UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended AugustMay 1, 20202021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-37404
DAVIDsTEA Inc. |
(Exact name of registrant as specified in its charter) |
Canada |
| 98-1048842 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
5430 Ferrier
Mount-Royal, Québec, Canada, H4P 1M2
(Address of principal executive offices) (zip code)
(888) 873-0006
(Registrant’s telephone number, including area code)
Securities Registered Pursuantregistered pursuant to Section 12(b) of the Act:
Title of | Name of Each Exchange on |
| Trading Symbol | |
Common shares, no par |
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| 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. YESYes ☒ NONo ☐
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). YESYes ☒ NONo ☐
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b212b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☐ |
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. ☒☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESYes ☐ NONo ☒
As of September 17, 2020, 26,208,129June 11, 2021, 26,255,769 common shares of the registrant were outstanding.
The brand, service or product names or marks referred to in this Quarterly Report are trademarks or services marks, registered or otherwise, of DAVIDsTEA Inc. and our wholly-owned subsidiary, DAVIDsTEA (USA) Inc.
DAVIDsTEA Inc.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private issuer, the Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the United States Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers, although the Company is not required to do so.
In this Quarterly Report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CAD,” “CND$“CAD”,” “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,”dollars”, “US$” and “USD” mean U.S. dollars.
On September 17, 2020,June 11, 2021, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of Canada closing average exchange rateNew York was US$1.00 = CAD$1.32001.2148.
2 |
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]
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| As at |
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ASSETS |
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Current |
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Cash |
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Accounts and other receivables |
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Inventories |
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Income tax receivable |
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Prepaid expenses and deposits |
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Total current assets |
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Property and equipment |
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Intangible assets |
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Right-of-use assets |
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Total assets |
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LIABILITIES AND EQUITY |
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Current |
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Trade and other payables |
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Deferred revenue |
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Current portion of lease liabilities |
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Total current liabilities |
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Non-current portion of lease liabilities |
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Total liabilities |
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Commitments and contingencies |
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Equity |
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Share capital |
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Contributed surplus |
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Deficit |
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Accumulated other comprehensive income |
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Total |
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Total liabilities and equity |
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See accompanying notes.
3 |
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]
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| For the three months ended |
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| For the six months ended |
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| August 1, |
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| August 3, |
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| August 1, |
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| August 3, |
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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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| 23,031 |
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| 39,167 |
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| 55,273 |
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| 83,432 |
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Cost of sales |
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| 14,694 |
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| 17,362 |
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| 32,263 |
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| 35,291 |
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Gross profit |
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| 8,337 |
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| 21,805 |
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| 23,010 |
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| 48,141 |
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Selling, general and administration expenses |
| [Note 11] |
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| 7,409 |
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| 31,563 |
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| 29,042 |
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| 59,583 |
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Restructuring plan activities, net |
| [Note 8] |
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| (3,172 | ) |
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| 34,228 |
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Results from operating activities |
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| 4,100 |
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| (9,758 | ) |
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| (40,260 | ) |
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| (11,442 | ) |
Finance costs |
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| 1,559 |
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| 1,781 |
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| 3,226 |
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| 3,608 |
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Finance income |
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| (68 | ) |
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| (195 | ) |
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| (308 | ) |
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| (386 | ) |
Net income (loss) |
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| 2,609 |
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| (11,344 | ) |
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| (43,178 | ) |
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| (14,664 | ) |
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Other comprehensive income (loss) |
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Items to be reclassified subsequently to income: |
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Cumulative translation adjustment |
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| 1,451 |
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| 255 |
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| (18 | ) |
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| (242 | ) |
Total comprehensive income (loss) |
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| 4,060 |
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| (11,089 | ) |
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| (43,196 | ) |
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| (14,906 | ) |
Net income (loss) per share: |
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Basic |
| [Note 12] |
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| 0.10 |
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| (0.44 | ) |
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| (1.65 | ) |
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| (0.56 | ) |
Fully diluted |
| [Note 12] |
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| 0.10 |
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| (0.44 | ) |
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| (1.65 | ) |
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| (0.56 | ) |
Weighted average number of shares outstanding |
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Basic |
| [Note 12] |
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| 26,128,971 |
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| 26,056,520 |
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| 26,108,499 |
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| 26,038,128 |
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Fully diluted |
| [Note 12] |
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| 26,925,264 |
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| 26,056,520 |
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| 26,108,499 |
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| 26,038,128 |
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For the three months ended | ||||||||||||
May 1, | May 2, | |||||||||||
2021 $ | 2020 $ | |||||||||||
Sales | [Note 13] | 23,249 | 32,242 | |||||||||
Cost of sales | 12,481 | 17,569 | ||||||||||
Gross profit | 10,768 | 14,673 | ||||||||||
Selling, general and administration expenses | [Note 9] | 9,194 | 21,634 | |||||||||
Restructuring activities, net | [Note 10] | (1,602 | ) | 37,400 | ||||||||
Results from operating activities | 3,176 | (44,361 | ) | |||||||||
Finance costs | 10 | 1,667 | ||||||||||
Finance income | (55 | ) | (240 | ) | ||||||||
Net income (loss) | 3,221 | (45,788 | ) | |||||||||
Other comprehensive income (loss): | ||||||||||||
Cumulative translation adjustment | 812 | (1,468 | ) | |||||||||
Other comprehensive income (loss), net of tax | 812 | (1,468 | ) | |||||||||
Total comprehensive income (loss) | 4,033 | (47,256 | ) | |||||||||
Net earnings (loss) per share: | ||||||||||||
Basic | [Note 11] | 0.12 | (1.76 | ) | ||||||||
Fully diluted | [Note 11] | 0.12 | (1.76 | ) | ||||||||
Weighted average number of shares outstanding | ||||||||||||
Basic | [Note 11] | 26,296,690 | 26,088,127 | |||||||||
Fully diluted | [Note 11] | 27,400,840 | 26,088,127 |
See accompanying notes.
4 |
Table of Contents |
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 |
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| For the six months ended |
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| August 1, |
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| August 3, |
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| August 1, |
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| August 3, |
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| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
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| $ |
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| $ |
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| $ |
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| $ |
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OPERATING ACTIVITIES |
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Net Income (loss) |
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| 2,609 |
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| (11,344 | ) |
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| (43,178 | ) |
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| (14,664 | ) |
Items not affecting cash: |
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Depreciation of property and equipment |
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| 301 |
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| 1,359 |
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| 1,544 |
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| 2,684 |
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Amortization of intangible assets |
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| 571 |
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| 456 |
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| 1,083 |
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| 855 |
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Amortization of right-of-use assets |
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| 454 |
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| 3,114 |
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| 2,693 |
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| 6,216 |
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Gain on modification of lease liabilities |
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| (54,735 | ) |
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| (54,735 | ) |
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Provisions |
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| 47,818 |
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| — |
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| 47,818 |
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| — |
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Interest on lease liabilities |
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| 1,559 |
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| 1,781 |
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| 3,187 |
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| 3,608 |
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Loss on disposal of property and equipment and right-of-use assets |
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| 1,542 |
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| 22 |
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| 1,542 |
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| 22 |
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Impairment of property and equipment and right-of-use assets |
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| — |
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| 5,025 |
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| 39,960 |
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| 5,025 |
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Stock-based compensation expense |
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| 267 |
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| 143 |
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| 580 |
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| 270 |
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Sub-total |
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| 386 |
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| 556 |
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| 494 |
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| 4,016 |
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Net change in other non-cash working capital balances related to operations |
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| (4,209 | ) |
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| 2,527 |
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| (8,373 | ) |
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| (573 | ) |
Cash flows from (used in) operating activities |
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| (3,823 | ) |
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| 3,083 |
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| (7,879 | ) |
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| 3,443 |
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FINANCING ACTIVITIES |
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Proceed from issuance of common shares pursuant to exercise of stock options |
|
| 3 |
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| — |
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| 3 |
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| — |
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Payment of lease liabilities |
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| (1,198 | ) |
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| (5,799 | ) |
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| (5,574 | ) |
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| (11,622 | ) |
Cash flows used in financing activities |
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| (1,195 | ) |
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| (5,799 | ) |
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| (5,571 | ) |
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| (11,622 | ) |
INVESTING ACTIVITIES |
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Additions to property and equipment |
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| (40 | ) |
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| (319 | ) |
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| (312 | ) |
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| (734 | ) |
Additions to intangible assets |
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| — |
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| (958 | ) |
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| (317 | ) |
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| (1,663 | ) |
Repayment (issuance) of loan from a Company controlled by an executive employee |
|
| — |
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| (1,773 | ) |
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| 2,026 |
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| (1,773 | ) |
Cash flows from (used in) investing activities |
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| (40 | ) |
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| (3,050 | ) |
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| 1,397 |
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| (4,170 | ) |
Decrease in cash during the period |
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| (5,058 | ) |
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| (5,766 | ) |
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| (12,053 | ) |
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| (12,349 | ) |
Cash, beginning of the period |
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| 39,343 |
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| 35,491 |
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| 46,338 |
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| 42,074 |
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Cash, end of the period |
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| 34,285 |
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| 29,725 |
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| 34,285 |
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| 29,725 |
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Supplemental Information |
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Cash paid for: |
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Interest |
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| — |
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| — |
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| — |
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| — |
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Income taxes (classified as operating activity) |
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| — |
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| — |
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| — |
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| — |
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Cash received for: |
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Interest |
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| 68 |
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| 210 |
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| 279 |
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| 405 |
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Income taxes (classified as operating activity) |
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| 563 |
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| 168 |
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| 870 |
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| 168 |
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| For the three months ended |
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| May 1, |
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| May 2, |
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| 2021 |
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| 2020 |
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| $ |
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| $ |
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OPERATING ACTIVITIES |
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Net income (loss) |
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| 3,221 |
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| (45,788 | ) |
Items not affecting cash: |
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Depreciation of property and equipment |
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| 388 |
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| 1,243 |
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Amortization of intangible assets |
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| 403 |
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| 512 |
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Amortization of right-of-use assets |
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| 159 |
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| 2,239 |
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Liabilities subject to compromise |
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| (2,148 | ) |
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| — |
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Interest on lease liabilities |
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| 10 |
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| 1,629 |
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Impairment of property and equipment and right-of-use assets |
|
| — |
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|
| 39,960 |
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Stock-based compensation expense |
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| 182 |
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| 313 |
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Sub-total |
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| 2,215 |
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|
| 108 |
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Net change in other non-cash working capital balances related to operations |
|
| (908 | ) |
|
| (4,164 | ) |
Cash flows from (used in) operating activities |
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| 1,307 |
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| (4,056 | ) |
FINANCING ACTIVITIES |
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Payment of lease liabilities |
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| (183 | ) |
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| (4,376 | ) |
Cash flows used in financing activities |
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| (183 | ) |
|
| (4,376 | ) |
INVESTING ACTIVITIES |
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Additions to property and equipment |
|
| — |
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| (272 | ) |
Additions to intangible assets |
|
| — |
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| (317 | ) |
Repayment of loan from a Company controlled by an executive employee |
|
| — |
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| 2,026 |
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Cash flows from investing activities |
|
| — |
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|
| 1,437 |
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Increase (decrease) in cash during the period |
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| 1,124 |
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| (6,995 | ) |
Cash, beginning of the period |
|
| 30,197 |
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| 46,338 |
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Cash, end of the period |
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| 31,321 |
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| 39,343 |
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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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| 50 |
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Income taxes |
|
| — |
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| — |
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Cash received for: |
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Interest |
|
| 55 |
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| 778 |
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Income taxes (classified as operating activity) |
|
| — |
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| 2,948 |
|
See accompanying notes.
5 |
Table of Contents |
DAVIDsTEA Inc.
Incorporated under the laws of Canada
INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)(DEFICIT)
[Unaudited and in thousands of Canadian dollars]
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| Accumulated |
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| Other |
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| Total |
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| Share |
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| Contributed |
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| Comprehensive |
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| Equity |
| |||||
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| Capital |
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| Surplus |
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| Deficit |
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| Income |
|
| (Deficiency) |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Balance, February 1, 2020 |
|
| 112,843 |
|
|
| 1,577 |
|
|
| (92,278 | ) |
|
| 1,207 |
|
|
| 23,349 |
|
Net loss for the six months ended August 1, 2020 |
|
| — |
|
|
| — |
|
|
| (43,178 | ) |
|
| — |
|
|
| (43,178 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18 | ) |
|
| (18 | ) |
Total comprehensive loss |
|
| — |
|
|
| — |
|
|
| (43,178 | ) |
|
| (18 | ) |
|
| (43,196 | ) |
Issuance of common shares |
|
| 4 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| 3 |
|
Common shares issued on vesting of restricted stock units |
|
| 272 |
|
|
| (554 | ) |
|
| 174 |
|
|
| — |
|
|
| (108 | ) |
Stock-based compensation expense |
|
| — |
|
|
| 580 |
|
|
| — |
|
|
| — |
|
|
| 580 |
|
Balance, August 1, 2020 |
|
| 113,119 |
|
|
| 1,602 |
|
|
| (135,282 | ) |
|
| 1,189 |
|
|
| (19,372 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 2, 2019 |
|
| 112,519 |
|
|
| 1,400 |
|
|
| (61,293 | ) |
|
| 1,497 |
|
|
| 54,123 |
|
Net loss for the six months ended August 3, 2019 |
|
| — |
|
|
| — |
|
|
| (14,664 | ) |
|
| — |
|
|
| (14,664 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (242 | ) |
|
| (242 | ) |
Total comprehensive loss |
|
| — |
|
|
| — |
|
|
| (14,664 | ) |
|
| (242 | ) |
|
| (14,906 | ) |
Common shares issued on vesting of restricted stock units |
|
| 273 |
|
|
| (561 | ) |
|
| 195 |
|
|
| — |
|
|
| (93 | ) |
Stock-based compensation expense |
|
| — |
|
|
| 270 |
|
|
| — |
|
|
| — |
|
|
| 270 |
|
Balance, August 3, 2019 |
|
| 112,792 |
|
|
| 1,109 |
|
|
| (75,762 | ) |
|
| 1,255 |
|
|
| 39,394 |
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
| Other |
|
| Total |
| |||||
|
| Share |
|
| Contributed |
|
|
|
|
| Comprehensive |
|
| Equity |
| |||||
|
| Capital |
|
| Surplus |
|
| Deficit |
|
| Income (loss) |
|
| (Deficiency) |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Balance, January 30, 2021 |
|
| 113,167 |
|
|
| 1,747 |
|
|
| (148,068 | ) |
|
| 1,863 |
|
|
| (31,291 | ) |
Net income for the three months ended May 1, 2021 |
|
| — |
|
|
| — |
|
|
| 3,221 |
|
|
| — |
|
|
| 3,221 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 812 |
|
|
| 812 |
|
Total comprehensive income |
|
| — |
|
|
| — |
|
|
| 3,221 |
|
|
| 812 |
|
|
| 4,033 |
|
Common shares issued on vesting of restricted stock units |
|
| 70 |
|
|
| (142 | ) |
|
| (24 | ) |
|
| — |
|
|
| (96 | ) |
Stock-based compensation expense |
|
| — |
|
|
| 182 |
|
|
| — |
|
|
| — |
|
|
| 182 |
|
Balance, May 1, 2021 |
|
| 113,237 |
|
|
| 1,787 |
|
|
| (144,871 | ) |
|
| 2,675 |
|
|
| (27,172 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 1, 2020 |
|
| 112,843 |
|
|
| 1,577 |
|
|
| (92,278 | ) |
|
| 1,207 |
|
|
| 23,349 |
|
Net loss for the three months ended May 2, 2020 |
|
| — |
|
|
| — |
|
|
| (45,788 | ) |
|
| — |
|
|
| (45,788 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,468 | ) |
|
| (1,468 | ) |
Total comprehensive loss |
|
| — |
|
|
| — |
|
|
| (45,788 | ) |
|
| (1,468 | ) |
|
| (47,256 | ) |
Common shares issued on vesting of restricted stock units |
|
| 74 |
|
|
| (156 | ) |
|
| 69 |
|
|
| — |
|
|
| (13 | ) |
Stock-based compensation expense |
|
| — |
|
|
| 313 |
|
|
| — |
|
|
| — |
|
|
| 313 |
|
Balance, May 2, 2020 |
|
| 112,917 |
|
|
| 1,734 |
|
|
| (137,997 | ) |
|
| (261 | ) |
|
| (23,607 | ) |
See accompanying notes.
6 |
Table of Contents |
DAVIDsTEA Inc.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-monththree-month periods ended AugustMay 1, 20202021 and August 3, 2019May 2, 2020 [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, DAVIDsTEA (USA) Inc., (collectively, the “Company”) for the three and six-month periodsthree-month period ended AugustMay 1, 20202021 were authorized for issue in accordance with a resolution of the Board of Directors on September 21, 2020.June 15, 2021. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the Nasdaq Global Market under the symbol “DTEA”. The registered office is located at 5430 Ferrier St., Town of Mount-Royal, Québec,Quebec, Canada, H4P 1M2.
The Company isoffers a branded retailer and growing mass wholesaler of specialty tea, offering a differentiatedbranded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories and tea-related gifts and accessories through its 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 thanthe Amazon Marketplace, its wholesale customers which include over 2,500 grocery stores and pharmacies, and 18 company-owned stores across Canada. The resultsWe offer primarily proprietary tea blends that are exclusive to the Company, as well as traditional single-origin teas and herbs. Our passion for and knowledge of operations fortea permeates our culture and is rooted in an excitement to explore the interim period are not necessarily indicativetaste, health and lifestyle elements of the results of operations for the full year.tea. 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 quarters because of lower customer engagement during the summer months.
In March 2020, the outbreak of a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization and on March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closure of all of its retail stores in Canada and the United States. On August 21, 2020, the Company re-opened 18 stores across Canada.
The Company qualifies for the Canada Emergency Wage Subsidy (“CEWS”) under the COVID-19 Economic Response Plan of the Government of Canada. During the first and second quarters of Fiscal 2020,period ended May 1, 2021, the Company recognized payroll subsidies of $1.1 million (May 2, 2020 - $0.8 million and $1.2 million respectivelymillion) under this wage subsidy program as a reduction in the associated wage costs which the Company incurred, which werewas recognized in Selling, general and administration expenses.
CCAA Proceedings
On July 8, 2020, the Company announced that it iswas 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 the Amazon Marketplace as well as its wholesale distribution channel, through which it sells a selection of DAVIDsTEA products in grocery stores and pharmacies across Canada.channel. 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 athe formal restructuring processRestructuring 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.
7 |
Table of Contents |
On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to December 15, 2020 and issued a Claimsclaims process order (the “Claims Process OrderOrder”) establishing the claims procedures for the Company’s creditors under the CCAA. ThisThe Claims Process Order, among other things, setsset November 6, 2020 (the “Claims Bar Date”) as the time by which creditors musthad to submit their claims to PwC,PricewaterhouseCoopers (“PwC”), the Court-appointed Monitor.
On December 15, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to March 19, 2021. The Court also approved a retention plan for certain key employees (“KERP”) and created a priority charge over the debtors’ assets for the KERP in addition to extending the Claims Bar Date for certain Canadian employees until December 31, 2020.
On March 19, 2021, the Québec Superior Court extended the stay of all proceedings against the Company to June 4, 2021, and addressed certain administrative matters.
On May 7, 2021, the Company obtained an order from the Québec Superior Court authorizing the Company to file its plan of arrangement (the “Plan of Arrangement”) under the CCAA and to call a creditors’ meeting to be held on June 11, 2021. The Court order also extended to July 16, 2021 the previously-announced stay of all proceedings against the Company under the CCAA.
At the creditors’ meeting held on June 11, 2021, subsequent to period-end, the Plan of Arrangement was approved by the requisite majorities of creditors of DAVIDsTEA Inc. and its subsidiary, DAVIDsTEA (USA) Inc., respectively, in accordance with the CCAA, that is, a simple majority of creditors of DAVIDsTEA Inc. and of DAVIDsTEA (USA) Inc., voting separately, whose claims are affected by the Plan of Arrangement, representing in each case at least two-thirds in dollar value of all such claims duly filed in accordance with the CCAA proceedings.
The Company will seek a sanction order (the “Sanction Order”) for the Plan of Arrangement from the Québec Superior Court at a hearing scheduled for June 16, 2021. If the Sanction Order is granted, the Company will seek recognition of the Sanction Order from the United States Bankruptcy Court for the District of Delaware under Chapter 15 of the United States Bankruptcy Code at a hearing scheduled for June 17, 2021.
The Plan of Arrangement approved by the Company’s creditors on June 11, 2021 provides that DAVIDsTEA Inc. will distribute an aggregate amount of approximately $18.0 million to its creditors and those of DAVIDsTEA (USA) Inc. in full and final settlement of all claims affected by the Plan of Arrangement. Such distribution will take place after, and is conditional upon, the two Court approvals referred to above, the whole as provided in the Plan of Arrangement. The Company can provide no assurance that it will obtain a sanction order for the Plan of Arrangement from the Québec Superior Court or that the sanction order, if any, will be recognized by the United States Bankruptcy Court for the District of Delaware.
2. 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 1, 2020,January 30, 2021, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB. In management’s opinion, the unaudited condensed interim consolidated financial statements reflect all the adjustments that are necessary for a fair presentation of the results for the interim period presented. These unaudited condensed interim consolidated financial statements have been prepared using the accounting policies and methods of computation as outlined in note 3 of the consolidated financial statements for the year ended February 1, 2020, other than as disclosed in note 3 below.January 30, 2021.
Going Concern Uncertainty
In December 2019, a novel strain of coronavirus, responsible for COVID-19, was first reported and was subsequently declared a pandemic by the World Health Organization in March 2020. The measures adopted by the federal, provincial and state governments in order to mitigate the spread of the outbreak required the Company to temporarily close all of its retail locations across North America effective March 17, 2020. On August 21, 2020, the Company re-opened 18 of its stores throughout Canada.
On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under applicable laws in both Canada and in the United States in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories. As part of the Restructuring Plan, in July 2020, the Company sent notices to terminate leases for 82164 of its stores in Canada and all 42 of its stores in the United States. On July 30,August 21, 2020, the Company sent notices to terminate leases for an additional 82re-opened 18 of its stores in Canada and continues to negotiate with landlords for the remaining 18 stores.throughout Canada.
8 |
Table of Contents |
Although the Company continues to offer its products directly to consumers through its online store and in supermarkets and drugstores across Canada, it is unlikely that customers will purchase its products at previous volumes through these alternative channels. Furthermore, the duration and impact of the COVID-19 pandemic is unknown and may influence consumer shopping behavior and consumer demand including online shopping. Notwithstanding that
The Plan of Arrangement requires approximately $18.0 million to be paid to the Company expectsCompany’s creditors in order to legally emerge from the formal restructuring process as a leaner organization, thereprocess. This is no assurance thatexpected to place increased risk on the Restructuring Plan will be successful and that all relevant and required regulatory, creditor and court approvals will be obtained.Company’s available liquidity, especially considering the Company does not currently have access to any debt or financing arrangements.
For the three and six-month periodsquarter ended AugustMay 1, 2020,2021, the Company reported a net income of $2.6 million and incurred a net loss of $43.2 million, respectively.$3.2 million. The Company’s current liabilities total $86.6$111.6 million as at AugustMay 1, 2020.2021. As at AugustMay 1, 2020,2021, the Company held cash and accounts and other receivables of $41.0$37.9 million. The Company does not currently have any third-party financing available with which to meet any future financial obligations.
The Company’s ability to continue as a going concern is dependent on its ability to stabilize its business from unfavorable trend lines, strengthening its businessand by focusing on how to grow its product portfolio including sales and customer service execution, and structuring its operationsexecution. The Company expects to ensure it successfully emergestransition to a digital-first organization with a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, supported by a right-sized support organization.
Management believes that there is material uncertainty surrounding the Company’s ability to execute the strategy necessary to return to sustained profitability in the current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, and changes in consumer behavior and the ability to successfully emerge from the Restructuring Plan process.behavior.
As a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.
These interim condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. These interim condensed consolidated financial statements as at and for the three and six-month periodsthree-months ended AugustMay 1, 20202021 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.
3. CHANGES IN ACCOUNTING POLICIESPRINCIPLES
Change in the pattern of consumption of intangible assets
Intangible assets are initially recorded at cost. Intangible assets with finite lives are amortized over their useful economic life. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates.
In the first quarter of 2021 the Company reviewed the pattern of consumption of its intangible assets. The Company previously used the declining method at the rate of 30% per annum. The Company changed the method of depreciation for intangible assets to a straight-line basis over the assets useful economic life to better reflect the underlying pattern of consumption.
Recently Issued Accounting Pronouncements
On May 28, 2020, the IASB issued an amendment to IFRS 16, Leases“Leases” to make it easier for lessees to account for COVID-19-related rent concessions such as rent holidays and temporary rent reductions. In April 2021, the IASB extended the relief to cover rent concessions that reduce lease payments due on or before June 30, 2022.
The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the COVID-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modifications. It applies to COVID-19-related rent concessions that reduce lease payments due on or before June 30, 2021.
The amendment iswas effective as of June 1, 2020 but cancould be applied immediately in any financial statements—statements; interim or annual—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 February 2, 2020. With respect to rent concessions not meeting the definition of a lease modification, the Company elected to account for such concessions by continuing to account for the lease liability and right-of-use asset using the rights and obligations of the existing lease and recognizing a separate lease payable in the period in which the allocated lease cash payment is due. As a result of the Initial Order obtained from the Québec Superior Court on July 8, 2020, any rent concessions provided by landlords are accordingly nullified.
9 |
Table of Contents |
4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgmentsjudgment 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 judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in note 5 of the consolidated financial statements for the year ended February 1, 2020.As of February 2, 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.
Key sources of estimation uncertainty
Lease termination
As a result of the termination of leases pursuant to the Restructuring Plan in the second quarter of 2020, the Company has recorded an estimate for allowed claim in the amount of $42.9 million. The estimate for allowed claim is based on the Company’s best estimate and is determined based on the total undiscounted lease liability offset by an estimate of the losses that affected landlords will be able to successfully mitigate. Accordingly, an expense of $42.9 million was recorded in Restructuring plan activities, net in the unaudited interim consolidated statement of income (loss). This provision is subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the provision in future periods may be material and will be recorded through earnings.
Recoverability and impairment of non-financial assets
The temporary store closures as a result of COVID-19, as well as the permanent closure of a majority of our retail stores resulting from the Restructuring Plan, and the related reduction in operating income during the first and second quarters of fiscal 2020 are considered to be indicators of impairment and the Company performed an assessment of recoverability for the property and equipment and right-of-use assets associated with its retail locations.
Key judgments in applying accounting principles
Lease liabilities
The temporary store closures as a result of COVID-19, and the resulting non-payment of rent for the months of April, May, June and part of July as well as the Restructuring Plan led the Company to make significant judgements with respect to the impacts of these events on the lease liabilities as of August 1, 2020. These include considerations such as the accounting for rent concessions, and the timing of termination of leases.
For all leases terminated as a result of the CCAA filing and for which the notice period had expired, lease liabilities under IFRS 16 were determined to have been modified.January 30, 2021.
5. INVENTORIES
During the three and six-month periods ended August 1, 2020, inventories recognized as cost of sales amounted to $6,104 and $14,760, respectively [August 3, 2019 - $11,623 and $23,617, respectively]. During the three and six-month periods ended August 1, 2020, the cost of inventory includes write-downs of nil and $560, respectively [August 3, 2019 – reversals of write downs of $493 and $493, respectively] recorded as a result of net realizable value being lower than cost.
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| |||||||
|
| |||||||
|
| |||||||
| ||||||||
| ||||||||
| ||||||||
6. PROPERTY AND EQUIPMENT AND RIGHT-OF-USE ASSETS
An assessment of impairment indicators was performed which caused the Company to review the recoverable amountAs a result of the propertyimpairment assessment and equipment, and right-of-use assets for certain cash generating units (“CGUs”) with an indication of impairment. CGUs reviewed included storesthe Company’s decision to be permanently closed as part of theimplement its Restructuring Plan and the remaining stores that are expected to perform below the Company’s previous projections.
As a result,accelerate its transition to predominately an online retailer, the Company recorded an impairment loss of its property and equipment and right-of-use assets of $13.0 million and nil in the first and second quarters of 2020 respectively, related to property and equipment, [first and second quarter of 2019, respectively, nil and nil] and $27.0 million and nil inrespectively, during the first and second quarters of 2020, respectively, related to right of use assets [first and second quarter of 2019, respectively, nil and $5.0 million].three-month period ended May 2, 2020.
Included in the amount above for property and equipment, is an impairment loss of $12.8$40.0 million, for$37.4 million relates to the 206 stores to be permanently closed as parta result of the Restructuring Plan. Plan, and is recorded in Restructuring plan activities, net (Note 10) in the interim consolidated statement of income (loss) and comprehensive income (loss).
The remaining $0.2$2.6 million of impairment loss was determined by comparing the carrying amount of the CGU’scash-generating units’ net assets with their respective recoverable amounts based on value in use, for 7 of the 18 stores that remain open.
Includedand is recorded in Selling, general and administration expenses (Note 9) in the amount above, for rightinterim consolidated statement of use assets, is an impairment loss of $24.6 million for the 206 stores to be permanently closed after the completion of the Restructuring Planincome (loss) and the remaining impairment loss of $2.4 million pertain to 7 of the 18 stores that remain open.
comprehensive income (loss). For these stores, a value in use of $791 for the first quarter of 2020, [August 3, 2019 – $3,924] was determined based on management’s best estimate of expected future cash flows from use over the remaining lease terms. This determination consideredterms, considering historical experience as well as currentand 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 13.0% for the first quarter of 2020 [August 3, 2019 – 11.9%].
For the three and six-month periods ended August 1, 2020, the depreciation expense was $301 and $1,544 respectively [August 3, 2019 - $1,359 and $2,684, respectively]; with $1,186 recorded in the Canada segment [August 3, 2019 - $2,318], $358 recorded in the U.S. segment [August 3, 2019 - $366], and $305 recorded in corporate selling, general and administration expenses [August 3, 2019 - $257]. Depreciation expense, and impairment losses are reported in the consolidated statement of loss and comprehensive loss under Selling, general and administration expenses (Note 11).
Depreciation expenseof property and impairment losses related to right-of-use assets have beenequipment for the three-month period ended May 1, 2021 was $388 (May 2, 2020 - $1,243), and is recorded in Selling, general and administration expenses (Note 11)9) in the interim consolidated statement of lossincome (loss) and comprehensive loss.income (loss).
For Right-of-useAmortization of right-of-use assets for the threethree-month period ended May 1, 2021 was $159 (May 2, 2020 - $2,239), and six-month periods ended August 1, 2020, the depreciation expense was $454 and $2,693 respectively [August 3, 2019 - $3,114 and $6,216, respectively]; with $2,416is recorded in the Canada segment [August 3, 2019 - $5,059],Selling, general and $277 recordedadministration expenses (Note 9) in the U.S. segment [August 3, 2019 - $1,157]interim consolidated statement of income (loss) and comprehensive income (loss).
7. RESTRUCTURING PLAN
(a) Liabilities subject to compromise6. LIABILITIES SUBJECT TO COMPROMISE
As a result of the Initial Order obtained on July 8, 2020 and subsequent amendments (note(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 subject to compromise pursuant to the Company’s Plan of Arrangement.
On September 17, 2020, the Court issued a plan of arrangement that is expectedClaims Process Order establishing the claims procedures for the Company’s creditors under the CCAA. The Claims Process Order, among other things set November 6, 2020 as the time by which creditors had to be presentedsubmit their claims to creditors. PwC.
Obligations for goods and services provided to the Company after the filing date of July 8, 2020 are discharged based on negotiated terms and conditions.
As of August 1, 2020,are excluded from liabilities subject to compromise amounted to $68.0 million and are made up of trade and other payables, provisions related to lease terminations and severance. These liabilities may also be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events.
(b) PROVISIONS
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|
Leases
During the second quarter of 2020, in connection with the termination of leases pursuant to the Restructuring Plan, the Company reduced its lease liabilities by $54.7 million, resulting in a gain on the modification of lease liabilities reported in Restructuring plan activities, net (note 8).
In addition, as a result of the termination of leases pursuant to the Restructuring Plan in the second quarter of 2020, the Company has recorded an estimate for allowed claim in the amount of $42.9 million. The estimate for the allowed claim is based on the Company’s best estimate and is determined based on the total undiscounted lease liability offset by an estimate of the losses that affected landlords will be able to successfully mitigate. Accordingly, an expense of $42.9 million was recorded in Restructuring plan activities, net in the unaudited interim consolidated statement of income (loss). This provision is subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the provision in future periods may be material and will be recorded through earnings.
The Company sent notices to terminate leases for an additional 82 of its stores in Canada on July 30, 2020 which were effective on August 29, 2020. The Company expects to record an additional gain on the modification of this lease liability of $16.6 million and an estimate for allowed claim in the amount of $18.0 million in the third quarter ending October 31, 2020. This estimate is based on the same assumptions used for the lease modifications recorded in the second quarter of 2020. The actual amount recorded in the third quarter of 2020 may differ as the Restructuring Plan proceedings evolve.compromise.
Table of Contents |
As of May 1, 2021, liabilities subject to compromise are broken down as follows:
|
| Disclaimed and modified leases |
|
| Trade and other payables |
|
| Severance Costs |
|
| Liabilities subject to compromise |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Balance as at January 30, 2021 |
|
| 75,310 |
|
|
| 20,699 |
|
|
| 4,541 |
|
|
| 100,550 |
|
Reversals |
|
| (1,771 | ) |
|
| (377 | ) |
|
| — |
|
|
| (2,148 | ) |
Balance as at May 1, 2021 |
|
| 73,539 |
|
|
| 20,322 |
|
|
| 4,541 |
|
|
| 98,402 |
|
The Plan of Arrangement approved by the Company’s creditors on June 11, 2021 provides that the Company will distribute an aggregate amount of approximately $18.0 million to its creditors in full and final settlement of all claims affected by the Plan of Arrangement. Such distribution will take place after, and is conditional upon, the Court approvals, the whole as provided in the Plan of Arrangement. The Company can provide no assurance that it will obtain a sanction order for the Plan of Arrangement from the Québec Superior Court or that the sanction order, if any, will be recognized by the United States Bankruptcy Court for the District of Delaware.
8. RESTRUCTURING PLAN ACTIVITIES, NET
|
| For the three months ended |
|
| For the six months ended |
| ||
|
| August 1, |
|
| August 1, |
| ||
|
| 2020 |
|
| 2020 |
| ||
|
| $ |
|
| $ |
| ||
Gain on modification of lease liabilities |
|
| (54,735 | ) |
|
| (54,735 | ) |
Lease terminations |
|
| 42,878 |
|
|
| 42,878 |
|
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 37,400 |
|
Severance |
|
| 5,168 |
|
|
| 5,168 |
|
Loss on disposal of property and equipment and right-of-use assets |
|
| 1,542 |
|
|
| 1,542 |
|
Penalties and interest related to lease payable |
|
| 1,001 |
|
|
| 1,001 |
|
Professional fees associated with our Restructuring Plan |
|
| 974 |
|
|
| 974 |
|
Restructuring plan activities, net |
|
| (3,172 | ) |
|
| 34,228 |
|
9.7. SHARE CAPITAL
Authorized
An unlimited number of common shares.
Issued and outstanding
|
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
Share Capital - |
|
|
|
|
|
|
During the three and six-month periodsthree-month period ended AugustMay 1, 2020, 4,000 stock options were exercised for2021, 21,187 common shares for cash proceeds of $3 [August 3, 2019(May 2, 2020 – nil].
In addition, during the three and six-month periods ended August 1, 2020, 104,652 and 117,96713,315 common shares, respectively [August 3, 2019 – 9,603 and 48,968 common shares respectively]shares) were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $198 and $272,$70, net of tax [August 3, 2019(May 2, 2020 — $52 and $273, net of tax, respectively]$74) and a reduction in contributed surplus of $398 and $554, respectively [August 3, 2019$142 (May 2, 2020 — $122 and $561, respectively]$156).
Stock-based compensation
As at AugustMay 1, 2021, 1,246,519 (May 2, 2020, 1,042,285 [August 3, 2019, 1,650,733]1,533,986) common shares remain available for issuance under the 2015 Omnibus Plan.
No stock options were granted during the three and six-monththree-month periods ended AugustMay 1, 20202021 and August 3, 2019.
May 2, 2020.
A summary of the status of the Company’s stock option plan and changes during the six-monththree-month periods isare presented below.
|
| For the six months ended |
| |||||||||||||
|
| August 1, |
|
| August 3, |
| ||||||||||
|
| 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 |
|
|
| — |
|
|
| — |
|
Forfeitures |
|
| — |
|
|
| — |
|
|
| (28,305 | ) |
|
| 4.84 |
|
Outstanding, end of period |
|
| 72,350 |
|
|
| 9.41 |
|
|
| 109,235 |
|
|
| 7.73 |
|
Exercisable, end of period |
|
| 72,350 |
|
|
| 9.41 |
|
|
| 107,816 |
|
|
| 7.65 |
|
For the three months ended | ||||||||||||||||
May 1, | May 2, | |||||||||||||||
2021 | 2020 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
average | average | |||||||||||||||
Options | exercise | Options | exercise | |||||||||||||
outstanding | price | outstanding | price | |||||||||||||
# | $ | # | $ | |||||||||||||
Outstanding and exercisable, beginning of year and end of period | 17,490 | 6.32 | 76,350 | 8.96 |
11 |
Table of Contents |
A summary of the status of the Company’s RSU plan and changes during the six-monththree-month periods isare presented below.
|
| For the six months ended |
| |||||||||||||
|
| August 1, |
|
| August 3, |
| ||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||
|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| ||||
|
|
|
|
| average |
|
|
|
|
| average |
| ||||
|
| RSUs |
|
| fair value |
|
| RSUs |
|
| fair value |
| ||||
|
| outstanding |
|
| per unit (1) |
|
| outstanding |
|
| per unit (1) |
| ||||
|
| # |
|
| $ |
|
| # |
|
| $ |
| ||||
Outstanding, beginning of year |
|
| 749,522 |
|
|
| 2.17 |
|
|
| 270,976 |
|
|
| 5.26 |
|
Granted |
|
| 1,177,222 |
|
|
| 1.44 |
|
|
| 804,710 |
|
|
| 1.93 |
|
Forfeitures |
|
| (275,162 | ) |
|
| 1.66 |
|
|
| (32,525 | ) |
|
| 5.27 |
|
Vested |
|
| (117,967 | ) |
|
| 2.22 |
|
|
| (71,468 | ) |
|
| 5.52 |
|
Vested, withheld for tax |
|
| (120,383 | ) |
|
| 2.26 |
|
|
| (50,331 | ) |
|
| 5.72 |
|
Outstanding, end of period |
|
| 1,413,232 |
|
|
| 1.65 |
|
|
| 921,362 |
|
|
| 2.30 |
|
For the three months ended | ||||||||||||||||
May 1, | May 2, | |||||||||||||||
2021 | 2020 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
average | average | |||||||||||||||
RSUs | fair value | RSUs | fair value | |||||||||||||
outstanding | per unit (1) | outstanding | per unit (1) | |||||||||||||
# | $ | # | $ | |||||||||||||
Outstanding, beginning of year | 1,306,101 | 1.70 | 749,522 | 2.17 | ||||||||||||
Granted | — | — | 332,551 | 1.48 | ||||||||||||
Forfeitures | (24,131 | ) | 1.45 | (28,117 | ) | 1.48 | ||||||||||
Vested | (21,187 | ) | 3.32 | (13,315 | ) | 5.59 | ||||||||||
Vested, withheld for tax | (22,065 | ) | 3.32 | (14,458 | ) | 5.63 | ||||||||||
Outstanding, end of period | 1,238,718 | 1.65 | 1,026,183 | 4.43 |
_____________
(1) | Weighted average fair value per unit as at date of grant. |
During the three and six-month periodsthree-month period ended AugustMay 1, 2020,2021, the Company recognized a stock-based compensation expense of $267 and $580, respectively [August 3, 2019$182 (May 2, 2020 — $143 and $270]$313).
10.8. 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 six months ended |
|
| For the three months ended |
| ||||||||||||||||||||||||||||||||||||||||
|
| August 1, |
| August 3, |
| August 1, |
| August 3, |
|
| May 1, |
| May 2, |
| ||||||||||||||||||||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||||||||||||||||||||||||||||||||
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
| ||||||||||||
Income tax recovery — statutory rate |
| 26.8 |
| 699 |
| 26.8 |
| (3,037 | ) |
| 26.8 |
| (11,572 | ) |
| 26.8 |
| (3,930 | ) | |||||||||||||||||||||||||||||
Income tax provision (recovery) — statutory rate |
| 26.4 |
| 850 |
| 26.8 |
| (12,122 | ) | |||||||||||||||||||||||||||||||||||||||
Increase (decrease) in income tax provision (recovery) resulting from: |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||
Non-deductible items |
| 3.9 |
| 103 |
| (0.4 | ) |
| 43 |
| (0.3 | ) |
| 126 |
| (0.5 | ) |
| 76 |
|
| (1.6 | ) |
| 52 |
| (0.1 | ) |
| 23 |
| |||||||||||||||||
Unrecognized deferred income tax assets |
|
| (30.7 | ) |
|
| (802 | ) |
|
| (26.4 | ) |
|
| 2,994 |
|
|
| (26.5 | ) |
|
| 11,446 |
|
|
| (26.3 | ) |
|
| 3,854 |
| ||||||||||||||||
Unrecognized (recognized) deferred income tax assets |
|
| (24.8 | ) |
|
| (902 | ) |
|
| (26.7 | ) |
|
| 12,099 |
| ||||||||||||||||||||||||||||||||
Income tax provision (recovery) — effective tax rate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
12 |
Table of Contents |
11.9. SELLING, GENERAL AND ADMINISTRATION EXPENSES
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
|
| August 1, |
|
| August 3, |
|
| August 1, |
|
| August 3, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Wages, salaries and employee benefits |
|
| 3,270 |
|
|
| 14,792 |
|
|
| 12,663 |
|
|
| 31,309 |
|
Depreciation of property and equipment |
|
| 301 |
|
|
| 1,359 |
|
|
| 1,544 |
|
|
| 2,684 |
|
Amortization of intangible assets |
|
| 571 |
|
|
| 456 |
|
|
| 1,083 |
|
|
| 855 |
|
Amortization right-of-use asset |
|
| 454 |
|
|
| 3,114 |
|
|
| 2,693 |
|
|
| 6,216 |
|
Marketing expenses |
|
| 597 |
|
|
| 1,245 |
|
|
| 1,639 |
|
|
| 2,356 |
|
Stores supplies |
|
| 311 |
|
|
| 815 |
|
|
| 1,076 |
|
|
| 1,625 |
|
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 5,025 |
|
|
| 2,561 |
|
|
| 5,025 |
|
Stock-based compensation |
|
| 267 |
|
|
| 143 |
|
|
| 580 |
|
|
| 270 |
|
Government wage subsidy |
|
| (1,156 | ) |
|
| — |
|
|
| (1,999 | ) |
|
| — |
|
Other selling, general and administration |
|
| 2,794 |
|
|
| 4,614 |
|
|
| 7,202 |
|
|
| 9,243 |
|
|
|
| 7,409 |
|
|
| 31,563 |
|
|
| 29,042 |
|
|
| 59,583 |
|
For the three months ended | ||||||||
May 1, | May 2, | |||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Wages, salaries and employee benefits | 3,566 | 9,394 | ||||||
Depreciation of property and equipment | 388 | 1,243 | ||||||
Amortization of intangible assets | 403 | 512 | ||||||
Amortization right-of-use asset | 159 | 2,239 | ||||||
Impairment of property and equipment and right-of-use assets | — | 2,560 | ||||||
IT expenses | 2,212 | 696 | ||||||
Marketing expenses | 945 | 1,041 | ||||||
Credit card fees | 536 | 616 | ||||||
Professional fees | 237 | 614 | ||||||
Stores supplies | 357 | 766 | ||||||
Stock-based compensation | 182 | 313 | ||||||
Government emergency wage subsidy | (1,064 | ) | (843 | ) | ||||
Other selling, general and administration | 1,273 | 2,483 | ||||||
9,194 | 21,634 |
10. RESTRUCTURING PLAN ACTIVITIES, NET
Included in Restructuring plan activities, net are the following expenses:
|
| For the three months ended |
| |||||
|
| May 1, |
|
| May 2, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| $ |
|
| $ |
| ||
Disclaimed leases |
|
| (1,771 | ) |
|
| - |
|
Trade and other payables |
|
| (460 | ) |
|
| - |
|
Impairment of property and equipment and right-of-use assets |
|
| - |
|
|
| 37,400 |
|
Professional fees |
|
| 546 |
|
|
| - |
|
Interest and penalties related to unpaid occupancy charges |
|
| 83 |
|
|
| - |
|
Restructuring plan activities, net |
|
| (1,602 | ) |
|
| 37,400 |
|
Certain comparative figures have been reclassified to conform to the current period presentation.
12.11. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) 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 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.
Table of Contents |
The following reflects the incomeearnings (loss) and share data used in the basic and diluted EPS computations:
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
|
| August 1, |
|
| August 3, |
|
| August 1, |
|
| August 3, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Net loss for basic EPS |
|
| 2,609 |
|
|
| (11,344 | ) |
|
| (43,178 | ) |
|
| (14,664 | ) |
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 26,128,971 |
|
|
| 26,056,520 |
|
|
| 26,108,499 |
|
|
| 26,038,128 |
|
Fully diluted |
|
| 26,925,264 |
|
|
| 26,056,520 |
|
|
| 26,108,499 |
|
|
| 26,038,128 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 0.10 |
|
|
| (0.44 | ) |
|
| (1.65 | ) |
|
| (0.56 | ) |
Fully diluted |
|
| 0.10 |
|
|
| (0.44 | ) |
|
| (1.65 | ) |
|
| (0.56 | ) |
For the three months ended | ||||||||
May 1, | May 2, | |||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Net earnings (loss) for basic EPS | 3,221 | (45,788 | ) | |||||
Weighted average number of shares outstanding: | ||||||||
Basic | 26,296,690 | 26,088,127 | ||||||
Fully diluted | 27,400,840 | 26,088,127 | ||||||
Net earnings (loss) per share: | ||||||||
Basic | 0.12 | (1.76 | ) | |||||
Fully diluted | 0.12 | (1.76 | ) |
13.12. RELATED PARTY DISCLOSURES
Transactions with related parties are measured at the exchange amount, being the consideration established and agreed to by the related parties.
During the three and six-month periodsthree-month period ended AugustMay 1, 2020,2021, the Company purchased merchandise for resale amounting to $3 and $26, respectively [August 3, 2019 – nil and $15, respectively]$46 (May 2, 2020 - $23) and provided infrastructure and administrative services of $8 and $75, respectively [August 3, 2019$5 (May 2, 2020 - $41 and $59, respectively]$67) to a company controlled by one of its executive employees. As of May 1, 2021, an amount of $4 was outstanding and presented in Trade and other payables.
The Company also spent $9 and $53, respectively [August 3, 2019nil (May 2, 2020 — $68 and $68, respectively]$44) for consulting services from a related party of the principal shareholder. As well during the three-month period ended August 3, 2019, the Company purchased a perpetual license rights to a reporting data model and associated intellectual property for $200 from a related party of the principal shareholder.
Loan to a Company controlled by one of the Company’s executive employees
During the second quarter of 2019, the Company entered into a secured loan agreement with Oink Oink Candy Inc., doing business as “Squish”, as borrower, and Rainy Day Investments Ltd. (“RDI”), as guarantor pursuant to which the Company agreed to lend to Squish an amount of up to $4$4.0 million, amended on September 13, 2019 to reflect a maximum amount available under the facility of $2$2.0 million. RDI guaranteed all of Squish’s obligations to the Company and, as security in full for the guarantee, gave a movable hypothec (or lien) in favorfavour of the Company on its shares of the Company. Squish is a company controlled by Sarah Segal, an officerthe Chief Executive Officer and Chief Brand Officer of the Company. RDI, the principal shareholder of the Company, is controlled by Herschel Segal, Executive Chairman Interim Chief Executive Officerof the Board and Strategic Advisor and a director of 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.
During the first quarter of 2020, the loan of $2$2.0 million along withand accrued interest of $45, wereincluding $19 which was earned in the first quarter, was fully repaid.
14.13. SEGMENT INFORMATION
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. TheDuring the year ended January 30, 2021, 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 aare geographic level.components. The Company has concluded that it has two reportableoperating segments, Canada and the U.S., that derive their revenues from the online, retail and wholesale sale of tea, tea accessories and food and beverages. The Company’s Chief Executive and Brand Officer and President, Chief Financial and Operations Officer (the chief operating decision makermakers or “CODM”) makesmake decisions about resources allocationto be allocated and assesses performance at the country level,of these segments, and for which discrete financial information is available. In the prior year the operating segments were the retail premises, and the reportable segments were Canada and US. As a result, there is no impact on prior period information as reportable segments were previously Canada and US.
Table of Contents |
The Company derives revenue from the following products:
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
|
| August 1, |
|
| August 3, |
|
| August 1, |
|
| August 3, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Tea |
|
| 19,921 |
|
|
| 29,306 |
|
|
| 46,016 |
|
|
| 62,730 |
|
Tea accessories |
|
| 3,065 |
|
|
| 6,629 |
|
|
| 7,685 |
|
|
| 14,284 |
|
Food and beverages |
|
| 45 |
|
|
| 3,232 |
|
|
| 1,572 |
|
|
| 6,418 |
|
|
|
| 23,031 |
|
|
| 39,167 |
|
|
| 55,273 |
|
|
| 83,432 |
|
For the three months ended | ||||||||
May 1, | May 2, | |||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Tea | 20,469 | 26,095 | ||||||
Tea accessories | 2,780 | 4,620 | ||||||
Food and beverages | - | 1,527 | ||||||
23,249 | 32,242 |
Property and equipment, right-of-use assets and intangible assets by country are as follows:
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|
|
|
| ||
|
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|
|
| 2020 |
| ||
|
| $ |
|
| $ |
| ||
Canada |
|
|
|
|
|
| ||
| - | 138 | ||||||
|
|
|
|
| ||||
|
|
Results from operating activities before corporate expenses per country are as follows:
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| For the three months ended |
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| ||||||||||||||||||||||||||||
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| May 1, 2021 |
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|
|
| Canada |
|
| US |
|
| Consolidated |
| ||||||||||||||||||||
|
| $ |
|
| $ |
|
| $ |
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|
|
| ||||||||||||||||||||
Sales |
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Cost of sales |
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Gross profit |
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| |||||||||||||||||||||||
Selling, general and administration expenses (allocated) |
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| ||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Results from operating activities before corporate expenses |
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|
|
|
| |||||||||||||||||||||||
Selling, general and administration expenses (non-allocated) |
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|
|
|
|
|
|
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| |||||||||||||||||||||
Restructuring plan activities, net |
|
|
|
|
|
|
|
|
|
| ( | ) | ||||||||||||||||||||
Results from operating activities |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Finance costs | 10 | |||||||||||||||||||||||||||||||
Finance income | (55 | ) | ||||||||||||||||||||||||||||||
Net income before income taxes | 3,221 | |||||||||||||||||||||||||||||||
For the three months ended | ||||||||||||||||||||||||
May 2, 2020 | ||||||||||||||||||||||||
Canada | US | Consolidated | ||||||||||||||||||||||
$ | $ | $ | ||||||||||||||||||||||
Sales | 24,260 | 7,982 | 32,242 | |||||||||||||||||||||
Cost of sales | 13,411 | 4,158 | 17,569 | |||||||||||||||||||||
Gross profit | 10,849 | 3,824 | 14,673 | |||||||||||||||||||||
Selling, general and administration expenses (allocated) | 9,598 | 2,525 | 12,123 | |||||||||||||||||||||
Impairment of property and equipment and right-of-use assets | 2,560 | — | 2,560 | |||||||||||||||||||||
Results from operating activities before corporate expenses | (1,309 | ) | 1,299 | (10 | ) | |||||||||||||||||||
Selling, general and administration expenses (non-allocated) | 6,951 | |||||||||||||||||||||||
Restructuring plan activities, net | 37,400 |
| ||||||||||||||||||||||
Results from operating activities |
|
|
|
|
|
|
|
|
|
| ( | ) | ||||||||||||
Finance costs |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Finance income |
|
|
|
|
|
|
|
|
|
| ( | ) | ||||||||||||
Net |
|
|
|
|
|
|
|
|
|
| ( | ) |
Table of Contents |
|
| For the three months ended August 3, 2019 |
|
| For the six months ended August 3, 2019 |
| ||||||||||||||||||
|
| Canada |
|
| US |
|
| Consolidated |
|
| Canada |
|
| US |
|
| Consolidated |
| ||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Sales |
|
| 30,340 |
|
|
| 8,827 |
|
|
| 39,167 |
|
|
| 64,530 |
|
|
| 18,902 |
|
|
| 83,432 |
|
Cost of sales |
|
| 13,925 |
|
|
| 3,437 |
|
|
| 17,362 |
|
|
| 28,039 |
|
|
| 7,252 |
|
|
| 35,291 |
|
Gross profit |
|
| 16,415 |
|
|
| 5,390 |
|
|
| 21,805 |
|
|
| 36,491 |
|
|
| 11,650 |
|
|
| 48,141 |
|
Selling, general and administration expenses (allocated) |
|
| 14,697 |
|
|
| 4,462 |
|
|
| 19,159 |
|
|
| 29,573 |
|
|
| 9,277 |
|
|
| 38,850 |
|
Impairment of property and equipment and right-of-use assets |
|
| 2,480 |
|
|
| 2,545 |
|
|
| 5,025 |
|
|
| 2,480 |
|
|
| 2,545 |
|
|
| 5,025 |
|
Results from operating activities before corporate expenses |
|
| (762 | ) |
|
| (1,617 | ) |
|
| (2,379 | ) |
|
| 4,438 |
|
|
| (172 | ) |
|
| 4,266 |
|
Selling, general and administration expenses (non-allocated) |
|
|
|
|
|
|
|
|
|
| 7,378 |
|
|
|
|
|
|
|
|
|
|
| 15,708 |
|
Results from operating activities |
|
|
|
|
|
|
|
|
|
| (9,758 | ) |
|
|
|
|
|
|
|
|
|
| (11,442 | ) |
Finance costs |
|
|
|
|
|
|
|
|
|
| 1,781 |
|
|
|
|
|
|
|
|
|
|
| 3,608 |
|
Finance income |
|
|
|
|
|
|
|
|
|
| (195 | ) |
|
|
|
|
|
|
|
|
|
| (386 | ) |
Net Loss before income taxes |
|
|
|
|
|
|
|
|
|
| (11,344 | ) |
|
|
|
|
|
|
|
|
|
| (14,664 | ) |
15.14. FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, liquidity and credit.
Currency Risk — Foreign Exchange Risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Given that some of its purchases are denominated in U.S. dollars, the Company is exposed to foreign exchange risk. The Company’s foreign exchange risk is largely limited to currency fluctuations between the Canadian and U.S. dollars. The Company is exposed to currency risk through its cash, accounts receivable and accounts payable denominated in U.S. dollars.
Assuming that all other variables remain constant, a revaluation of these monetary assets and liabilities due to a 5% rise or fall in the Canadian dollar against the U.S. dollar would have resulted in an increase or decrease to net income (loss) in the amount of $155.$249 (May 2, 2020 - $41).
The Company’s foreign exchange exposure is as follows:
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| ||
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| ||
|
| US$ |
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| US$ |
| ||
Cash |
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| ||
Accounts |
|
|
|
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| ||
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| |||
Trade and other payables | 1,585 | 750 |
|
The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.
The Company had no foreign exchange contracts outstanding as at August 1, 2020.
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 rates and consist primarily of cash on hand.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. On July 8, 2020, the Company announced it was implementing the Restructuring Plan in order to stabilize its operations and eventually generate free cash-flow to sustain the business. Considering the Company does not have access to financing and needs to operate the business and fund its restructuring activities, theThe Company’s approach to managing liquidity risk is to ensure, to the extent possible, that it will always have sufficient liquidity to meet liabilities as they becomewhen due. The Company’s liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. The Company is exposed to this risk mainly in respect of its trade and other payables, lease and purchase obligations.
As at AugustMay 1, 2020,2021, the Company had $34.3$31.3 million in cash.
The Company expects to finance its working capital needs and investments in infrastructure through cash flows from operations and cash on hand. At AugustMay 1, 2020, Trade2021, trade and other payables amounted to $26.6$6.2 million (February 1, 2020(January 30, 2021 - $20.8$4.2 million), Provisions amounted to $47.8 million and purchase obligations amounted to $6.6$13.0 million, (February 1,net of $7.2 million of advances (January 30, 2021 - $14.1 million, net of $6.8 million of advances). On July 8, 2020, - $11.5 million).As part of itsthe Company announced it was implementing a Restructuring Plan Tradeand as a result, trade and other payables due as at July 8, 2020 are subject to a planthe Company’s Plan of arrangement to be proposed by the Company to its creditors as part of the CCAA proceedings.Arrangement. All trade and other payables from July 9, 2020 onwards are expected to be paid according to negotiated vendor terms.terms or are cash-on-delivery.
In light of implementing the Restructuring Plan, the Company expects to use cash on hand to pay for the settlement of obligations, which as a result of creditors accepting the Plan of Arrangement on June 11, 2021, is expected to approximate $18.0 million and become due and payable to our Monitor on June 30, 2021, for ultimate distribution to creditors.
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 receivables. Accounts receivable primarily consist of receivables from retail customers who pay by credit card, receivables from our wholesale channel sales, recoveries of credits from suppliers for returned or damaged products, and receivables from other companies for sales of products, gift cards and other services. Credit card payments have minimal credit risk and the limited number of corporate receivables is closely monitored. As a result, expected credit loss on these financial assets is not significant.
Table of Contents |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and there are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes”, “expects”, “may”, “will”, “should”, “could”, “seeks”, “projects”, “approximately”, “intend”, “plans”, “estimates” or “anticipates” or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our Restructuring Plan, our results of operations, financial condition, liquidity, prospects, competitive strengths and differentiators, strategy, long-term Adjusted EBITDA margin potential, dividend policy, impact of the macroeconomic environment, properties, outcome of litigation and legal proceedings, use of cash and operating and capital expenditures, impact of new accounting pronouncements, and impact of improvements to internal control and financial reporting.
While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including the risk factors listed under Item 1A. Risk Factors, as well as other cautionary language in Form 10-K filed with the SEC on June 16, 2020, as well as the additional Risk Factors set out in our Form 10-Q filed with the SEC on July 31, 2020.April 30, 2021.
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:
| ☐ | The effects of our Restructuring Plan pursuant to the CCAA in Canada and recognition of the CCAA proceedings in the United States under Chapter 15 of the United States Bankruptcy Code; |
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|
|
| ☐ | We may not have sufficient cash to maintain our operations following the Restructuring Plan. |
☐ | Our ability to | |
|
|
|
| ☐ | The duration and impact of the global COVID-19 pandemic, which has disrupted the Company’s business and has adversely affected the Company’s financial condition and operating results, and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners; |
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|
|
| ☐ | Our |
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| |
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| ☐ | Our ability to |
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17 |
Table of Contents |
| ☐ | Our ability to maintain and enhance our brand image; |
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|
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| ☐ | Significant competition within our industry; |
|
|
|
| ☐ |
|
| Our ability to attract and retain employees that embody our | |
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|
|
| ☐ | Changes in consumer preferences and economic conditions affecting disposable income; |
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|
|
| ☐ | Our ability to source, develop and market new varieties of teas, tea accessories, |
|
|
|
| ☐ | Our reliance upon the continued retention of key personnel; |
|
|
|
| ☐ | The impact from real or perceived quality or safety issues with our teas, tea accessories, |
|
|
|
| ☐ | Our ability to obtain quality products from third-party manufacturers and suppliers on a timely basis or in sufficient quantities, in particular in light of supply chain disruption due to the COVID-19 pandemic; |
|
|
|
| ☐ | The impact of weather conditions, natural disasters and man-made disasters on the supply and price of tea; |
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|
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| ☐ | Actual or attempted breaches of data security; |
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|
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| ☐ | The costs of protecting and enforcing our intellectual property rights and defending against intellectual property claims brought by others; |
|
|
|
| ☐ | Fluctuations in exchange rates; and |
|
|
|
| ☐ | The seasonality of our business. |
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”2021” are to the Company’s fiscal year ending January 30, 2021.29, 2022. All references to “Fiscal 2019”2020” are to the Company’s fiscal year ended February 1, 2020. All references to “Fiscal 2018” are to the Company’s fiscal year ended February 2, 2019.January 30, 2021.
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. Fiscal 2019The year ended January 30, 2021 and 2020the year ending January 29, 2022 both cover a 52-week period.
Overview
We areThe Company offers a branded retailer and growing mass wholesaler of specialty tea, offering a differentiatedbranded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories and tea-related gifts and accessories through ourits 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 thanthe Amazon Marketplace, its wholesale customers which include over 2,500 grocery stores and pharmacies, and 18 company-owned stores across Canada. TheWe offer primarily proprietary tea blends that are exclusive to the Company, as well as traditional single-origin teas and herbs. Our passion for and knowledge of tea permeates our culture and is headquarteredrooted in Montréal, Canada.an excitement to explore the taste, health and lifestyle elements of tea.
Table of Contents |
The Company has a history of losses over the last several years and the COVID-19 pandemic required an acceleration of its transformation initiatives. Consumer purchasing preferences have increasingly been trending away from brick-and-mortar and increasingly towards online and alternative channels over the last several years. In Fiscal 2019 while over 80% of the Company’s revenues were generated from on average 234 brick-and-mortar stores, same-stores sales declined by 12.7% compared to Fiscal 2018. E-commerce and wholesale revenues during Fiscal 2019 increased by 20.9 % compared to Fiscal 2018.
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 isWe are focused on effectively optimizing our retail footprint to emerge asinto a leaner, more sustainable physical presence that complements a growing world-class online and grocerywholesale 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 arewere 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 Companywe announced that it waswe were implementing the Restructuring Plan under the CCAA in order to accelerate itsour transition to an online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, the Companywe would continue to operate itsour online business through itsour e-commerce platform at www.davidstea.com and itson the Amazon Marketplace, as well as our wholesale distribution channel, through which it sells a selection of DAVIDsTEA products in grocery stores and pharmacies across Canada.channel. Following a careful review of available options to stem the losses from its brick-and-mortar footprint, the Company’sour management and Board of Directors determined that a formal restructuring process was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.
On July 8, 2020, the Companywe 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 PwCPricewaterhouseCoopers (“PwC”) as Monitor in the CCAA proceedings.
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 Companyus 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,we, on July 10, 2020, sent notices to terminate leases for 82 of itsour stores in Canada and all 42 of our stores in the United States. These lease terminations were effective on August 9, 2020.
On July 16, 2020, the Companywe 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 Companywe sent notices to terminate leases for an additional 82 of its stores in Canada. These lease terminations were effective on August 29, 2020.
On August 21, 2020, the Companywe re-opened 18 stores across Canada.
On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against the Companyus to December 15, 2020 and issued a Claims Process Order establishing the claims procedures for the Company’sour creditors under the CCAA. ThisThe Claims Process Order, among other things setsset November 6, 2020 (the “Claims Bar Date”) as the time by which creditors musthad to submit their claims to PwC,PwC.
On December 15, 2020, the Court-appointed Monitor.Québec Superior Court extended the stay of all proceedings against us to March 19, 2021. The Court also approved a retention plan for certain key employees (“KERP”) and created a priority charge over the debtors’ assets for the KERP in addition to extending the Claims Bar Date for certain Canadian employees until December 31, 2020.
On March 19, 2021, the Québec Superior Court extended the stay of all proceedings against us to June 4, 2021, and addressed certain administrative matters.
On May 7, 2021, the Company obtained an order from the Québec Superior Court authorizing the Company to file its Plan of Arrangement under the CCAA and to call a creditors’ meeting to be held on June 11, 2021. The Court order also extended to July 16, 2021 the previously-announced stay of all proceedings against the Company under the CCAA.
At the creditors’ meeting held on June 11, 2021, the Plan of Arrangement was approved by the requisite majorities of creditors of DAVIDsTEA Inc. and its subsidiary, DAVIDsTEA (USA) Inc., respectively, in accordance with the CCAA, that is, a simple majority of creditors of DAVIDsTEA Inc. and of DAVIDsTEA (USA) Inc., voting separately, whose claims are affected by the Plan of Arrangement, representing in each case at least two-thirds in dollar value of all such claims duly filed in accordance with the CCAA proceedings.
19 |
Table of Contents |
The Company expects to successfully emergewill seek a sanction order for the Plan of Arrangement from the CCAA restructuring processQuébec Superior Court at a hearing scheduled for June 16, 2021. If the sanction order is granted, DAVIDsTEA and DAVIDsTEA (USA) Inc. will seek recognition of the sanction order from the United States Bankruptcy Court for the District of Delaware under Chapter 15 of the United States Bankruptcy Code at a hearing scheduled for June 17, 2021.
The Plan of Arrangement approved by the Company’s creditors on June 11, 2021 provides that DAVIDsTEA Inc. will distribute an aggregate amount of approximately $18.0 million to its creditors and those of DAVIDsTEA (USA) Inc. in full and final settlement of all claims affected by the Plan of Arrangement. Such distribution will take place after, and is conditional upon, the two Court approvals referred to above, the whole as provided in the Plan of Arrangement. The Company can provide no assurance that it will obtain a stronger, more resilient company; however,sanction order for the Plan of Arrangement from the Québec Superior Court or that the sanction order, if any, will be recognized by the United States Bankruptcy Court for the District of Delaware.
Management believes that there is material uncertainty surrounding itsour 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, and changes in consumer behavior. Accordingly, there isAs a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt in itsabout the Company’s ability to continue as a going concern. 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 10-Q.
10-Q and in our Form 10-K filed with the SEC and on SEDAR and available at www.sec.gov and www.sedar.com, respectively.
How We Assess Our Performance
The key measures we use to evaluate the performance of our business and the execution of our strategy are set forth below:
Sales. Sales are generated from our online store, retail stores, and from our wholesale distribution channel. Our business is seasonal and, as a result, our sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal quarter, which includes the holiday sales period, and tend to be lowest in the second and third fiscal quarters because of lower customer engagement in both our online store and physical locations in the summer months.
The specialty retail industry is cyclical, and our sales are affected by general economic conditions. A number of factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence can affect purchases of our products. Sales also include gift card breakage income.
As we transition to generating sales primarily from our online store, measuring the change in period-over-period comparable same store sales, although still a valid measure within our retail sales channel, loses its significance in the overall evaluation of how our business is performing. Other measures such as sales performance in total and in our e-commerce and wholesale channels begin to influence how we direct resources and evaluate our performance. Factors affecting our performance include:
| ☐ | our ability to anticipate and respond effectively to consumer preference, buying and economic trends; |
|
|
|
| ☐ | our ability to provide a product offering that generates new and repeat visits online and in our other channels; |
|
|
|
| ☐ | the customer experience we provide online and in our other channels; |
|
|
|
| ☐ | the level of customer traffic to our website and our online presence more generally; |
|
|
|
| ☐ | the number of customer transactions and average ticket online; |
|
|
|
| ☐ | the pricing of our tea, and tea accessories; and |
|
|
|
| ☐ | our ability to obtain, manufacture and distribute product |
20 |
Table of Contents |
GrossGross Profit. 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.
Restructuring plan activities, net. Restructuring plan activities, net consist of gains on modification of lease liabilities, estimates for allowed landlord claims, loss on disposal of property and equipment and right-of-use assets, impairment of property and equipment and right-of-use assets, severance costs, interest and penalties related to unpaid occupancy charges, professional fees, and store closure related costs.
Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) consist of store operating expenses and other general and administration expenses. Store operating expenses consist of all store expenses excluding certain occupancy related costs (which are included in costs of sales). General and administration costs consist of salaries and other payroll costs, travel, professional fees, stock compensation, marketing expenses, information technology, depreciation of property and equipment, amortization of intangible assets, amortization of right-of-use assets, any store or other asset impairment taken in the normal course of business and other operating costs.
General and administration costs, which are generally fixed in nature, do not vary proportionally with sales to the same degree as our cost of sales. We believe that these costs will decrease as a percentage of sales over time. Accordingly, this expense as a percentage of sales is usually higher in lower volume quarters and lower in higher volume quarters.
We present Adjusted selling, general and administration expenses as a supplemental measure because we believe it facilitates a comparative assessment of our selling, general and administration expenses under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure under “Item 2. Management’s Discussion and Analysis of“Non-IFRS Financial Condition and Results of Operations”, ofMeasures” in this Quarterly Report on Form 10-Q (the “MD&A”).10-Q.
Results from Operating Activities. Results from operating activities consist of our gross profit less our selling, general and administration expenses and restructuringRestructuring plan activities.
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 under “Non-IFRS Financial Measures” in our MD&A.this Quarterly Report on Form 10-Q.
Finance Costs. Finance costs consist of cash and imputed non-cash charges related to any credit facility, and interest expense from lease liabilities.
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, non-cash compensation expense, loss on disposal of property and equipment, impairment of property and equipment and right-of-use assets, and certain non-recurring expenses. This measure also functions as a benchmark to evaluate our operating performance. It is reconciled to its nearest IFRS measure under “Non-IFRS Financial Measures” in our MD&A.this Quarterly Report on Form 10-Q.
21 |
Table of Contents |
Selected Operating and Financial Highlights
Results of Operations
Our financial results for the second quarter include the impact of our restructuring efforts focused primarily on improving the performance of our North American retail footprint and the related general and administrative cost structure. On July 8, 2020, we obtained the Initial Order pursuant to the CCAA from the Québec Superior Court and on July 9, 2020, we received protection from creditor action against our assets in the United States from the United States Bankruptcy Court for the District of Delaware. On July 10, 2020, we sent notices to terminate leases for 82 of our stores in Canada and all 42 stores in the United States. These lease terminations were effective on August 9, 2020. On July 30, 2020, we sent notices to terminate leases for an additional 82 of our stores in Canada. These lease terminations were effective on August 29, 2020.
Sales during the second quarter of $23.0 million declined by $16.1 million or 41.2% over the prior year quarter due primarily to having no stores opened during the period. Adjusted EBITDA in the secondfirst quarter of Fiscal 2020 was $1.42021 decreased by $9.0 million or 27.9% to $23.2 million primarily attributable to closure of our retail stores beginning March 17, 2020. Notwithstanding the reduction in revenue, the Company recorded Net income of $3.2 million for the period compared to $0.4a Net loss of $45.8 million in the prior year quarter. Adjusted EBITDA in the first quarter of Fiscal 2020 was $2.5 million compared to negative $0.9 million in the prior year quarter.
The following table summarizes key components of our results of operations for the periods indicated:
|
| For the three months ended |
| |||||||||||||||||||||
|
| For the three months ended |
| For the six months ended |
|
|
|
|
|
| ||||||||||||||
|
| August 1, |
| August 3, |
| August 1, |
| August 3, |
|
| May 1, |
| May 2, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Consolidated statement of income (loss) data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Sales |
| $ | 23,031 |
| $ | 39,167 |
| $ | 55,273 |
| $ | 83,432 |
|
| $ | 23,249 |
| $ | 32,242 |
| ||||
Cost of sales |
|
| 14,694 |
|
|
| 17,362 |
|
|
| 32,263 |
|
| 35,291 |
|
|
| 12,481 |
|
|
| 17,569 |
| |
Gross profit |
| 8,337 |
| 21,805 |
| 23,010 |
| 48,141 |
|
| 10,768 |
| 14,673 |
| ||||||||||
Selling, general and administration expenses |
| 7,409 |
| 31,563 |
| 29,042 |
| 59,583 |
|
| 9,194 |
| 21,634 |
| ||||||||||
Restructuring plan activities, net |
|
| (3,172 | ) |
|
| — |
|
|
| 34,228 |
|
| — |
|
|
| (1,602 | ) |
|
| 37,400 |
| |
Results from operating activities |
| 4,100 |
| (9,758 | ) |
| (40,260 | ) |
| (11,442 | ) |
| 3,176 |
| (44,361 | ) | ||||||||
Finance costs |
| 1,559 |
| 1,781 |
| 3,226 |
| 3,608 |
|
| 10 |
| 1,667 |
| ||||||||||
Finance income |
|
| (68 | ) |
|
| (195 | ) |
|
| (308 | ) |
| (386 | ) |
|
| (55 | ) |
|
| (240 | ) | |
Net income (loss) |
| $ | 2,609 |
|
| $ | (11,344 | ) |
| $ | (43,178 | ) |
| $ | (14,664 | ) |
| $ | 3,221 |
|
| $ | (45,788 | ) |
Percentage of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Sales |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % | ||||||
Cost of sales |
| 63.8 | % |
| 44.3 | % |
| 58.4 | % |
| 42.3 | % |
| 53.7 | % |
| 54.5 | % | ||||||
Gross profit |
| 36.2 | % |
| 55.7 | % |
| 41.6 | % |
| 57.7 | % |
| 46.3 | % |
| 45.5 | % | ||||||
Selling, general and administration expenses |
| 32.2 | % |
| 80.6 | % |
| 52.5 | % |
| 71.4 | % |
| 39.5 | % |
| 67.1 | % | ||||||
Results from operating activities |
| 17.8 | % |
| (24.9 | %) |
| (72.8 | %) |
| (13.7 | %) |
| 13.7 | % |
| (137.6 | )% | ||||||
Finance costs |
| 6.8 | % |
| 4.5 | % |
| 5.8 | % |
| 4.3 | % |
| 0.0 | % |
| 5.2 | % | ||||||
Finance income |
| (0.3 | %) |
| (0.5 | %) |
| (0.6 | %) |
| (0.5 | %) |
| (0.2 | )% |
| (0.7 | )% | ||||||
Net income (loss) |
| 11.3 | % |
| (29.0 | %) |
| (78.1 | %) |
| (17.6 | %) |
| 13.9 | % |
| (142.0 | )% | ||||||
Other financial and operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Adjusted EBITDA (1) |
| $ | 1,365 |
| $ | 361 |
| $ | 430 |
| $ | 3,630 |
|
| $ | 2,505 |
| $ | (937 | ) | ||||
Adjusted EBITDA as a percentage of sales |
| 5.9 | % |
| 0.9 | % |
| 0.8 | % |
| 4.4 | % |
| 10.8 | % |
| (2.9 | )% | ||||||
Adjusted SG&A (1) |
| 8,565 |
| 26,538 |
| 28,480 |
| 54,558 |
|
| $ | 9,395 |
| $ | 19,917 |
| ||||||||
Adjusted operating loss (1) |
| (228 | ) |
| (4,711 | ) |
| (5,470 | ) |
| (6,395 | ) | ||||||||||||
Adjusted Net loss (1) |
| $ | (1,719 | ) |
| $ | (6,297 | ) |
| $ | (8,388 | ) |
| $ | (9,617 | ) | ||||||||
Adjusted results from operating activities (1) |
| $ | 1,373 |
| $ | (5,244 | ) | |||||||||||||||||
Adjusted net income (loss) (1) |
| $ | 1,418 |
| $ | (6,671 | ) |
____________________
(1) | For a reconciliation of Adjusted EBITDA, |
Non-IFRS Financial Measures
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.
Table of Contents |
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.
Non-IFRS Financial Measures
These non-IFRS financial measures include; Adjusted selling general and administrationadministrative expenses, Adjusted results from operating activities, Adjusted net lossincome (loss), Adjusted EBITDA and Adjusted EBITDA, are not a presentation made in accordance with IFRS, and the use of the terms Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjustedfully diluted net loss and Adjusted EBITDA, may differ from similar measures reported by other companies. income (loss) per common share.
We believe that Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDAalthough these non-IFRS financial measures provide investors with useful information with respect to our historical operations. Adjusted selling, generaloperations and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA are not measurements of our financial performance under IFRS and should not be considered in isolation or as an alternative to net income, net cash provided by operating, investing or financing activities or any other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with IFRS. We understand that although Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under IFRS.tool. Some of these limitations are:
☐ | Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net |
☐ | Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net |
☐ | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. |
Because of these limitations, Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDAthese non-IFRS financial measures should not be considered as discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations.
The following tables presentprovide reconciliations of Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDAour non-IFRS financial measures to our Net income (loss) determinedthe most directly comparable measure calculated in accordance with IFRS:
Reconciliation of Selling, general and administration expenses to Adjusted selling, general and administration expenses
|
| For the three months ended |
| For the six months ended |
| |||||||||||||||||||
|
| August 1, |
| August 3, |
| August 1, |
| August 3, |
|
| For the three months ended |
| ||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| May 1, |
| May 2, |
| |||||||
|
|
|
|
|
|
|
|
|
|
| 2021 |
|
| 2020 |
| |||||||||
Selling, general and administration expenses |
| $ | 7,409 |
| $ | 31,563 |
| $ | 29,042 |
| $ | 59,583 |
|
| $ | 9,194 |
| $ | 21,634 |
| ||||
Impairment of property and equipment and right-of-use assets |
| — |
| (5,025 | ) |
| (2,561 | ) |
| (5,025 | ) | |||||||||||||
Government wage subsidy |
|
| 1,156 |
|
|
| — |
|
|
| 1,999 |
|
|
| — |
| ||||||||
Impairment of property and equipment and right-of-use assets (a) |
| — |
| (2,560 | ) | |||||||||||||||||||
Software implementation costs (b) |
| (863 | ) |
| — |
| ||||||||||||||||||
Government emergency wage subsidy (c) |
|
| 1,064 |
|
|
| 843 |
| ||||||||||||||||
Adjusted selling, general and administration expenses |
| $ | 8,565 |
|
| $ | 26,538 |
|
| $ | 28,480 |
|
| $ | 54,558 |
|
| $ | 9,395 |
|
| $ | 19,917 |
|
_________
(a) | Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets. |
(b) | Represents costs related to implementation and configuration of software solutions. |
(c) | Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan. |
Reconciliation of Results from operating activities to Adjusted results from operating activities
|
| For the three months ended |
| |||||
|
| May 1, |
|
| May 2, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Results from operating activities |
| $ | 3,176 |
|
| $ | (44,361 | ) |
Impairment of property and equipment and right-of-use assets (a) |
|
| — |
|
|
| 2,560 |
|
Software implementation costs (b) |
|
| 863 |
|
|
| — |
|
Restructuring plan activities, net (c) |
|
| (1,602 | ) |
|
| 37,400 |
|
Government emergency wage subsidy (d) |
|
| (1,064 | ) |
|
| (843 | ) |
Adjusted results from operating activities |
| $ | 1,373 |
|
| $ | (5,244 | ) |
_________
(a) | Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets. |
(b) | Represents costs related to implementation and configuration of software solutions. |
(c) | Represents the costs related to the Restructuring plan activities, net. |
(d) | Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan. |
23 |
Table of Contents |
Reconciliation of Net income (loss) to Adjusted net income (loss)
|
| For the three months ended |
| |||||
|
| May 1, |
|
| May 2, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Net income (loss) |
| $ | 3,221 |
|
| $ | (45,788 | ) |
Impairment of property and equipment and right-of-use assets (a) |
|
| — |
|
|
| 2,560 |
|
Software implementation costs (b) |
|
| 863 |
|
|
| — |
|
Restructuring plan activities, net (c) |
|
| (1,602 | ) |
|
| 37,400 |
|
Government emergency wage subsidy (d) |
|
| (1,064 | ) |
|
| (843 | ) |
Adjusted net income (loss) |
| $ | 1,418 |
|
| $ | (6,671 | ) |
_________
(a) | Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets. |
(b) | Represents costs related to implementation and configuration of software solutions. |
(c) | Represents the costs related to the Restructuring plan activities, net. |
(d) | Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan. |
Reconciliation of fully diluted net earnings (loss) per common share to Adjusted fully diluted net earnings (loss) per common share
|
| For the three months ended |
| |||||
|
| May 1, |
|
| May 2, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
| ||
Weighted average number of shares outstanding, fully diluted |
|
| 26,296,690 |
|
|
| 26,088,127 |
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average number of shares outstanding, fully diluted |
|
| 27,400,840 |
|
|
| 26,088,127 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 3,221 |
|
| $ | (45,788 | ) |
|
|
|
|
|
|
|
|
|
Adjusted net income (loss) |
| $ | 1,418 |
|
| $ | (6,671 | ) |
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share, fully diluted |
| $ | 0.12 |
|
| $ | (1.76 | ) |
|
|
|
|
|
|
|
|
|
Adjusted net earnings (loss) per share, fully diluted |
| $ | 0.05 |
|
| $ | (0.26 | ) |
Reconciliation of Net income (loss) to Adjusted EBITDA
|
| For the three months ended |
| |||||
|
| May 1, |
|
| May 2, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Net income (loss) |
| $ | 3,221 |
|
| $ | (45,788 | ) |
Finance costs |
|
| 10 |
|
|
| 1,667 |
|
Finance income |
|
| (55 | ) |
|
| (240 | ) |
Depreciation and amortization |
|
| 950 |
|
|
| 3,994 |
|
EBITDA |
| $ | 4,126 |
|
| $ | (40,367 | ) |
Additional adjustments : |
|
|
|
|
|
|
|
|
Stock-based compensation expense (a) |
|
| 182 |
|
|
| 313 |
|
Impairment of property and equipment and right-of-use assets (b) |
|
| — |
|
|
| 2,560 |
|
Software implementation costs (c) |
|
| 863 |
|
|
| — |
|
Restructuring plan activities, net (d) |
|
| (1,602 | ) |
|
| 37,400 |
|
Government emergency wage subsidy (e) |
|
| (1,064 | ) |
|
| (843 | ) |
Adjusted EBITDA |
| $ | 2,505 |
|
| $ | (937 | ) |
_________
(a) | Represents non-cash stock-based compensation expense. |
(b) | Represents costs related to impairment of property and equipment and right-of-use assets and intangibles assets for stores. |
(c) | Represents costs related to implementation and configuration of software solutions. |
(d) | Represents the costs related to the Restructuring plan activities, net. |
(e) | Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan. |
24 |
Table of Contents |
Reconciliation of Adjusted results from operating activities
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
|
| August 1, |
|
| August 3, |
|
| August 1, |
|
| August 3, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Results from operating activities |
| $ | 4,100 |
|
| $ | (9,758 | ) |
| $ | (40,260 | ) |
| $ | (11,442 | ) |
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 5,025 |
|
|
| 2,561 |
|
|
| 5,025 |
|
Loss on disposal of property and equipment |
|
| — |
|
|
| 22 |
|
|
| — |
|
|
| 22 |
|
Restructuring plan activities, net |
|
| (3,172 | ) |
|
| — |
|
|
| 34,228 |
|
|
| — |
|
Government wage subsidy |
|
| (1,156 | ) |
|
| — |
|
|
| (1,999 | ) |
|
| — |
|
Adjusted results from operating activities |
| $ | (228 | ) |
| $ | (4,711 | ) |
| $ | (5,470 | ) |
| $ | (6,395 | ) |
Reconciliation of Net lossOperating Results for the Three-Months Ended May 1, 2021 Compared to Adjusted EBITDA
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
|
| August 1, |
|
| August 3, |
|
| August 1, |
|
| August 3, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 2,609 |
|
| $ | (11,344 | ) |
| $ | (43,178 | ) |
| $ | (14,664 | ) |
Finance costs |
|
| 1,559 |
|
|
| 1,781 |
|
|
| 3,226 |
|
|
| 3,608 |
|
Finance income |
|
| (68 | ) |
|
| (195 | ) |
|
| (308 | ) |
|
| (386 | ) |
Depreciation and amortization |
|
| 1,326 |
|
|
| 4,929 |
|
|
| 5,320 |
|
|
| 9,755 |
|
EBITDA |
| $ | 5,426 |
|
| $ | (4,829 | ) |
| $ | (34,940 | ) |
| $ | (1,687 | ) |
Additional adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
| 267 |
|
|
| 143 |
|
|
| 580 |
|
|
| 270 |
|
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 5,025 |
|
|
| 2,561 |
|
|
| 5,025 |
|
Loss on disposal of property and equipment |
|
| — |
|
|
| 22 |
|
|
| — |
|
|
| 22 |
|
Restructuring plan activities, net |
|
| (3,172 | ) |
|
| — |
|
|
| 34,228 |
|
|
| — |
|
Government wage subsidy |
|
| (1,156 | ) |
|
| — |
|
|
| (1,999 | ) |
|
| — |
|
Adjusted EBITDA |
| $ | 1,365 |
|
| $ | 361 |
|
| $ | 430 |
|
| $ | 3,630 |
|
Reconciliation of reported results to Adjusted net loss
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
|
| August 1, |
|
| August 3, |
|
| August 1, |
|
| August 3, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 2,609 |
|
| $ | (11,344 | ) |
| $ | (43,178 | ) |
| $ | (14,664 | ) |
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 5,025 |
|
|
| 2,561 |
|
|
| 5,025 |
|
Loss on disposal of property and equipment |
|
| — |
|
|
| 22 |
|
|
| — |
|
|
| 22 |
|
Restructuring plan activities, net |
|
| (3,172 | ) |
|
| — |
|
|
| 34,228 |
|
|
| — |
|
Government wage subsidy |
|
| (1,156 | ) |
|
| — |
|
|
| (1,999 | ) |
|
| — |
|
Adjusted Net loss |
| $ | (1,719 | ) |
| $ | (6,297 | ) |
| $ | (8,388 | ) |
| $ | (9,617 | ) |
Reconciliation of fully diluted loss per common share to adjusted fully diluted loss per common share
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
|
| August 1, |
|
| August 3, |
|
| August 1, |
|
| August 3, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
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|
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| ||||
Weighted average number of shares outstanding, basic and fully diluted |
|
| 26,128,971 |
|
|
| 26,056,520 |
|
|
| 26,108,499 |
|
|
| 26,038,128 |
|
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|
|
Adjusted weighted average number of shares outstanding, fully diluted |
|
| 26,925,264 |
|
|
| 26,056,520 |
|
|
| 26,108,499 |
|
|
| 26,038,128 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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Net income (loss) |
| $ | 2,609 |
|
| $ | (11,344 | ) |
| $ | (43,178 | ) |
| $ | (14,664 | ) |
|
|
|
|
|
|
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|
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|
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|
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Adjusted Net (loss) |
| $ | (1,719 | ) |
| $ | (6,297 | ) |
| $ | (8,388 | ) |
| $ | (9,617 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, fully diluted |
| $ | 0.10 |
|
| $ | (0.44 | ) |
| $ | (1.65 | ) |
| $ | (0.56 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss) per share, basic |
| $ | (0.07 | ) |
| $ | (0.24 | ) |
| $ | (0.32 | ) |
| $ | (0.37 | ) |
|
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|
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Adjusted Net loss per share, fully diluted |
| $ | (0.06 | ) |
| $ | (0.24 | ) |
| $ | (0.32 | ) |
| $ | (0.37 | ) |
the Operating Results for the Three Months Ended August 1,May 2, 2020 compared to Three Months Ended August 3, 2019
Sales. Sales for the three monthsthree-months ended AugustMay 1, 20202021 decreased 41.2%27.9%, or $16.1$9.0 million, to $23.0$23.2 million from $39.2$32.2 million in the prior year quarter. On March 17, 2020, in response to the COVID-19 pandemic, the Company temporarily closed all its retail stores in Canada and the United States. The Company onlyStates, and subsequently in second quarter of fiscal 2020 as part of its formal Restructuring Plan, exited all of its brick-and-mortar stores except for 18 Canadian stores which were reopened 18 stores subsequent to quarter-end. With all retail locations closedon August 21, 2020. Accordingly, brick and mortar sales for the duration ofquarter declined when compared to the secondprior year quarter this resulted in a $31.3by $11.9 million decline in retail sales and customer migrationor 78.3% to online and wholesale channels.$3.3 million. Sales from e-commerce and wholesale channels increased by $15.0$2.9 million or 189.9%17.2% to $23.0$19.9 million, from $7.9$17.0 million in the prior year quarter. E-commerce and wholesale sales represented 100%85.9% of sales compared to 20.2%52.9% of sales in the prior year quarter.
Gross profit.Profit. Gross profit of $8.3$10.8 million for the three monthsthree-months ended AugustMay 1, 20202021 decreased by $13.5$3.9 million or 61.8%26.6% from the prior year quarter due primarily to a decline in sales during the period. Gross profit as a percentage of sales declinedincreased slightly to 36.2%46.3% for the three-month period ended AugustMay 1, 20202021 from 55.7%45.5% in the prior year quarter. Gross profit was also impacted by the significant increase in e-commerce sales during the period ended August 1, 2020 and resulted in an increase of $3.0 million in delivery and distribution costs, partially offset by better gross margin on hard goods and kits. Further impacting our margins in the quarter was occupancy costs related to terminated store leases amounting to $1.7 million.
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. We expect that the increased cost to deliver online purchases will be less than the selling expenses incurred in a retail environment that have been historically included as part of Selling, general and administration expenses.
Selling, generalGeneral and administration expensesAdministration Expenses.. Selling, general and administration expenses (“SG&A”) decreased by $24.2$12.4 million or 76.5%57.5%, to $7.4$9.2 million in the three monthsthree-months ended AugustMay 1, 20202021 from the prior year quarter. Excluding the impact of the $1.2 millionimpairment of property and equipment and right-of-use assets for the three-month period ended May 2, 2020, the impact of software implementation and configuration costs, and the impact of the wage subsidy received throughunder the Canadian government COVID-19 Economic Response Plan, Adjusted SG&A decreased by $18.0$10.5 million or 52.8% to $9.4 million during the three-month period ended May 1, 2021. In connection with our Restructuring Plan, we terminated the leases for the three months endedall of our stores in North America except for 18 Canadian stores which reopened on August 1,21, 2020. The decrease is explained by the closure of all stores effective March 17, 2020 and the corresponding impact onAs a result, wages, salaries and employee benefits amounting to $11.5were reduced by $5.1 million, other store related expenses decreased by $1.4 million and we realized a $3.6reduction of $2.9 million reduction in amortization expenses due to a lower right-of-use asset value at the beginning of the period. Adjusted SG&A as a percentage of sales in the quarter decreased to 37.2%40.4% from 67.8% due to lower selling expenses resulting from61.8% in the closure of all stores effective March 17, 2020.prior year quarter.
Results from operating activities.Operating Activities. IncomeEarnings from operating activities was $4.1$3.2 million compared to a loss of $9.8$44.4 million in the prior year quarter. Excluding the impact of the Restructuring plan activities under the CCAA announced on July 8, 2020, the subsidy received from the Canadian government COVID-19 Economic Response Plan, the impact of the impairment of property and equipment and right-of-use assets for the three-month period ended May 2, 2020, the impact of the Restructuring Plan announced on July 8, 2020, and the loss on disposalwage subsidy received from the Canadian government under the COVID-19 Economic Response Plan, , and the implementation and configuration of property and equipment,software solutions, Adjusted results from operating activitiesincome amounted to a loss of $0.2$1.4 million in the three-month period ended AugustMay 1, 20202021 compared to a loss of $4.7$5.2 million in the prior year quarter. This resultingThe improvement of $4.5 millionin operating results is partially explained by a reduction in wages, salariesthe reduced SG&A required to support approximately 86% of sales generated from e-commerce and employee benefits amounting to $11.5 millionwholesale and a reduction of $3.6 million in amortization expense due to a lower right-of-use asset value at the beginning of the period, and a reduction of other selling expenses, partially offset by the reduction ofslightly better gross profit of $13.5 million.margin.
Finance costs.Costs. Finance costs amounted to $1.6 millionalmost nil in the three monthsthree-months ended AugustMay 1, 2020,2021, a decrease of $0.2$1.6 million from the prior year quarter. The interest expense relates to the accounting for lease liabilities with variable lease arrangements and has decreased slightly from the prior year quarter.
Finance income.Income. Finance income of $0.1 million$55.0 thousand is derived mainly from interest on cash on hand and has decreased slightly from the prior year quarter.
EBITDA. EBITDA was $5.4 million in the quarter ended August 1, 2020 compared to a negative $4.8 million in the prior year quarter, representing an increase of $10.3 million over the prior year quarter. Adjusted EBITDA for the quarter ended August 1, 2020, which excludes the impact of stock-based compensation expense, Restructuring plan activities and the subsidy received from the Canadian government COVID-19 Economic Response Plan, amounted to $1.4 million compared to $0.4 million in the prior year quarter. As the Company pivots to a digital first strategy, we are seeing an improvement in free cash flow driven from our focus on e-commerce and wholesale channels. In this quarter, EBITDA also improved as a result of a reduced general and administrative infrastructure to support the on-going business.
Net income (loss). Net income was $2.6$3.2 million in the quarter ended AugustMay 1, 20202021 compared to a netNet loss of $11.3$45.8 million in the prior year quarter. Adjusted net loss,income (loss), which excludes the Restructuring plan activities, the subsidy received from the Canadian Government in response tounder the COVID-19 Economic Response Plan, the impairment of property and equipment and right-of-use assets, and the loss on disposalcosts related to the implementation and configuration of property and equipmentsoftware solutions amounted to a loss of $1.7$1.4 million compared to a net loss of $6.3$6.7 million in the prior year quarter. This $4.6$8.1 million improvement is driven by the same reasons mentioned above in Results“Results from operating activities.activities”.
Fully diluted incomeearnings (loss) per common share. Fully diluted incomeearnings per common share was $0.10$0.12 in the first quarter ended May 1, 2021 compared to a loss per common share of $0.44$1.76 in the second quarter of Fiscal 2019.prior year first quarter. Adjusted fully diluted lossearnings per common share, which is adjusted net lossincome on a fully diluted weighted average shares outstanding basis, was a loss$0.05, compared to negative $0.26 in the same quarter of $0.06 per sharethe prior year.
EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was $4.1 million in the quarter ended May 1, 2021 compared to a loss of $0.24 per share.
Six Months Ended August 1, 2020 compared to Six Months Ended August 3, 2019
Sales. Sales for the six months ended August 1, 2020 decreased 33.8%, or $28.2 million, to $55.3 million from $83.4negative $40.4 million in the same period in 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. The Company reopened 18 stores throughout Canada on August 21, 2020. This resulted in a decline in retail sales and a migration to our online and wholesale channels. Sales from our e-commerce and wholesale channels increased $24.4 million or 155.7% to $40.0 million, from $15.6 million in the same period in prior year resulting primarily from the closure of our stores along with naturally occurring organic growth in these channels. The decline in retail sales of $52.5 million resulted from the temporary closure of all of our stores since March 17, 2020. For the six-month period ended August 1, 2020, e-commerce and wholesale sales represented 72.4% of total sales as opposed to 18.8% in the same period in the prior year.
Gross profit. Gross profit of $23.0 million for the six-month period ended August 1, 2020 decreased by $25.1 million or 52.2% 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 41.6% for the six-month period ended August 1, 2020 from 57.7% in the same period in the prior year. Gross profit was also impacted by the significant increase in e-commerce sales during the period ended August 1, 2020 and resulted inquarter representing an increase of $5.2 million in delivery and distribution costs, $1.7 million of occupancy cost related to terminated store leases in the second quarter, partially offset by a better gross margin on hard goods and kits. Further impacting our margins in the six months ended August 1, 2020 was an increase in inventory obsolescence of $1.0 million reflecting mainly the spring merchandise left in our closed retail stores during the first quarter.
Selling, general and administration expenses. SG&A decreased by $30.5 million or 51.3%, to $29.0 million in the six months ended August 1, 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 subsidy received from the Canadian Government in response to the COVID-19 Economic Response Plan in the six-month period ended August 1, 2020 which amounted to negative $0.6 million, Adjusted SG&A decreased by $28.5 million for the six months ended August 1, 2020. This is mostly explained by the temporary closure of our stores effective March 17, 2020 and the corresponding impact on wages, salaries and employee benefits amounting to $18.6 million and $4.4 million reduction 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 51.5% from 65.4% due to lower selling expenses resulting from the temporary closure of our stores effective March 17, 2020.
Results from operating activities. Loss from operating activities was $40.3 million compared to a loss of $11.4 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 subsidy received from the Canadian Government in response to the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment, Adjusted results from operating activities was a loss of $5.5 million compared to a loss of $6.4 million in the same period in the prior year. This resulting improvement of $0.9$44.5 million is explained by reduction in wages, salaries and employee benefits amounting to $18.6 million and $4.4 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 $25.1 million.
Finance costs. Finance costs amounted to $3.2 million in the six-month period ended August 1, 2020, a decrease of $0.4 million fromover the prior year quarter. The interest expense relates to lease liabilities and has decreased slightly from the prior year quarter.
Finance income. Finance income of $0.1 million is derived mainly from interest on cash on hand and has decreased slightly from the prior year quarter.
EBITDA. EBITDA was negative $34.9 million in the six-month period ended August 1, 2020 compared to negative $1.7 million in the same period in the prior year, representing a decrease of $33.3 million over Fiscal 2019. Adjusted EBITDA for the six monthsquarter ended AugustMay 1, 2020,2021, which excludes the impact of stock-based compensation expense, the impairment of property and equipment and right-of-use assets, the Restructuring planPlan activities, net, the wage subsidy received from the Canadian Government in response togovernment under the COVID-19 Economic Response Plan, and costs related to the loss on disposalimplementation and configuration of property and equipmentsoftware solutions amounted to $0.4$2.5 million compared to $3.6negative $0.9 million infor the same period in the prior year. The declineincrease in Adjusted EBITDA of $3.2$3.4 million is an outcome of the decline in gross profit that was partially offset by a reduction in SG&A.
Net loss. Net loss was $43.2 millionrestructuring efforts resulting in the six months ended August 1, 2020 comparedrealignment of the business model to a net lossprimarily an e-commerce and wholesale distribution model.
25 |
Table of Contents |
Summary of $14.7 million inquarterly results
Due to seasonality and the same period in priortiming of holidays, the results of operations for any quarter are not necessarily indicative of the results of operations for the fiscal year. Adjusted net loss, which excludesThe table below presents selected consolidated financial data for 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 in response to the COVID-19 Economic Response Plan and loss on disposal of property and equipment, was $8.4 million compared to $9.6 million in the same period in the prior year. This $1.2 million improvement is driven by the same reasons mentioned above in Results from operating activities.eight most recently completed quarters.
Fully diluted loss per common share. Fully diluted loss per common share was negative $1.61 compared to negative $0.56 in the six months ended August 1, 2020. Adjusted fully diluted loss per common share, which is adjusted net loss on a fully diluted weighted average shares outstanding basis, was negative $0.31 per share compared to negative $0.37 per share.
Fiscal Year 2021 | Fiscal Year 2020 | Fiscal year 2019 | ||||||||||||||||||||||||||||||
First | Fourth | Third | Second | First | Fourth | Third | Second | |||||||||||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | |||||||||||||||||||||||||
Sales | 23,249 | 40,189 | 26,225 | 23,031 | 32,242 | 73,538 | 39,493 | 39,167 | ||||||||||||||||||||||||
Net income (loss) | 3,221 | (27,222 | ) | 14,467 | 2,609 | (45,788 | ) | (5,701 | ) | (10,830 | ) | (11,344 | ) | |||||||||||||||||||
EBITDA | 4,126 | (25,918 | ) | 15,295 | 5,426 | (40,367 | ) | (1,097 | ) | (4,548 | ) | (4,829 | ) | |||||||||||||||||||
Adjusted EBITDA | 2,505 | 5,384 | 3,834 | 1,365 | (935 | ) | 9,971 | (2,241 | ) | 361 | ||||||||||||||||||||||
Cash | 31,321 | 30,197 | 21,925 | 34,285 | 39,343 | 46,338 | 28,044 | 29,725 | ||||||||||||||||||||||||
Accounts receivable | 6,570 | 6,157 | 7,669 | 6,757 | 4,371 | 6,062 | 5,430 | 3,913 | ||||||||||||||||||||||||
Prepaid expenses and deposits | 11,578 | 14,470 | 13,400 | 8,476 | 4,928 | 4,542 | 6,906 | 9,890 | ||||||||||||||||||||||||
Inventories | 29,258 | 23,468 | 26,176 | 24,354 | 23,450 | 22,363 | 32,638 | 27,893 | ||||||||||||||||||||||||
Trade and other payables | 6,154 | 4,152 | 3,621 | 6,460 | 18,000 | 20,794 | 21,155 | 13,810 |
Liquidity and Capital Resources
As at AugustMay 1, 20202021, we had $34.3$31.3 million of cash, primarily held by major Canadian financial institutions.
Working capital, excluding liabilities subject to compromise of $98.4 million, was negative $13.2 million as of August 1, 2020, compared to $36.4$65.6 million as at FebruaryMay 1, 2020.
Our primary source2021, compared to $62.7 million as at January 30, 2021. In light of liquidity isimplementing the Restructuring Plan, the Company expects to use cash on hand to pay for the settlement of obligations, which as we have no accessa result of creditors accepting the Plan of Arrangement on June 11, 2021, is expected to any form a debt financing. Our primary cash needs areapproximate $18.0 million and become due and payable to finance working capital and capital expenditures in connection with enhancing the functions and features of our online store. Monitor on June 30, 2021, for ultimate distribution to creditors.
Our working capital requirements are for the purchase of inventory and payment of payroll and other operating costs. Furthermore, in light of implementing the Restructuring Plan, the Company expects to use cash on hand to pay for professional fees and for the settlement of Initial Order obligations upon acceptance of a plan of arrangement that will be presented to creditors. Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. We fund our capital expenditures and working capital requirements from a combination of cash on hand and cash provided by operating activities.
Cash Flow
A summaryAs at May 1, 2021, the Company has financial commitments in connection with the purchase of our cash flows provided by (used in) operating, investinggoods or services that are enforceable and financing activities is presented inlegally binding on the following table:
|
| For the three months ended |
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| For the six months ended |
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|
| August 1, |
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| August 3, |
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| August 1, |
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| August 3, |
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| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
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Cash flows provided by (used in): |
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| ||||
Operating activities |
| $ | (3,823 | ) |
| $ | 3,083 |
|
| $ | (7,879 | ) |
| $ | 3,443 |
|
Financing activities |
|
| (1,195 | ) |
|
| (5,799 | ) |
|
| (5,571 | ) |
|
| (11,622 | ) |
Investing activities |
|
| (40 | ) |
|
| (3,050 | ) |
|
| 1,397 |
|
|
| (4,170 | ) |
Decrease in cash |
| $ | (5,058 | ) |
| $ | (5,766 | ) |
| $ | (12,053 | ) |
| $ | (12,349 | ) |
Company, exclusive of additional amounts based on sales, taxes and other costs. Purchase obligations, net of $7.2 million of advances, amounting to $13.0 million are expected to be discharged within 12 months.
Table of Contents |
Cash Flow
Three Months Ended August 1, 2020 compared to Three Months Ended August 3, 2019A summary of our cash flows from (used in) operating, financing and investing activities is presented in the following table:
For the year ended | ||||||||
May 1, | May 2, | |||||||
2021 | 2020 | |||||||
$ | $ | |||||||
Cash flows provided by (used in) : | ||||||||
Operating activities | 1,307 | (4,056 | ) | |||||
Financing activities | (183 | ) | (4,376 | ) | ||||
Investing activities | — | 1,437 | ||||||
Increase (decrease) in cash | 1,124 | (6,995 | ) |
Cash flows provided by (used in) Operatingfrom operating activities. Net cash flows used in Operatingprovided by operating activities during the quarter ended August 1, 2020 amounted to $3.8$1.3 million and representedfor the three-months ended May 1, 2021, representing a change of $6.9$5.4 million from the net cash used in operations of $4.1 million in the first quarter of the prior year quarter.year. The changeimprovement is primarily due to the impact of the Restructuring Plan under the CCAA, wherein we have used cash to make vendor deposits for both services and inventory related goods.a favourable change in non-cash working capital balances.
Cash flows used in Financing activitiesfinancing activities. . Net cash flows used in Financing activities of $1.1 million compares to $5.8 million used in the prior year quarter. This net reduction in use of cash was primarily due to the non-payment of lease obligations from May 3, 2020 to July 8, 2020.
Cash flows used in Investing activities. Cash flows used in Investing activities decreased by $3.0 million to almost nil for the three-months ended August 1, 2020. The decrease is primarily due to the capital expenditures and the loan advance that was made in the prior year quarter. Capital expenditures decreased by $1.2 million, to almost nil for the three months ended August 1, 2020, from $1.3 million for the three months ended August 3, 2019. This decrease was primarily due to lower investment in both leasehold improvements as well as software enhancements.
Six Months Ended August 1, 2020 compared to Six Months Ended August 3, 2019
Cash flows (used in) provided by Operating activities. Net cash flows used in Operating activities during the quarter ended August 1, 2020 amounted to $7.9 million and represented a change of $11.3 million from the prior year. The change is primarily due to the impact of our Restructuring Plan under the CCAA, wherein we have used cash to make vendor deposits for both services and inventory related goods.
Cash flows used in Financing activities. Net cash flows used in financing activities of $5.6$0.2 million during the six-monththree-month period ended AugustMay 1, 20202021 represents a reduction of $6.1$4.2 million compared to the prior year corresponding period andfirst quarter due primarily to the non-paymenta reduction of lease obligationsliabilities resulting from April 1, 2020 to July 8, 2020.the termination of our store leases.
Cash flows provided by (used in) Investinginvesting activities. Cash flows provided by investing activities of $1.4 million duringin the six-month periodquarter ended August 1,May 2, 2020 increased by $5.6 million. The increase is primarily due to the receipt of cash from repayment of thea loan from a Company controlled by an executive employee, partially offset by capital expenditures. Capital expenditures decreased by $1.8 million to $0.6 million for the six-month period ended August 1, 2020, from $2.4 million in the prior year corresponding period. This decrease was primarily due to lower investment in both leasehold improvements as well as software enhancements.
Off-Balance Sheet Arrangements
WeOther than operating lease obligations, we have no off-balanceoff‑balance sheet obligations.obligations
Contractual Obligations and Commitments
There have been no significant changes to our contractual obligations as disclosed in our consolidated financial statements for the fiscal year ended February 1, 2020, other than those which occur inIn the normal course of business, we enter into contractual obligations that will require us to disburse cash over future periods. All commitments have been recorded in our consolidated balance sheets, except for purchase obligations. As at May 1, 2021, the Company has financial commitments in connection with the purchase of goods or services that are enforceable and legally binding on the specific impactCompany, exclusive of additional amounts based on sales, taxes and other costs. Purchase obligations, net of $7.2 million of advances, amounting to $13.0 million (January 30, 2021 - $14.1 million, net of $6.8 million of advances) are expected to be discharged within 12 months.
The Plan of Arrangement approved by the Company’s creditors on June 11, 2021 provides that the Company will distribute an aggregate amount of approximately $18.0 million to its creditors in full and final settlement of all claims affected by the Plan of Arrangement. Such distribution will take place after and is conditional upon Court approvals, the whole as provided in the Plan of Arrangement. As part of the Restructuring Plan of Arrangement, the Company will provide the Monitor with the funds to settle the creditor claims by June 30, 2021, at which is currently unknown. Giventime the natureMonitor will distribute amounts to creditors according to the Court approved Plan of our Restructuring Plan, we do anticipate that there will be significant changes to previously reported contractual obligations, which we will disclose when reasonably estimable.Arrangement.
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 judgment involved and its potential impact on our reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period, and would materially impact our financial position, changes in financial position or results of operations. Our significant accounting policies are discussed under Note 3 to our consolidated financial statements for the year ended February 1, 2020January 30, 2021 included in our Annual Report on Form 10-K dated June 16, 2020.April 30, 2021. There have been no material changes to the critical accounting policies and estimates since February 1, 2020,January 31, 2021, other than thoseas disclosed in Note 4note 3 to ourthe condensed interim consolidated financial statements for the three and six-month periods ended August 1, 2020.
statements.
Recently Issued Accounting Standards
Refer to Note 3, “Changes in Accounting Policies”Principles” for a discussion of recent accounting pronouncements.
27 |
Table of Contents |
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 June 16, 2020.April 30, 2021.
We are exposed to foreign currency exchange risk on purchases of our teas and tea accessories.
A significant portion of our tea and tea accessory purchases are in U.S. dollars as is our revenue from U.S. stores and U.S. e‑commerce customers. As a result, our statement of loss and cash flows could be adversely impacted by changes in exchange rates, primarily between the U.S. dollar and the Canadian dollar.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chairman and Interim Chief Executive and Brand Officer and our President, Chief Financial Officer and Chief Operating Officer, evaluated the effectiveness of our disclosure controls and procedures as of AugustMay 1, 2020.2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Based on the assessment of our disclosure controls and procedures, as a result of the identification of a material weakness in connection with our non-financial asset impairment testing processes identified in the close process for the fourth quarter of Fiscal 2019, as well as the material weakness identified in the Company’s financial statement close process for the quarter ended November 2, 2019 related to accounting errors identified in the assessment of impairment indicators upon the adoption of IFRS 16, Leases, as previously described in Part I, Item 1A “Risk Factors”, our management concluded that considering the significant extent of change driven largely by the implementation of our Restructuring Plan, remediation efforts continue and our disclosure controls and procedures were not effective as of AugustMay 1, 2020.2021.
Changes in Internal Control over Financial Reporting
The COVID-19 pandemic could negatively affect our internal controls over financial reporting, including our ongoing process of remediating the material weakness in our disclosure control and procedures, as a portion of our workforce is required to work remotely and standard processes are disrupted. New processes, procedures, and controls, which may increase the overall inherent risk in the business, may be required to ensure an effective control environment.
With the exception of the material weaknesses identified thereThere were no othersignificant changes in our internal control over financial reporting during our fiscal quarter ended AugustMay 1, 20202021 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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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 at present a party to any legal proceedings, government actions, administrative actions, investigations or claims that are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business, financial condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
Pursuant to anthe Amended and Restated Initial Order from the Québec Superior Court, as amended, 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.July 16, 2021.
The additional risk factor set out below should be read in conjunction withThere have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for our fiscal year ended February 1, 2020 filedJanuary 30, 2021, other than as set out below.
The section of our Form 10-K for the fiscal year ended January 30, 2021 entitled “Risks Associated with the SECRestructuring Plan” on June 16, 2020 and for our first quarter ended May 2, 2020 filedpages 15 to 18 thereof is hereby replaced in its entirety by the following:
Risks Associated with the SEC on July 31, 2020, which are incorporated by reference herein.Restructuring Plan
If we failWe are subject to complythe risks and uncertainties associated with the continued listing requirementsRestructuring Plan, and even if our Restructuring Plan is completed, we may not be able to achieve our stated goals.
As set out above, on July 8, 2020, we obtained the Initial Order pursuant to the CCAA from the Québec Superior Court in order to implement the Restructuring Plan and on July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Nasdaq Stock Market, it couldCompany under Chapter 15 of the United States Bankruptcy Code which 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. On July 16, 2020, we obtained an Amended and Restated Initial Order from the Québec Superior Court, extending the stay of all proceedings against the Company to September 17, 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. The Claims Process 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. On December 15, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to March 19, 2021. On March 19, 2021, the Québec Superior Court extended the stay of all proceedings against the Company to June 4, 2021, and addressed certain administrative matters. On May 7, 2021, the Company obtained an order from the Québec Superior Court authorizing the Company to file its Plan of Arrangement under the CCAA and to call a creditors’ meeting to be held on June 11, 2021. The Québec Superior Court order also extended to July 16, 2021 the stay of all proceedings against the Company under the CCAA. At the creditors’ meeting held on June 11, 2021, the Plan of Arrangement was approved by the requisite majorities of creditors of DAVIDsTEA Inc. and our subsidiary DAVIDsTEA (USA) Inc., respectively, in accordance with the CCAA, that is, a simple majority of creditors of DAVIDsTEA Inc. and of DAVIDsTEA (USA) Inc., voting separately, whose claims are affected by the Plan of Arrangement, representing in each case at least two-thirds in dollar value of all such claims duly filed in accordance with the CCAA proceedings. The Company will seek a sanction order for the Plan of Arrangement from the Québec Superior Court at a hearing scheduled for June 16, 2021. If the sanction order is granted, the Company will seek recognition thereof from the United States Bankruptcy Court for the District of Delaware under Chapter 15 of the United States Bankruptcy Code at a hearing scheduled for June 17, 2021.
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Our Plan of Arrangement provides that we will remit the required funds to PwC no later than five business days after the issuance, if any, of a final order from the United States Bankruptcy Court for the District of Delaware recognizing and enforcing the sanction order from the Québec Superior Court or such later date as may be acceptable to us, in consultation to PwC, and that such funds will be distributed by PwC to our creditors, as applicable, as soon as practicable thereafter.
For the duration of the Restructuring Plan, our operations and our ability to develop and execute our business plan, as well as our continuation as a going concern, are subject to the risks and uncertainties associated with restructuring in general, including:
· | our ability to obtain a sanction order from the Québec Superior Court with respect to the Restructuring Plan and to obtain approval from the Québec Superior Court with respect to motions, if any, filed from time to time in connection with the Restructuring Plan; | |
· | our ability to obtain recognition of the sanction order from the United States Bankruptcy Court for the District of Delaware under Chapter 15 of the United States Bankruptcy Code in connection with the Restructuring Plan and to obtain approval with respect to motions, if any, filed from time to time under Chapter 15 of the United States Bankruptcy Code in connection with the Restructuring Plan; | |
· | our ability to maintain our relationships with our suppliers, service providers, customers, employees and other third parties; | |
· | our ability to maintain contracts that are critical to our operations; | |
· | our ability to develop and execute our business plan; | |
· | our ability to maintain our listing on the Nasdaq Global Market; and | |
· | our lowered ability to obtain acceptable and appropriate financing. |
Because of the risks and uncertainties associated with the Restructuring Plan, we cannot accurately predict or quantify the ultimate impact of events that will occur during the Restructuring Plan that may be inconsistent with our plans.
Even if our Restructuring Plan is completed, we may continue to face a number of risks, such as further deterioration in economic conditions, including in light of the COVID-19 pandemic, changes in consumer habits, changes in demand for our products and increasing expenses. Some of these risks become more acute when a restructuring under the CCAA continues for a protracted period without indication of how or when the restructuring may be completed. As a result inof these risks and others, we cannot guarantee that our common stock being delisted, which could adversely affectRestructuring Plan will achieve our stated goals, and there is substantial doubt regarding our ability to continue as a going concern.
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As a result of the market priceRestructuring Plan, our financial results may be volatile and liquiditymay not reflect historical trends.
For the duration of the Restructuring Plan, we expect our financial results to continue to be volatile as restructuring activities and expenses, lease terminations, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our securitiesfinancial performance after the date of the Initial Order. In addition, if we emerge from the Restructuring Plan, the amounts reported in subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements, including as a result of revisions to our operating plans in connection with the Restructuring Plan.
Our Plan of Arrangement is based in large part upon assumptions and could have other adverse effects.analyses developed by us; if these assumptions and analyses prove to be incorrect, our Plan of Arrangement may be unsuccessful in its execution.
Our common stockPlan of Arrangement reflects assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to:
· | our ability to transition to online sales and sales through wholesale channels than from sales through retail stores; | |
· | our ability to generate adequate liquidity or access financing sources; | |
· | our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them; | |
· | our ability to retain key employees; and | |
· | the overall strength and stability of general economic conditions and the retail industry, both in Canada and the United States. |
The failure of any of these factors could materially adversely affect the successful restructuring of our business.
In addition, our Plan of Arrangement relies on financial projections, including with respect to revenues, earnings, capital expenditures, payment of liabilities and cash flow. Financial projections are necessarily speculative, and it is currently listedlikely that one or more of the assumptions and estimates that are the basis of these financial projections will not be entirely accurate. The financial projections may be even more speculative than normal in light of the COVID-19 pandemic. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by our Plan of Arrangement under the CCAA will occur or, even if they do occur, that they will have the anticipated effects on us or our business or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of the Restructuring Plan.
Trading in our shares for the duration of the Restructuring Plan poses substantial risks.
The Company’s stockholders are cautioned that trading on The Nasdaq Global Select Market (“Nasdaq”). in shares of the Company for the duration of the Restructuring Plan may be highly speculative and pose substantial risks due to the uncertainty related to the Restructuring Plan. Accordingly, the Company urges extreme caution with respect to existing and future investments in its shares.
We must satisfy Nasdaq’s continued listing requirements, including, among others, a minimum stockholders’ equity of $10,000,000, and a minimum bid price for our common stock of $1.00 per share, or risk possibly delisting,may be subject to claims that will not be discharged in the Restructuring Plan, which could have a material adverse effect on our business.financial condition and results of operations.
On August 6, 2020,The CCAA provides, in effect, that approval of our Plan of Arrangement will discharge the Company receivedfrom substantially all debts which arose prior to the Initial Order. With few exceptions, all such debts (i) are subject to compromise and/or treatment under our Plan of Arrangement and/or (ii) will be discharged in accordance with the terms of the Plan of Arrangement, if the Court orders referred to below are obtained. Such debts will not be considered compromised until our Plan of Arrangement is sanctioned by the Québec Superior Court and the United States Bankruptcy Court for the District of Delaware as referred to below and until we have fully implemented the Plan of Arrangement in accordance with its terms. Any claims not subject to compromise and/or treatment under the Plan of Arrangement or not otherwise discharged in accordance with the Plan of Arrangement could be asserted against us and may have an adverse effect on our financial condition and results of operations on a notification letter (the “Stockholders’ Equity Notice”)post-Restructuring Plan basis.
We may not have sufficient cash to maintain our operations following the Restructuring Plan.
We face considerable uncertainty regarding the adequacy of our liquidity and capital resources. In addition to the cash required to fund our ongoing operations, we have incurred significant professional fees and other expenses in connection with the Restructuring Plan and expect that such fees and other expenses will continue throughout the Restructuring Plan process. We cannot provide any assurance that our cash on hand and cash flow from operations will be sufficient to fund our operations and allow us to satisfy our obligations following the Restructuring Plan.
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Operating under Court protection for an extended period of time may harm our business.
An extended period of operations under protection of the Québec Superior Court could have a material adverse effect on our business, financial condition, results of operations and liquidity. During such time as our Restructuring Plan is ongoing, our senior management has been and will be required to spend a significant amount of time and effort dealing with the Restructuring Plan instead of focusing exclusively on our business operations. A further prolonged period of operating under protection of the Québec Superior Court also may make it more difficult to retain management and other key personnel necessary for the success and growth of our business. In addition, the longer the Restructuring Plan continues, the more likely it is that our customers and suppliers will lose confidence in our ability to restructure our business successfully and will seek to establish alternative commercial relationships. Furthermore, so long as the Restructuring Plan continues, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Restructuring Plan.
We may not be able to obtain Court approval of the Plan of Arrangement under the CCAA.
In connection with the Restructuring Plan, on June 11, 2021 we obtained approval from our creditors for the Plan of Arrangement by the requisite majority votes set out in the CCAA. We will have to obtain a sanction order for the Plan of Arrangement from the Listing Qualifications Staff (the “Staff”) of Nasdaq indicatingQuébec Superior Court, at a hearing scheduled for June 16, 2021. In order to obtain the sanction order, we will have to appear before the Québec Superior Court and demonstrate to the Court that the Company’s stockholders’ equityPlan of $(17,604,000), as reported in its Quarterly Report on Form 10-Q for the period ended May 2, 2020 does not satisfy the Nasdaq Global Market continued listing requirement set forth in Nasdaq Listing Rule 5450(b)(1)(A), which requires companies listed on the Nasdaq Global Market to maintain a minimumArrangement is fair and reasonable, independent of US $10,000,000 in stockholders’ equity. The Stockholders’ Equity Notice has no immediate effect on the listing of the Company’s common stock. The Company has until September 21, 2020 to submit to Nasdaq a plan to regain compliance with Nasdaq Listing Rule 5450(b)(1)(A). If the Company’s plan is accepted, Nasdaq may grant an extension of up to 180 calendar days from the date of the Stockholders’ Equity Notice for the Company to provide evidence of compliance. If the plan is not accepted or the Company is not granted an extension, the Company will then consider actions appropriate to the circumstances, which may include applicable appeals to a Nasdaq Listing Qualifications Panel.
On August 10, 2020, the Company received a notification letter (the “Bid Price Notice”) from Nasdaq saying that the Company was not in compliance with the minimum bid price requirement under Nasdaq Listing Rule 5450(a)(1). The Bid Price Notice has no immediate effect on the listing of the Company’s common stock on Nasdaq and the Company has until February 8, 2021 to regain compliance.
creditor approval. There can be no assurance that we will be able to regain compliance with Nasdaq’s continued listing requirements. The failureobtain a sanction order for the Plan of NasdaqArrangement from the Québec Superior Court. If the sanction order is granted, the Company will seek recognition thereof from the United States Bankruptcy Court for the District of Delaware under Chapter 15 of the United States Bankruptcy Code at a hearing scheduled for June 17, 2021. There can be no assurance that we will be able to acceptobtain recognition of a sanction order, if any, from the Company’s plan to regain compliance, subsequent failure to regain compliance under Nasdaq Listing Rule 5450(b)(1)(A) or failure to regain compliance under Nasdaq Listing Rule 5450(a)(1) prior to February 8, 2021 each could result inUnited States Bankruptcy Court for the Company’s common stock being delisted from Nasdaq.District of Delaware.
If we do not obtain the foregoing Court approvals, we may have to submit a new or amended Plan of Arrangement to our creditors for approval. If such new or amended Plan of Arrangement is not approved by our creditors by the requisite majority votes under the CCAA, it is possible that our creditors will ask the Québec Superior Court to lift the stay of proceedings currently in effect and exercise their various legal recourses against us.
We may experience increased levels of employee attrition as a result of the Restructuring Plan.
As a result of the Restructuring Plan, we may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty. A delistingloss of key personnel or material erosion of employee morale could make it more difficultadversely affect our business and results of operations. Our ability to buyengage, motivate and retain key employees or sell our securitiestake other measures intended to motivate and incentivize key employees to obtain accurate quotations, andremain with us through the priceRestructuring Plan may be limited. The loss of services of members of our common stocksenior management team could suffer a material decline. In addition, a delisting would impair our ability to raise capital through the public markets, could deter broker-dealers from makingexecute our strategy and implement operational initiatives, which would likely have a market in or otherwise seeking or generating interestmaterial adverse effect on our business, financial condition and results of operations.
We are subject to actions and decisions of our creditors and other third parties who have interests in our securitiesRestructuring Plan that may be inconsistent with our interests.
The decisions of our creditors and might deter certain institutionsother third parties could significantly affect our business and persons from investingoperations in various ways. For example, negative publicity or events associated with the Restructuring Plan may adversely affect our relationships with our suppliers, service providers, employees and customers, which in turn could adversely affect our operations and financial condition. Because of the risks and uncertainties associated with the Restructuring Plan, we cannot predict or quantify the ultimate impact that events occurring during the Restructuring Plan will have on our business, financial condition, results of operations, or the certainty as to our ability to continue as a going concern. Under our Plan of Arrangement, if approved, we will settle liabilities for amounts other than those reflected in our securitiesconsolidated financial statements. Further, our Plan of Arrangement may materially change the amounts and classifications reported in our consolidated historical financial statements.
We may not be able to obtain financing.
Because of our financial condition, we have heightened exposure to, and less ability to withstand, the operating risks that are customary in the retail industry, exacerbated by the COVID-19 pandemic. Any of these risks could result in our need for substantial funding. A number of factors, including the Restructuring Plan, our financial results in recent years, and the competitive environment we face, adversely affect the availability and terms of funding that might be available to us during, and upon completion of, the Restructuring Plan. As such, we may not be able to source capital at rates acceptable to us, or at all, to fund current operations on completion of the Restructuring Plan. We have also defaulted on our credit agreement in the past. In the event we need funds to execute our strategy, we could have limited access to liquidity, which would have negative consequences on our long-term business plan. Our Restructuring Plan may raise serious doubts about our ability to borrow money on terms favorable to us, which would have negative consequences on our ability to achieve our long-term business plan or to take advantage of future opportunities.
Our inability to obtain necessary funding on acceptable terms would have a material adverse impact on us and on our ability to sustain our operations. We do not currently have a credit facility or loan with a bank or financial institution and can give no assurance that we will be able to obtain any such facility or loan on terms acceptable to us, or at all.
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ItemItem 2. Unregistered Sales of Equity Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
None.
(a) Exhibits:
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101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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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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