Adjustment

 

Income

 

Equity

 

 

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 30, 2016

 

259,205

 

7,094

 

(138,465)

 

2,529

 

3,674

 

6,203

 

134,037

 

Net income for the three months ended April 30, 2016

 

 —

 

 —

 

1,514

 

 —

 

 —

 

 —

 

1,514

 

Other comprehensive loss

 

 —

 

 —

 

 —

 

(3,794)

 

(2,322)

 

(6,116)

 

(6,116)

 

Total comprehensive income (loss)

 

 —

 

 —

 

1,514

 

(3,794)

 

(2,322)

 

(6,116)

 

(4,602)

 

Issuance of common shares

 

470

 

(126)

 

 —

 

 —

 

 —

 

 —

 

344

 

Common shares issued on vesting of restricted stock units

 

214

 

(417)

 

(289)

 

 —

 

 —

 

 —

 

(492)

 

Stock-based compensation

 

 —

 

316

 

 —

 

 —

 

 —

 

 —

 

316

 

Income tax impact associated with stock options

 

 —

 

157

 

 —

 

 —

 

 —

 

 —

 

157

 

Balance, April 30, 2016

 

259,889

 

7,024

 

(137,240)

 

(1,265)

 

1,352

 

87

 

129,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 28, 2017

 

263,828

 

8,833

 

(142,398)

 

333

 

2,854

 

3,187

 

133,450

 

Net loss for the three months ended April 29, 2017

 

 —

 

 —

 

(362)

 

 —

 

 —

 

 —

 

(362)

 

Other comprehensive income

 

 —

 

 —

 

 —

 

548

 

722

 

1,270

 

1,270

 

Total comprehensive income (loss)

 

 —

 

 —

 

(362)

 

548

 

722

 

1,270

 

908

 

Issuance of common shares

 

1,468

 

(653)

 

 —

 

 —

 

 —

 

 —

 

815

 

Common shares issued on vesting of restricted stock units

 

268

 

(554)

 

14

 

 —

 

 —

 

 —

 

(272)

 

Stock-based compensation expense

 

 —

 

574

 

 —

 

 —

 

 —

 

 —

 

574

 

Balance, April 29, 2017

 

265,564

 

8,200

 

(142,746)

 

881

 

3,576

 

4,457

 

135,475

 

 

See accompanying notes

 

6


 

DAVIDsTEA Inc.

 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

For the three-month periods ended April 29, 2017 and April 30, 2016 [Unaudited]

 

[Amounts in thousands of Canadian dollars except share and per share amounts]

 

1. CORPORATE INFORMATION

 

The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three-month period ended April 29, 2017 were authorized for issue in accordance with a resolution of the Board of Directors on June 7, 2017.  The Company is incorporated and domiciled in Canada and its shares are publicly traded on the NASDAQ Global Market under the symbol “DTEA”. The registered office is located at 5430, Ferrier St., Town of Mount-Royal, Quebec, Canada, H4P 1M2.

 

The Company is engaged in the retail and online sale of tea, tea accessories and food and beverages in Canada and the United States. The results of operations for the interim period are not necessarily indicative of the results of operations for the full year. Sales fluctuate from quarter to quarter. Sales are traditionally higher in the fourth fiscal quarter due to the year-end holiday season, and tend to be lowest in the second and third fiscal quarter because of lower customer traffic during the summer months.

 

 

2. STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION

 

These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). Accordingly, these financial statements do not include all of the financial statement disclosures required for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended January 28, 2017, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB. In management’s opinion, the unaudited condensed interim consolidated financial statements reflect all the adjustments that are necessary for a fair presentation of the results for the interim period presented. These unaudited condensed interim consolidated financial statements have been prepared using the accounting policies and methods of computation as outlined in note 3 of the consolidated financial statements for the year ended January 28, 2017. During the three-month period ended April 29, 2017, we did not implement any new accounting standards.

 

Gift card breakage

 

During the three months ended October 29, 2016, the Company determined that it had sufficient historical
redemption patterns to record breakage income associated with unredeemed gift cards, and accordingly recorded breakage income associated to gift cards issued and redeemed in prior years, when no breakage income was included. Gift card breakage is included in sales in the interim consolidated statement of income (loss). Sales for the three months ended April 29, 2017 include breakage income of $335 [nil for the three months ended April 30, 2016].

 

3. CHANGES IN ACCOUNTING POLICIES

 

Information on significant new accounting standards and amendments issued but not yet adopted is described below.

 

IFRS 9, “Financial Instruments”(“IFRS 9”), partially replaces the requirements of IAS 39, “Financial Instruments: Recognition and Measurement”. This standard is the first step in the project to replace IAS 39. The IASB intends to expand IFRS 9 to add new requirements for the classification and measurement of financial liabilities, derecognition of financial instruments, impairment and hedge accounting to become a complete replacement of IAS 39.

7


 

These changes are applicable for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Company is currently assessing the impact of adopting this standard on the Company’s consolidated financial statements and related note disclosures.

 

IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue that applies to all contracts with customers, except for contracts that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and will be effective for annual periods beginning on or after January 1, 2018. The Company is currently in the process of evaluating the impact this standard is expected to have on the consolidated financial statements. The Company in the process of assessing whether the loyalty program we currently offer could be considered a separate performance obligation. As we continue our evaluation, we will further clarify the expected impact of the adoption of the standard, which we do not believe will be material.

 

IFRS 16, “Leases” (“IFRS 16”) replaces IAS 17, “Leases”. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized in the statement of financial position. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019. Early application is permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its consolidated financial statements. The Company expects the adoption of IFRS 16 will have a significant impact as the Company will recognize new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of use assets and interest expense on lease liabilities. The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical expedients under the standard. The Company expects to disclose additional detailed information, including its transition method, any practical expedients elected and
estimated quantitative financial effects, before the adoption of IFRS 16.

 

IFRIC 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of adopting the interpretation of IFRIC 22 on its consolidated financial statements.

 

 

 

 

4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

 

The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.

 

In preparing these unaudited condensed interim consolidated financial statements, critical judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in note 5 of the consolidated financial statements for the year ended January 28, 2017.

 

 

8


 

5. INVENTORIES

 

 

 

 

 

 

 

 

    

April 29, 
2017

    

January 28,
2017

 

 

 

$

 

$

 

Finished goods

 

24,640

 

24,504

 

Goods in transit

 

2,482

 

5,463

 

Packaging

 

1,452

 

1,297

 

 

 

28,574

 

31,264

 

 

 

 

6. PROVISIONS

 

 

 

 

 

 

 

For the three
months ended

 

 

 

    

April 29, 
2017

    

 

 

 

$

 

 

Opening balance

 

8,494

 

 

Utilization

 

(529)

 

 

Reversals

 

(886)

 

 

Accretion expense

 

112

 

 

Cumulative translation adjustment

 

301

 

 

Ending balance

 

7,492

 

 

Less: Current portion

 

(2,123)

 

 

Long-term portion of provisions

 

5,369

 

 

 

Provisions for onerous contracts have been recognized in respect of store leases where the unavoidable costs of meeting the obligations under the lease agreements exceed the economic benefits expected to be received from the contract. The unavoidable costs reflect the present value of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract. During the three-month period ended April 29, 2017, the provisions for certain stores were partially or fully reversed due to changes in anticipated lease termination dates. 

 

 

7.  REVOLVING FACILITY

 

The Company has a credit agreement (the “Credit Agreement”) with the Bank of Montreal (“BMO”). The Credit Agreement provides for a three-year revolving term facility, maturing October 31, 2019, in the principal amount of $20,000 (which the Company refers to as the “Revolving Facility”) or the equivalent amount in U.S. dollars, repayable at any time. The Credit Agreement also provides for an accordion feature whereby the Company may, at any time prior to maturity and with permission from BMO, request an increase to the Revolving Facility by an amount not greater than $10,000.

 

The credit facility contains a number of financial and non-financial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company also cannot make any dividend payments. As at April 29, 2017,  the Company is in compliance with these covenants.

 

As at April 29, 2017 and January 28, 2017, the Company did not have any borrowings on the Revolving Facility.

 

 

 

 

9


 

8. SHARE CAPITAL

 

Authorized

 

An unlimited number of Common shares.

 

Issued and outstanding

 

 

 

 

 


 

    

April 29, 
2017

    

January 28,
2017

 

 

 

$

 

$

 

25,576,056 Common shares [January 28, 2017 - 25,330,951 shares]

 

265,564

 

263,828

 

 

 

265,564

 

263,828

 

 

During the three-month period ended April 29, 2017, 217,000 stock options were exercised for common shares for cash proceeds of $815 [April 30, 2016 — 394,515 stock options for cash proceeds of $344]. The carrying value of common shares during the three-month period ended April 29, 2017 includes $653 [April 30, 2016 — $126], which corresponds to a reduction in contributed surplus associated to options exercised during the period.

 

In addition, during the three-month period ended April 29, 2017,  28,105 common shares [April 30, 2016 – 30,398 common shares] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $268, net of tax [April 30, 2016 – $214] and a reduction in contributed surplus of $554 [April 30, 2016 — $417].

 

Stock-based compensation

 

As at April 29, 2017,  658,940 common shares remain available for issuance under the 2015 Omnibus Plan.

 

The weighted average fair value of options granted of $2.39 for the three-month period ended April 29, 2017 [for the three-month period ended April 30, 2016 — $3.65] was estimated using the Black Scholes option pricing model, using the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the three months ended

 

    

April 29, 
2017

      

April 30, 
2016

Risk-free interest rate

 

 

 

 

1.79

%  

 

 

 

 

1.23

%  

Expected volatility

 

 

 

 

27.4

%  

 

 

 

 

29.8

%  

Expected option life

 

 

 

 

4.0

years

 

 

 

 

4.0

years

Expected dividend yield

 

 

 

 

0

%  

 

 

 

 

0

%  

Exercise price

 

 

 

$

9.76

 

 

 

 

$

14.39

 

 

Expected volatility was estimated using historical volatility of similar companies whose share prices were publicly available. 

 

10


 

A summary of the status of the Company’s stock option plan and changes during the three-month period is presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the three months ended

 

 

 

April 29, 
2017

 

April 30, 
2016

 

 

    

 

    

Weighted

    

 

    

Weighted

 

 

 

 

 

average

 

 

 

average

 

 

 

Options

 

exercise

 

Options

 

exercise

 

 

 

outstanding

 

price

 

outstanding

 

price

 

 

 

#

 

$

 

#

 

$

 

Outstanding, beginning of period

 

933,195

 

5.63

 

2,146,880

 

3.04

 

Issued

 

161,980

 

9.76

 

131,500

 

14.39

 

Exercised

 

(217,000)

 

3.76

 

(394,515)

 

0.87

 

Forfeitures

 

(30,040)

 

7.64

 

(51,322)

 

5.94

 

Outstanding, end of period

 

848,135

 

6.83

 

1,832,543

 

4.24

 

Exercisable, end of period

 

491,165

 

4.96

 

910,283

 

2.85

 

 

The weighted average share price at the date of exercise for stock options exercised during the three-month period ended April 29, 2017 was $9.47 [for the three-month period ended April 30, 2016 — $14.50].

 

A summary of the status of the Company’s RSU plan and changes during the three-month period is presented below.

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the three months ended

 

 

 

April 29, 
2017

 

April 30, 
2016

 

 

    

 

    

Weighted

    

 

    

Weighted

 

 

 

 

 

average

 

 

 

average

 

 

 

RSUs

 

fair value

 

RSUs

 

fair value

 

 

 

outstanding

 

per unit (1)

 

outstanding

 

per unit (1)

 

 

 

#

 

$

 

#

 

$

 

Outstanding, beginning of period

 

252,233

 

12.42

 

252,720

 

7.39

 

Granted

 

204,437

 

8.96

 

96,520

 

14.39

 

Forfeitures

 

(18,548)

 

9.79

 

(20,310)

 

7.07

 

Vested

 

(28,105)

 

10.05

 

(30,398)

 

7.07

 

Vested, withheld for tax

 

(30,119)

 

10.09

 

(28,652)

 

7.07

 

Outstanding, end of peiod

 

379,898

 

6.53

 

269,880

 

9.99

 

(1)

Weighted average fair value per unit as at date of grant.

 

During the three-month period ended April 29, 2017, the Company recognized a stock-based compensation expense of $574  [April 30, 2016 — $316].

 

 

9. INCOME TAXES

 

Income tax expense is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full fiscal year.

 

11


 

A reconciliation of the statutory income tax rate to the effective tax rate is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

April 29, 
2017

 

April 30, 
2016

 

 

 

%

 

$

 

%

 

$

 

Income tax provision — statutory rate

    

26.5

 

 9

 

26.5

 

568

 

Non-deductible items

 

364.7

 

124

 

3.5

 

74

 

Other

 

773.5

 

263

 

(0.7)

 

(16)

 

Income tax provision — effective tax rate

 

1,164.7

 

396

 

29.3

 

626

 

 

A breakdown of the income tax provision (recovery) on the interim consolidated statement of income (loss) is as follows:

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

April 29, 
2017

    

April 30, 
2016

    

 

 

$

 

$

 

Income tax provision (recovery)

 

 

 

 

 

Current

 

(604)

 

793

 

Deferred

 

1,000

 

(167)

 

 

 

396

 

626

 

 

 

 

10. SELLING, GENERAL AND ADMINISTRATION EXPENSES

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

April 29, 
2017

    

April 30, 
2016

 

 

 

$

 

$

 

Wages, salaries and employee benefits

 

16,221

 

13,327

 

Depreciation of property and equipment

 

2,064

 

1,787

 

Amortization of intangible assets

 

282

 

161

 

Loss on disposal of property and equipment

 

 6

 

 —

 

Recovery for onerous contracts

 

(886)

 

 —

 

Stock-based compensation

 

574

 

316

 

Other selling, general and administration

 

5,892

 

5,528

 

 

 

24,153

 

21,119

 

 

 

 

11. EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) amounts are calculated by dividing the net income (loss) for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS amounts are calculated by dividing the net income (loss) attributable to ordinary equity holders (after adjusting for dividends) by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares, unless these would be anti‑dilutive.

12


 

 

The following reflects the income and share data used in the basic and diluted EPS computations:

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

April 29, 
2017

    

April 30, 
2016

 

 

 

$

 

$

 

Net income (loss) for basic EPS

 

(362)

 

1,514

 

 

 

 

 

 

 

Weighted average number of shares outstanding — basic

 

25,402,543

 

24,134,285

 

Restricted stock units

 

 —

 

213,275

 

Options

 

 —

 

1,545,038

 

Weighted average number of shares — fully diluted

 

25,402,543

 

25,892,598

 

 

As a result of the net loss during the three-month period ended April 29, 2017,  the stock options and restricted stock units disclosed in Note 8 are anti-dilutive.

 

 

12. RELATED PARTY DISCLOSURES

 

There have been no significant changes in related party transactions from those disclosed in the Company’s audited annual consolidated financial statements for the year ended January 28, 2017.

 

 

13. SEGMENT INFORMATION

 

An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The Company has reviewed its operations and determined that each of its retail stores represents an operating segment. However, because its retail stores have similar economic characteristics, sell similar products, have similar types of customers, and use similar distribution channels, the Company has determined that these operating segments can be aggregated at a geographic level. As a result, the Company has concluded that it has two reportable segments, Canada and the U.S., that derive their revenues from the retail and online sale of tea, tea accessories and food and beverages. The Company’s Chief Executive Officer (the chief operating decision maker) makes decisions about resources allocation and assesses performance at the country level, and for which discrete financial information is available.

 

The Company derives revenue from the following products:

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

April 29,
 2017

    

April 30,
2016

    

 

 

$

 

$

 

Tea

 

33,873

 

30,147

 

Tea accessories

 

10,509

 

9,893

 

Food and beverages

 

4,287

 

4,429

 

 

 

48,669

 

44,469

 

 

Property and equipment and intangible assets by country are as follows:

 

 

 

 

 

 

 

    

April 29, 
2017

    

January 28,
2017

 

 

 

$

 

$

 

Canada

 

41,525

 

41,432

 

US

 

12,988

 

12,686

 

Total

 

54,513

 

54,118

 

 

13


 

Gross profit per country, excluding intercompany profit, is used to measure performance because management believes this information is the most relevant in evaluating results. Gross profit per country is as follows:

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

April 29, 2017

 

 

 

Canada

 

US

 

Consolidated

 

 

 

$

 

$

 

$

 

Sales

    

39,952

    

8,717

    

48,669

    

Cost of sales

 

19,317

    

5,170

    

24,487

 

Gross profit

 

20,635

 

3,547

 

24,182

 

Selling, general and administration expenses

 

 

 

 

 

24,153

 

Results from operating activities

 

 

 

 

 

29

 

Finance costs

 

 

 

 

 

131

 

Finance income

 

 

 

 

 

(136)

 

Income before income taxes

 

 

 

 

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

April 30, 2016

 

 

 

Canada

 

US

 

Consolidated

 

 

 

$

 

$

 

$

 

Sales

    

36,959

    

7,510

    

44,469

    

Cost of sales

 

17,074

 

4,240

 

21,314

 

Gross profit

 

19,885

 

3,270

 

23,155

 

Selling, general and administration expenses

 

 

 

 

 

21,119

 

Results from operating activities

 

 

 

 

 

2,036

 

Finance costs

 

 

 

 

 

17

 

Finance income

 

 

 

 

 

(121)

 

Income before income taxes

 

 

 

 

 

2,140

 

 

 

14. FINANCIAL RISK MANAGEMENT

 

The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, liquidity and credit.

 

Currency risk — foreign exchange risk

 

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Given that some of its purchases are denominated in U.S. dollars, the Company is exposed to foreign exchange risk. The Company’s foreign exchange risk is largely limited to currency fluctuations between the Canadian and U.S. dollars. The Company is exposed to currency risk through its cash, accounts receivable and accounts payable denominated in U.S. dollars.

 

Assuming that all other variables remain constant, a revaluation of these monetary assets and liabilities due to a 5% rise or fall in the Canadian dollar against the U.S. dollar would have resulted in an increase or decrease to net income (loss) in the amount of $131.

 

The Company’s foreign exchange exposure is as follows:

 

 

 

 

 

 

 

    

April 29,
 2017

    

January 28,
2017

 

 

 

US$

 

US$

 

Cash

 

2,802

 

690

 

Accounts receivable

 

2,729

 

1,188

 

Accounts payable

 

2,906

 

2,461

 

 

The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.

14


 

 

In order to protect itself from the risk of losses should the value of the Canadian dollar decline in relation to the U.S. dollar, the Company has entered into forward contracts to fix the exchange rate of 80% to 90% of its expected U.S. dollar inventory purchasing requirements, through October 2017. A forward foreign exchange contract is a contractual agreement to buy a specific currency at a specific price and date in the future. The Company designated the forward contracts as cash flow hedging instruments under International Accounting Standard 39. This has resulted in mark-to-market foreign exchange adjustments, for qualifying hedged instruments, being recorded as a component of other comprehensive income (loss) for the three-month period ended April 29, 2017. As at April 29, 2017, the designated portion of these hedges was considered effective.

 

The nominal and contract values of foreign exchange contracts outstanding as at April 29, 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nominal

 

Nominal

 

 

 

Unrealized

 

 

 

Contractual

 

value

 

value

 

 

 

gain

 

 

 

exchange rate

 

US$

 

C$

 

Term

 

C$

 

Purchase contracts

 

 

 

 

 

 

 

 

 

 

 

U.S. dollar

 

1.3098

 

22,100

 

28,947

 

May 2017 to October 2017