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 1934.1934
For the quarterly period ended November 2, 2019.August 1, 2020
OR
¨ ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.1934
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 |
|
| 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 |
| Smaller reporting company |
|
|
| Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 26,079,662September 17, 2020, 26,208,129 common shares of the registrant were outstanding.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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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,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,September 17, 2020, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New YorkCanada closing average exchange rate was US$1.00 = CAD$1.3196.1.3200
Table of Contents |
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 | ||||||||||
August 1, | Feb 1, | |||||||||
2020 | 2020 | |||||||||
$ | $ | |||||||||
ASSETS | ||||||||||
Current | ||||||||||
Cash | 34,285 | 46,338 | ||||||||
Accounts and other receivables | 6,757 | 6,062 | ||||||||
Inventories | [Note 5] | 24,354 | 22,363 | |||||||
Income tax receivable | 223 | 1,196 | ||||||||
Prepaid expenses and deposits | 8,476 | 4,542 | ||||||||
Total current assets | 74,095 | 80,501 | ||||||||
Property and equipment | [Note 6] | 3,086 | 17,737 | |||||||
Intangible assets | 4,693 | 6,339 | ||||||||
Right-of-use assets | [Note 6] | 7,292 | 35,082 | |||||||
Total assets | 89,166 | 139,659 | ||||||||
LIABILITIES AND EQUITY | ||||||||||
Current | ||||||||||
Trade and other payables | [Note 7] | 26,642 | 20,794 | |||||||
Deferred revenue | 6,268 | 6,852 | ||||||||
Provisions | [Note 7] | 47,818 | — | |||||||
Current portion of lease liabilities | 6,545 | 16,434 | ||||||||
Total current liabilities | 87,273 | 44,080 | ||||||||
Non-current portion of lease liabilities | 21,265 | 72,230 | ||||||||
Total liabilities | 108,538 | 116,310 | ||||||||
Commitments and contingencies | ||||||||||
Equity | ||||||||||
Share capital | [Note 9] | 113,119 | 112,843 | |||||||
Contributed surplus | 1,602 | 1,577 | ||||||||
Deficit | (135,282 | ) | (92,278 | ) | ||||||
Accumulated other comprehensive income | 1,189 | 1,207 | ||||||||
Total equity (deficiency) | (19,372 | ) | 23,349 | |||||||
Total liabilities and equity (deficiency) | 89,166 | 139,659 |
As at November 2, February 2, 2019 2019 $ $ ASSETS Current Cash Accounts and other receivables [Note 12] Inventories [Note 5] Income tax receivable Prepaid expenses and deposits Total current assets Property and equipment Intangible assets Right-of-use assets [Notes 3 and 6] Total assets LIABILITIES AND EQUITY Current Trade and other payables Deferred revenue Current portion of provisions [Note 3] Current portion of lease liabilities [Note 3] Total current liabilities Deferred rent and lease inducements [Note 3] Provisions [Note 3] Non-current portion of lease liabilities [Note 3] Total liabilities Commitments and contingencies Equity Share capital [Note 8] Contributed surplus Deficit Accumulated other comprehensive income Total equity Total liabilities and equity 28,044 42,074 5,430 3,681 32,638 34,353 1,195 4,107 6,906 8,819 74,213 93,034 20,557 23,788 6,454 5,678 44,825 — 146,049 122,500 21,155 20,951 5,619 6,241 — 3,714 16,291 — 43,065 30,906 — 8,698 — 15,440 74,074 — 117,139 55,044 112,835 112,519 1,294 1,400 (86,575 ) (47,960 ) 1,356 1,497 28,910 67,456 146,049 122,500
See accompanying notes.
Table of Contents |
DAVIDsTEA Inc.
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]
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| For the three months ended |
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| For the six months ended |
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| August 1, |
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| August 3, |
|
| August 1, |
|
| August 3, |
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| 2020 |
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| 2019 |
|
| 2020 |
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| 2019 |
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Sales |
| [Note 14] |
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| 23,031 |
|
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| 39,167 |
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| 55,273 |
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| 83,432 |
|
Cost of sales |
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| 14,694 |
|
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| 17,362 |
|
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| 32,263 |
|
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| 35,291 |
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Gross profit |
|
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| 8,337 |
|
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| 21,805 |
|
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| 23,010 |
|
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| 48,141 |
|
Selling, general and administration expenses |
| [Note 11] |
|
| 7,409 |
|
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| 31,563 |
|
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| 29,042 |
|
|
| 59,583 |
|
Restructuring plan activities, net |
| [Note 8] |
|
| (3,172 | ) |
|
| — |
|
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| 34,228 |
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|
| — |
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Results from operating activities |
|
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| 4,100 |
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| (9,758 | ) |
|
| (40,260 | ) |
|
| (11,442 | ) |
Finance costs |
|
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| 1,559 |
|
|
| 1,781 |
|
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| 3,226 |
|
|
| 3,608 |
|
Finance income |
|
|
|
| (68 | ) |
|
| (195 | ) |
|
| (308 | ) |
|
| (386 | ) |
Net income (loss) |
|
|
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| 2,609 |
|
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| (11,344 | ) |
|
| (43,178 | ) |
|
| (14,664 | ) |
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Other comprehensive income (loss) |
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Items to be reclassified subsequently to income: |
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Cumulative translation adjustment |
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| 1,451 |
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| 255 |
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| (18 | ) |
|
| (242 | ) |
Total comprehensive income (loss) |
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| 4,060 |
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| (11,089 | ) |
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| (43,196 | ) |
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| (14,906 | ) |
Net income (loss) per share: |
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Basic |
| [Note 12] |
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| 0.10 |
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| (0.44 | ) |
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| (1.65 | ) |
|
| (0.56 | ) |
Fully diluted |
| [Note 12] |
|
| 0.10 |
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| (0.44 | ) |
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| (1.65 | ) |
|
| (0.56 | ) |
Weighted average number of shares outstanding |
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Basic |
| [Note 12] |
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| 26,128,971 |
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| 26,056,520 |
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| 26,108,499 |
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| 26,038,128 |
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Fully diluted |
| [Note 12] |
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| 26,925,264 |
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| 26,056,520 |
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| 26,108,499 |
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| 26,038,128 |
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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] Cost of sales Gross profit Selling, general and administration expenses [Note 10] Results from operating activities Finance costs Finance income Loss before income taxes Provision for income tax (recovery) [Note 9] Net loss Other comprehensive loss Items to be reclassified subsequently to income: Unrealized net gain on forward exchange contracts [Note 14] Realized net loss on forward exchange contracts reclassified to inventory Provision for income tax recovery Cumulative translation adjustment Other comprehensive income (loss), net of tax Total comprehensive loss Net loss per share: Basic and fully diluted [Note 11] Weighted average number of shares outstanding Basic and fully diluted [Note 11] 39,493 43,656 122,925 129,609 18,139 25,275 53,430 71,193 21,354 18,381 69,495 58,416 30,670 29,119 90,254 84,865 (9,316 ) (10,738 ) (20,759 ) (26,449 ) 1,699 80 5,305 237 (185 ) (122 ) (570 ) (574 ) (10,830 ) (10,696 ) (25,494 ) (26,112 ) — (1,635 ) — (5,851 ) (10,830 ) (9,061 ) (25,494 ) (20,261 ) — — — 794 — (425 ) — (565 ) — 113 — (62 ) (26 ) (62 ) (141 ) (473 ) (26 ) (374 ) (141 ) (306 ) (10,856 ) (9,435 ) (25,635 ) (20,567 ) (0.42 ) (0.35 ) (0.98 ) (0.78 ) 26,068,435 25,992,339 26,048,239 25,862,086
See accompanying notes.
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 |
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| For the six months ended |
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|
| August 1, |
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| August 3, |
|
| August 1, |
|
| August 3, |
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|
| 2020 |
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| 2019 |
|
| 2020 |
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| 2019 |
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| $ |
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| $ |
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| $ |
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| $ |
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OPERATING ACTIVITIES |
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Net Income (loss) |
|
| 2,609 |
|
|
| (11,344 | ) |
|
| (43,178 | ) |
|
| (14,664 | ) |
Items not affecting cash: |
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Depreciation of property and equipment |
|
| 301 |
|
|
| 1,359 |
|
|
| 1,544 |
|
|
| 2,684 |
|
Amortization of intangible assets |
|
| 571 |
|
|
| 456 |
|
|
| 1,083 |
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|
| 855 |
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Amortization of right-of-use assets |
|
| 454 |
|
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| 3,114 |
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| 2,693 |
|
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| 6,216 |
|
Gain on modification of lease liabilities |
|
| (54,735 | ) |
|
| — |
|
|
| (54,735 | ) |
|
| — |
|
Provisions |
|
| 47,818 |
|
|
| — |
|
|
| 47,818 |
|
|
| — |
|
Interest on lease liabilities |
|
| 1,559 |
|
|
| 1,781 |
|
|
| 3,187 |
|
|
| 3,608 |
|
Loss on disposal of property and equipment and right-of-use assets |
|
| 1,542 |
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|
| 22 |
|
|
| 1,542 |
|
|
| 22 |
|
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 5,025 |
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| 39,960 |
|
|
| 5,025 |
|
Stock-based compensation expense |
|
| 267 |
|
|
| 143 |
|
|
| 580 |
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|
| 270 |
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Sub-total |
|
| 386 |
|
|
| 556 |
|
|
| 494 |
|
|
| 4,016 |
|
Net change in other non-cash working capital balances related to operations |
|
| (4,209 | ) |
|
| 2,527 |
|
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| (8,373 | ) |
|
| (573 | ) |
Cash flows from (used in) operating activities |
|
| (3,823 | ) |
|
| 3,083 |
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| (7,879 | ) |
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| 3,443 |
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FINANCING ACTIVITIES |
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Proceed from issuance of common shares pursuant to exercise of stock options |
|
| 3 |
|
|
| — |
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|
| 3 |
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|
| — |
|
Payment of lease liabilities |
|
| (1,198 | ) |
|
| (5,799 | ) |
|
| (5,574 | ) |
|
| (11,622 | ) |
Cash flows used in financing activities |
|
| (1,195 | ) |
|
| (5,799 | ) |
|
| (5,571 | ) |
|
| (11,622 | ) |
INVESTING ACTIVITIES |
|
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Additions to property and equipment |
|
| (40 | ) |
|
| (319 | ) |
|
| (312 | ) |
|
| (734 | ) |
Additions to intangible assets |
|
| — |
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|
| (958 | ) |
|
| (317 | ) |
|
| (1,663 | ) |
Repayment (issuance) of loan from a Company controlled by an executive employee |
|
| — |
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| (1,773 | ) |
|
| 2,026 |
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|
| (1,773 | ) |
Cash flows from (used in) investing activities |
|
| (40 | ) |
|
| (3,050 | ) |
|
| 1,397 |
|
|
| (4,170 | ) |
Decrease in cash during the period |
|
| (5,058 | ) |
|
| (5,766 | ) |
|
| (12,053 | ) |
|
| (12,349 | ) |
Cash, beginning of the period |
|
| 39,343 |
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| 35,491 |
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| 46,338 |
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|
| 42,074 |
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Cash, end of the period |
|
| 34,285 |
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| 29,725 |
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| 34,285 |
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| 29,725 |
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Supplemental Information |
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Cash paid for: |
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Interest |
|
| — |
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|
| — |
|
|
| — |
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| — |
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Income taxes (classified as operating activity) |
|
| — |
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|
| — |
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|
| — |
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| — |
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Cash received for: |
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Interest |
|
| 68 |
|
|
| 210 |
|
|
| 279 |
|
|
| 405 |
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Income taxes (classified as operating activity) |
|
| 563 |
|
|
| 168 |
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|
| 870 |
|
|
| 168 |
|
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 Items not affecting cash: Depreciation of property and equipment Amortization of intangible assets Amortization of right-of-use assets Loss on disposal of property and equipment Impairment of property, equipment and right-of-use assets Interest on lease liabilities Deferred rent Recovery for onerous contracts Stock-based compensation expense Amortization of financing fees Accretion on provisions Deferred income taxes Sub-total Net change in other non-cash working capital balances related to operations Cash flows related to operating activities FINANCING ACTIVITIES Proceed from issuance of common shares pursuant to exercise of stock options Payment of lease liabilities Cash flows related to financing activities INVESTING ACTIVITIES Additions to property and equipment Additions to intangible assets Loan advance to a Company controlled by an executive employee Cash flows related to investing activities Decrease in cash during the period Cash, beginning of the period Cash, end of the period Supplemental Information Cash paid for: Interest Income taxes (classified as operating activity) Cash received for: Interest Income taxes (classified as operating activity) (10,830 ) (9,061 ) (25,494 ) (20,261 ) 1,313 1,785 3,997 5,193 517 377 1,372 905 2,938 — 9,153 — — — 22 14 2,051 725 7,076 3,285 1,699 — 5,305 — — 74 — (17 ) — 3,414 — 5,306 256 91 526 (7 ) — 21 — 61 — 60 — 177 — (2,575 ) — (3,921 ) (2,056 ) (5,089 ) 1,957 (9,265 ) 6,842 (12,948 ) 6,272 (28,316 ) 4,786 (18,037 ) 8,229 (37,581 ) 9 8 9 82 (5,720 ) — (17,342 ) — (5,711 ) 8 (17,333 ) 82 (44 ) (1,752 ) (778 ) (3,420 ) (485 ) (1,128 ) (2,148 ) (3,851 ) (227 ) — (2,000 ) — (756 ) (2,880 ) (4,926 ) (7,271 ) (1,681 ) (20,909 ) (14,030 ) (44,770 ) 29,725 39,623 42,074 63,484 28,044 18,714 28,044 18,714 — — — — — 7 — 9 217 120 622 563 2,780 — 2,948 —
See accompanying notes.
Table of Contents |
DAVIDsTEA Inc.
DAVIDsTEA Inc.
Incorporated under the laws of Canada
INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)(DEFICIENCY)
[Unaudited and in thousands of Canadian dollars]
|
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| Accumulated |
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| Other |
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| Total |
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| Share |
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| Contributed |
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|
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| Comprehensive |
|
| Equity |
| |||||
|
| Capital |
|
| Surplus |
|
| Deficit |
|
| Income |
|
| (Deficiency) |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Balance, February 1, 2020 |
|
| 112,843 |
|
|
| 1,577 |
|
|
| (92,278 | ) |
|
| 1,207 |
|
|
| 23,349 |
|
Net loss for the six months ended August 1, 2020 |
|
| — |
|
|
| — |
|
|
| (43,178 | ) |
|
| — |
|
|
| (43,178 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18 | ) |
|
| (18 | ) |
Total comprehensive loss |
|
| — |
|
|
| — |
|
|
| (43,178 | ) |
|
| (18 | ) |
|
| (43,196 | ) |
Issuance of common shares |
|
| 4 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| 3 |
|
Common shares issued on vesting of restricted stock units |
|
| 272 |
|
|
| (554 | ) |
|
| 174 |
|
|
| — |
|
|
| (108 | ) |
Stock-based compensation expense |
|
| — |
|
|
| 580 |
|
|
| — |
|
|
| — |
|
|
| 580 |
|
Balance, August 1, 2020 |
|
| 113,119 |
|
|
| 1,602 |
|
|
| (135,282 | ) |
|
| 1,189 |
|
|
| (19,372 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 2, 2019 |
|
| 112,519 |
|
|
| 1,400 |
|
|
| (61,293 | ) |
|
| 1,497 |
|
|
| 54,123 |
|
Net loss for the six months ended August 3, 2019 |
|
| — |
|
|
| — |
|
|
| (14,664 | ) |
|
| — |
|
|
| (14,664 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (242 | ) |
|
| (242 | ) |
Total comprehensive loss |
|
| — |
|
|
| — |
|
|
| (14,664 | ) |
|
| (242 | ) |
|
| (14,906 | ) |
Common shares issued on vesting of restricted stock units |
|
| 273 |
|
|
| (561 | ) |
|
| 195 |
|
|
| — |
|
|
| (93 | ) |
Stock-based compensation expense |
|
| — |
|
|
| 270 |
|
|
| — |
|
|
| — |
|
|
| 270 |
|
Balance, August 3, 2019 |
|
| 112,792 |
|
|
| 1,109 |
|
|
| (75,762 | ) |
|
| 1,255 |
|
|
| 39,394 |
|
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 Net loss for the nine months ended November 3, 2018 Other comprehensive loss Total comprehensive loss Issuance of common shares Common shares issued on vesting of restricted stock units Stock-based compensation expense Income tax impact associated with stock options Balance, November 3, 2018 Balance, February 2, 2019 IFRS 16 adoption adjustment (1) Adjusted balance at beginning of period Net loss for the nine months ended November 2, 2019 Other comprehensive loss Total comprehensive loss Issuance of common shares Common shares issued on vesting of restricted stock units Stock-based compensation expense Balance, November 2, 2019 111,692 2,642 (14,721 ) (167 ) 1,922 1,755 101,368 — — (20,261 ) — — — (20,261 ) — — — 167 (473 ) (306 ) (306 ) — — (20,261 ) 167 (473 ) (306 ) (20,567 ) 164 (82 ) — — — — 82 643 (1,322 ) 286 — — — (393 ) — (7 ) — — — — (7 ) — (1 ) — — — — (1 ) 112,499 1,230 (34,696 ) — 1,449 1,449 80,482 112,519 1,400 (47,960 ) — 1,497 1,497 67,456 — — (13,333 ) — — — (13,333 ) 112,519 1,400 (61,293 ) — 1,497 1,497 54,123 — — (25,494 ) — — — (25,494 ) — — — — (141 ) (141 ) (141 ) — — (25,494 ) — (141 ) (141 ) (25,635 ) 13 (4 ) — — — — 9 303 (628 ) 212 — — — (113 ) — 526 — — — — 526 112,835 1,294 (86,575 ) — 1,356 1,356 28,910
(1) Restated - Note 3
See accompanying notes.
Table of Contents |
DAVIDsTEA Inc.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine-monthsix-month periods ended November 2,August 1, 2020 and August 3, 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-monthsix-month periods ended November 2, 2019August 1, 2020 were authorized for issue in accordance with a resolution of the Board of Directors on December 20, 2019.September 21, 2020. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the NASDAQNasdaq Global Market under the symbol “DTEA”. The registered office is located at 5430 Ferrier St., Town of Mount-Royal, Quebec,Québec, Canada, H4P 1M2.
The Company is engageda branded retailer and growing mass wholesaler of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories through its e-commerce platform at www.davidstea.com and in the18 Company-owned and operated retail stores in Canada. A selection of DAVIDsTEA products is also available in more than 2,500 grocery stores and online sale of tea, tea accessories and food and beverages in Canada and the United States.pharmacies across Canada. 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 quarterquarters because of lower customer trafficengagement during the summer months.
In March 2020, the outbreak of a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization and on March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closure of all of its retail stores in Canada and the United States. On August 21, 2020, the Company re-opened 18 stores across Canada.
The Company qualifies for the Canada Emergency Wage Subsidy (“CEWS”) under the COVID-19 Economic Response Plan of the Government of Canada. During the first and second quarters of Fiscal 2020, the Company recognized payroll subsidies of $0.8 million and $1.2 million respectively under this wage subsidy program as a reduction in the associated wage costs which the Company incurred, which were recognized in Selling, general and administration expenses.
On July 8, 2020, the Company announced that it is implementing a restructuring plan (the “Restructuring Plan”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, the Company would continue to operate its online business through its e-commerce platform at www.davidstea.com and its wholesale distribution channel, through which it sells a selection of DAVIDsTEA products in grocery stores and pharmacies across Canada. Following a careful review of available options to stem the losses from its brick-and-mortar footprint, the Company’s management and Board of Directors determined that a formal restructuring process was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.
On July 8, 2020, the Company obtained an Initial Order pursuant to the CCAA from the Québec Superior Court in order to implement the Restructuring Plan (the “Initial Order”).
On July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of the United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and enforced the Initial Order, in effect providing protection to the Company from creditor action against its assets in the United States.
As part of its Restructuring Plan and further to obtaining the Initial Order, the Company, on July 10, 2020, sent notices to terminate leases for 82 of its stores in Canada and all 42 stores in the United States. These lease terminations were effective on August 9, 2020.
On July 16, 2020, the Company obtained an Amended and Restated Initial Order from the Québec Superior Court, extending to September 17, 2020 the application of the Initial Order. The Amended and Restated Initial Order also dealt with certain administrative matters, particularly with regards to the lease terminations.
On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada. These lease terminations were effective on August 29, 2020.
7 |
Table of Contents |
On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to December 15, 2020 and issued a Claims Process Order establishing the claims procedures for the Company’s creditors under the CCAA. This Order, among other things sets November 6, 2020 as the time by which creditors must submit their claims to PwC, the Court-appointed Monitor.
2. STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION AND GOING CONCERN UNCERTAINTY
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, 2019,1, 2020, 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, 2019,1, 2020, other than as disclosed in note 3 below.
3. CHANGES IN ACCOUNTING POLICIESGoing Concern Uncertainty
DuringIn December 2019, a novel strain of coronavirus, responsible for COVID-19, was first reported and was subsequently declared a pandemic by the World Health Organization in March 2020. The measures adopted by the federal, provincial and state governments in order to mitigate the spread of the outbreak required the Company to close all of its retail locations across North America effective March 17, 2020. On August 21, 2020, the Company re-opened 18 of its stores throughout Canada.
On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under applicable laws in both Canada and in the United States in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories. As part of the Restructuring Plan, the Company sent notices to terminate leases for 82 of its stores in Canada and all 42 of its stores in the United States. On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada and continues to negotiate with landlords for the remaining 18 stores.
Although the Company continues to offer its products directly to consumers through its online store and in supermarkets and drugstores across Canada, it is unlikely that customers will purchase its products at previous volumes through these alternative channels. Furthermore, the duration and impact of the COVID-19 pandemic is unknown and may influence consumer shopping behavior and consumer demand including online shopping. Notwithstanding that the Company expects to emerge from the restructuring process as a leaner organization, there is no assurance that the Restructuring Plan will be successful and that all relevant and required regulatory, creditor and court approvals will be obtained.
For the three and six-month periods ended August 1, 2020, the Company reported a net income of $2.6 million and incurred a net loss of $43.2 million, respectively. The Company’s current liabilities total $86.6 million as at August 1, 2020. As at August 1, 2020, the Company held cash and accounts and other receivables of $41.0 million. The Company does not currently have any third-party financing available with which to meet any future financial obligations.
The Company’s ability to continue as a going concern is dependent on its ability to stabilize its business from unfavorable trend lines, strengthening its business by focusing on how to grow its product portfolio including sales and customer service execution, and structuring its operations to ensure it successfully emerges with a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, supported by a right-sized support organization.
Management believes that there is material uncertainty surrounding the Company’s ability to execute the strategy necessary to return to profitability in the current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, changes in consumer behavior and the ability to successfully emerge from the Restructuring Plan process.
As a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.
These interim condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company’s financial statement close processCompany will continue its operations for the quarter ended November 2, 2019, accounting errors were identifiedforeseeable future and will be able to realize its assets and discharge its liabilities and commitments in the assessmentnormal course of impairment indicators upon completingbusiness. These interim condensed consolidated financial statements as at and for the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequentthree and six-month periods ended August 1, 2020 do not include any adjustments to the adoptioncarrying amounts and classification of IFRS 16, Leases (“IFRS 16”). When appropriately performingassets, liabilities and reported expenses that may otherwise be required if 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 togoing concern basis was not appropriate. Such adjustments could 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.material.
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.
8 |
Table of Contents |
3. CHANGES IN ACCOUNTING POLICIES
Recently Issued Accounting Pronouncements
On May 28, 2020, the IASB issued an amendment to IFRS 16, Leases to make it easier for lessees to account for COVID-19-related rent concessions such as rent holidays and temporary rent reductions.
The following table illustrates the effectamendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the voluntary change in accounting policy on the adoption of IFRS 16COVID-19 pandemic are lease modifications and allows lessees to account for such rent concessions 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 |
|
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 rightif they were not lease modifications. It applies to use the underlying asset and aCOVID-19-related rent concessions that reduce 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 beginningpayments due on or after January 1, 2019.
a) Nature of the effect of adoption of IFRS 16 (restated)before June 30, 2021.
The amendment is effective as of June 1, 2020 but can be applied immediately in any financial statements—interim or annual—not yet authorized for issue. The Company has adopted IFRS 16applied the practical expedient to all rent concessions meeting the criteria as atset out in the amendment, as of February 3, 2019. Substantially all2, 2020. With respect to rent concessions not meeting the definition 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 aslease modification, 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 methodaccount for such concessions 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:
|
| |
|
| |
|
| |
|
|
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 Other assets Total assets LIABILITIES Lease liability Deferred rent and lease inducements Provisions Other liabilities Total liabilities EQUITY Deficit Other Total equity TOTAL LIABILITIES AND EQUITY - 75,596 75,596 (14,613 ) 60,983 122,500 - 122,500 - 122,500 122,500 75,596 198,096 (14,613 ) 183,483 - 102,168 102,168 - 102,168 8,698 (8,698 ) - - - 19,154 (19,154 ) - - - 27,192 - 27,192 - 27,192 55,044 74,316 129,360 - 129,360 (47,960 ) 1,280 (46,680 ) (14,613 ) (61,293 ) 115,416 - 115,416 - 115,416 67,456 1,280 68,736 (14,613 ) 54,123 122,500 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 equalcontinuing to the lease liabilities, adjustedaccount 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.
The lease liabilities as at February 3, 2019 can be reconciled to the operating lease commitments as of February 2, 2019 as follows:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
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 using the rights 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 dateobligations of the existing 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 ofand recognizing a separate 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 expensepayable in the period onin which the event or condition that triggersallocated lease cash payment is due. As a result of the payment occurs.Initial Order obtained from the Québec Superior Court on July 8, 2020, any rent concessions provided by landlords are accordingly nullified.
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.
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.
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:
|
|
|
|
|
|
The adoption of this interpretation did not have a significant impact on the Company’s financial statements.
4. SIGNIFICANT ACCOUNTING JUDGEMENTS,JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgmentjudgments 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 judgementsjudgments 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 1, 2020.As of February 2, 2019.2020, the Company also considered the impacts related to COVID-19 and the Restructuring Plan to its use of estimates and judgments, as appropriate, within its unaudited interim condensed consolidated financial statements. Estimates and assumptions are subject to inherent uncertainty, which may result in actual amounts differing from reported amounts.
5. INVENTORIESKey sources of estimation uncertainty
|
| 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 |
|
Lease termination
As a result of the termination of leases pursuant to the Restructuring Plan in the second quarter of 2020, the Company has recorded an estimate for allowed claim in the amount of $42.9 million. The estimate for allowed claim is based on the Company’s best estimate and is determined based on the total undiscounted lease liability offset by an estimate of the losses that affected landlords will be able to successfully mitigate. Accordingly, an expense of $42.9 million was recorded in Restructuring plan activities, net in the unaudited interim consolidated statement of income (loss). This provision is subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the provision in future periods may be material and will be recorded through earnings.
Recoverability and impairment of non-financial assets
The temporary store closures as a result of COVID-19, as well as the permanent closure of a majority of our retail stores resulting from the Restructuring Plan, and the related reduction in operating income during the first and second quarters of fiscal 2020 are considered to be indicators of impairment and the Company performed an assessment of recoverability for the property and equipment and right-of-use assets associated with its retail locations.
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Key judgments in applying accounting principles
Lease liabilities
The temporary store closures as a result of COVID-19, and the resulting non-payment of rent for the months of April, May, June and part of July as well as the Restructuring Plan led the Company to make significant judgements with respect to the impacts of these events on the lease liabilities as of August 1, 2020. These include considerations such as the accounting for rent concessions, and the timing of termination of leases.
For all leases terminated as a result of the CCAA filing and for which the notice period had expired, lease liabilities under IFRS 16 were determined to have been modified.
5. INVENTORIES
During the three and six-month periods ended August 1, 2020, inventories recognized as cost of sales amounted to $6,104 and $14,760, respectively [August 3, 2019 - $11,623 and $23,617, respectively]. During the three and six-month periods ended August 1, 2020, the cost of inventory includes write-downs of nil and $560, respectively [August 3, 2019 – reversals of write downs of $493 and $493, respectively] recorded as a result of net realizable value being lower than cost.
August 1, | February 1, | |||||||
2020 | 2020 | |||||||
$ | $ | |||||||
Finished goods | 20,018 | 18,590 | ||||||
Goods in transit | 2,628 | 2,059 | ||||||
Packaging | 1,708 | 1,714 | ||||||
24,354 | 22,363 |
6. PROPERTY AND EQUIPMENT AND RIGHT-OF-USE ASSETS
For the three and nine months ended November 2, 2019, anAn assessment of impairment indicators was performed which caused the Company to review the recoverable amount of the property and equipment, and right-of-use assets for certain cash generating units (“CGUs”) with an indication of impairment. CGUs reviewed included stores performingto be permanently closed as part of the Restructuring Plan and the remaining stores that are expected to perform below the Company’s expectations.
As a result, for the three and nine months ended November 2, 2019,Company recorded an impairment loss of $13.0 million and nil in the first and second quarters of 2020 respectively, related to property and equipment, [first and second quarter of 2019, respectively, nil and nil] and $27.0 million and nil in the first and second quarters of 2020, respectively, related to right of use assets [first and second quarter of 2019, respectively, nil and $5.0 million].
Included in the amount above, for property and equipment, is an impairment loss of $12.8 million for the right-of-use assets206 stores to be permanently closed as part of $2,051 and $7,076, respectively, [November 3, 2018 — $725 and $3,285 related to store leasehold improvements, furniture and equipment, computer hardware]the Restructuring Plan. The remaining $0.2 million of impairment loss 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. Valueuse for 7 of the 18 stores that remain open.
Included in the amount above, for right of use assets, is an impairment loss of $24.6 million for the 206 stores to be permanently closed after the completion of the Restructuring Plan and the remaining impairment loss of $2.4 million pertain to 7 of the 18 stores that remain open.
For these stores, a value in use of $1,613 [November$791 for the first quarter of 2020, [August 3, 2018 —nil]2019 – $3,924] was determined based on management’s best estimate of expected future cash flows from use over the remaining lease terms, consideringterms. This determination considered historical experience as well as current economic conditions, including the expected reopening date and the timeframe to foot traffic recovery in those location, and was then discounted using a pre-taxpre‑tax discount rate of 11.9% [November13.0% for the first quarter of 2020 [August 3, 2018 —2019 – 11.9%]. A reversal of impairment occurs when previously impaired CGUs see improved financial results.
For the three and nine monthssix-month periods ended November 2,August 1, 2020, the depreciation expense was $301 and $1,544 respectively [August 3, 2019 no- $1,359 and $2,684, respectively]; with $1,186 recorded in the Canada segment [August 3, 2019 - $2,318], $358 recorded in the U.S. segment [August 3, 2019 - $366], and $305 recorded in corporate selling, general and administration expenses [August 3, 2019 - $257]. Depreciation expense, and impairment losses were reversed [Novemberare reported in the consolidated statement of loss and comprehensive loss under Selling, general and administration expenses (Note 11).
Depreciation expense and impairment losses related to right-of-use assets have been recorded in Selling, general and administration expenses (Note 11) in the consolidated statement of loss and comprehensive loss.
For Right-of-use assets, for the three and six-month periods ended August 1, 2020, the depreciation expense was $454 and $2,693 respectively [August 3, 2018 — nil]2019 - $3,114 and $6,216, respectively]; with $2,416 recorded in the Canada segment [August 3, 2019 - $5,059], and $277 recorded in the U.S. segment [August 3, 2019 - $1,157]. Impairment losses
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7. RESTRUCTURING PLAN
(a) Liabilities subject to compromise
As a result of the Initial Order obtained on July 8, 2020 and subsequent amendments (note 1), the payment of liabilities owing as of July 8, 2020 is stayed, and the outstanding liabilities, as well as any additional outstanding claims by creditors are reversed onlysubject to compromise pursuant to a plan of arrangement that is expected to be presented to creditors. Obligations for goods and services provided to the extent thatCompany after the carrying amountsfiling date of July 8, 2020 are discharged based on negotiated terms and conditions.
As of August 1, 2020, liabilities subject to compromise amounted to $68.0 million and are made up of trade and other payables, provisions related to lease terminations and severance. These liabilities may also be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events.
(b) PROVISIONS
As at | ||||
August 1, | ||||
2020 | ||||
$ | ||||
Lease termination | 42,878 | |||
Severance | 4,940 | |||
Provisions | 47,818 |
Leases
During the second quarter of 2020, in connection with the termination of leases pursuant to the Restructuring Plan, the Company reduced its lease liabilities by $54.7 million, resulting in a gain on the modification of lease liabilities reported in Restructuring plan activities, net (note 8).
In addition, as a result of the CGU’s net assets do not exceedtermination of leases pursuant to the carrying amount that would have been determined, netRestructuring Plan in the second quarter of depreciation, if no impairment loss had been recognized.
7. REVOLVING FACILITY
On June 11, 2018,2020, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provideshas recorded an estimate for a two year revolving facility (“Amended Revolving Facility”)allowed claim 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$42.9 million. The estimate 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 interestallowed claim is based on the Company’s adjusted leverage ratio, atbest estimate and is determined based on 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 rangetotal undiscounted lease liability offset by an estimate of 0.3% to 0.5%the losses that affected landlords will be paid onable to successfully mitigate. Accordingly, an expense of $42.9 million was recorded in Restructuring plan activities, net in the daily principal amountunaudited interim consolidated statement of income (loss). This provision is subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the unused portion of the Amended Revolving Facility.provision in future periods may be material and will be recorded through earnings.
The credit facility also contains nonfinancial covenants that, among other thingsCompany sent notices to terminate leases for an additional 82 of its stores in Canada on July 30, 2020 which were effective on August 29, 2020. The Company expects to record an additional gain on the modification of this lease liability of $16.6 million 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 thanan estimate for allowed claim in the normal courseamount of business.$18.0 million in the third quarter ending October 31, 2020. This estimate is based on the same assumptions used for the lease modifications recorded in the second quarter of 2020. The Company also cannot make any dividend payments.actual amount recorded in the third quarter of 2020 may differ as the Restructuring Plan proceedings evolve.
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As at November 2, 2019, the Company did not have any borrowings under the Amended Revolving Facility.8. RESTRUCTURING PLAN ACTIVITIES, NET
|
| For the three months ended |
|
| For the six months ended |
| ||
|
| August 1, |
|
| August 1, |
| ||
|
| 2020 |
|
| 2020 |
| ||
|
| $ |
|
| $ |
| ||
Gain on modification of lease liabilities |
|
| (54,735 | ) |
|
| (54,735 | ) |
Lease terminations |
|
| 42,878 |
|
|
| 42,878 |
|
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 37,400 |
|
Severance |
|
| 5,168 |
|
|
| 5,168 |
|
Loss on disposal of property and equipment and right-of-use assets |
|
| 1,542 |
|
|
| 1,542 |
|
Penalties and interest related to lease payable |
|
| 1,001 |
|
|
| 1,001 |
|
Professional fees associated with our Restructuring Plan |
|
| 974 |
|
|
| 974 |
|
Restructuring plan activities, net |
|
| (3,172 | ) |
|
| 34,228 |
|
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.9. SHARE CAPITAL
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 Commoncommon shares.
Issued and outstanding
August 1, | February 1, |
During the three and
In addition, during the three and
Stock-based compensation As at August 1, 2020, 1,042,285 [August 3, 2019, 1,650,733] common shares remain available for issuance under the 2015 Omnibus Plan. No stock options were granted during the three and six-month periods ended August 1, 2020 and August 3, 2019.
A summary of the status of the Company’s stock option plan and changes during the
A summary of the status of the Company’s RSU plan and changes during the
During the three and
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:
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
The following reflects the income and share data used in the basic and diluted EPS computations:
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
Loan to a Company controlled by one of the
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
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
The Company derives revenue from the following products:
Property and equipment, right-of-use assets and intangible assets by country are as follows:
Non-IFRS Financial Measures
Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA,
Because of these limitations, Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA
The following tables present reconciliations of Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA
Reconciliation of Adjusted selling, general and administration expenses
Reconciliation of Adjusted results from operating activities
Reconciliation of Net loss to Adjusted EBITDA
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 of IFRS 16 Net loss Executive separation costs related to salary (a) Impairment of property, equipment and right-of-use assets (b) Impact of onerous contracts (c) Strategic review and proxy contest costs (d) Recovery of income tax (e) 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 of IFRS 16 Weighted average number of shares outstanding, fully diluted Adjusted weighted average number of shares outstanding, fully diluted Net loss Adjusted net loss Net loss per share, fully diluted Adjusted net loss per share, fully diluted
Three Months Ended
Gross As the Company pivots to a Selling, general and administration expenses. Selling, general and administration expenses (“SG&A”) decreased by
Results from operating activities. Income from operating activities was Finance costs. Finance costs amounted to $1.6 million in the three months ended August 1, 2020, a decrease of
Finance
EBITDA Net
Fully diluted Six Months Ended August 1, 2020 compared to Six Months Ended August 3, 2019 Sales. Sales for the six months ended August 1, 2020 decreased 33.8%, or $28.2 million, to $55.3 million from $83.4 million in the same period in
Gross profit. Gross profit of $23.0 million for the six-month period ended August 1, 2020 decreased by $25.1 million or
Selling, general and administration expenses. SG&A decreased by
Results from operating activities. Loss from operating activities was $40.3 million Finance costs. Finance costs amounted to $3.2 million in the six-month period ended August 1, 2020, a decrease of $0.4 million from the prior year quarter. The interest expense relates to lease liabilities and Finance income. Finance income of $0.1 million is derived mainly from interest on cash on hand and EBITDA. EBITDA was negative $34.9 million in the six-month period ended August 1, 2020 compared to negative $1.7 million in the same period in the prior year, representing a decrease of $33.3 million over Fiscal 2019. Adjusted EBITDA for the
Net loss. Net loss Fully diluted loss per common share. Fully diluted loss per common share was negative $1.61 compared to negative $0.56 in the
Liquidity and Capital Resources
As at
Our primary source of liquidity is cash on
our online store. Our
Cash Flow
A summary of our cash flows
Three Months Ended
Cash Cash flows used in Financing activities. Net cash flows used in Financing activities of $1.1 million compares to $5.8 million used in the prior year quarter. This net reduction in use of cash was primarily due to the non-payment of lease obligations from May 3, 2020 to July 8, 2020. Cash flows used in Investing activities. Cash flows used in Investing activities decreased by $3.0 million to almost nil for the three-months ended August 1, 2020. The decrease is primarily due to the capital expenditures and the loan advance that was made in the prior year quarter. Capital expenditures decreased by $1.2 million, to almost nil for the three months ended August 1, 2020, from $1.3 million for the three months ended Six Months Ended August 1, 2020 compared to Six Months Ended August 3, 2019 Cash flows (used in) provided by Operating activities. Net cash
Cash Cash flows provided by (used in) Investing activities. Cash flows provided by investing activities of $1.4 million during the six-month period ended August 1, 2020 increased by $5.6 million. The increase is primarily due to the receipt of cash from repayment of the loan from a Company controlled by an executive employee, partially offset by capital expenditures. Capital expenditures decreased by $1.8 million to $0.6 million for the
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
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
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
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 Based on
Changes in Internal Control over Financial Reporting
With the exception of the material weaknesses identified there were no other changes in our internal control over financial reporting during our fiscal quarter ended August 1, 2020 that
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
Pursuant to an Order from the Québec Superior Court, there is currently a stay of all proceedings against or in respect of the Company or affecting the Company’s business operations and activities, except with the leave of the Québec Superior Court, until December 15, 2020.
If we fail to comply with the continued listing requirements of the Nasdaq Stock Market, it could result in our common stock being delisted, which could adversely affect the market price and liquidity of our securities and could have other adverse effects. Our common stock is currently listed for trading on The Nasdaq Global Select Market (“Nasdaq”). We must satisfy Nasdaq’s continued listing requirements, including, among others, a minimum stockholders’ equity of $10,000,000, and a minimum bid price for our common stock of $1.00 per share, or risk possibly delisting, which could have a material adverse effect on our business. On August 6, 2020, the Company received a notification letter (the “Stockholders’ Equity Notice”) from the Listing Qualifications Staff (the “Staff”) of Nasdaq indicating that the Company’s stockholders’ equity of $(17,604,000), as reported in its Quarterly Report on Form 10-Q for the period ended May 2, 2020 does not satisfy the Nasdaq Global Market continued listing requirement set forth in Nasdaq Listing Rule 5450(b)(1)(A), which requires companies listed on the Nasdaq Global Market to maintain a minimum of US $10,000,000 in stockholders’ equity. The Stockholders’ Equity Notice has no immediate effect on the listing of the Company’s common stock. The Company has until September 21, 2020 to submit to Nasdaq a plan to regain compliance with Nasdaq Listing Rule 5450(b)(1)(A). If the Company’s plan is accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the Stockholders’ Equity Notice for the Company to provide evidence of compliance. If the plan is not accepted or the Company is not granted an extension, the Company will then consider actions appropriate to the circumstances, which may include applicable appeals to a Nasdaq Listing Qualifications Panel. On August 10, 2020, the Company received a notification letter (the “Bid Price Notice”) from Nasdaq saying that the Company was not in compliance with the minimum bid price requirement under Nasdaq Listing Rule 5450(a)(1). The Bid Price Notice has no immediate effect on the listing of the Company’s common stock on Nasdaq and the Company has until February 8, 2021 to regain compliance. There can be no assurance that we will be able to regain compliance with Nasdaq’s continued listing requirements. The failure of Nasdaq to accept the Company’s plan to regain compliance, subsequent failure to regain compliance under Nasdaq Listing Rule 5450(b)(1)(A) or failure to regain compliance under Nasdaq Listing Rule 5450(a)(1) prior to February 8, 2021 each could result in the Company’s common stock being delisted from Nasdaq. A delisting could make it more difficult to buy or sell our securities and to obtain accurate quotations, and the price of our common stock could suffer a material decline. In addition, a delisting would impair our ability to raise capital through the public markets, could deter broker-dealers from making a market in or otherwise seeking or generating interest in our securities and might deter certain institutions and persons from investing in our securities at all.
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
None.
(a) Exhibits:
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.
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