UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2019January 29, 2022
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
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DAVIDsTEA Inc. |
(Exact name of registrant as specified in its charter) |
Canada |
| 98-1048842 |
(State or other jurisdiction of incorporation or organization) |
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5430 Ferrier Mount-Royal, Québec, Canada, H4P 1M2 | ||
(Address of principal executive offices) |
(888) 873-0006
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of | Name of Each Exchange on Which Registered |
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Common shares, no par | NASDAQ | DTEA |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ ☐ No x☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ ☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x ☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x ☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ☐
As of August 3, 2018,July 31, 2021, the last business day of our most recently completed second fiscal quarter, the aggregate market value of the registrant’s Common Shares held by non-affiliates was US$37,327,359.13,200,483.
As of April 17, 2019, 26,018,83222, 2022, 26,427,929 common shares of the registrant were outstanding.
The brand, service or product names or marks referred to in this Annual Report are trademarks or services marks, registered or otherwise, of DAVIDsTEA Inc. and our consolidated subsidiary.wholly-owned subsidiary, DAVIDsTEA (USA) Inc.
EXPLANATORY NOTE
DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the United States Securities and Exchange Commission (“SEC”) instead of filing on the reporting forms available to foreign private issuers, although the Company is not required to do so. We are permitted to file our audited consolidated financial statements with the SEC under International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), without a reconciliation to U.S. generally accepted accounting principles (“U.S. GAAP”). As a result, we do not prepare a reconciliation of our results to U.S. GAAP. It is possible that certain of our accounting policies could be different from U.S. GAAP.
The Company prepares and files a management proxy circular and related material under Canadian requirements. As the Company’s management proxy circular is not filed pursuant to Regulation 14A, the Company may not incorporate by reference information required by Part III of this Form 10-K from its management proxy circular.
In this annual report on Form 10-K, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CAD”, “CND$”, “CDN$,” “CDN,” “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,” “US$” and “USD” mean U.S. dollars.
On April 22, 2022, the Bank of Canada exchange rate was US$1.00 = CAD$1.2702.
All references to our website contained herein do not constitute incorporation by reference of information contained on such websiteswebsite and such information should not be considered part of this document.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS |
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
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Table of Contents |
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and there are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “approximately,” “intends,” “plans,”“believes”, “expects”, “may”, “will”, “should”, “approximately”, “intends”, “plans”, “estimates” or “anticipates,”“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 Annual Reportfacts and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our strategy of transitioning to e-commerce and wholesale sales, future sales through our e-commerce and wholesale channels, our results of operations, financial condition, liquidity and prospects, competitive strengths and differentiators, strategy, long-term Adjusted EBITDA margin potential, dividend policy,the impact of the COVID-19 pandemic on the global macroeconomic environment, properties, outcome of litigation and legal proceedings, use of cash and operating and capital expenditures, impact of new accounting pronouncements, impact of improvements to internal control and financial reporting.environment.
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 this Form 10-K.
Actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to the following:
| · | Our ability to |
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| · | The duration and impact of the ongoing 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 ability to maintain and enhance our brand image; |
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| · | Significant competition within our industry; |
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Our ability to obtain quality products from third-party manufacturers and suppliers on a timely basis or in sufficient | ||
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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-K, 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-availablepotentially available relevant information. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report on Form 10-K 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-K. 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-K, 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-K 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.
While we believe these opinions and expectations 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 this Form 10-K.
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PART I
ITEM 1. BUSINESS
DAVIDsTEA is a corporation incorporated under the Canada Business Corporation Act and domiciled in Canada. DAVIDsTEA’s common shares trade on the NASDAQ Global Market under the symbol “DTEA”. Unless the context otherwise requires, the terms “we,” “our,” “us,” “DAVIDsTEA” and the “Company” refer to DAVIDsTEA Inc. and its subsidiary. All references to “Fiscal 2016” are to the Company’s fiscal year ended January 28, 2017. All references to “Fiscal 2017” are to the Company’s fiscal year ended February 3, 2018. All references to “Fiscal 2018” are to the Company’s fiscal year ended February 2, 2019.wholly-owned subsidiary, DAVIDsTEA (USA) Inc.
Accounting Periods
The Company’s fiscal year ends on the Saturday closest to the end of January 31. This typically resultingresults in a 52-week year, but occasionally givinggives rise to an additional week, resulting in a 53-week year. TheFiscal years ended January 30, 2016, January 28, 2017are designated in the Consolidated Financial Statements and February 2, 2019 cover a 52-week period. TheNotes thereto, as well as the remainder of this Annual Report on Form 10-K, by the calendar year ended February 3, 2018 covers a 53-weekin which the fiscal period.year commenced.
All references herein to the Company’s fiscal years are as follows:
Fiscal year | Year ended | Number of weeks | ||
Fiscal 2017 | February 3, 2018 | 53 | ||
Fiscal 2018 | February 2, 2019 | 52 | ||
Fiscal 2019 | February 1, 2020 | 52 | ||
Fiscal 2020 | January 30, 2021 | 52 | ||
Fiscal 2021 | January 29, 2022 | 52 |
Our Company
DAVIDsTEA isThe Company offers a branded retailer of specialty tea, offering a differentiatedbranded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories and gifts accessories, foodthrough its e-commerce platform at www.davidstea.com and beverages primarily through 237 company-operated DAVIDsTEAthe Amazon Marketplace, its wholesale customers which include over 3,500 grocery stores as of February 2, 2019, and our website, davidstea.com. We offerpharmacies, and 18 company-owned stores across Canada. The Company offers primarily proprietary tea blends that are exclusive to DAVIDsTEA,the Company, as well as traditional single-origin teas and herbs. Our passion for and knowledge of tea permeates our culture and is rooted in an excitement to explore the taste, health and lifestyle elements of tea. With a focus on innovative flavours, wellness-driven ingredients and organic tea, the Company launches seasonally driven “collections” with a mission of making tea fun and accessible to all.
In our retail stores, we striveSales fluctuate from quarter to makequarter. Sales are traditionally highest in the enjoymentfourth fiscal quarter due to the year-end holiday season and tend to be lowest in the second and third fiscal quarters because of tea a multi‑sensory experience by facilitating customers’ interaction with our products through education and sampling, which allows our customerslower customer engagement during the opportunity to appreciate the compelling attributes of tea as well as the ease of preparation. We design our stores with a modern and minimalistic aesthetic that, coupled with our teal‑colored logo, create an inviting atmosphere and stand in stark contrast to common perceptions of tea as a more traditional product. Our in‑store “Tea Guides” help novice and experienced tea drinkers alike select from the approximately 135 premium teas and tea blends featured on our “Tea Wall,” which is the focal point of our stores.summer months.
Our website presents customers with educational information to guide their exploration of tea, serving a similar function as the “Tea Guides” in our retail stores. Additionally, on our website customers can purchase our full assortment of premium loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories, as well as certain products that are exclusive to our website.
We have a dedicated and highly experienced product development team that is constantly creating new tea blends using high‑quality ingredients from around the world and identifying new tea products designed to match customers’ tastes as they evolve. We capitalize on our product development capabilities by rotating new tea blends each year into our offering. The product development team also infuses innovation into our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, food and beverages, providing our customers with fun, inventive and convenient ways to enjoy tea.
We intend to focus our attention on continuing to improve and develop new and innovative teas products and tea-related gift offerings. To enhance our retail operations, we plan to reinvigorate our stores through creative merchandising that better highlights the functional benefits of our growing wellness collection of teas. We plan to grow our latte and custom beverage experience and offerings. We also plan to build on the investments we have already made in our website. Aiming to simulate for our online customers the experience of our retail stores, we plan to provide customers additional expertise published by our Tea Guides, a community-focused platform that builds on our existing customers and fans, and other features designed to facilitate our customers in their discovery of tea. Relatedly, we also plan to continue to implement new digital marketing strategies not only to retain the business of existing customers, but to also increase brand awareness and attractiveness to potential new customers. Finally, we intend to expand our wholesale channel, strategically placing our tea products in specialty grocery stores, pharmacies, hotels and restaurants, which will allow us to continue to enhance brand awareness of DAVIDsTEA throughout Canada and the United States.
Our Market and Competition
We participate in a large and growing global tea market which, combined with the relatively low percentage of tea sales in North America, makes the market opportunity very attractive. The markets for tea products in Canada and the United States are highly fragmented. Wefragmented and we compete with a large number ofmany relatively small independently owned tea retailers and a number ofseveral regional tea retailers, as well as retailers of grocery products, including loose‑leaf teas, tea sachets and tea-related beverages. We also compete with other vendors of loose‑leaf teas, tea sachets and ready‑to‑drink teas, such as club stores, wholesalers, and internet suppliers, as well as with houseware retailers and suppliers that offer tea wares and related accessories.
We believe we differentiate ourselves from our competitors because we are considered by our customers as tea experts and by the excellence of our blended and straight teas, through our distinct retail experience, our broad product offering that ranges from loose leaf tea to beverage to ready-to-drink (“RTD”),in-store craft beverages, the potential broad demographic appeal of our brand, innovative tea products driven by customer insights, the effectiveness of our website,online store, www.davidstea.com, and digital and community focused marketing strategies,events, and our passionate customer-focused culture supported by our experienced management team and dedicated board members.
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Our Product Offerings
We offer a significant variety of premium loose‑leaf teas, and pre-packaged teas, tea sachets, and tea-related giftsgift’s and accessories. We also offer on‑the‑go craft tea beverages in our retail stores.
Teas
Our loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts can be enjoyed by consumers at home, on‑the‑go or at work. Our different flavors of loose-leaf tea span eight different tea categories: white, green, oolong, black, pu’erh, mate, rooibos, and herbal tea. Our tea collection features over 30% certified organic tea,teas, and to our knowledge makes us the largest organic loose-leaf provider on the market. We carry only responsibly sourced and fairtrade certified blends. Our teas and ingredients used in our tea blends are sourced from various regions around the world, including from China, South Korea, Japan, Taiwan, Vietnam, India, Nepal, Kenya, Sri Lanka, South Africa, Thailand and South Africa.Canada. In addition to loose‑leaf teas, we sell pre‑packaged teas and tea sachets to make the tea experience more convenient. Our tea-related gifts include special edition seasonal and holiday gift packages as well as novelty themed gifts that continue to innovate with new themes, seasonal collections and visually-appealingvisually appealing gift boxes designed for entertaining. Our tea gifts are substantially all either fully recyclable or compostable.
Tea Accessories
Our tea accessories are created to make the tea preparation process and tea experience more convenient, fun, and easy at home or on-the-go. Tea accessories include tea mugs, travel mugs, teacup sets, teapots, tea makers, kettles, infusers, filters, frothers, tins and spoons. Many of our accessories are crafted with unique functional features to improve tea preparation and consumption as well as with visually-appealingvisually appealing colors and designs consistent with our brand aesthetic.
FoodDistribution Channels
We have strategically pivoted the organization to serve consumer demand by leveraging our digital channels supported by emerging omni-channel fulfillment capabilities, including by online pick-up in store and Beveragescurbside pick-up. These strategies align with rapidly evolving consumer preferences as we refocus our energies to provide consumers with an enhanced shopping experience on our online channels. We believe our continued efforts to transform our business to a digital first organization will improve our customer experience, our overall performance, and ultimately position us for long-term growth.
Digital Retail
Our online store, www.davidstea.com, features our full assortment of premium loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories. To drive increased sales through our website, we utilize online‑specific marketing and promotions in addition to employing banner advertisements, search engine optimization and pay‑per‑click arrangements on various social media platforms to help drive customer traffic to our website. The use of influencers and affiliates with like-minded brands are also helping to attract customers to our online store. We periodically enhance our online store with new features and functionality to improve our customers’ experience and accessibility for mobile users. We have also launched a select assortment on the Amazon Marketplace that complements our full product assortment on our online store.
Wholesale
We sell our tea and related products to premium grocery and drugstore chains throughout Canada. We believe that the broad distribution of select tea blends helps to service not only existing customers but also attract new customers to our exclusive sachet tea offerings, while ultimately also driving greater brand awareness and traffic to our online and retail stores where our full selection of products including loose-leaf tea blends and packaged gifts become available. In Fiscal 2021, demand from hotels, restaurants and various other office and corporate customers was softened by the impact of the ongoing COVID-19 pandemic.
Retail Stores
Over the last decade, our brand connected with consumers and created a reputation of quality and innovation driven primarily from our in-store experience. The secular decline in retail and consumers’ move to many things digital has significantly impacted our business. We continue our transition to a digital first organization, complemented by select stores strategically located throughout Canada and we continue to re-invent our in-store experience.
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Our retail stores offer tea beverages and food products for on‑the‑go consumption. Our beverages range from standard hot or iced tea to our “Tea Lattes”.
Distribution Channels
Retail Stores and Operations
Our Stores
Asfootprint consists of February 2, 2019, our retail footprint consisted of 18918 mall-based stores in Canada and 48 stores in the United States. Our retail stores are located primarily within malls, including lifestyle centers and outlets, and on street locations.Canada. Each store exterior prominently displays the DAVIDsTEA teal signage.
Distinctive Retail Experience
The DAVIDsTEA experience starts withsignage and our in-store Tea Guides. Our employees’ passionsGuides’ passion for tea and wellness permeate our culture and are rooted in a deep knowledge of, and desire to share, the compelling attributes of tea.culture. A key element of the retail experience is our “Tea Wall,” a focal point of the store. Our Tea Guides help to create a highly interactive and immersive multi-sensory experience for our customers. The Tea Guides facilitate customers’ interaction with our products through education and sampling, which allows our customers the opportunity to appreciate the compelling attributes of tea as well as the ease of preparation. Every visit to our stores is designed to create a sense of adventure for our customers, novice
Marketing and experienced tea drinkers alike, as our knowledgeable, personable and passionate Tea Guides assist our customers in navigating the “Tea Wall” by selectingAdvertising
We use a variety of teas for customersmarketing and advertising mediums to smell baseddrive brand health, customer acquisition, and engagement. We leverage our customer database and respond to shopping behaviors and needs with content across email, site, and digital media to drive relevance and urgency. Our diversified media mix spans traditional to digital to social media. We focus on their taste preferences.
Site Selection and Store Portfolio
We seekproductivity of marketing investment to maintain our stores in strategic locations that support the brand image, targeting high customer traffic locations primarily within malls, including lifestyle centers and outlets, and on street locations. We regularly review our store portfolio, identifying new store locations and monitoring existing locations for sufficient levels of customer traffic to maintain successful stores. We actively monitor and manage the performance of our stores and increasingly seek to incorporate information learned through the monitoring process into our analyses for future site selection and store retention decisions.
Store Management, Culture and Trainingdrive increased effectiveness.
We are guided by a philosophy that recognizes customer service and the importance of delivering optimal performance, allowing us to identify and reward teams that meet our high standards. We use store-level scorecards that report key performance indicators, and we provide our store managers with a number of analytical tools to assist them in attaining optimum store performance including access to the key performance indicator reports, coaching logs for one‑on‑one meetings, weekly one‑on‑one meetings between our store managers and district managers, and annual evaluations. While our focus isfocused on the overall performance of the team and our stores, we provide incentives to individual team members, store managers and district managers to encourage success.
Our rewarding corporate culture allows us to attract passionate and friendly employees who share a vision of making tea fun and accessible – which we believe is a key contributor to our success – and also reflects our belief in community engagement and doing right by our customers and employees.
Digital Retail
Our website, www.davidstea.com, features our full assortment of premium loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories. To drive increased sales through our website, we utilize online‑specific marketing and promotions in addition to employing banner advertisements, search engine optimization and pay‑per‑click arrangementsadvertising efforts to help drive customer traffic to our website. We will be introducing new marketing and core gap features that will further enhance the website experience and improve its accessibility for mobile users.
Through our website, we can reach customers who may not live near one of our retail locations. We believe our website and our stores are complementary, as our website provides our store customers an additional channel through which to purchase our teas and tea‑related products while also helping drive awareness of and customer traffic to our stores.
Wholesale
We currently sell tea products to Hotel, Restaurant and Institution (“HRI”) distribution channels. In Fiscal 2018, we launched several select pre-packaged sachet offerings with a national Canadian grocer. We believe that the broad distribution of select tea blends helps to service not only existing customers but also attract new customers to our exclusive sachet tea offerings, while ultimately also driving greaterbuild brand awareness and trafficincrease sales on our digital platforms. Such marketing efforts include communications with our Super Steeper and Frequent Steeper loyalty members and using paid and non-paid media programs to our onlinehelp create demand on platforms such as Facebook, Instagram, Pinterest, LinkedIn, YouTube, TikTok and retail stores where our full selection of products including loose-leaf tea blends and packaged gifts become available.Yelp.
MarketingCOVID-19 has impacted our in-store marketing efforts due to the social distancing and Advertising
Weother regulatory requirements and protocols. Notwithstanding this, we differentiate our business through a field‑based marketing approach to build brand awareness and drive customers to our stores and website in both new and existing markets. Our events sponsorship group engages directly in the communities around our stores, driving store visits by participating in both hyper‑local and large‑scale events where they offer product samplings and beverage coupons. These events are customized for each of our markets and are identified and coordinated by our local store managers and Tea Guides with support from our dedicated corporate events team.
In addition, we continue to leverage our growing digital presence, including through Facebook, Instagram, Twitter, Google+, Pinterest, LinkedIn, YouTube, Snapchat and Yelp, to increase our website sales and drive additional store visits within existing and new markets. Our marketing and advertising efforts are led by a strong marketing and merchandising team.
Product Development and Design
Our tea and merchandising teams travel throughout the world seekingseek premium teas and tea-related products.products from around the world. These teams consist of Tea Blend Developers, Product Designers, Category Merchants and Quality Control Personnel, who leverage our extensive experience in selecting and developing our product assortment. We constantly explore distinctive ingredients, flavors and trends that are popular in a variety of cultures, which we introduce to our customers through their incorporation in new teas. Our research and development team works with our blenders and suppliers to create new and exciting flavors of tea, which we rotate into our product offerings to attract new customers and to continue to pique the interest of existing customers. Our blending process focuses on magnifying the senses and bringing smell and taste to the forefront. We introduce new flavors and blends each month as well as around seasonal holidays.holidays blends. Through extensive research, we have identified key customer segments and preferences to help evaluate our product assortment and we have developed an effective product release cadence. We believe our focus on innovation and continual product development are key differentiating factors for our brand that drives our customers’ loyalty and supports our efforts to attract new customers.
Travel restrictions brought on by COVID-19 have not impacted our ability to develop new products and innovate, due primarily to strong relationships built over the years with our suppliers, including our significant library of untapped new blends and products that we can bring to market as required.
Our innovation also extends to creating new and exciting merchandise to make the tea consumption and experience more convenient and stimulating at home or on-the-go. Since our merchandising team designs and develops most of our products in‑house, we believe we are better positioned than our competitors who do not have such an in-house function to create the unique and proprietary designs that make consuming loose‑leaf tea easier and more funenjoyable for our customers. We believe the combination of our product selection and our product innovation allows us to offer customers a distinctive assortment that differentiates us from other specialty tea retailers.
Sourcing and Manufacturing
We do not own or operate any tea estates or blending operations; instead, we work with vendors who source ingredients for our teas and tea blends from all over the world. The majorityMany of our tea blenders are in either Germany or the United States. Since we founded the Company in 2008, we have developed strong relationships with our vendors. These relationships are important, as we depend on our vendors to provide us with the highest quality teas and ingredients from around the world. Our quality control process includes both in-house testing and vendor testing. Therefore, in addition to bringing our designs for tea blends to fruition, our vendors play an important role in quality control and in ensuring our teas meet applicable regulatory guidelines. Our tea merchandise is sourced from a number ofseveral suppliers who manufacture to our unique and proprietary designs.
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Warehouse and Distribution Facilities
We distribute our loose-leaf teas, pre-packaged teas, tea sachets, and tea-related gifts and, accessories to our stores and our online customers from third-party distribution centerscenters. In September 2021, we consolidated the North American distribution of our products to one facility located in Montréal,Longueuil, Québec, Canada. Prior to this, the Company distributed products throughout Canada from Sherbrooke, Québec and throughout the U.S. from Champlain, New York. We useYork using third-party logistics facilities in Sherbrooke, Québec and Champlain, New York. The Sherbrooke facility ships to our Canadian stores and Canadian online customers. The Champlain, New York facility ships to all our U.S. stores and to our U.S. online customers.these locations. Our products are typically shipped to our stores and our online customers via third‑party national transportation providers multiple times per week.
Management Information Systems
Our management information systems provide a full range of business process supports to our online and retail stores, our store operations and service support center teams. Additionally, we operate our website on an independent platform. We utilize a combination of industry‑standard and customized software systems to provide various functions related to point of sales, inventory management, warehouse management, and accounting and financial reporting.
Government Regulation
We are subject to labor and employment laws, import and trade restrictions laws, laws governing advertising, privacy and data security laws, safety regulations, and other laws, including consumer protection regulations that apply to retailers and/or the promotion and sale of merchandise and the operation of stores and warehouse facilities. In the United States, we are subject to the regulatory authority of, among other agencies, the Federal Trade Commission (“FTC”) and the U.S. Food and Drug Administration (“FDA”). We are also subject to the laws of Canada, including the regulatory authority of Canadian Food Inspection Agency, as well as provincial and local regulations. We monitor changes in these laws and believe that we are in material compliance with applicable laws.
Insurance
We maintain third-party insurance for a number of risk management activities including, but not limited to, workers’ compensation, general liability, property, directors and officers, cyber insurance and employee-related health care benefits. We evaluate our insurance requirements on an ongoing basis to ensure that we maintain adequate levels of coverage.
Trademarks and Other Intellectual Property
We regard intellectual property and other proprietary rights as important to our success. In addition to registered intellectual property, such as our patents and marks, we also rely upon trade secrets and know‑how to develop and maintain our competitive position. We protect our intellectual property rights through a variety of methods, including by availing ourselves of trademark and trade secret laws and by entering into confidentiality agreements with vendors, employees, consultants, and others who have access to our proprietary information.
We own several trademarks and servicemarksservice marks that have been registered with the Canadian Intellectual Property Office and the U.S. Patent and Trademark Office, including DAVIDsTEA®. We have also registered our stylized logos, and we own domain names, including www.davidstea.com. In addition, we have registered or have applied to register one or more of our marks in a number ofseveral foreign countries and expect to continue to do so in the future. However, we cannot be certain that we can obtain the registration for the marks in every country where we apply for registration.
We must constantly protect against any infringement by competitors. If we believe a competitor has infringed or is infringing upon our rights, we may take legal action, which could result in litigation, in which case we may incur significant expenses and divert significant management attention from our business operations.
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Employees
Human Capital
As of the end of Fiscal 2018, we had 2,901 associates. As of February 2, 2019,January 29, 2022, we employed a total of 487204 full‑time employees and 2,414174 part‑time employees with 467 in the United States and 2,434 in Canada. Of all those employees, 2,671133 were employed in our corporate office, 69 in our production and distribution operations and 176 in our store network and 230 were employed in corporate, distribution and direct channel support functions.network. None of our employees is represented by a labor union.
Our employees are united by our goal of infusing people’s lives with positivitea. Our human capital resources objectives include identifying, recruiting, retaining and incentivizing our existing and new employees. We foster a people-first approach through connection and collaboration, focusing on mental & physical wellness, diversity and inclusion, family, sustainability, and community involvement. We offer hybrid and flexible work options, generous time off and professional development and training. We believe that fostering this openness and flexibility within our organization is how we haveencourage a good relationship with our employees.collaborative work environment resulting in new ideas and continuous improvement.
Seasonality
Our business experiences seasonal fluctuations, reflecting increased sales during the holiday season in November and December. Our sales and income are generally highest in the fourth quarter, which includes the holiday sales period, and tends to be lowest in the second and third fiscal quarters. Therefore, operating results for any fiscal quarter are not necessarily indicative of results for the full fiscal year. To prepare for the holiday season, we must increase our inventory levels above those maintained during the rest of the year. We expect inventory levels, along with an increase in accounts payable and accrued expenses, to reach their highest levels in the third and fourth quarters in anticipation of the increased net sales during the holiday season. As a result of this seasonality, and generally because of variations in consumer spending habits, we experience fluctuations in net sales, earningsearnings/(losses) and working capital requirements during the year.
Corporate Information
DAVIDsTEA Inc. was incorporated under the Canada Business Corporations Act, or the CBCA, on April 29,30, 2008, and our principal executive offices are located at 5430 Ferrier Street, Mount‑Royal, Québec, Canada, H4P 1M2. Our telephone number at our principal executive offices is (888) 873‑0006. Our website address is www.davidstea.com.
DAVIDsTEA Inc. owns a 100% equity interest in its sole subsidiary, DAVIDsTEA (USA) Inc., a corporation organized under the laws of Delaware.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments to these reports are filed with the Securities and Exchange Commission (the “SEC”)SEC and the Québec Autorité des marchés financiers (the “AMF”). We are subject to the informational requirements of the Securities Act of 1933 (the “Securities Act”) and the Exchange Act, and we file or furnish reports, proxy statements and other information with the SEC and/or the AMF as required by applicable law.
Our website is located at www.davidstea.com, and our investor relations website is located at http://ir.davidstea.com. The contents of our website are not part of this Annual Report on Form 10-K. Our electronic filings with the SEC and the AMF (including all annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to these reports), including the exhibits, are available, free of charge, on our investor relations website as soon as reasonably practicable after we electronically file them with the SEC and the AMF. To request a printed copy of this Annual Report on Form 10-K or consolidated financial statements and related MD&A as of and for the year ended February 2, 2019, which we will provide without charge, please contact the Company’s Chief Financial Officer at 5430, Ferrier Street, Town of Mount-Royal, H4P 1M2, or send an email to investors@davidstea.com. Additional information relating to the Company, including directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s securities and securities authorized for issuance under equity compensation plans is also contained in the Company’s management information circular, which will be available on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.
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ITEM 1A. RISK FACTORS
You should carefully consider the risks and uncertainties described below together with all of the other information contained in this Annual Report on Form 10-K and in our other public disclosures. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading price of our common shares could decline, and you could lose all or part of your investment.investment in our shares. Although we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known to us or that are currently deemed immaterial that may adversely affect our business and financial condition. These risk factors could cause actual results to differ materially from those expressed or implied in any of our forward-looking statements.
Risk Factor Summary
Risks Related to Our BusinessOperational and Our IndustryStrategic Matters
Recent significant changes to our board of directors and our executive leadership team, any future loss of directors or executives, and the resulting transitions might harm our future operating results.
We have recently experienced significant changes to our board of directors and our leadership team. In June 2018, our shareholders elected seven new directors, two of whom subsequently resigned and were replaced in August 2018. We have an interim Chief Executive Officer and several other new members of our leadership team, including our Chief Financial Officer, our VP Supply Chain, our VP Marketing and VP of eCommerce, each of whom have joined the Company recently. These types of board and leadership changes have the potential to disrupt our operations due to the operational and administrative inefficiencies, added costs, decreased employee morale, uncertainty and decreased productivity among our employees, increased likelihood of turnover, and the loss of personnel with deep institutional knowledge, which could result in significant disruptions to our operations. In addition, we must successfully integrate the new leadership team within our organization in order to achieve our operating objectives, and changes in key leadership positions may temporarily affect our financial performance and results of operations as new leadership becomes familiar with our business. These changes could increase the volatility of our stock price. In addition, the loss of any of these individuals could significantly delay, prevent the achievement of, or make it more difficult for us to pursue and execute on our business objectives, and could have an adverse effect on our business, financial condition and operating results. If we are unable to mitigate these or other similar risks, our business, results of operations and financial condition may be adversely affected.
Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results from operations and financial condition.
We are subject to taxes by the U.S. federal and state tax authorities as well as Canadian federal, provincial and local tax authorities, and our tax liabilities will be affected by the allocation of profits and expenses to differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
| · | Our transition from a focus on sales through retail stores to online sales and sales through wholesale channels required that we expand and improve our |
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| · | We may need to raise additional capital in |
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| · | Because our business is highly concentrated on a single, discretionary product category - tea, including loose-leaf teas, pre-packaged teas, tea sachets, and tea-related gifts and accessories - we are vulnerable to changes in |
· | Our success depends, in part, on our ability to continue to source, develop and market new varieties of teas and tea blends, tea-related gifts, accessories, and food and beverages that meet our high standards and customer preferences. | |
· | Our failure to accurately forecast consumer demand for our products while increasing inventory levels could adversely affect our gross margins, cash flow and liquidity. | |
· | We may experience negative effects to our brand and reputation from real or perceived quality or safety issues with our tea, tea accessories, and food and beverages, which could have an adverse effect on our operating results. | |
· | Our business largely depends on a strong brand image, and if we are unable to maintain and enhance our brand image, particularly in new markets where we have | |
· | If we are unable to attract, train, assimilate and retain employees that embody our culture, we may not be able to grow or successfully operate our business. | |
· | Loss of key employees, an inability to attract and retain qualified employees or increased labor costs could adversely affect our results of operations and growth potential. | |
· | Litigation may adversely affect our business, financial condition, results of operations or liquidity. |
Risks Related to External and Economic Matters
· | We face significant competition from other specialty tea and beverage retailers and retailers of grocery products, which could adversely affect our growth plans and our financial results. | |
· | Because we rely on a limited number of third‑party suppliers and manufacturers, we may not be able to obtain quality products on a timely basis or in sufficient quantities. | |
· | A shortage in the supply, a decrease in the quality or an increase in the price of tea and ingredients used in our tea blends, because of weather conditions, earthquakes, pandemic, epidemic crop disease, pests or other natural or manmade causes could impose significant costs and losses on our business. | |
· | Our ability to source our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, and beverage profitably or at all could be hurt if new trade restrictions are imposed, existing trade restrictions become more burdensome or environmental regulations become more stringent. | |
· | Third‑party failure to adequately receive, warehouse and ship our merchandise to our stores, wholesale and online customers could result in lost sales or reduced demand for our teas, tea accessories, and beverages. | |
· | Fluctuations in economic conditions could materially impact our operating results. | |
· | We face business disruption and related risks resulting from the COVID-19 pandemic, which could have a material adverse effect on our business and results of operations. | |
· | Geopolitical conditions, including trade disputes and direct or indirect acts or war or terrorism, could have an adverse effect on our operations, in particular our global supply chain, and adversely impact our financial results. | |
· | Fluctuations in foreign currency exchange rates could harm our results of operations as well as the price of common shares. | |
· | We face risks from the shifting dynamics in international trade. | |
· | Fluctuations in our results of operations for the fourth fiscal quarter have a disproportionate effect on our overall financial condition and results of operations. | |
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Risks Related to Regulatory, Data Privacy and Compliance Matters
· | Our marketing programs, digital initiatives and use of consumer information are governed by an evolving set of laws. Enforcement trends and unfavorable changes in those laws or trends, or our failure to comply with existing or future laws, could substantially harm our business and results of operations. | |
· | We are subject to customer payment-related risks that could increase operating costs or exposure to fraud or theft, subject us to potential liability and potentially disrupt our business. | |
· | We rely significantly on information technology systems and any failure, inadequacy, interruption, or security failure of those systems could harm our ability to operate our business effectively. | |
· | Data security breaches could negatively affect our reputation, credibility, and business. | |
· | Use of social media may adversely affect our reputation or subject us to fines or other penalties. | |
· | Our failure to comply with existing or new regulations, both in the United States and Canada, or an adverse action regarding product claims or advertising could have a material adverse effect on our results of operations and financial condition. | |
· | We may not be able to protect our intellectual property adequately, which could harm the value of our brand and adversely affect our business. | |
· | We rely on independent certification for a number of our products and our marketing of products marked “Organic”, “Fair Trade” and “Kosher”. Loss of certification within our supply chain or as relates to our manufacturing process or failure to comply with government regulations pertaining to the use of such marketing claims could harm our business. |
Risks Related to Accounting and Tax Matters
· | Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results from operations and | |
· | Our ability to use our net operating loss carryforwards in | |
· | Our transfer pricing policies are subject to audit, with respect to which an unfavorable outcome could take a disproportionate share of our management’s attention and negatively affect our financial condition. | |
· | We currently report our financial results under IFRS, which differs in certain significant respects from U.S. GAAP. |
Risks Relating to Ownership of Our Common Shares
· | Our largest shareholder owns approximately 46% of our common shares, which may limit our minority shareholders’ ability to influence corporate matters. | |
· | Our stock price may be volatile or may decline. | |
· | Our articles and bylaws contain provisions that may have | |
· | Because we are a federally incorporated Canadian corporation and all of our directors and officers are resident in Canada, it may be difficult for investors in the United States to enforce civil liabilities against us based solely upon the federal securities laws of the United States. | |
· | We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses. | |
· | There could be adverse tax | |
· | Shareholder activism, including public criticism of our company or our management team or litigation, may adversely affect our stock price. |
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WeRisks Related to Operational and Strategic Matters
Our transition from a focus on sales through retail stores to online sales and sales through wholesale channels required that we expand and improve our operational delivery capabilities and has strained our operational, managerial, and administrative resources, which may adversely affect our business.
Our current business strategy involves a transition to online sales and sales through wholesale channels of our high-quality tea and accessories, from our previous business model focused on sales through our retail stores. This transition has placed increased demands on our operational, managerial, administrative, and other resources, which may be subjectinadequate to audits of our income,support the transition. Our senior management team may be unable to effectively address challenges involved with the transition from a focus on sales primarily through retail stores to a focus on online sales and sales through wholesale channels, given the substantial differences in those sales environments. We will also need to continue to enhance our operational management systems, financial and management controls, and information systems, and to hire, train and retain qualified and capable personnel. Implementing or enhancing our infrastructure, management systems, information systems, controls, and procedures, particularly as they relate to online sales, and any changes to our existing operational, managerial, administrative and other transaction taxes by these tax authorities. Outcomes from these auditsresources could have an adverse effect onnegatively affect our operating results of operations and financial condition.
Our transfer pricing policiesWe may need to raise additional capital in the future. If we are subjectunable to audit, an unfavorable outcomeobtain adequate funding on terms acceptable to which could take a disproportionate shareus, we may be unable to execute our business plan.
To remain competitive, we must continue to make investments in the development of our management’s attentionproducts, the expansion of our online presence, our management information systems and negatively affect our financial condition.sales and marketing activities. If cash generated from operations is insufficient to fund such growth, we could be required to raise additional funds. Currently we do not have a committed source of funding in place and there can be no assurance that any funding or sources of financing will be available to us, or if available, on terms favorable to us. If we cannot raise the required capital when needed, we may not be able to satisfy the demands of existing and prospective customers, we could lose revenue and market share and we may have to curtail our capital expenditures.
We and our subsidiary engage in a number of intercompany transactions in various jurisdictions. Such activity subjects us to complex transfer pricing regulations in the countries in which we operate. There is a relatively high degree of uncertainty and inherent subjectivity in complying with these regulations. Tax examinations similarly are often complex, and tax authorities may disagree with the treatment of items reported by us and our transfer pricing methodology.
We are currently undergoing an audit by the Canada Revenue Agency (the “CRA”) on the subject of transfer pricing. We believe that these transactions reflect the accurate economic allocation of profit and risk and that proper contemporaneous transfer pricing documentation is in place. However, the ultimate outcome of any examination with respect to amounts owed by us may differ from the amounts recorded in our financial statements and might also include penalties and interest. Preliminary findings from the transfer pricing audit indicates a difference in the interpretation of the economics of the arrangement. Appealing an unfavorable outcome could require significant attention of senior management to the detriment of other aspects of our business. As well, the difference between what we have reserved and what the CRA auditors may find we owe may materially affect our financial position and financial results in the period or periods for which such determination is made.
Because our business is highly concentrated on a single, discretionary product category –- tea, including loose-leaf teas, pre-packaged teas, tea sachets, and tea-related gifts and accessories and food and beverages –- we are vulnerable to changes in consumer preferences and in economic conditions affecting disposable income that could harm our financial results.
Our business is not diversified and consists primarily of developing, sourcing, marketing, and selling loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, and food andcraft beverages. Consumers’ preferences change rapidly and without warning, moving from one trend to another among many retail concepts. Therefore, our business is substantially dependent on our ability to educate consumers on the many positive attributes of tea and anticipate shifts in consumers’ tastes. Any future shifts in consumer preferences away from the consumption of beverages brewed from premium loose‑leaf teas would also have a material adverse effect on our results of operations. In particular,For example, there has been an increasing focus on health and wellness, which we believe has increased demand for products, such as our teas, that are perceived to be healthier than other beverage alternatives. If such consumer preference trends change, or if our teas are not perceived to be healthier than other beverage alternatives, our financial results could be adversely affected.
Consumer purchases of specialty retail products, including our products, are discretionary in nature and are historically affected by economic conditions such as changes in employment, salary and wage levels, and confidence in prevailing and future economic conditions. These discretionaryconditions as may be affected by geopolitical issues, such as the Russian invasion of Ukraine, trade restrictions, unseasonable weather, pandemics, including the current COVID-19 pandemic, as well as the transition to selling our products primarily online and other factors that are outside of our control. Discretionary purchases may decline during recessionary periods or at other times when disposable income is lower. Ourlower, such as during highly inflationary periods. Further, due to the COVID-19 pandemic and our permanent store closings, our financial performance mayhas become more susceptible to economicfluctuations in online consumer spending, as the consumer is limited to purchasing our products through the online store and other conditionsa selection of products through grocery stores and pharmacies. We have seen significant decreases in regions where we have a significant numberconsumer spending due to factors such as the pandemic, rising inflation rates and geopolitical conflict, particularly in our industry, and such trends may continue. If periods of stores. Our continued success will depend, in part, ondecreased consumer spending persist, our ability to anticipate, identifysales could decrease, and respond quickly to changing consumer preferencesour financial condition and economic conditions.results of operations could be adversely affected.
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We may not be able to obtain credit when desired on favorable terms, if at all, which may impact our ability to execute our current or future business strategies.
We anticipate that our current cash and cash equivalents will be sufficient to meet our current and anticipated needs for general corporate purposes during the next 12 months. However, it is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. In addition, we may not have access to the funds available under our credit agreement (the “Credit Agreement”) with the Bank of Montréal and BMO Capital Markets (collectively, the “Lender”). We are currently renegotiating our Credit Agreement with the Lender. As our negotiations with the Lender are ongoing, the outcome of such negotiations remains uncertain. If we are successful in renegotiating our Credit Agreement and then breach covenants in that renegotiated credit agreement, the Lender could make the loans outstanding under that renegotiated credit agreement immediately due and payable. If we do not generate sufficient cash flow from operations or otherwise, we may need additional financing to execute our current or future business strategies. We cannot assure you that additional financing will be available to us on favorable terms, if at all. To the contrary, we expect that future lending would be under more restrictive terms than those presently upon us. If adequate funds are not available or not available on acceptable terms, if and when needed, our ability to fund our operations, meet obligations in the normal course of business, take advantage of strategic opportunities, or otherwise respond to competitive pressures would be significantly limited.
We have defaulted on the Credit Agreement. Although the Lender is forbearing declaring any event of default, if we do not successfully cure our default, in the event we need funds to execute our strategy, the Lender could limit access to liquidity, which would have negative consequences on our long-term business plan.
On April 24, 2015, we entered into the Credit Agreement with the Lender. The Credit Agreement was amended on September 15, 2016 and June 11, 2018. The Credit Agreement contains various affirmative and negative covenants. Among the covenants are maintenance of a coverage ratio, which requires that we maintain on a consolidated basis a minimum fixed charge coverage ratio of 1.10:1.00; delivery of a borrower base certificate and a compliance certificate; and delivery of a quarterly compliance certificate. Failure to abide by one of these financial and reporting covenants constitutes an event of default under the Credit Agreement.
On February 5, 2019, we received a notice from the Lender that we were in breach of the Credit Agreement’s financial and reporting covenants. In the same notice, the Lender indicated that it was tolerating the existence of these events of default. We have entered into good-faith negotiations with the Lender to replace terms of the Credit Agreement with those we intend to be able to keep. In the meantime, we are unable to make any borrowing requests until a new agreement has been entered into, or as otherwise permitted in writing by the Lender. This could limit immediate access to liquidity, which would have a negative outcome on our financial condition. Further, the Lender has not waived any events of default and reserved all of its rights under the Credit Agreement. Declaration of an event of default would 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.
Expanding our focus to online sales and wholesale alongside our retail stores will require us to continue to expand and improve our operations and could strain our operational, managerial and administrative resources, which may adversely affect our business.
Growing our business in historically non-core channels will place increased demands on our operational, managerial, administrative and other resources, which may be inadequate to support our expansion. Our senior management team may be unable to effectively address challenges involved with expansion forecasts for the future. It may also require us to enhance our store management systems, financial and management controls and information systems, and to hire, train and retain personnel. Implementing new systems, controls and procedures, to our infrastructure and any changes to our existing operational, managerial, administrative and other resources could negatively affect our results of operations and financial condition.
We have experienced a slowdown in the growth rate of our business during the past few years and negative comparable store sales, meaning our former high levels of growth may not be achieved in future periods.
We have experienced significant fluctuation in the growth rate of our business during the last several years. Although we have planned initiatives to support the growth of our business, such as continued investment in our online presence, increased marketing and product development to support our wholesale business, or changes to our promotional strategy, we cannot be sure that these initiatives will not negatively affect our gross margins in the short term depending on the timing and extent of our realization of the costs and benefits of such initiatives.
Similarly, we may not be able to regain the levels of comparable store sales that we have experienced historically. If our future comparable store sales continue to decline, our financial results will suffer. A variety of factors affect comparable store sales including increasing consumer use of e-commerce online retail options, which may not be recaptured by consumers’ use of our website, consumer tastes, competition, current economic conditions, pricing, and decreases in consumer traffic in shopping malls or other locations in which our stores are located. These factors may cause our comparable store sales results to be materially lower than previous periods and our expectations, which could harm our results of operations and result in a decline in the price of our common shares.
We face significant competition from other specialty tea and beverage retailers and retailers of grocery products, which could adversely affect our growth plans and us.
The U.S. and Canadian tea markets are highly fragmented. We compete directly with a large number of relatively small independently owned tea retailers and a number of regional tea retailers, as well as retailers of grocery products, including loose‑leaf teas, tea sachets and other beverages. We must spend considerable resources to differentiate our customer and product experience. Some of our competitors may have greater financial, marketing and operating resources than we do. Therefore, despite our efforts, our competitors may be more successful than us in attracting customers.
Our success depends, in part, on our ability to continue to source, develop and market new varieties of teas and tea blends, tea-related gifts, accessories, and food and beverages that meet our high standards and customer preferences.
We currently offer approximately 135150 varieties of teas and tea blends and a wide assortment of tea-related gifts, accessories and food and beverages. Our success depends in part on our ability to continually innovate, develop, source and market new varieties of loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, and food and beverages that both meet our standards for quality and appeal to customers’ preferences. We have conducted extensive customer market research in order to target our development,efforts, however, failure to innovate, develop, source and market new varieties of loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, and food and beverages that consumers want to buy could lead to a decrease in our sales and profitability.
Because we rely on a limited number of third‑party suppliers and manufacturers, we may not be able to obtain quality products on a timely basis or in sufficient quantities.
We rely on a limited number of decentralized vendors to supply us with straight tea and specially blended teas on a continuous basis. Our financial performance depends in large part on our ability to purchase tea in sufficient quantities at competitive prices from these vendors. In general, we do not have long‑term purchase contracts or other contractual assurances of continued supply, pricing or exclusive access to products from these vendors.
Any of our suppliers or manufacturers could discontinue supplying us with teas in sufficient quantities for a variety of reasons. The benefits we currently experience from our supplier and manufacturer relationships could be adversely affected if they:
Events that adversely affect our vendors could impair our ability to obtain inventory in the quantities and at the quality that we desire. Such events include difficulties or problems with our vendors’ businesses, finances, labor relations, ability to import raw materials, costs, production, insurance and reputation, as well as natural disasters or other catastrophic occurrences.
More generally, if we experience significant increased demand for our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, or food and beverages, or need to replace an existing vendor, additional supplies or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, and that any new vendor may not allocate sufficient capacity to us in order to meet our requirements, fill our orders in a timely manner or meet our strict quality requirements. In the event we are required to find new sources of supply, we may encounter delays in production, inconsistencies in quality and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards. In particular, the loss of a tea vendor would necessitate that we work with our new vendors to replicate our tea blends, which could result in our inability to sell such tea blends for a period of time or in a change of quality in our tea blends. Any delays, interruption or increased costs in the supply of loose‑leaf teas or the manufacture of our pre-packaged teas, tea sachets and tea-related gifts, and accessories could have an adverse effect on our ability to meet customer demand for our products and result in lower sales and profitability both in the short and long term.
A shortage in the supply, a decrease in the quality or an increase in the price of tea and ingredients used in our tea blends, as a result of weather conditions, earthquakes, crop disease, pests or other natural or manmade causes could impose significant costs and losses on our business.
The supply and price of tea and ingredients used in our tea blends are subject to fluctuation, depending on demand and other factors outside of our control. The supply, quality and price of our teas and other ingredients can be affected by multiple factors in countries that produce tea or other ingredients, including political and economic conditions, civil and labor unrest, adverse weather conditions, including floods, drought and temperature extremes, earthquakes, tsunamis, and other natural disasters and related occurrences. This risk is particularly true with respect to regions or countries from which we source a significant percentage of our products. In extreme cases, entire tea harvests may be lost or may be negatively impacted in some geographic areas. These factors can increase costs and decrease sales, which may have a material adverse effect on our business, results of operations and financial condition.
Tea and other ingredients may be vulnerable to crop disease and pests, which may vary in severity and effect. The costs to control disease and pest damage vary depending on the severity of the damage and the extent of the plantings affected. Moreover, available technologies to control such conditions may not continue to be effective. These conditions can increase costs and decrease sales, which may have a material adverse effect on our business, results of operations and financial condition.
Our ability to source our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, and food and beverage profitably or at all could be hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.
All of our teas and ingredients used in our blends are currently grown, and a substantial majority of our pre-packaged teas, tea sachets and tea-related gifts, and accessories are currently manufactured outside of the United States and Canada. The United States, Canada, and the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. Countries impose, modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions that make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards and customs restrictions, could increase the cost or reduce the supply of teas, and tea accessories available to us or may require us to modify our supply chain organization or other current business practices, any of which could harm our business, financial condition and results of operations.
In addition, there is a risk that our suppliers and manufacturers could fail to comply with applicable regulations, which could lead to investigations by the United States, Canadian or foreign government agencies responsible for international trade compliance. Resulting penalties or enforcement actions could delay future imports or exports or otherwise negatively affect our business.
Our business largely depends on a strong brand image, and if we are unable to maintain and enhance our brand image, particularly in new markets where we have limited brand recognition, we may be unable to increase or maintain our level of sales.
We believe that our brand image and brand awareness are important to our business and potential future growth. We also believe that maintaining and enhancing our brand image is important to maintaining and expanding our customer base and retaining our employees. Our ability to successfully integrate our strategy to expand into new channels or to maintain the strength and distinctiveness of our brand in our existing markets will be adversely impacted if we fail to connect with our target customers.
Maintaining and enhancing our brand image may require us to continue to make substantial investments in areas such as merchandising, marketing, store operations, and employee training, which could adversely affect our cash flow and which may ultimately be unsuccessful. Furthermore, our brand image could be jeopardized if we fail to maintain high standards for merchandise quality, if we fail to comply with local laws and regulations if we experience negative publicity or other negative events that affect our image and reputation or as a result of communications by our shareholders. Some of these risks may be beyond our ability to control, such as the effects of negative publicity regarding our suppliers or our shareholders. Failure to successfully market and maintain our brand image could harm our business, results of operations and financial condition.
Our failure to accurately forecast consumer demand for our products while increasing inventory levels could adversely affect our gross margins, cash flow and liquidity.
As we shift our focussales mix pivots towards tea related products and away from the sale of hard goods and accessories, we are increasing inventory levels of our tea products, which are perishable. In the event we are unable to adequately manage our inventory levels, we may be forced to either write off or sell expiring excess inventory at a discount, which could affect our financial performance. Further, if our strategy of focusing on tea rather than hard goods and accessories does not suit customer preferences, we could have a large volume of obsolete inventory that we may be required to write off or discount, which would negatively affect our gross margins and operating results. If our inventory and our forecasts exceed demand, our liquidity and cash flow may be adversely affected.
We may experience negative effects to our brand and reputation from real or perceived quality or safety issues with our tea, tea accessories, and food and beverages, which could have an adverse effect on our operating results.
We believe our customers rely on us to provide them with high‑quality teas, tea accessories, and food and beverages. Concerns regarding the safety of our teas, tea accessories, and food and beverages or the safety and quality of our supply chain could cause consumers to avoid purchasing certain products from us or to seek alternative sources of tea, tea accessories, and food and beverages, even if the basis for the concern has been addressed or is outside of our control. Adverse publicity about these concerns, whether or not ultimately based on fact, and whether or not involving teas, tea accessories, and food and beverages sold at our brick-and-mortar stores, could discourage consumers from buying our teas, tea accessories, and food and beverages and have an adverse effect on our brand, reputation and operating results.
Furthermore, the sale of teas, tea accessories, and food and beverages entails a risk of product liability claims and the resulting negative publicity. For example, tea supplied to us could contain contaminants that, if not detected by us, could result in illness or death upon their consumption. Similarly, tea accessories, and food and beverages could contain contaminants or contain design or manufacturing defects that could result in illness, injury or death. It is possible that product liability claims will be asserted against us in the future.
We may also be subject to involuntary product recalls or may voluntarily conduct a product recall. The costs associated with any future product recall could, individually and in the aggregate, be significant in any given fiscal year. In addition, any product recall, regardless of direct costs of the recall, may harm consumer perceptions of our teas, tea accessories, and food and beverages and have a negative impact on our future sales and results of operations.
Any loss of confidence on the part of our customers in the safety and quality of our teas, tea accessories, and food and beverages would be difficult and costly to overcome. Any such adverse effect could be exacerbated by our position in the market as a purveyor of quality teas, tea accessories, and food and beverages and could significantly reduce our brand value. Issues regarding the safety of any teas, tea accessories, and food and beverages sold by us, regardless of the cause, could have a substantial and adverse effect on our sales and operating results.
Our business largely depends on a strong brand image, and if we are unable to maintain and enhance our brand image, particularly in new markets where we have limited brand recognition, we may be unable to increase or maintain our level of sales.
We believe that our brand image and brand awareness are important to our business and potential future growth. We also believe that maintaining and enhancing our brand image is important to maintaining and expanding our customer base and retaining our employees. Our ability to successfully integrate our strategy to expand into new channels or to maintain the strength and distinctiveness of our brand in our existing markets will be adversely impacted if we fail to connect with our target customers.
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Maintaining and enhancing our brand image may require us to continue to make substantial investments in areas such as merchandising, marketing, retail and online store operations, wholesale operations, and employee training, which could adversely affect our cash flow, and which may ultimately be unsuccessful. Furthermore, our brand image could be jeopardized if we fail to maintain high standards for merchandise quality and delivery to our online and wholesale customers, if we fail to comply with local laws and regulations, if we experience negative publicity or other negative events that affect our image and reputation, or because of communications by our shareholders. Some of these risks may be beyond our ability to control, such as the effects of negative publicity regarding our suppliers or our shareholders. Failure to successfully market and maintain our brand image could harm our business, results of operations and financial condition.
If we are unable to attract, train, assimilate and retain employees that embody our culture, we may not be able to grow or successfully operate our business.
Our success is partly due to our ability to attract, train, assimilate and retain enough employees, who understand and appreciate our culture, represent our brand effectively and establish credibility with our customers. Due to the changes caused by the COVID-19 pandemic including remote work and the shift in our business model toward online sales, maintaining our culture and training and assimilating employees has proven more difficult and there can be no assurance that we can maintain our culture and the effective representation of our brand going forward. If we are unable to hire and retain store and other personnel capable of consistently providing a high-level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of the loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, and food and beverages we offer, the performance of our existing stores, online experience and other aspects of our business could be materially adversely affected and our brand image may be negatively impacted. In addition, the rate of employee turnover in the retail industry is typically high and finding qualified candidates to fill positions may be difficult. Any failure to meet our staffing needs, including for IT professionals or warehouse and distribution facility employees, or any material increases in team member turnover rates could have a material adverse effect on our business or results of operations. We also rely on temporary or seasonal personnel to staff our stores and distribution centers. We may not be able to find adequate temporary or seasonal personnel to staff our operations when needed, which may strain our existing personnel and negatively affect our operations.
Loss of key employees, an inability to attract and retain qualified employees or increased labor costs could adversely affect our results of operations and growth potential.
Our success will depend in part upon our leadership team and other key management personnel. The loss of any key member of management may prevent the Company from implementing its business plans in a timely manner. Further, labor is a significant component of the cost of operating our business. Our ability to meet labor needs while controlling labor costs is subject to external factors, such as employment levels, prevailing wage rates, minimum wage legislation, changing demographics, health and other insurance costs and governmental labor and employment requirements. Our transition to online sales and sales through wholesale channels from our previous model focused on retail stores has led to an increased need for employees with IT expertise. Our ability to identify and retain qualified IT personnel has been difficult in light of the increased demand for such talent. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, while increasing our wages could cause our earnings to decrease. Due to current factors including low unemployment rates we have had difficulty attracting and retaining qualified personnel to staff our warehouse and production facilities. If we face labor shortages or increased labor costs because of increased competition for employees from our competitors and other industries, higher employee-turnover rates, increases in the federal- or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs, including costs associated with health insurance coverage or workers’ compensation insurance, our operating expenses could increase and our business, financial condition and results of operations could be materially and adversely affected.
Litigation may adversely affect our business, financial condition, results of operations or liquidity.
Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, intellectual property rights holders, shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions, or other litigation. The outcome of litigation, particularly class action lawsuits, regulatory actions, and intellectual property claims, is inherently difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. Regardless of the outcome or merit, the cost to defend future litigation may be significant and result in the diversion of management and other company resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition, results of operations or liquidity.
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Risks Related to External and Economic Matters
We face significant competition from other specialty tea and beverage retailers and retailers of grocery products, which could adversely affect our growth plans and us.
The U.S. and Canadian tea markets are relatively fragmented. We compete directly with many small independently owned tea retailers and several regional tea retailers, as well as retailers of grocery products, including loose‑leaf teas, tea sachets and other beverages. We must spend considerable resources to differentiate our customer and product experience. Some of our competitors may have greater financial, marketing, and operating resources than we do. Therefore, despite our efforts, our competitors may be more successful than us in attracting customers.
Because we rely on a limited number of third‑party suppliers and manufacturers, we may not be able to obtain quality products on a timely basis or in sufficient quantities.
We rely on a limited number of decentralized vendors to supply us with straight tea, specialty blended teas and tea-related hardware and accessories on a continuous basis. Our financial performance depends in large part on our ability to purchase tea and tea accessories in sufficient quantities at competitive prices from these vendors. In general, we do not have long‑term purchase contracts or other contractual assurances of continued supply, pricing, or exclusive access to products from these vendors. For example, a significant portion of our tea and tea-related hardware is sourced from Germany and China, respectively. The Russian invasion of Ukraine has had ripple effects globally, including energy supply disruptions to Germany and port closures in China, which may negatively impact our critical supply of products from those regions.
Any of our suppliers or manufacturers could discontinue supplying us with teas in sufficient quantities for a variety of reasons. The benefits we currently experience from our supplier and manufacturer relationships could be adversely affected if they:
· | raise the prices they charge us; | |
· | change payment terms; | |
· | discontinue selling products to us; | |
· | sell similar or identical products to our competitors; or | |
· | enter into arrangements with competitors that could impair our ability to sell our suppliers’ and manufacturers’ products, including by giving our competitors exclusive licensing arrangements or exclusive access to tea blends or limiting our access to such arrangements or blends. |
Events that adversely affect our vendors could impair our ability to obtain inventory in the quantities and at the quality that we desire. Such events include difficulties or problems with our vendors’ businesses, finances, labor relations, ability to import raw materials, costs, production, insurance, and reputation, as well as natural disasters or other catastrophic occurrences, such as the COVID-19 pandemic and the Russian invasion of Ukraine.
More generally, if we experience significant increased demand for our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, or food and beverages, or need to replace an existing vendor, additional supplies or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, and that any new vendor may not allocate sufficient capacity to us in order to meet our requirements, fill our orders in a timely manner or meet our strict quality requirements. In the event we are required to find new sources of supply, we may encounter delays in production, inconsistencies in quality and added costs because of the time it takes to train our suppliers and manufacturers in our methods, products, and quality control standards. In particular, the loss of a tea vendor would necessitate that we work with our new vendors to replicate our tea blends, which could result in our inability to sell such tea blends for a period of time or in a change of quality in our tea blends. Any delays, interruption, or increased costs in the supply of loose‑leaf teas or the manufacture of our pre-packaged teas, tea sachets and tea-related gifts, and accessories could have an adverse effect on our ability to meet customer demand for our products and result in lower sales and profitability both in the short and long term.
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A shortage in the supply, a decrease in the quality or an increase in the price of tea and ingredients used in our tea blends, because of weather conditions, earthquakes, pandemic, epidemic crop disease, pests or other natural or manmade causes could impose significant costs and losses on our business.
The supply and price of tea and ingredients used in our tea blends are subject to fluctuation, depending on demand and other factors outside of our control. The supply, quality and price of our teas and other ingredients can be affected by multiple factors in countries that produce tea or other ingredients, including political and economic conditions, civil and labor unrest, pandemic, epidemic and adverse weather conditions such as floods, drought and temperature extremes, earthquakes, tsunamis, and other natural disasters and related occurrences. This risk is particularly true with respect to regions or countries from which we source a significant percentage of our products. In extreme cases, entire tea harvests may be lost or may be negatively impacted in some geographic areas. These factors can increase costs and decrease sales, which may have a material adverse effect on our business, results of operations and financial condition.
Tea and other ingredients may be vulnerable to crop disease and pests, which may vary in severity and effect. The costs to control disease and pest damage vary depending on the severity of the damage and the extent of the plantings affected. Moreover, available technologies to control such conditions may not continue to be effective. These conditions can increase costs and decrease sales, which may have a material adverse effect on our business, results of operations and financial condition.
Our ability to source our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, and beverage profitably or at all could be hurt if new trade restrictions are imposed, existing trade restrictions become more burdensome or environmental regulations become more stringent.
All our teas and ingredients used in our blends are currently grown, and a substantial majority of our pre-packaged teas, tea sachets and tea-related gifts, and accessories are currently manufactured outside of the United States and Canada. The United States, Canada, and the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, environmental regulations or other restrictions or regulations, or may adversely adjust prevailing quota, duty, or tariff levels. Countries impose, modify, and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions that make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards, and customs restrictions, could increase the cost or reduce the supply of teas, and tea accessories available to us or may require us to modify our supply chain organization or other current business practices, any of which could harm our business, financial condition, and results of operations.
In addition, there is a risk that our suppliers and manufacturers could fail to comply with applicable regulations, which could lead to investigations by the United States, Canadian or foreign government agencies responsible for international trade compliance. Resulting penalties or enforcement actions could delay future imports or exports or otherwise negatively affect our business.
Third‑party failure to adequately receive, warehouse and ship our merchandise to our stores, wholesale and online customers could result in lost sales or reduced demand for our teas, tea accessories, and food and beverages.beverages.
We currently rely upon third‑party warehouse facilities for the majoritymost of our product receipts from vendors and shipments to our stores and e‑commerceour wholesale and online customers. Our utilization of third‑party warehouse services for our merchandise is subject to risks, including employee strikes, or their information technology systems failure.failure, and their implementation of appropriate measures to ensure the safety of their employees due to COVID-19. If we change warehousing companies, we could face logistical difficulties that could adversely affect our receipts and delivery of merchandise and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those we receive from our current third‑party transportation providers in Canada and the United States that we currently use, which in turn would increase our costs and thereby adversely affect our operating results.
In addition, we currently rely upon third-party transportation providers for all of our product shipments from our distribution centers to our stores, wholesale, and online customers. Our utilization of third-party delivery services for our shipments is subject to risk, including increases in fuel prices, which would increase our shipping costs, unexpected limitations on expected activities, employee strikes and inclement weather, which may affect third parties’ abilities to provide delivery services that adequately meet our shipping needs. For example, the COVID-19 pandemic has adversely impacted third-party transportation providers and their ability to operate at expected levels. Our operations may be further materially adversely affected by the temporary closure of our suppliers or third-party delivery services, restrictions on the shipment of our products, and travel restrictions that may be requested or mandated by public authorities.
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If we change shipping companies, we could face logistical difficulties that could adversely affect deliveries, and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers in Canada and the United States that we currently use, which in turn would increase our costs and thereby adversely affect our operating results.
Fluctuations in economic conditions could materially impact our operating results.
Our operating results could be materially impacted by changes in overall economic conditions and other economic factors that impact consumer confidence and spending, including discretionary spending. Future economic conditions affecting disposable consumer income such as employment levels, business conditions, overall economic slowdown or recession, changes in housing market conditions, changes in government benefits, the availability of credit, interest rates, inflation or deflation, tax rates and other matters could reduce consumer spending. Given the inflation rates in fiscal 2021, there have been and may continue to be increases to our cost of goods, supply chain costs and labor costs. In addition, any other economic factors or circumstances resulting in higher transportation, labor, insurance or healthcare costs or commodity prices could increase our merchandise costs and operating, general and administrative expenses and otherwise adversely affect our financial condition, results of operations or cash flows. Increased fuel prices also have an effect on consumer spending and on our costs of producing and procuring products that we sell. A deterioration in overall economic conditions, the likelihood of which is made more uncertain by recent increases in the inflation rate, could adversely affect our business in many ways, including slowing sales growth, reducing overall sales and reducing gross margins. We are unable to predict how the global economy and financial markets will perform. If the global economy and financial markets do not perform as we expect, it could adversely affect our financial condition, results of operations or cash flows.
We face business disruption and related risks resulting from the COVID-19 pandemic, which could have a material adverse effect on our business and results of operations.
COVID-19 spread rapidly throughout the world, prompting governments and businesses to take unprecedented measures in response. On March 17, 2020, we closed all our stores in North America, as subsequently mandated by governments in both Canada and the United States, to protect our employees, customers, and communities in light of the COVID-19 pandemic. As part of the reevaluation of our strategy due to the impact of the COVID-19 pandemic on our retail business and our decision to pursue a restructuring, we significantly decreased our retail footprint, by terminating leases for 164 of our stores in Canada and all 42 of our stores in the United States. Since August 21, 2020, we have maintained a total of 18 retail locations across Canada. As we have moved away from a significant retail footprint and toward an online and wholesale focused business, there is no assurance that the customers will purchase our products at previous volumes through these channels.
Additionally, we rely on independent certificationour employees, contractors, third-party transportation providers, vendors, and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our business. We cannot predict when any of our contractors, third-party transportation providers, vendors and other business partners will be able to operate at pre-pandemic levels. Nor can we predict the duration of the COVID-19 pandemic and whether existing restrictions may be extended, or new restrictions will be put in place. The Company has at times required substantially all its employees to work remotely. As of March 31, 2022 our offices have re-opened and we have in place policies that allows for a flexible, hybrid model of working.
The Company continues to monitor the situation and take appropriate actions in accordance with recommendations and requirements of relevant authorities. The impacts to date, however, have been significant, including but not limited to the acceleration of our decision to shift away from a significant retail footprint. The ultimate impact is still unknown and largely dependent upon future developments, including but not limited to the duration of the pandemic and its related variants, the temporary or permanent changes in customer demand and consumer spending and shopping habits, and restrictions on the activities of our European and other internationally based suppliers and distribution channels.
The COVID-19 pandemic continues to evolve. The ultimate impact of the COVID-19 pandemic on our results, financial position and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, such as the duration of the pandemic, including as a result of any new variants, the effectiveness of vaccination, and the impact of these and other factors on our stores, employees, production, warehouse and distribution facilities, distributors, vendors, and customers. If we are not able to respond to and manage the impact of pandemic-related developments effectively, our business, operating results, financial condition, and cash flows could be adversely affected.
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Geopolitical conditions, including trade disputes and direct or indirect acts or war or terrorism, could have an adverse effect on our operations, in particular our global supply chain, and adversely impact our financial results.
Recently, Russia initiated significant military action against Ukraine. In response, Canada, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations. Canada, the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of the conflict, including related geopolitical tensions, regional instability, and geopolitical shifts which could materially adversely affect regional economies and the global economy. Such consequences could increase our costs, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations.
Further, disruption in our global supply chain could negatively affect our business. The products we sell are sourced from a limited number of our productssuppliers including suppliers in Germany and our marketingChina, which regions have been significantly impacted by the Russian invasion of products marked “Organic”, “Fair Trade”Ukraine. As well, the Chinese Government has recently imposed restrictions on one of its major ports in response to COVID-19 and “Kosher”. Loss of certification withinrelated variant outbreaks. These and any future disruption in our supply chain or as relatedinability to our manufacturing process or failure to comply with government regulations pertaining to the use of the term organic could harm our business.
We rely on independent certification, such as “Organic,” “Fair Trade,” or “Kosher,” to differentiate some of ourfind qualified suppliers and access products from others. We offer one of the largest certified organic collections of teathat meet requisite quality standards in North America amongst branded tea retailers. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. The loss of any independent certificationsa timely and efficient manner could adversely affect our marketplace position, whichbusiness. The loss or disruption of such supply arrangements for any reason could interrupt product supply and, if not effectively managed and remedied, have an adverse effect on our business, financial condition, results of operations or cash flows.
Fluctuations in foreign currency exchange rates could harm our business.results of operations as well as the price of common shares.
In addition, most of the purchases we make from our suppliers are denominated in U.S. dollars. As a result, a depreciation of the Canadian dollar against the U.S. Departmentdollar increases the cost of Agricultureacquiring those supplies in Canadian dollars, which negatively affects our gross profit margin. From time to time, we have entered into forward contracts to fix the exchange rate of our expected U.S. dollar purchases in respect to our inventory. However, we have not entered into such contract during Fiscal 2021 and have none outstanding at this time. Any forward contracts may be inadequate in offsetting any gains and losses in foreign currency transactions, and such gains or losses could have a significant, and potentially adverse, effect on our results of operations.
Our earnings per share are reported in Canadian dollars, and accordingly may be translated into U.S. dollars by analysts or our investors. Given the foregoing, the value of an investment in our common shares to a U.S. shareholder will fluctuate as the U.S. dollar rises and falls against the Canadian Food Inspection Agency require thatdollar. Our decision to declare a dividend depends on results of operations reported in Canadian dollars, and we will declare dividends, if any, in Canadian dollars. As a result, U.S. and other shareholders seeking U.S. dollar total returns are subject to foreign exchange risk as the U.S. dollar rises and falls against the Canadian dollar.
We face risks from the shifting dynamics in international trade.
The lack of clarity about the effects of Brexit and future laws and regulations pertaining to international trade creates uncertainty for us, which may affect our certified organic products meet certain consistent, uniform standards. Compliance with such regulations could pose a significant burden on somebusiness and operations.
Although none of our suppliers or manufacturers are based the United Kingdom, a significant portion of our tea comes from suppliers in European Union countries, such as Germany. The United Kingdom formally left the European Union on January 31, 2020. This began a transition period that ran until December 31, 2020. On December 24, 2020, the European Commission reached a trade agreement with the United Kingdom on the terms of its future cooperation with the European Union (the “Trade Agreement”). The Trade Agreement offers United Kingdom and European Union companies preferential access to each other’s markets, ensuring imported goods that satisfy applicable point of origin rules (that is, that United Kingdom or European Union goods are wholly produced or significantly worked in the United Kingdom or European Union, as applicable) will be free of tariffs and quotas; however, economic relations between the United Kingdom and the European Union will now be on more restrictive terms than existed previously.
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Further, uncertainty related to future protectionist trade policies may have a material adverse effect on global economic conditions and may significantly reduce global trade. Increasing trade protectionism may cause an increase in (i) the cost of goods exported from regions globally, (ii) the length of time required to transport goods, (iii) increased container transportation costs, and (iv) the risks associated with exporting goods. Such increases may significantly affect the quantity of goods to be shipped, shipping time schedules, shipping costs and other associated costs, which could causehave a disruption in some of our product offerings. Moreover, in the event of actual or alleged non‑compliance, we might be forced to find an alternative supplier, which could adversely affectmaterial adverse effect on our business, results of operations and financial condition.
We are subject toFluctuations in our results of operations for the risks associated with leasing substantial amounts of space and are required to make substantial lease payments underfourth fiscal quarter have a disproportionate effect on our operating leases. Any failure to make these lease payments when due would likely harm our business, profitabilityoverall financial condition and results of operations.
We do not own any real estate. Instead,Our business is seasonal and, historically, we lease allhave realized a higher portion of our store locations, our corporate offices in Montréal, Canadasales, earnings, and a distribution center in Montréal, Canada. Our store leases typically have ten‑year terms and generally require us to pay total rent per square foot that is reflective of our small average store square footage and premium locations. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions. Our substantial operating lease obligations could have significant negative consequences, including:
We depend on cash flow from operations in the fourth fiscal quarter, due to paythe impact of the holiday selling season. Any factors that harm our lease expenses, financefourth fiscal quarter operating results, including disruptions in our growthsupply chain, ability of our supply chain to handle higher volumes, adverse weather, unfavorable economic conditions or lesser than anticipated sales of our holiday-specific product assortment, could have a disproportionate effect on our results of operations for the entire fiscal year.
To prepare for our peak shopping season, we must order and maintain higher quantities of inventory than we would carry at other times of the year. As a result, our working capital requirements also fluctuate during the year, increasing in the second and fulfillthird fiscal quarters in anticipation of the fourth fiscal quarter. Any unanticipated decline in demand for our other cash needs. Ifloose‑leaf teas, pre‑packaged teas, tea sachets, tea-related gifts, and accessories during our business does not generate sufficient cash flow from operating activitiespeak shopping season could require us to fund these requirements, we may not be able to achievesell excess inventory at a substantial markdown, which could diminish our growth plans, fundbrand and reduce our other liquiditysales and capital needs or ultimately service our lease expenses, which would harm our business.gross profit.
IfOur quarterly results of operations may also fluctuate significantly because of a variety of other factors, including the seasonality of our business. As a result, historical period-to-period comparisons of our sales and operating results are not necessarily indicative of future period-to-period results. You should not rely on the results of a single fiscal quarter, particularly the fourth fiscal quarter holiday season, as an indication of our annual results or our future performance.
Risks Related to Regulatory, Privacy and Compliance Matters
Our marketing programs, digital initiatives and use of consumer information are governed by an evolving set of laws. Enforcement trends and unfavorable changes in those laws or trends, or our failure to comply with existing or future storelaws, could substantially harm our business and results of operations.
We collect, maintain, and use data, including personally identifiable information, provided to us through online activities, other customer interactions in our business, and our employees and service providers. Our business and current and future marketing programs depend on our ability to collect, maintain, use, and otherwise process this data, and our ability to do so is not profitable,subject to evolving international and U.S. and Canadian federal, state and/or provincial laws, regulations, and enforcement trends with respect to the foregoing. We strive to comply with all applicable laws, regulations and other legal obligations relating to privacy, data protection, information security and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, may conflict with other laws, regulations, and legal obligations, or may conflict with our practices. If so, we may suffer damage to our reputation and be subject to public scrutiny, proceedings, or actions against us by governmental entities or others, which could hurt our reputation, force us to spend significant amounts to defend our practices, distract our management, increase our costs of doing business and result in monetary liability, and we decidecould be required to closechange our practices.
Because the interpretation and application of many laws and regulations relating to privacy, data protection, information security, and consumer protection, along with industry standards, are uncertain, it weis possible that relevant laws, regulations, or standards may nonetheless remain committedbe interpreted and applied in manners that are, or are alleged to performbe, inconsistent with our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease.practices. In addition, as our leases expire,privacy, data protection, information security and consumer protection laws and regulations change, we may failincur additional costs to negotiate renewals on commercially acceptable terms or at all,ensure we remain in compliance. For example, we have online sales to Californians, which could causesubject us to close storesthe California Consumer Privacy Act (“CCPA”), the standards and restrictions of which are in desirable locations. Even if we are ablecertain cases more stringent than other U.S. privacy laws. Additionally, the California Privacy Rights Act (“CPRA”) was approved by California voters in the November 2020 election. The CPRA significantly modifies the CCPA, creating obligations relating to renew existing leases,consumer data beginning on January 1, 2022, with enforcement beginning July 1, 2023. More generally, some observers have noted the termsCCPA could mark the beginning of such renewal may not bea trend toward more stringent privacy legislation in the United States, as attractive asobserved with the expiring lease, whichrecent Virginia Consumer Data Protection Act, enacted March 2021 and takes effect January 2023, the Colorado Privacy Act, enacted June 2021 and takes effect July 2023, and the Utah Privacy Act, enacted March 2022 and takes effect December 2023. These new state laws could materiallyincrease our potential liability and adversely affect our resultsbusiness.
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Complying with the CCPA, CPRA and other privacy, data protection, information security and consumer protection laws and regulations may cause us to incur substantial operational costs or require us to modify our practices. If applicable privacy, data protection, information security and consumer protection laws and regulations evolve or become more restrictive, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may decrease, our investment in our e‑commerce platform may not be fully realized, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability for security breaches may increase. Any failure, or perceived failure, by us to comply with international, federal, state and/or provincial laws and regulations relating to privacy, data protection, information security and consumer protection, or self-regulatory standards that apply to us or that third parties assert are applicable to us, our policies or notices we post or make available, or other actual or asserted obligations relating to privacy, data protection, information security and data protection could subject us to claims, investigations, sanctions, enforcement actions and other proceedings, disgorgement of operations.profits, fines, damages, civil and criminal liability, penalties or injunctions.
We are subject to customer payment-related risks that could increase operating costs or exposure to fraud or theft, subject us to potential liability and potentially disrupt our business.
We accept payments using a variety of methods, including cash, credit andcards, debit cards and gift cards. Acceptance of these payment options subjects us to rules, regulations, contractual obligations, and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. As a result, our business and operating results could be adversely affected.
We rely significantly on information technology systems and any failure, inadequacy, interruption, or security failure of those systems could harm our ability to operate our business effectively.
We rely on ourcomplex information technology systems to effectively manage our business data, communications, point‑of‑sale, supply chain, order entry and fulfillment, inventory and warehouse and distribution centers and other business processes.processes, which technology systems are vital to our continuing operations. The failure of our systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and the loss of sales, causing our business to suffer. Despite any precautions we may take, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, power outages, viruses, security breaches, cyber-attacks, and terrorism, including breaches of our transaction processing or other systems that could result in the compromise of confidential company, customer, or employee data. We maintain disaster recovery procedures, but there is no guarantee that these will be adequate in all circumstances. Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers, require us to expend significant time and expense developing, maintaining or upgrading our information technology systems or prevent us from paying our vendors or employees, receiving payments from our customers or performing other information technology, administrative or outsourcing services on a timely basis. Furthermore, our ability to conduct our website operations may be affected by changes in foreign, state, provincial and federal privacy laws and we could incur significant costs in complying with the multitude of foreign, state, provincial and federal laws regarding the unauthorized disclosure of personal information. Although we carry business interruption and cyber-security insurance, our coverage may not be sufficient to compensate us for potentially significant losses in connection with the risks described above.
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In addition, we are dependent on third‑party hardware and software providers, including our website. We sell merchandise over the Internet through our website, which represents a growing percentage of our overall net sales. The successful operation of our e-commerce business depends on our ability to maintain the efficient and continuous operation of our website and our fulfillment operations, and to provide a shopping experience that will generate orders and return visits to our site. Our e-commerce operations are subject to numerous risks, including rapid technology change, unanticipated operating problems, credit card fraud and system failures or security breaches and the costs to address and remedy such failures or breaches. Additionally, our website operations as well as other information systems, may be affected by our reliance on third‑party hardware and software providers, whose products and services are not within our control, making it more difficult for us to correct any defects; technology changes; risks related to the failure of computer systems through which we conduct our website operations; telecommunications failures; security breaches or attempts thereof; and similar disruptions. Third‑party hardware and software providers may not continue to make their products available to us on acceptable terms or at all and such providers may not maintain policies and practices regarding data privacy and security in compliance with all applicable laws. Any impairment in our relationships with such providers could have an adverse effect on our business.
Our marketing programs, digital initiatives and use of consumer information are governed by an evolving set of laws and enforcement trends and unfavorable changes in those laws or trends, or our failure to comply with existing or future laws, could substantially harm our business and results of operations.
We collect, maintain and use data, including personally identifiable information, provided to us through online activities and other customer interactions in our business. Our current and future marketing programs depend on our ability to collect, maintain and use this information, and our ability to do so is subject to evolving international and U.S. and Canadian federal, state and/or provincial laws and enforcement trends with respect to the foregoing. We strive to comply with all applicable laws and other legal obligations relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, may conflict with other rules or may conflict with our practices. If so, we may suffer damage to our reputation and be subject to proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts to defend our practices, distract our management, increase our costs of doing business and result in monetary liability.
In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we remain in compliance. For example, our stores in California and online sales to Californians subject us to the California Consumer Privacy Act, the standards and restrictions of which are more stringent than in other U.S. states. If applicable data privacy and marketing laws become more restrictive at the international, federal, state or provincial levels, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may decrease, our investment in our e‑commerce platform may not be fully realized, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability for security breaches may increase.
Data security breaches could negatively affect our reputation, credibility, and business.
We collect and store personal information relating to our customers and employees, including their personally identifiable information, and we rely on third parties for the operation of our e‑commerce site and for the various social media tools and websites we use as part of our marketing strategy. Consumers are increasingly concerned over the security of personal information transmitted over the Internet (or through other mechanisms), consumer identity theft and user privacy. Any perceived, attempted or actual unauthorized disclosure of personally identifiable information regarding our employees, customers or website visitors could harm our reputation and credibility, reduce our e‑commerce sales, impair our ability to attract website visitors, reduce our ability to attract and retain customers and result in litigation against us or the imposition of significant fines or penalties and could require us to expend significant time and expense developing, maintaining or upgrading our information technology systems or prevent us from paying our vendors or employees, receiving payments from our customers or performing other information. We cannot be certain that any of our third‑party service providers with access to such personally identifiable information will maintain policies and practices regarding data privacy and security in compliance with all applicable laws, or that they will not experience data security breaches or attempts thereof which could have a corresponding adverse effect on our business.
Recently, data security breaches suffered by well‑known companies and institutions have attracted a substantial amount of media attention, prompting new foreign, federal, provincial, and state laws and legislative proposals addressing data privacy and security, as well as increased data protection obligations imposed on merchants by credit card issuers. As a result, we may become subject to more extensive requirements to protect the customer information that we process in connection with the purchase of our products, resulting in increased compliance costs. Furthermore, the risk of cyberattacks and security breaches and incidents is anticipated to increase as a result of the Russian invasion of Ukraine and the resulting geopolitical unrest. Any breach of our or our third-party service providers’ websites or computer systems could adversely affect our business, credibility and reputation and lead to remediation or litigation-related expenses, which could have a materially adverse effect on our results of operations.
Use of social media may adversely affect our reputation or subject us to fines or other penalties.
Use of social media platforms, user review and recommendation websites and other forms of online communications provides individuals with access to a broad audience of consumers and other interested persons. As laws and regulations rapidly evolve to govern the use of these social media platforms, and devices, especially with respect to advertising and consumer privacy, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these social media platforms and devices could adversely affect our reputation or subject us to fines or other penalties.
Consumers value readily available information concerning retailers and their goods and services and often act on such information without further investigation and without regard to its accuracy. Information concerning us may be posted online by unaffiliated third parties, whether seeking to pass themselves off as us or not, at any time, which may be adverse to our reputation or business. The harm may be immediate without affording us an opportunity for redress or correction.
Fluctuations in our results of operations for the fourth fiscal quarter have a disproportionate effect on our overall financial condition and results of operations.
Our business is seasonal and, historically, we have realized a higher portion of our sales, earnings and cash flow from operations in the fourth fiscal quarter, due to the impact of the holiday selling season. Any factors that harm our fourth fiscal quarter operating results, including disruptions in our supply chain, ability of our supply chain to handle higher volumes, adverse weather or unfavorable economic conditions, could have a disproportionate effect on our results of operations for the entire fiscal year.
In order to prepare for our peak shopping season, we must order and maintain higher quantities of inventory than we would carry at other times of the year. As a result, our working capital requirements also fluctuate during the year, increasing in the second and third fiscal quarters in anticipation of the fourth fiscal quarter. Any unanticipated decline in demand for our loose‑leaf teas, pre‑packaged teas, tea sachets, tea-related gifts, and accessories during our peak shopping season could require us to sell excess inventory at a substantial markdown, which could diminish our brand and reduce our sales and gross profit.
Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings and the sales contributed by new stores. As a result, historical period‑to‑period comparisons of our sales and operating results are not necessarily indicative of future period‑to‑period results. You should not rely on the results of a single fiscal quarter, particularly the fourth fiscal quarter holiday season, as an indication of our annual results or our future performance.
We face risks from Brexit.
Although none of our suppliers or manufacturers are based the United Kingdom, a significant portion of our tea comes suppliers in European Union countries, such as Germany. The lack of clarity about Brexit and the future laws and regulations of the United Kingdom creates uncertainty for us, as the outcome of these negotiations may affect our business and operations. Additionally, there also is a risk that countries where our suppliers and manufacturers are located may decide to leave the European Union. The uncertainty surrounding Brexit not only potentially affects our business in the European Union, but may have a material adverse effect on global economic conditions and the stability of global financial markets, which in turn could have a material adverse effect on our business, financial condition, and results of operations.
Fluctuations in foreign currency exchange rates could harm our results of operations as well as the price of common shares and any dividends that we may pay.
The reporting currency for our combined consolidated financial statements is the Canadian dollar. Changes in exchange rates between the Canadian dollar and the U.S. dollar may have a significant, and potentially adverse, effect on our results of operations. Because we recognize sales in the United States in U.S. dollars, if the U.S. dollar weakens against the Canadian dollar, it would have a negative impact on our U.S. operating results upon translation of those results into Canadian dollars for the purposes of consolidation. Any hypothetical reduction in sales could be partially or completely offset by lower cost of sales and lower selling, general and administration expenses that are generated in U.S. dollars.
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In addition, a majority of the purchases we make from our suppliers are denominated in U.S. dollars. As a result, a depreciation of the Canadian dollar against the U.S. dollar increases the cost of acquiring those supplies in Canadian dollars, which negatively affects our gross profit margin. From time to time, we have entered into forward contracts to fix the exchange rate of our expected U.S. dollar purchases in respect to our inventory. However, these may be inadequate in offsetting any gains and losses in foreign currency transactions, and such gains or losses could have a significant, and potentially adverse, effect on our results of operations.
Our earnings per share are reported in Canadian dollars, and accordingly may be translated into U.S. dollars by analysts or our investors. Given the foregoing, the value of an investment in our common shares to a U.S. shareholder will fluctuate as the U.S. dollar rises and falls against the Canadian dollar. Our decision to declare a dividend depends on results of operations reported in Canadian dollars, and we will declare dividends, if any, in Canadian dollars. As a result, U.S. and other shareholders seeking U.S. dollar total returns, including increases in the share price and dividends paid, are subject to foreign exchange risk as the U.S. dollar rises and falls against the Canadian dollar.
We currently report our financial results under IFRS, which differs in certain significant respects from U.S. GAAP.
We report our financial statements under IFRS. There have been and there may in the future certain significant differences between IFRS and U.S. GAAP, including but not limited to differences related to revenue recognition, share-based compensation expense, income tax, impairment of long-lived assets and earnings per share. As a result, our financial information and reported earnings for historical or future periods could be significantly different if they were prepared in accordance with U.S. GAAP. As a result, you may not be able to meaningfully compare our financial statements under IFRS with those companies that prepare financial statements under U.S. GAAP.
Changes to estimates related to our property, fixtures and equipment or operating results that are lower than our current estimates at certain store locations may cause us to incur impairment charges on certain long-lived assets, which may adversely affect our results of operations.
In accordance with accounting guidance as it relates to the impairment of long-lived assets, we make certain estimates and projections with regard to individual store operations, as well as our overall performance, in connection with our impairment analyses for long-lived assets. When impairment triggers are deemed to exist for any location, the recoverable amount is compared to its carrying value. If the carrying value exceeds the recoverable amount, an impairment charge equal to the difference between the carrying value and recoverable amount is recorded. The projections of future cash flows used in these analyses require the use of judgment and a number of estimates and projections of future operating results. If actual results differ from our estimates, additional charges for asset impairments may be required in the future. We have experienced significant impairment charges in past years and the current fiscal year. If future impairment charges are significant, our reported operating results would be adversely affected.
Further, we have significant long-term lease obligations. If our cash flows and capital resources are insufficient to fund our lease obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness.
If we are unable to attract, train, assimilate and retain employees that embody our culture, including store personnel, store and district managers and regional directors, we may not be able to grow or successfully operate our business.
Our success depends in part upon our ability to attract, train, assimilate and retain a sufficient number of employees, including Tea Guides, store managers, district managers and regional directors, who understand and appreciate our culture, represent our brand effectively and establish credibility with our customers. If we are unable to hire and retain store personnel capable of consistently providing a high-level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of the loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, and food and beverages we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially adversely affected and our brand image may be negatively impacted. In addition, the rate of employee turnover in the retail industry is typically high and finding qualified candidates to fill positions may be difficult. Any failure to meet our staffing needs or any material increases in team member turnover rates could have a material adverse effect on our business or results of operations. We also rely on temporary or seasonal personnel to staff our stores and distribution centers. We may not be able to find adequate temporary or seasonal personnel to staff our operations when needed, which may strain our existing personnel and negatively affect our operations.
We are subject to potential challenges relating to overtime pay and other regulations that affect our employees, which could cause our business, financial condition, results of operations or cash flows to suffer.
Various labor laws, including Canadian federal and provincial laws and U.S. federal and state laws, among others, govern our relationship with our employees and affect our operating costs. These laws include minimum wage requirements, overtime pay, unemployment tax rates, workers’ compensation rates and citizenship requirements. These laws change frequently and may be difficult to interpret and apply. In particular, as a retailer, we may be subject to challenges regarding the application of overtime and related pay regulations to our employees. A determination that we do not comply with these laws could harm our brand image, business, financial condition and results of operation. Additional government‑imposed increases in minimum wages, overtime pay, paid leaves of absence or mandated health benefits could also cause our business, financial condition, results of operations or cash flows to suffer.
If we face labor shortages or increased labor costs, our results of operations and our growth could be adversely affected.
Labor is a significant component of the cost of operating our business. Our ability to meet labor needs while controlling labor costs is subject to external factors, such as employment levels, prevailing wage rates, minimum wage legislation, changing demographics, health and other insurance costs and governmental labor and employment requirements. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, while increasing our wages could cause our earnings to decrease. If we face labor shortages or increased labor costs because of increased competition for employees from our competitors and other industries, higher employee-turnover rates, unionization of farm workers or increases in the federal- or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our operating expenses could increase and our business, financial condition and results of operations could be materially and adversely affected.
Litigation may adversely affect our business, financial condition, results of operations or liquidity.
Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, intellectual property rights holders, shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is inherently difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. Regardless of the outcome or merit, the cost to defend future litigation may be significant and result in the diversion of management and other company resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition, results of operations or liquidity.
Our failure to comply with existing or new regulations, both in the United States and Canada, or an adverse action regarding product claims or advertising could have a material adverse effect on our results of operations and financial condition.
Our business operations, including labeling, advertising, sourcing, distribution, and sale of our products, are subject to regulation by various federal, state, and local government entities and agencies, particularly the Food and Drug Administration (“FDA”),FDA, the Federal Trade Commission (“FTC”)FTC and the Office of Foreign Asset Control (“OFAC”) in the United States, as well as Canadian entities and agencies, including the Canadian Food Inspection Agency. From time to time, we may be subject to challenges to our marketing, advertising, or product claims in litigation or governmental, administrative, or other regulatory proceedings. Failure to comply with applicable regulations or withstand such challenges could result in changes in our supply chain, product labeling, packaging, or advertising, loss of market acceptance of the product by consumers, additional recordkeeping requirements, injunctions, product withdrawals, recalls, product seizures, fines, monetary settlements, or criminal prosecution. Any of these actions could have a material adverse effect on our results of operations and financial condition.
In addition, consumers who allege that they were deceived by any statements that were made in advertising or labeling could bring a lawsuit against us under consumer protection laws. If we were subject to any such claims, while we would defend ourselves against such claims, we may ultimately be unsuccessful in our defense. Defending ourselves against such claims, regardless of their merit and ultimate outcome, would likely result in a significant distraction for management, be lengthy and costly and could adversely affect our results of operations and financial condition. In addition, the negative publicity surrounding any such claims could harm our reputation and brand image.
We may not be able to protect our intellectual property adequately, which could harm the value of our brand and adversely affect our business.
We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. We pursue the registration of our domain names, trademarks, service marks and patentable technology in Canada, the United States and in certain other jurisdictions. In particular, ourOur trademarks, including our registered DAVIDsTEA® and DAVIDsTEA logo design trademarks and the unregistered names of a significant number of the varieties of specially blended teas that we sell, are valuable assets that reinforce the distinctiveness of our brand and our customers’ favorable perception of our stores.
We also strive to protect our intellectual property rights by relying on federal, state, and common law rights, as well as contractual restrictions with our employees, contractors (including those who develop, source, manufacture, store and distribute our tea blends, tea accessories and other tea‑related merchandise), vendors and other third parties. However, we may not enter into confidentiality and/or invention assignment agreements with every employee, contractor and service provider to protect our proprietary information and intellectual property ownership rights. In addition, although we have exclusivity agreements with each of our significant suppliers who performs blending services for us, or who has access to our designs, we may not be able to successfully protect the tea blends and designs to which such suppliers have access under trade secret laws, and the periods for exclusivity governing our tea blends last for periods as brief as 18 months. Unauthorized disclosure of or claims to our intellectual property or confidential information may adversely affect our business.
From time to time, third parties have sold our products using our name without our consent, and, we believe, have infringed, or misappropriated our intellectual property rights. We respond to these actions on a case‑by‑case basis and where appropriate may commence litigation to protect our intellectual property rights. However, we may not be able to detect unauthorized use of our intellectual property or to take appropriate steps to enforce, defend and assert our intellectual property in all instances.
Effective trade secret, patent, copyright, trademark and domain name protection is expensive to obtain, develop and maintain,maintain. Our failure to register or protect our trademarks could prevent us in the future from using our trademarks or challenging third parties who use names and logos similar to our trademarks, which may in turn cause customer confusion, impede our marketing efforts, negatively affect customers’ perception of our brand, stores and products, and adversely affect our sales and profitability. Moreover, intellectual property proceedings and infringement claims brought by or against us could result in substantial costs and a significant distraction for management and have a negative impact on our business. We cannot assure you that we are not infringing or violating, and have not infringed or violated, any third‑party intellectual property rights, or that we will not be accused of doing so in the future.
In addition, although we have also taken steps to protect our intellectual property rights internationally, the laws of certain foreign countries may not protect intellectual property to the same extent as do the laws of the United States and Canada and mechanisms for enforcement of intellectual property rights may be inadequate in those countries. Other entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks in foreign countries. There may also be other prior registrations in other foreign countries of which we are not aware. We may need to expend additional resources to defend our trademarks in these countries, and the inability to defend such trademarks could impair our brand or adversely affect the growth of our business internationally.
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We rely on independent certification for a number of our products and our marketing of products marked “Organic”, “Fair Trade” and “Kosher”. Loss of certification within our supply chain or as relates to our manufacturing process or failure to comply with government regulations pertaining to the use of such marketing claims could harm our business.
We rely on independent certification, such as “Organic,” “Fair Trade,” or “Kosher,” to differentiate some of our products from others. We offer one of the largest certified organic collections of tea in North America amongst branded tea retailers. We must comply with the requirements of independent organizations or certification authorities to label our products as certified. The loss of any independent certifications could adversely affect our marketplace position, which could harm our business.
In addition, the U.S. Department of Agriculture and the Canadian Food Inspection Agency require that our certified organic products meet certain consistent, uniform standards. Compliance with such regulations could pose a significant burden on some of our suppliers, which could cause a disruption in some of our product offerings. Moreover, in the event of actual or alleged non‑compliance, we might be forced to find an alternative supplier, which could adversely affect our business, results of operations and financial condition.
Risks Related to Accounting and Tax Matters
Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results from operations and financial condition.
We are subject to taxes by the U.S. federal and state tax authorities as well as Canadian federal, provincial, and local tax authorities, and our tax liabilities will be affected by the allocation of profits and expenses to differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by several factors, including:
· | changes in the valuation of our deferred tax assets and liabilities, including as a result of the tax reform bill in the United States known as the Tax Cuts and JOBS Act; | |
· | changes in tax laws, regulations, or interpretations thereof; or | |
· | future earnings being lower than anticipated in jurisdictions where we have lower statutory tax rates and higher than anticipated earnings in jurisdictions where we have higher statutory tax rates. |
We may be subject to audits of our income, sales, and other transaction taxes by these tax authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.
Our ability to use our net operating loss carryforwards in the United States may be subject to limitation in the event we experience an “ownership change.”
Under Section 382 of the Internal Revenue Code of 1986, as amended, our ability to utilize net operating loss carryforwards in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more shareholders or groups of shareholders who own at least 5% of our common shares increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three‑year period. Any such limitation on the timing of utilizing our net operating loss carryforwards would increase the use of cash to settle our tax obligations. Accordingly, the application of Section 382 could have a material effect on the use of our net operating loss carryforwards, which could adversely affect our future cash flow from operations.
Our transfer pricing policies are subject to audit, an unfavorable outcome to which could take a disproportionate share of our management’s attention and negatively affect our financial condition.
We and our subsidiary engage in a number of intercompany transactions in various jurisdictions. Such activity subjects us to complex transfer pricing regulations in the countries in which we operate. There is a relatively high degree of uncertainty and inherent subjectivity in complying with these regulations. Tax examinations similarly are often complex, and tax authorities may disagree with the treatment of items reported by us and our transfer pricing methodology.
We believe that these transactions reflect the accurate economic allocation of profit and risk; however, the ultimate outcome of any examination with respect to amounts owed by us may differ from the amounts recorded in our financial statements and might also include penalties and interest. A recent CRA transfer pricing audit conducted prior to the Company’s formal restructuring process indicated a difference in the interpretation of the economics of our intercompany transactions. Although we believe that as a result of the formal restructuring process that the CRA will not be able to impose cash penalties, they may still have the authority to require us to decrease our available net operating loss carryforwards. Appealing an unfavorable outcome could require significant attention of senior management to the detriment of other aspects of our business. As well, the difference between what we have reserved and what the CRA auditors may find we owe may materially affect our financial position and financial results in the period or periods for which such determination is made.
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We currently report our financial results under IFRS, which differs in certain significant respects from U.S. GAAP.
We report our financial statements under IFRS. There have been and there may in the future certain significant differences between IFRS and U.S. GAAP, including but not limited to differences related to share-based compensation expense, income tax, impairment of long-lived assets and earnings per share. As a result, our financial information and reported earnings for historical or future periods could be significantly different if they were prepared in accordance with U.S. GAAP. As a result, you may not be able to meaningfully compare our financial statements under IFRS with those companies that prepare financial statements under U.S. GAAP.
Risks Relating to Ownership of Our Common Shares
Our largest shareholder owns approximately 46% of our common shares, which may limit our minority shareholders’ ability to influence corporate matters.
Our largest shareholder, Rainy Day Investments, Ltd. (“Rainy Day”) owns approximately 46% of our common shares. Rainy Day may have the ability to influence the outcome of any corporate transaction or other matter submitted to shareholders for approval and the interests of Rainy Day may differ from the interests of our other shareholders.
Rainy Day, as our largest shareholder, has significant influence in electing our directors and, consequently, has a substantial say in the appointment of our executive officers, our management policies and strategic direction. In addition, certain matters, such as amendments to our articles of incorporation or votes regarding a potential merger or a sale of all or substantially all of our assets, require approval of at least two thirds of our shareholders; Rainy Day’s approval will be required to achieve any such threshold. Accordingly, should the interests of Rainy Day differ from those of other shareholders, the other shareholders are highly susceptible to the influence of Rainy Day’s votes.
Our stock price may be volatile or may declinedecline.
Our common shares have traded as high as US$29.97 and as low as US$1.070.32 during the period frombetween our IPO toinitial public offering in 2015 and April 17, 2019.28, 2022.
An active, liquid, and orderly market for our common shares may not be sustained, which could depress the trading price of our common shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration. In addition, broad market, and industry factors, most of which we cannot control, may harm the price of our common shares, regardless of our actual operating performance. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significantvolatility, price changes, volume changes, disruption, and volume fluctuations.credit contraction, which could adversely affect global economic conditions. This market volatility, as well as general economic, market and political conditions and Canadian dollar exchange rate relative to the U.S. dollar, could subject the market price of our shares to wide price fluctuations regardless of our operating performance.
Our operating results and the trading price of our shares may fluctuate in response to various factors, including:
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| · | conditions or trends affecting our industry or the economy globally, such as the COVID-19 pandemic and the conflict in Ukraine and the surrounding region; |
· | inability to quickly remediate material weaknesses or the continued identification of material weaknesses; | |
· | stock market price and volume fluctuations of other publicly traded companies and | |
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| · | instability in financial markets or other factors that may affect economic conditions, on a global level or in particular markets; |
· | fluctuations of the Canadian dollar exchange rate relative to the U.S. dollar; | |
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| · | variations in our operating performance and the performance of our competitors; |
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| · | changes in financial estimates by us or by any securities analysts who might cover our shares; |
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| · | actions and announcements by us or our competitors, including new product offerings, significant acquisitions, strategic partnerships, or divestitures; |
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| · | sales, or anticipated sales, of large blocks of our shares, including sales by our directors, officers, or significant shareholders; |
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| · | other events beyond our control such as major catastrophic events, weather, and war. |
These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.
Shareholder activism, including public criticism of our company or our management team or litigation, may adversely affect our stock price.
Responding to actions by activist stockholders can be costly and time-consuming and may divert the attention of management and our employees. The review, consideration, and response to public announcements or criticism by any activist shareholder, or litigation initiated by such shareholders, requires the expenditure of significant time and resources by us. We have previously experienced shareholder activism, which became the subject of contention among other of our significant shareholders and ultimately resulted in changes to our Board of Directors and management. Additional public disagreements or proxy contests for the election of directors at our annual meeting could require us to incur significant legal fees and proxy solicitation expenses, may negatively affect our stock price, potentially result in litigation, and may have other material adverse effects on our business.
If we are unable to implement and maintain effective internal control over financial reporting in the future, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares may be negatively affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second Annual Report on Form 10-K, we are required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes‑Oxley Act. Our independent registered public accounting firm is not required to express an opinion as to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company,” as defined in the JOBS Act. At such time, however, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating.
The process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation is time‑consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes‑Oxley Act in a timely manner or if our management is unable to report that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an “emerging growth company,” investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares could be negatively affected. We could also become subject to investigations by the NASDAQ Global Market on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
Our articles bylaws and certain Canadian legislationbylaws contain provisions that may have the effect of delaying or preventing a change in control.
Certain provisions of our articles of amendment and bylaws, together or separately, could discourage potential acquisition proposals, delay, or prevent a change in control and limit the price that certain investors may be willing to pay for our common shares.
For instance, our bylaws contain provisions that establish certain advance notice procedures for nomination of candidates for election as directors at shareholders’ meetings.
The Investment Canada Act requires that a “non‑Canadian,” as defined therein, file an application for review with the Minister responsible for the Investment Canada Act and obtain approval of the Minister prior to acquiring control of a Canadian business, where prescribed financial thresholds are exceeded. Otherwise, there are no limitations either under the laws of Canada or in our articles on the rights of non‑Canadians to hold or vote our common shares.
Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have otherwise presented a premium to our shareholders.
Because we are a federally incorporated Canadian corporation and the majoritymany of our directors and officers are resident in Canada, it may be difficult for investors in the United States to enforce civil liabilities against us based solely upon the federal securities laws of the United States.
We are a federally incorporated Canadian corporation with our principal place of business in Canada. A majorityAll of our directors and officers and the auditors named herein are residents of Canada and all or a substantial portion of our assets and those of such persons are located outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within the United States upon us or our directors or officers or such auditors who are not residents of the United States, or to realize in the United States upon judgments of courts of the United States predicated upon civil liabilities under the Securities Act. Investors should not assume that Canadian courts: (1) would enforce judgments of U.S. courts obtained in actions against us or such persons predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or “blue sky” laws of any state within the United States or (2) would enforce, in original actions, liabilities against us or such persons predicated upon the U.S. federal securities laws or any such state securities or blue skyblue-sky laws.
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We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on August 3, 2019.July 30, 2022. We would lose our foreign private issuer status if, for example, more than 50% of our common shares is directly or indirectly held by residents of the United States on August 3, 2019July 30, 2022, and we fail to meet additional requirements necessary to maintain our foreign private issuer status. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms beginning at the end of Fiscal 2019,2022, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short‑swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the listing rules of The NASDAQ Global Market. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting, and other expenses that we do not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. These expenses will relate to, among other things, the obligation to reconcile our financial information that is reported according to IFRS to U.S. GAAP and to report future results according to U.S. GAAP.
There could be adverse tax consequence for our shareholders in the United States if we are a passive foreign investment company.
Under United States federal income tax laws, if a company is, or for any past period was, a passive foreign investment company (“PFIC”), it could have adverse United States federal income tax consequences to U.S. shareholders even if the company is no longer a PFIC. The determination of whether we are a PFIC is a factual determination made annually based on all the facts and circumstances and thus is subject to change, and the principles and methodology used in determining whether a company is a PFIC are subject to interpretation. While we do not believe that we currently are or have been a PFIC, we could be a PFIC in the future. United States purchasers of our common shares are urged to consult their tax advisors concerning United States federal income tax consequences of holding our common shares if we are considered to be a PFIC.
If we are a PFIC, U.S. holders would be subject to adverse U.S. federal income tax consequences, such as ineligibility for any preferred tax rates on capital gains or on actual or deemed dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements under U.S. federal income tax laws or regulations. Whether or not U.S. holders make a timely qualified electing fund, or QEF, election or mark‑to‑market election may affect the U.S. federal income tax consequences to U.S. holders with respect to the acquisition, ownership and disposition of our common shares and any distributions such U.S. holders may receive. Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our common shares.
Shareholder activism, including public criticism of our company or our management team or litigation, may adversely affect our stock price.
Responding to actions by activist stockholders can be costly and time-consuming and may divert the attention of management and our employees. The review, consideration, and response to public announcements or criticism by any activist shareholder, or litigation initiated by such shareholders, requires the expenditure of significant time and resources by us. We have previously experienced shareholder activism, which became the subject of contention among other of our significant shareholders and ultimately resulted in changes to our Board of Directors and management. Additional public disagreements or proxy contests for the election of directors at our annual meeting could require us to incur significant legal fees and proxy solicitation expenses, may negatively affect our stock price, potentially result in litigation, and may have other material adverse effects on our business.
Table of Contents |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Properties
Our principal executive and administrative offices are located at 5430 Ferrier Street, Mount‑Royal, Québec, Canada, H4P 1M2. We currently lease one warehouseproduction and distribution centerassembly facility located in Montréal, Québec, which we opened in July 2010. See “Item 1. Business —- Warehouse and Distribution Facilities” above for further information.
The general location, use, approximate size, and lease renewal date of our properties, none of which is owned by us, are set forth below:
| Approximate |
|
| Lease | |||||
|
|
| |||||||
|
|
|
|
| renewal date |
| |||
Montréal, Québec |
| Executive and |
| 22,000 |
| October 31, 2023 | |||
Montréal, Québec |
|
|
| 61,500 |
| June 30, |
As of February 2, 2019,January 29, 2022, we operated 23718 company-operated stores with 189 storeslocated in Canada and 48 stores in the United States, consisting of approximately 220,00015,000 gross square feet. All of our stores are leased from third parties and the leases typically have 10-year terms. Most leases for our retail stores provide for a minimum rent, typically including rent increases, plus a percentage rent based upon sales after certain minimum thresholds are achieved. The leases generally require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses.
The following table summarizes the locations of our stores as of February 2, 2019:January 29, 2022:
Locations in Canada |
| Number of stores |
| |
|
| |||
Alberta | ||||
| ||||
| ||||
| ||||
|
|
| 3 |
|
British Columbia |
| 1 | ||
Manitoba | 1 | |||
New Brunswick | 1 | |||
Ontario |
|
| 5 | |
| ||||
|
| |||
Québec |
|
|
| |
|
|
| ||
|
| ||||
|
| |||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
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, weWe are not presently a party to any legal proceedings, government actions, administrative actions, investigations or claims that are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business, financial condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. See “Item 1A. Risk Factors”.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.applicable
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Table of Contents |
PART II
Market Information
Our common shares have been listed on the NASDAQ Global Market under the symbol “DTEA” since June 2015. Prior to that date, there was no public trading of our common shares. As of April 17, 2019,22, 2022, there were approximately 13 holders of record of our common shares. Excluded from the number of stockholders of record are stockholders who hold shares in “nominee” or “street” name. The closing price per share of the Company’s common shares as of April 22, 2022, as reported under the NASDAQ Global Market Exchange, was $2.48.
Voting Rights
Each holder of Common Shares shall be entitled to receive notice of and to attend all meetings of shareholders of the Company and to vote thereat, except meetings at which only holders of a specified class of shares (other than Common Shares) or specified series of share are entitled to vote. At all meetings of which notice must be given to the holders of the Common Shares, each holder of Common Shares shall be entitled to one vote in respect of each Common Share held by such holder.
Dividends
The holders of the Common Shares shall be entitled, subject to the rights, privileges, restrictions, and conditions attaching to any other class of shares of the Company, to receive any dividend declared by the Company.
We have never declared or paid regular cash dividends on our common shares. The declaration and payment of any dividends in the future will be determined by our Board of Directors, in its discretion, and will depend on a number ofseveral factors, including our earnings, capital requirements, overall financial condition, and contractual restrictions, including restrictions contained in any agreements governing any indebtedness we may incur.
Liquidation, Dissolution or Winding-up
The holders of the Common Shares shall be entitled, subject to the rights, privileges, restrictions, and conditions attaching to any other class of shares of the Company, to receive the remaining property of the Company on a liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or on any other return of capital or distribution of assets of the Company among its shareholders for the purpose of winding-up its affairs.
Stock Performance Graph
The stock performance graph below compares cumulative total return on DAVIDsTEA common shares to the cumulative total return of the NASDAQ Composite Index, S&P 500 Index and S&P 500 Consumer Discretionary Sector Index from June 4, 2015January 28, 2017, through February 2, 2019.January 29, 2022. The graph assumes an initial investment of $100 in DAVIDsTEA and the NASDAQ Composite Index, S&P 500 Index and S&P 500 Consumer Discretionary Sector Index as of June 4, 2015.January 28, 2017. The performance shown on the graph below is not intended to forecast or be indicative of possible future performance of our common shares.
27 |
Table of Contents |
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data as of the dates and for the periods indicated. The selected consolidated financial data as of and for the years ended February 2, 2019January 29, 2022 and February 3, 2018January 30, 2021 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data as of and for the years ended January 28, 2017, January 30, 2016February 1, 2020, February 2, 2019 and January 31, 2015February 3, 2018 are derived from audited consolidated financial statements that are not included in this Annual Report on Form 10-K.Report. Historical results are not necessarily indicative of the results to be expected for future periods. Our financial statements have been prepared in accordance with IFRS. These principles differ in certain respects from U.S. GAAP.
This selected consolidated financial data should be read in conjunction with the disclosures set forth under “Risk Related to Our Business and Our Industry”“Item 1A. Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto.
|
| For the year ended |
|
| For the year ended |
| ||||||||||||||||||||||||||||||||||
|
| February 2, |
| February 3, |
|
| January 28, |
|
| January 30, |
|
| January 31, |
|
| January 29, |
| January 30, |
| February 1, |
| February 2, |
| February 3, |
| |||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
(in thousands, except share information) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Consolidated statements of income (loss) data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Sales |
| $ | 212,753 |
| $ | 224,015 |
| $ | 215,984 |
| $ | 180,690 |
| $ | 141,883 |
|
| $ | 104,073 |
| $ | 121,686 |
| $ | 196,462 |
| $ | 212,753 |
| $ | 224,015 |
| ||||||||
Cost of sales |
|
| 114,774 |
|
|
| 116,772 |
|
|
| 107,534 |
|
|
| 85,359 |
|
|
| 64,185 |
|
|
| 60,871 |
|
| 71,953 |
|
| 87,886 |
|
| 114,774 |
|
| 116,772 |
| ||||
Gross profit |
| 97,979 |
| 107,243 |
| 108,450 |
| 95,331 |
| 77,698 |
|
| 43,202 |
| 49,733 |
| 108,576 |
| 97,979 |
| 107,243 |
| ||||||||||||||||||
Selling, general and administration expenses |
|
| 125,722 |
|
|
| 131,930 |
|
|
| 114,756 |
|
|
| 80,116 |
|
|
| 66,565 |
|
| 42,923 |
| 46,464 |
| 135,306 |
| 125,722 |
| 131,930 |
| |||||||||
Restructuring plan activities, net |
|
| (76,857 | ) |
|
| 56,327 |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Results from operating activities |
| (27,743 | ) |
| (24,687 | ) |
| (6,306 | ) |
| 15,215 |
| 11,133 |
|
| 77,136 |
| (53,058 | ) |
| (26,730 | ) |
| (27,743 | ) |
| (24,687 | ) | ||||||||||||
Finance costs |
| 1,614 |
| 2,371 |
| 76 |
| 1,051 |
| 2,345 |
|
| 152 |
| 3,273 |
| 6,751 |
| 1,614 |
| 2,371 |
| ||||||||||||||||||
Finance income |
| (700 | ) |
| (567 | ) |
| (479 | ) |
| (348 | ) |
| (133 | ) |
|
| (143 | ) |
|
| (399 | ) |
|
| (784 | ) |
|
| (700 | ) |
|
| (567 | ) | |||||
Accretion of preferred shares |
| - |
| - |
| - |
| 401 |
| 1,044 |
| |||||||||||||||||||||||||||||
Loss from embedded derivative on Series A, A-1 and A-2 preferred shares |
| - |
| - |
| - |
| 140,874 |
| 380 |
| |||||||||||||||||||||||||||||
IPO-related costs |
| - |
| - |
| - |
| - |
| 856 |
| |||||||||||||||||||||||||||||
Settlement cost related to former option holder |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 520 |
| ||||||||||||||||||||
Income (loss) before income taxes |
| (28,657 | ) |
| (26,491 | ) |
| (5,903 | ) |
| (126,763 | ) |
| 6,121 |
| |||||||||||||||||||||||||
Provision for income tax (recovery) |
|
| 4,882 |
|
|
| 2,010 |
|
|
| (2,235 | ) |
|
| 4,668 |
|
|
| (333 | ) | ||||||||||||||||||||
Net income (loss) before income taxes |
|
| 77,127 |
|
| (55,932 | ) |
|
| (32,697 | ) |
| (28,657 | ) |
| (26,491 | ) | |||||||||||||||||||||||
Provision for (recovery of) income taxes |
|
| (1,000 | ) |
|
|
|
|
| (1,500 | ) |
|
| 4,882 |
|
| 2,010 |
| ||||||||||||||||||||||
Net income (loss) |
| $ | (33,539 | ) |
| $ | (28,501 | ) |
| $ | (3,668 | ) |
| $ | (131,431 | ) |
| $ | 6,454 |
|
| $ | 78,127 |
|
| $ | (55,932 | ) |
| $ | (31,197 | ) |
| $ | (33,539 | ) |
| $ | (28,501 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Weighted average number of shares outstanding - basic |
| 25,967,836 |
| 25,716,186 |
| 24,699,290 |
| 19,776,946 |
| 11,984,763 |
|
| 26,323,469 |
| 26,168,848 |
| 26,056,332 |
| 25,967,836 |
| 25,716,186 |
| ||||||||||||||||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Basic and fully diluted |
| $ | (1.29 | ) |
| $ | (1.11 | ) |
| $ | (0.15 | ) |
| $ | (6.65 | ) |
| $ | 0.54 |
| ||||||||||||||||||||
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Basic |
| 2.97 |
| $ | (2.14 | ) |
| $ | (1.20 | ) |
| $ | (1.29 | ) |
| $ | (1.11 | ) | ||||||||||||||||||||||
Fully diluted |
| 2.83 |
| $ | (2.14 | ) |
| $ | (1.20 | ) |
| $ | (1.29 | ) |
| $ | (1.11 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Consolidated balance sheet data (at year end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Cash |
| $ | 42,074 |
| $ | 63,484 |
| $ | 64,440 |
| $ | 72,514 |
|
|
|
| $ | 25,107 |
| $ | 30,197 |
| $ | 46,338 |
| $ | 42,074 |
| $ | 63,484 |
| |||||||||
Total assets |
| $ | 122,500 |
| $ | 147,936 |
| $ | 174,334 |
| $ | 158,972 |
|
|
|
| $ | 78,602 |
| $ | 81,242 |
| $ | 139,659 |
| $ | 122,500 |
| $ | 147,936 |
| |||||||||
Total liabilities |
| $ | 55,044 |
| $ | 46,568 |
| $ | 40,884 |
| $ | 24,935 |
|
|
|
| $ | 30,287 |
| $ | 112,533 |
| $ | 116,310 |
| $ | 55,044 |
| $ | 46,568 |
| |||||||||
Total equity |
| $ | 67,456 |
| $ | 101,368 |
| $ | 133,450 |
| $ | 134,037 |
|
|
| |||||||||||||||||||||||||
Total equity (deficiency) |
| $ | 48,315 |
| $ | (31,291 | ) |
| $ | 23,349 |
| $ | 67,456 |
| $ | 101,368 |
|
28 |
Table of Contents |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Preface
In preparing this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), we have taken into accountconsidered all information available to us up to May 2, 2019,April 29, 2022, the date of this MD&A. The audited annual consolidated financial statements and this MD&A were reviewed by the Company’s Audit Committee and were approved and authorized for issuance by our Board of Directors on May 2, 2019.April 29, 2022.
All financial information contained in this annual MD&A and in the audited annual consolidated financial statements has been prepared in accordance with IFRS, except for certain non-GAAP informationnon-IFRS financial measures and ratios discussed in this Annual Report on Form 10-K. As a foreign private issuer, we are permitted to file our audited consolidated financial statements with the SEC under IFRS without a reconciliation to U.S. GAAP and as a result, we do not prepare a reconciliation of our results to U.S. GAAP. It is possible that certain of our accounting policies could be different from U.S. GAAP. All monetary amounts in this MD&A are expressed in Canadian dollars, except for share and per share data and where otherwise indicated.
This MD&A should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company as of February 2, 2019January 29, 2022, and February 3, 2018January 30, 2021 and for the years ended January 29, 2022, January 30, 2021, and February 2, 2019, February 3, 2018, and January 28, 20171, 2020 which are contained in this Annual Report on Form 10-K.
Accounting PeriodsOverview
All references to “Fiscal 2018” are to the Company’s fiscal year ended February 2, 2019. All references to “Fiscal 2017” are to the Company’s fiscal year ended February 3, 2018.
The Company’s fiscal year ends on the Saturday closest to the endCompany offers a selection of January, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. The year ended February 2, 2019 covers a 52-week fiscal period, and the year ended February 3, 2018 covers a 53-week fiscal period.
Overview
We are a branded retailer of specialty tea, offering a differentiated selection ofhigh-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, and tea-related gifts, accessories, and foodgifts through its e-commerce platform at www.davidstea.com and beveragesthe Amazon Marketplace, its wholesale customers which include over 3,500 grocery stores and pharmacies, and 18 company-owned stores across Canada. The Company offers primarily through 237 company-operated DAVIDsTEA stores as of February 2, 2019, and our website, davidstea.com. Weproprietary tea blends that are building a brand that seeksexclusive to expand the definition of tea with innovative products that consumers can explore in an open and inviting retail environment. We strive to make tea a multi-sensory experience by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of teaCompany, as well as traditional single-origin teas and herbs. Our passion for and knowledge of tea permeates our culture and is rooted in an excitement to explore the easetaste, health, and lifestyle elements of preparation.tea. With a focus on innovative flavours, wellness-driven ingredients and organic tea, the Company launches seasonally driven “collections” with a mission of making tea fun and accessible to all.
Sales fluctuate from quarter to quarter. Sales are traditionally highest 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.
Business Update
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 its retail stores in Canada and the United States.
Following a careful review of available options to stem the losses generated primarily from its brick-and-mortar footprint, our management and Board of Directors determined that a formal restructuring process was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.
On July 8, 2020, the Company announced that it was implementing a restructuring plan (the “Restructuring Plan”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, the Company would continue to operate its online business through its e-commerce platform and the Amazon Marketplace as well as its wholesale distribution channel. On August 21, 2020, the Company re-opened 18 stores across Canada and permanently shuttered 164 stores in Canada and all 42 stores in the United States.
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 were 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.
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The approved Plan of Arrangement required that DAVIDsTEA Inc. distribute an aggregate amount of $17.6 million to its creditors and those of DAVIDsTEA (USA) Inc. in full and final settlement of all claims affected by the Plan of Arrangement on June 18, 2021.
On September 9, 2021, the Monitor filed a Certificate of Termination with the Québec Superior Court in accordance with paragraph 24 of the Sanction Order and declared the CCAA proceedings were terminated without further act or formality.
The Company emerged from the formal restructuring process, a smaller and more invigorated organization, with a renewed sense of purpose and confidence as we continue building a high-performing, future-ready winning culture, driven by purpose. We were founded on a spirit of innovation and of embracing unconventional ideas with a desire to create a North American experience around tea. We removed the boundaries that kept tea in the cupboards of only those in-the-know. We experimented and took risks, attracted passionate employees and as customers became friends, we embraced our brand purpose; a desire to share positivity with all, and use our platform to do good - for business and for the lives of all we interact with.
Our actions are driven by the fervent desire to become the world’s most innovative tea company. One that inspires greater wellness and sustainability through ethical and sustainable tea sourcing, compostable and regenerative packaging, and caring for our community. Our digital-first strategy is built to respond to consumer demand - meeting consumers where they are, driving loyalty with the ability to scale the business, without borders. We are focused on building a winning culture that is fueled by delighting consumers and driven to overcome challenging operational and market conditions. We are focused on revenue growth, attaining profitability and positive cash-flow, and with an unwavering sense of passion, purpose and commitment to our customers and our stakeholders.
We ended Fiscal 2021 with revenues of $104.1 million, Adjusted EBITDA1 of $5.3 million, cash balance of $25.1 million.
Factors Affecting Our Performance
We believe that our performance and future success depend on a number ofseveral factors that present significant opportunities for us and may pose risks and challenges, as discussed in the “Risk Factors” section of this Form 10-K.
Fiscal 2018 Highlights
During Fiscal 2018, sales declined by $11.3 million and 5% over the prior year to $212.8 million. Net loss increased by $5.0 million to $33.5 million for the year from a net loss of $28.5 million in Fiscal 2017. Adjusted EBITDA in Fiscal 2018 was a loss of $1.3 million and compares to $12.8 million in Fiscal 2017.
How We Assess Our Performance
The key measures we use to evaluate the performance of our business and the execution of our strategy are set forth below:
Sales. Sales consist primarily of salesare generated from our online stores, retail stores, and e-commerce site.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 quarterquarters because of lower customer trafficengagement 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 ofSeveral factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence can affect purchases of our products.
________________
Sales also include gift card breakage income.
Comparable Sales. Comparable sales refer1 Non-IFRS financial measure. A non-IFRS financial measure is not a standardized financial measure under the financial reporting framework used to year-over-year comparison information for comparable storesprepare our financial statements and e-commerce. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation. As a result, data regarding comparable sales maymight not be comparable to similarly titled data fromsimilar financial measures used by other retailers.issuers. Refer to the Non-IFRS and other financial measures section, for definitions of these metrics and reconciliations to the most comparable IFRS measures.
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The fiscal year ended February 3, 2018 included 53 weeks instead of
As we have transitioned to generating sales primarily from our online stores, measuring the normal 52 weeks which are includedchange in the fiscal year ended February 2, 2019. As a result, changes inperiod-over-period comparable same store sales, are not consistent with changesalthough still a valid measure within our retail sales channel, loses its significance in net sales reported for other fiscal periods.
Measuring the change in year-over-year comparable sales allows us to evaluateoverall evaluation of how our business is performing. Various factors affect comparableOther measures such as sales including: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 | |
· | the number of customer transactions and average ticket online; | |
|
|
|
| · | |
the pricing of our tea, tea | ||
|
|
|
| · |
Non-Comparable Sales. Non-comparable sales include sales from stores prior to the beginning of their thirteenth fiscal month of operation and wholesale sales channel, which includes sales to grocery, hotels, restaurants and institutions, office and workplace locations and food services, as well as corporate gifting. As we pursue our growth strategy, we expect that a significant percentage of our sales will continue to come from non-comparable sales.
Gross Profit. Gross profit is equal to our sales less our cost of sales. Cost of sales includes product costs, freight costs, certain store occupancy costs, assembly, and distribution costs.
Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) consist of store operating expenses and other general and administration expenses, including store impairments and provision for onerous contracts.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 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 AdjustedResults from Operating Activities. Results from operating activities consist of our gross profit less our selling, general and administration expenses, and Restructuring Plan activities, net.
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.
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Selected Operating and Financial Highlights
Results of Operations
Sales during the fourth quarter of $39.9 million declined by $0.3 million or 0.8% over the prior year quarter. Adjusted EBITDA(1) in the fourth quarter of Fiscal 2021 was $3.7 million compared to $5.4 million in the prior year quarter. Sales in Fiscal 2021 of $104.1 million declined by $17.6 million or 14.5% over the prior year. Adjusted EBITDA in Fiscal 2021 of $5.3 million declined by $4.4 million compared to the prior year.
The following table summarizes key components of our results of operations for the period indicated:
|
| For the three months ended |
|
| For the twelve months ended |
| ||||||||||
|
| January 29, |
|
| January 30, |
|
| January 29, |
|
| January 30, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Consolidated statement of income (loss) data: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sales |
| $ | 39,878 |
|
| $ | 40,189 |
|
| $ | 104,073 |
|
| $ | 121,686 |
|
Cost of sales |
|
| 24,055 |
|
|
| 24,544 |
|
|
| 60,871 |
|
|
| 71,953 |
|
Gross profit |
|
| 15,823 |
|
|
| 15,645 |
|
|
| 43,202 |
|
|
| 49,733 |
|
Selling, general and administration expenses |
|
| 14,402 |
|
|
| 10,581 |
|
|
| 42,923 |
|
|
| 46,464 |
|
Restructuring plan activities, net |
|
| 107 |
|
|
| 32,310 |
|
|
| (76,857 | ) |
|
| 56,327 |
|
Results from operating activities |
|
| 1,314 |
|
|
| (27,246 | ) |
|
| 77,136 |
|
|
| (53,058 | ) |
Finance costs |
|
| 48 |
|
|
| 13 |
|
|
| 152 |
|
|
| 3,273 |
|
Finance income |
|
| (25 | ) |
|
| (37 | ) |
|
| (143 | ) |
|
| (399 | ) |
Net income (loss) before income taxes |
|
| 1,291 |
|
|
| (27,222 | ) |
|
| 77,127 |
|
|
| (55,932 | ) |
Recovery of income tax |
|
| — |
|
|
| — |
|
|
| (1,000 | ) |
|
| — |
|
Net income (loss) |
| $ | 1,291 |
|
| $ | (27,222 | ) |
| $ | 78,127 |
|
| $ | (55,932 | ) |
Percentage of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of sales |
|
| 60.3 | % |
|
| 61.1 | % |
|
| 58.5 | % |
|
| 59.1 | % |
Gross profit |
|
| 39.7 | % |
|
| 38.9 | % |
|
| 41.5 | % |
|
| 40.9 | % |
Selling, general and administration expenses |
|
| 36.1 | % |
|
| 26.3 | % |
|
| 41.2 | % |
|
| 38.2 | % |
Restructuring plan activities, net |
|
| 0.3 | % |
|
| 80.4 | % |
|
| (73.8 | )% |
|
| 46.3 | % |
Results from operating activities |
|
| 3.3 | % |
|
| (67.8 | )% |
|
| 74.1 | % |
|
| (43.6 | )% |
Finance costs |
|
| 0.1 | % |
|
| 0.0 | % |
|
| 0.1 | % |
|
| 2.7 | % |
Finance income |
|
| (0.1 | )% |
|
| (0.1 | )% |
|
| (0.1 | )% |
|
| (0.3 | )% |
Net income (loss) |
|
| 3.2 | % |
|
| (67.7 | )% |
|
| 75.1 | % |
|
| (46.0 | )% |
Other financial and operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (1) |
| $ | 3,696 |
|
| $ | 5,383 |
|
| $ | 5,251 |
|
| $ | 9,649 |
|
Adjusted EBITDA as a percentage of sales |
|
| 9.3 | % |
|
| 13.4 | % |
|
| 5.0 | % |
|
| 7.9 | % |
Adjusted SG&A (1) |
| $ | 13,894 |
|
| $ | 11,631 |
|
| $ | 43,674 |
|
| $ | 48,397 |
|
Adjusted results from operating activities (1) |
| $ | 1,929 |
|
| $ | 4,014 |
|
| $ | (472 | ) |
| $ | 1,336 |
|
Adjusted net income (loss) (1) |
| $ | 1,906 |
|
| $ | 4,038 |
|
| $ | (481 | ) |
| $ | (1,538 | ) |
_________
(1) | For a reconciliation of Adjusted EBITDA, Adjusted SG&A, Adjusted results from operating activities, and Adjusted net income (loss), to the most directly comparable measure calculated in accordance with IFRS, see “Non-IFRS financial measures and ratios” below. |
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Non-IFRS Financial Measures and Ratios
The Company uses certain non-IFRS financial measures and ratios for purposes of comparison to prior periods, to prepare annual operating budgets, and for the development of future projections. These measures and ratios 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 and ratios by providing further understanding of our results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS.
We present the following non-IFRS financial measures;
(a) “Adjusted selling, general and administration expenses” is presented as a supplemental measure because we believe it facilitates a comparative assessment of our selling, general and administration expenses under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure on page 35 of this Annual Report on Form 10-K.
Results from Operating Activities. Results from operating activities consist of our gross profit less our selling, general and administration expenses.
We present adjusted(b) “Adjusted results from operating activitiesactivities” is presented as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure on page 35 of this Annual Report on Form 10-K.
Finance Costs. Finance costs consist(c) “Adjusted net income (loss)” is presented as a supplemental performance measure because we believe it facilitates a comparative assessment of cash and imputed non-cash charges relatedour operating performance relative to our credit facility, long-term debt and finance lease obligations.performance based on our results under IFRS, while isolating the effects of some items that vary from period to period.
Finance Income. Finance income consists of interest income on cash balances.
Provision for Income Tax. Provision for income tax consists of federal, provincial, state and local current and deferred income taxes.
Adjusted EBITDA. We present Adjusted EBITDA(d) “Adjusted EBITDA” is presented as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. Specifically, Adjusted EBITDA allows for an assessment of our operating performance and our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, finance costs, deferred rent, non-cash compensation expense, costs related to onerous contracts or contracts where we expect the costs of the obligations to exceed the economic benefit, gain (loss) on derivative financial instruments, 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. For a reconciliation of net loss to Adjusted EBITDA, refer to page 37 of this Annual Report on Form 10-K.
Selected OperatingManagement believes that these non-IFRS financial measures and Financial Highlights
Resultsratios in addition to IFRS measures and ratios provide users of Operationsour financial reports with enhanced understanding of our results and related trends and increases the transparency and clarity of the core results of our business.
The following table summarizes key componentsuse of non-IFRS financial measures and ratios provide complementary information that exclude items that do not reflect our core performance or where their exclusion would assist users in understanding our results for the period. For these reasons, a significant number of users of the MD&A analyze our results based on these financial measures. Management believes these measures help users of MD&A to better analyze results, enabling better comparability of our results of operations for thefrom one period indicated:to another and with peers.
For the three months ended For the twelve months ended February 2, February 3, February 2, February 3, 2019 2018 2019 2018 Consolidated statement of loss data: Sales Cost of sales Gross profit Selling, general and administration expenses Results from operating activities Finance costs Finance income Loss before income taxes Provision for income tax Net loss $ $ Percentage of sales: Sales Cost of sales Gross profit Selling, general and administration expenses Results from operating activities % % % % Finance costs Finance income % % % % Loss before income taxes % % % % Provision for income tax Net loss % % % % Other financial and operations data: Adjusted EBITDA (1) $ Adjusted EBITDA as a percentage of sales % Number of stores at end of year Comparable sales growth (decline) for year (2) % % %$ 83,144 $ 86,662 $ 212,753 $ 224,015 43,581 42,178 114,774 116,772 39,563 44,484 97,979 107,243 40,857 52,926 125,722 131,930 (1,294 ) (8,442 ) (27,743 ) (24,687 ) 1,377 1,756 1,614 2,371 (126 ) (147 ) (700 ) (567 ) (2,545 ) (10,051 ) (28,657 ) (26,491 ) 10,733 6,040 4,882 2,010 (13,278 ) (16,091 ) $ (33,539 ) $ (28,501 ) 100.0 % 100.0 % 100.0 % 100.0 % 52.4 % 48.7 % 53.9 % 52.1 % 47.6 % 51.3 % 46.1 % 47.9 % 49.1 % 61.1 % 59.1 % 58.9 % -1.6 -9.7 -13.0 -11.0 1.7 % 2.0 % 0.8 % 1.1 % -0.2 -0.2 -0.3 -0.3 -3.1 -11.6 -13.5 -11.8 12.9 % 7.0 % 2.3 % 0.9 % -16.0 -18.6 -15.8 -12.7 $ 10,940 16,397 $ (1,272 ) $ 12,819 13.2 % 18.9 % -0.6 5.7 % 237 240 237 240 -1.6% -6.0 -6.1 -6.0
__________
Non-IFRS Metrics
Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted EBITDA and Adjusted Net Income are not a presentation made in accordance with IFRS, and the use of the term Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted EBITDA, and Adjusted Net Income may differ from similar measures reported by other companies. We believe that Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted EBITDA, and Adjusted Net Incomealthough 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 EBITDA and Adjusted Net Income are not measurements of our financial performance under IFRS and should not be considered in isolation or as an alternative to net income (loss), 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 EBITDA and Adjusted Net Income are frequently used by securities analysts, lenders, and others in their evaluation of companies, it hasthey 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 |
|
|
|
| · | Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net income (loss) and Adjusted EBITDA do not reflect the cash requirements necessary to fund capital expenditures; and |
· | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements. |
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Because of these limitations, Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted EBITDA, and Adjusted Net Incomethese 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 present a reconciliationprovide reconciliations of Adjusted Selling, Generalour non-IFRS financial measures and Administration expenses, Adjusted results from Operating Activities, Adjusted EBITDAratios to our net loss, Adjusted Net Income (Loss) and Adjusted Fully Diluted Income (Loss) per common share 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 twelve months ended February 2, February 3, February 2, February 3, 2019 2018 2019 2018 Selling, general and administration expenses Executive separation costs (a) Impairment of property and equipment and intangible assets (b) Impact of onerous contracts (c) Strategic review and proxy contest costs (d) ERP project termination (e) Adjusted selling, general and administration expenses $ 40,857 $ 52,926 $ 125,722 $ 131,930 (440 ) (151 ) (1,280 ) (2,225 ) (6,675 ) (10,098 ) (9,960 ) (15,069 ) (66 ) (11,767 ) (552 ) (7,854 ) (55 ) - (3,593 ) - (2,496 ) - (2,496 ) - $ 31,125 $ 30,910 $ 107,841 $ 106,782
|
| For the three months ended |
|
| For the twelve months ended |
| ||||||||||
|
| January 29, |
|
| January 30, |
|
| January 29, |
|
| January 30, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Selling, general and administration expenses |
| $ | 14,402 |
|
| $ | 10,581 |
|
| $ | 42,923 |
|
| $ | 46,464 |
|
Impairment of property and equipment and right-of-use assets (a) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,561 | ) |
Software implementation costs (b) |
|
| (504 | ) |
|
| — |
|
|
| (3,599 | ) |
|
| — |
|
Government emergency wage and rent subsidy (c) |
|
| (4 | ) |
|
| 1,050 |
|
|
| 4,350 |
|
|
| 4,494 |
|
Adjusted selling, general and administration expenses |
| $ | 13,894 |
|
| $ | 11,631 |
|
| $ | 43,674 |
|
| $ | 48,397 |
|
___________
(a) | |
Represents costs related to impairment of property, equipment and | |
(b) | Represents non-recurring costs related to implementation and configuration of software solutions. |
(c) | Represents |
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 |
|
| For the twelve months ended |
| ||||||||||
|
| January 29, |
|
| January 30, |
|
| January 29, |
|
| January 30, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Results from operating activities |
| $ | 1,314 |
|
| $ | (27,246 | ) |
| $ | 77,136 |
|
| $ | (53,058 | ) |
Impairment of property and equipment and right-of-use assets (a) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,561 |
|
Software implementation costs (b) |
|
| 504 |
|
|
| — |
|
|
| 3,599 |
|
|
| — |
|
Restructuring plan activities, net (c) |
|
| 107 |
|
|
| 32,310 |
|
|
| (76,857 | ) |
|
| 56,327 |
|
Government emergency wage and rent subsidy (d) |
|
| 4 |
|
|
| (1,050 | ) |
|
| (4,350 | ) |
|
| (4,494 | ) |
Adjusted results from operating activities |
| $ | 1,929 |
|
| $ | 4,014 |
|
| $ | (472 | ) |
| $ | 1,336 |
|
For the three months ended For the twelve months ended February 2, February 3, February 2, February 3, 2019 2018 2019 2018 Results from operating activities Executive separation costs (a) Impairment of property and equipment and intangible assets (b) Impact of onerous contracts (c) Strategic review and proxy contest costs (d) ERP project termination (e) Adjusted results from operating activities ________ $ (1,294 ) $ (8,442 ) $ (27,743 ) $ (24,687 ) 440 151 1,280 2,225 6,675 10,098 9,960 15,069 66 11,767 552 7,854 55 - 3,593 - 2,496 - 2,496 - $ 8,438 $ 13,574 $ (9,862 ) $ 461
__________
(a) | Represents costs related to impairment of property, equipment and |
(b) | Represents non-recurring costs related to implementation and configuration of software solutions. |
(c) | Represents the costs related to the Restructuring Plan activities, net. |
(d) | Represents the wages and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan. |
Reconciliation of Net income (loss) to Adjusted EBITDA
|
| For the three months ended |
|
| For the twelve months ended |
| ||||||||||
|
| January 29, |
|
| January 30, |
|
| January 29, |
|
| January 30, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net income (loss) |
| $ | 1,291 |
|
| $ | (27,222 | ) |
| $ | 78,127 |
|
| $ | (55,932 | ) |
Finance costs |
|
| 48 |
|
|
| 13 |
|
|
| 152 |
|
|
| 3,273 |
|
Finance income |
|
| (25 | ) |
|
| (37 | ) |
|
| (143 | ) |
|
| (399 | ) |
Depreciation and amortization |
|
| 1,299 |
|
|
| 1,327 |
|
|
| 4,318 |
|
|
| 7,493 |
|
Recovery of income taxes |
|
| — |
|
|
| — |
|
|
| (1,000 | ) |
|
| — |
|
EBITDA |
| $ | 2,613 |
|
| $ | (25,919 | ) |
| $ | 81,454 |
|
| $ | (45,565 | ) |
Additional adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense (a) |
|
| 468 |
|
|
| 42 |
|
|
| 1,405 |
|
|
| 820 |
|
Impairment of property and equipment and right-of-use assets (b) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,561 |
|
Software implementation costs (c) |
|
| 504 |
|
|
| — |
|
|
| 3,599 |
|
|
| — |
|
Restructuring plan activities, net (d) |
|
| 107 |
|
|
| 32,310 |
|
|
| (76,857 | ) |
|
| 56,327 |
|
Government emergency wage and rent subsidy (e) |
|
| 4 |
|
|
| (1,050 | ) |
|
| (4,350 | ) |
|
| (4,494 | ) |
Adjusted EBITDA |
| $ | 3,696 |
|
| $ | 5,383 |
|
| $ | 5,251 |
|
| $ | 9,649 |
|
________
(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 | |
(d) | Represents the costs related to the |
(e) | Represents the wages and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan. |
34 |
Table of Contents |
Reconciliation of Net income (loss) to Adjusted EBITDA to our net lossincome (loss)
|
| For the three months ended |
|
| For the twelve months ended |
| ||||||||||
|
| January 29, |
|
| January 30, |
|
| January 29, |
|
| January 30, |
| ||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Net income (loss) |
| $ | 1,291 |
|
| $ | (27,222 | ) |
| $ | 78,127 |
|
| $ | (55,932 | ) |
Impairment of property and equipment and right-of-use assets (a) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,561 |
|
Software implementation costs (b) |
|
| 504 |
|
|
| — |
|
|
| 3,599 |
|
|
| — |
|
Restructuring plan activities, net (c) |
|
| 107 |
|
|
| 32,310 |
|
|
| (76,857 | ) |
|
| 56,327 |
|
Government emergency wage and rent subsidy (d) |
|
| 4 |
|
|
| (1,050 | ) |
|
| (4,350 | ) |
|
| (4,494 | ) |
Recovery of income taxes (e) |
|
| — |
|
|
| — |
|
|
| (1,000 | ) |
|
| — |
|
Adjusted net income (loss) |
| $ | 1,906 |
|
| $ | 4,038 |
|
| $ | (481 | ) |
| $ | (1,538 | ) |
For the three months ended For the twelve months ended February 2, February 3, February 2, February 3, 2019 2018 2019 2018 Net loss Finance costs Finance income Depreciation and amortization Recovery of income tax EBITDA Additional adjustments : Stock-based compensation expense (a) Executive separation costs related to salary (b) Impairment of property and equipment and intangible assets (c) Impact of onerous contracts (d) Deferred rent (e) Loss on disposal of property and equipment Strategic review and proxy contest costs (f) ERP project termination (g) Adjusted EBITDA _______ $ (13,278 ) $ (16,091 ) $ (33,539 ) $ (28,501 ) 1,377 1,756 1,614 2,371 (126 ) (147 ) (700 ) (567 ) 2,105 2,341 8,203 9,905 10,733 6,040 4,882 2,010 $ 811 $ (6,101 ) $ (19,540 ) $ (14,782 ) 218 283 211 2,021 440 151 1,280 2,033 6,675 10,098 9,960 15,069 66 11,767 552 7,854 42 165 25 542 137 34 151 82 55 - 3,593 - 2,496 - 2,496 - $ 10,940 $ 16,397 $ (1,272 ) $ 12,819
_________
(a) | |
Represents costs related to impairment of property, | |
(b) | |
Represents | |
(c) | Represents the costs related to the |
(d) | |
Represents |
Reconciliation of reported results to Adjusted Net Income (Loss)
For the three months ended For the twelve months ended February 2, February 3, February 2, February 3, 2019 2018 2019 2018 Net loss Executive separation costs (a) Impairment of property and equipment and intangible assets (b) Impact of onerous contracts and accretion expense (c) Strategic review and proxy contest costs (d) ERP project termination (e) Income tax expense adjustment (f) Write-down of deferred income tax assets (g) Provision for uncertain tax positions (h) Impact of change in U.S. tax rates (i) Adjusted net income (loss)$ (13,278 ) $ (16,091 ) $ (33,539 ) $ (28,501 ) 440 151 1,280 2,225 6,675 10,098 9,960 15,069 140 13,501 803 10,146 55 - 3,593 - 2,496 - 2,496 - (2,687 ) (6,313 ) (4,866 ) (7,444 ) 9,500 6,409 9,500 6,409 3,060 - 4,000 - - 1,986 - 1,986 $ 6,401 $ 9,741 $ (6,773 ) $ (110 )
________
(e) | |
Represents | |
Restructuring Plan activities. | |
Reconciliation of fullyFully diluted net loss per common share to adjustedAdjusted fully diluted net income (loss) per common share
|
| For the three months ended |
| For the twelve months ended |
| |||||||||||||||||||||||||||
|
| February 2, |
| February 3, |
|
| February 2, |
| February 3, |
|
| For the three months ended |
| For the twelve months ended |
| |||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| January 29, |
| January 30, |
| January 29, |
| January 30, |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| |||||||||||
Weighted average number of shares outstanding, fully diluted |
| 26,010,544 |
| 25,874,769 |
| 25,967,836 |
| 25,716,186 |
|
| 27,614,734 |
| 26,228,206 |
| 27,644,498 |
| 26,168,848 |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Adjustment for anti-dilution (a) |
| - |
| 247,008 |
| - |
| - |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Adjusted weighted average number of shares outstanding, fully diluted |
| 26,010,544 |
| 26,121,777 |
| 25,967,836 |
| 25,716,186 |
|
| 27,614,734 |
| 27,140,065 |
| 26,323,469 |
| 26,168,848 |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net loss |
| $ | (13,278 | ) |
| $ | (16,091 | ) |
| $ | (33,539 | ) |
| $ | (28,501 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Net income (loss) |
| $ | 1,291 |
| $ | (27,222 | ) |
| $ | 78,127 |
| $ | (55,932 | ) | ||||||||||||||||||
Adjusted net income (loss) |
| $ | 6,401 |
| $ | 9,741 |
| $ | (6,773 | ) |
| $ | (110 | ) |
| $ | 1,906 |
| $ | 4,038 |
| $ | (481 | ) |
| $ | (1,538 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net loss per share, fully diluted |
| $ | (0.51 | ) |
| $ | (0.62 | ) |
| $ | (1.29 | ) |
| $ | (1.11 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Net earnings (loss) per share, fully diluted |
| $ | 0.05 |
| $ | (1.00 | ) |
| $ | 2.97 |
| $ | (2.14 | ) | ||||||||||||||||||
Adjusted net income (loss) per share, fully diluted |
| $ | 0.25 |
| $ | 0.37 |
| $ | (0.26 | ) |
| $ | (0.00 | ) |
| $ | 0.07 |
| $ | 0.15 |
| $ | (0.02 | ) |
| $ | (0.06 | ) |
Operating Resultsresults for the Fourth Quarterfourth quarter of 2018 Comparedfiscal 2021 compared to the Operating Resultsoperating results for the Fourth Quarterfourth quarter of 2017fiscal 2020
Sales. Sales decreased 4.1%0.8% to $83.1$39.9 million from $86.7$40.2 million in the fourth quarter of Fiscal 2017.2020. Sales through e-commerce and wholesale channelsin Canada of $31.4 million, representing 79% of total revenues, increased $2.5$0.4 million and 20.2% driven primarilyor 1.1% over the prior year quarter. U.S. sales of $8.5 million declined by greater online adoption in both Canada and$0.7 million or 7.3% over the U.S., asprior year quarter. Our gifting assortment performed well, as our entry into grocery chain distribution earlier this year.with sales amounting to $18.7 million, representing an increase of $4.3 million or 30% over the prior year quarter. Offsetting this was a decline in retail sales of $5.9our tea and hard-goods assortment over the same period in the prior year. Sales from e-commerce and wholesale channels decreased by $4.4 million partially explained by $3.1or 14.3% to $30.7 million, from one less week$35.0 million in the prior year quarter as we transition from last year’s pandemic-fueled surge of online sales to serving consumers throughout our fiscal 2018 calendar yearomni-channel capabilities. E-commerce and a decline of $3.2 million and 1.6% in comparable sales.
Gross Profit. Gross profit decreased by $4.9 million to $39.6 million and decreased as a percentagewholesale sales represented 77% of sales compared to 47.6% from 51.3%, resulting from a shift87% of sales in productthe prior year quarter. Brick-and-mortar sales mix andfor the deleveragingquarter of fixed costs due to negative comparable sales.
Selling, General and Administration Expenses. Selling, general and administration expenses decreased by $12.1$9.2 million to $40.9 million comparedcompares favorably to the prior year quarter. As a percentagequarter by $4.0 million, explained by an increase in same store comparable sales, in part due to more days of sales selling, general and administration expenses decreasedduring the current year fourth quarter due to 49.1% from 61.1%. Adjusted SG&A, which excludes any impact from executive separation costs, impairment of property and equipment and intangibles assets, onerous contracts, costsfewer closures related to strategic reviewthe pandemic and proxy contest and ERP project termination costs,the introduction of kiosks in Fiscal 2021 which generated sales of $0.6 million.
Gross Profit. Gross profit increased by $0.2 million1.1% to $31.1 million. As a percentage of sales, Adjusted selling, general and administration expenses increased to 37.4% from 35.7%, due to the deleveraging of fixed costs as a result of negative comparable sales this quarter.
Results from Operating Activities. Loss from operating activities was $1.3 million as compared to $8.4$15.8 million in the fourth quarter of Fiscal 2017. Adjusted results2021 from operating activities, which excludes any impact from executive separationthe prior year quarter due to an increase in product margins and a decrease in delivery and distribution costs, impairment of property and equipment and intangibles assets, onerous contracts, costs related to strategic review and proxy contest and ERP project termination costs was $8.4 millionpartially offset by higher retail lease expenses, compared to $13.6 millionthe prior year quarter. Gross profit as a percentage of sales increased to 39.7% for the quarter compared to 38.9% in the prior year quarter.
Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) increased by $3.8 million or 36.1% to $14.4 million in the quarter compared to the prior year quarter. Excluding the impact of non-recurring software implementation and configuration costs and the impact of the wage and rent subsidies received under the Canadian government COVID-19 Economic Response Plan, Adjusted SG&A increased by $2.3 million to $13.9 million in the quarter primarily due to increases in online marketing expenses as we continue the transformation to a digital first organization, additional staff to support our brick and mortar stores, and additional professional and recurring software related costs. Adjusted SG&A as a percentage of sales in the quarter increased to 34.8% from 28.9% in the prior year quarter.
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Restructuring plan activities, net. Restructuring plan activities, net includes an expense of $0.1 million compared to an expense of $32.3 million in the prior year quarter and is explained by provisions in connection with lease terminations, amounts due to vendors, store closure costs and professional fees in connection with our formal restructuring activities.
Results from Operating Activities. Results from operating activities during the quarter were $1.3 million as compared to a loss of $27.2 million in the prior year quarter. Excluding the impact of the Restructuring Plan announced on July 8, 2020, and concluded in September 2021, the wage subsidy received from the Canadian government under the COVID-19 Economic Response Plan, and non-recurring software implementation costs, Adjusted operating income amounted to $1.9 million in the three-month period ended January 29, 2022 compared to $4.0 million in the prior year quarter. The decrease in operating results is explained by an increase in SG&A costs, as noted above.
Finance Costs.Costs. Finance costs decreased by $0.4 millionamounted to $1.4 million$48 thousand in Fiscal 2018 resultingthe three months ended January 29, 2022, an increase of $35 thousand from lower accretion expense of $1.7 million offset by an interest accrual of $1.3 million regarding uncertain tax provisions. the prior year quarter.
Finance Income.Income. Finance income remained stable at $0.1 million in both Fiscal 2018 and Fiscal 2017, as a result of $25 thousand is derived mainly from interest income generated on cash on hand.hand and has decreased slightly from $37 thousand from the prior year quarter.
Provision (Recovery) for Income Tax. Provision for income tax increased by $4.7 million, to $10.7 million in Fiscal 2018. The increase in the provision for income taxes was due primarily to a write-down of the deferred income tax assetsEBITDA and a provision for uncertain tax position.
Adjusted EBITDA. Adjusted EBITDA, which excludes non-cash orand other items in the current and prior periods, was $10.9 million compared to $16.4$2.6 million in the fourth quarter of Fiscal 2017.
Net Income (Loss). Net loss was $13.3 millionended January 29, 2022, compared to a net loss of $16.1negative $25.9 million in the fourthprior year quarter representing an increase of Fiscal 2017.$28.5 million over the prior year quarter. Adjusted net income,EBITDA for the quarter ended January 29, 2022, which excludes anythe impact from executive separation costs,of stock-based compensation expense, the impairment of property and equipment and intangiblesright-of-use assets, onerous contractsthe Restructuring Plan activities, net, the wage and accretion,rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan, and non-recurring software implementation costs related to strategic review and proxy contest, ERP project termination costs, and provision for uncertain tax positions, was $6.4$3.7 million compared to $9.7 million.$5.4 million for the same period in the prior year. The decrease in Adjusted EBITDA, of $1.7 million, reflects the impact of increased Adjusted SG&A of $2.3 million comprised of increases in online marketing expenses as we continue the transformation to a digital first organization, additional staff to support our brick-and-mortar stores, and additional professional and recurring software related costs. These costs were partially offset by improved Gross profit resulting from an increase in product margins and a decrease in delivery and distribution costs, partially offset by higher retail lease expenses, compared to the prior year quarter. All is an outcome of the continued transformation efforts resulting in the realignment of the business model to primarily an e-commerce and wholesale distribution model.
Net Income (Loss) per Share.Fully diluted lossnet income (loss) per share. Fully diluted net income per common share was $0.51$0.05 compared to $0.62a fully diluted net loss of $1.00 in the fourth quarter of Fiscal 2017.prior year quarter. Adjusted fully diluted lossnet income per common share, which is adjustedAdjusted net income on a fully-dilutedfully diluted weighted average shares outstanding basis, was $0.25 per share$0.07 compared to $0.37 per share.$0.15 in the prior year quarter.
Cash on Hand.hand. At the end of the fourth quarter of Fiscal 2021, the Company had cash amounting to $42.1$25.1 million. Our strong cash position enables us to execute our strategy and invest further in our e-commerce platform.funding working capital, transformative technology improvements and related infrastructure.
Operating results for the Fiscal Year Ended February 2, 2019 Comparedended January 29, 2022 compared to Fiscal Year Ended February 3, 2018ended January 30, 2021
Sales.Sales. Sales for Fiscal 20182021 decreased 5%,by 14.5% or $11.3by $17.6 million, to $212.8$104.1 million from $224.0$121.7 million in Fiscal 2017, comprising $16.42020. Sales in Canada of $82.5 million, representing 79.3% of total revenues, decreased $10.0 million or 10.8% over the prior year. U.S. sales of $21.6 million decreased by $7.6 million or 26.1% over the prior year. Our gifting assortment performed well, with sales amounting to $40.2 million, representing an increase of $3.3 million or 8.8% over the prior year. Offsetting this was a decline in our tea and hard-goods assortment over the prior year. Sales from e-commerce and wholesale channels decreased by $13.7 million or 14.1% to $83.5 million from $97.1 million in comparablethe prior year as we transition from last year’s pandemic-fueled surge of online sales decreaseto serving consumers throughout our omni-channel capabilities. E-commerce and $5.1 million increasewholesale sales represented 80.2% of sales compared to 79.8% of sales in non‑comparable sales. For Fiscal 2018, comparablethe prior year. Brick-and-mortar sales decreased by 6.1% and non‑comparable$3.9 million or 16.1% to $20.6 million from $24.5 million in the prior year. Excluding stores that were permanently shuttered on March 17, 2020, sales for our current 18 stores increased primarily dueby $8.6 million or 74.5% to e-commerce and wholesale channel sales driven primarily by greater online adoption$20.0 million from $11.4 million in both Canada and the U.S., as well as our entry into grocery chain distribution.prior year.
36 |
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Gross Profit. Gross profit decreased by 8.6%, or $9.313.1% and $6.5 million, to $98.0$43.2 million in Fiscal 2018 from $107.2 million2021 in comparison to Fiscal 2017.2020 due primarily to a decline in sales during the year and a lower gross margin, partially offset by lower delivery and distribution costs and lower retail lease expense compared to the prior year. Gross profit as a percentage of sales decreasedincreased to 46.1%41.5% for the year ended January 29, 2022, from 40.9% in Fiscal 2018 from 47.9% in Fiscal 2017. The decrease in gross profit as a percent of sales was primarily due to deleveraging of fixed costs due to the negative 6.1% comparative sales for theprior year.
Selling, General and Administration Expenses. Selling, general and administration expenses SG&A decreased by 4.7%$3.5 million or 7.6%, or $6.2 million, to $125.8$42.9 million in Fiscal 2018 from $131.92021. Excluding the impact of non-recurring software implementation and configuration costs and the impact of the wage and rent subsidies received under the Canadian government COVID-19 Economic Response Plan in the year ended January 29, 2022, Adjusted SG&A decreased by $4.7 million to $43.7 million for the year ended January 29, 2022. In connection with our Restructuring Plan, we terminated the leases for all our stores in North America in Fiscal 2017.2020, except for 18 Canadian stores which reopened on August 21, 2020. As a result, wages, salaries, and employee benefits were reduced by $4.8 million. Adjusted SG&A as a percentage of sales selling, general and administration expenses decreased to 59.1% in Fiscal 2018 from 58.9% in Fiscal 2017. Excluding employee separation costs, impairment of property and equipment and intangibles assets, impact of onerous contracts, cessation of ERP project, as well as loss on disposal of property and equipment in Fiscal 2018, selling, general and administration expenses increased 0.9% to $107.8 million in Fiscal 2018 from $106.8 million in Fiscal 2017, due primarily salaries of new 2017 stores going full year in 2018 as well as higher for comparable stores. As a percentage of sales, selling, general and administration expenses excluding the impacts referenced above increased to 50.7%42.0% from 47.7%39.8%.
Restructuring plan activities, net. Restructuring plan activities, net includes a gain of $76.9 million compared to a loss of $56.3 million in the prior year. Included in this period’s gain is the impact of the Sanction Order that was granted on June 16, 2021. Therein, net liabilities subject to compromise amounting to $95.3 million were settled according to the Sanction Order by payment of $17.6 million through the Monitor to creditors who had duly proven their claims as part of the claims process. The resulting gain of $79.9 million was reduced by $2.0 million of professional fees in connection with the CCAA proceedings and presented in the consolidated statements of income (loss) and comprehensive income (loss).
Results from Operating Activities. LossResults from operating activities increased by $3.1 million, to $(27.8) million in Fiscal 2018 from $(24.7)2021 were $77.1 million in Fiscal 2017. Excluding executive separation costs, impairment of property and equipment and intangible assets, impact of onerous contracts, ERP termination project as well as the loss on disposal of property and equipment in Fiscal 2018, results from operating activities decreasedcompared to a loss of $(9.9)$53.1 million in Fiscal 20182020. Excluding the impact of the Restructuring Plan announced on July 8, 2020, the wage and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan, and non-recurring software implementation costs, Adjusted operating loss amounted to $0.5 million in Fiscal 2017.the year ended January 29, 2022, compared to income of $1.3 million in the prior year. The decrease in operating results is explained by a sales decrease of $17.6 million, partially offset by a reduction in operating costs.
Finance Costs. Finance costs amounted to $0.2 million in the year ended January 29, 2022, a decrease of $3.1 million from the prior year. The interest expense relates to the accounting for lease liabilities and has decreased from the prior year due to the reduction in our store footprint.
Finance Income. Finance income of $0.1 million is derived mainly from interest on cash on hand and has decreased slightly from $0.4 million in the prior year.
EBITDA and Adjusted EBITDA. Adjusted EBITDA, which excludes non-cash orand other items in the current and prior periods, was negative $1.3$81.5 million in the year ended January 29, 2022 compared to $12.8negative $45.6 million for Fiscal 2017.
Net Loss. Net loss was $33.5in the prior year representing an improvement of $127.0 million compared to a net loss of $28.5 millionover the prior year. Adjusted EBITDA for the comparable period in Fiscal 2017. Adjusted net lossyear ended January 29, 2022, which excludes anythe impact from executive separation costs,of stock-based compensation expense, the impairment of property and equipment and intangibleright-of-use assets, onerous contracts,the Restructuring Plan activities, net, the wage and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan, and non-recurring software implementation costs was $5.3 million compared to $9.7 million in the prior year. The decrease in Adjusted EBITDA, of $4.4 million comprised of increases in online marketing expenses as we continue the transformation to a digital first organization, additional staff to support our brick-and-mortar stores, and additional professional and recurring software related costs.
Recovery of income tax. Recovery of income tax amounted to strategic review and proxy contest, ERP project termination costs, and$1.0 million compared to $nil in Fiscal 2020. The recovery is due to the adjustment of the provision for uncertain tax positions, was $6.8 million compared to an adjusted net loss $0.1 million in Fiscal 2017.
Finance Costs. Finance costs decreased by $0.8 million to $1.6 million in Fiscal 2018 from $2.4 million in Fiscal 2017, as a result of a lower accretion expense on the provision for onerous contracts.
Finance Income. Finance income increased by $0.1 million, or 23.5%, to $0.7 million in Fiscal 2018 from $0.6 million in Fiscal 2017, as a result of interest income generated on cash on hand.
Provision (Recovery) for Income Tax. Provision for income tax increased by $2.9 million, to $4.9 million in Fiscal 2018. The increase in the provision for income taxes was due primarily to a write-down of the deferred income tax assets and a provision for uncertain tax position.positions. Our effective tax rates were (17.0%)1.3% and (7.6%)$nil in Fiscal 20182021 and 2017,2020, respectively. The effective tax rate decreased as a resultprimarily from the increase of the write-down of theunrecognized deferred income tax assets and an adjustment to the provision for uncertain tax position.positions in the current year.
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Net income (loss). Net income was $78.1 million in the year ended January 29, 2022 compared to a Net loss of $55.9 million in the prior year. Adjusted net loss, which excludes the Restructuring Plan activities, net, the wage and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan, non-recurring software implementation costs and recovery of income taxes amounted to $0.5 million compared to a Net loss of $1.5 million in the prior year. This $1.0 million improvement is driven by the same reasons mentioned above in “Results from operating activities.”
Net Loss per Share.Fully diluted lossearnings (loss) per common share. Fully diluted net earnings per common share was $1.29$2.83 in Fiscal 2021 compared to $1.11a loss of $2.14 in the comparable period of Fiscal 2017.2020. Adjusted fully diluted loss per common share, which is adjustedAdjusted net loss on a fully-dilutedfully diluted weighted average shares outstanding basis, was $0.26 per share$0.02, compared to $0.00 per share.$0.06 in the prior year.
Summary of Quarterly Results
Due to seasonality and the timing of holidays, the results of operations for any quarter are not necessarily indicative of the results of operations for the fiscal year. The table below presents selected consolidated financial data for the eight most recently completed quarters.
Fiscal Year 2021 |
|
| Fiscal Year 2020 |
| ||||||||||||||||||||||||||||
|
| Fourth |
|
| Third |
|
| Second |
|
| First |
|
| Fourth |
|
| Third |
|
| Second |
|
| First |
| ||||||||
|
| Quarter |
|
| Quarter |
|
| Quarter |
|
| Quarter |
|
| Quarter |
|
| Quarter |
|
| Quarter |
|
| Quarter |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Sales |
|
| 39,878 |
|
|
| 22,203 |
|
|
| 18,743 |
|
|
| 23,249 |
|
|
| 40,189 |
|
|
| 26,225 |
|
|
| 23,031 |
|
|
| 32,242 |
|
Net income (loss) |
|
| 1,291 |
|
|
| (1,864 | ) |
|
| 75,478 |
|
|
| 3,221 |
|
|
| (27,222 | ) |
|
| 14,467 |
|
|
| 2,609 |
|
|
| (45,788 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
| 2,613 |
|
|
| (778 | ) |
|
| 75,493 |
|
|
| 4,126 |
|
|
| (25,918 | ) |
|
| 15,295 |
|
|
| 5,426 |
|
|
| (40,367 | ) |
Adjusted EBITDA |
|
| 3,696 |
|
|
| (308 | ) |
|
| (641 | ) |
|
| 2,505 |
|
|
| 5,384 |
|
|
| 3,834 |
|
|
| 1,365 |
|
|
| (935 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 0.05 |
|
|
| (0.07 | ) |
|
| 2.87 |
|
|
| 0.12 |
|
|
| (1.04 | ) |
|
| 0.53 |
|
|
| 0.10 |
|
|
| (1.76 | ) |
Fully diluted |
|
| 0.05 |
|
|
| (0.07 | ) |
|
| 2.75 |
|
|
| 0.12 |
|
|
| (1.00 | ) |
|
| 0.52 |
|
|
| 0.10 |
|
|
| (1.76 | ) |
Adjusted fully diluted |
|
| 0.13 |
|
|
| (0.01 | ) |
|
| (0.07 | ) |
|
| 0.05 |
|
|
| 0.15 |
|
|
| 0.09 |
|
|
| (0.06 | ) |
|
| (0.26 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 26,393,118 |
|
|
| 26,359,969 |
|
|
| 26,299,094 |
|
|
| 26,296,690 |
|
|
| 26,228,206 |
|
|
| 26,214,573 |
|
|
| 26,128,971 |
|
|
| 26,088,127 |
|
Fully diluted |
|
| 27,614,734 |
|
|
| 26,359,969 |
|
|
| 27,455,005 |
|
|
| 27,400,840 |
|
|
| 27,140,065 |
|
|
| 26,767,470 |
|
|
| 26,925,264 |
|
|
| 26,088,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
| 25,107 |
|
|
| 13,367 |
|
|
| 12,051 |
|
|
| 31,321 |
|
|
| 30,197 |
|
|
| 21,925 |
|
|
| 34,285 |
|
|
| 39,343 |
|
Accounts receivable |
|
| 3,209 |
|
|
| 4,602 |
|
|
| 6,986 |
|
|
| 6,625 |
|
|
| 6,157 |
|
|
| 7,669 |
|
|
| 6,757 |
|
|
| 4,371 |
|
Prepaid expenses and deposits |
|
| 4,142 |
|
|
| 4,835 |
|
|
| 5,580 |
|
|
| 11,578 |
|
|
| 14,470 |
|
|
| 13,400 |
|
|
| 8,476 |
|
|
| 4,928 |
|
Inventories |
|
| 31,048 |
|
|
| 39,802 |
|
|
| 38,055 |
|
|
| 29,258 |
|
|
| 23,468 |
|
|
| 26,176 |
|
|
| 24,354 |
|
|
| 23,450 |
|
Trade and other payables |
|
| 12,300 |
|
|
| 13,958 |
|
|
| 12,533 |
|
|
| 6,154 |
|
|
| 4,152 |
|
|
| 3,621 |
|
|
| 6,460 |
|
|
| 18,000 |
|
Liquidity and Capital Resources
As of February 2, 2019at January 29, 2022, we had $42.1$25.1 million of cash compared to $63.5 million as of February 3, 2018. Our workingheld by major Canadian financial institutions.
Working capital was $62.1 million as of February 2, 2019, compared to $77.2$43.4 million as at February 3, 2018.January 29, 2022, compared to $62.7 million, excluding liabilities subject to compromise, as a January 30, 2021. The decrease in working capital is substantially explained by a decrease in cash, accounts and other receivables and prepaid expenses and deposits, an increase in trade and other payables and current portion of lease liabilities, partially offset by an increase in inventory and deferred revenue.
Our primary cash needs are to support the increase in inventories needed to satisfy customer demand and for any capital expenditures related to store renovations.
Our primary sourcessource of liquidity areis cash on hand and borrowings under our Revolving Facility. As of February 2, 2019, we are in default under our Revolving Facility and, notwithstanding we have sufficient cash to operate the business,cashflow generated from operations as we do not currently have access to borrowings under this Revolving Facility. BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement.
We are in good-faith negotiations with BMO to replace the current Revolving Facility with an alternative arrangement that will provide the Company with access to borrowings, if needed. Notwithstanding this, the Company has never drawn on any committed debt facilities.
financing. Our primary working capital requirements are fordriven by the purchase of store inventory, and payment of payroll, rentongoing technology expenditures and other store operating costs.
Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter.
Capital expenditures typically vary depending on the timing of store remodeling, store openings and infrastructure-related investments. During Fiscal 2018, capital expenditures totaled $8.3 million. We devoted approximately 47% of our capital expenditures to construct as well as renovate a number of existing stores. The remainder of the capital expenditures was used to make continued investments in our infrastructure.
We believe that our cash position will be adequatenew business model are not significant and amounted to finance our planned capital expenditures and working capital requirements for the next twelve months.
Cash Flow
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
For the year ended February 2, February 3, 2019 2018 Cash flows provided by (used in): Operating activities Investing activities Financing activities Increase (decrease) in cash $ (13,228 ) $ 9,858 (8,264 ) (12,596 ) 82 1,782 $ (21,410 ) $ (956 )
Cash Flows Provided by Operating Activities
For the year ended February 2, February 3, 2019 2018 Cash flows provided by (used in) operating activities: Net loss Depreciation of property and equipment Amortization of intangible assets Loss on disposal of property and equipment Impairment of property and equipment and intangible assets Deferred rent Provision for onerous contracts Stock-based compensation expense Amortization of financing fees Accretion on provisions Deferred income taxes (recovered) Net change in other non-cash working capital balances related to operations Cash flows provided by operating activities $ (33,539 ) $ (28,501 ) 6,905 8,431 1,298 1,474 1,875 82 9,960 15,069 25 542 6,282 10,321 211 2,021 64 79 251 2,292 5,069 3,585 (11,628 ) (5,537 ) $ (13,228 ) $ 9,858
Net cash provided by operating activities decreased to $(13.2) million$52 in Fiscal 2018 from $9.9 million in Fiscal 2017. The decrease in the cash flows provided by operating activities was due mainly to investment in working capital, primarily inventory and to lower results from operating activities partially offset by lower impairment on property and equipment and provision on onerous contracts.
The increase in inventories of $9.9 million in Fiscal 2018 is primarily related to sales shortfalls. The increase in trade and other payables of $6.6 million is mainly due to increase in inventories in Fiscal 2018 compared to Fiscal 2017.
Cash Flows Used in Investing Activities
Capital expenditures decreased $4.3 million, to $8.3 million in Fiscal 2018 from $12.6 million in Fiscal 2017. This decrease was due primarily to a reduction in new store openings costs and renovations of existing stores.
Cash Flows Provided by Financing Activities
For the year ended February 2, February 3, 2019 2018 Cash flows provided by financing activities: Proceeds from issuance of common shares pursuant to exercise of stock options Cash flows provided by financing activities $ 82 $ 1,782 $ 82 $ 1,782
Net cash provided by financing activities decreased by $1.7 million to $0.1 million in Fiscal 2018 from $1.8 million in Fiscal 2017 due to a decrease in the proceeds from issuance of common shares upon exercise of stock options.
Credit Facility with Bank of Montreal
The Company has a credit arrangement (hereinafter referred to as “Credit Agreement”) with the Bank of Montreal (“BMO”) that provides for a three-year revolving term facility, maturing June 11, 2020, in the principal amount of $15.0 million (which we refer to as the “Revolving Facility”) or the equivalent amount in U.S. dollars, repayable at any time.2021.
As at February 2, 2019, we did not have any borrowingsJanuary 29, 2022, the Company has financial commitments in connection with the purchase of goods and services that are enforceable and legally binding on the Revolving Facility.Company, amounting to $11.3 million, net of $542 of advances (Fiscal 2020 - $14.1 million, net of $6.8 million of advances) which are expected to be discharged within 12 months.
The Credit Agreement subjects us to certain financial covenants. Without the prior written consent of BMO, our fixed charge coverage ratio may not be less than 1.10:1.00 and our leverage ratio may not exceed 3.00:1.00. In addition, our net tangible worth may not be less than $65.0 million.
Borrowings under the Revolving Facility are available in the form of Canadian dollar advances, U.S. dollar advances, prime rate loans, banker’s acceptances, U.S. base rate loans and LIBOR loans. Further, up to an aggregate maximum amount of $2.0 million, or the equivalent amount in other currencies authorized by BMO, is available by way of letters of credit or letters of guarantees for terms of not more than 364 days. The Revolving Facility bears interest based on our adjusted leverage ratio. In the event our adjusted leverage ratio is equal to or less than 3.00:1.00, the Revolving Facility bears interest at (a) the bank’s prime rate plus 0.50% per annum, (b) the bank’s U.S. base rate plus 0.50% per annum, (c) LIBOR plus 1.50% per annum, subject to availability, or (d) 1.50% on the face amount of each banker’s acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of 0.30% will be paid on the daily principal amount of the unused portion of the Revolving Facility. Should our adjusted leverage ratio be greater than 3.00:1.00 but less than 4.00:1.00, the Revolving Facility bears interest at (a) the bank’s prime rate plus 0.75% per annum, (b) the bank’s U.S. base rate plus 0.75% per annum, (c) LIBOR plus 1.75% per annum, subject to availability, or (d) 1.75% on the face amount of each banker’s acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of 0.35% will be paid on the daily principal amount of the unused portion of the Revolving Facility. If our adjusted leverage ratio is greater than 4.00:1.00 but less than 5.00:1.00, the Revolving Facility bears interest at (a) bank’s prime rate plus 1.25% per annum, (b) the bank’s U.S. base rate plus 1.25% per annum, (c) LIBOR plus 2.25% per annum, subject to availability, or (d) 2.25% on the face amount of each banker’s acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of 0.45% will be paid on the daily principal amount of the unused portion of the Revolving Facility. If our adjusted leverage ratio is greater than 5.00:1.00, the Revolving Facility bears interest at (a) bank’s prime rate plus 1.50% per annum, (b) the bank’s U.S. base rate plus 2.50% per annum, (c) LIBOR plus 2.50% per annum, subject to availability, or (d) 2.50% on the face amount of each banker’s acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of 0.50% will be paid on the daily principal amount of the unused portion of the Revolving Facility.
The Credit Agreement is collateralized by a first lien security interest in all of our assets, a general security agreement, registered in each Canadian province in which we do business, creating a first priority charge on all assets. The Credit Agreement is also guaranteed by, and secured by a first lien security interest in all of the assets of, our wholly owned U.S. subsidiary, DAVIDsTEA (USA) Inc.
The Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. We also cannot make any dividend payments. As at February 23, 2018, we were in default under certain covenants contained in our Credit Agreement, including our failure to maintain a fixed charge coverage ratio of 1.10:1.00 and certain reporting requirements. BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement.
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Off‑Balance Sheet Arrangements
Other than operating lease obligations, we have no off‑balance sheet obligations.
Cash Flow
A summary of our cash flows provided by (used in) operating, investing, and financing activities is presented in the following table:
For the twelve months ended | ||||||||
January 29, | January 30, | |||||||
2022 | 2021 | |||||||
$ | $ | |||||||
Cash flows provided by (used in): | ||||||||
Operating activities | (4,241 | ) | (11,269 | ) | ||||
Financing activities | (797 | ) | (6,003 | ) | ||||
Investing activities | (52 | ) | 1,132 | |||||
Decrease in cash | (5,090 | ) | (16,140 | ) |
Cash flows used in operating activities
For the twelve months ended | ||||||||
January 29, | January 30, | |||||||
2022 | 2021 | |||||||
$ | $ | |||||||
OPERATING ACTIVITIES | ||||||||
Net income (loss) | 78,127 | (55,932 | ) | |||||
Items not affecting cash: | — | — | ||||||
Depreciation of property and equipment | 1,586 | 2,399 | ||||||
Amortization of intangible assets | 1,695 | 2,053 | ||||||
Amortization of right-of-use assets | 1,037 | 3,041 | ||||||
Gain on modification of lease liabilities | — | (75,121 | ) | |||||
Loss (gain) on liabilities subject to compromise | (79,861 | ) | 100,550 | |||||
Interest on lease liabilities | 131 | 3,230 | ||||||
Loss on disposal of property and equipment and right-of-use assets | — | 769 | ||||||
Impairment of property and equipment and right-of-use assets | — | 39,960 | ||||||
Loss on disposal of intangible assets | — | 790 | ||||||
Stock-based compensation expense | 1,405 | 820 | ||||||
Sub-total | 4,120 | 22,559 | ||||||
Net change in other non-cash working capital balances related to operations | (8,361 | ) | (33,828 | ) | ||||
Cash flows used in operating activities | (4,241 | ) | (11,269 | ) |
Cash flows used in operating activities. Net cash flows used in operating activities during the year ended January 29, 2022 amounted to $4.2 million. Included in the net change in non-cash working capital balances related to operations is the payment of $17.6 million made to the Company’s creditors to settle obligations according to the Restructuring Plan Sanction Order. Adjusting cashflows used in operating activities for this payment, cash flows provided by operating activities would have amounted to $13.3 million.
Cash flows provided by (used in) investing activities
For the twelve months ended | ||||||||
January 29, | January 30, | |||||||
2022 | 2021 | |||||||
$ | $ | |||||||
INVESTING ACTIVITIES | ||||||||
Additions to property and equipment | (52) | (433) | ||||||
Additions to intangible assets | — | (480) | ||||||
Repayment of loan from a Company controlled by an executive employee | — | 2,045 | ||||||
Cash flows provided by (used in) investing activities | (52) | 1,132 |
Cash flows used in investing activities. Cash flows used in investing activities of $0.1 million during the year ended January 29, 2022 decreased by $1.2 million compared to prior year. The decrease is primarily due to the repayment of a loan from a Company controlled by an executive employee during the prior fiscal year.
39 |
Table of Contents |
Cash flows used in financing activities
For the twelve months ended | ||||||||
January 29, | January 30, | |||||||
2022 | 2021 | |||||||
$ | $ | |||||||
FINANCING ACTIVITIES | ||||||||
Proceed from issuance of common shares pursuant to exercise of stock options | — | 4 | ||||||
Payment of lease liabilities | (797 | ) | (6,007 | ) | ||||
Cash flows used in financing activities | (797 | ) | (6,003 | ) |
Cash flow used in financing activities. Net cash flows used in financing activities of $0.8 million during the year ended January 29, 2022 represents a decrease of $5.2 million compared to the prior year and due primarily to due to a reduction of lease liabilities resulting from the termination of our store leases.
Contractual Obligations and Commitments
In 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 January 29, 2022, the Company has financial commitments in connection with the purchase of goods and services that are enforceable and legally binding on the Company, exclusive of additional amounts based on sales, taxes and other costs. Purchase obligations for goods and minimum annual lease payments under operating leases. The following table summarizes our contractual obligations asservices amounting to $11.3 million, net of February 2, 2019, and the effect such obligations are$542 of advances (Fiscal 2020 - $14.1 million, net of $6.8 million of advances) is expected to have on our liquidity and cash flows in future periods.
|
|
|
|
| Payments due by period |
|
|
|
| |||||||||||
|
|
|
| less than |
|
| Between |
|
| Between |
|
| More than |
| ||||||
|
| Total |
|
| 1 year |
|
| 1 and 3 years |
|
| 3 and 5 years |
|
| 5 years |
| |||||
Trade and other payables |
| $ | 18,251 |
|
| $ | 18,251 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Operating lease obligations (1) |
|
| 116,772 |
|
|
| 21,089 |
|
|
| 66,790 |
|
|
| 28,893 |
|
|
| - |
|
Purchase obligations (2) |
|
| 9,146 |
|
|
| 9,146 |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total |
| $ | 144,169 |
|
| $ | 48,486 |
|
| $ | 66,790 |
|
| $ | 28,893 |
|
| $ | 0 |
|
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 included elsewhere in this Annual Report. There have been no material changes to the critical accounting policies and estimates since January 31, 2021, other than as disclosed in Note 3 to the consolidated financial statements.
Key sources of estimation uncertainty
Key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year are as follows:
i. Recoverability and impairment of non-financial assets. Leasehold improvementsnon‑financial assets
The temporary store closures because of COVID-19, as well as the permanent closure of most of our retail stores resulting from the Restructuring Plan, and furniturethe related reduction in operating income during Fiscal 2020 were considered to be indicators of impairment and the Company performed an assessment of recoverability for the property and equipment are reviewed for impairment if events or changesand right-of-use assets associated with its retail locations.
ii. Estimating the incremental borrowing rate of leases
The Company cannot readily determine the interest rate implicit in circumstances indicatethe lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the carrying amount may notCompany would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be recoverable. A review for impairment is conducted by comparingadjusted to reflect the carrying amountterms and conditions of the Cash Generating Units (CGU)’ assets with their respective recoverable amounts based on value in use. Value in uselease. The Company estimates the IBR using observable inputs (such as market interest rates) when available and is determined based on management’s best estimate of expected future cash flows, which includesrequired to make certain entity and asset-specific estimates of growth rates, from use over(such as the remaining lease term and discounted using a pre‑tax weighted average cost of capital.subsidiary’s stand-alone credit rating).
Table of Contents |
Income taxes. To determine the extent to which deferred income tax assets can be recognized, management estimates the amount of probable future taxable profits that will be available against which deductible temporary differences and unused tax losses can be used. Such estimates are made as part of the budget and strategic plan by tax jurisdiction. Management exercises judgment to determine the extent to which realization of future taxable benefits is probable considering factors such as the number of years included in the forecast period and prudent tax planning strategies.
Intercompany transfer pricing. Our intercompany transfer pricing are currently subject to audit by the CRA. We believe that our intercompany transfer policies and tax positions are reasonable and reflect economic realities documented at the time of implementation. However, it is possible that the final outcome of our audit may be materially different from that which is reflected in our income tax provision.
CriticalSignificant judgments in applying accounting policiesprinciples
We believe the following are critical judgments that management has made in the process of applying accounting policies that have the most significant effect on the amounts recognized in our consolidated financial statements:
i. Impairment of non‑financial assets.assets
Management is required to make significant judgments in determining if individual commercial premises in which it carries out its activities are individual CGUs, or if these units should be aggregated at a district or regional level to form a CGU. The significant judgments applied by management in determining if stores should be aggregated in a given geographic area to form a CGU include the determination of expected customer behavior, the allocation basis of e-commerce sales to CGUs, and whether customers could interchangeably shop in any of the stores in a given area and whether management views the cash flowsinflows of the stores in the group as interdependent.
ii. Income taxes. Wetaxes
The Company may be subject to audits related to tax risks, and uncertainties exist with respect to the interpretation of tax regulations, changes in tax laws, and the amount and timing of future taxable income. Differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income and income tax expense already recorded. We establishThe Company establishes provisions if required, based on reasonable estimates, for possible consequences of audits by the tax authorities. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the entity and the responsible tax authority, which may arise on a wide variety of issues.
iii. Determination of the lease term of leases with renewal options
The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.
The Company has the option, under some of its leases to lease the assets for additional terms of one to three years. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal, including store performance, expected future performance and past business practice. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).
41 |
Table of Contents |
Recently Issued Accounting Standards
Information on significant new accounting standards and amendments issued but not yet adopted is described below.Costs necessary to sell inventories (IAS 2) agenda decision
At its June 2021 meeting, the IFRS 16, “Leases” (“Interpretations Committee finalised an agenda decision about the costs an entity includes as the “estimated costs necessary to make the sale” when determining the net realizable value of inventories. The IFRS 16”) replaces IAS 17, “Leases.” This standard provides a single model for leases abolishingInterpretations Committee concluded that when determining the current distinction between finance and operating leases, with most leases being recognizednet realizable value of inventories, an entity estimates the costs necessary to make the sale in the ordinary course of business, which requires the exercise of judgment. There was no impact on the balance sheet. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019. Early application is permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company expects the adoption of IFRS 16 will have a significant impact as the Company will recognize new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. The Company has elected to apply the modified retrospective method by setting right-of-use assets based on the lease liability at the date of initial application, adjusted by the amount of any prepaid or accrued lease payments, and will benefit from the following practical expedients;Company’s results.
As of February 2, 2019, based on the information currently available, the Company estimates that it will recognize a right-of-use asset of approximately $62,800 to $66,000 and a lease liability of approximately $90,000 to $94,600. The right-of-use asset will be net of the provision for onerous leases and deferred rent and lease inducements relating to the leases recognised in the consolidated balance sheet immediately before the date of initial application. The actual impacts of the initial application of IFRS 16 may vary from the estimates provided, as the Company has not finalized all its calculations.
IFRIC 23, “Uncertainty over Income Tax Treatments”, was issued by the IASB in June 2017. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. The Interpretation requires an entity to:
The Company does not expect a material impact from the adoption of IFRIC 23 on its consolidated financial statements.
JOBS Act Exemptions and Foreign Private Issuer Status
Exchange Act Exemptions and Foreign Private Issuer Status
We do not qualify as an “emerging growth company”“accelerated filer” or “large accelerated filer” as defined in the JOBSExchange Act. An emerging growth companyCompanies that are not an accelerated filer or large accelerated filer may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. This includes an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes‑Oxley Act. We may take advantage of this exemption for up to five yearsuntil such time as we qualify as an accelerated filer or such earlier time that we are no longer an emerging growth company.large accelerated filer. We will cease to bequalify (1) as an emerging growth companyaccelerated filer if we (1) have an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of US$1.07 billion75 million or more, in annual revenuebut less than US$700 million, as of the endlast business day of our most recently completed second fiscal year,quarter, or (2) areas a large accelerated filer andif we have more than US$700.0 million inan aggregate worldwide market value of ourthe voting and non-voting common sharesequity held by non‑affiliatesits non-affiliates of US$700 million or more, as of the endlast business day of our most recently completed second fiscal quarter or (3) issue more than US$1.0 billion of non‑convertible debt securities over a three‑year period.quarter. We may choose to take advantage of some but not all of these reduced burdens.
We do not take advantage of the extended transition period provided under Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We report under the Exchange Act as a non‑U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, asAs long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
| · | the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; |
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| · | the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; |
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|
| · | the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10‑Q containing unaudited financial and other specified information, or current reports on Form 8‑K, upon the occurrence of specified significant events; and |
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|
|
| · | Regulation FD, which regulates selective disclosures of material information by issuers. |
ITEM 7A. Quantitative and Qualitative Disclosures about Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in interest rates on debt and foreign currency exchange risk on purchases of our teas and tea accessories.
Interest Rate Risk
Our borrowings under our Revolving Facility carry floating interest rates tied to our lender’s prime rate, and therefore, our consolidated statements of loss and cash flows will be exposed to changes in interest rates in fiscal periods in which we have debt outstanding. As at February 2, 2019, we have no indebtedness under our Revolving Facility.
Foreign Exchange Risk
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. During the year, in order to protect ourselves from the risk of losses should the value of the Canadian dollar decline in relation to the U.S. dollar, we entered into forward contracts of $30.0 million to fix the exchange rate of 80% to 90% of our expected February 2018 to September 2018 U.S. dollar purchases in respect of our inventory.
Table of Contents |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| Page |
|
Audited Consolidated Financial Statements |
|
| |
Report of Independent Registered Public Accounting Firm (PCAOC ID: 1263) | 44 | ||
As of January 29, 2022 and January 30, 2021: | |||
| 46 |
| |
|
| ||
Consolidated |
| 47 |
|
| |||
Consolidated Statements of |
| 48 |
|
| 49 |
| |
| 50 |
| |
51
Table of Contents |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of DAVIDsTEA Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DAVIDsTEA Inc. (the Company) [the “Company”] as of February 2, 2019January 29, 2022 and February 3, 2018,January 30, 2021, the related consolidated statements of lossincome (loss) and comprehensive loss,income (loss), cash flows and equity for each of the three years in the period ended February 2, 2019January 29, 2022 and the related notes (collectively[collectively referred to as the “consolidated financial statements”)]. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 2, 2019January 29, 2022 and February 3, 2018January 30, 2021 and the results of its operations and its cash flows for each of the three years in the period ended February 2, 2019,January 29, 2022, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Basis for Opinionopinion
These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“[“PCAOB”)] and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. We determined that there are no critical audit matters.
/s/ Ernst & Young LLP1
We have served as the Company’s auditor since 2011.
Montréal, Canada
May 2, 2019April 29, 2022
_________
1 CPA, Auditor, CA, public accountancy permit no. A123806
Table of Contents |
DAVIDsTEA Inc.
DAVIDsTEA Inc.
Incorporated under the laws of Canada
[In thousands of Canadian dollars]
As at February 2, February 3, 2019 2018 $ $ ASSETS Current Cash [Note 6] Accounts and other receivables [Note 7] Inventories Income tax receivable Prepaid expenses and deposits Total current assets Property and equipment [Note 8] Intangible assets [Note 9] Deferred income tax assets [Note 17] Total assets LIABILITIES AND EQUITY Current Trade and other payables [Note 10] Deferred revenue [Note 11] Current portion of provisions [Note 12] Derivative financial instruments [Note 22] Total current liabilities Deferred rent and lease inducements Provisions [Note 12] Total liabilities Commitments and contingencies [Note 13] Equity Share capital [Note 15] Contributed surplus Deficit Accumulated other comprehensive income Total equity 42,074 63,484 3,681 3,131 34,353 24,450 4,107 2,968 8,819 7,712 93,034 101,745 23,788 36,558 5,678 4,439 — 5,194 122,500 147,936 20,951 14,392 6,241 5,186 3,714 4,693 — 229 30,906 24,500 8,698 8,608 15,440 13,460 55,044 46,568 112,519 111,692 1,400 2,642 (47,960 ) (14,721 ) 1,497 1,755 67,456 101,368 122,500 147,936
As at | ||||||||||
January 29, | January 30, | |||||||||
2022 | 2021 | |||||||||
$ | $ | |||||||||
ASSETS | ||||||||||
Current | ||||||||||
Cash | 25,107 | 30,197 | ||||||||
Accounts and other receivables | [Note 6] | 3,209 | 6,212 | |||||||
Inventories | [Note 7] | 31,048 | 23,468 | |||||||
Prepaid expenses and deposits | 4,142 | 14,470 | ||||||||
Total current assets | 63,506 | 74,347 | ||||||||
Property and equipment | [Note 8] | 775 | 2,309 | |||||||
Intangible assets | [Note 9] | 2,234 | 3,929 | |||||||
Right-of-use assets | [Note 10] | 12,087 | 657 | |||||||
Total assets | 78,602 | 81,242 | ||||||||
LIABILITIES AND EQUITY | ||||||||||
Current | ||||||||||
Trade and other payables | [Note 11] | 12,300 | 4,152 | |||||||
Deferred revenue | [Note 12] | 5,434 | 7,080 | |||||||
Liabilities subject to compromise | [Note 13] | 0 | 100,550 | |||||||
Current portion of lease liabilities | [Note 10] | 2,364 | 396 | |||||||
Total current liabilities | 20,098 | 112,178 | ||||||||
Non-current portion of lease liabilities | [Note 10] | 10,189 | 355 | |||||||
Total liabilities | 30,287 | 112,533 | ||||||||
Commitments and contingencies | ||||||||||
Equity | ||||||||||
Share capital | [Note 15] | 113,534 | 113,167 | |||||||
Contributed surplus | 2,507 | 1,747 | ||||||||
Deficit | (70,671 | ) | (148,068 | ) | ||||||
Accumulated other comprehensive income | 2,945 | 1,863 | ||||||||
Total equity (deficiency) | 48,315 | (31,291 | ) | |||||||
Total liabilities and equity | 78,602 | 81,242 |
See accompanying notes
Table of Contents |
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF LOSSINCOME (LOSS) AND COMPREHENSIVE LOSSINCOME (LOSS)
[In thousands of Canadian dollars, except share information]
For the year ended February 2, February 3, January 28, 2019 2018 2017 $ $ $ Sales [Note 21] Cost of sales Gross profit Selling, general and administration expenses [Note 18] Results from operating activities Finance costs [Note 16] Finance income Loss before income taxes Provision for income tax (recovery) [Note 17] Net loss Other comprehensive loss Items to be reclassified subsequently to income: Unrealized net gain (loss) on forward exchange contracts [Note 22] Realized net (gain) loss on forward exchange contracts reclassified to inventory Provision for income tax recovery (income tax) on comprehensive income Cumulative translation adjustment Other comprehensive loss, net of tax Total comprehensive loss Net loss per share: Basic and fully diluted [Note 19] Weighted average number of shares outstanding Basic and fully diluted [Note 19] 212,753 224,015 215,984 114,774 116,772 107,534 97,979 107,243 108,450 125,722 131,930 114,756 (27,743 ) (24,687 ) (6,306 ) 1,614 2,371 76 (700 ) (567 ) (479 ) (28,657 ) (26,491 ) (5,903 ) 4,882 2,010 (2,235 ) (33,539 ) (28,501 ) (3,668 ) - (992 ) (2,247 ) 230 309 (742 ) (63 ) 183 793 (425 ) (932 ) (820 ) (258 ) (1,432 ) (3,016 ) (33,797 ) (29,933 ) (6,684 ) (1.29 ) (1.11 ) (0.15 ) 25,967,836 25,716,186 24,699,290
|
|
| For the year ended |
| |||||||||
|
|
| January 29, |
|
| January 30, |
|
| February 1, |
| |||
|
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
|
| $ |
|
| $ |
|
| $ |
| |||
Sales | [Note 22] |
|
| 104,073 |
|
|
| 121,686 |
|
|
| 196,462 |
|
Cost of sales |
|
|
| 60,871 |
|
|
| 71,953 |
|
|
| 87,886 |
|
Gross profit |
|
|
| 43,202 |
|
|
| 49,733 |
|
|
| 108,576 |
|
Selling, general and administration expenses | [Note 18] |
|
| 42,923 |
|
|
| 46,464 |
|
|
| 135,306 |
|
Restructuring plan activities, net | [Note 19] |
|
| (76,857 | ) |
|
| 56,327 |
|
|
| 0 |
|
Results from operating activities |
|
|
| 77,136 |
|
|
| (53,058 | ) |
|
| (26,730 | ) |
Finance costs | [Note 16] |
|
| 152 |
|
|
| 3,273 |
|
|
| 6,751 |
|
Finance income |
|
|
| (143 | ) |
|
| (399 | ) |
|
| (784 | ) |
Net income (loss) before income taxes |
|
|
| 77,127 |
|
|
| (55,932 | ) |
|
| (32,697 | ) |
Recovery of income taxes | [Note 17, 19] |
|
| (1,000 | ) |
|
| 0 |
|
|
| (1,500 | ) |
Net income (loss) |
|
|
| 78,127 |
|
|
| (55,932 | ) |
|
| (31,197 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment |
|
|
| 1,082 |
|
|
| 656 |
|
|
| (290 | ) |
Other comprehensive income (loss), net of tax |
|
|
| 1,082 |
|
|
| 656 |
|
|
| (290 | ) |
Total comprehensive income (loss) |
|
|
| 79,209 |
|
|
| (55,276 | ) |
|
| (31,487 | ) |
Net earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | [Note 20] |
|
| 2.97 |
|
|
| (2.14 | ) |
|
| (1.20 | ) |
Fully diluted | [Note 20] |
|
| 2.83 |
|
|
| (2.14 | ) |
|
| (1.20 | ) |
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | [Note 20] |
|
| 26,323,469 |
|
|
| 26,168,848 |
|
|
| 26,056,332 |
|
Fully diluted | [Note 20] |
|
| 27,644,498 |
|
|
| 26,168,848 |
|
|
| 26,056,332 |
|
See accompanying notes
Table of Contents |
DAVIDsTEA Inc.
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF CASH FLOWS
[In thousands of Canadian dollars]
For the year ended February 2, February 3, January 28, 2019 2018 2017 $ $ $ OPERATING ACTIVITIES Net loss Items not affecting cash: Depreciation of property and equipment Amortization of intangible assets Write-off of property and equipment Impairment of property and equipment Deferred rent Provision (recovery) for onerous contracts Stock-based compensation expense Amortization of financing fees Accretion on provisions Deferred income taxes (recovered) Net change in other non-cash working capital balances related to operations Cash flows related to operating activities FINANCING ACTIVITIES Proceeds from issuance of common shares pursuant to exercise of stock options Cash flows related to financing activities INVESTING ACTIVITIES Additions to property and equipment Additions to intangible assets Cash flows related to investing activities Decrease in cash during the year Cash, beginning of year Cash, end of year Supplemental Information Cash paid for: Interest Income taxes (classified as operating activity) Cash received for: Interest Income taxes (classified as operating activity) (33,539 ) (28,501 ) (3,668 ) 6,904 8,431 8,069 1,298 1,474 758 1,875 82 356 9,960 15,069 7,516 25 542 1,325 6,282 10,321 8,140 211 2,021 2,264 64 79 75 251 2,292 — 5,069 3,585 (4,380 ) (1,600 ) 15,395 20,455 (11,628 ) (5,537 ) (9,293 ) (13,228 ) 9,858 11,162 82 1,782 2,779 82 1,782 2,779 (3,898 ) (9,634 ) (20,531 ) (4,366 ) (2,962 ) (1,484 ) (8,264 ) (12,596 ) (22,015 ) (21,410 ) (956 ) (8,074 ) 63,484 64,440 72,514 42,074 63,484 64,440 — — 1 10 880 2,437 650 574 486 1,774 68 532
See accompanying notes.
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF EQUITY
[In thousands of Canadian dollars]
Accumulated Other Comprehensive Income Accumulated Accumulated Derivative Foreign Accumulated Financial Currency Other Share Contributed Instrument Translation Comprehensive Total Capital Surplus Deficit Adjustment Adjustment Income Equity $ $ $ $ $ $ $ Balance, January 28, 2017 Net loss for the year ended February 3, 2018 Other comprehensive loss Total comprehensive loss Issuance of common shares Common shares issued on vesting of restricted stock units Write-down of deferred income tax assets Stock-based compensation expense Income tax impact associated with stock options Impact of change in foreign tax rate associated with stock options Reduction of stated capital Balance, February 3, 2018 Balance, February 3, 2018 Net loss for the year ended February 2, 2019 Other comprehensive loss Total comprehensive loss Issuance of common shares Common shares issued on vesting of restricted stock units Stock-based compensation expense Income tax impact associated with stock options Balance, February 2, 2019 263,828 8,833 (142,398 ) 333 2,854 3,187 133,450 - - (28,501 ) - - - (28,501 ) - - - (500 ) (932 ) (1,432 ) (1,432 ) - - (28,501 ) (500 ) (932 ) (1,432 ) (29,933 ) 2,669 (887 ) - - - - 1,782 1,142 (1,984 ) 231 - - - (611 ) - (3,412 ) - - - - (3,412 ) - 2,021 - - - - 2,021 - (1,797 ) - - - - (1,797 ) - (132 ) - - - - (132 ) (155,947 ) - 155,947 - - - — 111,692 2,642 (14,721 ) (167 ) 1,922 1,755 101,368 111,692 2,642 (14,721 ) (167 ) 1,922 1,755 101,368 - - (33,539 ) - - - (33,539 ) - - - 167 (425 ) (258 ) (258 ) - - (33,539 ) 167 (425 ) (258 ) (33,797 ) 164 (82 ) - - - - 82 663 (1,370 ) 300 - - - (407 ) - 211 - - - - 211 - (1 ) - - - - (1 ) 112,519 1,400 (47,960 ) - 1,497 1,497 67,456
|
| For the year ended |
| |||||||||
|
| January 29, |
|
| January 30, |
|
| February 1, |
| |||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
|
| 78,127 |
|
|
| (55,932 | ) |
|
| (31,197 | ) |
Items not affecting cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment |
|
| 1,586 |
|
|
| 2,399 |
|
|
| 5,411 |
|
Amortization of intangible assets |
|
| 1,695 |
|
|
| 2,053 |
|
|
| 1,934 |
|
Amortization of right-of-use assets |
|
| 1,037 |
|
|
| 3,041 |
|
|
| 12,051 |
|
Gain on modification of lease liabilities |
|
| 0 |
|
|
| (75,121 | ) |
|
| 0 |
|
Loss (gain) on liabilities subject to compromise |
|
| (79,861 | ) |
|
| 100,550 |
|
|
| 0 |
|
Interest on lease liabilities |
|
| 131 |
|
|
| 3,230 |
|
|
| 6,962 |
|
Loss on disposal of property and equipment and right-of-use assets |
|
| 0 |
|
|
| 769 |
|
|
| 100 |
|
Impairment of property and equipment and right-of-use assets |
|
| 0 |
|
|
| 39,960 |
|
|
| 17,780 |
|
Loss on disposal of intangible assets |
|
| 0 |
|
|
| 790 |
|
|
| 0 |
|
Stock-based compensation expense |
|
| 1,405 |
|
|
| 820 |
|
|
| 813 |
|
Sub-total |
|
| 4,120 |
|
|
| 22,559 |
|
|
| 13,854 |
|
Net change in other non-cash working capital balances related to operations |
|
| (8,361 | ) |
|
| (33,828 | ) |
|
| 19,254 |
|
Cash flows provided by (used in) operating activities |
|
| (4,241 | ) |
|
| (11,269 | ) |
|
| 33,108 |
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Proceed from issuance of common shares pursuant to exercise of stock options |
|
| 0 |
|
|
| 4 |
|
|
| 14 |
|
Payment of lease liabilities |
|
| (797 | ) |
|
| (6,007 | ) |
|
| (23,206 | ) |
Cash flows used in financing activities |
|
| (797 | ) |
|
| (6,003 | ) |
|
| (23,192 | ) |
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
| (52 | ) |
|
| (433 | ) |
|
| (1,032 | ) |
Additions to intangible assets |
|
| 0 |
|
|
| (480 | ) |
|
| (2,594 | ) |
Repayment of loan from a Company controlled by an executive employee |
|
| 0 |
|
|
| 2,045 |
|
|
| (2,026 | ) |
Cash flows provided by (used in) investing activities |
|
| (52 | ) |
|
| 1,132 |
|
|
| (5,652 | ) |
Increase (decrease) in cash during the year |
|
| (5,090 | ) |
|
| (16,140 | ) |
|
| 4,264 |
|
Cash, beginning of the year |
|
| 30,197 |
|
|
| 46,338 |
|
|
| 42,074 |
|
Cash, end of the year |
|
| 25,107 |
|
|
| 30,197 |
|
|
| 46,338 |
|
Supplemental Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
| 0 |
|
|
| 0 |
|
|
| 50 |
|
Income taxes (classified as operating activity) |
|
| 0 |
|
|
| — |
|
|
| — |
|
Cash received for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
| 122 |
|
|
| 368 |
|
|
| 778 |
|
Income taxes (classified as operating activity) |
|
| — |
|
|
| 870 |
|
|
| 2,948 |
|
See accompanying notes
Table of Contents |
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)
[In thousands of Canadian dollars]
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
| other |
|
| Total |
| |||||
|
| Stock |
|
| Contributed |
|
|
|
|
| comprehensive |
|
| equity |
| |||||
|
| capital |
|
| surplus |
|
| Deficit |
|
| income |
|
| (deficiency) |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Balance, January 30, 2021 |
|
| 113,167 |
|
|
| 1,747 |
|
|
| (148,068 | ) |
|
| 1,863 |
|
|
| (31,291 | ) |
Net income for the twelve months ended January 29, 2022 |
|
| 0 |
|
|
| 0 |
|
|
| 78,127 |
|
|
| 0 |
|
|
| 78,127 |
|
Other comprehensive income |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,082 |
|
|
| 1,082 |
|
Total comprehensive income |
|
| 0 |
|
|
| 0 |
|
|
| 78,127 |
|
|
| 1,082 |
|
|
| 79,209 |
|
Common shares issued on vesting of restricted stock units |
|
| 367 |
|
|
| (645 | ) |
|
| (730 | ) |
|
| 0 |
|
|
| (1,008 | ) |
Stock-based compensation expense |
|
| 0 |
|
|
| 1,405 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,405 |
|
Balance, January 29, 2022 |
|
| 113,534 |
|
|
| 2,507 |
|
|
| (70,671 | ) |
|
| 2,945 |
|
|
| 48,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 1, 2020 |
|
| 112,843 |
|
|
| 1,577 |
|
|
| (92,278 | ) |
|
| 1,207 |
|
|
| 23,349 |
|
Net loss for the twelve months ended January 30, 2021 |
|
| 0 |
|
|
| 0 |
|
|
| (55,932 | ) |
|
| 0 |
|
|
| (55,932 | ) |
Other comprehensive income |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 656 |
|
|
| 656 |
|
Total comprehensive income |
|
| 0 |
|
|
| 0 |
|
|
| (55,932 | ) |
|
| 656 |
|
|
| (55,276 | ) |
Issuance of common shares |
|
| 5 |
|
|
| (1 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 4 |
|
Common shares issued on vesting of restricted stock units |
|
| 319 |
|
|
| (649 | ) |
|
| 142 |
|
|
| 0 |
|
|
| (188 | ) |
Stock-based compensation expense |
|
| 0 |
|
|
| 820 |
|
|
| 0 |
|
|
| 0 |
|
|
| 820 |
|
Balance, January 30, 2021 |
|
| 113,167 |
|
|
| 1,747 |
|
|
| (148,068 | ) |
|
| 1,863 |
|
|
| (31,291 | ) |
See accompanying notes
48 |
Table of Contents |
DAVIDsTEA Inc.
DAVIDsTEA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended January 29, 2022, January 30, 2021 and February 2, 2019, February 3, 2018 and January 28, 20171, 2020
[Amounts in thousands of Canadian dollars except per share amounts and where otherwise indicated]
1. CORPORATE INFORMATION
The consolidated financial statements of DAVIDsTEA Inc. and its wholly-owned subsidiary, DAVIDsTEA (USA) Inc., (collectively, the “Company”) for the year ended February 2, 2019January 29, 2022 were authorized for issue in accordance with a resolution of the Board of Directors on May 2, 2019.April 29, 2022. 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 Street, Town of Mount-Royal, Quebec, Canada, H4P 1M2.
The Company is engaged inoffers a specialty branded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories, and gifts through its e-commerce platform at www.davidstea.com and the retailAmazon Marketplace, its wholesale customers which include over 3,500 grocery stores and online salepharmacies, and 18 company-owned stores across Canada. The Company offers 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 rooted in an excitement to explore the taste, health, and lifestyle elements of tea. With a focus on innovative flavours, wellness-driven ingredients and organic tea, accessories,the Company launches seasonally driven “collections” with a mission of making tea fun and food and beverages in Canada and in the United States.accessible to all. 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 trafficengagement during the summer months.
CCAA Proceedings
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 its retail stores in Canada and the United States.
Following a careful review of available options to stem the losses generated primarily from its brick-and-mortar footprint, management and Board of Directors determined that a formal restructuring process was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.
On July 8, 2020, the Company announced that it was implementing a restructuring plan (the “Restructuring Plan”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, the Company would continue to operate its online business through its e-commerce platform and the Amazon Marketplace as well as its wholesale distribution channel. On August 21, 2020, the Company re-opened 18 stores across Canada and permanently shuttered 164 stores in Canada and 42 stores in the United States.
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 were 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 approved Plan of Arrangement required that DAVIDsTEA Inc. distribute an aggregate amount of approximately $17.6 million to its creditors and those of DAVIDsTEA (USA) Inc. in full and final settlement of all claims affected by the Plan of Arrangement on June 18, 2021.
On September 9, 2021, the Monitor filed a Certificate of Termination with the Québec Superior Court in accordance with paragraph 24 of the Sanction Order and declared the CCAA proceedings were terminated without further act or formality.
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2. BASIS OF PREPARATION
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The accounting policies were consistently applied to all periods presented, other than with respect to the adoption of new accounting standards as disclosed in noteNote 4.
The Company’s fiscal year ends on the Saturday closest to the end of January, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. The years ended January 28, 2017,29, 2022, January 30, 2021 and February 2, 20191, 2020 cover a 52-week period. The year ended February 3, 2018 covers a 53-week fiscal period.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Basis of consolidationConsolidation
The consolidated financial statements include the accounts of the Company and its wholly owned U.S. subsidiary, DAVIDsTEA (USA) Inc. The financial statements of the subsidiary are prepared for the same reporting period as the parent company, using consistent accounting policies. All intercompany transactions, balances and unrealized gains or losses have been eliminated.
Basis of measurement
These consolidated financial statements have been prepared on the historical cost basis except for the following material items:
Functional and presentation currencyPresentation Currency
These consolidated financial statements are presented in Canadian dollars, which is the parent Company’s functional currency.
3. SIGNIFICANT ACCOUNTING POLICIES
Cash
Cash on the consolidated balance sheet comprises cash at banks and on hand.
Trade receivables
Trade receivables primarily represent amounts due from wholesale customers and are accounted for at amortized cost, less any provision for doubtful accounts which is based on management’s best estimate of expected credit losses.
Government assistance
Government assistance, including wage and rent subsidies, is recognized when there is a reasonable assurance that the assistance will be received and that the Company will comply with all relevant conditions. Government assistance related to incurred expenses is recorded as a reduction of the related expenses.
Inventory valuation
Inventories are measured at the lower of cost and net realizable value. Cost is determined using the weighted average cost method. Costs include the cost of purchase and transportation costs that are directly incurred to bring the inventories to their present location, and duty. Net realizable value is the estimated selling price of inventory in the ordinary course of business, less any estimated selling costs. Cost also includes realized gains and losses on forward contracts designated as cash flow hedges of U.S. inventory purchases.incremental costs necessary to make the sale.
Property and equipment
Property and equipment are initially recorded at cost and are depreciated over their useful economic life. Cost includes expenditures that are directly attributable to the acquisition of the asset, including any costs directly related to bringing the asset to a working condition for its intended use. The residual values, useful lives, and methods of depreciation of property and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. All repair and maintenance costs are recognized in net lossincome (loss) as incurred.incurred
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Depreciation of an asset begins once it becomes available for use. Depreciation is charged to income for both Furniture and equipment as well as Computer hardware on a straight-line basis over the following bases:assets’ useful life.
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Leasehold improvements are depreciated on a straight‑line basis over the lesser of the useful economic life and the initial term of the leases, plus one renewal option period, not to exceed 10 years.lease term.
Any gain or loss arising on the disposal or derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in ourthe consolidated statement of net lossincome (loss) when the asset is derecognized.
Intangible assets
Intangible assets consist of computer software, trademarks, and patents.
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.
The amortization expense on intangible assets with finite lives is recognized in outthe consolidated statement of lossincome (loss) as the expense category that is consistent with the function of the intangible assets.
Any gain or loss arising on the disposal or derecognition of the intangible asset (calculated as the difference between the net disposal proceeds and the carrying amount of the intangible asset) is included in our consolidated statement of lossincome (loss) when the intangible asset is derecognized.
When computer software Leased assets
Right-of-use assets
The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is not an integral partavailable for use). Right-of-use assets are initially measured at cost, which includes the initial amount of lease liabilities adjusted for any initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received.
The right-of-use assets are depreciated on a related item of computer hardware,straight-line basis over the software is treated as an intangible. Computer software is amortized on the basisshorter of its estimated useful life usingand the declining methodlease term unless the Company is reasonably certain to obtain ownership of the leased asset at the rate of 30%.
Leases
Leases are classified as either operating or finance, based on the substance of the transaction at inception of the lease. Classification is re‑assessed if the termsend of the lease term. In addition, the right-of-use assets are changed.subject to impairment and adjusted for any remeasurement of lease liabilities, to the extent that there is a balance of right-of-use asset at the time the change in lease liability occurs. Amortization expense is recorded in selling, general and administrative expense.
Leases in which a significant portionLease liabilities
At the commencement date of the risks and rewardslease, the Company recognizes lease liabilities measured at the present value of ownership are not assumedlease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are classifiedrecognized as operating leases.expense in the period in which the event or condition that triggers the payment occurs.
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In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. Interest accretion is recorded as interest expense in finance costs. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. The Company carries onhas elected to apply the practical expedient to not separate the lease component and its operations in premises underassociated non-lease component.
Short-term leases and leases of varying termslow-value assets
The Company applies the short-term lease recognition exemption to its short-term leases of machinery and renewal options, whichequipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are accounted for as operating leases. Payments under an operating leaseconsidered of low value (i.e., below US $5,000). Lease payments on short-term leases and leases of low-value assets are recognized in net lossas expense on a straight‑linestraight-line basis over the term of the lease. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight‑line basis and, consequently, records the difference between the recognized rental expense and the amounts payable under the lease as deferred rent. Contingent (sales‑based) rentals are recognized as an expense when incurred.term.
Store opening costs
Store opening costs are expensed as incurred.
Impairment
| i. | Impairment of financial assets |
The Company applies the “expectedexpected credit loss” model. The impairmentloss model applies to its trade receivables. It requires a credit loss to be reflected in profit and loss immediately after an asset or receivable is acquired and subsequent changes in expected credit losses at each reporting date reflecting the change in credit risk. The Company applies the simplified approach for trade receivables and calculates expected credit losses based on lifetime expected credit losses.
| ii. | Impairment of non‑financial assets |
The Company assesses all non-financial assets, at each reporting date, whether there is an indicationfor indications that an item of property and equipment or an intangible assetthe carrying amount may not be impaired.recoverable. If any indication exists, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’sassets or cash‑generating unit’s (“CGU”) fair value less costs of disposal and its value in use. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
In determining fair value less costs of disposal, recent market transactions are taken into account.considered. If no such transactions can be identified, an appropriate valuation model is used. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre‑tax discount rate that reflects current market assessments of the time value of money. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or corporate assets. The discount rate applied to an asset or CGU is the weighted average cost of capital (“WACC”). Management considers factors such as risk-free rate, equity risk premium, size premium, specific business risk premium and cost of debt to derive the WACC.
The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover the lease term.
Based on the management of operations, the Company has defined each of the commercial premises in which it carries out its activities as a CGU. For non-financial assets that can be reasonably and consistently allocated to individual stores, the store level is used as the CGU although where appropriate these premises are aggregated at a district or regionalfor impairment testing. For all other non-financial assets, the corporate level to form a CGU.is used as the group of CGUs.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment may no longer exist or may have decreased and if there has been a change in the assumptions used to determine the asset’s recoverable amount. The reversal is limited to the extent that an asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, had no impairment loss been recognized. Such reversal is recognized in ourthe consolidated statement of loss.income (loss).
Derivative financial instruments and hedge accounting
The Company enters into foreign exchange forward contracts to hedge its foreign currency risks, resulting from variability in foreign currency exchange rates on inventory purchases, as described in Note 22.
Derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
For the purpose of hedge accounting, hedges are classified as cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction.
At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
The Company has applied hedge accounting for its foreign exchange forward contracts and has designated them as cash flow hedges. The effective portion of the gain or loss on the hedging instrument is recognized directly in Other Comprehensive Loss (“OCI”), while any ineffective portion is recognized immediately in out consolidated statement of loss. The amounts recognized in OCI are reclassified to inventory when such non-financial asset is recognized on the consolidated balance sheet, and our consolidated statement of loss when inventory is subsequently sold.
Provisions
Provisions are recognized when the Company has a present obligation as a resultbecause of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Company expects some or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in our consolidated statement of loss,income (loss), net of any reimbursement. All provisions are reviewed at each reporting date and adjusted to reflect the current best estimates.
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If the effect of the time value of money is material, provisions are discounted using a current pre‑tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
Deferred lease inducementsLiabilities subject to compromise
The deferred lease inducements are composed of free rent and construction allowances obtained upon signing of lease agreements for certain retail stores. They are amortized onAs a straight‑line basis over the termresult of the related leases, plus one renewal option,CCAA process, the payment of liabilities owing as of July 8, 2020 was stayed, and the outstanding liabilities, as well as any additional outstanding claims by creditors were subject to a maximumcompromise pursuant to the Company’s Plan of 10 years.Arrangement.
Share capitalLiabilities subject to compromise represent the liabilities that will ultimately be subject to the plan of arrangement (“allowed claims”) and compromise to the Company’s creditors, and include disclaimed leases, trade and other payables, and severance costs, as further described in Note 13. Trade and other payables, and severance costs represent the Company’s legal obligation. Disclaimed leases are measured at the Company’s best estimate of liabilities that will ultimately be subject to the plan of arrangement (“allowed claims”). The measurement of liabilities subject to compromise is measured at the reporting date based on an analysis of the nature and carrying value of the underlying liabilities, proof of claim, as well as the stage of advancement of the claims identification, resolution and barring process.
Obligations for goods and services provided to the Company after the filing date of July 8, 2020 are discharged based on negotiated terms and are excluded from liabilities subject to compromise.
On September 9, 2021, the Monitor filed a Certificate of Termination with the Québec Superior Court in accordance with paragraph 24 of the Sanction Order and declared the CCAA proceedings were terminated without further act or formality.
As a result of the final settlement, the Company recorded a gain on the settlement of liabilities subject to compromise of $79.9 million (Note 13).
Share capital
| i. | Common shares |
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any tax effects.
Common shares are classified as equity if they are non‑redeemable or redeemable only at the Company’s option, and any dividends are discretionary. Dividends thereon are recognized as distributions within equity on approval by the Company’s Board of Directors.
Preferred shares are classified as a financial liability if they are redeemable on a specific date or at the option of the shareholders. Dividends thereon are recognized as interest expense in our consolidated statement of net loss as accrued.
Stock‑based compensation
The Company has a stock option plan for employees and directors from which options to purchase common shares are issued (the “Plan”). Options may not be granted with an exercise price of less than the fair value of the underlying shares at the grant date. The awards have no cash settlement alternatives. The vesting requirements are typically service‑based and the options normally have a contractual life of seven years.
The fair value of stock‑based compensation awards granted to employees is measured at the grant date using the Black Scholes option pricing model. Measurement inputs include the share price of the underlying shares on the measurement date, the exercise price of the option, the expected volatility (based on weighted average historical volatility of comparable companies adjusted for changes expected based on publicly available information)the Company), the weighted average expected life of the option (based on historical experience), expected dividends, and the risk‑free interest rate (based on government bonds).
The value of the compensation expense is recognized over the vesting period of the stock options as an expense included in selling and general administration expenses, with a corresponding increase to contributed surplus in equity. The amount recognized as an expense is adjusted to reflect the Company’s best estimate of the number of awards that will ultimately vest. No expense is recognized for awards that do not ultimately vest.
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Any consideration paid by plan participants on the exercise of stock options and the previously recognized compensation cost of the options exercised included in contributed surplus are credited to share capital.
Under the Company’s 2015 Omnibus Equity Incentive Plan (the “2015 Omnibus Plan”), selected employees and directors are granted RSUs where each RSU has a value equal to one common share. The compensation expense is recorded at the fair value of the Company’s common shares at the grant date over the vesting period (generally one to three years) with a corresponding credit to contributed surplus for equity-settled RSUs and a corresponding credit to a liability for cash-settled RSUs. RSUs may be settled in shares, cash, or a combination of cash or shares upon vesting at the discretion of the Company. Cash settled RSUs are revalued at each reporting date to reflect their fair value at that date. Fair value is determined using the closing price of the Company’s common shares on the NASDAQ Global Market prior to the date of the grant. The Company has not issued any cash settled awards to date.
Revenue recognition
Revenue is recognized when control of goods has been transferred at the amount of consideration to which the Company expects to be entitled. Revenue is recognized on e-commerce sales when merchandise is delivered to the consumer. Revenue from retail sales is recorded upon delivery to the customer. Revenue is recognized on e-commerce sales when merchandise is delivered. Revenues are recorded net of discounts, rebates, estimated returns, sales taxes and amounts deferred related to the issuance of Frequent Steeper points.
Revenue from the Company's wholesale business is recognized upon receipt of products by the customer. Wholesale revenue is recorded net of estimates of returns, discounts, operational chargebacks, and certain advertising allowances. Estimates for operational chargebacks are based on actual customer notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly basis. The Company's historical estimates of these amounts have not differed materially from actual results.
| i. | Gift card breakage |
Gift cards sold are recorded as deferred revenue and revenue is recognized at the time of redemption or in accordance with the Company’s accounting policy for breakage. Breakage income represents the estimated value of gift cards that is not expected to be redeemed by customers and is determined in proportion to the pattern of rights exercised by the customer. Gift card breakage is included in sales in the consolidated statement of loss.income (loss).
| ii. | Loyalty program |
The Frequent Steeper loyalty and rewards program allows customers to earnredeem points when they purchase productsearned in the Company’s retail stores and on the Company’s website. The Company introduced a new Loyalty program on January 1, 2019 that enhanced some features and removed expiryreturn for loose-leaf tea. Points expire after 365 days of points. Under the old program, points were redeemed for free tea or free beverages, depending on the number of points a customer has obtained over a limited collection period, typically a three-month period. Free tea offers were issued at the end of each collection period and redeemable within 60 days thereafter. Free beverage offers were issued at the end of the calendar collection period and redeemable within 60 days thereafter.no activity.
Starting January 1, 2019, the Company launched a new Frequent Steeper loyalty and rewards program that allows customers to earn points when they purchase products at the Company’s retail stores and on the Company’s website. Points are converted into offers to receive loose-leaf teas which must be redeemed within 60 days. Free beverage offers are issued once a customer has purchased 10 beverages which must be redeemed within 60 days.
Consideration is allocated between the loyalty program awards and the goods on which the awards were earned, based on their relative stand-alone selling prices. The fair value of Frequent Steeper points and offers are determined based on the estimated selling price of the loose-leaf tea, net of points and offers we expect will not be redeemed. The fair value of beverage offers is determined based on the estimated selling price of the beverage, net of beverage offers that are not expected to be redeemed. The relative selling price of points and offers issued are recorded as deferred revenue. Offers for loose-leaf tea and beverage offers are recognized as revenue on the earlier of redemption and expiry. On an ongoing basis, the Company monitors historical redemption rates. Frequent Steeper redemptions are included with total sales in our consolidated statement of net loss.income (loss).
iii. | Subscription box |
Revenue is recognized at a point in time, which is upon delivery of subscription boxes, as it meets the criteria to satisfy the performance obligation. Deferred revenue is recognized for consideration received in advance of the delivery of subscription boxes.
Finance income
Interest income is recognized as interest accrues using the effective interest method.
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Income taxes
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in our consolidated statement of lossincome (loss) except to the extent that they relate to items recognized directly in equity or in other comprehensive loss.income (loss).
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered or paid. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
The Company uses the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax assets and liabilities for all temporary differences caused when the tax bases of assets and liabilities differ from their carrying amounts reported in the consolidated financial statements. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the temporary differences when they reverse, based on tax rates that have been enacted or substantively enacted at the end of the reporting period. The Company recognizes deferred income tax assets for unused tax losses and deductible temporary differences only to the extent that, in management’s opinion, it is probable that future taxable income will be available against which they can be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority and the Company intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
Earnings per share
Basic earnings per share is calculated using the weighted average number of shares outstanding during the year.
The diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to include additional shares issued from the assumed conversion of preferred shares and the exercise of stock options and RSUs, if dilutive. For stock options, the number of additional shares is calculated by assuming that the proceeds from such exercises, as well as the amount of unrecognized stock-based compensation, which is considered to be assumed proceeds, are used to purchase common shares at the average market price during the reporting period.
Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. A financial asset or liability is recognized initially (at settlement date) at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the instrument. Financial assets and liabilities carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the consolidated statements of loss.income (loss).
After initial recognition, financial assets are measured at amortized cost or fair value. Where assets are measured at fair value, gains and losses are either recognized entirely in profit or loss (“FVTPL”) or recognized in other comprehensive income (“FVOCI”).
The Company classifies its financial assets and liabilities according to their characteristics and management's choices and intentions related thereto for the purposes of ongoing measurement.
Classifications that the Company has used for financial assets include:
(a) Amortized Cost – non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This includes trade receivables, and these are recorded at amortized cost with gains
(a) | Amortized Cost - non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This includes trade receivables. Gains and losses are recognized in net income (loss) in the period that the asset is no longer recognized or becomes impaired; and | |
(b) | FVTPL - financial assets which are classified as fair value through profit and loss. This includes cash. | |
Classifications that the Company has used for financial liabilities include: | ||
(a) | Amortized cost - non-derivative financial liabilities measured at amortized cost with gains and losses recognized in net loss in the period that the liability is no longer recognized. This includes Trade and other payables |
(b) FVTPL – financial assets which are classified as fair value through profit and loss. This includes cash and derivative financial instruments
Classifications that the Company has used for financial liabilities include:
a) Amortized cost – non-derivative financial liabilities measured at amortized cost with gains and losses recognized in net loss in the period that the liability is no longer recognized. This includes Trade and other payables; and
b) FVTPL – financial liabilities which are classified as fair value through profit and loss. This includes derivative financial instruments
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Foreign currency translation
Revenues, expenses and non-monetary assets and liabilities denominated in foreign currencies are recorded at the rate of exchange prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates prevailing at the balance sheet date. Unrealized and realized translation gains and losses are reflected in our statement of loss.income (loss).
The assets and liabilities of the Company’s U.S. wholly owned subsidiary, whose functional currency is the U.S. dollar, are translated into Canadian dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates for the year. Differences arising from the exchange rate changes are included in OCI in the cumulative translation account.
Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other OCI in the cumulative translation account and reclassified from equity to our consolidated statement of lossincome (loss) on disposal of the net investment.
4. CHANGES IN ACCOUNTING PRINCIPLES
As of February 4, 2018, the Company adopted IFRS 9, “Financial Instruments” (“IFRS 9”). IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after January 1, 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.Recently Issued Accounting Pronouncements
With the exception of hedge accounting, which the Company applied prospectively, the Company has applied IFRS 9 retrospectively, with the initial application date of February 4, 2018.2021 - Costs necessary to sell inventories (IAS 2) agenda decision
Overall, thereAt its June 2021 meeting, the IFRS Interpretations Committee finalised an agenda decision about the costs an entity includes as the “estimated costs necessary to make the sale” when determining the net realizable value of inventories. The IFRS Interpretations Committee concluded that when determining the net realizable value of inventories, an entity estimates the costs necessary to make the sale in the ordinary course of business, which requires the exercise of judgment. There was no material impact on the Company’s consolidated financial statements.results.
2020 - COVID-19 related rent concessions
On May 28, 2020, the IASB issued an amendment to IFRS 16, “Leases” to make it easier for lessees to account for COVID-19-related rent concessions such as rent holidays and temporary rent reductions. In April 2021, the IASB extended the relief to cover rent concessions that reduce lease payments due on or before June 30, 2022. |
| February 3, 2018 |
| February 3, 2018 | |||||
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| IAS 39 |
| IFRS 9 | ||||
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| Carrying |
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| Carrying |
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| Measurement |
| Value |
| Measurement |
| Value |
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| category |
| $ |
| category |
| $ |
Cash |
| FVTPL |
| 63,484 |
| FVTPL |
| 63,484 |
Credit card cash clearing receivables |
| Amortized cost |
| 1,291 |
| Amortized cost |
| 1,291 |
Other receivables |
| Amortized cost |
| 1,840 |
| Amortized cost |
| 1,840 |
Derivative financial instruments |
| FVTPL |
| 229 |
| FVTPL |
| 229 |
The classificationamendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of all financial liabilitiesthe COVID-19 pandemic are lease modifications and allows lessees to account for such rent concessions as financial liabilities at amortized cost remains unchanged as well as their measurement resulting from their classification.
As of February 4, 2018, the Company adopted IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”). IFRS 15 replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue thatif they were not lease modifications. It applies to all contracts with customers, except for contractsCOVID-19-related rent concessions that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and is effective for annual periods beginningreduce lease payments due on or after January 1, 2018. The implementation of IFRS 15 impacts the allocation of revenue that is deferred in relation to the Company’s customer loyalty award programs. Prior to adoption, revenue was allocated to the customer loyalty awards using the residual fair value method. Under IFRS 15, consideration is allocated between the loyalty program awards and the goods on which the awards were earned, based on their relative stand-alone selling prices. The change in allocation of revenue that is deferred in relation to the Company’s customer loyalty program did not have a material impact on retained earnings as at February 4, 2018. Overall, there was not a material impact on the Company’s consolidated financial statements.before June 30, 2021.
AsThe amendment was effective as of June 1, 2020 but could be applied immediately in any financial statements; interim or annual, not yet authorized for issue. The Company applied the practical expedient to all rent concessions meeting the criteria as set out in the amendment, as of February 4, 2018,2, 2020. With respect to rent concessions not meeting the definition of a lease modification, the Company adopted International Financial Reporting Interpretations (“IFRIC”) 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. There was no material impact on the Company’s consolidated financial statements.
Standards issued but not yet effective
IFRS 16, “Leases” (“IFRS 16”) replaces IAS 17, “Leases.” This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized on the balance sheet. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019. Early application is permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company expects the adoption of IFRS 16 will have a significant impact as the Company will recognize new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. The Company has elected to apply the modified retrospective methodaccount for such concessions by setting right-of-use assets based oncontinuing to account for the lease liability atand right-of-use asset using the daterights and obligations of initial application, adjusted by the amountexisting lease and recognizing a separate lease payable in the period in which the allocated lease cash payment is due. As a result of any prepaid or accrued lease payments, and will benefitthe Initial Order obtained from the following practical expedients;Québec Superior Court on July 8, 2020, any rent concessions provided by landlords were accordingly nullified.
As of February 2, 2019, based on the information currently available, the Company estimates that it will recognize a right-of-use asset of approximately $62,800 to $66,000 and a lease liability of approximately $90,000 to $94,600. The right-of-use asset will be net of the provision for onerous leases and deferred rent and lease inducements relating to the leases recognised in the consolidated balance sheet immediately before the date of initial application. The actual impacts of the initial application of IFRS 16 may vary from the estimates provided, as the Company has not finalized all its calculations.
IFRIC 23, “Uncertainty over Income Tax Treatments”, was issued by the IASB in June 2017. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. The Interpretation requires an entity to:
The Company does not expect a material impact from the adoption of IFRIC 23 on its consolidated financial statements.
5. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the consolidated financial statements in conformity with IFRS requires the Company to make judgments, apart from those involving estimation, in applying accounting policies that affect the recognition and measurement of assets, liabilities, revenues, and expenses. Actual results may differ from the judgments made by the Company. Information about judgments that have the most significant effect on recognition and measurement of assets, liabilities, revenues, and expenses are discussed below. Informationas well as information about significant estimates isare discussed in the following section.
56 |
Table of Contents |
Key sources of estimation uncertainty
Recoverability and impairmentKey sources of non‑financial assets
Leasehold improvements and furniture and equipment are reviewed for impairment if events or changesestimation uncertainty that have a significant risk of resulting in circumstances indicate that the carrying amount may not be recoverable. A review for impairment is conducted by comparinga material adjustment to the carrying amount of assets and liabilities within the CGU’s assets with their respective recoverable amounts based on value in use. Value in use is determined based on management’s best estimate of expected future cash flows, which includes estimates of growth rates, from use over the remaining lease term and discounted using a pre‑tax weighted average cost of capital (Note 8).next financial year are as follows:
Critical judgements in applying accounting policies
| i. | Recoverability and impairment of non‑financial assets |
The temporary store closures because of COVID-19, as well as the permanent closure of most of our retail stores resulting from the Restructuring Plan, and the related reduction in operating income during Fiscal 2020 were 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.
ii. | Estimating the incremental borrowing rate of leases |
The Company cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. The Company estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity and asset-specific estimates (such as the subsidiary’s stand-alone credit rating).
Significant judgments in applying accounting principles
i. | Impairment of non‑financial assets |
Management is required to make significant judgments in determining if individual commercial premises in which it carries out its activities are individual CGUs, or if these units should be aggregated at a district or regional level to form a CGU. The significant judgments applied by management in determining if stores should be aggregated in a given geographic area to form a CGU include the determination of expected customer behavior, the allocation basis of e-commerce sales to CGUs, and whether customers could interchangeably shop in any of the stores in a given area and whether management views the cash inflows of the stores in the group as interdependent.
| ii. | Income taxes |
The Company may be subject to audits related to tax risks, and uncertainties exist with respect to the interpretation of tax regulations, changes in tax laws, and the amount and timing of future taxable income. Differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income and income tax expense already recorded. The Company establishes provisions if required, based on reasonable estimates, for possible consequences of audits by the tax authorities. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the entity and the responsible tax authority, which may arise on a wide variety of issues.
iii. | Determination of the lease term of leases with renewal options |
To determine
The Company determines the extent to which deferred income tax assets can be recognized, management estimateslease term as the amount of probable future taxable profits that will be available against which deductible temporary differences and unused tax losses can be used. Such estimates are made as partnon-cancellable term of the budget and strategic planlease, together with any periods covered by tax jurisdiction. Management exercises judgmentan option to determineextend the extentlease if it is reasonably certain to which realization of future taxable benefitsbe exercised, or any periods covered by an option to terminate the lease, if it is probable considering factors such as the number of years included in the forecast period and prudent tax planning strategies. See Note 19—Income Taxes for more details.reasonably certain not to be exercised.
The Company has the option, under some of its leases to lease the assets for additional terms of one to three years. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal, including store performance, expected future performance and past business practice. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).
Table of Contents |
6. ACCOUNTS AND OTHER RECEIVABLES
January 29, | January 30, | |||||||
2022 | 2021 | |||||||
$ | $ | |||||||
Credit card and cash clearing receivables | 434 | 706 | ||||||
Trade receivables | 2,391 | 1,232 | ||||||
Other receivables | 384 | 4,274 | ||||||
3,209 | 6,212 |
February 2, February 3, 2019 2018 $ $ Credit card cash clearing receivables Other receivables 1,477 1,291 2,204 1,840 3,681 3,131
58 |
Table of Contents |
7. INVENTORIES
7. INVENTORIES
February 2, February 3, $ $ Finished goods Goods in transit Packaging | January 29, | January 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finished goods | 24,639 | 17,478 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goods in transit | 1,316 | 3,123 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Packaging | 5,093 | 2,867 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
31,048 | 23,468 |
During the year ended February 2, 2019,January 29, 2022, inventories recognized as cost of sales amounted to $63,195 [February 3, 2018 —$64,611, January 28, 2017$32,352 [January 30, 2021 -$34,463, February 1, 2020 - $62,995]$56,310]. The cost of inventory includes a write-down of $703 [February 3, 2018 – nil, January 28, 2017$nil [January 30, 2021 - $869]$557, February 1, 2020 - $nil] recorded as a result of net realizable value being lower than cost. Inventory write-downs of nil [February 2, 2018$131 [January 30, 2021 - $730, January 28, 2017 – nil]$nil, February 1, 2020 - $406] recognized in the previous years were reversed.
8. PROPERTY AND EQUIPMENT
|
| Leasehold |
|
| Furniture and |
|
| Computer |
|
|
|
| ||||
|
| improvements |
|
| equipment |
|
| hardware |
|
| Total |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, February 1, 2020 |
|
| 85,173 |
|
|
| 14,022 |
|
|
| 5,964 |
|
|
| 105,159 |
|
Acquisitions |
|
| 237 |
|
|
| 150 |
|
|
| 47 |
|
|
| 434 |
|
Disposals |
|
| (78,001 | ) |
|
| (11,987 | ) |
|
| (4,251 | ) |
|
| (94,239 | ) |
Cumulative translation adjustment |
|
| 712 |
|
|
| 49 |
|
|
| 12 |
|
|
| 773 |
|
Balance, January 30, 2021 |
|
| 8,121 |
|
|
| 2,234 |
|
|
| 1,772 |
|
|
| 12,127 |
|
Acquisitions |
|
| — |
|
|
| 52 |
|
|
| — |
|
|
| 52 |
|
Balance, January 29, 2022 |
|
| 8,121 |
|
|
| 2,286 |
|
|
| 1,772 |
|
|
| 12,179 |
|
|
| Leasehold |
|
| Furniture and |
|
| Computer |
|
|
|
| ||||
|
| improvements |
|
| equipment |
|
| hardware |
|
| Total |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Accumulated depreciation and impairment |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, February 1, 2020 |
|
| 71,771 |
|
|
| 10,853 |
|
|
| 4,798 |
|
|
| 87,422 |
|
Depreciation |
|
| 1,582 |
|
|
| 517 |
|
|
| 300 |
|
|
| 2,399 |
|
Impairment |
|
| 10,665 |
|
|
| 1,990 |
|
|
| 512 |
|
|
| 13,167 |
|
Disposals |
|
| (78,001 | ) |
|
| (11,782 | ) |
|
| (4,084 | ) |
|
| (93,867 | ) |
Cumulative translation adjustment |
|
| 573 |
|
|
| 93 |
|
|
| 31 |
|
|
| 697 |
|
Balance, January 30, 2021 |
|
| 6,590 |
|
|
| 1,671 |
|
|
| 1,557 |
|
|
| 9,818 |
|
Depreciation |
|
| 1,260 |
|
|
| 232 |
|
|
| 94 |
|
|
| 1,586 |
|
Balance, January 29, 2022 |
|
| 7,850 |
|
|
| 1,903 |
|
|
| 1,651 |
|
|
| 11,404 |
|
|
| Leasehold |
|
| Furniture and |
|
| Computer |
|
|
|
| ||||
|
| improvements |
|
| equipment |
|
| hardware |
|
| Total |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Net Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, January 30, 2021 |
|
| 1,531 |
|
|
| 563 |
|
|
| 215 |
|
|
| 2,309 |
|
Balance, January 29, 2022 |
|
| 271 |
|
|
| 383 |
|
|
| 121 |
|
|
| 775 |
|
Table of Contents |
8. PROPERTY AND EQUIPMENT
|
| Leasehold |
|
| Furniture and |
|
| Computer |
|
|
|
| ||||
|
| improvements |
|
| equipment |
|
| hardware |
|
| Total |
| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance, January 28, 2017 |
|
| 75,555 |
|
|
| 11,185 |
|
|
| 3,948 |
|
|
| 90,688 |
|
Acquisitions |
|
| 6,581 |
|
|
| 1,808 |
|
|
| 1,245 |
|
|
| 9,634 |
|
Disposals |
|
| — |
|
|
| (187 | ) |
|
| — |
|
|
| (187 | ) |
Cumulative translation adjustment |
|
| (1,503 | ) |
|
| (167 | ) |
|
| (49 | ) |
|
| (1,719 | ) |
Balance, February 3, 2018 |
|
| 80,633 |
|
|
| 12,639 |
|
|
| 5,144 |
|
|
| 98,416 |
|
Acquisitions |
|
| 2,096 |
|
|
| 1,125 |
|
|
| 676 |
|
|
| 3,897 |
|
Disposals |
|
| (68 | ) |
|
| (32 | ) |
|
| - |
|
|
| (100 | ) |
Cumulative translation adjustment |
|
| 1,481 |
|
|
| 178 |
|
|
| 58 |
|
|
| 1,717 |
|
Balance, February 2, 2019 |
|
| 84,142 |
|
|
| 13,910 |
|
|
| 5,878 |
|
|
| 103,930 |
|
Leasehold Furniture and Computer improvements equipment hardware Total $ $ $ $ Accumulated depreciation and impairment Balance, January 28, 2017 Depreciation Impairment Disposals Cumulative translation adjustment Balance, February 3, 2018 Depreciation Impairment Disposals Cumulative translation adjustment Balance, February 2, 2019 Net Carrying Value Balance, February 3, 2018 Balance, February 2, 2019 32,342 5,048 2,138 39,528 6,394 1,357 680 8,431 13,491 1,148 430 15,069 — (105 ) — (105 ) (931 ) (102 ) (32 ) (1,065 ) 51,296 7,346 3,216 61,858 5,117 1,134 653 6,904 8,164 1,411 351 9,926 — (16 ) — (16 ) 1,297 126 47 1,470 65,874 10,001 4,267 80,142 29,337 5,293 1,928 36,558 18,268 3,909 1,611 23,788
For the year ended February 2, 2019, an assessmentA review of impairment indicators was performed which causedin Fiscal 2021 and Fiscal 2020. This review revealed that no impairment was required in Fiscal 2021.
In Fiscal 2020, the Company to reviewreviewed the recoverable amount of the property and equipment for certain CGUs with an indication of impairment. CGUs reviewed included stores performingthat were permanently closed as part of the Restructuring Plan and the remaining stores that were expected to perform below the Company’s expectations. As a result,previous projection. This review required an impairment loss of $9,926 [February 3, 2018 - $15,069, January 28, 2017 — $7,516] related to store leasehold improvements, furniture and equipment and computer hardware amounting to $10,665, $1,990 and $512, respectively for a total of $13,167.
Impairment losses, including property and equipment and right-of-use assets, related to closed stores of $37,399 was recordedreported in the Canada and U.S. segments for $7,686 and $2,240, respectively [February 3, 2018 - $5,114 and $9,955, January 28, 2017 —$1,116 and $6,400, respectively]. These losses were determined by comparing the carrying amount of the CGU’sFiscal 2020 under Restructuring Plan activities, net assets with their respective recoverable amounts based on value in use. Value in use of nil [February 3, 2018 - $1,097, January 28, 2017 —$472] was determined based on management’s best estimate of expected future cash flows from use over the remaining lease terms, considering historical experience as well as current economic conditions, and was then discounted using a pre‑tax discount rate of 11.9% [February 3, 2018 – 11.9%(Note 19), January 28, 2017 — 13.4%]. A reversal of impairment occurs when previously impaired CGUs see improved financial results. For the year ended February 2, 2019, no ofwhile impairment losses were reversed [February 3, 2018 - $866, January 28, 2017 — nil]. Impairment losses were reversed onlyrelated to the extentstores that the carrying amounts of the CGU’s net assets do not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.
For the year ended February 2,remain open in Fiscal 2021, Fiscal 2020 and Fiscal 2019, the depreciation expense was $6,904 [February 3, 2018 - $8,431, January 28, 2017 —$8,069 ]; with $5,825 recorded in the Canada segment [February 3, 2018 - $6,387, January 28, 2017 — $5,583], $520 recorded in the U.S. segment [February 3, 2018 - $1,508, January 28, 2017 — $1,930],amounting to $nil, $2,561 and $559 recorded in corporate selling, general and administration expenses [February 3, 2018 - $536, January 28, 2017 — $556]. Depreciation expense and net impairment losses are$17,780, respectively, were reported in the consolidated statement of loss and comprehensive loss under selling, general and administration expenses (Note 18).
Depreciation expense is reported in the consolidated statement of income (loss) and comprehensive income (loss) under Selling, general and administration expenses (Note 18).
9. RIGHT-OF-USE ASSETS AND INTANGIBLE ASSETS
|
| Computer |
|
|
|
|
| |||||
|
| software |
|
| Other |
|
| Total |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Cost |
|
|
|
|
|
|
|
|
| |||
Balance, February 1, 2020 |
|
| 14,511 |
|
|
| 101 |
|
|
| 14,612 |
|
Acquisitions |
|
| 479 |
|
|
| 0 |
|
|
| 479 |
|
Disposals |
|
| (2,418 | ) |
|
| — |
|
|
| (2,418 | ) |
Cumulative translation adjustment |
|
| (54 | ) |
|
| 0 |
|
|
| (54 | ) |
Balance, January 30, 2021 |
|
| 12,518 |
|
|
| 101 |
|
|
| 12,619 |
|
Acquisitions |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
Disposals |
|
| — |
|
|
| — |
|
|
| 0 |
|
Cumulative translation adjustment |
|
| 0 |
|
|
| 0 |
|
|
| — |
|
Balance, January 29, 2022 |
|
| 12,518 |
|
|
| 101 |
|
|
| 12,619 |
|
|
| Computer |
|
|
|
|
| |||||
|
| software |
|
| Other |
|
| Total |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Accumulated amortization |
|
|
|
|
|
|
|
|
| |||
Balance, February 1, 2020 |
|
| 8,273 |
|
|
| — |
|
|
| 8,273 |
|
Amortization |
|
| 2,053 |
|
|
| 0 |
|
|
| 2,053 |
|
Impairment |
|
| 0 |
|
|
| — |
|
|
| 0 |
|
Disposals |
|
| (1,628 | ) |
|
| — |
|
|
| (1,628 | ) |
Cumulative translation adjustment |
|
| (8 | ) |
|
| — |
|
|
| (8 | ) |
Balance, January 30, 2021 |
|
| 8,690 |
|
|
| — |
|
|
| 8,690 |
|
Amortization |
|
| 1,695 |
|
|
| 0 |
|
|
| 1,695 |
|
Impairment |
|
| 0 |
|
|
| — |
|
|
| 0 |
|
Disposals |
|
| — |
|
|
| — |
|
|
| 0 |
|
Cumulative translation adjustment |
|
| — |
|
|
| 0 |
|
|
| 0 |
|
Balance, January 29, 2022 |
|
| 10,385 |
|
|
| — |
|
|
| 10,385 |
|
|
| Computer |
|
|
|
|
| |||||
|
| software |
|
| Other |
|
| Total |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Net Carrying Value |
|
|
|
|
|
|
|
|
| |||
Balance, January 30, 2021 |
|
| 3,828 |
|
|
| 101 |
|
|
| 3,929 |
|
Balance, January 29, 2022 |
|
| 2,133 |
|
|
| 101 |
|
|
| 2,234 |
|
Amortization expense is reported in the consolidated statement of income (loss) and comprehensive income (loss) under selling, general and administration expenses (Note 18).
60 |
Table of Contents |
10. LEASE LIABILITIES
Computer software Other Total $ $ $ Cost Balance, January 28, 2017 Acquisitions Cumulative translation adjustment Balance, February 3, 2018 Acquisitions Disposal Cumulative translation adjustment Balance, February 2, 2019 Accumulated amortization Balance, January 28, 2017 Amortization Cumulative translation adjustment Balance, February 3, 2018 Amortization Impairment Disposal Cumulative translation adjustment Balance, February 2, 2019 Net Carrying Value Balance, February 3, 2018 Balance, February 2, 2019 Set out below are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements:6,321 279 6,600 2,962 - 2,962 (4 ) (10 ) (14 ) 9,279 269 9,548 4,356 0 4,356 (1,724 ) (178 ) (1,902 ) 4 10 14 11,915 101 12,016 3,565 77 3,642 1,456 18 1,474 (2 ) (5 ) (7 ) 5,019 90 5,109 1,281 17 1,298 34 - 34 - (111 ) (111 ) 2 6 8 6,336 2 6,338 4,260 179 4,439 5,579 98 5,678
|
| Right-of-Use |
|
| Lease |
| ||
|
| Assets |
|
| Liability |
| ||
|
| $ |
|
| $ |
| ||
Balance, January 30, 2021 |
|
| 657 |
|
|
| 751 |
|
Additions |
|
| 12,467 |
|
|
| 12,468 |
|
Amortization expense |
|
| (1,037 | ) |
|
| — |
|
Interest expense |
|
| — |
|
|
| 131 |
|
Payments |
|
| — |
|
|
| (797 | ) |
Balance, January 29, 2022 |
|
| 12,087 |
|
|
| 12,553 |
|
|
|
|
|
|
|
|
|
|
Presented as: |
|
|
|
|
|
|
|
|
Current |
|
| — |
|
|
| 2,364 |
|
Non-Current |
|
| 12,087 |
|
|
| 10,189 |
|
|
| Right-of-Use |
|
| Lease |
| ||
|
| Assets |
|
| Liability |
| ||
|
| $ |
|
| $ |
| ||
Balance, February 1, 2020 |
|
| 35,082 |
|
|
| 88,664 |
|
Additions |
|
| 1,987 |
|
|
| 1,987 |
|
Amortization expense |
|
| (3,041 | ) |
|
| — |
|
Impairment of right-of-use assets |
|
| (26,793 | ) |
|
| — |
|
Gain on modification of lease liability |
|
| (6,684 | ) |
|
| (81,805 | ) |
Loss on disposal |
|
| (397 | ) |
|
| — |
|
Interest expense |
|
| — |
|
|
| 3,230 |
|
Payments |
|
| — |
|
|
| (6,007 | ) |
Transfer to liabilities subject to compromise |
|
| — |
|
|
| (6,207 | ) |
CTA |
|
| 503 |
|
|
| 889 |
|
Balance, January 30, 2021 |
|
| 657 |
|
|
| 751 |
|
|
|
|
|
|
|
|
|
|
Presented as: |
|
|
|
|
|
|
|
|
Current |
|
| — |
|
|
| 396 |
|
Non-Current |
|
| 657 |
|
|
| 355 |
|
The Company recorded an impairment loss of $nil related to the Company’s right-of-use assets [January 30, 2021 - $26,793, February 1, 2020 - $16,193].
Amortization expense is reported in the consolidated statement of lossincome (loss) and comprehensive income (loss) under selling,Selling, general and administration expenses (Note 18).
The following table presents a maturity analysis of future contractual undiscounted cash flows from lease liabilities:
January 29, | ||||
2022 | ||||
$ | ||||
Within one year | 2,997 | |||
After one year but no more than five years | 11,295 | |||
More than five years | — |
The Company has lease contracts that contain variable lease payments primarily based on a percentage of retail sales. The Company recognized variable lease payments of $3,301 for the year ended January 29, 2022 [January 30, 2021 - $985, February 1, 2020 - $1,274] In addition, expenses related to leases of low-value assets were $13 [January 30, 2021 - $18, February 1, 2020 - $18]. These expenses are recorded in Selling, general and administrative expenses (Note 18).
11. TRADE AND OTHER PAYABLESJanuary 29, | January 30, | |||||||
2022 | 2021 | |||||||
$ | $ | |||||||
Trade payable and accrued liabilities | 11,088 | 1,891 | ||||||
Income taxes payable | 44 | 1,244 | ||||||
Wages, salaries and employee benefits payable | 1,168 | 1,017 | ||||||
12,300 | 4,152 |
Included in disposal is a write-offprepaid expenses and deposits are advances to suppliers of $1,724 [February 2, 2018 – nil] related to costs incurred with respect to an ERP upgrade which the Company no longer intends to continue.$542 [January 30, 2021 - $6.8 million].
Table of Contents |
12. DEFERRED REVENUE
10. TRADE AND OTHER PAYABLES
February 2, February 3, 2019 2018 $ $ Trade payable and accrued liabilities Income taxes payable Government remittances Wages, salaries and employee benefits payable
February 2, February 3, 2019 2018 $ $ Gift cards liability 4,992 Loyalty program liability 1,249 6,241 | January 29, | January 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gift cards liability | 4,457 | 4,642 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loyalty program | 890 | 1,548 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subscription box liability | 87 | 890 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
5,434 | 7,080 |
During the year, the Company recorded gift card breakage income of $242 [February 3, 2018$294 [January 30, 2021 - $575, January 28, 2017$74, February 1, 2020 - $850]$1,294]. Gift card breakage is included in sales in the consolidated statement of loss.
12. PROVISIONS
February 2, February 3, 2019 2018 $ $ Opening balance Additions Reversals Utilization Settlements Accretion expense Cumulative translation adjustment Ending balance Less: Current portion Long-term portion of provisions 18,153 8,494 11,078 14,073 (4,796 ) (3,752 ) (5,730 ) (2,467 ) (691 ) (132 ) 251 2,292 889 (355 ) 19,154 18,153 (3,714 ) (4,693 ) 15,440 13,460
Provisions for onerous contracts have been recognized in respect of store leases where the unavoidable costs of meeting the obligations under the lease agreements exceed the economic benefits expected to be received from the contract. The unavoidable costs reflect the present value of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract. For the year ended February 2, 2019, additions to the onerous provisions were recorded in the amount of $11,078 [February 3, 2018 - $14,073], while the provisions for other stores were fully or partially reversed in the amount of $4,796 [February 3, 2018 - $3,752]income (loss).
13. COMMITMENTS AND CONTINGENCIESLIABILITIES SUBJECT TO COMPROMISE
Operating Lease CommitmentsAs a result of the Initial Order obtained on July 8, 2020 and subsequent amendments (Note 1), the payment of liabilities owing as of July 8, 2020 was stayed, and the outstanding liabilities as of that date, as well as any additional outstanding claims by creditors were subject to compromise pursuant to the Company’s Plan of Arrangement.
Obligations for goods and services provided to the Company after the filing date of July 8, 2020 were discharged based on negotiated terms and are excluded from liabilities subject to compromise.
The commercial premises at whichPlan of Arrangement was approved by the Company’s creditors on June 11, 2021 and required that the Company carries outdistribute an aggregate amount of $17.6 million to its retail operations, its head officecreditors in full and its primary warehouse location are leased from third parties. These rental contracts are classified as operating leases since there is no transferfinal settlement of risks and rewards inherent to ownership.
These leases have varying terms and renewal rights. In many cases,all claims affected by the amounts payablePlan of Arrangement. On June 18, 2021, the Monitor issued a Certificate of Implementation in which it certified that all the conditions precedent to the lessor include a fixed rental payment as well as a percentageimplementation of sales obtainedthe Plan, including, among other things, remittance of funds to the Monitor for distribution to creditors, had been fulfilled or waived by the Company indebtors. As a result of the leased premises. Many leases include escalating rental payments, whereby cash outflows increase over the lease term. Free rental periods are also sometimes included.
The minimum rentals payable under long‑term operating leases are exclusive of certain operating costs for whichfinal settlement, the Company recorded a gain on the settlement of liabilities subject to compromise of $79.9 million which was reduced by $2.0 million of professional fees in connection with the CCAA proceedings. This net gain is responsible. For the year ended February 2, 2019, the Company has recognizedpresented in the consolidated statementstatements of loss contingent rent amounting to $1,030 [February 3, 2018 - $1,742, January 28, 2017 — $2,312]income (loss) and accrued forcomprehensive income (loss) in Restructuring Plan activities, net and Recovery of income taxes as a contingent rent liabilitynet gain of $477 [February 3, 2018 - $725, January 28, 2017 —$1,001].
Included in the cost of sales$76.9 million and selling, general and administration expenses for the year ended February 2, 2019 is rent expense of $31,520 [February 3, 2018 - $31,565, January 28, 2017 — $29,173].
The following is a schedule of future minimum lease payments under operating leases:
February 2, February 3, 2019 2018 $ $ Within one year After one year but not more than five years More than five years 21,089 19,840 66,790 86,844 28,893 28,281 116,772 134,965
14. REVOLVING FACILITY$1.0 million, respectively.
On June 11, 2018,September 9, 2021, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides forMonitor filed a two-year revolving facility (“Amended Revolving Facility”)Certificate of Termination with the Québec Superior Court in the principal amount of $15.0 million or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018,accordance with no accordion feature. Borrowings under the Amended Revolving Facility may not exceed the lesserparagraph 24 of the total commitment forSanction Order and declared the revolving facility and the borrowing base, calculated as 75% of the face value of all eligible receivables plus 50% of the estimated value of all eligible inventory, less any priority payables.CCAA proceedings were terminated without further act or formality.
The Amended Credit Agreement subjects the CompanyAs a result, there are no liabilities subject to certain financial covenants. Without the prior written consentcompromise as of the lender, the Company’s fixed charge coverage ratio may not be less than 1.10:1.00 and the Company’s leverage ratio may not exceed 3.00:1:00. In addition, the Company’s net tangible worth may not be less than $65,000 and the Company’s minimum excess availability must not be less than $15.0 million. The Amended Revolving Facility bears interest based on the Company’s adjusted leverage ratio, at the bank’s prime rate, U.S. bank rate and LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility.
The credit facility also contains non-financial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company also cannot make any dividend payments.14. COMMITMENTS AND CONTINGENCIES
As at February 2, 2019,January 29, 2022, the Company did not have any borrowings underhas financial commitments in connection with the Amended Revolving Facility.purchase of goods and services that are enforceable and legally binding on the Company, exclusive of additional amounts based on sales, taxes and other costs. Purchase obligations, net of $542 of advances, which is included in Prepaid expenses and deposits, amounting to $11.3 million (Fiscal 2020 - $14.1 million, net of $6.8 of advances) are expected to be discharge within 12 months.
As at February 2, 2019, the Company is in breach of its fixed charge coverage ratio and certain non-financial covenants. BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement, however the Company cannot borrow under the facility. The Company is in good-faith discussions with BMO to install an asset based lending facility that will provide a revolving facility at commercial reasonable terms.15. SHARE CAPITAL
15. SHARE CAPITAL
Authorized
An unlimited number of common shares.
Issued and Outstanding
February 2, February 3, $ $ Share Capital - Common shares 2019 2018 112,519 111,692
|
|
| January 30, |
| ||||
|
|
| 2022 |
| ||||
|
|
| $ | |||||
Share Capital - 26,423,717 Common shares (January 30, 2021 - 26,234,582) | 113,534 | 113,167 |
62 |
Table of Contents |
Common |
| ||||
shares | |||||
# | |||||
Number of shares in issuance |
|
|
| ||
Balance, |
|
|
| ||
Issuance of common shares upon exercise of options |
|
|
| ||
Issuance of common shares upon vesting of restricted stock units |
|
|
| ||
Balance, |
|
| |||
|
| ||||
Issuance of common shares upon vesting of restricted stock units |
|
|
| ||
Balance, |
|
|
During the year ended February 2, 2019, 51,720January 29, 2022, no stock options were exercised for common shares for cash proceeds of $82 and 36,415 common shares for a non-cash settlement of $121 [February 3, 2018 – 456,773[January 30, 2021 - 4,000 stock options for cash proceeds of $1,782, January 28, 2017 — 1,236,154$4, February 1, 2020 - 18,500 stock options for cash proceeds of $2,779]$14]. The carrying value of common shares during the year ended February 2, 2019 includes $82 [February 3, 2018 - $887] which corresponds to a reduction in the contributed surplus associated to options exercised during the period.
In addition, during the year ended February 2, 2019, 74,728January 29, 2022, 189,135 common shares [February 3, 2018 – 97,648, January 28, 2017 —57,325][January 30, 2021 - 144,420, February 1, 2020 - 55,845] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $663,$367, net of tax [February 2, 2018[January 30, 2021 - $1,142]$319, February 1, 2020 - $303].
Stock‑Based Compensation
The 2015 Omnibus Plan provides for awards of stock options, stock appreciation rights (“SARs”), restricted stock, unrestricted stock, stock units (including restricted stock units, “RSUs”), performance awards, deferred share units, elective deferred share units and other awards convertible into or otherwise based on the Company’s common shares. Eligibility for stock options intended to be incentive stock options (“ISOs”) is limited to the Company’s employees. Dividend equivalents may also be provided in connection with an award under the 2015 Omnibus Plan. The maximum term of stock options and SARs is seven years. The options vest evenly over a period of 36 or 48 months, with some options vesting monthly and some options vesting annually. There are no cash settlement alternatives.
The maximum number of the Company’s common shares that are available for issuance under the 2015 Omnibus Plan is 1,440,0002,940,000 shares. Common shares issued under the 2015 Omnibus Plan may be shares held in treasury or authorized but unissued shares of the Company not reserved for any other purpose. As at February 2, 2019, 867,882January 29, 2022, 1,034,499 common shares remain available for issuance under the 2015 Omnibus Plan.
No options were granted for the year ended February 2, 2019. The weighted average fair value of options granted of $2.39 for the year ended February 3, 2018 was estimated using the Black Scholes option pricing model, using the following assumptions; risk-free interest rate of 1.79%, expected volatility of 27.4%, expected option life of 4.0 years, expected dividend yield of nil%, and exercise price of $9.76. Expected volatility was estimated using historical volatility of similar companies whose share prices were publicly available.
A summary of the status of the Company’s stock option plan and changes during the year is presented below.
|
| For the year ended |
|
| For the year ended |
| ||||||||||||||||||||||||||
|
| February 2, |
| February 3, |
|
| January 29, |
| January 30, |
| ||||||||||||||||||||||
|
| 2019 |
| 2018 |
|
| 2022 |
| 2021 |
| ||||||||||||||||||||||
|
|
|
| Weighted |
|
|
| Weighted |
|
|
|
| Weighted |
|
|
| Weighted |
| ||||||||||||||
|
|
|
| average |
|
|
| average |
|
|
|
| average |
|
|
| average |
| ||||||||||||||
|
| Options |
| exercise |
| Options |
| exercise |
|
| Options |
| exercise |
| Options |
| exercise |
| ||||||||||||||
|
| outstanding |
| price |
| outstanding |
| price |
|
| outstanding |
| price |
| outstanding |
| price |
| ||||||||||||||
|
| # |
|
| $ |
|
| # |
|
| $ |
|
| # |
|
| $ |
|
| # |
|
| $ |
| ||||||||
Outstanding, beginning of year |
| 447,779 |
| 7.18 |
| 933,195 |
| 5.63 |
|
| 17,490 |
| 6.32 |
| 76,350 |
| 8.96 |
| ||||||||||||||
Issued |
| - |
| - |
| 161,980 |
| 9.76 |
| |||||||||||||||||||||||
Exercised |
| (88,135 | ) |
| 2.76 |
| (456,773 | ) |
| 3.9 |
|
| — |
| — |
| (4,000 | ) |
| 0.77 |
| |||||||||||
Forfeitures |
|
| (222,104 | ) |
|
| 8.95 |
|
|
| (190,623 | ) |
|
| 9.63 |
|
|
| (14,000 | ) |
|
| 4.31 |
|
|
| (54,860 | ) |
|
| 10.40 |
|
Outstanding, end of year |
|
| 137,540 |
|
|
| 7.17 |
|
|
| 447,779 |
|
|
| 7.18 |
| ||||||||||||||||
Exercisable, end of year |
|
| 80,332 |
|
|
| 4.74 |
|
|
| 304,415 |
|
|
| 5.57 |
| ||||||||||||||||
Outstanding, end of period |
|
| 3,490 |
|
|
| 14.39 |
|
|
| 17,490 |
|
|
| 6.32 |
| ||||||||||||||||
Exercisable, end of period |
|
| 3,490 |
|
|
| 14.39 |
|
|
| 17,490 |
|
|
| 6.32 |
|
The weighted average share price at the date of exercise for options exercised during the year ended February 2, 2019January 30, 2021 was $4.47 [February 3, 2018 — $8.51].$0.87.
Table of Contents |
The following table summarizestables summarize information about the stock options outstanding at February 2, 2019January 29, 2022 and February 3, 2018:
Weighted Number of Number average Weighted options Weighted outstanding at contractual average exercisable at average February 2, remaining exercise February 2, exercise 2019 life price 2019 price Range of exercise prices # (years) $ # $ $0.77 $3.33 - $4.31 $8.76 - $10.28 $14.39 - $17.99 As at February 2, 2019 January 30, 2021:31,100 1.1 0.77 31,100 0.77 35,000 2.6 4.29 35,000 4.29 53,225 5.1 10.28 - - 18,215 4.2 14.51 14,232 14.54 137,540 3.4 7.17 80,332 4.74
|
|
|
|
| Weighted |
|
|
|
|
| Number of |
|
|
|
| |||||
|
| Number |
|
| average |
|
| Weighted |
|
| options |
|
| Weighted |
| |||||
|
| outstanding at |
|
| contractual |
|
| average |
|
| exercisable at |
|
| average |
| |||||
|
| January 29, |
|
| remaining |
|
| exercise |
|
| January 29, |
|
| exercise |
| |||||
|
| 2022 |
|
| life |
|
| price |
|
| 2022 |
|
| price |
| |||||
Range of exercise prices |
| # |
|
| (years) |
|
| $ |
|
| # |
|
| $ |
| |||||
$14.39 - $17.99 |
|
| 3,490 |
|
|
| 1.2 |
|
|
| 14.39 |
|
|
| 3,490 |
|
|
| 14.39 |
|
Balance, January 29, 2022 |
|
| 3,490 |
|
|
| 1.2 |
|
|
| 14.39 |
|
|
| 3,490 |
|
|
| 14.39 |
|
Weighted Number of Number average Weighted options Weighted outstanding at contractual average exercisable at average February 3, remaining exercise February 3, exercise 2018 life price 2018 price Range of exercise prices # (years) $ # $ $3.33 - $4.31 $8.76 - $10.28 $14.39 - $17.99 As at February 3, 2018 $0.77 50,600 2.3 0.77 50,600 0.77 172,396 3.7 3.91 161,395 3.89 161,980 6.4 9.76 55,530 8.76 62,803 4.3 14.68 36,890 14.72 447,779 4.6 7.18 304,415 5.57
|
|
|
|
| Weighted |
|
|
|
|
| Number of |
|
|
|
| |||||
|
| Number |
|
| average |
|
| Weighted |
|
| options |
|
| Weighted |
| |||||
|
| outstanding at |
|
| contractual |
|
| average |
|
| exercisable at |
|
| average |
| |||||
|
| January 30, |
|
| remaining |
|
| exercise |
|
| January 30, |
|
| exercise |
| |||||
|
| 2021 |
|
| life |
|
| price |
|
| 2021 |
|
| price |
| |||||
Range of exercise prices |
| # |
|
| (years) |
|
| $ |
|
| # |
|
| $ |
| |||||
$3.33 - $4.31 |
|
| 14,000 |
|
|
| 0.8 |
|
|
| 4.3 |
|
|
| 14,000 |
|
|
| 4.3 |
|
$14.39 - $17.99 |
|
| 3,490 |
|
|
| 2.20 |
|
|
| 14.39 |
|
|
| 3,490 |
|
|
| 14.39 |
|
As at January 30, 2021 |
|
| 17,490 |
|
|
| 1.1 |
|
|
| 6.32 |
|
|
| 17,490 |
|
|
| 6.32 |
|
Table of Contents |
A summary of the status of the Company’s RSU plan and changes during the yearyears ended February 2, 2019January 29, 2022 and February 3, 2018January 30, 2021 is presented below.
|
| For the year ended |
|
| For the year ended |
| ||||||||||||||||||||||||||
|
| February 2, |
| February 3, |
|
| January 29, |
| January 30, |
| ||||||||||||||||||||||
|
| 2019 |
| 2018 |
|
| 2022 |
| 2021 |
| ||||||||||||||||||||||
|
|
|
| Weighted |
|
|
| Weighted |
|
|
|
| Weighted |
|
|
| Weighted |
| ||||||||||||||
|
|
|
| average |
|
|
| average |
|
|
|
| average |
|
|
| average |
| ||||||||||||||
|
| RSUs |
| fair value |
| RSUs |
| fair value |
|
| RSUs |
| fair value |
| RSUs |
| fair value |
| ||||||||||||||
|
| outstanding |
| per unit (1) |
| outstanding |
| per unit (1) |
|
| outstanding |
| per unit (1) |
| outstanding |
| per unit (1) |
| ||||||||||||||
|
| # |
|
| $ |
|
| # |
|
| $ |
|
| # |
|
| $ |
|
| # |
|
| $ |
| ||||||||
Outstanding, beginning of year |
| 289,416 |
| 9.7 |
| 252,233 |
| 12.42 |
|
| 1,306,101 |
| 1.70 |
| 749,522 |
| 5.26 |
| ||||||||||||||
Granted |
| 491,450 |
| 4.47 |
| 298,897 |
| 8.59 |
|
| 727,217 |
| 4.55 |
| 1,177,222 |
| 1.44 |
| ||||||||||||||
Forfeitures |
| (360,371 | ) |
| 6.31 |
| (89,035 | ) |
| 10.03 |
|
| (364,478 | ) |
| (3.54 | ) |
| (351,205 | ) |
| (1.71 | ) | |||||||||
Vested |
| (74,728 | ) |
| 8.85 |
| (97,648 | ) |
| 11.85 |
|
| (189,135 | ) |
| (2.32 | ) |
| (121,920 | ) |
| (1.54 | ) | |||||||||
Vested, withheld for tax |
|
| (74,791 | ) |
|
| 8.6 |
|
|
| (75,031 | ) |
|
| 11.28 |
|
|
| (196,915 | ) |
|
| (2.32 | ) |
|
| (147,518 | ) |
|
| (2.16 | ) |
Outstanding, end of year |
|
| 270,976 |
|
|
| 5.26 |
|
|
| 289,416 |
|
|
| 9.7 |
| ||||||||||||||||
Outstanding, end of period |
|
| 1,282,790 |
|
|
| 2.60 |
|
|
| 1,306,101 |
|
|
| 1.70 |
|
______________
(1) Weighted average fair value per unit as at date of grant.
During the year ended February 2, 2019,January 29, 2022, the Company recognized a stock-based compensation expense of $211 [February 3, 2018$1,405 [January 30, 2021 - $2,021, January 28, 2017 — $2,264]$820, February 1, 2020 - $813].
16. FINANCE COSTS
|
| February 2, |
| February 3, |
| January 28, |
|
| For the year ended |
| ||||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
|
| January 29, |
| January 30, |
| February 1, |
| ||||||||||
|
| $ |
| $ |
| $ |
|
| 2022 |
| 2021 |
| 2020 |
| ||||||||||
Financing fees on term loan and Revolving Facility [note 14] |
| 2 |
| 79 |
| 75 |
| |||||||||||||||||
Accretion on provisions |
| 251 |
| 2,292 |
| - |
| |||||||||||||||||
|
| $ |
|
| $ |
|
| $ |
| |||||||||||||||
Interest and penalty on provision for uncertain tax position |
| 1,300 |
| - |
| - |
|
| 0 |
| 0 |
| (250 | ) | ||||||||||
Interest on lease liabilities |
| 131 |
| 3,229 |
| 6,962 |
| |||||||||||||||||
Other finance costs |
| 61 |
| - |
| 1 |
|
|
| 21 |
|
|
| 44 |
|
|
| 39 |
| |||||
|
| 1,614 |
| 2,371 |
| 76 |
|
|
| 152 |
|
|
| 3,273 |
|
|
| 6,751 |
|
Table of Contents |
17. INCOME TAXES
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
|
| For the year ended |
| |||||||||||||||||||||
|
| February 2, |
|
| February 3, |
|
| January 28, |
| |||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||||||||||||||
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
| ||||||
Income tax recovery — statutory rate |
|
| 26.9 |
|
|
| (7,700 | ) |
|
| 26.8 |
|
|
| (7,097 | ) |
|
| 26.5 |
|
|
| (1,564 | ) |
Increase (decrease) in provision for income tax (recovery) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible items |
|
| (1.3 | ) |
|
| 378 |
|
|
| (1.6 | ) |
|
| 437 |
|
|
| (10.1 | ) |
|
| 598 |
|
Effect of substantively enacted income tax rate changes |
|
| — |
|
|
| — |
|
|
| (7.9 | ) |
|
| 2,090 |
|
|
| — |
|
|
| — |
|
Unrecognized deferred income tax assets |
|
| (15.0 | ) |
|
| 4,306 |
|
|
| (16.7 | ) |
|
| 4,415 |
|
|
| — |
|
|
| — |
|
Write-down of deferred income tax assets |
|
| (18.2 | ) |
|
| 5,194 |
|
|
| (7.8 | ) |
|
| 2,054 |
|
|
| — |
|
|
| — |
|
Provision for uncertain tax position |
|
| (9.4 | ) |
|
| 2,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
| 0.0 |
|
|
| 4 |
|
|
| (0.4 | ) |
|
| 111 |
|
|
| 21.5 |
|
|
| (1,269 | ) |
Income tax provision (recovery) — effective tax rate |
|
| (17.0 | ) |
|
| 4,882 |
|
|
| (7.6 | ) |
|
| 2,010 |
|
|
| 37.9 |
|
|
| (2,235 | ) |
|
| For the year ended |
| |||||||||||||||||||||
|
| January 29, |
|
| January 30, |
|
| February 1, |
| |||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||||||||||||||
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
| ||||||
Income tax provision (recovery) — statutory rate |
|
| 26.3 |
|
|
| 20,288 |
|
|
| 26.4 |
|
|
| (14,737 | ) |
|
| 26.8 |
|
|
| (8,747 | ) |
Increase (decrease) in income tax provision (recovery) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible items |
|
| 0.5 |
|
|
| 408 |
|
|
| (0.1 | ) |
|
| 39 |
|
|
| (0.7 | ) |
|
| 232 |
|
Effect of substantively enacted income tax rate changes |
|
| (0.1 | ) |
|
| (51 | ) |
|
| (0.7 | ) |
|
| 400 |
|
|
| (1.2 | ) |
|
| 394 |
|
Unrecognized deferred income tax assets |
|
| (27.3 | ) |
|
| (21,096 | ) |
|
| (25.4 | ) |
|
| 14,209 |
|
|
| (25.2 | ) |
|
| 8,232 |
|
Provision for uncertain tax position |
|
| (0.6 | ) |
|
| (454 | ) |
|
| — |
|
|
| — |
|
|
| 4.6 |
|
|
| (1,500 | ) |
Other |
|
| (0.1 | ) |
|
| (95 | ) |
|
| (0.2 | ) |
|
| 89 |
|
|
| 0.3 |
|
|
| (111 | ) |
Income tax provision (recovery) — effective tax rate |
|
| (1.3 | ) |
|
| (1,000 | ) |
|
| (0 | ) |
|
| — |
|
|
| 4.6 |
|
|
| (1,500 | ) |
A breakdown of the income tax provision (recovery)recovery on the consolidated statement of lossincome (loss) is as follows:
For the year ended February 2, February 3, January 28, $ $ $ Income tax provision (recovery) Current Deferred 2019 2018 2017 (187 ) (1,575 ) 2,145 5,069 3,585 (4,380 ) 4,882 2,010 (2,235 )
January 29, | January 30, | February 1, | ||||||||||
2022 | 2021 | 2020 | ||||||||||
$ | $ | $ | ||||||||||
Income tax recovery | ||||||||||||
Current | (1,000 | ) | — | (1,500 | ) | |||||||
Deferred | — | — | — | |||||||||
(1,000 | ) | — | (1,500 | ) |
On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was signed into law, which reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. AsIn Fiscal 2018, in connection with a result of the U.S. Tax Reform, The Company’s net deferred taxes reported on the balance sheet were required to be re-measured using the newly enacted rates. The effect of this re-evaluation resulted in a decrease in the net deferred tax assets in the amount of $4,892 during the year ended February 3, 2018.
The U.S. Tax Reform introduces other important changes in the U.S. corporate income tax laws that may significantly affect the Company in future years, including the creation of a new Base Erosion Anti-Abuse Tax that subjects certain payments from U.S. corporations to foreign related parties to additional taxes, and limitations to certain deductions for net interest expense incurred by U.S. corporations. The U.S. Tax Reform also includes an increase in bonus depreciation from 50% to 100% for qualified property placed in service after September 27, 2017 and before 2023. Future regulations and interpretations to be issued by U.S. authorities may also impact the Company’s estimates and assumptions used in calculating its income tax provisions.
We are currently undergoingCanada Revenue Agency transfer pricing audit, by the Canada Revenue Agency. While the Company believes that its filing positions are appropriate and supportable, periodically, certain matters may be challenged by tax authorities. We believe that our transfer pricing practices reflect the accurate economic allocation of profit and risk and that proper contemporaneous transfer pricing documentation is in place. Preliminary findings from the transfer pricing audit indicates a difference in the interpretation of the economics of the arrangement. Although the outcome of such matters is not predictable with assurance, we have nonetheless recorded a provision of $4.0 million comprised of $2.7 million and $1.3 milllionmillion for taxes and interest, respectively. WhileIn Fiscal 2019 the Company believesrevised its estimate for this uncertain tax provisions are adequate,position to $1.2 million and $1.0 million for taxes and interest, respectively. In 2020, the final determination ofCompany further revised its estimate for this uncertain tax auditsposition to $359 for interest. This is classified in trade and any related disputes could be materially different from historical income tax provisions and accruals. The Company intendsother payables within liabilities subject to vigorously defend its practices and believes it has sufficient arguments to mitigate the unfavorable outcome.compromise (Note 13).
66 |
Table of Contents |
The tax effects of temporary differences and net operating losses that give rise to deferred income tax assets and lease liabilities are as follows:
|
| January 29, |
|
| January 30, |
|
| February 1, |
| |||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Deferred income tax assets |
|
|
|
|
|
|
|
|
| |||
Operating losses carried forward |
|
| 14,965 |
|
|
| 14,295 |
|
|
| 7,893 |
|
Tax values of property and equipment in excess of carrying value including impairment |
|
| 2,647 |
|
|
| 3,099 |
|
|
| 2,330 |
|
Stock options |
|
| 3,584 |
|
|
| 3,587 |
|
|
| 3,763 |
|
Financing fees and IPO-related costs |
|
| 1 |
|
|
| 3 |
|
|
| 5 |
|
Lease liabilities |
|
| 3,301 |
|
|
| 197 |
|
|
| 23,942 |
|
Liabilities subject to compromise |
|
| — |
|
|
| 21,454 |
|
|
| — |
|
Other |
|
| 112 |
|
|
| 791 |
|
|
| 953 |
|
Total deferred income tax assets |
|
| 24,610 |
|
|
| 43,426 |
|
|
| 38,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets |
|
| (3,180 | ) |
|
| (191 | ) |
|
| (9,444 | ) |
Unrealized foreign exchange gain related to intercompany advances |
|
| — |
|
|
| (8 | ) |
|
| (109 | ) |
Total deferred income tax liabilities |
|
| (3,180 | ) |
|
| (199 | ) |
|
| (9,553 | ) |
Total deferred income tax assets, net |
|
| 21,430 |
|
|
| 43,227 |
|
|
| 29,333 |
|
Unrecognized deferred income tax asset |
|
| (21,430 | ) |
|
| (43,227 | ) |
|
| (29,333 | ) |
Net deferred income tax assets |
|
| — |
|
|
| — |
|
|
| — |
|
February 2, February 3, 2019 2018 $ $ Deferred income tax assets Operating losses carried forward 4,608 1,259 Tax values of property and equipment in excess of carrying value including impairment 3,505 1,553 Deferred rent 1,762 1,662 Stock options 3,843 3,401 Financing fees and IPO-related costs 588 1,197 Lease inducements 634 515 Provisions for onerous contracts 5,357 4,812 Other 665 635 Total deferred income tax assets 20,962 15,034 Deferred income tax liabilities Unrealized foreign exchange gain on derivative financial instruments - 62 Unrealized foreign exchange gain related to intercompany advances (212 ) (113 ) Deferred income tax liabilities (212 ) (51 ) Net 20,750 14,983 Unrecognized deferred income tax asset (20,750 ) (9,789 ) Net deferred income tax assets (liabilities) - 5,194
As at February 2, 2019,January 29, 2022, the Company’s Canadian operations have accumulated losses amounting to $11.9$ 34.3 million [February 3, 2018 — nil; January 28, 2017 — nil][January 30, 2021 - $32.5 million, February 1, 2020 - $20.2 million], which begin to expire during the yearin 2039. As at February 2, 2019,January 29, 2022, the Company’s U.S. subsidiary has accumulated losses amounting to US$14.026.8 million [February 3, 2018 —[January 30, 2021 - US$14.2 million; January 28, 2017 —25.9 million, February 1, 2020 - US$14.917.4 million], of which US$13.8 million expire during the years ending in 2033 to 2039.2037. The remaining accumulated losses amounting to US$13.0 million have an indefinite carry forward period.
Based upon the projections for future taxable income and prudent tax planning strategies, management believes it is no longer probable the Company will realize the benefits of these operating tax losses carried forward and other deductible temporary differences. Therefore, a full valuation allowance of $20,750$21.4 million was recorded against the net deferred income tax asset.
67 |
Table of Contents |
The changes in the net deferred income tax asset were as follows for the fiscal years:year:
|
| February 2, |
| February 3, |
|
| January 29, |
| January 30, |
| February 1, |
| ||||||||
|
| 2019 |
| 2018 |
|
| 2022 |
| 2021 |
| 2020 |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Balance net, beginning of year |
| 5,194 |
| 14,375 |
|
| 0 |
| 0 |
| 0 |
| ||||||||
Deferred rent |
| 101 |
| (222 | ) |
| 0 |
| 0 |
| (1,762 | ) | ||||||||
Canadian and U.S. operating losses carried forward |
| 3,349 |
| (1,180 | ) |
| 670 |
| 6,402 |
| 6,476 |
| ||||||||
Property and equipment, including store impairment |
| 1,952 |
| 3,387 |
|
| (452 | ) |
| 769 |
| (1,175 | ) | |||||||
Stock options |
| 442 |
| (2,245 | ) |
| (3 | ) |
| (176 | ) |
| (80 | ) | ||||||
Financing fees and IPO-related costs |
| (609 | ) |
| (604 | ) |
| (2 | ) |
|
| (2 | ) |
| (583 | ) | ||||
Foreign exchange gain on derivative financial instrument |
| (62 | ) |
| 183 |
| ||||||||||||||
Unrealized foreign exchange gain on intercompany advances |
| (99 | ) |
| 196 |
|
| 8 |
|
| 101 |
| 103 |
| ||||||
Right-of-use asset |
| (2,989 | ) |
| 9,253 |
| (9,444 | ) | ||||||||||||
Lease liabilities |
| 3,104 |
| (23,745 | ) |
| 23,942 |
| ||||||||||||
Lease inducement |
| 120 |
| (149 | ) |
| 0 |
| 0 |
| (634 | ) | ||||||||
Unrecognized deferred income tax asset |
| (10,961 | ) |
| (9,789 | ) |
| 21,797 |
| (13,894 | ) |
| (11,774 | ) | ||||||
Provisions for onerous contracts |
| 544 |
| 1,447 |
|
| 0 |
| 0 |
| (5,357 | ) | ||||||||
Liabilities subject to compromise |
| (21,454 | ) |
| 21,454 |
| 0 |
| ||||||||||||
Other |
|
| 29 |
|
|
| (205 | ) |
|
| (679 | ) |
|
| (162 | ) |
|
| 288 |
|
Deferred income tax assets net, end of year |
|
| - |
|
|
| 5,194 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
18. SELLING, GENERAL AND ADMINISTRATION EXPENSES
Included in selling, general and administration expenses are the following expenses:
For the year ended February 2, February 3, January 28, $ $ $ Wages, salaries and employee benefits Depreciation of property and equipment Amortization of intangible assets Loss on disposal of property and equipment Impairment of property and equipment Net Provision for onerous contracts (a) Stock-based compensation Executive and employee separation costs related to salary Strategic review and proxy contest costs ERP project termination Other selling, general and administration 2019 2018 2017 68,324 65,888 61,143 6,904 8,431 8,069 1,298 1,474 758 151 82 356 9,960 15,069 7,516 552 7,854 8,140 211 2,021 2,264 1,280 2,033 835 3,593 - - 2,496 - - 30,953 29,078 25,675 125,722 131,930 114,756
|
| For the twelve months ended |
| |||||||||
|
| January 29, |
|
| January 30, |
|
| February 1, |
| |||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Wages, salaries and employee benefits |
|
| 15,465 |
|
|
| 20,222 |
|
|
| 65,288 |
|
Depreciation of property and equipment |
|
| 1,586 |
|
|
| 2,399 |
|
|
| 5,411 |
|
Amortization of intangible assets |
|
| 1,695 |
|
|
| 2,053 |
|
|
| 1,934 |
|
Amortization right-of-use asset |
|
| 1,037 |
|
|
| 3,041 |
|
|
| 12,051 |
|
Impairment of property and equipment and right-of-use assets |
|
| — |
|
|
| 2,561 |
|
|
| 17,780 |
|
Marketing expenses |
|
| 6,923 |
|
|
| 4,693 |
|
|
| 7,282 |
|
Stock-based compensation |
|
| 1,405 |
|
|
| 820 |
|
|
| 813 |
|
Government emergency wage and rent subsidies (1) |
|
| (4,350 | ) |
|
| (4,494 | ) |
|
| — |
|
Software implementation costs |
|
| 3,599 |
|
|
| — |
|
|
| — |
|
IT expenses |
|
| 5,558 |
|
|
| 3,986 |
|
|
| 4,022 |
|
Credit card fees |
|
| 2,255 |
|
|
| 2,770 |
|
|
| 3,030 |
|
Professional fees |
|
| 1,474 |
|
|
| 1,713 |
|
|
| 2,002 |
|
Other selling, general and administration |
|
| 6,276 |
|
|
| 6,700 |
|
|
| 15,693 |
|
|
|
| 42,923 |
|
|
| 46,464 |
|
|
| 135,306 |
|
(1) | The Company qualifies for |
Table of Contents |
19. RESTRUCTURING PLAN ACTIVITIES, NET
Included in Restructuring Plan activities, net are the following expenses:
For the year ended | ||||||||||||
January 29, | January 30, | February 1, | ||||||||||
2022 | 2021 | 2020 | ||||||||||
$ | $ | $ | ||||||||||
Liabilities subject to compromise | (78,861 | ) | (75,121 | ) | — | |||||||
Professional fees | 2,004 | 2,840 | — | |||||||||
Income tax recovery | (1,000 | ) | — | — | ||||||||
Trade and Other Payables | — | 3,089 | — | |||||||||
Lease terminations | — | 76,281 | — | |||||||||
Loss on disposal of property and equipment and right-of-use assets | — | 1,559 | — | |||||||||
Severance costs | — | 4,840 | — | |||||||||
Interest and penalties related to unpaid occupancy charges | — | 1,282 | — | |||||||||
Store closure related costs | — | 4,158 | — | |||||||||
Impairment of property and equipment and right-of-use assets | — | 37,399 | — | |||||||||
(77,857 | ) | 56,327 | — | |||||||||
Presented in: | ||||||||||||
Restructuring plan activities, net | (76,857 | ) | 56,327 | — | ||||||||
Recovery of income taxes | (1,000 | ) | — | — | ||||||||
(77,857 | ) | 56,327 | — |
19.20. EARNINGS PER SHARE
The following reflects the lossincome (loss) and share data used in the basic and diluted EPS computations:
February 2, February 3, January 28, 2019 2018 2017 $ $ $ Net loss for basic EPS Weighted average number of shares outstanding — basic and diluted (33,539 ) (28,501 ) (3,688 ) 25,967,836 25,716,186 24,699,290
|
| For the year ended |
| |||||||||
|
| January 29, |
|
| January 30, |
|
| February 1, |
| |||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Net earnings (loss) for basic EPS |
|
| 78,127 |
|
|
| (55,932 | ) |
|
| (31,197 | ) |
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 26,323,469 |
|
|
| 26,168,848 |
|
|
| 26,056,332 |
|
Fully diluted |
|
| 27,644,498 |
|
|
| 26,168,848 |
|
|
| 26,056,332 |
|
Net earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 2.97 |
|
|
| (2.14 | ) |
|
| (1.20 | ) |
Fully diluted |
|
| 2.83 |
|
|
| (2.14 | ) |
|
| (1.20 | ) |
For the years ended January 30, 2021, and February 2, 2019, February 3, 2018, and January 28, 2017, as a result1, 2020, because of the net loss during the year, the stock options and RSUs disclosed in Note 15 are anti‑dilutive.
20.21. RELATED PARTY DISCLOSURES
TransactionsLoan 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 $4.0 million, amended on September 13, 2019 to reflect a maximum amount available under the facility of $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 favor of the Company on its shares of the Company. Squish is a company controlled by Sarah Segal, the Chief Executive Officer and Chief Brand Officer of the Company and a member of the Board of Directors. RDI, the principal shareholder of the Company, is controlled by Herschel Segal, Strategic Advisor of the Company and recently retired Chairman of the Board of Directors. 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 $2.0 million and accrued interest of $45, including $19 which was earned in the first quarter, was fully repaid.
Other transactions with related parties are measured at the exchange amount, being the consideration established and agreed to by the related parties.
69 |
Table of Contents |
During the year ended February 2, 2019,January 29, 2022, the Company purchased merchandise for resale from a company controlled by one of its executive employees amounting to $241 [February 3, 2018 — $87;$305 [January 30, 2021 - $139, February 1, 2020 - $124]. As of January 28, 2017 — nil]. Subsequent to year end, the Company extended its relationship by entering into29, 2022, an agreement for the purchaseamount of $nil was outstanding and sale of administrativepresented in Trade and infrastructure services.other payables.
InThe Company also provided infrastructure and administrative services of $60 [January 30, 2021 - $90, February 2019, the Company entered into an arrangement with1, 2020 - $312] to a company controlled by one of its executive employees.
There was no spend for consulting services from a related party of the controllingprincipal shareholder for the development of reporting and consulting services.in January 30, 2022 [January 30, 2021 - $53, February 1, 2020 - $237].
During the year ended February 2, 2019, the Company reimbursed Rainy Day Investments Ltd. (“Rainy Day Investments”), a controlling shareholder $957 for third-party costs incurred by it in connection with the proxy contest which culminatedThere were no amounts receivable from, or payable to related parties at the Company’s annual meeting held on June 14, 2018. This reimbursement was approved by the independent members of the Board of Directors of the Company. This amount is included in selling, general and administration expenses.January 29, 2022.
Transactions with Key Management Personnelkey management personnel
Key management of the Company includes members of the Board as well as members of the Executive Committee.certain executive officers. The compensation earnedexpensed by key management in aggregate was as follows:
February 2, February 3, January 28, 2019 2018 2017 $ $ $ Wages, salaries ,bonus and director fees Termination benefits Stock-based compensation Total compensation earned by key management personnel 2,706 4,071 3,434 1,025 1,485 719 101 1,809 1,377 3,832 7,365 5,530
|
| For the year ended |
| |||||||||
|
| January 29, |
|
| January 30, |
|
| February 1, |
| |||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Wages, salaries, bonus and director fees |
|
| 2,182 |
|
|
| 2,261 |
|
|
| 2,784 |
|
Termination benefits |
|
| 0 |
|
|
| 132 |
|
|
| 110 |
|
Stock-based compensation |
|
| 1,258 |
|
|
| 736 |
|
|
| 669 |
|
Total compensation earned by key management personnel |
|
| 3,440 |
|
|
| 3,129 |
|
|
| 3,563 |
|
21.22. SEGMENT INFORMATION
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The Company has reviewed its operations and determined that each of its retail stores represents antwo operating segment. However, because its retail stores have similar economic characteristics, sell similar products, have similar types of customers, and use similar distribution channels, the Company has determined that these operating segments can be aggregated at a geographic level. As a result, the Company has concluded that it has two reportable segments, Canada, and the U.S., that derive their revenues from thevarious distribution channels including online, retail and online sale of tea, tea accessories, and food and beverages.wholesale. 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 to be allocated to the segments and assesses performance, and for which discrete financial information is available.
The Company derives revenue from the following products:
|
| For the year ended |
| |||||||||
|
| January 29, |
|
| January 30, |
|
| February 1, |
| |||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Tea |
|
| 89,921 |
|
|
| 103,620 |
|
|
| 148,846 |
|
Tea accessories |
|
| 12,700 |
|
|
| 16,255 |
|
|
| 34,003 |
|
Food and beverages |
|
| 1,452 |
|
|
| 1,811 |
|
|
| 13,613 |
|
|
|
| 104,073 |
|
|
| 121,686 |
|
|
| 196,462 |
|
February 2, February 3, January 28, $ $ $ Tea Tea accessories Food and beverages 2019 2018 2017 152,761 156,125 143,280 44,436 49,470 53,807 15,556 18,420 18,897 212,753 224,015 215,984
All property and equipment, right-of-use assets and intangible assets are located in Canada.
Table of Contents |
Property and equipment and intangible assets by country are as follows:
February 2, February 3, January 28, $ $ $ Canada US Total 2019 2018 2017 27,996 37,234 41,432 1,470 3,763 12,686 29,466 40,997 54,118
Results from operating activities before corporate expenses per country are as follows:
|
| For the year ended |
| |||||||||
|
| February 2, 2019 |
| |||||||||
|
| Canada |
|
| US |
|
| Consolidated |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Sales |
|
| 169,430 |
|
|
| 43,323 |
|
|
| 212,753 |
|
Cost of sales |
|
| 89,604 |
|
|
| 25,170 |
|
|
| 114,774 |
|
Gross profit |
|
| 79,826 |
|
|
| 18,153 |
|
|
| 97,979 |
|
Selling, general and administration expenses (allocated) |
|
| 57,902 |
|
|
| 18,175 |
|
|
| 76,077 |
|
Impairment of property and equipment |
|
| 7,719 |
|
|
| 2,240 |
|
|
| 9,960 |
|
Onerous contracts provision (recovery) |
|
| 2,034 |
|
|
| (1,482 | ) |
|
| 552 |
|
Results from operating activities before corporate expenses |
|
| 12,171 |
|
|
| (780 | ) |
|
| 11,391 |
|
Selling, general and administration expenses (non-allocated) |
|
|
|
|
|
|
|
|
|
| 39,134 |
|
Results from operating activities |
|
|
|
|
|
|
|
|
|
| (27,743 | ) |
Finance costs |
|
|
|
|
|
|
|
|
|
| 1,614 |
|
Finance income |
|
|
|
|
|
|
|
|
|
| (700 | ) |
Loss before income taxes |
|
|
|
|
|
|
|
|
|
| (28,657 | ) |
For the year ended | ||||||||||||
January 29, 2022 | ||||||||||||
Canada | US | Consolidated | ||||||||||
$ | $ | $ | ||||||||||
Sales | 82,545 | 21,528 | 104,073 | |||||||||
Cost of | 48,632 | 12,239 | 60,871 | |||||||||
Gross profit | 33,913 | 9,289 | 43,202 | |||||||||
Selling, general and administration expenses (allocated) | 13,149 | 2,724 | 15,873 | |||||||||
Results from operating activities before corporate expenses | 20,764 | 6,565 | 27,329 | |||||||||
Selling, general and administration expenses (non-allocated) | 27,050 | |||||||||||
Restructuring plan activities, net | (76,857 | ) | ||||||||||
Results from operating activities | 77,136 | |||||||||||
Finance costs | 152 | |||||||||||
Finance income | (143 | ) | ||||||||||
Net income before income taxes | 77,127 |
|
| For the year ended |
|
| For the year ended |
| ||||||||||||||||||
|
| February 3, 2018 |
|
| January 30, 2021 |
| ||||||||||||||||||
|
| Canada |
| US |
| Consolidated |
|
| Canada |
| US |
| Consolidated |
| ||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Sales |
| 185,287 |
| 38,728 |
| 224,015 |
|
| 92,537 |
| 29,149 |
| 121,686 |
| ||||||||||
Cost of sales |
|
| 93,383 |
|
|
| 23,389 |
|
|
| 116,772 |
|
|
| 55,902 |
|
|
| 16,051 |
|
|
| 71,953 |
|
Gross profit |
| 91,904 |
| 15,339 |
| 107,243 |
|
| 36,635 |
| 13,098 |
| 49,733 |
| ||||||||||
Selling, general and administration expenses (allocated) |
| 54,884 |
| 18,302 |
| 73,186 |
|
| 18,923 |
| 4,467 |
| 23,390 |
| ||||||||||
Impairment of property and equipment |
| 5,114 |
| 9,955 |
| 15,069 |
| |||||||||||||||||
Provision for onerous contracts |
|
| 1,752 |
|
|
| 6,102 |
|
|
| 7,854 |
| ||||||||||||
Impairment of property and equipment and right-of-use assets |
|
| 2,561 |
|
|
| — |
|
|
| 2,561 |
| ||||||||||||
Results from operating activities before corporate expenses |
| 30,154 |
| (19,020 | ) |
| 11,134 |
|
| 15,151 |
| 8,631 |
| 23,782 |
| |||||||||
Selling, general and administration expenses (non-allocated) |
|
|
|
|
|
| 35,821 |
|
|
|
|
|
| 20,513 |
| |||||||||
Restructuring plan activities, net |
|
|
|
|
|
| 56,327 |
| ||||||||||||||||
Results from operating activities |
|
|
|
|
| (24,687 | ) |
|
|
|
|
| (53,058 | ) | ||||||||||
Finance costs |
|
|
|
|
| 2,371 |
|
|
|
|
|
| 3,273 |
| ||||||||||
Finance income |
|
|
|
|
|
| (567 | ) |
|
|
|
|
|
| (399 | ) | ||||||||
Loss before income taxes |
|
|
|
|
|
| (26,491 | ) | ||||||||||||||||
Net loss before income taxes |
|
|
|
|
|
| (55,932 | ) |
For the year ended January 28, 2017 Canada US Consolidated $ $ $ Sales 180,380 35,604 215,984 Cost of sales 86,473 21,061 107,534 Gross profit 93,907 14,543 108,450 Selling, general and administration expenses (allocated) 49,466 16,584 66,050 Impairment of property and equipment 1,116 6,400 7,516 Provision for onerous contracts 427 7,713 8,140 Results from operating activities before corporate expenses 42,898 (16,154 ) 26,744 Selling, general and administration expenses (non-allocated) 33,050 Results from operating activities (6,306 ) Finance costs 76 Finance income (479 ) Loss before income taxes (5,903 )
|
| For the year ended February 1, 2020 |
| |||||||||
|
| Canada |
|
| US |
|
| Consolidated |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Sales |
|
| 152,892 |
|
|
| 43,570 |
|
|
| 196,462 |
|
Cost of sales |
|
| 68,958 |
|
|
| 18,928 |
|
|
| 87,886 |
|
Gross profit |
|
| 83,934 |
|
|
| 24,642 |
|
|
| 108,576 |
|
Selling, general and administration expenses (allocated) |
|
| 65,536 |
|
|
| 19,520 |
|
|
| 85,056 |
|
Impairment of property and equipment and right-of-use assets |
|
| 12,087 |
|
|
| 5,693 |
|
|
| 17,780 |
|
Results from operating activities before corporate expenses |
|
| 6,311 |
|
|
| (571 | ) |
|
| 5,740 |
|
Selling, general and administration expenses (non-allocated) |
|
|
|
|
|
|
|
|
|
| 32,470 |
|
Restructuring plan activities, net |
|
|
|
|
|
|
|
|
|
| — |
|
Results from operating activities |
|
|
|
|
|
|
|
|
|
| (26,730 | ) |
Finance costs |
|
|
|
|
|
|
|
|
|
| 6,751 |
|
Finance income |
|
|
|
|
|
|
|
|
|
| (784 | ) |
Net loss before income taxes |
|
|
|
|
|
|
|
|
|
| (32,697 | ) |
The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, credit, and liquidity.
Currency Risk — Foreign Exchange Riskrisk - 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 somea significant amount 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.
71 |
Table of Contents |
Assuming that
If all other variables remain constant, a revaluation of these monetary assets and liabilities due to a 5% rise or fall in the Canadian dollar against the U.S. dollar would have resulted in an increase or decrease to net loss in the amount of $123.$97.
The Company’s foreign exchange exposure is as follows:
February 2, February 3, 2019 2018 US$ US$ Cash Accounts receivable Accounts payable 267 5,686 1,142 882 3,869 2,555
January 29, | January 30, | |||||||
2022 | 2021 | |||||||
US$ | US$ | |||||||
Cash | 2,151 | 630 | ||||||
Accounts and other receivables | 137 | 465 | ||||||
Prepaid expenses and deposits | 199 | 5,394 | ||||||
Trade and other payables | 4,426 | 750 |
The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.
In order to protect itself from theMarket risk of losses should the value of the Canadian dollar decline in relation to the U.S. dollar, the Company entered into forward contracts to fix the exchange- interest rate of 80% to 90% of its expected U.S. dollar inventory purchasing requirements, through September 2018. A forward foreign exchange contract is a contractual agreement to buy a specific currency at a specific price and date in the future. The Company designated the forward contracts as cash flow hedging instruments under IFRS 9. This has resulted in mark-to-market foreign exchange adjustments, for qualifying hedged instruments, being recorded as a component of other comprehensive loss for the years ended Februay 2, 2019 and February 3, 2018. As at February 2, 2019 and February 3, 2018, the designated portion of these hedges was considered effective.
The Company had no foreign exchange contracts outstanding as at February 2, 2019.
The nominal and contract values of foreign exchange contracts outstanding as at February 3, 2018 are as follows:
Range of Nominal Nominal Unrealized Contractual value value gain/(loss) Purchase contracts exchange rate US$ C$ Term C$ U.S. dollar 1.2221 - 1.3050 February 2018 to September 2018 24,100 30,033 (229 )
Market Risk — Interest Rate Riskrisk
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 of cash. The Company is exposed to cash flow risk on its Revolving Facility which bears interest at variable interest rates (see Note 14). As at February 2, 2019 and February 3, 2018, the Company did not have any borrowings on the Revolving Facility.
Liquidity Riskrisk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s approach to managing liquidity risk is to ensure, to the extent possible, that it will always have sufficient liquidity to meet liabilities when due. The Company’s liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. The Company is exposed to this risk mainly in respect of its trade and other payables.payables, lease, and purchase obligations for goods and services.
As at February 2, 2019, the CompanyJanuary 29, 2022, we had $42.1$25.1 million in cash. In addition, the Company has a Revolving Facility of $15,000, the full amount of which remained un-drawncash held by major Canadian financial institutions.
Working capital was $43.4 million as at February 2, 2019. AccessJanuary 29, 2022, compared to this Facility is further described$62.7 million, excluding liabilities subject to compromise, as a January 30, 2021. The decrease in Note 14.
The Company expects to finance its working capital needs, store renovations,is substantially explained by a decrease in cash, accounts and investmentsother receivables and prepaid expenses and deposits, an increase in infrastructure through cash flows from operations and cash on hand. The Company expects that its trade and other payables willand current portion of lease liabilities, partially offset by an increase in inventory and deferred revenue.
Our primary source of liquidity is cash on hand and cashflow generated from operations as we do not have any committed debt financing. Our working capital requirements are driven by the purchase of inventory, payment of payroll, ongoing technology expenditures and other operating costs.
Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. Capital expenditures in our new business model are not significant and amounted to $52 in Fiscal 2021.
As at January 29, 2022, the Company has financial commitments in connection with the purchase of goods and services that are enforceable and legally binding on the Company, amounting to $11.3 million, net of $542 of advances (Fiscal 2020 - $14.1 million, net of $6.8 million of advances) which are expected to be discharged within 90 days.12 months.
The following table summarizes the obligations as of February 2, 2019 and February 3, 2018, and the effect such obligations are expected to have on liquidity and cash flows in future periods.
February 2, 2019 Payments due by period less than Between More than Total 1 year 1 and 5 years 5 years Trade and other payables Operating lease obligations Purchase obligations 18,251 18,251 - - 116,772 21,089 66,790 28,893 9,146 9,146 - - 144,169 48,486 66,790 28,893
|
| February 3, 2018 |
| |||||||||||||
|
| Payments due by period |
| |||||||||||||
|
|
|
|
| less than |
|
| Between |
|
| More than |
| ||||
|
| Total |
|
| 1 year |
|
| 1 and 5 years |
|
| 5 years |
| ||||
Trade and other payables |
|
| 14,392 |
|
|
| 14,392 |
|
|
| — |
|
|
| — |
|
Operating lease obligations |
|
| 134,965 |
|
|
| 19,840 |
|
|
| 86,844 |
|
|
| 28,281 |
|
Purchase obligations |
|
| 8,820 |
|
|
| 8,820 |
|
|
| — |
|
|
| — |
|
|
|
| 158,177 |
|
|
| 43,052 |
|
|
| 86,844 |
|
|
| 28,281 |
|
Credit Riskrisk
The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial obligations to the Company. The Company’s maximum exposure to credit risk at the reporting date is equal to the carrying value of accounts receivable and derivative financial instruments.receivables. Accounts receivable primarily consists 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.
72 |
Table of Contents |
Fair Valuesvalues
Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost. The disclosures in the “Financial instruments” section of Note 3 describe how the categories of financial instruments are measured and how income and expenses, including fair value gains and losses, are recognized. The fair values of derivative financial instruments have been determined by reference to forward exchange rates at the end of the reporting period and classified in Level 2 of the fair value hierarchy. There were no outstanding derivative financial instruments at February 2, 2019.
The classification of financial instruments at February 3, 2018, as well as their carrying values and fair values, are shown in the tables below:
Carrying Fair value value $ $ Financial assets Derivative financial instruments — foreign forward exchange contracts Financial liabilities Derivative financial instruments — foreign forward exchange contracts 239 239 468 468
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. Accordingly, the estimated fair values are not necessarily indicative of the amounts the Company could realize or would pay in a current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. The methods and assumptions used to estimate the fair value of financial instruments are described below:
The Company categorizes its financial assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs used in the measurement.
Level 1: This level includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date.
Level 2: This level includes valuations determined using directly (i.e. as prices) or indirectly (i.e. derived from prices) observable inputs other than quoted prices included within Level 1. Derivative instruments in this category are valued using models or other standard valuation techniques derived from observable market inputs.
Level 3: This level includes valuations based on inputs which are less observable, unavailable or where the observable data does not support a significant portion of the instruments’ fair value.
23.24. MANAGEMENT OF CAPITAL
The Company’s capital is composed of cash and shareholders’ (deficiency) equity as follows:
February 2, February 3, $ $ Cash Shareholder s equity [excluding accumulated other comprehensive income] Total capital under management 2019 2018 42,074 63,484 65,959 99,613 108,033 163,097
January 29, | January 30, |
The Company’s objectives in managing capital are to ensure sufficient liquidity to pursue its organic growth, to establish a strong capital base
The Company’s primary uses of capital are to finance The Company traditionally funded its
The Board does not establish quantitative return on capital criteria for management, but rather promotes year-over-year sustainable profitable growth. The Company is not subject to any externally imposed capital requirements.
Some agreements to which the Company is party
The Company indemnifies its directors and officers against claims reasonably incurred and resulting from the performance of their services to the Company and maintains liability insurance for its directors and
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Based on the assessment of our disclosure controls and procedures, our management concluded that our disclosure controls and procedures were effective as of January 29, 2022. Management’s
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act as a process, designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and disposition of assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures are made only in accordance with management and board authorizations; and providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Management, with the participation of
Changes in The COVID-19 pandemic could negatively affect our internal controls over financial reporting, as a portion of our workforce is required to work from home 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.
There were no significant changes in our internal control over financial reporting
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following is a list of the names and ages of our directors and officers as of April
Sarah Segal, Chief Executive Officer and Chief Brand Officer. Ms. Segal, 37, served as the President and Head of the Product Development and Tea Department of DAVIDsTEA from December 2010 to September 2012. Ms. Segal also served as the CEO of the retail company Oink Oink Candy Inc., doing business as “Squish”, based in Montreal, Québec. Ms. Segal was appointed VP, Product Development & Innovation of DAVIDsTEA in 2017, Chief Brand Officer on August 21, 2018, and Chief Executive Officer effective December 16, 2020. Ms. Segal received a Bachelor of Arts degree in Environmental Health from McGill University, Montreal, Québec, and an M.Sc. degree in Water Science, Policy and Management from Oxford University, Oxford, England. Ms. Segal is a resident of Québec, Canada. Frank Zitella, CPA, CMA, CA, President, Chief Financial Officer, Chief Operating Officer and Corporate Secretary. Mr. Zitella,
Pat De Marco, CPA, CA, Lead Director
Susan L. Burkman, Director (August 23, 2018 to present). Ms. Burkman,
Peter Robinson, Director (June 14, 2018 to present). Mr. Robinson,
Family Relationships
Sarah Segal,
Audit Committee
Function of Audit Committee
The Audit Committee of the Board of Directors (the “Audit Committee”) operates under a written charter adopted by the Board of Directors. The Charter contains a detailed description of the scope of the Audit Committee’s responsibilities and how they will be carried out. The Audit Committee Charter is available on our Investor Relations website at http://ir.davidstea.com under “Corporate Governance”
The directors are reimbursed by the Company for the reasonable costs and expenses incurred in connection with attending meetings of the Board of Directors and its committees including, to the extent applicable, the cost of travel on commercial
Value vested or earned during the year for directors
The following table sets out information regarding option-based awards and share-based awards that vested in the fiscal year ended
Notes:
(1) The directors do not hold any stock options (2) Jane Silverstone Segal became director on September 14, 2021 (3) Herschel Segal served as Chairman of the Board until September 14, 2021 (4) Emilia Di Raddo served as a director until June 17, 2021 Indebtedness of Directors and Officers
As of
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table and accompanying footnotes set forth information relating to the beneficial ownership of our common shares as of
Our major shareholders do not have voting rights that are different from our shareholders in general.
Each shareholder’s percentage ownership is based on
Beneficial ownership is determined in accordance with SEC rules. In general, under these rules a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power or investment power with respect to such security. A person is also deemed to be a beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all common shares held by that person. Our common shares that a person has the right to acquire within 60 days of
Unless otherwise indicated below, the address for each beneficial owner listed is c/o DAVIDsTEA Inc., 5430 Ferrier, Mount‑Royal, Québec, Canada, H4P 1M2.
Notes: * represents less than 1%. (1) Rainy Day Investments Ltd. (“Rainy Day”) is a company controlled by Herschel Segal, former Chairman of the Board of the Company, who holds voting and investment control over the shares held by Rainy Day. The principal business address for Rainy Day is 5695 Ferrier, Mount Royal, Québec, Canada, H4P 1N1. Jane Silverstone Segal, Chair of the Board of Directors, is the spouse of Herschel Segal. (2) The information set out above regarding DOMO Capital Management, LLC (“DOMO”) is taken from Schedule 13G dated January 5, 2022, as filed on EDGAR. According to Schedule 13G: (i) the 2,728,148 shares are owned by clients of DOMO and are held in discretionary accounts managed by DOMO, (ii) Justin R. Dopierala is the control person of DOMO; and (iii) both DOMO and Justin R. Dopierala may be contacted at N112 W16298 Mequon Rd., Suite No. 111, Germantown, Wisconsin, 53022, U.S.A. (3) Sarah Segal holds 265,356 RSUs and 53,425 common shares. (4) Frank Zitella holds 262,790 RSUs and 110,633 common shares. (5) Jane Silverstone Segal holds 15,280 RSUs and 100,000 common shares. (6) Pat De Marco holds 35,000 DSUs. (7) Peter Robinson holds 10,000 RSUs and 5,968 common shares. (8) Susan L. Burkman holds 10,000 RSUs, 7,500 DSUs and 2,401 common shares.
Transfer
The Company’s transfer agent and registrar is
Shares Beneficially Owned as at April 17, 2019 Number of Percentage shares of shares Name of beneficial owner (#) (%) Beneficial Owners of more than 5% of our common shares and/or selling shareholders: Rainy Day Investments Ltd.(1) Named Executive Officers and Directors: Herschel Segal(2) * Frank Zitella - - Joe Bongiorno(3) * Sarah Segal(4) * Pat De Marco(5) * Emilia Di Raddo(6) * Max Ludwig Fischer(7) * Peter Robinson(8) * Susan L. Burkman(9) * Anne Darche - - All executive officers and directors as a group(10) *
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Our Audit Committee reviews and approves related-party transactions or recommends related-party transactions for review by independent members of our Board of Directors. Each of the transactions described below have been reviewed by our Audit Committee.
During the second quarter of 2019, the Company entered into
Purchase of merchandise for resale from a company controlled by an executive of the Company During the fiscal year ended January 29, 2022, the Company purchased merchandise for resale from a company controlled by one of its executive officers amounting to $305 [January 30, 2021 - $139, February Infrastructure and administrative services provided to a company controlled by an executive of the The Company also provided infrastructure and administrative services of Purchase of perpetual license rights to
There were no amounts receivable from, or
Director Independence Three of the
To enhance the independent judgment of the Board of Directors, the independent members of the Board of Directors frequently meet in the absence of members of management and the non-independent directors. An
Sarah Segal,
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets out the aggregate fees billed to the Company for the fiscal years ended
For the year ended February 2, February 3, 2019 2018 $ $ Audit fees (1) Audit-related fees (2) Tax fees (3) All other fees (4)
Notes: (1) Audit fees consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements and review of the interim consolidated financial statements included in our quarterly reports, consultation concerning financial reporting and accounting standards, and services provided in connection with statutory and regulatory filings or engagements, including consent procedures in connection with public filings. (2) Audit-related fees consist of fees billed for related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and that are not reported under "Audit Fees". (3) Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, provincial, state, and international tax compliance, and transfer pricing studies and advisory services. (4) All other fees consist of fees for all other professional services and products rendered by EY. |
All fees paid and payable by the Company to EY in Fiscal 20182021 and Fiscal 20172020 were pre-approved by the Company’s Audit Committee pursuant to the procedures and policies set forth in the Audit Committee mandate. The Audit Committee's policy is to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval. The Chair of the Audit Committee is also authorized, pursuant to delegated authority, to pre-approve additional services on a case-by-case basis, and such approvals are communicated to the full Audit Committee at its next meeting.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Form 10-K:
(a)(1) Financial Statements
The audited consolidated financial statements of the Company filed as part of this Annual Report on Form 10-K are included in Part II, Item 8, and include:
Report of Independent Registered Public Accounting Firm | |
As of | |
Consolidated Balance Sheets | |
For the years ended January 29, 2022, January 30, 2021, and February | |
Consolidated Statements of | |
Consolidated Statements of Cash Flows | |
Consolidated Statements of Equity (Deficiency) | |
Notes to Consolidated Financial Statements |
(a)(2) Financial Statement Schedule
All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
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(a)(3) Exhibits
Incorporated by Reference Exhibit Number Description of Document Form Filing Date Exhibit Number Form of Amended and Restated Articles of Incorporation of DAVIDsTEA Inc. F-1/A 5/18/2015 3.1 F-1 4/2/2015 3.2 10-K 5/2/2019 4.1 F-1 4/2/2015 10.3 F-1 4/2/2015 10.14 Form of Non statutory Stock Option Award Agreement under 2015 Omnibus Incentive Plan F-1 4/2/2015 10.15 Form of Restricted Stock Unit Award Agreement Under 2015 Omnibus Incentive Plan F-1 4/2/2015 10.16 Form of Indemnification Agreement for Directors and Officers F-1 4/2/2015 10.17 Agreement of Lease between DAVIDsTEA Inc. and S. Rossy Investments Inc., dated July 22, 2013 F-1 4/2/2015 10.41 F-1 4/2/2015 10.42 F-1 4/2/2015 10.43 F-1 4/2/2015 10.44 F-1 4/2/2015 10.45 8-K 9/17/2019 10.1 Movable Hypothec on Securities between DAVIDsTEA Inc. and Rainy Day Investments LTD. 8-K 9/17/2019 10.2 8-K 9/17/2019 10.3(a)(3) Exhibits
Filed herewith | ||||||||||
Filed herewith | ||||||||||
Filed herewith | ||||||||||
Filed herewith | ||||||||||
Filed herewith | ||||||||||
Filed herewith | ||||||||||
101.INS | XBRL Instance Document | Filed herewith | ||||||||
101.SCH | XBRL Taxonomy Extension Schema | Filed herewith | ||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | Filed herewith | ||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | Filed herewith | ||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | Filed herewith | ||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | Filed herewith |
| Storage Agreement by and between Le Chateau Inc. and DAVIDsTEA Inc., dated May 28, 2012 |
| F-1 |
| 4/2/2015 |
| 10.50 | |
|
| F-1 |
| 4/2/2015 |
| 10.51 | ||
|
| F-1 |
| 4/2/2015 |
| 10.52 | ||
|
| F-1/A |
| 5/18/2015 |
| 10.56 | ||
|
| 10-K |
| 4/13/2017 |
| 10.40 | ||
| Employment Agreement by and between DAVIDsTEA Inc. and Joel Silver, dated March 13, 2017 |
| 8-K |
| 3/13/2017 |
| 10.1 | |
| Memorandum of Agreement between DAVIDsTEA Inc. and Christine Bullen, dated May 29, 2017 |
| 8-K |
| 6/2/2017 |
| 10.1 | |
| Executive Employment Agreement between DAVIDsTEA Inc. and Howard Tafler, dated September 7, 2017 |
| 10-Q |
| 9/7/2017 |
| 10.1 | |
|
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|
| 5/2/2019 |
| Filed herewith | ||
|
|
|
| 5/2/2019 |
| Filed herewith | ||
|
|
|
| 5/2/2019 |
| Filed herewith | ||
|
|
|
| 5/2/2019 |
| Filed herewith | ||
|
|
|
| 5/2/2019 |
| Filed herewith | ||
101.INS |
| 101.INS XBRL Instance |
|
|
| 4/19/2018 |
| Filed herewith |
101.SCH |
| 101.SCH XBRL Taxonomy Extension Schema |
|
|
| 4/19/2018 |
| Filed herewith |
101.CAL |
| 101.CAL XBRL Taxonomy Extension Calculation |
|
|
| 4/19/2018 |
| Filed herewith |
101.LAB |
| 101.LAB XBRL Taxonomy Extension Labels |
|
|
| 4/19/2018 |
| Filed herewith |
101.PRE |
| 101.PRE XBRL Taxonomy Extension Presentation |
|
|
| 4/19/2018 |
| Filed herewith |
101.DEF |
| 101.DEF XBRL Taxonomy Extension Definition |
|
|
| 4/19/2018 |
| Filed herewith |
None
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DAVIDsTEA INC. | ||
Date: | By: | /s/ | |
Name: |
| ||
| Title: |
|
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ | Chair of the Board and Director | |
Name: Jane Silverstone Segal | ||
/s/ Sarah Segal |
| |
Name: | ( | |
/s/ Frank Zitella | President, Chief Financial | |
Name: Frank Zitella | ( | |
| ||
/s/ Pat De Marco |
| Lead Director |
Name: Pat De Marco | ||
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| |
| ||
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| |
| ||
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| |
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/s/ Susan L. Burkman | Director | |
Name: Susan L. Burkman | ||
| ||
/s/ Peter Robinson |
| Director |
Name: Peter Robinson |
Date: May 2, 2019April 29, 2022
|