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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended November 2, 2019.

 

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

incorporation or organization)

 

(I.R.S. Employer

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)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

Name of Each Exchange on Which Registered

 

Trading Symbol

Common shares, no par value per share

NASDAQ Global Market

 

DTEA

 

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 x 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 x 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

¨

Non-accelerated filer

x

Smaller reporting company

¨

 

 

Emerging growth company

x

 

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. x

 

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

 

As of December 20, 2019, 26,079,662 common shares of the registrant were outstanding.

 

 
 
 
 

DAVIDsTEA Inc.

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Consolidated Financial Statements

 

4

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

Item 4.

Controls and Procedures

 

37

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

38

 

Item 1A.

Risk Factors

 

38

 

Item 2.

Unregistered Sales of Equity Securities

 

38

 

Item 3.

Defaults Upon Senior Securities

 

38

 

Item 4.

Mine Safety Disclosures

 

38

 

Item 5.

Other Information

 

38

 

Item 6.

Exhibits

 

39

 

 
2
 
 

 

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 13, 2019, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = CAD$1.3196.

 

 
3
 
Table of Contents

 

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

 

 

 

 

 

November 2,

 

 

February 2,

 

 

 

 

 

 

2019

 

 

2019

 

 

 

 

 

 

$

 

 

$

 

ASSETS

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

28,044

 

 

 

42,074

 

Accounts and other receivables

 

[Note 12]

 

 

 

5,430

 

 

 

3,681

 

Inventories

 

[Note 5]

 

 

 

32,638

 

 

 

34,353

 

Income tax receivable

 

 

 

 

 

 

1,195

 

 

 

4,107

 

Prepaid expenses and deposits

 

 

 

 

 

 

6,906

 

 

 

8,819

 

Total current assets

 

 

 

 

 

 

74,213

 

 

 

93,034

 

Property and equipment

 

 

 

 

 

 

20,557

 

 

 

23,788

 

Intangible assets

 

 

 

 

 

 

6,454

 

 

 

5,678

 

Right-of-use assets

 

[Notes 3 and 6]

 

 

 

44,825

 

 

 

 

Total assets

 

 

 

 

 

 

146,049

 

 

 

122,500

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other payables

 

 

 

 

 

 

21,155

 

 

 

20,951

 

Deferred revenue

 

 

 

 

 

 

5,619

 

 

 

6,241

 

Current portion of provisions

 

[Note 3]

 

 

 

 

 

 

3,714

 

Current portion of lease liabilities

 

[Note 3]

 

 

 

16,291

 

 

 

 

Total current liabilities

 

 

 

 

 

 

43,065

 

 

 

30,906

 

Deferred rent and lease inducements

 

[Note 3]

 

 

 

 

 

 

8,698

 

Provisions

 

[Note 3]

 

 

 

 

 

 

15,440

 

Non-current portion of lease liabilities

 

[Note 3]

 

 

 

74,074

 

 

 

 

Total liabilities

 

 

 

 

 

 

117,139

 

 

 

55,044

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Share capital

 

[Note 8]

 

 

 

112,835

 

 

 

112,519

 

Contributed surplus

 

 

 

 

 

 

1,294

 

 

 

1,400

 

Deficit

 

 

 

 

 

 

(86,575)

 

 

(47,960)

Accumulated other comprehensive income

 

 

 

 

 

 

1,356

 

 

 

1,497

 

Total equity

 

 

 

 

 

 

28,910

 

 

 

67,456

 

Total liabilities and equity

 

 

 

 

 

 

146,049

 

 

 

122,500

 

  

See accompanying notes. 

 

 
4
 
Table of Contents

 

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

 

 

 

 

 

 

November 2,

 

 

November 3,

 

 

November 2,

 

 

November 3,

 

 

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

[Note 13]

 

 

 

39,493

 

 

 

43,656

 

 

 

122,925

 

 

 

129,609

 

Cost of sales

 

 

 

 

 

18,139

 

 

 

25,275

 

 

 

53,430

 

 

 

71,193

 

Gross profit

 

 

 

 

21,354

 

 

 

18,381

 

 

 

69,495

 

 

 

58,416

 

Selling, general and administration expenses

 

[Note 10]

 

 

 

30,670

 

 

 

29,119

 

 

 

90,254

 

 

 

84,865

 

Results from operating activities

 

 

 

 

 

 

(9,316)

 

 

(10,738)

 

 

(20,759)

 

 

(26,449)

Finance costs

 

 

 

 

 

 

1,699

 

 

 

80

 

 

 

5,305

 

 

 

237

 

Finance income

 

 

 

 

 

 

(185)

 

 

(122)

 

 

(570)

 

 

(574)

Loss before income taxes

 

 

 

 

 

 

(10,830)

 

 

(10,696)

 

 

(25,494)

 

 

(26,112)

Provision for income tax (recovery)

 

[Note 9]

 

 

 

 

 

 

(1,635)

 

 

 

 

 

(5,851)

Net loss

 

 

 

 

 

 

(10,830)

 

 

(9,061)

 

 

(25,494)

 

 

(20,261)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Items to be reclassified subsequently to income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gain on forward exchange contracts

 

[Note 14]

 

 

 

 

 

 

 

 

 

 

 

 

794

 

Realized net loss on forward exchange contracts reclassified to inventory

 

 

 

 

 

 

 

 

 

(425)

 

 

 

 

 

(565)

Provision for income tax recovery

 

 

 

 

 

 

 

 

 

113

 

 

 

 

 

 

(62)

Cumulative translation adjustment

 

 

 

 

 

 

(26)

 

 

(62)

 

 

(141)

 

 

(473)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

(26)

 

 

(374)

 

 

(141)

 

 

(306)

Total comprehensive loss

 

 

 

 

 

 

(10,856)

 

 

(9,435)

 

 

(25,635)

 

 

(20,567)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and fully diluted

 

[Note 11]

 

 

 

(0.42)

 

 

(0.35)

 

 

(0.98)

 

 

(0.78)

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and fully diluted

 

[Note 11]

 

 

 

26,068,435

 

 

 

25,992,339

 

 

 

26,048,239

 

 

 

25,862,086

 

     

See accompanying notes.

 

 
5
 
Table of Contents

 

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

 

 

 

November 2,

 

 

November 3,

 

 

November 2,

 

 

November 3,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(10,830)

 

 

(9,061)

 

 

(25,494)

 

 

(20,261)

Items not affecting cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

1,313

 

 

 

1,785

 

 

 

3,997

 

 

 

5,193

 

Amortization of intangible assets

 

 

517

 

 

 

377

 

 

 

1,372

 

 

 

905

 

Amortization of right-of-use assets

 

 

2,938

 

 

 

 

 

 

9,153

 

 

 

 

Loss on disposal of property and equipment

 

 

 

 

 

 

 

 

22

 

 

 

14

 

Impairment of property, equipment and right-of-use assets

 

 

2,051

 

 

 

725

 

 

 

7,076

 

 

 

3,285

 

Interest on lease liabilities

 

 

1,699

 

 

 

 

 

 

5,305

 

 

 

 

Deferred rent

 

 

 

 

 

74

 

 

 

 

 

 

(17)

Recovery for onerous contracts

 

 

 

 

 

3,414

 

 

 

 

 

 

5,306

 

Stock-based compensation expense

 

 

256

 

 

 

91

 

 

 

526

 

 

 

(7)

Amortization of financing fees

 

 

 

 

 

21

 

 

 

 

 

 

61

 

Accretion on provisions

 

 

 

 

 

60

 

 

 

 

 

 

177

 

Deferred income taxes

 

 

 

 

 

(2,575)

 

 

 

 

 

(3,921)

Sub-total

 

 

(2,056)

 

 

(5,089)

 

 

1,957

 

 

 

(9,265)

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

 

 

6,842

 

 

 

(12,948)

 

 

6,272

 

 

 

(28,316)

Cash flows related to operating activities

 

 

4,786

 

 

 

(18,037)

 

 

8,229

 

 

 

(37,581)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

9

 

 

 

8

 

 

 

9

 

 

 

82

 

Payment of lease liabilities

 

 

(5,720)

 

 

 

 

 

(17,342)

 

 

 

Cash flows related to financing activities

 

 

(5,711)

 

 

8

 

 

 

(17,333)

 

 

82

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(44)

 

 

(1,752)

 

 

(778)

 

 

(3,420)

Additions to intangible assets

 

 

(485)

 

 

(1,128)

 

 

(2,148)

 

 

(3,851)

Loan advance to a Company controlled by an executive employee

 

 

(227)

 

 

 

 

 

(2,000)

 

 

 

Cash flows related to investing activities

 

 

(756)

 

 

(2,880)

 

 

(4,926)

 

 

(7,271)

Decrease in cash during the period

 

 

(1,681)

 

 

(20,909)

 

 

(14,030)

 

 

(44,770)

Cash, beginning of the period

 

 

29,725

 

 

 

39,623

 

 

 

42,074

 

 

 

63,484

 

Cash, end of the period

 

 

28,044

 

 

 

18,714

 

 

 

28,044

 

 

 

18,714

 

Supplemental Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes (classified as operating activity)

 

 

 

 

 

7

 

 

 

 

 

 

9

 

Cash received for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

217

 

 

 

120

 

 

 

622

 

 

 

563

 

Income taxes (classified as operating activity)

 

 

2,780

 

 

 

 

 

 

2,948

 

 

 

 

 

See accompanying notes.

 

 
6
 
Table of Contents

  

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, February 3, 2018

 

 

111,692

 

 

 

2,642

 

 

 

(14,721)

 

 

(167)

 

 

1,922

 

 

 

1,755

 

 

 

101,368

 

Net loss for the nine months ended November 3, 2018

 

 

 

 

 

 

 

 

(20,261)

 

 

 

 

 

 

 

 

 

 

 

(20,261)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

167

 

 

 

(473)

 

 

(306)

 

 

(306)

Total comprehensive loss

 

 

 

 

 

 

 

 

(20,261)

 

 

167

 

 

 

(473)

 

 

(306)

 

 

(20,567)

Issuance of common shares

 

 

164

 

 

 

(82)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

82

 

Common shares issued on vesting of restricted stock units

 

 

643

 

 

 

(1,322)

 

 

286

 

 

 

 

 

 

 

 

 

 

 

 

(393)

Stock-based compensation expense

 

 

 

 

 

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7)

Income tax impact associated with stock options

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Balance, November 3, 2018

 

 

112,499

 

 

 

1,230

 

 

 

(34,696)

 

 

 

 

 

1,449

 

 

 

1,449

 

 

 

80,482

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, February 2, 2019

 

 

112,519

 

 

 

1,400

 

 

 

(47,960)

 

 

 

 

 

1,497

 

 

 

1,497

 

 

 

67,456

 

IFRS 16 adoption adjustment (1)

 

 

 

 

 

 

 

 

(13,333)

 

 

 

 

 

 

 

 

 

 

 

(13,333)

Adjusted balance at beginning of period

 

 

112,519

 

 

 

1,400

 

 

 

(61,293)

 

 

 

 

 

1,497

 

 

 

1,497

 

 

 

54,123

 

Net loss for the nine months ended November 2, 2019

 

 

 

 

 

 

 

 

(25,494)

 

 

 

 

 

 

 

 

 

 

 

(25,494)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(141)

 

 

(141)

 

 

(141)

Total comprehensive loss

 

 

 

 

 

 

 

 

(25,494)

 

 

 

 

 

(141)

 

 

(141)

 

 

(25,635)

Issuance of common shares

 

 

13

 

 

 

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

Common shares issued on vesting of restricted stock units

 

 

303

 

 

 

(628)

 

 

212

 

 

 

 

 

 

 

 

 

 

 

 

(113)

Stock-based compensation expense

 

 

 

 

 

526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

526

 

Balance, November 2, 2019

 

 

112,835

 

 

 

1,294

 

 

 

(86,575)

 

 

 

 

 

1,356

 

 

 

1,356

 

 

 

28,910

 

    

(1) Restated - Note 3

 

See accompanying notes.

 

 
7
 
Table of Contents

 

DAVIDsTEA Inc.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine-month periods ended November 2, 2019 and November 3, 2018 [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 November 2, 2019 were authorized for issue in accordance with a resolution of the Board of Directors on December 20, 2019. 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 February 2, 2019, 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 February 2, 2019, other than as disclosed in note 3 below.

 

3. CHANGES IN ACCOUNTING POLICIES

 

During the course of the Company’s financial statement close process for the quarter ended November 2, 2019, accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). When appropriately performing the assessment of impairment indicators with respect to the right-of-use assets (“ROU assets”) as at May 4, 2019 and August 3, 2019, impairment charges of $13,924 and $5,025 respectively were identified that would have been required to be recognized in the respective periods under the Company’s accounting policy for transition to IFRS 16, which included the use of the practical expedient for assessing impairment. Upon further review, the Company also determined that, pursuant to IFRS standards, its financial statements would be more relevant had they applied IAS 36 to assess impairment of ROU assets as of the date of initial adoption, instead of applying the available practical expedient. Accordingly, the Company elected to voluntarily change its accounting policy to perform an impairment assessment in accordance with IAS 36 at the date of transition to IFRS 16. The Company believes this change is more relevant because it more faithfully depicts the performance of the Company. Subsequent to the retrospective application of the change in accounting policy, the impairment charges were nil and $5,025 for the quarter ended May 4, 2019 and the two quarters ended August 3, 2019, respectively.

 

Effects of the restatement

 

Based on the impairment test performed at February 3, 2019 upon the voluntary change to the Company’s method of transition to IFRS 16 to eliminate the use of the practical expedient, the Company’s ROU assets were impaired upon initial adoption by $32,487 as compared to the application of the previously recognized onerous lease provisions of $19,154 against the ROU assets. The difference that results from performing an IAS 36 impairment test at February 3, 2019 and the application of the practical expedient related to onerous leases results from a difference in the application of certain assumptions required under the two standards. The Company previously had recorded a reduction to the deficit of $1,280 on transition to IFRS 16. After the application of the voluntary change in accounting policy, the deficit increased by $14,613 to $61,293. The additional reduction in the initial value of the ROU assets resulted in a decrease in amortization expense in the three-month periods ended May 4, 2019 and August 3, 2019 of $689 and $699 respectively.

 

 
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The following table illustrates the effect of the voluntary change in accounting policy on the adoption of IFRS 16 as at February 3, 2019:

 

 

 

 

 

 

 

February 3,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

Change in

 

 

 

 

 

February 2,

2019

 

 

IFRS 16

Adoption

 

 

As previously

reported

 

 

policy

Adjustment

 

 

February 3,

2019

 

 

 

 

 

 

 

 

 

 

 

Restated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets

 

 

 

 

 

75,596

 

 

 

75,596

 

 

 

(14,613)

 

 

60,983

 

Other assets

 

 

122,500

 

 

 

 

 

 

122,500

 

 

 

 

 

 

122,500

 

Total assets

 

 

122,500

 

 

 

75,596

 

 

 

198,096

 

 

 

(14,613)

 

 

183,483

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease liability

 

 

 

 

 

102,168

 

 

 

102,168

 

 

 

 

 

 

102,168

 

Deferred rent and lease inducements

 

 

8,698

 

 

 

(8,698)

 

 

 

 

 

 

 

 

 

Provisions

 

 

19,154

 

 

 

(19,154)

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

27,192

 

 

 

 

 

 

27,192

 

 

 

 

 

 

27,192

 

Total liabilities

 

 

55,044

 

 

 

74,316

 

 

 

129,360

 

 

 

 

 

 

129,360

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deficit

 

 

(47,960)

 

 

1,280

 

 

 

(46,680)

 

 

(14,613)

 

 

(61,293)

Other

 

 

115,416

 

 

 

 

 

 

115,416

 

 

 

 

 

 

115,416

 

Total equity

 

 

67,456

 

 

 

1,280

 

 

 

68,736

 

 

 

(14,613)

 

 

54,123

 

TOTAL LIABILITIES AND EQUITY

 

 

122,500

 

 

 

75,596

 

 

 

198,096

 

 

 

(14,613)

 

 

183,483

 

 

 
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IFRS 16 – Leases

 

IFRS 16, “Leases’’ (“IFRS 16’’) replaces IAS 17, “Leases’’ and related interpretations. The standard introduces a single on-balance sheet recognition and measurement model for lessees, eliminating the distinction between operating and finance leases. The lessee recognizes a right-of-use asset representing its control of and right to use the underlying asset and a lease liability representing its obligation to make future lease payments. Lessors continue to classify leases as finance and operating leases. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard became effective for annual periods beginning on or after January 1, 2019.

 

a) Nature of the effect of adoption of IFRS 16 (restated)

 

The Company has adopted IFRS 16 as at February 3, 2019. Substantially all of the Company’s existing leases are real estate leases for its retail stores, warehouse and corporate head office. The adoption of IFRS 16 had a significant impact as the Company recognized new assets and liabilities. 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 elected to apply the modified retrospective method by setting right-of-use assets based on the lease liability at the date of initial application, adjusted by the amount of any prepaid or accrued lease payments with no restatement of the prior comparative period. Upon adoption of IFRS 16, the Company has applied the following practical expedients:

 

 

-

applying IFRS 16 exclusively to contracts that were previously identified as leases applying IAS 17 at the date of initial application;

 

-

applying a single discount rate to a portfolio of leases with reasonably similar characteristics;

 

-

excluding initial direct costs from the measurement of the right-of-use asset at the date of initial application; and

 

-

not separating the lease component and its associated non-lease component.

 

 
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The effect of adoption of IFRS 16, including the voluntary change in accounting policy applied retroactively, as at February 3, 2019 is as follows:

 

 

 

 

 

 

 

 

 

February 3,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

February 2,

2019

 

 

IFRS 16

Adoption

 

 

As previously

reported

 

 

Change in Policy Adjustment

 

 

February 3,

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets

 

 

-

 

 

 

75,596

 

 

 

75,596

 

 

 

(14,613)

 

 

60,983

 

Other assets

 

 

122,500

 

 

 

-

 

 

 

122,500

 

 

 

-

 

 

 

122,500

 

Total assets

 

 

122,500

 

 

 

75,596

 

 

 

198,096

 

 

 

(14,613)

 

 

183,483

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease liability

 

 

-

 

 

 

102,168

 

 

 

102,168

 

 

 

-

 

 

 

102,168

 

Deferred rent and lease inducements

 

 

8,698

 

 

 

(8,698)

 

 

-

 

 

 

-

 

 

 

-

 

Provisions

 

 

19,154

 

 

 

(19,154)

 

 

-

 

 

 

-

 

 

 

-

 

Other liabilities

 

 

27,192

 

 

 

-

 

 

 

27,192

 

 

 

-

 

 

 

27,192

 

Total liabilities

 

 

55,044

 

 

 

74,316

 

 

 

129,360

 

 

 

-

 

 

 

129,360

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deficit

 

 

(47,960)

 

 

1,280

 

 

 

(46,680)

 

 

(14,613)

 

 

(61,293)

Other

 

 

115,416

 

 

 

-

 

 

 

115,416

 

 

 

-

 

 

 

115,416

 

Total equity

 

 

67,456

 

 

 

1,280

 

 

 

68,736

 

 

 

(14,613)

 

 

54,123

 

TOTAL LIABILITIES AND EQUITY

 

 

122,500

 

 

 

75,596

 

 

 

198,096

 

 

 

(14,613)

 

 

183,483

 

 

For leases previously classified as operating leases, the Company recorded the right-of-use assets based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. Due to this, the Company derecognized an amount of $8,698 that was previously included under deferred rent and leasehold inducements with a corresponding adjustment to the right-of-use asset.

 

The excess of onerous lease provision under IAS 37 over right-of-use asset at the date of transition (mainly due to the higher discount rate used to calculate the lease liability and related right-of-use asset) amounted to $1,280 and was included in deficit.

 

 
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The lease liabilities as at February 3, 2019 can be reconciled to the operating lease commitments as of February 2, 2019 as follows:

 

 

 

February 3,

 

 

 

2019

 

 

 

$

 

 

 

 

 

 

 

 

 

Minimum lease payments under operating lease

 

 

116,772

 

Discounted using a weighted average incremental borrowing rate of 6.63%

 

 

(24,484)

Discounted non-lease component associated with lease component pursuant to practical expedient

 

 

9,880

 

 

 

 

102,168

 

 

Operating lease payments, which were previously included in cost of sales on the consolidated statement of income, are replaced with depreciation expenses (included in selling, general and administrative expenses) from the right-of-use asset and interest expense (included under finance costs) from the lease liability.

 

b) Summary of new accounting policies

 

Right-of-use assets

 

The Company recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are initially measured at cost, which includes the initial amount of lease liabilities adjusted for any initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received.

 

The right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term. In addition the right-of-use assets are subject to impairment and adjusted for any remeasurement of lease liabilities. Amortization expense is recorded in selling, general and administrative expense.

 

Lease liabilities

 

At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs.

 

In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. Interest accretion is recorded as interest expense in finance costs. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. The Company has elected to apply the practical expedient to not separate the lease component and its associated non-lease component.

 

Short-term leases and leases of low-value assets

 

The Company applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value (i.e., below US $5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.

 

 
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Significant judgement in determining the lease term of contracts with renewal options

 

The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

 

The Company has the option, under some of its leases to lease the assets for additional terms of three to five years. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal, including store performance, expected future performance and past business practice. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).

 

c) Amounts recognized in the statement of financial position and profit or loss

 

Set out below are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period:

 

 

 

Right-of use

 

 

Lease

 

 

 

assets

 

 

liability

 

 

 

$

 

 

$

 

Balance, February 3, 2019

 

 

60,983

 

 

 

102,168

 

Amortization expense

 

 

(9,153)

 

 

 

Impairment of right-of-use assets

 

 

(7,076)

 

 

 

Interest Expense

 

 

 

 

 

5,305

 

Payments

 

 

 

 

 

(17,342)

CTA

 

 

71

 

 

 

234

 

Balance, November 2, 2019

 

 

44,825

 

 

 

90,365

 

 

 

 

 

 

 

 

 

 

Presented as:

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

16,291

 

Non-Current

 

 

44,825

 

 

 

74,074

 

 

The Company recognizes variable lease payments of $409 and $839 respectively for the three and nine months ended November 2, 2019.

 

 
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IFRS 23 – Uncertainty over Income Tax Treatments

 

IFRIC 23, “Uncertainty over Income Tax Treatments” (the “Interpretation”), 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).

 

The adoption of this interpretation did not have a significant impact on the Company’s 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 February 2, 2019.

 

5. INVENTORIES

 

 

 

November 2,

 

 

February 2,

 

 

 

2019

 

 

2019

 

 

 

$

 

 

$

 

Finished goods

 

 

28,391

 

 

 

28,991

 

Goods in transit

 

 

1,597

 

 

 

3,262

 

Packaging

 

 

2,650

 

 

 

2,100

 

 

 

 

32,638

 

 

 

34,353

 

 

6. PROPERTY, EQUIPMENT AND RIGHT-OF-USE ASSETS

 

For the three and nine months ended November 2, 2019, an assessment of impairment indicators was performed which caused the Company to review the recoverable amount of the property, equipment and right-of-use assets for certain cash generating units (“CGUs”) with an indication of impairment. CGUs reviewed included stores performing below the Company’s expectations.

 

 
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As a result, for the three and nine months ended November 2, 2019, an impairment loss for the right-of-use assets of $2,051 and $7,076, respectively, [November 3, 2018 — $725 and $3,285 related to store leasehold improvements, furniture and equipment, computer hardware] was recorded in the Canada and U.S. segments for $949 and $1,102, respectively, for the three months ended November 2, 2019 and $3,429 and $3,647, respectively, for the nine months ended November 2, 2019, respectively [November 3, 2018 — $725 and nil, respectively, for the three months and $3,096 and $189, respectively, for the nine months]. These losses were determined by comparing the carrying amount of the CGU’s net assets with their respective recoverable amounts based on value in use. Value in use of $1,613 [November 3, 2018 —nil] 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 discount rate of 11.9% [November 3, 2018 — 11.9%]. A reversal of impairment occurs when previously impaired CGUs see improved financial results. For the three and nine months ended November 2, 2019, no impairment losses were reversed [November 3, 2018 — nil]. Impairment losses are reversed only to the extent that the carrying amounts of the CGU’s net assets do not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.

 

7. REVOLVING FACILITY

 

On June 11, 2018, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a two year revolving facility (“Amended Revolving Facility”) in the principal amount of $15,000 or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018, with no accordion feature. Borrowings under the Amended Revolving Facility may not exceed the lesser of the total commitment for the revolving facility and the borrowing base, calculated as 75% of the face value of all eligible receivables plus 50% of the estimated value of all eligible inventory, less any priority payables.

 

The Amended Credit Agreement subjects the Company to certain financial covenants. Without the prior written consent of the lender, the Company’s fixed charge coverage ratio may not be less than 1.10:1.00 and the Company’s leverage ratio may not exceed 3.00:1.00. In addition, the Company’s net tangible worth may not be less than $65,000 and the Company’s minimum excess availability must not be less than $15,000. The Amended Revolving Facility bears interest based on the Company’s adjusted leverage ratio, at the bank’s prime rate, U.S. bank rate or LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility.

 

The credit facility also contains nonfinancial 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 November 2, 2019, the Company did not have any borrowings under the Amended Revolving Facility.

 

As at November 2, 2019, the Company is in breach of its fixed charge coverage ratio and certain nonfinancial covenants. BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement, however the Company cannot borrow under the facility.

 

The current lending agreement will be terminated on the earlier of (a) January 24, 2020, (b) the Company securing new financing. The Company is in good faith discussions with BMO to install an asset based lending facility that will provide a revolving facility at commercially reasonable terms.

 

8. SHARE CAPITAL

 

Authorized

 

An unlimited number of Common shares.

 

Issued and outstanding

 

 

 

November 2,

 

 

February 2,

 

 

 

2019

 

 

2019

 

 

 

$

 

 

$

 

Share Capital - 26,079,662 Common shares (February 2, 2019 - 26,011,817)

 

 

112,835

 

 

 

112,519

 

 

 
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During the three and nine-month periods ended November 2, 2019 12,000 stock options were exercised for common shares for cash proceeds of $9 [November 3, 2018 – 10,000 and 88,135 stock options for 88,135 common shares for cash proceeds of $8 and $82, respectively and 36,418 common shares for a non-cash settlement of nil and $121 respectively].

 

In addition, during the three and nine-month periods ended November 2, 2019, 6,877 and 55,845 common shares, respectively [November 3, 2018 – 1,128 and 70,668 common shares respectively] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $30 and $303, net of tax [November 3, 2018 — $7 and $643, net of tax, respectively] and a reduction in contributed surplus of $67 and $628, respectively [November 3, 2018 — $18 and $1,322, respectively].

 

Stock-based compensation

 

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

 

 

 

November 2,

 

 

November 3,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

average

 

 

 

 

 

average

 

 

 

Options

 

 

exercise

 

 

Options

 

 

exercise

 

 

 

outstanding

 

 

price

 

 

outstanding

 

 

price

 

 

 

#

 

 

$

 

 

#

 

 

$

 

Outstanding, beginning of year

 

 

137,540

 

 

 

7.17

 

 

 

447,779

 

 

 

7.18

 

Issued

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(12,000)

 

 

0.77

 

 

 

(88,135)

 

 

2.76

 

Forfeitures

 

 

(35,001)

 

 

6.77

 

 

 

(220,791)

 

 

8.92

 

Outstanding, end of period

 

 

90,539

 

 

 

8.17

 

 

 

138,853

 

 

 

7.23

 

Exercisable, end of period

 

 

89,120

 

 

 

8.07

 

 

 

75,837

 

 

 

4.84

 

 

No stock options were granted during the three and nine-month periods ended November 2, 2019 and November 3, 2018.

 

 
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Table of Contents

  

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

 

 

 

November 2,

 

 

November 3,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

average

 

 

 

 

 

average

 

 

 

RSUs

 

 

fair value

 

 

RSUs

 

 

fair value

 

 

 

outstanding

 

 

per unit (1)

 

 

outstanding

 

 

per unit (1)

 

 

 

#

 

 

$

 

 

#

 

 

$

 

Outstanding, beginning of year

 

 

270,976

 

 

 

5.26

 

 

 

289,416

 

 

 

9.70

 

Granted

 

 

804,710

 

 

 

1.93

 

 

 

476,450

 

 

 

4.48

 

Forfeitures

 

 

(112,746)

 

 

3.46

 

 

 

(327,479)

 

 

6.45

 

Vested

 

 

(78,345)

 

 

5.52

 

 

 

(70,668)

 

 

9.08

 

Vested, withheld for tax

 

 

(59,134)

 

 

5.37

 

 

 

(69,017)

 

 

8.91

 

Outstanding, end of period

 

 

825,461

 

 

 

2.22

 

 

 

298,702

 

 

 

5.26

 

 

(1) Weighted average fair value per unit as at date of grant

 

During the three and nine-month periods ended November 2, 2019, the Company recognized stock-based compensation expense of $256 and $526 respectively [November 3, 2018 — expense of $91 and a net reversal of stock based compensation of $7, respectively].

 

As at November 2, 2019, 1,744,529 common shares remain available for issuance under the 2015 Omnibus Plan.

 

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.

 

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

 

 

 

November 2,

 

 

November 3,

 

 

November 2,

 

 

November 3,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

%

 

 

$

 

 

%

 

 

$

 

 

%

 

 

$

 

 

%

 

 

$

 

Income tax recovery — statutory rate

 

 

26.8

 

 

 

(2,902)

 

 

26.9

 

 

 

(2,873)

 

 

26.8

 

 

 

(6,832)

 

 

26.9

 

 

 

(7,015)

Increase (decrease) in provision for income tax (recovery) resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-deductible items

 

 

(0.7)

 

 

72

 

 

 

(0.4)

 

 

38

 

 

 

(0.6)

 

 

148

 

 

 

0.1

 

 

 

(31)

Unrecognized deferred income tax assets

 

 

(26.1)

 

 

2,830

 

 

 

(8.8)

 

 

940

 

 

 

(26.2)

 

 

6,684

 

 

 

(3.6)

 

 

940

 

Other

 

 

 

 

 

 

 

 

(2.4)

 

 

260

 

 

 

 

 

 

 

 

 

(1.0)

 

 

255

 

Income tax provision (recovery) — effective tax rate

 

 

 

 

 

 

 

 

15.3

 

 

 

(1,635)

 

 

 

 

 

 

 

 

22.4

 

 

 

(5,851)

 

 
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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

 

 

 

November 2,

 

 

November 3,

 

 

November 2,

 

 

November 3,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Income tax provision (recovery)

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

940

 

 

 

 

 

 

(1,930)

Deferred

 

 

 

 

 

(2,575)

 

 

 

 

 

(3,921)

 

 

 

 

 

 

(1,635)

 

 

 

 

 

(5,851)

 

10. SELLING, GENERAL AND ADMINISTRATION EXPENSES

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

November 2,

 

 

November 3,

 

 

November 2,

 

 

November 3,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Wages, salaries and employee benefits

 

 

15,690

 

 

 

16,767

 

 

 

46,999

 

 

 

49,031

 

Depreciation of property and equipment

 

 

1,313

 

 

 

1,785

 

 

 

3,997

 

 

 

5,193

 

Amortization of intangible assets

 

 

517

 

 

 

377

 

 

 

1,372

 

 

 

905

 

Amortization right-of-use asset

 

 

2,938

 

 

 

 

 

 

9,153

 

 

 

 

Loss on disposal of property and equipment

 

 

 

 

 

 

 

 

22

 

 

 

14

 

Impairment of property, equipment and right-of-use assets

 

 

2,051

 

 

 

725

 

 

 

7,076

 

 

 

3,285

 

Utilization of onerous contract

 

 

 

 

 

(2,126)

 

 

 

 

 

(4,820)

Recovery of provision for onerous contracts

 

 

 

 

 

3,414

 

 

 

 

 

 

5,306

 

Stock-based compensation

 

 

256

 

 

 

91

 

 

 

526

 

 

 

(7)

Executive separation cost related to salary

 

 

 

 

 

123

 

 

 

 

 

 

840

 

Strategic review and proxy contest

 

 

 

 

 

27

 

 

 

 

 

 

3,538

 

Other selling, general and administration

 

 

7,905

 

 

 

7,936

 

 

 

21,109

 

 

 

21,580

 

 

 

 

30,670

 

 

 

29,119

 

 

 

90,254

 

 

 

84,865

 

 

 
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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.

 

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

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

November 2,

 

 

November 3,

 

 

November 2,

 

 

November 3,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Net loss for basic EPS

 

 

(10,830)

 

 

(9,061)

 

 

(25,494)

 

 

(20,261)

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and fully diluted

 

 

26,068,435

 

 

 

25,992,339

 

 

 

26,048,239

 

 

 

25,862,086

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and fully diluted

 

 

(0.42)

 

 

(0.35)

 

 

(0.98)

 

 

(0.78)

 

As a result of the net loss during the three and nine-month periods ended November 2, 2019 and November 3, 2018, the stock options and restricted stock units disclosed in Note 8 were anti-dilutive. Accordingly, diluted net loss per share for each period was the same as basic net loss per share.

 

12. RELATED PARTY DISCLOSURES

 

Transactions with related parties are measured at the exchange amount, being the consideration established and agreed to by the related parties.

 

During the three and nine-month periods ended November 2, 2019, the Company purchased merchandise for resale amounting to $33 and $48, respectively [November 3, 2018 - $125 and $222, respectively], and provided infrastructure and administrative services of $163 and $222, respectively [November 3, 2018 - nil and nil, respectively] from and to a company controlled by one of its executive employees, respectively.

 

During the three and nine-month periods ended November 2, 2019, the Company purchased a perpetual license rights to a reporting data model and associated intellectual property for nil and $200 [November 3, 2018 – nil and nil] and spent $96 and $164 [November 3, 2018 – nil] for consulting services from a related party of the principal shareholder.

 

Loan to a Company controlled by one of the Company’s executive employees

 

During the second quarter of 2019, the Company entered into a secured loan agreement with Oink Oink Candy Inc., doing business as “Squish”, as borrower, and Rainy Day Investments Ltd. (“RDI”), as guarantor pursuant to which the Company agreed to lend to Squish an amount of up to $4 million, amended on September 13, 2019 to reflect a maximum amount available under the facility of $2.0 million and a repayment date no later than December 31, 2019. As of November 2, 2019, $2.0 million was outstanding under the agreement. The loan bears interest, payable monthly, at a rate of 1% over Bank of Montreal’s prime rate, which currently stands at 3.95%. RDI has guaranteed all of Squish’s obligations to the Company and, as security in full for the guarantee, has given a movable hypothec (or lien) in favour of the Company on its shares of DAVIDsTEA. Squish is a company controlled by Sarah Segal, an officer of DAVIDsTEA. RDI, the principal shareholder of DAVIDsTEA, is controlled by Herschel Segal, Executive Chairman, Interim Chief Executive Officer and a director of DAVIDsTEA. The Company and Squish previously entered into a Collaboration and Shared Services Agreement pursuant to which they collaborate on and share various services and infrastructure.

 

For the period ended November 2, 2019, the Company received $36 [November 3, 2018 – nil] as interest on the secured loan.

 

 
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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 or “CODM”) 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

 

 

For the nine months ended

 

 

 

November 2,

 

 

November 3,

 

 

November 2,

 

 

November 3,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Tea

 

 

30,038

 

 

 

31,348

 

 

 

92,770

 

 

 

92,167

 

Tea accessories

 

 

6,199

 

 

 

8,478

 

 

 

20,482

 

 

 

25,979

 

Food and beverages

 

 

3,256

 

 

 

3,830

 

 

 

9,673

 

 

 

11,463

 

 

 

 

39,493

 

 

 

43,656

 

 

 

122,925

 

 

 

129,609

 

 

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

 

 

 

November 2,

 

 

February 2,

 

 

 

2019 (1)

 

 

2019

 

 

 

$

 

 

$

 

Canada

 

 

62,840

 

 

 

27,996

 

US

 

 

8,996

 

 

 

1,470

 

Total

 

 

71,836

 

 

 

29,466

 

 

(1) Includes Right-of-use assets of $37,136 in Canada and $7,689 in US.

 

 
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Results from operating activities before corporate expenses per country are as follows:

 

 

 

For the three months

ended November 2, 2019

 

 

For the nine months ended November 2,

2019 (Restated - Note 3)

 

 

 

Canada

 

 

US

 

 

Consolidated

 

 

Canada

 

 

US

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

 

30,909

 

 

 

8,584

 

 

 

39,493

 

 

 

95,439

 

 

 

27,486

 

 

 

122,925

 

Cost of sales

 

 

14,060

 

 

 

4,079

 

 

 

18,139

 

 

 

42,099

 

 

 

11,331

 

 

 

53,430

 

Gross profit

 

 

16,849

 

 

 

4,505

 

 

 

21,354

 

 

 

53,340

 

 

 

16,155

 

 

 

69,495

 

Selling, general and administration expenses (allocated)

 

 

16,057

 

 

 

4,433

 

 

 

20,490

 

 

 

45,628

 

 

 

13,712

 

 

 

59,340

 

Impairment of property, equipment and right-of-use assets

 

 

949

 

 

 

1,102

 

 

 

2,051

 

 

 

3,429

 

 

 

3,647

 

 

 

7,076

 

Results from operating activities before corporate expenses

 

 

(157)

 

 

(1,030)

 

 

(1,187)

 

 

4,283

 

 

 

(1,204)

 

 

3,079

 

Selling, general and administration expenses (non-allocated)

 

 

 

 

 

 

 

 

 

 

8,129

 

 

 

 

 

 

 

 

 

 

 

23,838

 

Results from operating activities

 

 

 

 

 

 

 

 

 

 

(9,316)

 

 

 

 

 

 

 

 

 

 

(20,759)

Finance costs

 

 

 

 

 

 

 

 

 

 

1,699

 

 

 

 

 

 

 

 

 

 

 

5,305

 

Finance income

 

 

 

 

 

 

 

 

 

 

(185)

 

 

 

 

 

 

 

 

 

 

(570)

Loss before income taxes

 

 

 

 

 

 

 

 

 

 

(10,830)

 

 

 

 

 

 

 

 

 

 

(25,494)

 

 
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For the three months ended

November 3, 2018

 

 

For the nine months ended

November 3, 2018

 

 

 

Canada

 

 

US

 

 

Consolidated

 

 

Canada

 

 

US

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

 

34,709

 

 

 

8,947

 

 

 

43,656

 

 

 

103,091

 

 

 

26,518

 

 

 

129,609

 

Cost of sales

 

 

19,520

 

 

 

5,755

 

 

 

25,275

 

 

 

55,060

 

 

 

16,133

 

 

 

71,193

 

Gross profit

 

 

15,189

 

 

 

3,192

 

 

 

18,381

 

 

 

48,031

 

 

 

10,385

 

 

 

58,416

 

Selling, general and administration expenses (allocated)

 

 

13,872

 

 

 

4,513

 

 

 

18,385

 

 

 

40,794

 

 

 

12,907

 

 

 

53,701

 

Impairment of property, equipment and right-of-use assets

 

 

725

 

 

 

 

 

 

725

 

 

 

3,096

 

 

 

189

 

 

 

3,285

 

Impact of onerous contracts

 

 

133

 

 

 

1,155

 

 

 

1,288

 

 

 

1,129

 

 

 

(643)

 

 

486

 

Results from operating activities before corporate expenses

 

 

459

 

 

 

(2,476)

 

 

(2,017)

 

 

3,012

 

 

 

(2,068)

 

 

944

 

Selling, general and administration expenses (non-allocated)

 

 

 

 

 

 

 

 

 

 

8,721

 

 

 

 

 

 

 

 

 

 

 

27,393

 

Results from operating activities

 

 

 

 

 

 

 

 

 

 

(10,738)

 

 

 

 

 

 

 

 

 

 

(26,449)

Finance costs

 

 

 

 

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

237

 

Finance income

 

 

 

 

 

 

 

 

 

 

(122)

 

 

 

 

 

 

 

 

 

 

(574)

Loss before income taxes

 

 

 

 

 

 

 

 

 

 

(10,696)

 

 

 

 

 

 

 

 

 

 

(26,112)

 

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 loss in the amount of $68.

 

 
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The Company’s foreign exchange exposure is as follows:

 

 

 

November 2,

 

 

February 2,

 

 

 

2019

 

 

2019

 

 

 

US$

 

 

US$

 

Cash

 

 

1,431

 

 

 

267

 

Accounts receivable

 

 

1,396

 

 

 

1,142

 

Accounts payable

 

 

4,388

 

 

 

3,869

 

 

The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars. The Company had no foreign exchange contracts outstanding as at November 2, 2019.

 

Market Risk — Interest Rate Risk

 

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial instruments that potentially subject the Company to cash flow interest rate risk include financial assets with variable interest rates. The Company is exposed to cash flow risk under the Revolving Facility which bears interest at variable interest rates (Note 7). As at November 2, 2019, the Company did not have any borrowings on the Revolving Facility.

 

Liquidity Risk

 

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s approach to managing liquidity risk is to ensure, to the extent possible, that it will always have sufficient liquidity to meet liabilities when due. The Company’s liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. The Company is exposed to this risk mainly in respect of its trade and other payables.

 

As at November 2, 2019, the Company had $28,044 in cash.

 

The Company expects to finance its working capital needs, store renovations, and investments in infrastructure through cash flows from operations and cash on hand. The Company expects that its trade and other payables will be discharged within 90 days.

 

Credit Risk

 

The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial obligations to the Company. The Company’s maximum exposure to credit risk at the reporting date is equal to the carrying value of accounts receivable. Accounts receivable primarily consists of receivables from retail customers who pay by credit card, recoveries of credits from suppliers for returned or damaged products, receivables from other companies for sales of products, gift cards and other services and a loan advance to Squish. Credit card payments have minimal credit risk, the limited number of corporate receivables is closely monitored and the risk for the loan advance is limited, as a result of the pledge of DAVIDsTEA’s shares as security.

 

Fair Values

 

Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost, based on the guidance provided in IFRS 9. The fair values of derivative financial instruments have been determined by reference to forward exchange rates at the end of the reporting period and classified in Level 2 of the fair value hierarchy. There are no outstanding derivative financial instruments at November 2, 2019.

 

There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the three and nine-month periods ended November 2, 2019 and November 3, 2018.

 

 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and there are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, competitive strengths and differentiators, strategy, long-term Adjusted EBITDA margin potential, dividend policy, impact of the macroeconomic environment, properties, outcome of litigation and legal proceedings, use of cash and operating and capital expenditures, impact of new accounting pronouncements, impact of improvements to internal control and financial reporting.

 

While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including the risk factors listed under Item 1A. Risk Factors, as well as other cautionary language in Form 10-K for the fiscal year ended February 2, 2019, filed with the SEC on May 2, 2019.

 

Actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to, the following:

 

 

·Our ability to manage significant changes to our Board of Directors and leadership team;

 

 

 

 

·Our efforts to expand beyond retail stores;

 

 

 

 

·Our ability to maintain our brand image;

 

 

 

 

·Significant competition within our industry;

 

 

 

 

·The effect of a decrease in customer traffic to the shopping malls, centers and street locations where our stores are located;

 

 

 

 

·The results of our transfer pricing audit;

 

 

 

 

·Our ability to attract and retain employees that embody our culture, including Tea Guides and store and district managers and regional directors;

 

 

 

 

·Changes in consumer preferences and economic conditions affecting disposable income;

 

 

 

 

·Our ability to source, develop and market new varieties of teas, tea accessories, food and beverages;

 

 

 

 

·Our reliance upon the continued retention of key personnel;

 

 

 

 

·The impact from real or perceived quality or safety issues with our teas, tea accessories, food and beverages;

 

 

 

 

·Our ability to obtain quality products from third-party manufacturers and suppliers on a timely basis or in sufficient quantities;

 

 

 

 

·The impact of weather conditions, natural disasters and manmade disasters on the supply and price of tea;

 

 

 

 

·Actual or attempted breaches of data security;

 

 

 

 

·The costs of protecting and enforcing our intellectual property rights and defending against intellectual property claims brought by others;

 

 

 

 

·Fluctuations in exchange rates; and

 

 

 

 

·The seasonality of our business.

 

 
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All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. These statements are based upon information available to us as of the date of this Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially-available relevant information. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur, and investors are cautioned not to unduly rely upon these statements.

 

Forward-looking statements speak only as of the date of this Form 10-Q. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-Q, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Form 10-Q or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

 

Accounting Periods

 

All references to “Fiscal 2019” are to the Company’s fiscal year ending February 1, 2020. All references to “Fiscal 2018” are to the Company’s fiscal year ended February 2, 2019.

 

The Company’s fiscal year ends on the Saturday closest to the end of January, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. The year ended February 2, 2019 and year ending February 1, 2020 both cover a 52-week period.

 

Overview

 

We are a retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories and food and beverages, primarily through 233 company-operated DAVIDsTEA stores as of November 2, 2019, and through our online store at www.davidstea.com. Additionally, we currently operate five seasonal kiosks, located in high-traffic and high profile malls in Canada. These kiosks offer a streamlined assortment of pre-packaged teas, hard goods, accessories, and gifting items. We are building a brand that seeks to expand the definition of tea with innovative products that consumers can explore in an open and inviting retail environment and online. We strive to make tea a multi-sensory experience in our stores by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of tea as well as the ease of preparation.

 

Factors Affecting Our Performance

 

We believe that our performance and future success depend on a number of factors that present significant opportunities for us and may pose risks and challenges, as discussed in the “Risk Factors” section of Form 10-K filed with the SEC and on SEDAR and available at www.sec.gov and www.sedar.com, respectively.

 

How We Assess Our Performance

 

The key measures we use to evaluate the performance of our business and the execution of our strategy are set forth below:

 

Sales. Sales consist primarily of sales from our retail stores, our online store and from our wholesale distribution channel. Our business is seasonal and, as a result, our sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal quarter, which includes the holiday sales period, and tend to be lowest in the second and third fiscal quarter because of lower customer traffic in our locations in the summer months.

 

The specialty retail industry is cyclical, and our sales are affected by general economic conditions. A number of factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence can affect purchases of our products. Sales also include gift card breakage income.

 

Comparable Sales. Comparable sales refer to period-over-period comparison information for comparable stores. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation. As a result, data regarding comparable sales may not be comparable to similarly titled data from other retailers.

 

 
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Measuring the change in period-over-period comparable sales allows us to evaluate how our business is performing. Various factors affect comparable sales, including:

 

 

·

our ability to anticipate and respond effectively to consumer preference, buying and economic trends;

 

·

our ability to provide a product offering that generates new and repeat visits to our stores and online;

 

·

the customer experience we provide in our stores and online;

 

·

the level of customer traffic near our locations in which we operate;

 

·

the number of customer transactions and average ticket in our stores and online;

 

·

the pricing of our tea, tea accessories, and food and beverages;

 

·

our ability to obtain and distribute product efficiently;

 

·

our opening of new stores in the vicinity of our existing stores; and

 

·

the opening or closing of competitor stores in the vicinity of our stores.

 

Non-Comparable Sales. Non-comparable sales include sales from stores prior to the beginning of their thirteenth fiscal month of operation.

 

Gross Profit. Gross profit is equal to our sales less our cost of sales. Cost of sales includes product costs, freight costs, certain store occupancy costs and distribution costs.

 

Selling, General and Administration Expenses. Selling, general and administration expenses consist of store operating expenses and other general and administration expenses, including store impairments and provision (recovery) for onerous contracts. Store operating expenses consist of all store expenses excluding certain occupancy related costs (which are included in costs of sales). General and administration costs consist of salaries and other payroll costs, travel, professional fees, stock compensation, marketing expenses, information technology, depreciation of property, plant and equipment, amortization of intangible, amortization of right-of-use assets and other operating costs.

 

General and administration costs, which are generally fixed in nature, do not vary proportionally with sales to the same degree as our cost of sales. We believe that these costs will decrease as a percentage of sales over time. Accordingly, this expense as a percentage of sales is usually higher in lower volume quarters and lower in higher volume quarters.

 

We present Adjusted selling, general and administration expenses as a supplemental measure because we believe it facilitates a comparative assessment of our selling, general and administration expenses under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure on page 28 of this Quarterly Report on Form 10-Q.

 

Results from Operating Activities. Results from operating activities consist of our gross profit less our selling, general and administration expenses.

 

We present Adjusted results from operating activities as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure on page 29 of this Quarterly Report on Form 10-Q.

 

Finance Costs. Finance costs consist of cash and imputed non-cash charges related to our credit facility, accretion expense on the provisions for onerous contracts and interest expense from lease liabilities.

 

Finance Income. Finance income consists of interest income on cash balances.

 

Provision for Income Tax. Provision for income tax consists of federal, provincial, state and local current and deferred income taxes.

 

Adjusted EBITDA. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. Specifically, Adjusted EBITDA allows for an assessment of our operating performance and our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, finance costs, deferred rent, non-cash compensation expense, costs (recovery) related to onerous contracts or contracts where we expect the costs of the obligations to exceed the economic benefit, loss on disposal of property and equipment, impairment of property, equipment and right-of-use assets, and certain non-recurring expenses. This measure also functions as a benchmark to evaluate our operating performance. It is reconciled to its nearest IFRS measure on page 29 of this Quarterly Report on Form 10-Q.

 

 
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Table of Contents

 

Selected Operating and Financial Highlights

 

Results of Operations

 

The Company has adopted IFRS 16 as at February 3, 2019. As fully described in Note 3 of our unaudited condensed consolidated interim financial statements for the third quarter of 2019, IFRS 16 provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized on the consolidated balance sheet. The adoption of IFRS 16 had a significant impact as the Company recognized 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. Comparative figures for the first nine-month of 2019 have not been restated and continue to be reported under IAS 17, Leases and Related interpretations.

 

As a result, operating lease payments which were previously included in cost of sales on the consolidated statement of loss are replaced with depreciation expenses (included in selling, general and administrative expenses) from the right-of-use assets and interest expense (included under finance costs) from the lease liability. For analysis purposes only, this MD&A also shows where applicable, amounts for the first nine-month of 2019 as if the Company continued to report under IAS 17, Leases and Related interpretations, and did not adopt IFRS 16, other than for differences related to testing long-lived assets for impairment and accounting for onerous store leases pursuant to the guidance of IAS 37, Provisions, which could have had an impact on the EBITDA and net loss of the Company under accounting standards applicable prior to February 3, 2019.

 

The following table summarizes key components of our results of operations for the period indicated:

 

 

 

For the three months ended

For the nine months ended 

 

 

 

 

 

 

November 2, 2019

 

 

 

 

 

 

 

 

November 2, 2019

 

 

 

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated statement of loss data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$39,493

 

 

$39,493

 

 

$43,656

 

 

$122,925

 

 

$122,925

 

 

$129,609

 

Cost of sales

 

 

18,139

 

 

 

23,859

 

 

 

25,275

 

 

 

53,430

 

 

 

70,772

 

 

 

71,193

 

Gross profit

 

 

21,354

 

 

 

15,634

 

 

 

18,381

 

 

 

69,495

 

 

 

52,153

 

 

 

58,416

 

Selling, general and administration expenses

 

 

30,670

 

 

 

27,733

 

 

 

29,119

 

 

 

90,254

 

 

 

81,101

 

 

 

84,865

 

Results from operating activities

 

 

(9,316)

 

 

(12,099)

 

 

(10,738)

 

 

(20,759)

 

 

(28,948)

 

 

(26,449)

Finance costs

 

 

1,699

 

 

 

 

 

 

80

 

 

 

5,305

 

 

 

 

 

 

237

 

Finance income

 

 

(185)

 

 

(185)

 

 

(122)

 

 

(570)

 

 

(570)

 

 

(574)

Loss before income taxes

 

 

(10,830)

 

 

(11,914)

 

 

(10,696)

 

 

(25,494)

 

 

(28,378)

 

 

(26,112)

Provision for income tax recovery

 

 

 

 

 

 

 

 

(1,635)

 

 

 

 

 

 

 

 

(5,851)

Net loss

 

$(10,830)

 

$(11,914)

 

$(9,061)

 

$(25,494)

 

$(28,378)

 

$(20,261)

Percentage of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

100.0%

Cost of sales

 

 

45.9%

 

 

60.4%

 

 

57.9%

 

 

43.5%

 

 

57.6%

 

 

54.9%

Gross profit

 

 

54.1%

 

 

39.6%

 

 

42.1%

 

 

56.5%

 

 

42.4%

 

 

45.1%

Selling, general and administration expenses

 

 

77.7%

 

 

70.2%

 

 

66.7%

 

 

73.4%

 

 

66.0%

 

 

65.5%

Results from operating activities

 

(23.6

%)

 

(30.6

%)

 

(24.6

%)

 

(16.9

%)

 

(23.5

%)

 

(20.4

%)

Finance costs

 

 

4.3

%

 

 

0.0%

 

 

0.2%

 

 

4.3%

 

 

0.0%

 

 

0.1%

Finance income

 

(0.5

%) 

 

(0.5

%)

 

(0.3

%)

 

(0.5

%)

 

(0.5

%)

 

(0.4

%)

Loss before income taxes

 

(27.4

%)

 

(30.2

%)

 

(24.5

%)

 

(20.7

%)

 

(23.1

%)

 

(20.1

%) 

Provision for income tax recovery

 

 

0.0%

 

 

0.0%

 

(3.7

%)

 

 

0.0%

 

 

0.0%

 

(4.5

%)

Net loss

 

(27.4

%)

 

(30.2

%)

 

(20.8

%)

 

(20.7

%)

 

(23.1

%)

 

(15.6

%)

Other financial and operations data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (1)

 

$(2,241)

 

$(7,962)

 

$(6,248)

 

$1,387

 

 

$(15,955)

 

$(12,212)

Adjusted EBITDA as a percentage of sales

 

(5.7

%)

 

(20.2

%)

 

(14.3

%)

 

 

1.13%

 

(13.0

%)

 

(9.4

%)

Number of stores at end of period

 

 

233

 

 

 

233

 

 

 

238

 

 

 

233

 

 

 

233

 

 

 

238

 

Comparable sales decline for period (2)

 

(14.1

%)

 

(14.1

%)

 

(4.7

%)

 

(10.0

%)

 

(10.0

%)

 

(8.8

%)

_______________

(1)

For a reconciliation of Adjusted EBITDA to net income see “—Non-IFRS Financial Measures” below.

(2)

Comparable sales refer to period-over-period comparison information for comparable stores. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation.

 

 
27
 
Table of Contents

 

Non-IFRS Financial Measures

 

Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, are not a presentation made in accordance with IFRS, and the use of the terms Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, may differ from similar measures reported by other companies. We believe that Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, provides investors with useful information with respect to our historical operations. Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA are not measurements of our financial performance under IFRS and should not be considered in isolation or as an alternative to net income, net cash provided by operating, investing or financing activities or any other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with IFRS. We understand that although Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under IFRS. Some of these limitations are:

 

·

Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, do not reflect changes in, or cash requirements for, our working capital needs;

 

·

Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, do not reflect the cash requirements necessary to service interest or principal payments on our debt; and

 

·

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, does not reflect any cash requirements for such replacements.

 

Because of these limitations, Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA before and after adjustments for the impact of IFRS 16, should not be considered as discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations.

 

The following tables present reconciliations of Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA before and after adjustments for the impact of IFRS 16, to our Net loss determined in accordance with IFRS:

 

Reconciliation of Adjusted selling, general and administration expenses

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

 

 

 

November 2, 2019

 

 

 

 

 

 

 

 

November 2, 2019

 

 

 

 

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administration expenses

 

$30,670

 

 

$27,733

 

 

$29,119

 

 

$90,254

 

 

$81,101

 

 

$84,865

 

Executive separation costs related to salary (a)

 

 

 

 

 

 

 

 

(123)

 

 

 

 

 

 

 

 

(840)

Impairment of property, equipment and right-of-use assets (b)

 

 

(2,051)

 

 

(2,051)

 

 

(725)

 

 

(7,076)

 

 

(7,076)

 

 

(3,285)

Impact of onerous contracts (c)

 

 

 

 

 

 

 

 

(1,288)

 

 

 

 

 

 

 

 

(486)

Strategic review and proxy contest costs (d)

 

 

 

 

 

 

 

 

(27)

 

 

 

 

 

 

 

 

(3,538)

Adjusted selling, general and administration expenses

 

$28,619

 

 

$25,682

 

 

$26,956

 

 

$83,178

 

 

$74,025

 

 

$76,716

 

_____________

(a)

Executive separation costs represent mainly salary owed to certain former executives as part of their separation of employment from the Company.

(b)

Represent costs related to impairment of property, equipment and right-of-use assets for stores.

(c)

Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.

(d)

Represents costs related to the corporate strategic review process as well as costs related to the proxy contest.

 

 
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Table of Contents

 

Reconciliation of Adjusted results from operating activities

 

 

 

For the three months ended

For the nine months ended

 

 

 

 

 

November 2, 2019

 

 

 

 

 

 

November 2, 2019

 

 

 

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Results from operating activities

 

$(9,316)

 

$(12,099)

 

$(10,738)

 

$(20,759)

 

$(28,948)

 

$(26,449)

Executive separation costs related to salary (a)

 

 

 

 

 

 

 

 

123

 

 

 

 

 

 

 

 

 

840

 

Impairment of property, equipment and right-of-use assets (b)

 

 

2,051

 

 

 

2,051

 

 

 

725

 

 

 

7,076

 

 

 

7,076

 

 

 

3,285

 

Impact of onerous contracts (c)

 

 

 

 

 

 

 

 

1,288

 

 

 

 

 

 

 

 

 

486

 

Strategic review and proxy contest costs (d)

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

3,538

 

Adjusted results from operating activities

 

$(7,265)

 

$(10,048)

 

$(8,575)

 

$(13,683)

 

$(21,872)

 

$(18,300)

_____________

(a)

Executive separation costs represent mainly salary owed to certain former executives as part of their separation of employment from the Company.

(b)

Represent costs related to impairment of property, equipment and right-of-use assets for stores.

(c)

Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.

(d)

Represents costs related to the corporate strategic review process as well as costs related to the proxy contest.

 

Reconciliation of Net loss to Adjusted EBITDA

 

 

 

For the three months ended

For the nine months ended

 

 

 

 

 

November 2, 2019

 

 

 

 

 

 

November 2, 2019

 

 

 

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

 

2019

 

 

of IFRS 16 (1)

 

 

2018

 

 

2019

 

 

of IFRS 16 (1)

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(10,830)

 

$(11,914)

 

$(9,061)

 

$(25,494)

 

$(28,378)

 

$(20,261)

Finance costs

 

 

1,699

 

 

 

 

 

 

80

 

 

 

5,305

 

 

 

 

 

 

237

 

Finance income

 

 

(185)

 

 

(185)

 

 

(122)

 

 

(570)

 

 

(570)

 

 

(574)

Depreciation and amortization

 

 

4,768

 

 

 

1,830

 

 

 

2,162

 

 

 

14,522

 

 

 

5,369

 

 

 

6,098

 

Recovery of income tax

 

 

 

 

 

 

 

 

(1,635)

 

 

 

 

 

 

 

 

(5,851)

EBITDA

 

$(4,548)

 

$(10,269)

 

$(8,576)

 

$(6,237)

 

$(23,579)

 

$(20,351)

Additional adjustments :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense (a)

 

 

256

 

 

 

256

 

 

 

91

 

 

 

526

 

 

 

526

 

 

 

(7)

Executive separation costs related to salary (b)

 

 

 

 

 

 

 

 

123

 

 

 

 

 

 

 

 

 

840

 

Impairment of property, equipment and right-of-use assets (c)

 

 

2,051

 

 

 

2,051

 

 

 

725

 

 

 

7,076

 

 

 

7,076

 

 

 

3,285

 

Impact of onerous contracts (d)

 

 

 

 

 

 

 

 

1,288

 

 

 

 

 

 

 

 

 

486

 

Deferred rent (e)

 

 

 

 

 

 

 

 

74

 

 

 

 

 

 

 

 

 

(17)

Loss on disposal of property and equipment

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

22

 

 

 

14

 

Strategic review and proxy contest costs (f)

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

3,538

 

Adjusted EBITDA

 

$(2,241)

 

$(7,962)

 

$(6,248)

 

$1,387

 

 

$(15,955)

 

$(12,212)

_____________

(1)

Adjusted EBITDA for November 2, 2019 excluding impact of IFRS 16 assumes the Company continued to report under IAS 17, Leases and did not adopt IFRS 16. Under IFRS 16, the nature and timing of expenses related to operating leases have changed as the straight-line operating leases expenses have been replaced with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Accordingly, for the three months and nine months ended November 2, 2019, IFRS 16 had a favourable impact of approximately $5.7 million and $17.3 million respectively, on adjusted EBITDA as operating lease expenses have been replaced with depreciation and interest expense, which are not included in the calculation of adjusted EBITDA.

 

(a)

Represents non-cash stock-based compensation expense.

(b)

Executive separation costs represent mainly salary owed to certain former executives as part of their separation of employment from the Company.

(c)

Represent costs related to impairment of property, equipment and right-of-use assets for stores.

(d)

Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.

(e)

Represents the extent to which our annual rent expense has been above or below our cash rent payments.

(f)

Represents costs related to the corporate strategic review process as well as costs related to the proxy contest.

 

 
29
 
Table of Contents

 

Reconciliation of reported results to Adjusted net loss

  

 

 

For the three months ended

For the nine months ended

 

 

 

 

 

November 2, 2019

 

 

 

 

 

 

November 2, 2019

 

 

 

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(10,830)

 

$(11,914)

 

$(9,061)

 

$(25,494)

 

$(28,378)

 

$(20,261)

Executive separation costs related to salary (a)

 

 

 

 

 

 

 

 

123

 

 

 

 

 

 

 

 

 

840

 

Impairment of property, equipment and right-of-use assets (b)

 

 

2,051

 

 

 

2,051

 

 

 

725

 

 

 

7,076

 

 

 

7,076

 

 

 

3,285

 

Impact of onerous contracts (c)

 

 

 

 

 

 

 

 

1,288

 

 

 

 

 

 

 

 

 

486

 

Strategic review and proxy contest costs (d)

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

3,538

 

Recovery of income tax (e)

 

 

 

 

 

 

 

 

(1,635)

 

 

 

 

 

 

 

 

(5,851)

Adjusted net loss

 

$(8,779)

 

$(9,863)

 

$(8,533)

 

$(18,418)

 

$(21,302)

 

$(17,964)

_____________

(a)

Executive separation costs represent mainly salary owed to certain former executives as part of their separation of employment from the Company.

(b)

Represent costs related to impairment of property, equipment and right-of-use assets for stores.

(c)

Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.

(d)

Represents costs related to the corporate strategic review process as well as costs related to the proxy contest.

(e)

Represents the setup of deferred income tax assets resulting from the probability of using operating tax loss carry forwards

 

Reconciliation of fully diluted loss per common share to adjusted fully diluted loss per common share

  

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

 

 

November 2, 2019

 

 

 

 

 

 

November 2, 2019

 

 

 

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, fully diluted

 

 

26,068,435

 

 

 

26,068,435

 

 

 

25,992,339

 

 

 

26,048,239

 

 

 

26,048,239

 

 

 

25,862,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted average number of shares outstanding, fully diluted

 

 

26,068,435

 

 

 

26,068,435

 

 

 

25,992,339

 

 

 

26,048,239

 

 

 

26,048,239

 

 

 

25,862,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(10,830)

 

$(11,914)

 

$(9,061)

 

$(25,494)

 

$(28,378)

 

$(20,261)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net loss

 

$(8,779)

 

$(9,863)

 

$(8,533)

 

$(18,418)

 

$(21,302)

 

$(17,964)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, fully diluted

 

$(0.42)

 

$(0.46)

 

$(0.35)

 

$(0.98)

 

$(0.98)

 

$(0.78)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net loss per share, fully diluted

 

$(0.34)

 

$(0.38)

 

$(0.33)

 

$(0.71)

 

$(0.71)

 

$(0.69)

 

 
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Three Months Ended November 2, 2019 Compared to Three Months Ended November 3, 2018

 

Sales. Sales for the three months ended November 2, 2019 decreased 9.5%, or $4.2 million, to $39.5 million from $43.7 million in the prior year quarter. Sales from our e-commerce and wholesale channels increased $1.1 million, or by 14.1%, driven primarily by greater online adoption as well as by increased demand in our grocery distribution channel. Offsetting this was a decline in retail sales of $5.3 million and a decline of $5.0 million, or 14.1%, in comparable store sales.

 

Gross Profit. Gross profit increased by 16.2%, or $3.0 million, to $21.4 million for the three months ended November 2, 2019, from the prior year quarter. IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Accordingly, straight-line operating lease expense is no longer included in cost of sales in arriving at gross profit. Prior to the adoption of IFRS 16, straight-line operating lease expense amounting to $5.7 million would have been included in arriving at gross profit. Excluding the impact of IFRS 16, gross profit decreased by $2.7 million to $15.6 million, representing a gross profit of 39.6% for the three months ended November 2, 2019, a decrease of 2.5% from the prior year quarter resulting from a shift in product sales mix and the deleveraging of fixed costs due to negative comparable store sales.

 

Selling, General and Administration Expenses (“SG&A”). SG&A increased to $30.7 million for the three months ended November 2, 2019 from the prior year quarter. Under IFRS 16, SG&A includes $2.9 million of depreciation in connection with our right-of-use assets. Excluding the impact of IFRS 16, SG&A would have amounted to $27.7 million, a decrease of $1.4 million, or 4.8%, from the prior year quarter and as a percentage of sales would have amounted to 70.2% representing an increase of 3.5% over the prior year quarter. Excluding the impact of IFRS 16 and impairment of property, equipment and right-of-use assets for the three months ended November 2, 2019 and the impact of onerous contracts, impairment of property, equipment and right-of-use assets, executive separation cost related to salary and costs related to the strategic review and proxy contest for the three months ended November 3, 2018, Adjusted SG&A decreased by $1.3 million for the three months ended November 2, 2019. As a percentage of sales and excluding the impact of IFRS 16, Adjusted SG&A increased to 65.0% from 61.7% due to higher selling expenses.

 

Operating Activities. Loss from operating activities was $9.3 million as compared to a loss of $10.7 million in the prior year quarter. Excluding the impact of IFRS 16, loss from operating activities would have amounted to $12.1 million, a decrease of $1.4 million from the prior year quarter. This decrease is mainly explained by the absence of executive separation cost related to salary, the impact of onerous contracts, and costs related to the strategic review and proxy contest of incurred in the same period of 2018 offset by the increase in the impairment of property, equipment and right-of-use assets in 2019. Adjusted results from operating activities, which excludes any impact of executive separation cost related to salary, impairment of property, equipment and right-of-use assets, impact from onerous contracts, and costs related to the strategic review and proxy contest, was $10.0 million compared to $8.6 million in the prior year quarter.

 

Finance Costs. Finance costs amounted to $1.7 million in the three months ended November 2, 2019, an increase of $1.6 million from the prior year quarter. Finance costs under IFRS 16 includes interest expense from lease liabilities measured at the present value of lease payments to be made over the lease term. The Company recognized a lease liability of $102.2 million on initial application of IFRS 16. Excluding the impact of IFRS 16, interest expense would have been nil in the current year quarter.

 

Finance Income. Finance income of $0.2 million is derived primarily from interest on cash on hand and has increased slightly from prior year quarter.

 

EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was negative $4.5 million in the quarter ended November 2, 2019 compared to a negative $8.6 million in the prior year quarter. Excluding the impact of IFRS 16, EBITDA would have amounted to a negative $10.3 million, representing a decrease of $1.7 million over the prior year quarter. Adjusted EBITDA for the quarter amounted to a negative $2.2 million compared to a negative $6.2 million in the prior year quarter. Excluding the impact of IFRS 16, impairment of property, equipment and right-of-use assets and stock-based compensation for the three months ended November 2, 2019 and the impact of stock-based compensation, executive separation costs related to salary, impairment of property, equipment and right-of-use assets, onerous contracts, deferred rent and costs related to the strategic review and proxy contest for the three months ended November 3, 2018, Adjusted EBITDA decreased by $1.7 million to 8.0 million.

 

 
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Net Loss. Net loss was $10.8 million in the quarter ended November 2, 2019 compared to a net loss of $9.1 million in the prior year quarter. Excluding the impact of IFRS 16, Net loss would have amounted to $11.9 million, representing an increase of $2.9 million in net loss over the prior year quarter. Adjusted net loss, which excludes the impact from executive separation cost related to salary, impairment of property, equipment and right-of-use assets, impact of onerous contracts and costs related to strategic review and proxy contest, and the setup of deferred income tax assets resulting from the probability of using operating tax loss carry forwards, was $9.9 million compared to $8.5 million in the prior year quarter.

 

Fully diluted loss per common share. Fully diluted loss per common share was $0.42 compared to $0.35 in the third quarter of Fiscal 2018. Adjusted fully diluted loss per common share, which is adjusted net loss on a fully diluted weighted average shares outstanding basis, was $0.34 per share compared to $0.33 per share for the same period in the prior year.

 

Nine Months Ended November 2, 2019 Compared to Nine Months Ended November 3, 2018

 

Sales. Sales for the nine months ended November 2, 2019 decreased 5.2%, or $6.7 million, to $122.9 million from $129.6 million in the same period in the prior year. Sales from our e-commerce and wholesale channels increased $4.5 million, or by 22.7%, driven primarily by greater online adoption as well as by increased demand in our grocery distribution channel. Offsetting this was a decline in retail sales of $11.2 million and a decline of $10.8 million, or 10.0%, in comparable store sales.

 

Gross Profit. Gross profit increased by 19.0%, or $11.1 million, to $69.5 million for the nine months ended November 2, 2019, from the same period in the prior year. IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Accordingly, straight-line operating lease expense is no longer included in cost of sales in arriving at gross profit. Prior to the adoption of IFRS 16, straight-line operating lease expense amounting to $17.3 million would have been included in arriving at gross profit. Excluding the impact of IFRS 16, gross profit decreased by $6.3 million to $52.2 million, representing a gross profit of 42.4% for the nine months ended November 2, 2019, a decrease of 2.7% compare to the nine months ended November 3, 2018 driven by a shift in product sales mix and the deleveraging of fixed costs due to negative comparable store sales.

 

Selling, General and Administration Expenses. SG&A increased by 6.4%, or $5.4 million, to $90.3 million in the nine months ended November 2, 2019 from the same period in the prior year. Under IFRS 16, SG&A includes $9.2 million of depreciation in connection with our right-of-use assets. Excluding the impact of IFRS 16, SG&A would have amounted to $81.1 million, a decrease of $3.8 million, or 4.4%, from the prior year quarter and as a percentage of sales would have amounted to 66.0% representing an increase of 0.5% over the prior year quarter. Excluding the impact of IFRS 16 and impairment of property, equipment and right-of-use assets for the nine months ended November 2, 2019 and the impact of executive separation cost related to salary, impairment of property, equipment and right-of-use assets, onerous contracts and costs related to the strategic review and proxy contest for the nine months ended November 3, 2018, Adjusted SG&A decreased by $2.7 million for the nine months ended November 2, 2019. As a percentage of sales, Adjusted SG&A increase to 60.2% from 59.2% due to higher selling expenses.

 

Operating Activities. Loss from operating activities was $20.8 million as compared to a loss of $26.4 million in the same period in 2018. Excluding the impact of IFRS 16, loss from operating activities would have amounted to $28.9 million, an increase of $2.5 million from the same period in 2018. This is mainly due to the absence of costs related to executive separation costs related to salary, the impact of onerous contracts and the costs related to the strategic review and proxy contest incurred in the period in 2018 offset by increase in impairment of property, equipment and right-of-use assets in 2019. Adjusted results from operating activities, which excludes any impact from executive separation costs related to salary, impairment of property, equipment and right-of-use assets, onerous contracts, and costs related to the strategic review and proxy contest, was negative $21.9 million compared to negative $18.3 million in the same period in the prior year.

 

Finance Costs. Finance costs amounted to $5.3 million in the nine months ended November 2, 2019, an increase of $5.1 million from the same period in 2018. Finance costs under IFRS 16 includes interest expense from lease liabilities measured at the present value of lease payments to be made over the lease term. The Company recognized a lease liability of $102.2 million on initial application of IFRS 16. Excluding the impact of IFRS 16, interest expense would have been nil in the current nine-month period.

 

Finance Income. Finance income of $0.6 million is derived primarily from interest on cash on hand stayed stable from the same period in the prior year.

 

 
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EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was negative $6.2 million in the nine-month period ended November 2, 2019 compared to negative $20.4 million in the same period in the prior year. Excluding the impact of IFRS 16, EBITDA would have amounted to a negative $24.6 million, representing a decrease of $3.2 million over the same period in the prior year. Adjusted EBITDA for the nine-month period amounted to $1.4 million compared to a negative $12.2 million in the same period in the prior year. Excluding the impact of IFRS 16, impairment of property, equipment and right-of-use assets and stock-based compensation for the nine months ended November 2, 2019 and the impact of stock-based compensation, executive separation costs related to salary, impairment of property, equipment and right-of-use assets, onerous contracts, deferred rent and costs related to the strategic review and proxy contest for the nine months ended November 3, 2018, Adjusted EBITDA decreased by $3.7 million, to $16.0 million.

 

Net Loss. Net loss was $25.5 million in the nine-month period ended November 2, 2019 compared to a net loss of $20.3 million in the same period in the prior year. Excluding the impact of IFRS 16, Net loss would have amounted to $28.4 million, representing an increase of $8.1 million in net loss over the same period in the prior year. Adjusted net loss, which excludes the impact of IFRS 16 and the impact from executive separation costs related to salary, impairment of property, equipment and right-of-use assets, onerous contracts and costs related to strategic review and proxy contest, and the setup of deferred income tax assets resulting from the probability of using operating tax loss carry forwards, was $21.3 million compared to $18.0 million in the prior year period.

 

Fully diluted loss per common share. Fully diluted loss per common share in the nine-month period ended November 2, 2019 was $0.98 compared to $0.78 in the same period of Fiscal 2018. Adjusted fully diluted loss per common share, which is adjusted net loss on a fully diluted weighted average shares outstanding basis, was $0.71 per share compared to $0.69 per share.

 

Liquidity and Capital Resources

 

As at November 2, 2019, we had $28.0 million of cash primarily held by major Canadian financial institutions. Total current assets less the sum of Trade and other payables and Deferred revenue was $47,439 and $65,842, for the periods ended November 2, 2019 and February 2, 2019, respectively.

 

Our primary source of liquidity is cash on hand. Our primary cash needs are to finance working capital, investments in infrastructure and for capital expenditures related to store renovations.

 

Capital expenditures typically vary depending on the timing of new store openings, store renovations and infrastructure-related investments.

 

Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent and other store operating costs. Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. We funded our capital expenditures and working capital requirements from cash on hand and net cash provided by our operating activities.

 

We believe that our cash position, net cash provided by our operating activities will be adequate to finance our planned capital expenditures and working capital requirements for the next twelve months.

 

 
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Cash Flow

 

A summary of our cash flows from operating, investing and financing activities is presented in the following table:

 

 

 

For the three months ended

For the nine months ended

 

 

 

 

 

November 2, 2019

 

 

 

 

 

 

 

November 2, 2019

 

 

 

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

November 2,

 

 

Excluding impact

 

 

November 3,

 

 

 

2019

 

 

of IFRS 16

 

 

2018

 

 

2019

 

 

of IFRS 16

 

 

2018

 

Cash flows provided by (used in) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$4,786

 

 

$(934)

 

$(18,037)

 

$8,229

 

 

$(9,113)

 

$(37,581)

Financing activities

 

 

(5,711)

 

 

9

 

 

 

8

 

 

 

(17,333)

 

 

9

 

 

 

82

 

Investing activities

 

 

(756)

 

 

(756)

 

 

(2,880)

 

 

(4,926)

 

 

(4,926)

 

 

(7,271)

Decrease in cash

 

$(1,681)

 

$(1,681)

 

$(20,909)

 

$(14,030)

 

$(14,030)

 

$(44,770)

 

Three Months Ended November 2, 2019 Compared to Three Months Ended November 3, 2018

 

Cash Flows Used in Operating Activities. Net cash provided by operating activities amounted to $4.8 million for the three months ended November 2, 2019 from net cash used of $18.0 million for the three months ended November 3, 2018. Excluding the impact of IFRS 16, net cash used in operating activities amounted to $0.9 million, an improvement of $17.1 million from the prior year quarter. Net change in other non-cash working capital balances related to operations improved by $19.8 million primarily from a reduction in cash used for inventories, the decrease in prepaid and deposits, the collection of accounts receivables, collection of income tax receivables and the increase in accounts payable and accrued liabilities.

 

Cash Flows Used in Financing Activities. Net cash flows used in financing activities was $5.7 million for the three months ended November 2, 2019, compared to nil for the three months ended November 3, 2018. Excluding the impact of IFRS 16, net cash used in financing activities amounted to nil.

 

Cash Flows Used in Investing Activities. Cash flows used in investing activities was $0.8 million for the three months ended November 2, 2019, compared to $2.9 million for the three months ended November 3, 2018. The decrease in net cash used in investing activities relates to the decrease in capital expenditures

 

Nine Months Ended November 2, 2019 Compared to Nine Months Ended November 3, 2018

 

Cash Flows Used in Operating Activities. Net cash provided by operating activities amounted to $8.2 million for the nine months ended November 2, 2019 from net cash used of $37.6 million for the nine months ended November 3, 2018. Excluding the impact of IFRS 16, net cash used in operating activities amounted to $9.1 million, an improvement of $28.5 million from the same period in the prior year. Net change in other non-cash working capital balances related to operations improved by $34.6 million primarily from a reduction in cash used for inventories, the decrease in prepaid and deposits, the collection of accounts receivables, collection of income tax receivables and the increase in accounts payable and accrued liabilities.

 

Cash Flows Used in Financing Activities. Net cash flows used in financing activities was $17.3 million for the nine months ended November 2, 2019, compared to net cash provided of $0.1 million for the nine months ended November 3, 2018. Excluding the impact of IFRS 16, net cash used in financing activities amounted to nil.

 

Cash Flows Used in Investing Activities. Cash flows used in investing activities was $4.9 million for the nine months ended November 2, 2019, compared to $7.3 million for the nine months ended November 3, 2018. The decrease in net cash used in investing activities relates to the decrease in capital expenditures partially offset by the loan advance made in the second quarter.

 

 
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Credit Facility with Bank of Montreal

 

On June 11, 2018, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a two year revolving facility (“Amended Revolving Facility”) in the principal amount of $15,000 or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018, with no accordion feature. Borrowings under the Amended Revolving Facility may not exceed the lesser of the total commitment for the revolving facility and the borrowing base, calculated as 75% of the face value of all eligible receivables plus 50% of the estimated value of all eligible inventory, less any priority payables.

 

The Amended Credit Agreement subjects the Company to certain financial covenants. Without the prior written consent of the lender, the Company’s fixed charge coverage ratio may not be less than 1.10:1.00 and the Company’s leverage ratio may not exceed 3.00:1.00. In addition, the Company’s net tangible worth may not be less than $65,000 and the Company’s minimum excess availability must not be less than $15,000. The Amended Revolving Facility bears interest based on the Company’s adjusted leverage ratio, at the bank’s prime rate, U.S. bank rate or LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility.

 

The credit facility also contains nonfinancial 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 November 2, 2019, the Company did not have any borrowings under the Amended Revolving Facility.

 

As at November 2, 2019, the Company is in breach of its fixed charge coverage ratio and certain nonfinancial covenants. BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement, however the Company cannot borrow under the facility.

 

The current lending agreement will be terminated on the earlier of (a) January 24, 2020, (b) the Company securing new financing. The Company is in good faith discussions with BMO to install an asset based lending facility that will provide a revolving facility at commercially reasonable terms.

 

 
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Table of Contents

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet obligations.

 

Contractual Obligations and Commitments

 

There have been no significant changes to our contractual obligations as disclosed in our consolidated financial statements for the fiscal year ended February 2, 2019, other than those which occur in the normal course of business.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of financial statements requires us to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard to the level of judgement involved and its potential impact on our reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period, and would materially impact our financial position, changes in financial position or results of operations. Our significant accounting policies are discussed under Note 3 to our consolidated financial statements for the year ended February 2, 2019 included in our Annual Report on Form 10-K dated May 2, 2019. There have been no material changes to the critical accounting policies and estimates since February 2, 2019, other than with respect to IFRS 16 as described in Note 3 to the interim consolidated financial statements.

 

Recently Issued Accounting Standards

 

Refer to Note 3, “Changes in Accounting Policies” for a discussion of recent accounting pronouncements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There has been no material change in the foreign exchange and interest rate risk discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K dated May 2, 2019.

 

 
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Table of Contents

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chairman and Interim Chief Executive Officer and Chief Financial Officer and Chief Operating Officer, evaluated the effectiveness of our disclosure controls and procedures as of November 2, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of November 2, 2019, our Chairman and Interim Chief Executive Officer and Chief Financial Officer and Chief Operating Officer concluded that, as of such date, our disclosure controls and procedures were not effective.

 

During the course of the Company’s financial statement close process for the quarter ended November 2, 2019, accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). When appropriately performing the assessment of impairment indicators with respect to the right-of-use assets (“ROU assets”) as at May 4, 2019 and August 3, 2019, impairment charges of $13,924 and $5,025 respectively were identified that would have been required to be recognized in the respective periods under the Company’s accounting policy for transition to IFRS 16, which included the use of the practical expedient for assessing impairment. Upon further review, the Company also determined that, pursuant to IFRS standards, its financial statements would be more relevant had they applied IAS 36 to assess impairment of ROU assets as of the date of initial adoption, instead of applying the available practical expedient. Accordingly, the Company elected to voluntarily change its accounting policy to perform an impairment assessment in accordance with IAS 36 at the date of transition to IFRS 16. The Company believes this change is more relevant because it more faithfully depicts the performance of the Company. Subsequent to the retrospective application of the change in accounting policy, the impairment charges were nil and $5,025 for the quarters ended May 4, 2019 and August 3, 2019, respectively.

 

As a result of the aforementioned analysis, a material weakness in the design of the monitoring of impairment triggers upon completing the store impairment analysis under IAS 36, subsequent to the adoption of IFRS 16 was identified. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim statements will not be prevented or detected on a timely basis.

 

Certain remedial efforts were undertaken during the third quarter financial statement close process that resulted in effective design of the monitoring of impairment triggers under IAS 36 subsequent to the adoption of IFRS 16; however, we are unable to conclude that this control was operationally effective due to lack of sufficient extent of samples for testing.

 

Changes in Internal Control over Financial Reporting

 

In light of the restatement, our Chief Executive Officer and Chief Financial Officer have reassessed their evaluation of the effectiveness of the design and operation of its disclosure controls over financial reporting as of May 4, 2019 and concluded that the Company did not maintain effective disclosure control and procedures due to a material weakness in the Company’s internal control over financial reporting that existed at that date in the monitoring of impairment triggers upon completing a store impairment analysis under IAS 36 subsequent to the adoption of IFRS 16.. Furthermore, the CEO and CFO have made the same assessment and arrived at the same conclusion for the financial statements as of November 2, 2019.  

 

 
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Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Except as noted above, we are not presently a party to any legal proceedings, government actions, administrative actions, investigations or claims that are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business, financial condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors previously disclosed in our Form 10-K for our fiscal year ended February 2, 2019.

 

Item 2. Unregistered Sales of Equity Securities

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 
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Table of Contents

 

Item 6. Exhibits

 

(a) Exhibits:

 

31.1

 

Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

 

Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1

 

Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2

 

Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

DAVIDsTEA INC.

 

Date: December 20, 2019

By:

/s/ Herschel Segal

 

Name:

Herschel Segal

 

Title:

Chairman and Interim Chief Executive Officer

 

Date: December 20, 2019

 

/s/ Frank Zitella

 

 

Frank Zitella

 

 

Chief Financial Officer and Chief Operating Officer

 

 
40