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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 October 28, 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 December 6, 2017,  25,844,615 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 December  1, 2017, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = $1.2705.

 

 

 

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

 

 

 

 

October 28,

 

January 28,

 

 

 

 

2017

 

2017

 

 

 

 

$

    

$

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current

 

 

 

 

 

 

Cash

 

 

 

36,865

 

64,440

Accounts and other receivables

 

 

 

3,777

 

3,485

Inventories

 

[Note 5]

 

37,290

 

31,264

Income tax receivable

 

 

 

5,625

 

539

Prepaid expenses and deposits

 

 

 

6,232

 

5,659

Derivative financial instruments

 

[Note 15]

 

628

 

454

Total current assets

 

 

 

90,417

 

105,841

Property and equipment

 

[Note 6]

 

47,012

 

51,160

Intangible assets

 

 

 

3,502

 

2,958

Deferred income tax assets

 

[Note 10]

 

13,860

 

14,375

Total assets

 

 

 

154,791

 

174,334

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current

 

 

 

 

 

 

Trade and other payables

 

 

 

13,592

 

19,681

Deferred revenue

 

 

 

4,075

 

4,885

Current portion of provisions

 

[Note 7]

 

919

 

2,562

Total current liabilities

 

 

 

18,586

 

27,128

Deferred rent and lease inducements

 

 

 

8,669

 

7,824

Provisions

 

[Note 7]

 

3,926

 

5,932

Total liabilities

 

 

 

31,181

 

40,884

Equity

 

 

 

 

 

 

Share capital

 

[Note 9]

 

111,339

 

263,828

Contributed surplus

 

 

 

7,936

 

8,833

Retained earnings (deficit)

 

 

 

1,323

 

(142,398)

Accumulated other comprehensive income

 

 

 

3,012

 

3,187

Total equity

 

 

 

123,610

 

133,450

 

 

 

 

154,791

 

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

 

For the nine months ended

 

 

 

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

 

 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

    

[Note 14]

    

42,997

    

44,134

    

137,353

    

129,682

 

Cost of sales

 

 

 

24,625

 

23,587

 

74,594

 

66,072

 

Gross profit

 

 

 

18,372

 

20,547

 

62,759

 

63,610

 

Selling, general and administration expenses

 

[Note 11]

 

27,035

 

27,187

 

79,004

 

71,116

 

Results from operating activities

 

 

 

(8,663)

 

(6,640)

 

(16,245)

 

(7,506)

 

Finance costs

 

 

 

327

 

19

 

615

 

55

 

Finance income

 

 

 

(149)

 

(125)

 

(420)

 

(394)

 

Loss before income taxes

 

 

 

(8,841)

 

(6,534)

 

(16,440)

 

(7,167)

 

Income tax recovery

 

 

 

(2,356)

 

(1,574)

 

(4,030)

 

(1,454)

 

Net loss

 

 

 

(6,485)

 

(4,960)

 

(12,410)

 

(5,713)

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

Items to be reclassified subsequently to income:

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gain (loss) on forward exchange contracts

 

[Note 15]

 

1,872

 

537

 

95

 

(1,982)

 

Realized net (gain) loss on forward exchange contracts reclassified to inventory

 

 

 

824

 

(26)

 

79

 

(396)

 

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

 

 

 

(714)

 

(136)

 

(46)

 

631

 

Cumulative translation adjustment

 

 

 

589

 

699

 

(303)

 

(770)

 

Other comprehensive income (loss), net of tax

 

 

 

2,571

 

1,074

 

(175)

 

(2,517)

 

Total comprehensive loss

 

 

 

(3,914)

 

(3,886)

 

(12,585)

 

(8,230)

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

[Note 12]

 

(0.25)

 

(0.20)

 

(0.48)

 

(0.23)

 

Fully diluted

 

[Note 12]

 

(0.25)

 

(0.20)

 

(0.48)

 

(0.23)

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

 

 

— basic

 

[Note 12]

 

25,829,090

 

24,902,385

 

25,659,164

 

24,554,391

 

— fully diluted

 

[Note 12]

 

25,829,090

 

24,902,385

 

25,659,164

 

24,554,391

 

 

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

 

For the nine months ended

 

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

$

 

$

 

$

 

$

 

OPERATING ACTIVITIES

    

 

    

 

    

 

 

 

 

Net loss

 

(6,485)

 

(4,960)

 

(12,410)

 

(5,713)

 

Items not affecting cash:

 

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

2,138

 

2,110

 

6,316

 

5,818

 

Amortization of intangible assets

 

494

 

198

 

1,248

 

527

 

Loss on disposal of property and equipment

 

18

 

311

 

48

 

311

 

Impairment of property and equipment

 

2,658

 

2,516

 

4,971

 

2,516

 

Deferred rent

 

174

 

385

 

377

 

1,031

 

Provision (recovery) for onerous contracts

 

(46)

 

48

 

(1,573)

 

48

 

Stock-based compensation expense

 

362

 

643

 

1,738

 

1,573

 

Amortization of financing fees

 

19

 

19

 

59

 

55

 

Accretion on provisions

 

307

 

 —

 

558

 

 —

 

Deferred income taxes (recovered)

 

(227)

 

453

 

203

 

475

 

 

 

(588)

 

1,723

 

1,535

 

6,641

 

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

 

(15,546)

 

(23,978)

 

(21,511)

 

(31,467)

 

Cash flows related to operating activities

 

(16,134)

 

(22,255)

 

(19,976)

 

(24,826)

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

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

 

90

 

962

 

1,696

 

1,806

 

Cash flows related to financing activities

 

90

 

962

 

1,696

 

1,806

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

(2,770)

 

(5,776)

 

(7,501)

 

(15,498)

 

Additions to intangible assets

 

(728)

 

(399)

 

(1,794)

 

(860)

 

Cash flows related to investing activities

 

(3,498)

 

(6,175)

 

(9,295)

 

(16,358)

 

Decrease in cash during the period

 

(19,542)

 

(27,468)

 

(27,575)

 

(39,378)

 

Cash, beginning of period

 

56,407

 

60,604

 

64,440

 

72,514

 

Cash, end of period

 

36,865

 

33,136

 

36,865

 

33,136

 

Supplemental Information

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

Income taxes (classified as operating activity)

 

165

 

1,279

 

877

 

2,436

 

Cash received for:

 

 

 

 

 

 

 

 

 

Interest

 

146

 

121

 

433

 

382

 

Income taxes (classified as operating activity)

 

 —

 

97

 

26

 

522

 

 

See accompanying notes

 

5


 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

 

[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 loss for the nine months ended October 29, 2016

 

 —

 

 —

 

(5,713)

 

 —

 

 —

 

 —

 

(5,713)

 

Other comprehensive loss

 

 —

 

 —

 

 —

 

(1,747)

 

(770)

 

(2,517)

 

(2,517)

 

Total comprehensive loss

 

 —

 

 —

 

(5,713)

 

(1,747)

 

(770)

 

(2,517)

 

(8,230)

 

Issuance of common shares

 

2,705

 

(899)

 

 —

 

 —

 

 —

 

 —

 

1,806

 

Common shares issued on vesting of restricted stock units

 

239

 

(470)

 

(254)

 

 —

 

 —

 

 —

 

(485)

 

Stock-based compensation expense

 

 —

 

1,573

 

 —

 

 —

 

 —

 

 —

 

1,573

 

Income tax impact associated with stock options

 

 —

 

178

 

 —

 

 —

 

 —

 

 —

 

178

 

Balance, October 29, 2016

 

262,149

 

7,476

 

(144,432)

 

782

 

2,904

 

3,686

 

128,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 28, 2017

 

263,828

 

8,833

 

(142,398)

 

333

 

2,854

 

3,187

 

133,450

 

Net loss for the nine months ended October 28, 2017

 

 —

 

 —

 

(12,410)

 

 —

 

 —

 

 —

 

(12,410)

 

Other comprehensive loss

 

 —

 

 —

 

 —

 

128

 

(303)

 

(175)

 

(175)

 

Total comprehensive loss

 

 —

 

 —

 

(12,410)

 

128

 

(303)

 

(175)

 

(12,585)

 

Issuance of common shares

 

2,546

 

(850)

 

 —

 

 —

 

 —

 

 —

 

1,696

 

Common shares issued on vesting of restricted stock units

 

912

 

(1,652)

 

184

 

 —

 

 —

 

 —

 

(556)

 

Stock-based compensation expense

 

 —

 

1,738

 

 —

 

 —

 

 —

 

 —

 

1,738

 

Income tax impact associated with stock options

 

 —

 

(133)

 

 —

 

 —

 

 —

 

 —

 

(133)

 

Reduction of stated capital

 

(155,947)

 

 —

 

155,947

 

 —

 

 —

 

 —

 

 —

 

Balance, October 28, 2017

 

111,339

 

7,936

 

1,323

 

461

 

2,551

 

3,012

 

123,610

 

 

See accompanying notes

 

6


 

DAVIDsTEA Inc.

 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

For the three and nine-month periods ended October 28, 2017 and October 29, 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 and nine-month periods ended October 28, 2017 were authorized for issue in accordance with a resolution of the Board of Directors on December 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 nine-month period ended October 28, 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 and nine months ended October 28, 2017 include breakage income of  $100 and  $485, respectively  [$850 for the three and nine months ended October 29, 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”, for which the final version was issued in July 2014 by the IASB, replaces IAS 39, “Financial Instruments: Recognition and Measurement” and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application

7


 

permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Company plans to adopt the new standard on the required effective date. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements and related note disclosures. The  Company has performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses. The Company will perform a detailed assessment in the coming quarters to determine the extent of the impact. 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 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 expects that the implementation of IFRS 15 will impact the allocation of revenue that is deferred in relation to its customer loyalty award programs. Revenue is currently allocated to the customer loyalty awards using the residual fair value method. Under IFRS 15, consideration will be allocated between the loyalty program awards and the goods on which the awards were earned, based on their relative stand-alone selling prices. The Company is currently assessing the impact of this change on its consolidated financial statements. 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.

 

IFRIC 23, “Uncertainty over Income Tax Treatments”, was issued by the IASB in June 2017. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. The Interpretation requires an entity to:

- Contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution;

- Reflect an uncertainty in the amount of income tax payable (recoverable) if it is probable that it will pay (or recover) an amount for the uncertainty; and

- Measure a tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the amount payable (recoverable).

8


 

The Company is in the process of evaluating the impact of adopting the interpretation of IFRIC 23 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, other than as those disclosed in note 6.

 

5. INVENTORIES

 

 

 

 

 

 

 

    

October 28,

    

January 28,

 

 

2017

 

2017

 

 

$

 

$

Finished goods

 

32,647

 

24,504

Goods in transit

 

2,862

 

5,463

Packaging

 

1,781

 

1,297

 

 

37,290

 

31,264

 

 

6. PROPERTY AND EQUIPMENT

 

For the three and nine months ended October 28, 2017, an assessment of indicators was performed which caused the Company to review the recoverable amount of the property and equipment for certain CGUs with an indication of impairment. CGUs reviewed included stores performing below the Company’s expectations.

 

As a result, for the three and nine month periods ended October 28, 2017 an impairment loss of $2,658 and $5,837, respectively,  [$2,516 for the three and nine month periods ended October 29, 2016] related to store leasehold improvements, furniture and equipment, and computer hardware was recognized in the Canadian and U.S segments.  The impairment loss was determined by comparing the carrying amount of the CGU’s net assets with their respective recoverable amounts based on value in use, and is included in selling, general and administration expenses in the consolidated statements of net income (loss) and comprehensive income (loss). Value in use of $635 for the CGU’s in question was determined based on management’s best estimate of expected future cash flows from use over the remaining lease terms, considering historical experience as well as current economic conditions, and was then discounted using a pre‑tax weighted average cost of capital of 13.4%. For the three and nine months ended October 28, 2017, nil and $866, respectively, of impairment losses were reversed  following a change in the expected future cash flows of certain CGUs in the U.S. segment  [October 29, 2016 – nil and nil]. Value in use of  $848 for these CGU’s was determined in the same manner as described above. Impairment losses were reversed only to the extent that the carrying amounts of the CGU’s net assets did not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.

 

For the purpose of determining value in use as at October 28, 2017, management’s best estimate of future cash flows from use over the remaining lease terms incorporate an assumption of sales capture for CGU’s located in the same mall as one the Company`s main competitors. The Company performed a sensitivity analysis on its value in use calculations to determine how a change in its assumptions would impact its results from operations. As at October 28, 2017, a 20% decrease or increase in the expected future sales capture from the Company`s competitor, assuming that all other variables had remained the same, would have resulted in an increase of nil and $163 or a decrease of nil and $113 in the net impairment loss for the three and nine month periods ended October 28, 2017, respectively. 

9


 

 

7. PROVISIONS

 

 

 

 

 

 

For the

 

 

nine months ended

 

    

October 28,

 

 

2017

 

 

$

Opening balance

 

8,494

Utilization

 

(2,340)

Additions

 

458

Reversals

 

(2,031)

Payments

 

(132)

Accretion expense

 

558

Cumulative translation adjustment

 

(162)

Ending balance

 

4,845

Less: Current portion

 

(919)

Long-term portion of provisions

 

3,926

 

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 nine-month period ended October 28, 2017, due to changes in assumptions, additions to the onerous provisions were recorded in the amount of $458, while the provisions for other stores were partially or fully reversed by an amount of $2,031.

 

8.  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 October 28, 2017,  the Company is in compliance with these covenants.

 

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

 

9. SHARE CAPITAL

 

Authorized

 

An unlimited number of Common shares.

 

10


 

Issued and outstanding

 

 

 

 

 

 

 

    

October 28,

 

January 28,

 

 

2017

 

2017

 

 

$

 

$

25,843,544 Common shares [January 28, 2017 - 25,330,951 shares]

 

111,339

 

263,828

 

 

111,339

 

263,828

 

In June 2017, the shareholders of the Company approved a resolution to reduce the stated capital maintained in respect of the common shares by an amount of $155,947, which resulted in a corresponding reduction of the deficit.

 

During the three and nine-month periods ended October 28, 2017, 24,000 and 436,773 stock options, respectively, were exercised for common shares for cash proceeds of $90 and $1,696  [October 29, 2016 —  273,078 and 949,649 stock options for cash proceeds of  $962 and $1,806]. The carrying value of common shares during the three and nine-month periods ended October 28, 2017 includes $22 and $850, respectively [October 29, 2016 — $595 and $899], which corresponds to a reduction in contributed surplus associated to options exercised during the period.

 

In addition, during the three and nine-month periods ended October 28,  2017, 19,819 and 75,820 common shares, respectively, [October 29, 2016 – 2,043 and 32,441 common shares] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $208 and $912, net of tax, respectively  [October 29, 2016 – $25 and $239] and a reduction in contributed surplus of $433  and $1,652  [October 29, 2016 —  $53 and $470].

 

 

Stock-based compensation

 

As at October 28, 2017,  664,479 common shares remain available for issuance under the 2015 Omnibus Plan.

 

The weighted average fair value of options granted of $2.39 for the nine-month period ended October 28, 2017 [for the nine-month period ended October 29, 2016 — $3.72] was estimated using the Black Scholes option pricing model, using the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

October 28,

 

October 29,

 

    

2017

      

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

 

 

$

14.67

 

 

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

 

11


 

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

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

October 28,

 

October 29,

 

 

2017

 

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

 

174,031

 

14.67

Exercised

 

(436,773)

 

3.88

 

(949,649)

 

1.90

Forfeitures

 

(135,135)

 

8.31

 

(112,283)

 

4.97

Outstanding, end of period

 

523,267

 

7.67

 

1,258,979

 

5.34

Exercisable, end of period

 

315,909

 

5.74

 

586,885

 

3.61

 

The weighted average share price at the date of exercise for stock options exercised during the nine-month period ended October 28, 2017 was $8.68  [October 29, 2016 — $15.64].

 

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

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

 

October 28,

 

October 29,

 

 

 

2017

 

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

 

298,897

 

8.59

 

194,154

 

14.71

 

Forfeitures

 

(34,864)

 

10.19

 

(36,647)

 

7.23

 

Vested

 

(75,820)

 

12.21

 

(32,441)

 

7.39

 

Vested, withheld for tax

 

(65,342)

 

11.40

 

(30,981)

 

7.39

 

Outstanding, end of period

 

375,104

 

9.80

 

346,805

 

11.63

 

(1)

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

 

During the three and nine-month periods ended October 28, 2017, the Company recognized a stock-based compensation expense of $362 and $1,738, respectively [October 29, 2016 — $643 and $1,573].

 

10. 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.

 

12


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

%

  

$

  

%

  

$

 

%

 

$

 

%

 

$

 

Income tax recovery — statutory rate

  

26.8

  

(2,368)

  

26.6

  

(1,735)

  

26.8

  

(4,404)

  

26.6

  

(1,903)

 

Non-deductible items

 

(0.4)

 

38

 

(0.2)

 

11

 

(2.3)

 

385

 

(5.1)

 

367

 

Other

 

0.3

 

(26)

 

(2.3)

 

150

 

0.1

 

(11)

 

(1.1)

 

82

 

Income tax provision (recovery) — effective tax rate

 

26.7

 

(2,356)

 

24.1

 

(1,574)

 

24.6

 

(4,030)

 

20.3

 

(1,454)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

    

October 28,

    

October 29,

    

October 28,

    

October 29,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

$

 

$

 

$

 

$

 

Income tax provision (recovery)

 

 

 

 

 

 

 

 

 

Current

 

(2,129)

 

(2,027)

 

(4,233)

 

(1,929)

 

Deferred

 

(227)

 

453

 

203

 

475

 

 

 

(2,356)

 

(1,574)

 

(4,030)

 

(1,454)

 

 

 

11. SELLING, GENERAL AND ADMINISTRATION EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

    

October 28,

    

October 29,

    

October 28,

    

October 29,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

$

 

$

 

$

 

$

 

Wages, salaries and employee benefits

 

15,012

 

15,376

 

47,113

 

42,910

 

Depreciation of property and equipment

 

2,138

 

2,110

 

6,316

 

5,818

 

Amortization of intangible assets

 

494

 

198

 

1,248

 

527

 

Loss on disposal of property and equipment

 

18

 

311

 

48

 

311

 

Impairment of property and equipment

 

2,658

 

2,516

 

4,971

 

2,516

 

Provision (recovery) for onerous contracts

 

(46)

 

48

 

(1,573)

 

48

 

Stock-based compensation

 

362

 

643

 

1,738

 

1,573

 

Executive separation costs related to salary

 

1,070

 

505

 

1,882

 

505

 

Other selling, general and administration

 

5,329

 

5,480

 

17,261

 

16,908

 

 

 

27,035

 

27,187

 

79,004

 

71,116