FORM 10-Q
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.October 31, 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 |
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Non-accelerated filer |
| Smaller reporting company |
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| Emerging growth company |
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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, 26,079,66211, 2020, 26,230,907 common shares of the registrant were outstanding.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Table of Contents |
DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private issuer, the Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the United States Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers, although the Company is not required to do so.
In this quarterly report,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, 2019,11, 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$1.3196.1.2769
3 |
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 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
As at | |||||||||
October 31, | February 1, | ||||||||
2020 $ | 2020 $ | ||||||||
Current | |||||||||
Cash | 21,925 | 46,338 | |||||||
Accounts and other receivables | 7,669 | 6,062 | |||||||
Inventories | [Note 5] | 26,176 | 22,363 | ||||||
Income tax receivable | 222 | 1,196 | |||||||
Prepaid expenses and deposits | 13,400 | 4,542 | |||||||
Total current assets | 69,392 | 80,501 | |||||||
Property and equipment | [Note 6] | 2,905 | 17,737 | ||||||
Intangible assets | 4,311 | 6,339 | |||||||
Right-of-use assets | [Note 6] | 816 | 35,082 | ||||||
Total assets | 77,424 | 139,659 | |||||||
LIABILITIES AND EQUITY | |||||||||
Current | |||||||||
Trade and other payables | 3,621 | 20,794 | |||||||
Deferred revenue | 5,766 | 6,852 | |||||||
Liabilities subject to compromise | [Note 7] | 71,653 | — | ||||||
Current portion of lease liabilities | 519 | 16,434 | |||||||
Total current liabilities | 81,559 | 44,080 | |||||||
Non-current portion of lease liabilities | 403 | 72,230 | |||||||
Total liabilities | 81,962 | 116,310 | |||||||
Commitments and contingencies | |||||||||
Equity | |||||||||
Share capital | [Note 8] | 113,139 | 112,843 | ||||||
Contributed surplus | 1,761 | 1,577 | |||||||
Deficit | (120,836 | ) | (92,278 | ) | |||||
Accumulated other comprehensive income | 1,398 | 1,207 | |||||||
Total equity (deficiency) | (4,538 | ) | 23,349 | ||||||
Total liabilities and equity | 77,424 | 139,659 |
See accompanying notes. 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] 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
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| For the three months ended |
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| For the nine months ended |
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| October 31, |
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| November 2, |
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| October 31, |
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| November 2, |
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| 2020 $ |
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| 2019 $ |
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| 2020 $ |
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| 2019 $ |
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Sales | [Note 14] |
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| 26,225 |
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| 39,493 |
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| 81,497 |
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| 122,925 |
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Cost of sales |
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| 15,399 |
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| 18,139 |
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| 47,409 |
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| 53,430 |
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Gross profit |
|
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| 10,826 |
|
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| 21,354 |
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| 34,088 |
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| 69,495 |
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Selling, general and administration expenses | [Note 9] |
|
| 7,120 |
|
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| 30,670 |
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| 35,883 |
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|
| 90,254 |
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Restructuring plan activities, net | [Note 10] |
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| (10,743 | ) |
|
| — |
|
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| 24,017 |
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| — |
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Results from operating activities |
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| 14,449 |
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| (9,316 | ) |
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| (25,812 | ) |
|
| (20,759 | ) |
Finance costs |
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| 35 |
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| 1,699 |
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| 3,260 |
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| 5,305 |
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Finance income |
|
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| (53 | ) |
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| (185 | ) |
|
| (361 | ) |
|
| (570 | ) |
Net income (loss) |
|
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| 14,467 |
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| (10,830 | ) |
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| (28,711 | ) |
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| (25,494 | ) |
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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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| 209 |
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| (26 | ) |
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| 191 |
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| (141 | ) |
Other comprehensive earnings (loss), net of tax |
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| 209 |
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| (26 | ) |
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| 191 |
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| (141 | ) |
Total comprehensive income (loss) |
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| 14,676 |
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| (10,856 | ) |
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| (28,520 | ) |
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| (25,635 | ) |
Net income (loss) per share: |
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Basic | [Note 12] |
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| 0.55 |
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| (0.42 | ) |
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| (1.10 | ) |
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| (0.98 | ) |
Fully diluted | [Note 12] |
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| 0.54 |
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| (0.42 | ) |
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| (1.10 | ) |
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| (0.98 | ) |
Weighted average number of shares outstanding |
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Basic | [Note 12] |
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| 26,214,573 |
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| 26,068,435 |
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| 26,143,963 |
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| 26,048,239 |
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Fully diluted | [Note 12] |
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| 26,767,470 |
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| 26,068,435 |
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| 26,143,963 |
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| 26,048,239 |
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See accompanying notes.Notes.
5 |
Table of Contents |
DAVIDsTEA Inc.
DAVIDsTEA Inc.
Incorporated under the laws of Canada
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited and in thousands of Canadian dollars]
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| For the three months ended |
| For the nine months ended |
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| November 2, |
| November 3, |
| November 2, |
| November 3, |
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| For the three months ended |
| For the nine months ended |
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
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| October 31, |
| November 2, |
| October 31, |
| November 2, |
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| $ |
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| $ |
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| $ |
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| $ |
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| 2020 |
| 2019 |
| 2020 |
| 2019 |
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| $ |
| $ |
| $ |
| $ |
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OPERATING ACTIVITIES |
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Net loss |
| (10,830 | ) |
| (9,061 | ) |
| (25,494 | ) |
| (20,261 | ) | ||||||||||||||||||||
Net Income (loss) |
| 14,467 |
| (10,830 | ) |
| (28,711 | ) |
| (25,494 | ) | |||||||||||||||||||||
Items not affecting cash: |
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Depreciation of property and equipment |
| 1,313 |
| 1,785 |
| 3,997 |
| 5,193 |
|
| 237 |
| 1,313 |
| 1,781 |
| 3,997 |
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Amortization of intangible assets |
| 517 |
| 377 |
| 1,372 |
| 905 |
|
| 420 |
| 517 |
| 1,503 |
| 1,372 |
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Amortization of right-of-use assets |
| 2,938 |
| — |
| 9,153 |
| — |
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| 189 |
| 2,938 |
| 2,882 |
| 9,153 |
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Loss on disposal of property and equipment |
| — |
| — |
| 22 |
| 14 |
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Impairment of property, equipment and right-of-use assets |
| 2,051 |
| 725 |
| 7,076 |
| 3,285 |
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Gain on modification of lease liabilities |
| (20,385 | ) |
| — |
| (75,121 | ) |
| — |
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Liabilities subject to compromise |
| 2,633 |
| — |
| 71,653 |
| — |
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Interest on lease liabilities |
| 1,699 |
| — |
| 5,305 |
| — |
|
| 29 |
| 1,699 |
| 3,216 |
| 5,305 |
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Deferred rent |
| — |
| 74 |
| — |
| (17 | ) | |||||||||||||||||||||||
Recovery for onerous contracts |
| — |
| 3,414 |
| — |
| 5,306 |
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Loss on disposal of property and equipment and right-of-use assets |
| 18 |
| — | �� |
| 1,560 |
| 22 |
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Impairment of property and equipment and right-of-use assets |
| — |
| 2,051 |
| 39,960 |
| 7,076 |
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Stock-based compensation expense |
| 256 |
| 91 |
| 526 |
| (7 | ) |
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| 198 |
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| 256 |
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| 778 |
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| 526 |
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Amortization of financing fees |
| — |
| 21 |
| — |
| 61 |
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Accretion on provisions |
| — |
| 60 |
| — |
| 177 |
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Deferred income taxes |
|
| — |
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| (2,575 | ) |
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| — |
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| (3,921 | ) | ||||||||||||||||
Sub-total |
| (2,056 | ) |
| (5,089 | ) |
| 1,957 |
| (9,265 | ) |
| (2,194 | ) |
| (2,056 | ) |
| 19,501 |
| 1,957 |
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Net change in other non-cash working capital balances related to operations |
| 6,842 |
| (12,948 | ) |
| 6,272 |
| (28,316 | ) |
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| (9,822 | ) |
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| 6,842 |
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| (39,397 | ) |
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| 6,272 |
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Cash flows related to operating activities |
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| 4,786 |
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| (18,037 | ) |
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| 8,229 |
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| (37,581 | ) | ||||||||||||||||
Cash flows from (used in) operating activities |
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| (12,016 | ) |
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| 4,786 |
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| (19,896 | ) |
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| 8,229 |
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FINANCING ACTIVITIES |
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Proceed from issuance of common shares pursuant to exercise of stock options |
| 9 |
| 8 |
| 9 |
| 82 |
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Proceeds from issuance of common shares pursuant to exercise of stock options |
| — |
| 9 |
| 3 |
| 9 |
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Payment of lease liabilities |
| (5,720 | ) |
| — |
| (17,342 | ) |
| — |
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| (250 | ) |
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| (5,720 | ) |
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| (5,824 | ) |
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| (17,342 | ) | |||||
Cash flows related to financing activities |
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| (5,711 | ) |
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| 8 |
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| (17,333 | ) |
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| 82 |
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Cash flows used in financing activities |
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| (250 | ) |
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| (5,711 | ) |
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| (5,821 | ) |
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| (17,333 | ) | ||||||||||||||||
INVESTING ACTIVITIES |
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Additions to property and equipment |
| (44 | ) |
| (1,752 | ) |
| (778 | ) |
| (3,420 | ) |
| (91 | ) |
| (44 | ) |
| (402 | ) |
| (778 | ) | ||||||||
Additions to intangible assets |
| (485 | ) |
| (1,128 | ) |
| (2,148 | ) |
| (3,851 | ) |
| (3 | ) |
| (485 | ) |
| (320 | ) |
| (2,148 | ) | ||||||||
Loan advance to a Company controlled by an executive employee |
| (227 | ) |
| — |
| (2,000 | ) |
| — |
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Cash flows related to investing activities |
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| (756 | ) |
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| (2,880 | ) |
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| (4,926 | ) |
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| (7,271 | ) | ||||||||||||||||
Repayment (issuance) of loan from a Company controlled by an executive employee |
|
| — |
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| (227 | ) |
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| 2,026 |
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| (2,000 | ) | ||||||||||||||||||
Cash flows from (used in) investing activities |
|
| (94 | ) |
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| (756 | ) |
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| 1,304 |
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| (4,926 | ) | |||||||||||||||||
Decrease in cash during the period |
| (1,681 | ) |
| (20,909 | ) |
| (14,030 | ) |
| (44,770 | ) |
| (12,360 | ) |
| (1,681 | ) |
| (24,413 | ) |
| (14,030 | ) | ||||||||
Cash, beginning of the period |
| 29,725 |
| 39,623 |
| 42,074 |
| 63,484 |
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|
| 34,285 |
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| 29,725 |
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| 46,338 |
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| 42,074 |
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Cash, end of the period |
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| 28,044 |
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| 18,714 |
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| 28,044 |
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| 18,714 |
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| 21,925 |
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| 28,044 |
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| 21,925 |
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| 28,044 |
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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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Income taxes (classified as operating activity) |
| — |
| 7 |
| — |
| 9 |
|
| — |
| — |
| — |
| — |
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Cash received for: |
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Interest |
| 217 |
| 120 |
| 622 |
| 563 |
|
| 50 |
| 217 |
| 329 |
| 622 |
| ||||||||||||||
Income taxes (classified as operating activity) |
| 2,780 |
| — |
| 2,948 |
| — |
|
| — |
| 2,780 |
| 870 |
| 2,948 |
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See accompanying notes.Notes.
6 |
Table of Contents |
DAVIDsTEA Inc.
Incorporated under the laws of Canada
INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)(DEFICIENCY)
[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 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
Accumulated | |||||||||||
Other | Total | ||||||||||
Share | Contributed | 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 nine months ended October 31, 2020 | — | — | (28,711) | — | (28,711) | ||||||
Other comprehensive loss | — | — | — | 191 | 191 | ||||||
Total comprehensive loss | — | — | (28,711) | 191 | (28,520) | ||||||
Issuance of common shares | 4 |
| (1) | — | — | 3 | |||||
Common shares issued on vesting of restricted stock units | 292 | (593) | 153 | — | (148) | ||||||
Stock-based compensation expense | — | 778 | — |
| — | 778 | |||||
Balance, October 31, 2020 | 113,139 | 1,761 | (120,836) |
| 1,398 | (4,538) | |||||
Balance, February 2, 2019 | 112,519 | 1,400 | (61,293) | 1,497 | 54,123 | ||||||
Net loss for the nine months ended November 2, 2019 | — | — | (25,494) | — | (25,494) | ||||||
Other comprehensive loss | — | — | — | (141) | (141) | ||||||
Total comprehensive loss | — | — | (25,494) | (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 | 28,910 |
See accompanying notes.Notes.
7 |
Table of Contents |
DAVIDsTEA Inc.
DAVIDsTEA Inc.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine-month periods ended October 31, 2020 and 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, 2019October 31, 2020 were authorized for issue in accordance with a resolution of the Board of Directors on December 20, 2019.15, 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 higherhighest 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 three and nine-month periods ended October 31, 2020, the Company recognized payroll subsidies of $1.4 million and $3.4 million, respectively under this wage subsidy program as a reduction in the associated wage costs which the Company incurred, which was recognized in Selling, general and administration expenses.
On July 8, 2020, the Company announced that it was 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 the formal Restructuring Plan 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 of its 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.
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 set November 6, 2020 as the time by which creditors had to submit their claims to PwC, the Court-appointed Monitor.
8 |
Table of Contents |
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 noteNote 3 of the consolidated financial statements for the year ended February 2, 2019,1, 2020, other than as disclosed in noteNote 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 courseWorld Health Organization in March 2020. The measures adopted by the federal, provincial and state governments in order to mitigate the spread of the Company’s financial statementoutbreak required the Company to temporarily close processall of its retail locations across North America effective March 17, 2020.
On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under applicable laws in both Canada and 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 the quarter ended November 2, 2019, accounting errors were identified82 of its stores in Canada and all 42 of its stores in the assessmentUnited States.On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of impairment indicators upon completingits stores in Canada and on August 21, 2020, re-opened 18 of its stores throughout Canada.
Although the Company continues to offer its products directly to consumers through its online store impairment analysis under IAS 36, Impairmentand 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 Assets (“IAS 36”), subsequentthe 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 adoptionRestructuring Plan 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 nine-month periods ended October 31, 2020, the Company reported a net income of IFRS 16, Leases (“IFRS 16”). When appropriately performing the assessment$14.5 million and incurred a net loss of impairment indicators with respect to the right-of-use assets (“ROU assets”)$28.7 million, respectively. The Company’s current liabilities total $81.6 million 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,October 31, 2020. As at October 31, 2020, the Company also determined that, pursuant to IFRS standards, its financial statements would be more relevant had they applied IAS 36 to assess impairmentheld cash and accounts and other receivables 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.$29.6 million. The Company believes this change is more relevant because it more faithfully depicts the performance of the Company. Subsequentdoes not currently have any third-party financing available with which 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.
The following table illustratesCompany’s ability to continue as a going concern is dependent on its ability to stabilize its business from unfavorable trend lines, and by focusing on how to grow its product portfolio including sales and customer service execution. The Company expects to restructure its operations to successfully emerge 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 effectCompany’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.
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 voluntary changeCompany will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in accounting policy on the adoptionnormal course of IFRS 16business. These interim condensed consolidated financial statements as at February 3, 2019:and for the three and nine-month periods ended October 31, 2020 do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate. Such adjustments could be material.
|
|
|
|
|
| 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 |
|
9 |
Table of Contents |
3. CHANGES IN ACCOUNTING POLICIES
IFRS 16 – LeasesRecently Issued Accounting Pronouncements
On May 28, 2020, the IASB issued an amendment to IFRS 16, “Leases’’ (“IFRS 16’’) replaces IAS 17, “Leases’’ and related interpretations. The standard introduces a single on-balance sheet recognition and measurement model“Leases” to make it easier for lessees eliminating the distinction between operatingto account for COVID-19-related rent concessions such as rent holidays 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)temporary rent reductions.
The Company has adopted IFRS 16amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as at February 3, 2019. Substantially alla direct consequence of the Company’s existing leasesCOVID-19 pandemic are real estate leaseslease modifications and allows lessees to account for its retail stores, warehouse and corporate head office. The adoption of IFRS 16 had a significant impactsuch rent concessions as the Company recognized new assets and liabilities. In addition, the nature and timing of expenses relatedif they were not lease modifications. It applies 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 accruedCOVID-19-related rent concessions that reduce lease payments with no restatement of the prior comparative period. Upon adoption of IFRS 16, the Company has applied the following practical expedients:
|
| |
|
| |
|
| |
|
|
The effectamendment is effective as of adoptionJune 1, 2020 but can be applied immediately in any financial statements—interim or annual—not yet authorized for issue. The Company applied the practical expedient to all rent concessions meeting the criteria as set out in the amendment, as of IFRS 16, includingFebruary 2, 2020. With respect to rent concessions not meeting 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,definition of a lease modification, the Company recorded the right-of-use assets based on the amount equalelected to the lease liabilities, adjustedaccount for any related prepaid and accrued lease payments previously recognized. Duesuch concessions by continuing 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 calculateaccount for 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 noteNote 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
The unaudited interim consolidated statement of income (loss) includes amounts for net Restructuring Plan activities (Note 10). As a result of the termination of leases pursuant to the Restructuring Plan, included in these net Restructuring Plan activities amounts are estimates the Company has made for allowed claims in the three and nine-months ended October 31, 2020 amounting to $6.7 million and $49.6 million, respectively. The estimate for the allowed claim is based on the Company’s best estimate and is based on the total undiscounted lease liability offset by an estimate of the losses that affected landlords will be able to successfully mitigate, informed by proofs of claim submitted by creditors. 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 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.
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 judgments with respect to the impacts of these events on the lease liabilities as of October 31, 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 Restructuring Plan and for which the notice period had expired, lease liabilities under IFRS 16 were determined to have been modified.
10 |
Table of Contents |
5. INVENTORIES
During the three and nine-month periods ended October 31, 2020, inventories recognized as cost of sales amounted to $6,738 and $21,498, respectively [November 2, 2019 - $10,635 and $34,252, respectively]. During the three and nine-month periods ended October 31, 2020, the cost of inventory includes write-downs of $386 and $1,305, respectively [November 2, 2019 – reversal of write downs of $5 and $498, respectively] recorded as a result of net realizable value being lower than cost.
October 31, | February 1, | |||||||
2020 | 2020 | |||||||
$ | $ | |||||||
Finished goods | 22,141 | 18,590 | ||||||
Goods in transit | 1,294 | 2,059 | ||||||
Packaging | 2,741 | 1,714 | ||||||
26,176 | 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 performingthat were 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 monthsnine-month periods ended November 2, 2019,October 31, 2020, the Company recorded an impairment loss for theof nil and $13,167, respectively, related to property and equipment, [November 2, 2019 - nil and nil, respectively] and nil and $26,793, respectively, related to right-of-use assets [November 2, 2019 - 2,051 and 7,076, respectively].
These impairment losses are further broken down as follows:
| For the nine months |
| ||||||||||
|
| ended October 31, 2020 |
| |||||||||
|
| Stores |
|
|
|
|
|
|
| |||
|
| permanently |
|
| Stores that |
|
|
|
| |||
|
| closed |
|
| remain open |
|
| Total |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Property and equipment |
|
| 12,966 |
|
|
| 201 |
|
|
| 13,167 |
|
Right-of-use assets |
|
| 24,433 |
|
|
| 2,360 |
|
|
| 26,793 |
|
|
|
| 37,399 |
|
|
| 2,561 |
|
|
| 39,960 |
|
The impairment loss taken in the first quarter of $2,051 and $7,076, respectively, [November 3, 2018 — $725 and $3,2852020 related to store leasehold improvements, furniture and equipment, computer hardware]the stores that remain open 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. This value in use of $1,613$791 [November 3, 2018 —nil]2, 2019 – $1,613] 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%13.0% for the first quarter of 2020 [November 3, 2018 —2, 2019 – 11.9%]. A reversal
Depreciation and amortization expenses are broken down as follows:
|
| For the three months |
|
| For the nine months |
| ||||||||||||||||||||||||||
|
| ended October 31, 2020 |
|
| ended October 31, 2020 |
| ||||||||||||||||||||||||||
|
| Stores |
|
|
|
|
|
|
|
|
|
|
| Stores |
|
|
|
|
|
|
|
|
|
| ||||||||
|
| permanently |
|
| Stores that |
|
|
|
|
|
|
|
| permanently |
|
| Stores that |
|
|
|
|
|
|
| ||||||||
|
| closed |
|
| remain open |
|
| Head office |
|
| Total |
|
| closed |
|
| remain open |
|
| Head office |
|
| Total |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Canada |
|
| 6 |
|
|
| 170 |
|
|
| 250 |
|
|
| 426 |
|
|
| 2,246 |
|
|
| 1,214 |
|
|
| 873 |
|
|
| 4,333 |
|
US |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 330 |
|
|
| — |
|
|
| — |
|
|
| 330 |
|
|
|
| 6 |
|
|
| 170 |
|
|
| 250 |
|
|
| 426 |
|
|
| 2,576 |
|
|
| 1,214 |
|
|
| 873 |
|
|
| 4,663 |
|
11 |
Table of Contents |
Depreciation expense, and impairment losses related to stores that remain open are reported in the consolidated statement of impairment occurs when previously impaired CGUs see improved financial results. income (loss) and comprehensive income (loss) under Selling, general and administration expenses (Note 9). Impairment losses related to stores that were permanently closed as a result of the Company’s Restructuring Plan are reported in Restructuring plan activities, net (Note 10).
For the three and nine monthsnine-month periods ended November 2, 2019, no impairment losses were reversed [November 3, 2018 — nil]. Impairment lossesthe depreciation expense was $1,313 and $3,997 respectively; with $3,444 recorded in the Canada segment, $164 recorded in the U.S. segment, and $389 recorded in corporate selling, general and administration expenses.
For Right-of-use assets, for the three and nine-month periods ended November 2, 2019, the depreciation expense was $2,938 and $9,153, respectively; with $7,538 recorded in the Canada segment, and $1,615 recorded in the U.S. segment.
7. 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.
Liabilities subject to compromise may 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.
|
| Estimate for allowed claims |
|
| Trade and other payables |
|
| Severance Costs |
|
| Liabilities subject to compromise |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Balance as at February 1, 2020 and May 2, 2020 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Reclassification of trade and other payables |
|
| — |
|
|
| 21,202 |
|
|
| — |
|
|
| 21,202 |
|
Additions |
|
| 42,878 |
|
|
| — |
|
|
| 4,940 |
|
|
| 47,818 |
|
Balance as at August 1, 2020 |
|
| 42,878 |
|
|
| 21,202 |
|
|
| 4,940 |
|
|
| 69,020 |
|
Additions |
|
| 16,937 |
|
|
| 419 |
|
|
| — |
|
|
| 17,356 |
|
Reversals |
|
| (10,227 | ) |
|
| (3,380 | ) |
|
| (407 | ) |
|
| (14,014 | ) |
Effect of foreign currency exchange |
|
| (378 | ) |
|
| (331 | ) |
|
| — |
|
|
| (709 | ) |
Balance as at October 31, 2020 |
|
| 49,210 |
|
|
| 17,910 |
|
|
| 4,533 |
|
|
| 71,653 |
|
As a result of the CGU’s net assets do not exceedtermination of leases pursuant to 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,Restructuring Plan in the three and nine-month periods ended October 31, 2020, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”)has recorded an estimate for allowed claim in the amount of $6.7 million and $49.6 million, respectively, in Restructuring plan activities, net in the unaudited interim consolidated statement of income (loss) (Note 10). 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 commitmentestimate 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, informed by proofs of claim submitted by creditors. This provision is subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the daily principal amount of 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 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.8. SHARE CAPITAL
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 Commoncommon 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 |
|
Table of Contents |
Issued and outstanding
October 31, | February 1, | |||||||
2020 | 2020 | |||||||
$ | $ | |||||||
Share Capital - 26,216,560 Common shares (February 1, 2020 - 26,086,162) | 113,139 | 112,843 |
During the three and nine-month periods ended November 2, 2019 12,000October 31, 2020, nil and 4,000 stock options, respectively were exercised for common shares for cash proceeds of $9nil and $3, respectively [November 3, 20182, 2019 – 10,00012,000 and 88,13512,000 stock options, for 88,135 common sharesrespectively, for cash proceeds of $8$9 and $82, respectively and 36,418 common shares for a non-cash settlement of nil and $121$9, respectively].
In addition, during the three and nine-month periods ended November 2, 2019, 6,877October 31, 2020, 8,431 and 55,845126,398 common shares, respectively [November 3, 20182, 2019 – 1,1286,877 and 70,66855,845 common shares respectively] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $30$20 and $303,$292, net of tax [November 3, 20182, 2019 — $7$30 and $643,$303, net of tax, respectively] and a reduction in contributed surplus of $39 and $593, respectively [November 2, 2019 — $67 and $628, respectively [November 3, 2018 — $18 and $1,322, respectively].
Stock-based compensation
As at October 31, 2020, 1,088,729 [November 2, 2019, 1,744,529] common shares remain available for issuance under the 2015 Omnibus Plan.
No stock options were granted during the three and nine-month periods ended October 31, 2020 and November 2, 2019.
A summary of the status of the Company’s stock option plan and changes during the nine-month periodperiods 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.
|
| For the nine months ended |
| |||||||||||||
|
| October 31, |
|
| November 2, |
| ||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||
|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| ||||
|
|
|
|
| average |
|
|
|
|
| average |
| ||||
|
| Options |
|
| exercise |
|
| Options |
|
| exercise |
| ||||
|
| outstanding |
|
| price |
|
| outstanding |
|
| price |
| ||||
|
| # |
|
| $ |
|
| # |
|
| $ |
| ||||
Outstanding, beginning of year |
|
| 76,350 |
|
|
| 8.96 |
|
|
| 137,540 |
|
|
| 7.17 |
|
Issued |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Exercised |
|
| (4,000 | ) |
|
| 0.77 |
|
|
| (12,000 | ) |
|
| 0.77 |
|
Forfeitures |
|
| — |
|
|
| — |
|
|
| (35,001 | ) |
|
| 6.77 |
|
Outstanding, end of period |
|
| 72,350 |
|
|
| 9.41 |
|
|
| 90,539 |
|
|
| 8.17 |
|
Exercisable, end of period |
|
| 72,350 |
|
|
| 9.41 |
|
|
| 89,120 |
|
|
| 8.07 |
|
A summary of the status of the Company’s RSU plan and changes during the nine-month periodperiods is presented below.
|
| For the nine months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| November 2, |
| November 3, |
|
| October 31, |
| November 2, |
| ||||||||||||||||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||||||||||||||||||||
|
|
|
| Weighted |
|
|
| Weighted |
|
|
|
| Weighted |
|
|
| Weighted |
| ||||||||||||||
|
|
|
| average |
|
|
| average |
|
|
|
| average |
|
|
| average |
| ||||||||||||||
|
| RSUs |
| fair value |
| RSUs |
| fair value |
|
| RSUs |
| fair value |
| RSUs |
| fair value |
| ||||||||||||||
|
| outstanding |
| per unit (1) |
| outstanding |
| per unit (1) |
|
| outstanding |
| per unit (1) |
| outstanding |
| per unit (1) |
| ||||||||||||||
|
| # |
|
| $ |
|
| # |
|
| $ |
|
| # |
| $ |
| # |
| $ |
| |||||||||||
Outstanding, beginning of year |
| 270,976 |
| 5.26 |
| 289,416 |
| 9.70 |
|
| 749,522 |
| 2.17 |
| 270,976 |
| 5.26 |
| ||||||||||||||
Granted |
| 804,710 |
| 1.93 |
| 476,450 |
| 4.48 |
|
| 1,177,222 |
| 1.44 |
| 804,710 |
| 1.93 |
| ||||||||||||||
Forfeitures |
| (112,746 | ) |
| 3.46 |
| (327,479 | ) |
| 6.45 |
|
| (313,229 | ) |
| (1.67 | ) |
| (112,746 | ) |
| 3.46 |
| |||||||||
Vested |
| (78,345 | ) |
| 5.52 |
| (70,668 | ) |
| 9.08 |
|
| (126,398 | ) |
| (2.28 | ) |
| (78,345 | ) |
| 5.52 |
| |||||||||
Vested, withheld for tax |
|
| (59,134 | ) |
|
| 5.37 |
|
|
| (69,017 | ) |
|
| 8.91 |
|
|
| (128,760 | ) |
|
| (2.31 | ) |
|
| (59,134 | ) |
|
| 5.37 |
|
Outstanding, end of period |
|
| 825,461 |
|
|
| 2.22 |
|
|
| 298,702 |
|
|
| 5.26 |
|
|
| 1,358,357 |
|
| 1.63 |
|
| 825,461 |
|
| 2.22 |
|
_____________
(1) | Weighted average fair value per unit as at date of grant. |
(1) Weighted average fair value per unit as at dateDuring the three and nine-month periods ended October 31, 2020, the Company recognized a stock-based compensation expense of grant$198 and $778, respectively [November 2, 2019 — $256 and $526].
13 |
Table of Contents |
9. SELLING, GENERAL AND ADMINISTRATION EXPENSES
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| October 31, |
|
| November 2, |
|
| October 31, |
|
| November 2, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Wages, salaries and employee benefits |
|
| 3,496 |
|
|
| 15,690 |
|
|
| 15,879 |
|
|
| 46,999 |
|
Depreciation of property and equipment |
|
| 237 |
|
|
| 1,313 |
|
|
| 1,781 |
|
|
| 3,997 |
|
Amortization of intangible assets |
|
| 420 |
|
|
| 517 |
|
|
| 1,503 |
|
|
| 1,372 |
|
Amortization right-of-use asset |
|
| 189 |
|
|
| 2,938 |
|
|
| 2,882 |
|
|
| 9,153 |
|
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 2,051 |
|
|
| 2,561 |
|
|
| 7,076 |
|
Loss on disposal of property and equipment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 22 |
|
Marketing expenses |
|
| 1,209 |
|
|
| 1,618 |
|
|
| 2,848 |
|
|
| 3,974 |
|
IT expenses |
|
| 736 |
|
|
| 1,080 |
|
|
| 2,190 |
|
|
| 3,059 |
|
Credit card fees |
|
| 547 |
|
|
| 618 |
|
|
| 1,736 |
|
|
| 1,839 |
|
Professional fees |
|
| 611 |
|
|
| 377 |
|
|
| 1,682 |
|
|
| 1,256 |
|
Stores supplies |
|
| 178 |
|
|
| 1,862 |
|
|
| 1,254 |
|
|
| 3,487 |
|
Stock-based compensation |
|
| 198 |
|
|
| 256 |
|
|
| 778 |
|
|
| 526 |
|
Government emergency wage subsidy |
|
| (1,446 | ) |
|
| — |
|
|
| (3,445 | ) |
|
| — |
|
Other selling, general and administration |
|
| 745 |
|
|
| 2,350 |
|
|
| 4,234 |
|
|
| 7,494 |
|
|
|
| 7,120 |
|
|
| 30,670 |
|
|
| 35,883 |
|
|
| 90,254 |
|
10. RESTRUCTURING PLAN ACTIVITIES, NET
During the three and nine-month periods ended November 2, 2019,October 31, 2020, the Company, recognized stock-based compensation expensein connection with the termination or modification of $256leases pursuant to the Restructuring Plan, reduced its lease liabilities by $20.4 million and $526$75.1 million, respectively, [November 3, 2018 — expenseresulting in a gain on the modification of $91 and a net reversal of stock based compensation of $7, respectively].lease liabilities.
As at November 2, 2019, 1,744,529 common shares remain available for issuance under the 2015 Omnibus Plan.
|
| For the three months ended |
|
| For the nine months ended |
| ||
|
| October 31, |
|
| October 31, |
| ||
|
| 2020 |
|
| 2020 |
| ||
|
| $ |
|
| $ |
| ||
Gain on modification of lease liabilities |
|
| (20,385 | ) |
|
| (75,121 | ) |
Estimate for allowed claim |
|
| 6,710 |
|
|
| 49,588 |
|
Loss on disposal of property and equipment and right-of-use assets |
|
| 18 |
|
|
| 1,560 |
|
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 37,399 |
|
Severance costs |
|
| (337 | ) |
|
| 4,832 |
|
Interest and penalties related to unpaid occupancy charges |
|
| 146 |
|
|
| 1,147 |
|
Professional fees |
|
| 856 |
|
|
| 1,829 |
|
Store closure related costs |
|
| 2,249 |
|
|
| 2,783 |
|
Restructuring plan activities, net |
|
| (10,743 | ) |
|
| 24,017 |
|
9.11. 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 |
|
| For the three months ended | For the nine months ended |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| November 2, |
| November 3, |
| November 2, |
| November 3, |
|
| October 31, |
| November 2, |
| October 31, |
| November 2, |
| ||||||||||||||||||||||||||||||||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||||||||||||||||||||||||||||||||||||||||
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
| $ |
| % |
| $ |
| % |
| $ |
| % |
| $ |
| |||||||||||||||||||||||
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||
Income tax provision (recovery) — statutory rate |
| 26.8 |
| 3,878 |
| 26.8 |
| (2,902 | ) |
| 26.8 |
| (7,694 | ) |
| 26.8 |
| (6,832 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Non-deductible items |
| (0.7 | ) |
| 72 |
| (0.4 | ) |
| 38 |
| (0.6 | ) |
| 148 |
| 0.1 |
| (31 | ) |
| 0.4 |
| 54 |
| (0.7 | ) |
| 72 |
| (0.6 | ) |
| 180 |
| (0.6 | ) |
| 148 |
| ||||||||||||||||||||||||
Unrecognized deferred income tax assets |
| (26.1 | ) |
| 2,830 |
| (8.8 | ) |
| 940 |
| (26.2 | ) |
| 6,684 |
| (3.6 | ) |
| 940 |
|
|
| (27.2 | ) |
|
| (3,932 | ) |
|
| (26.1 | ) |
|
| 2,830 |
|
| (26.2 | ) |
|
| 7,514 |
|
| (26.2 | ) |
|
| 6,684 |
| |||||||||||||
Other |
|
| — |
|
|
| — |
|
|
| (2.4 | ) |
|
| 260 |
|
|
| — |
|
|
| — |
|
|
| (1.0 | ) |
|
| 255 |
| ||||||||||||||||||||||||||||||||
Income tax provision (recovery) — effective tax rate |
|
| — |
|
|
| — |
|
|
| 15.3 |
|
|
| (1,635 | ) |
|
| — |
|
|
| — |
|
|
| 22.4 |
|
|
| (5,851 | ) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Table of Contents |
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 |
|
11.12. 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 | ) |
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| October 31, |
|
| November 2, |
|
| October 31, |
|
| November 2, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Net income (loss) for basic EPS |
|
| 14,467 |
|
|
| (10,830 | ) |
|
| (28,711 | ) |
|
| (25,494 | ) |
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 26,214,573 |
|
|
| 26,068,435 |
|
|
| 26,143,963 |
|
|
| 26,048,239 |
|
Fully diluted |
|
| 26,767,470 |
|
|
| 26,068,435 |
|
|
| 26,143,963 |
|
|
| 26,048,239 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 0.55 |
|
|
| (0.42 | ) |
|
| (1.10 | ) |
|
| (0.98 | ) |
Fully diluted |
|
| 0.54 |
|
|
| (0.42 | ) |
|
| (1.10 | ) |
|
| (0.98 | ) |
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.
12.13. 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,October 31, 2020, the Company purchased merchandise for resale amounting to $50 and $76, respectively [November 2, 2019 – $33 and $48, respectively [November 3, 2018 - $125 and $222, respectively], and provided infrastructure and administrative services of $5 and $80, respectively [November 2, 2019 - $163 and $222, respectively [November 3, 2018 - nil and nil, respectively] from and to a company controlled by one of its executive employees, respectively.employees.
DuringThe Company also spent nil and $53, respectively [November 2, 2019 — $96 and $164, respectively] for consulting services from a related party of the three and nine-month periodsprincipal shareholder. As well during the three-month period 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 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$4.0 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%.million. RDI has guaranteed all of Squish’s obligations to the Company and, as security in full for the guarantee, has givengave a movable hypothec (or lien) in favourfavor of the Company on its shares of DAVIDsTEA.the Company. Squish is a company controlled by Sarah Segal, an officer of DAVIDsTEA.the Company. RDI, the principal shareholder of DAVIDsTEA,the Company, is controlled by Herschel Segal, Executive Chairman, Interim Chief Executive Officer and a director of DAVIDsTEA.the Company. 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.
ForDuring the period ended November 2, 2019,first quarter of 2020, the Company received $36 [November 3, 2018 – nil] asloan of $2.0 million along with accrued interest on the secured loan.of $45 were fully repaid.
13.14. 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 online, retail and onlinewholesale sale of tea, tea accessories and food and beverages. The Company’s Interim 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 |
|
| For the three months ended |
| For the nine months ended |
| ||||||||||||||||||||||
|
| November 2, |
| November 3, |
| November 2, |
| November 3, |
|
| October 31, |
| November 2, |
| October 31, |
| November 2, |
| ||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| $ |
| $ |
| $ |
| |||||||||||
Tea |
| 30,038 |
| 31,348 |
| 92,770 |
| 92,167 |
|
| 22,989 |
| 30,038 |
| 69,004 |
| 92,770 |
| ||||||||||||||
Tea accessories |
| 6,199 |
| 8,478 |
| 20,482 |
| 25,979 |
|
| 3,183 |
| 6,199 |
| 10,868 |
| 20,482 |
| ||||||||||||||
Food and beverages |
|
| 3,256 |
|
|
| 3,830 |
|
|
| 9,673 |
|
|
| 11,463 |
|
|
| 53 |
|
| 3,256 |
|
| 1,625 |
|
| 9,673 |
| |||
|
|
| 39,493 |
|
|
| 43,656 |
|
|
| 122,925 |
|
|
| 129,609 |
|
|
| 26,225 |
|
| 39,493 |
|
| 81,497 |
|
| 122,925 |
|
15 |
Table of Contents |
Property and equipment, right-of-use assets 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 |
|
October 31, | February 1, |
Results from operating activities before corporate expenses per country are as follows:
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
The Company’s foreign exchange exposure is as follows:
The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars. The Company had no foreign exchange contracts outstanding as at
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 and liabilities with variable interest
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
As at
The Company expects to finance its working capital needs
Refer to Note 2 for details with respect to the going concern uncertainty.
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
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
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
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:
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 2020” are to the Company’s fiscal year ending January 30, 2021. All references to “Fiscal 2019” are to the Company’s fiscal year
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.
Overview
We are a 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 our e-commerce platform at www.davidstea.com and in 18 Company-owned and operated retail stores in Canada. A selection of DAVIDsTEA products is also available in more than 2,500 grocery stores and pharmacies across Canada. The Company is headquartered in Montréal, Canada. We believe that our proprietary loose-leaf tea assortment and related product suite differentiates us from competitors in North America and resonates with our target customer base. Our strategy is to stabilize our business from unfavorable trend lines by playing to our core strengths and strengthening our business by focusing on how to grow our product portfolio. This includes migrating sales to a virtual experience and best-in-class customer service execution. Our Restructuring Plan is focused on effectively optimizing our retail footprint to emerge as a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, all supported by a right-sized support organization. On March 17, 2020, we closed all of our stores in North America, as subsequently mandated by the governments in both Canada and the United States in light of the COVID-19 pandemic. Due to the degree of uncertainty in connection with the scope and extent of the COVID-19 pandemic and the resulting impact to our business, and considering that significant losses were historically incurred in our brick-and-mortar operations which are anchored by commercial leases that are difficult to modify, we concluded that our transformation objectives would be better achieved through a formal restructuring process. On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under the CCAA in order to accelerate its transition to an online retailer and wholesaler of high-quality tea and accessories and
On July 8, 2020, the Company obtained the Initial Order pursuant to the CCAA from the Québec Superior Court in order to implement the Restructuring Plan. Among other things, the Initial Order provided for the appointment of PwC as Monitor in the CCAA proceedings. On July 9, 2020, the United States Bankruptcy Court for the District of As part of its Restructuring Plan and 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 On August 21, 2020, the Company re-opened 18 stores across Canada. On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to December 15, 2020 and issued a
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. 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. 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 under “Item 1A. Risk Factors” of this Form
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
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.
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, assembly and distribution costs.
Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) consist of store operating expenses and other general and administration
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
Results from Operating Activities. Results from operating activities consist of our gross profit less our selling, general and administration
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
Finance Costs. Finance costs consist of cash and imputed non-cash charges related to
Finance Income. Finance income consists of interest income on cash balances.
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,
Selected Operating and Financial Highlights
Results of Operations
Sales during the third quarter of $26.2 million declined by $13.3 million or 33.6% over the prior year quarter due to the reduction in our retail store footprint. Adjusted EBITDA
The following table summarizes key components of our results of operations for the
The Company uses certain non-IFRS financial measures for purposes of comparison to prior periods, to prepare annual operating budgets, and for the development of future projections. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similarly titled measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS financial measures to provide supplemental measures of our operating performance and thus highlight trends in our business that may not otherwise be apparent when relying solely on IFRS financial measures. These non-IFRS financial measures include; Adjusted
We believe that
Because of these limitations,
The following tables Reconciliation of Selling, general and administration expenses to Adjusted selling, general and administration expenses
Reconciliation of Results from operating activities to Adjusted results from operating activities
Reconciliation of Net income (loss) to Adjusted
Reconciliation of Net
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
Reconciliation of fully diluted
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 October 31, 2020 compared to Three Months Ended November 2, 2019
Gross
Selling, general and administration expenses. Selling, general and administration expenses decreased by $23.6 million or 76.8% to
Results from operating activities. Income from operating activities was Finance costs. Finance costs amounted to almost nil in the three months ended October 31, 2020, a decrease of
Finance
EBITDA. EBITDA
Net
Fully diluted income (loss) per common share. Fully diluted income per common share was $0.54 compared to a loss of $0.42 in the third quarter of Fiscal 2019. Adjusted fully diluted income per common share, which is adjusted net income (loss) on a fully diluted weighted average shares outstanding basis, was $0.09 per share compared to a loss of $0.34 per share. Nine Months Ended October 31, 2020 compared to Nine Months Ended November 2, 2019 Sales. Sales for the nine months ended October 31, 2020 decreased 33.7%, or $41.4 million, to $81.5 million from $122.9 million in the same period in the prior year. On March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closures of all its retail stores in Canada and the United States, and subsequently, as part of its Restructuring Plan, exited all of its brick and mortar stores except for 18 Canadian stores which were reopened on August 21, 2020. Accordingly, brick and mortar sales declined by $78.9 million or 80.3% when compared to the same period in the prior year. Sales from our e-commerce and wholesale channels increased $37.5 million or 152.0% to $62.1 million, from $24.7 million in the same period in prior year as we shifted to a digital first strategy to address consumers changing shopping habits. For the nine-month period ended October 31, 2020, e-commerce and wholesale sales represented 76.2% of total sales as opposed to 20.1% in the same period in the prior year. Gross profit. Gross profit of $34.1 million for the nine-month period ended October 31, 2020 decreased by $35.4 million or 50.9% from the same period of the prior year due primarily to a decline in sales during the period. Gross profit as a percentage of sales declined to 41.8% for the nine-month period ended October 31, 2020 from 56.5% in the same period in the prior year. As the Company pivots to a digital first strategy, the cost of delivery and distribution that is included in arriving at gross profit will compare unfavorably to prior periods that were predominantly focused on retail sales distribution. The significant increase in e-commerce sales during the period ended October 31, 2020 resulted in an increase of $9.3 million in delivery and distribution costs. Our margins were also impacted by an increase in inventory obsolescence of $2.6 million in Fiscal 2020 caused by the consolidation of merchandise from our closed retail stores during the first quarter and the permanent closure of the majority of our stores. Selling, general and administration expenses. SG&A decreased by $54.4 million or 60.2%, to $35.9 million in the nine months ended October 31, 2020 from the same period in the prior year. Excluding the impact of the impairment of property and equipment and right-of-use assets, and the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan in the nine-month period ended October 31, 2020 which amounted to $0.9 million, Adjusted SG&A decreased by $46.4 million for the nine months ended October 31, 2020. This is mostly explained by the temporary closure of our stores effective March 17, 2020 and the reopening of 18 stores on August 21, 2020. As a result, wages, salaries and employee benefits were reduced by $31.1 million and we realized a reduction of $8.5 million in amortization expense due to a lower right-of-use asset value at the beginning of Fiscal 2020. As a percentage of sales, Adjusted SG&A decreased to 45.1% from 67.7% due to lower selling expenses resulting from the now permanent closure of our 206 stores effective March 17, 2020 and the reopening of 18 stores on August 21, 2020.
Results from operating activities. Loss from operating activities was $25.8 million compared to a loss of $20.8 million in the same period in Fiscal 2019. Excluding the impact of the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment, Adjusted results from operating activities was a loss of $2.7 million compared to a loss of $13.7 million in the same period in the prior year. This resulting improvement of $11.0 million is explained by reduction in wages, salaries and employee benefits, from stores and head office, amounting to $31.1 million and an $8.5 million reduction in amortization expense due to a lower right-of-use asset value at the beginning of Fiscal 2020, and a reduction of other selling expenses, partially offset by the reduction of gross profit of $35.4 million. Finance costs. Finance costs amounted to $3.3 million in the nine-month period ended October 31, 2020, a decrease of $2.0 million from the prior year quarter. The interest expense relates to lease liabilities and has decreased from the prior year period due to the store closures. Finance income. Finance income of $0.4 million is derived mainly from interest on cash on hand and has decreased slightly from the prior year period. EBITDA.EBITDA was negative $19.6 million in the nine-month period ended October 31, 2020 compared to negative $6.2 million in the same period in the prior year, representing a decrease of $13.4 million over Fiscal 2019. Adjusted EBITDA for the nine months ended October 31, 2020, which excludes the impact of stock-based compensation expense, the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment amounted to $4.3 million compared to $1.4 million in the same period in the prior year. The increase in Adjusted EBITDA, of $2.9 million, is an outcome of the reduction in SG&A that was partially offset by the decline in gross profit. Net loss. Net loss was $28.7 million in the nine months ended October 31, 2020 compared to a net loss of $25.5 million in the same period in prior year. Adjusted net loss, which excludes the impact from the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, the subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and loss on disposal of property and equipment was $5.6 million compared to $18.4 million in the same period in the prior year. This $12.8 million improvement is driven by the same reasons mentioned above in Results from operating activities. Fully diluted loss per common
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 October 31, 2020 compared to Three Months Ended November 2, 2019
Cash Cash flows used in Financing activities. Net cash flows used in Financing activities of $0.3 million compares to $5.7 million used in the prior year quarter. This net reduction in use of cash was primarily due to the Restructuring Plan and the termination of our store lease agreements. Cash flows used in Investing activities. Cash flows used in Investing activities decreased from $0.8 million to $0.1 million for the three months ended Nine Months Ended October 31, 2020 compared to Nine Months Ended November Cash flows (used in) provided by Operating activities. Net cash flows used in
Cash Cash flows provided by (used in) Investing activities. Cash flows provided by investing activities of $1.3 million during the nine-month period ended October 31, 2020 increased by $6.2 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 $2.2 million to $0.7 million for the
Off-Balance Sheet Arrangements
We have no off-balance sheet obligations.
Contractual Obligations and Commitments
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 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 October 31, 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 any of such risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading price of our common shares could decline and you could lose all or part of your investment in the Company. Although we believe that we have identified and discussed as referred to above the key risk factors affecting our business, there may be additional risks and uncertainties that are not currently known to us or that are currently deemed immaterial that may adversely affect our business and financial condition.
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
None.
(a) Exhibits:
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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