UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.1934
For the quarterly period ended NovemberMay 2, 2019.2020
OR
¨ ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.1934
For the transition period from __________ to __________
Commission file number 001-37404
DAVIDsTEA Inc. |
(Exact name of registrant as specified in its charter) |
Canada | 98-1048842 | |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
5430 Ferrier
Mount-Royal, Québec, Canada, H4P 1M2
(Address of principal executive offices) (zip code)
(888) 873-0006
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | Trading Symbol | ||
Common shares, no par value per share |
| DTEA |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x ☒ NO ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x ☒ NO ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.
Large accelerated filer |
| Accelerated filer |
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Non-accelerated filer |
| Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ ☐ NO x☒
As of December 20, 2019, 26,079,662July 27, 2020, 26,103,477 common shares of the registrant were outstanding.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Table of Contents |
DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private issuer, the Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the United States Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers, although the Company is not required to do so.
On March 4, 2020, the SEC issued an order (Release No. 34-88318) under Section 36 of the Exchange Act, granting exemptions from specified provisions of the Exchange Act and certain rules thereunder. On March 25, 2020, the order was modified and superseded by a new SEC order (Release No. 34-88465) that provides conditional relief to public companies that are unable to timely comply with their filing obligations as a result of the COVID-19 outbreak (the “Order”).
The Company is filing this Quarterly Report on Form 10-Q for the quarter ended May 2, 2020 (the “Quarterly Report”) in reliance on the Order due to circumstances related to the COVID-19 pandemic. In particular, the Company could not file this Quarterly Report within the time period specified under the Exchange Act due to significant disruption of its business by the COVID-19 pandemic and related mitigation efforts, such as instituting remote work arrangements, which have negatively impacted the Company’s ability to prepare its Quarterly Report.
Pursuant to the requirements of the Order, the Company filed a Current Report on Form 8-K with the SEC on June 15, 2020 indicating our intention to rely upon the Order with respect to the filing of this Quarterly Report, which would have otherwise been required to have been filed by June 16, 2020. This Quarterly Report is being filed within the 45-day extension period provided by the Order.
In this quarterly report,Quarterly Report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CAD,” “CND$,” “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,” “US$” and “USD” mean U.S. dollars.
On December 13, 2019,July 24, 2020, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = CAD$1.3196.1.3425.
| Table of Contents |
PartPART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DAVIDsTEA Inc.
Incorporated under the laws of Canada
INTERIM CONSOLIDATED BALANCE SHEETS
[Unaudited and in thousands of Canadian dollars]
As at November 2, February 2, 2019 2019 $ $ ASSETS Current Cash Accounts and other receivables [Note 12] Inventories [Note 5] Income tax receivable Prepaid expenses and deposits Total current assets Property and equipment Intangible assets Right-of-use assets [Notes 3 and 6] Total assets LIABILITIES AND EQUITY Current Trade and other payables Deferred revenue Current portion of provisions [Note 3] Current portion of lease liabilities [Note 3] Total current liabilities Deferred rent and lease inducements [Note 3] Provisions [Note 3] Non-current portion of lease liabilities [Note 3] Total liabilities Commitments and contingencies Equity Share capital [Note 8] Contributed surplus Deficit Accumulated other comprehensive income Total equity Total liabilities and equity 28,044 42,074 5,430 3,681 32,638 34,353 1,195 4,107 6,906 8,819 74,213 93,034 20,557 23,788 6,454 5,678 44,825 — 146,049 122,500 21,155 20,951 5,619 6,241 — 3,714 16,291 — 43,065 30,906 — 8,698 — 15,440 74,074 — 117,139 55,044 112,835 112,519 1,294 1,400 (86,575 ) (47,960 ) 1,356 1,497 28,910 67,456 146,049 122,500
As at | |||||||||
May 2, | Feb 1, | ||||||||
2020 | 2020 | ||||||||
$ | $ | ||||||||
ASSETS | |||||||||
Current | |||||||||
Cash | 39,343 | 46,338 | |||||||
Accounts and other receivables | 4,371 | 6,062 | |||||||
Inventories | [Note 5] | 23,450 | 22,363 | ||||||
Income tax receivable | 795 | 1,196 | |||||||
Prepaid expenses and deposits | 4,928 | 4,542 | |||||||
Total current assets | 72,887 | 80,501 | |||||||
Property and equipment | [Note 6] | 3,657 | 17,737 | ||||||
Intangible assets | 6,149 | 6,339 | |||||||
Right-of-use assets | [Note 7] | 7,139 | 35,082 | ||||||
Total assets | 89,832 | 139,659 | |||||||
LIABILITIES AND EQUITY | |||||||||
Current | |||||||||
Trade and other payables | 18,000 | 20,794 | |||||||
Deferred revenue | 6,560 | 6,852 | |||||||
Current portion of lease liabilities | [Note 7] | 18,415 | 16,434 | ||||||
Total current liabilities | 42,975 | 44,080 | |||||||
Non-current portion of lease liabilities | [Note 7] | 70,464 | 72,230 | ||||||
Total liabilities | 113,439 | 116,310 | |||||||
Commitments and contingencies | |||||||||
Equity | |||||||||
Share capital | [Note 8] | 112,917 | 112,843 | ||||||
Contributed surplus | 1,734 | 1,577 | |||||||
Deficit | (137,997 | ) | (92,278 | ) | |||||
Accumulated other comprehensive income | (261 | ) | 1,207 | ||||||
Total equity | (23,607 | ) | 23,349 | ||||||
Total liabilities and equity | 89,832 | 139,659 | |||||||
See accompanying notes.
| Table of Contents |
DAVIDsTEA Inc.
Incorporated under the laws of Canada
INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)LOSS AND COMPREHENSIVE LOSS
AND COMPREHENSIVE INCOME (LOSS)
[Unaudited and in thousands of Canadian dollars, except share and per share information]
For the three months ended For the nine months ended November 2, November 3, November 2, November 3, 2019 2018 2019 2018 $ $ $ $ Sales [Note 13] Cost of sales Gross profit Selling, general and administration expenses [Note 10] Results from operating activities Finance costs Finance income Loss before income taxes Provision for income tax (recovery) [Note 9] Net loss Other comprehensive loss Items to be reclassified subsequently to income: Unrealized net gain on forward exchange contracts [Note 14] Realized net loss on forward exchange contracts reclassified to inventory Provision for income tax recovery Cumulative translation adjustment Other comprehensive income (loss), net of tax Total comprehensive loss Net loss per share: Basic and fully diluted [Note 11] Weighted average number of shares outstanding Basic and fully diluted [Note 11] 39,493 43,656 122,925 129,609 18,139 25,275 53,430 71,193 21,354 18,381 69,495 58,416 30,670 29,119 90,254 84,865 (9,316 ) (10,738 ) (20,759 ) (26,449 ) 1,699 80 5,305 237 (185 ) (122 ) (570 ) (574 ) (10,830 ) (10,696 ) (25,494 ) (26,112 ) — (1,635 ) — (5,851 ) (10,830 ) (9,061 ) (25,494 ) (20,261 ) — — — 794 — (425 ) — (565 ) — 113 — (62 ) (26 ) (62 ) (141 ) (473 ) (26 ) (374 ) (141 ) (306 ) (10,856 ) (9,435 ) (25,635 ) (20,567 ) (0.42 ) (0.35 ) (0.98 ) (0.78 ) 26,068,435 25,992,339 26,048,239 25,862,086
For the three months ended | |||||||||
May 2, | May 4, | ||||||||
2020 | 2019 | ||||||||
Sales | [Note 13] | 32,242 | 44,265 | ||||||
Cost of sales | 17,569 | 17,929 | |||||||
Gross profit | 14,673 | 26,336 | |||||||
Selling, general and administration expenses | [Note 10] | 59,034 | 28,020 | ||||||
Results from operating activities | (44,361 | ) | (1,684 | ) | |||||
Finance costs | 1,667 | 1,827 | |||||||
Finance income | (240 | ) | (191 | ) | |||||
Net loss | (45,788 | ) | (3,320 | ) | |||||
Other comprehensive loss | |||||||||
Items to be reclassified subsequently to income: | |||||||||
Cumulative translation adjustment | (1,468 | ) | (497 | ) | |||||
Other comprehensive loss, net of tax | (1,468 | ) | (497 | ) | |||||
Total comprehensive loss | (47,256 | ) | (3,817 | ) | |||||
Net loss per share: | |||||||||
Basic and fully diluted | [Note 11] | (1.76 | ) | (0.13 | ) | ||||
Weighted average number of shares outstanding | |||||||||
Basic and fully diluted | [Note 11] | 26,088,127 | 26,019,594 | ||||||
See accompanying notes.
| Table of Contents |
DAVIDsTEA Inc.
DAVIDsTEA Inc.
Incorporated under the laws of Canada
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited and in thousands of Canadian dollars]
For the three months ended For the nine months ended November 2, November 3, November 2, November 3, 2019 2018 2019 2018 $ $ $ $ OPERATING ACTIVITIES Net loss Items not affecting cash: Depreciation of property and equipment Amortization of intangible assets Amortization of right-of-use assets Loss on disposal of property and equipment Impairment of property, equipment and right-of-use assets Interest on lease liabilities Deferred rent Recovery for onerous contracts Stock-based compensation expense Amortization of financing fees Accretion on provisions Deferred income taxes Sub-total Net change in other non-cash working capital balances related to operations Cash flows related to operating activities FINANCING ACTIVITIES Proceed from issuance of common shares pursuant to exercise of stock options Payment of lease liabilities Cash flows related to financing activities INVESTING ACTIVITIES Additions to property and equipment Additions to intangible assets Loan advance to a Company controlled by an executive employee Cash flows related to investing activities Decrease in cash during the period Cash, beginning of the period Cash, end of the period Supplemental Information Cash paid for: Interest Income taxes (classified as operating activity) Cash received for: Interest Income taxes (classified as operating activity) (10,830 ) (9,061 ) (25,494 ) (20,261 ) 1,313 1,785 3,997 5,193 517 377 1,372 905 2,938 — 9,153 — — — 22 14 2,051 725 7,076 3,285 1,699 — 5,305 — — 74 — (17 ) — 3,414 — 5,306 256 91 526 (7 ) — 21 — 61 — 60 — 177 — (2,575 ) — (3,921 ) (2,056 ) (5,089 ) 1,957 (9,265 ) 6,842 (12,948 ) 6,272 (28,316 ) 4,786 (18,037 ) 8,229 (37,581 ) 9 8 9 82 (5,720 ) — (17,342 ) — (5,711 ) 8 (17,333 ) 82 (44 ) (1,752 ) (778 ) (3,420 ) (485 ) (1,128 ) (2,148 ) (3,851 ) (227 ) — (2,000 ) — (756 ) (2,880 ) (4,926 ) (7,271 ) (1,681 ) (20,909 ) (14,030 ) (44,770 ) 29,725 39,623 42,074 63,484 28,044 18,714 28,044 18,714 — — — — — 7 — 9 217 120 622 563 2,780 — 2,948 —
For the three months ended | ||||||||
May 2, | May 4, | |||||||
2020 | 2019 | |||||||
$ | $ | |||||||
OPERATING ACTIVITIES | ||||||||
Net loss | (45,788 | ) | (3,320 | ) | ||||
Items not affecting cash: | ||||||||
Depreciation of property and equipment | 1,243 | 1,325 | ||||||
Amortization of intangible assets | 512 | 399 | ||||||
Amortization of right-of-use assets | 2,239 | 3,102 | ||||||
Impairment of property and equipment and right-of-use assets | 39,960 | — | ||||||
Interest on lease liabilities | 1,629 | 1,827 | ||||||
Stock-based compensation expense | 313 | 127 | ||||||
Sub-total | 108 | 3,460 | ||||||
Net change in other non-cash working capital balances related to operations | (4,164 | ) | (3,100 | ) | ||||
Cash flows (used in) from operating activities | (4,056 | ) | 360 | |||||
FINANCING ACTIVITIES | ||||||||
Payment of lease liabilities | (4,376 | ) | (5,823 | ) | ||||
Cash flows used in financing activities | (4,376 | ) | (5,823 | ) | ||||
INVESTING ACTIVITIES | ||||||||
Additions to property and equipment | (272 | ) | (415 | ) | ||||
Additions to intangible assets | (317 | ) | (705 | ) | ||||
Repayment of loan from a Company controlled by an executive employee | 2,026 | — | ||||||
Cash flows from (used in) investing activities | 1,437 | (1,120 | ) | |||||
Decrease in cash during the period | (6,995 | ) | (6,583 | ) | ||||
Cash, beginning of the period | 46,338 | 42,074 | ||||||
Cash, end of the period | 39,343 | 35,491 | ||||||
Supplemental Information | ||||||||
Cash paid for: | ||||||||
Interest | 50 | — | ||||||
Income taxes (classified as operating activity) | — | — | ||||||
Cash received for: | ||||||||
Interest | 778 | 195 | ||||||
Income taxes (classified as operating activity) | 2,948 | — | ||||||
See accompanying notes.
| Table of Contents |
DAVIDsTEA Inc.
DAVIDsTEA Inc.
Incorporated under the laws of Canada
INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
[Unaudited and in thousands of Canadian dollars]
Accumulated Other Comprehensive Income Accumulated Accumulated Derivative Foreign Accumulated Financial Currency Other Share Contributed Instrument Translation Comprehensive Total Capital Surplus Deficit Adjustment Adjustment Income Equity $ $ $ $ $ $ $ Balance, February 3, 2018 Net loss for the nine months ended November 3, 2018 Other comprehensive loss Total comprehensive loss Issuance of common shares Common shares issued on vesting of restricted stock units Stock-based compensation expense Income tax impact associated with stock options Balance, November 3, 2018 Balance, February 2, 2019 IFRS 16 adoption adjustment (1) Adjusted balance at beginning of period Net loss for the nine months ended November 2, 2019 Other comprehensive loss Total comprehensive loss Issuance of common shares Common shares issued on vesting of restricted stock units Stock-based compensation expense Balance, November 2, 2019 111,692 2,642 (14,721 ) (167 ) 1,922 1,755 101,368 — — (20,261 ) — — — (20,261 ) — — — 167 (473 ) (306 ) (306 ) — — (20,261 ) 167 (473 ) (306 ) (20,567 ) 164 (82 ) — — — — 82 643 (1,322 ) 286 — — — (393 ) — (7 ) — — — — (7 ) — (1 ) — — — — (1 ) 112,499 1,230 (34,696 ) — 1,449 1,449 80,482 112,519 1,400 (47,960 ) — 1,497 1,497 67,456 — — (13,333 ) — — — (13,333 ) 112,519 1,400 (61,293 ) — 1,497 1,497 54,123 — — (25,494 ) — — — (25,494 ) — — — — (141 ) (141 ) (141 ) — — (25,494 ) — (141 ) (141 ) (25,635 ) 13 (4 ) — — — — 9 303 (628 ) 212 — — — (113 ) — 526 — — — — 526 112,835 1,294 (86,575 ) — 1,356 1,356 28,910
(1) Restated - Note 3
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| Accumulated |
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| Other |
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| Contributed |
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| Comprehensive |
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| Total |
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| Surplus |
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| Deficit |
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| Income |
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| Equity |
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| $ |
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| $ |
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| $ |
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| $ |
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Balance, February 1, 2020 |
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| 112,843 |
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| 1,577 |
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| (92,278 | ) |
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| 1,207 |
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| 23,349 |
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Net loss for the three months ended May 2, 2020 |
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| — |
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| — |
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| (45,788 | ) |
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| — |
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| (45,788 | ) |
Other comprehensive loss |
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| — |
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|
| — |
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| — |
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| (1,468 | ) |
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| (1,468 | ) |
Total comprehensive loss |
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| — |
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| — |
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| (45,788 | ) |
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| (1,468 | ) |
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| (47,256 | ) |
Common shares issued on vesting of restricted stock units |
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| 74 |
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| (156 | ) |
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| 69 |
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| — |
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| (13 | ) |
Stock-based compensation expense |
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| — |
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| 313 |
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| — |
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| — |
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| 313 |
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Balance, May 2, 2020 |
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| 112,917 |
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| 1,734 |
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| (137,997 | ) |
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| (261 | ) |
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| (23,607 | ) |
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Balance, February 2, 2019 |
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| 112,519 |
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| 1,400 |
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| (61,293 | ) |
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| 1,497 |
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| 54,123 |
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Net loss for the three months ended May 4, 2019 |
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| — |
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| (3,320 | ) |
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| — |
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| (3,320 | ) |
Other comprehensive loss |
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| — |
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| — |
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| — |
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| (497 | ) |
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| (497 | ) |
Total comprehensive loss |
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| — |
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| — |
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| (3,320 | ) |
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| (497 | ) |
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| (3,817 | ) |
Common shares issued on vesting of restricted stock units |
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| 221 |
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| (439 | ) |
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| 149 |
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| — |
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| (69 | ) |
Stock-based compensation expense |
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| — |
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| 127 |
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| — |
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| — |
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| 127 |
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Balance, May 4, 2019 |
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| 112,740 |
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| 1,088 |
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| (64,464 | ) |
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| 1,000 |
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| 50,364 |
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See accompanying notes.
| Table of Contents |
DAVIDsTEA Inc.
DAVIDsTEA Inc.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine-monththree-month periods ended NovemberMay 2, 2020 and May 4, 2019 and November 3, 2018 [Unaudited]
[Amounts in thousands of Canadian dollars except share and per share amounts]
1. CORPORATE INFORMATION
The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three and nine-month periodsthree-month period ended NovemberMay 2, 20192020 were authorized for issue in accordance with a resolution of the Board of Directors on December 20, 2019.July 30, 2020. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the NASDAQNasdaq Global Market under the symbol “DTEA”. The registered office is located at 5430 Ferrier St., Town of Mount-Royal, Quebec, Canada, H4P 1M2.
The Company is engaged in We are a branded retailer and growing mass wholesaler of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories through, at the date hereof, 18 Company-owned and operated retail and online sale of tea, tea accessories and food and beveragesstores in Canada, as well as our e-commerce platform at www.davidstea.com. A selection of DAVIDsTEA products is also available in more than 2,500 grocery stores and the United States.pharmacies across Canada. The results of operations for the interim period are not necessarily indicative of the results of operations for the full year. Sales fluctuate from quarter to quarter. Sales are traditionally higher in the fourth fiscal quarter due to the year-end holiday season and tend to be lowest in the second and third fiscal quarterquarters because of lower customer trafficengagement during the summer months.
In March 2020, the outbreak of a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization and on March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closure of all of its retail stores in Canada and the United States.
The Company qualifies for the Canada Emergency Wage Subsidy (“CEWS”) under the COVID-19 Economic Response Plan of the Government of Canada. During the first quarter of Fiscal 2020, the Company recognized payroll subsidies totaling $0.8 million under this wage subsidy program as a reduction in the associated wage costs which the Company incurred, which were recognized in Selling, general and administrative expenses. Subsequent to the first quarter, the Company received the above-mentioned $0.8 million and also received an additional $0.5 million under the CEWS program.
On July 8, 2020, the Company announced that it is implementing a restructuring plan (the “Restructuring Plan”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) in order to accelerate its transition to an online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, the Company will continue to operate its online business through its e-commerce platform at www.davidstea.com and its wholesale distribution channel, through which it sells a selection of DAVIDsTEA products in grocery stores and pharmacies across Canada. Following a careful review of available options to stem the losses from its brick-and-mortar footprint, the Company’s management and Board of Directors determined that a formal restructuring process was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.
On July 8, 2020, the Company obtained an Initial Order pursuant to the CCAA from the Quebec Superior Court in order to implement the Restructuring Plan (the “Initial Order”).
On July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of the United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and enforced the Initial Order, in effect providing protection to the Company from creditor action against its assets in the United States.
As part of its Restructuring Plan and further to obtaining the Initial Order, the Company, on July 10, 2020, sent notices to terminate leases for 82 of its stores in Canada and all 42 stores in the United States.
On July 16, 2020, the Company obtained an Amended and Restated Initial Order from the Quebec Superior Court, extending to September 17, 2020 the application of the Initial Order.
On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada and continues to negotiate with landlords for the remaining 18 stores. The lease terminations will take effect on August 9 , 2020 for the initial 82 stores and August 29, 2020, for the additional 82 stores.
| 7 |
| Table of Contents |
2. STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION AND GOING CONCERN UNCERTAINTY
These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). Accordingly, these financial statements do not include all of the financial statement disclosures required for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended February 2, 2019,1, 2020, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB. In management’s opinion, the unaudited condensed interim consolidated financial statements reflect all the adjustments that are necessary for a fair presentation of the results for the interim period presented. These unaudited condensed interim consolidated financial statements have been prepared using the accounting policies and methods of computation as outlined in note 3 of the consolidated financial statements for the year ended February 2, 2019,1, 2020, other than as disclosed in note 3 below.
3. CHANGES IN ACCOUNTING POLICIESGoing Concern Uncertainty
DuringIn December 2019, a novel strain of coronavirus, responsible for COVID-19, was first reported and was subsequently declared a pandemic by the courseWorld Health Organization in March 2020. The measures adopted by the federal, provincial and state governments in order to mitigate the spread of the Company’s financial statement close process for the quarter ended November 2, 2019, accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). When appropriately performing the assessment of impairment indicators with respect to the right-of-use assets (“ROU assets”) as at May 4, 2019 and August 3, 2019, impairment charges of $13,924 and $5,025 respectively were identified that would have beenoutbreak required to be recognized in the respective periods under the Company’s accounting policy for transition to IFRS 16, which included the use of the practical expedient for assessing impairment. Upon further review, the Company also determined that, pursuant to IFRS standards,close all of its financial statements would be more relevant had they applied IAS 36 to assess impairment of ROU assets asretail locations across North America effective March 17, 2020 until further notice. As of the date of initial adoption, instead of applying the available practical expedient. Accordingly,this report, the Company electedhas not re-opened any of its stores.
On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under applicable laws in both Canada and in the United States in order to voluntarily changeaccelerate its accounting policy to perform an impairment assessment in accordance with IAS 36 at the date of transition to IFRS 16. The Company believes this change is more relevant because it more faithfully depicts the performancean online retailer and wholesaler of high-quality tea and accessories. As part of the Company. SubsequentRestructuring Plan, the Company sent notices to terminate leases for 82 of its stores in Canada and all 42 of its stores in the retrospective applicationUnited States. On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada and continues to negotiate with landlords for the remaining 18 stores.
Although the Company continues to offer its products directly to consumers through its online store and in supermarkets and drugstores across Canada, it is unlikely that customers will purchase its products at previous volumes through these alternative channels. Furthermore, the duration and impact of the change in accounting policy,COVID-19 pandemic is unknown and may influence consumer shopping behavior and consumer demand including online shopping. Notwithstanding that the impairment charges were nilCompany expects to emerge from the restructuring process as a leaner organization, there is no assurance that the Restructuring Plan will be successful and $5,025 forthat all relevant and required regulatory, creditor and court approvals will be obtained.
For the quarter ended May 4, 20192, 2020, the Company incurred a net loss of $45.8 million. The Company’s current liabilities total $43.0 million as at May 2, 2020. As at May 2, 2020, the Company held cash and accounts and other receivables of $43.7 million. The Company does not currently have any third-party financing available with which to meet any future financial obligations.
The Company’s ability to continue as a going concern is dependent on its ability to stabilize its business from unfavorable trend lines, strengthening its business by focusing on how to grow its product portfolio including sales and customer service execution, and effectively optimizing its North American retail footprint to emerge as a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, all supported by a right-sized support organization. Management believes that there is material uncertainty surrounding the Company’s ability to execute the strategy necessary to return to profitability in the current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, changes in consumer behavior and the two quarters ended August 3, 2019, respectively.ability to successfully emerge from the Restructuring Plan process.
EffectsAs a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of the restatementbusiness.
BasedThese interim condensed consolidated financial statements have been prepared on a going concern basis, which assumes the impairment test performedCompany will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. These interim condensed consolidated financial statements as at February 3, 2019 uponand for the voluntary changethree months ended May 2, 2020 do not include any adjustments to the Company’s methodcarrying amounts and classification of transition to IFRS 16 to eliminateassets, liabilities and reported expenses that may otherwise be required if the use of the practical expedient, the Company’s ROU assets were impaired upon initial adoption by $32,487 as compared to the application of the previously recognized onerous lease provisions of $19,154 against the ROU assets. The difference that results from performing an IAS 36 impairment test at February 3, 2019 and the application of the practical expedient related to onerous leases results from a difference in the application of certain assumptions required under the two standards. The Company previously had recorded a reduction to the deficit of $1,280 on transition to IFRS 16. After the application of the voluntary change in accounting policy, the deficit increased by $14,613 to $61,293. The additional reduction in the initial value of the ROU assets resulted in a decrease in amortization expense in the three-month periods ended May 4, 2019 and August 3, 2019 of $689 and $699 respectively.going concern basis was not appropriate. Such adjustments could be material.
| 8 |
| Table of Contents |
3. CHANGES IN ACCOUNTING POLICIES
Recently Issued Accounting Pronouncements
On May 28, 2020, the IASB issued an amendment to IFRS 16, Leases to make it easier for lessees to account for COVID-19-related rent concessions such as rent holidays and temporary rent reductions.
The following table illustrates the effectamendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the voluntary change in accounting policy on the adoption of IFRS 16COVID-19 pandemic are lease modifications and allows lessees to account for such rent concessions as at February 3, 2019:
|
|
|
|
|
| February 3, |
|
|
|
|
| |||||||||
|
|
|
|
|
| 2019 |
|
| Change in |
|
|
| ||||||||
|
| February 2, 2019 |
|
| IFRS 16 Adoption |
|
| As previously reported |
|
| policy Adjustment |
|
| February 3, 2019 |
| |||||
|
|
|
|
|
|
|
|
|
| Restated |
| |||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Right-of-use assets |
|
| — |
|
|
| 75,596 |
|
|
| 75,596 |
|
|
| (14,613 | ) |
|
| 60,983 |
|
Other assets |
|
| 122,500 |
|
|
| — |
|
|
| 122,500 |
|
|
| — |
|
|
| 122,500 |
|
Total assets |
|
| 122,500 |
|
|
| 75,596 |
|
|
| 198,096 |
|
|
| (14,613 | ) |
|
| 183,483 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liability |
|
| — |
|
|
| 102,168 |
|
|
| 102,168 |
|
|
| — |
|
|
| 102,168 |
|
Deferred rent and lease inducements |
|
| 8,698 |
|
|
| (8,698 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Provisions |
|
| 19,154 |
|
|
| (19,154 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Other liabilities |
|
| 27,192 |
|
|
| — |
|
|
| 27,192 |
|
|
| — |
|
|
| 27,192 |
|
Total liabilities |
|
| 55,044 |
|
|
| 74,316 |
|
|
| 129,360 |
|
|
| — |
|
|
| 129,360 |
|
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
| (47,960 | ) |
|
| 1,280 |
|
|
| (46,680 | ) |
|
| (14,613 | ) |
|
| (61,293 | ) |
Other |
|
| 115,416 |
|
|
| — |
|
|
| 115,416 |
|
|
| — |
|
|
| 115,416 |
|
Total equity |
|
| 67,456 |
|
|
| 1,280 |
|
|
| 68,736 |
|
|
| (14,613 | ) |
|
| 54,123 |
|
TOTAL LIABILITIES AND EQUITY |
|
| 122,500 |
|
|
| 75,596 |
|
|
| 198,096 |
|
|
| (14,613 | ) |
|
| 183,483 |
|
IFRS 16 – Leases
IFRS 16, “Leases’’ (“IFRS 16’’) replaces IAS 17, “Leases’’ and related interpretations. The standard introduces a single on-balance sheet recognition and measurement model for lessees, eliminating the distinction between operating and finance leases. The lessee recognizes a right-of-use asset representing its control of and rightif they were not lease modifications. It applies to use the underlying asset and aCOVID-19-related rent concessions that reduce lease liability representing its obligation to make future lease payments. Lessors continue to classify leases as finance and operating leases. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard became effective for annual periods beginningpayments due on or after January 1, 2019.
a) Nature of the effect of adoption of IFRS 16 (restated)before June 30, 2021.
The amendment is effective as of June 1, 2020 but can be applied immediately in any financial statements—interim or annual—not yet authorised for issue. The Company has adopted IFRS 16applied the practical expedient to all rent concessions meeting the criteria as at February 3, 2019. Substantially allset-out in the amendment. With respect to rent concessions not meeting the definition of the Company’s existing leases are real estate leases for its retail stores, warehouse and corporate head office. The adoption of IFRS 16 had a significant impact aslease modification, the Company recognized new assets and liabilities. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. The Company has elected to apply the modified retrospective methodaccount for such concessions by setting right-of-use assets based on the lease liability at the date of initial application, adjusted by the amount of any prepaid or accrued lease payments with no restatement of the prior comparative period. Upon adoption of IFRS 16, the Company has applied the following practical expedients:
|
| |
|
| |
|
| |
|
|
The effect of adoption of IFRS 16, including the voluntary change in accounting policy applied retroactively, as at February 3, 2019 is as follows:
February 3, 2019 February 2, 2019 IFRS 16 Adoption As previously reported Change in Policy Adjustment February 3, 2019 Restated ASSETS Right-of-use assets Other assets Total assets LIABILITIES Lease liability Deferred rent and lease inducements Provisions Other liabilities Total liabilities EQUITY Deficit Other Total equity TOTAL LIABILITIES AND EQUITY - 75,596 75,596 (14,613 ) 60,983 122,500 - 122,500 - 122,500 122,500 75,596 198,096 (14,613 ) 183,483 - 102,168 102,168 - 102,168 8,698 (8,698 ) - - - 19,154 (19,154 ) - - - 27,192 - 27,192 - 27,192 55,044 74,316 129,360 - 129,360 (47,960 ) 1,280 (46,680 ) (14,613 ) (61,293 ) 115,416 - 115,416 - 115,416 67,456 1,280 68,736 (14,613 ) 54,123 122,500 75,596 198,096 (14,613 ) 183,483
For leases previously classified as operating leases, the Company recorded the right-of-use assets based on the amount equalcontinuing to the lease liabilities, adjustedaccount for any related prepaid and accrued lease payments previously recognized. Due to this, the Company derecognized an amount of $8,698 that was previously included under deferred rent and leasehold inducements with a corresponding adjustment to the right-of-use asset.
The excess of onerous lease provision under IAS 37 over right-of-use asset at the date of transition (mainly due to the higher discount rate used to calculate the lease liability and related right-of-use asset) amounted to $1,280 and was included in deficit.
The lease liabilities as at February 3, 2019 can be reconciled to the operating lease commitments as of February 2, 2019 as follows:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
Operating lease payments, which were previously included in cost of sales on the consolidated statement of income, are replaced with depreciation expenses (included in selling, general and administrative expenses) from the right-of-use asset using the rights and interest expense (included under finance costs) from the lease liability.
b) Summary of new accounting policies
Right-of-use assets
The Company recognises right-of-use assets at the commencement dateobligations of the existing lease (i.e., the date the underlying asset is available for use). Right-of-use assets are initially measured at cost, which includes the initial amount ofand recognising a separate lease liabilities adjusted for any initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received.
The right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term. In addition the right-of-use assets are subject to impairment and adjusted for any remeasurement of lease liabilities. Amortization expense is recorded in selling, general and administrative expense.
Lease liabilities
��
At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expensepayable in the period on whichthat the event or condition that triggers theallocated lease cash payment occurs.is due.
In calculatingAs rent concessions were also received in the present value of lease payments,three-month period ending August 1, 2020, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicitexpects there to be further impacts in the leasesecond quarter. The Company 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 inprocess of assessing the in-substance fixed lease payments or a change inimpact of the assessmentamendment to purchaseIFRS 16 on the underlying asset. The Company has elected to apply the practical expedient to not separate the lease component and its associated non-lease component.second quarter ending August 1, 2020.
Short-term leases and leases of low-value assets
The Company applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value (i.e., below US $5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.
Significant judgement in determining the lease term of contracts with renewal options
The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.
The Company has the option, under some of its leases to lease the assets for additional terms of three to five years. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal, including store performance, expected future performance and past business practice. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).
c) Amounts recognized in the statement of financial position and profit or loss
Set out below are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period:
|
| Right-of use |
|
| Lease |
| ||
|
| assets |
|
| liability |
| ||
|
| $ |
|
| $ |
| ||
Balance, February 3, 2019 |
|
| 60,983 |
|
|
| 102,168 |
|
Amortization expense |
|
| (9,153 | ) |
|
| — |
|
Impairment of right-of-use assets |
|
| (7,076 | ) |
|
| — |
|
Interest Expense |
|
| — |
|
|
| 5,305 |
|
Payments |
|
| — |
|
|
| (17,342 | ) |
CTA |
|
| 71 |
|
|
| 234 |
|
Balance, November 2, 2019 |
|
| 44,825 |
|
|
| 90,365 |
|
|
|
|
|
|
|
|
|
|
Presented as: |
|
|
|
|
|
|
|
|
Current |
|
| — |
|
|
| 16,291 |
|
Non-Current |
|
| 44,825 |
|
|
| 74,074 |
|
The Company recognizes variable lease payments of $409 and $839 respectively for the three and nine months ended November 2, 2019.
IFRS 23 – Uncertainty over Income Tax Treatments
IFRIC 23, “Uncertainty over Income Tax Treatments” (the “Interpretation”), was issued by the IASB in June 2017. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. The Interpretation requires an entity to:
|
|
|
|
|
|
The adoption of this interpretation did not have a significant impact on the Company’s financial statements.
4. SIGNIFICANT ACCOUNTING JUDGEMENTS,JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.
In preparing these unaudited condensed interim consolidated financial statements, critical judgementsjudgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in note 5 of the consolidated financial statements for the year ended February 2, 2019.1, 2020, other than as disclosed below.
5. INVENTORIESKey sources of estimation uncertainty
|
| November 2, |
|
| February 2, |
| ||
|
| 2019 |
|
| 2019 |
| ||
|
| $ |
|
| $ |
| ||
Finished goods |
|
| 28,391 |
|
|
| 28,991 |
|
Goods in transit |
|
| 1,597 |
|
|
| 3,262 |
|
Packaging |
|
| 2,650 |
|
|
| 2,100 |
|
|
|
| 32,638 |
|
|
| 34,353 |
|
Recoverability and impairment of non-financial assets
The temporary store closures as a result of COVID-19, the associated reduction in operating income during the first quarter of fiscal 2020 and the Restructuring Plan are considered to be indicators of impairment and the Company performed an assessment of recoverability for the property and equipment and right-of-use assets associated with its retail locations.
Key judgments in applying accounting principles
Valuation of lease liabilities
The temporary store closures as a result of COVID-19, and the resulting non-payment of rent for the months of April, May and June, as well as the Restructuring Plan led the Company to make significant judgments with respect to the impacts of these events on the lease liabilities as of May 2, 2020, including considerations such as the accounting for rent concessions, and the timing of recognition of provisions related to defaults of leases and store closures.
| 9 |
| Table of Contents |
5. INVENTORIES
During the quarter ended May 2, 2020, inventories recognized as cost of sales amounted to $8,656 (May 4, 2019 - $11,994). The cost of inventory includes write-downs of $560 (May 4, 2019 - nil) recorded as a result of net realizable value being lower than cost.
May 2, | February 1, | |||||||
2020 | 2020 | |||||||
$ | $ | |||||||
Finished goods | 20,546 | 18,590 | ||||||
Goods in transit | 527 | 2,059 | ||||||
Packaging | 2,377 | 1,714 | ||||||
| 23,450 | 22,363 | |||||||
6. PROPERTY EQUIPMENT AND RIGHT-OF-USE ASSETSEQUIPMENT
For the three and nine months ended NovemberMay 2, 2019,2020, an assessment of impairment indicators was performed which caused the Company to review the recoverable amount of the property equipment and right-of-use assetsequipment for certain cash generating units (“CGUs”) with an indication of impairment. CGUs reviewed included stores performingto be permanently closed upon the completion of the Restructuring Plan and the remaining stores that are now expected to perform below the Company’s expectations.
previous projections. As a result forof the threeimpairment assessment and nine months ended November 2, 2019,the Company’s decision to implement its Restructuring Plan and to accelerate its transition to an online retailer, the Company recorded an impairment loss of $ 13.0 million [May 4, 2019 – nil] of its property and equipment.
Included in the amount above is an impairment loss of $12.8 million for the right-of-use assets206 stores to be permanently closed after the completion of $2,051 and $7,076, respectively, [November 3, 2018 — $725 and $3,285 related to store leasehold improvements, furniture and equipment, computer hardware]the Restructuring Plan. The remaining $0.2 million of impairment loss was recorded in the Canada and U.S. segments for $949 and $1,102, respectively, for the three months ended November 2, 2019 and $3,429 and $3,647, respectively, for the nine months ended November 2, 2019, respectively [November 3, 2018 — $725 and nil, respectively, for the three months and $3,096 and $189, respectively, for the nine months]. These losses were determined by comparing the carrying amount of the CGU’s net assets with their respective recoverable amounts based on value in use. Valueuse for 7 of the 18 stores that will remain open.
For these stores, a value in use of $1,613 [November 3, 2018 —nil]$791 [May 4, 2019 – nil] was determined based on management’s best estimate of expected future cash flows from use over the remaining lease terms, considering historical experience as well as current economic conditions, including the expected reopening date and the timeframe to foot traffic recovery in those location, and was then discounted using a pre-taxpre‑tax discount rate of 11.9% [November 3, 2018 — 11.9%]13.0% [May 4, 2019 – nil].
For the three-month period ended May 2, 2020, the depreciation expense was $1,243 [May 4, 2019 - $1,325]; with $1,040 recorded in the Canada segment [May 4, 2019 - $1,157], $53 recorded in the U.S. segment [May 4, 2019 - $41], and $150 recorded in corporate selling, general and administration expenses [May 4, 2019 - $127]. A reversalDepreciation expense, and impairment losses are reported in the consolidated statement of impairment occurs when previously impaired CGUs see improved financial results. loss and comprehensive loss under Selling, general and administration expenses (Note 10).
7. LEASES
For the three and nine months ended NovemberMay 2, 2019, no2020, an assessment of impairment losses were reversed [November 3, 2018 — nil]. Impairment losses are reversed onlyindicators was performed which caused the Company to review the extent that the carrying amountsrecoverable amount of the CGU’s netright-of-use assets do not exceedfor certain cash generating units (“CGUs”) with an indication of impairment. CGUs reviewed included stores to be permanently closed upon the carrying amountcompletion of the Restructuring Plan and remaining stores that would have been determined, net of depreciation, if no impairment loss had been recognized.are now expected to perform below the Company’s previous projections.
7. REVOLVING FACILITYAs a result of the impairment assessment and the Company’s decision to implement its Restructuring Plan and to accelerate its transition to an online retailer, the Company recorded an impairment loss of $27.0 million related to the right-of-use assets based on the same assumptions as the impairment loss recorded for the property and equipment (See Note 6).
On June 11, 2018,Included in the amount above is an impairment loss of $24.6 million for the 206 stores to be permanently closed after the completion of the Restructuring Plan and the remaining impairment loss of $2.4 million pertain to 7 of the 18 stores that the Company amended its existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a two year revolving facility (“Amended Revolving Facility”)expects to remain open.
Depreciation expense and impairment losses related to right-of-use assets have been recorded in Selling, general and administration expenses (Note 10) in the principal amountconsolidated statement of $15,000 or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018, with no accordion feature. Borrowings under the Amended Revolving Facility may not exceed the lesser of the total commitment for the revolving facilityloss 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.comprehensive loss.
The Amended Credit Agreement subjectsCompany recognized variable lease payments of $49 for the Company to certain financial covenants. Without the prior written consent of the lender, the Company’s fixed charge coverage ratio may not be less than 1.10:1.00 and the Company’s leverage ratio may not exceed 3.00:1.00.three-month period ended May 2, 2020. In addition, the Company’s net tangible worth may not be less than $65,000expenses related to leases of low-value assets were $5. These expenses are recorded in Selling, general and the Company’s minimum excess availability must not be less than $15,000. The Amended Revolving Facility bears interest based on the Company’s adjusted leverage ratio, at the bank’s prime rate, U.S. bank rate or LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility.administrative expenses (Note 10).
| 10 |
| Table of Contents |
8. SHARE CAPITAL
The credit facility also contains nonfinancial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company also cannot make any dividend payments.
As at November 2, 2019, the Company did not have any borrowings under the Amended Revolving Facility.
As at November 2, 2019, the Company is in breach of its fixed charge coverage ratio and certain nonfinancial covenants. BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement, however the Company cannot borrow under the facility.
The current lending agreement will be terminated on the earlier of (a) January 24, 2020, (b) the Company securing new financing. The Company is in good faith discussions with BMO to install an asset based lending facility that will provide a revolving facility at commercially reasonable terms.
8. SHARE CAPITAL
Authorized
An unlimited number of Commoncommon shares.
Issued and outstanding
|
| November 2, |
|
| February 2, |
| ||
|
| 2019 |
|
| 2019 |
| ||
|
| $ |
|
| $ |
| ||
Share Capital - 26,079,662 Common shares (February 2, 2019 - 26,011,817) |
|
| 112,835 |
|
|
| 112,519 |
|
May 2, | February 1, |
During the
In addition, during the
Stock-based compensation As at May 2, 2020, 1,533,986 [May 4, 2019, 929,053] common shares remain available for issuance under the 2015 Omnibus Plan. No stock options were granted during the three-month periods ended May 2, 2020 and May 4, 2019.
A summary of the status of the Company’s stock option plan and changes during the
A summary of the status of the Company’s RSU plan and changes during the
_____________
During the
9. INCOME TAXES
Income tax expense is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full fiscal year.
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
10. SELLING, GENERAL AND ADMINISTRATION EXPENSES
11. EARNINGS PER SHARE
Basic earnings per share (“EPS”) amounts are calculated by dividing the net
The following reflects the income and share data used in the basic and diluted EPS computations:
As a result of the net loss during the
12. RELATED PARTY DISCLOSURES
Transactions with related parties are measured at the exchange amount, being the consideration established and agreed to by the related parties.
During the
Loan to a Company controlled by one of the
During the second quarter of 2019, the Company entered into a secured loan agreement with Oink Oink Candy Inc., doing business as “Squish”, as borrower, and Rainy Day Investments Ltd. (“RDI”), as guarantor, pursuant to which the Company agreed to lend to Squish an amount of up to $4 million, amended on September 13, 2019 to reflect a maximum amount available under the facility of
13. SEGMENT INFORMATION
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The Company has reviewed its operations and determined that each of its retail stores represents an operating segment. However, because its retail stores have similar economic characteristics, sell similar products, have similar types of customers, and use similar distribution channels, the Company has determined that these operating segments can be aggregated at a geographic level. As a result, the Company has concluded that it has two reportable segments, Canada and the U.S., that derive their revenues from the retail and online sale of tea, tea accessories and food and beverages. The Company’s Chief Executive Officer (the chief operating decision maker or “CODM”) makes decisions about resources allocation and assesses performance at the country level, and for which discrete financial information is available.
The Company derives revenue from the following products:
Property and equipment, right-of-use assets and intangible assets by country are as follows:
Results from operating activities before corporate expenses per country are as follows:
14. FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, liquidity and credit.
Currency Risk — Foreign Exchange Risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Given that some of its purchases are denominated in U.S. dollars, the Company is exposed to foreign exchange risk. The Company’s foreign exchange risk is largely limited to currency fluctuations between the Canadian and U.S. dollars. The Company is exposed to currency risk through its cash, accounts receivable and accounts payable denominated in U.S. dollars.
Assuming that all other variables remain constant, a revaluation of these monetary assets and liabilities due to a 5% rise or fall in the Canadian dollar against the U.S. dollar would have resulted in an increase or decrease to net loss in the amount of
The Company’s foreign exchange exposure is as follows:
The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars. The Company had no foreign exchange contracts outstanding as at
Market Risk — Interest Rate Risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial instruments that potentially subject the Company to cash flow interest rate risk include financial assets and liabilities with variable interest
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. 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
As at
The Company expects to finance its working capital needs
Refer to note 2 for details with respect to the going concern uncertainty. Credit Risk
The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial obligations to the Company. The Company’s maximum exposure to credit risk at the reporting date is equal to the carrying value of 15. SUBSEQUENT EVENTS As part of its Restructuring Plan and further to obtaining the On July 16, 2020, the Company obtained an Amended and Restated Initial Order from the Quebec Superior Court, extending to September 17, 2020 the application of the
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and there are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms
While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including the risk factors listed under Item 1A. Risk Factors, as well as other cautionary language in Form 10-K
Actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to, the following:
All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. These statements are based upon information available to us as of the date of this Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially-available relevant information. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur, and investors are cautioned not to unduly rely upon these statements.
Forward-looking statements speak only as of the date of this Form 10-Q. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-Q, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Form 10-Q or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
Accounting Periods
All references to “Fiscal 2020” are to the Company’s fiscal year ending January 30, 2021. All references to “Fiscal 2019” are to the Company’s fiscal year
The Company’s fiscal year ends on the Saturday closest to the end of January, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. The
Overview
We are a branded retailer and growing mass wholesaler of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories through, at the date hereof, 18 Company-owned and
The Company has a history of losses over the last several years and the COVID-19 pandemic required an acceleration of its transformation initiatives. Consumer purchasing preferences have increasingly been trending away from brick-and-mortar and increasingly towards online and alternative channels over the last several years. In Fiscal 2019 while over 80% of the Company’s revenues were generated from on average 234 brick-and-mortar stores, same-stores sales declined by 12.7% as compared to Fiscal 2018. E-commerce and wholesale revenues during Fiscal 2019 increased by 20.9 % compared to Fiscal 2018 We believe that our proprietary loose-leaf tea assortment and related product suite differentiates us from competitors in North America and resonates with our target customer base. Our strategy is to stabilize our business from unfavorable trend lines by playing to our core strengths and strengthening our business by focusing on how to grow our product portfolio. This includes migrating sales to a virtual experience and best-in-class customer service execution. Our Restructuring Plan is focused on effectively optimizing our North American retail footprint to emerge as a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, all supported by a right-sized support organization. On March 17, 2020, we closed all of our stores in North America, as subsequently mandated by the governments in both Canada and the United States in light of the COVID-19 pandemic. Due to the degree of uncertainty in connection with the scope and extent of the COVID-19 pandemic and the resulting impact to our business, and considering that significant losses were historically incurred in our brick-and-mortar operations which are anchored by commercial leases that are difficult to modify, we concluded that our transformation objectives would be better achieved through a formal restructuring process. On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under the CCAA in order to accelerate its transition to an online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, the Company will continue to operate its online business through its e-commerce platform at www.davidstea.com and its wholesale distribution channel, through which it sells a selection of DAVIDsTEA products in grocery stores and pharmacies across Canada. Following a careful review of available options to stem the losses from its brick-and-mortar footprint, the Company’s management and Board of Directors determined that a formal restructuring process was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic. On July 8, 2020, the Company obtained the Initial Order pursuant to the CCAA from the Quebec Superior Court in order to implement the Restructuring Plan. Among other things, the Initial Order provided for the appointment of PwC as Monitor in the CCAA proceedings.
On July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of the United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and enforced the Initial Order, in effect providing protection to the Company from creditor action against its assets in the United States. As part of its Restructuring Plan and further to obtaining the Initial Order, the Company, on July 10, 2020, sent notices to terminate leases for 82 of its stores in Canada and all 42 stores in the United States. On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada and continues to negotiate with landlords for the remaining 18 stores. The lease terminations will take effect on August 9, 2020 for the initial 82 stores and August 29, 2020 for the additional 82 stores. On July 16, 2020, the Company obtained an Amended and Restated Initial Order from the Quebec Superior Court, extending to September 17, 2020 the application of the Initial Order. The Amended and Restated Initial Order also dealt with certain administrative matters, particularly with regards to the lease terminations. Factors Affecting Our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us and may pose risks and challenges, as discussed in the “Risk Factors” section under “Item 1A. Risk Factors” of this Form 10-Q and in our Form 10-K filed with the SEC and on SEDAR and available at www.sec.gov and www.sedar.com, respectively.
How We Assess Our Performance
The key measures we use to evaluate the performance of our business and the execution of our strategy are set forth below:
Sales. Sales
The specialty retail industry is cyclical, and our sales are affected by general economic conditions. A number of factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence can affect purchases of our products. Sales also include gift card breakage income.
Gross Profit. Gross profit is equal to our sales less our cost of sales. Cost of sales includes product costs, freight costs, certain store occupancy costs and distribution costs.
Selling, General and Administration Expenses. Selling, general and administration expenses consist of store operating expenses and other general and administration expenses, including store
General and administration costs, which are generally fixed in nature, do not vary proportionally with sales to the same degree as our cost of sales. We believe that these costs will decrease as a percentage of sales over time. Accordingly, this expense as a percentage of sales is usually higher in lower volume quarters and lower in higher volume quarters.
We present Adjusted selling, general and administration expenses as a supplemental measure because we believe it facilitates a comparative assessment of our selling, general and administration expenses under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure on page
Results from Operating Activities. Results from operating activities consist of our gross profit less our selling, general and administration expenses.
We present Adjusted results from operating activities as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure on page
Finance Costs. Finance costs consist of cash and imputed non-cash charges related to
Finance Income. Finance income consists of interest income on cash balances.
Adjusted EBITDA. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. Specifically, Adjusted EBITDA allows for an assessment of our operating performance and our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, finance costs,
Selected Operating and Financial Highlights
Results of Operations
On March 17, 2020, the Company
The following table summarizes key components of our results of operations for the
Non-IFRS Financial Measures
Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA,
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Because of these limitations, Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA
The following tables present reconciliations of Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA
Reconciliation of Adjusted selling, general and administration expenses
Reconciliation of Adjusted results from operating activities
Reconciliation of Net loss to Adjusted EBITDA
Reconciliation of reported results to Adjusted net loss
For the three months ended For the nine months ended November 2, 2019 November 2, 2019 November 2, Excluding impact November 3, November 2, Excluding impact November 3, 2019 of IFRS 16 2018 of IFRS 16 Net loss Executive separation costs related to salary (a) Impairment of property, equipment and right-of-use assets (b) Impact of onerous contracts (c) Strategic review and proxy contest costs (d) Recovery of income tax (e) Adjusted net loss
Reconciliation of fully diluted loss per common share to adjusted fully diluted loss per common share
For the three months ended For the nine months ended November 2, 2019 November 2, 2019 November 2, Excluding impact November 3, November 2, Excluding impact November 3, 2019 of IFRS 16 2018 of IFRS 16 Weighted average number of shares outstanding, fully diluted Adjusted weighted average number of shares outstanding, fully diluted Net loss Adjusted net loss Net loss per share, fully diluted Adjusted net loss per share, fully diluted Three Months Ended
Gross
Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) increased by $31.0 million or 110.6%, to $59.0 million in the three months ended May 2, 2020 from the prior year quarter. Excluding the impact of
Results from Operating
Finance
Finance
EBITDA
Net
Fully diluted loss per common
Liquidity and Capital Resources
As at
Our primary source of liquidity is cash on hand. Our primary cash needs are to finance working capital
our online store. Our
Cash Flow
A summary of our cash flows from (used in) operating, investing and financing activities is presented in the following table:
Cash Flows
Cash Flows Used in Financing Activities. Net cash flows used in financing activities
Cash Flows
Off-Balance Sheet Arrangements
We have no off-balance sheet obligations.
Contractual Obligations and Commitments
There have been no significant changes to our contractual obligations as disclosed in our consolidated financial statements for the fiscal year ended February
Critical Accounting Policies and Estimates
Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of financial statements requires us to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard to the level of
Recently Issued Accounting Standards
Refer to Note 3, “Changes in Accounting Policies” for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the foreign exchange and interest rate risk discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K dated
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chairman and Interim Chief Executive Officer and Chief Financial Officer and Chief Operating Officer, evaluated the effectiveness of our disclosure controls and procedures as of Based on Changes in Internal Control over Financial Reporting The COVID-19 pandemic could negatively affect our internal controls over financial reporting, including our ongoing process of remediating the material weakness in our disclosure control and procedures, as a portion of our workforce is required to work remotely and standard processes are disrupted. New processes, procedures, and controls, which may increase the overall inherent risk in the business, may be required to ensure an effective control environment. With the exception of the material weaknesses identified there were no other changes in our internal control over financial reporting during our fiscal quarter ended May 2, 2020 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Except as noted above, we are not at present a party to any legal proceedings, government actions, administrative actions, investigations or claims that are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business, financial condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Pursuant to the Amended and Restated Initial Order from the Quebec Superior Court, there is currently a stay of all proceedings against or in respect of the Company or affecting the Company’s business operations and activities, except with the leave of the Quebec Superior Court, until September 17, 2020. The additional risk factors set out below should be read in conjunction with the risk factors previously disclosed in our Form 10-K for our fiscal year ended February 1, 2020, which are incorporated by reference herein. Risks Associated with the Restructuring Plan We are subject to the risks and uncertainties associated with the Restructuring Plan. As set out above, on July 8, 2020, we obtained the Initial Order pursuant to the CCAA from the Quebec Superior Court in order to implement the Restructuring Plan and on July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of the United States Bankruptcy Code which provisionally recognized the proceedings under the CCAA and enforced the Initial Order, in effect providing protection to the Company from creditor action against its assets in the United States. On July 16, 2020, we obtained an Amended and Restated Initial Order from the Quebec Superior Court, extending to September 17, 2020 the application of the Initial Order. The Amended and Restated Initial Order also dealt with certain administrative matters. For the duration of the Restructuring Plan, our operations and our ability to develop and execute our business plan, as well as our continuation as a going concern, are subject to the risks and uncertainties associated with restructuring in general, including:
Because of the risks and uncertainties associated with the Restructuring Plan, we cannot accurately predict or quantify the ultimate impact of events that will occur during the Restructuring Plan that may be inconsistent with our plans. Operating under Court protection for an extended period of time may harm our business. An extended period of operations under protection of the Quebec Superior Court could have a material adverse effect on our business, financial condition, results of operations and liquidity. During such time as our Restructuring Plan is ongoing, our senior management will be required to spend a significant amount of time and effort dealing with the Restructuring Plan instead of focusing exclusively on our business operations. A prolonged period of operating under protection of the Quebec Superior Court also may make it more difficult to retain management and other key personnel necessary for the success and growth of our business. In addition, the longer the Restructuring Plan continues, the more likely it is that our customers and suppliers will lose confidence in our ability to restructure our business successfully and will seek to establish alternative commercial relationships. Furthermore, so long as the Restructuring Plan continues, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Restructuring Plan. We may not be able to obtain approval or homologation of a Plan of Arrangement under the CCAA. In connection with the Restructuring Plan, we are required to obtain approval from our creditors for a Plan of Arrangement by the requisite majority votes set out in the CCAA. Specifically, in accordance with the CCAA, the Plan of Arrangement will be subject to approval by a simple majority in number of the holders of “provable claims”, representing at least two-thirds of the aggregate dollar amount of such “provable claims”. There can be no assurance that we will be successful in obtaining such approval from our creditors. If we do not obtain such approval from our creditors, we will have to submit a new or amended Plan of Arrangement to our creditors for approval. If such new or amended Plan of Arrangement is not approved by our creditors by the foregoing requisite majority votes, it is possible that our creditors will ask the Quebec Superior Court to lift the stay of proceedings currently in effect and exercise their various legal recourses against us. Moreover, if our Plan of Arrangement is approved by our creditors by the requisite majority votes set out in the CCAA, we will have to obtain an order from the Quebec Superior Court homologating or ratifying the Plan of Arrangement. In order to obtain the order, we will have to appear before the Quebec Superior Court and demonstrate to the Court that the Plan of Arrangement is fair and reasonable, independent of creditor approval. There can be no assurance that we will be able to obtain homologation of the Plan of Arrangement from the Quebec Superior Court.
Even if our Restructuring Plan is completed, we may not be able to achieve our stated goals and there is substantial doubt regarding our ability to continue as a going concern. Even if our Restructuring Planis completed, we may continue to face a number of risks, such as further deterioration in economic conditions, particularly in light of the COVID-19 pandemic, changes in consumer habits, changes in demand for our products and increasing expenses. Some of these risks become more acute when a restructuring under the CCAA continues for a protracted period without indication of how or when the restructuring may be completed. As a result of these risks and others, we cannot guarantee that our Restructuring Planwill achieve our stated goals. As a result of the Restructuring Plan, our financial results may be volatile and may not reflect historical trends. For the duration of the Restructuring Plan, we expect our financial results to continue to be volatile as restructuring activities and expenses, lease terminations, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the Initial Order. In addition, if we emerge from the Restructuring Plan, the amounts reported in subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements, including as a result of revisions to our operating plans in connection with the Restructuring Plan. We may be subject to claims that will not be discharged in the Restructuring Plan, which could have a material adverse effect on our financial condition and results of operations. The CCAA provides that approval of a Plan of Arrangement discharges a debtor from substantially all debts arising prior to such approval. With few exceptions, all claims that arose prior to confirmation of a Plan of Arrangement (i) would be subject to compromise and/or treatment under the Plan of Arrangement and/or (ii) would be discharged in accordance with the terms of such Plan of Arrangement. Any claims not ultimately discharged through the Plan of Arrangement could be asserted against us and may have an adverse effect on our financial condition and results of operations on a post-Restructuring Plan basis. We may experience increased levels of employee attrition as a result of the Restructuring Plan. As a result of the Restructuring Plan, we may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the Restructuring Plan may be limited. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would likely have a material adverse effect on our business, financial condition and results of operations. We are subject to actions and decisions of our creditors and other third parties who have interests in our Restructuring Plan that may be inconsistent with our interests. The decisions of our creditors and other third parties could significantly affect our business and operations in various ways. For example, negative publicity or events associated with the Restructuring Plan may adversely affect our relationships with our suppliers, service providers, employees and customers, which in turn could adversely affect our operations and financial condition. Because of the risks and uncertainties associated with the Restructuring Plan, we cannot predict or quantify the ultimate impact that events occurring during the Restructuring Plan will have on our business, financial condition, results of operations, or the certainty as to our ability to continue as a going concern. As a result of the Restructuring Plan, settlement of liabilities is subject to uncertainty. While operating under the protection of the CCAA, and subject to approval of the Quebec Superior Court, we may settle liabilities for amounts other than those reflected in our consolidated financial statements. Further, a Plan of Arrangement under the CCAA could materially change the amounts and classifications reported in our consolidated historical financial statements.
Trading in our shares for the duration of the Restructuring Plan poses substantial risks. The Company’s stockholders are cautioned that trading in shares of the Company for the duration of the Restructuring Plan may be highly speculative and pose substantial risks due to the uncertainty related to the Restructuring Plan. Accordingly, the Company urges extreme caution with respect to existing and future investments in its shares. If we fail to comply with the continued listing requirements of the Nasdaq Global Market, it could result in our common stock being delisted, which could adversely affect the market price and liquidity of our securities and have other adverse effects. Our common stock is currently listed for trading on the Nasdaq Global Market (“Nasdaq”). We must satisfy Nasdaq’s continued listing requirements, including, among others, a minimum bid price for our common stock of USD $1.00 per share, or risk possible delisting, which would have a material adverse effect on our business. On April 21, 2020, prior to the Restructuring Plan, the Company was notified by Nasdaq that the Company was not in compliance with the minimum bid price requirement under Nasdaq Listing Rule 5450(a)(1). The notification had no immediate effect on the listing of the Company’s common stock on Nasdaq and the Company subsequently regained compliance with the minimum bid requirement. Any failure to comply with Nasdaq’s continued listing requirements may result in the Company’s common stock being delisted from Nasdaq and it could be more difficult to buy or sell our shares and to obtain accurate quotations, and the price of our common stock could suffer a material decline. In addition, a delisting would impair our ability to raise capital through the public markets, could deter broker-dealers from making a market in or otherwise seeking or generating interest in our shares and might deter certain institutions and persons from investing in our shares. We cannot predict the effect of the Restructuring Plan on the trading price of our stock on Nasdaq or whether the Restructuring Plan may cause or contribute to our common stock trading below the minimum price of USD $1.00 per share. Nasdaq has the discretionary authority to suspend or terminate our listing as a result of the Restructuring Plan Under Nasdaq Rule 5110(b), Nasdaq may use its discretionary authority to suspend or terminate the listing of our common stock in that we have filed for protection under the CCAA, which is comparable to United States federal bankruptcy laws, even though our securities may otherwise meet all enumerated criteria for continued listing on Nasdaq. In the event that Nasdaq’s Listing Qualifications Department determines that the listing of our common stock will be suspended or terminated, we will have the right to request a hearing before the Nasdaq Hearings Panel in order to review the matter, by submitting a request in writing within seven calendar days of the date of the notification of suspension or termination of the listing. Under Nasdaq Rules, any such hearing before the Nasdaq Hearings Panel will generally take place within 45 days of the written request. In connection with our announcement of the Restructuring Plan, we held discussions on July 8 and July 9, 2020 with Nasdaq’s Listing Qualifications Department with respect thereto. We subsequently received written requests from the Listing Qualifications Department for information with respect to the Restructuring Plan, to assist Nasdaq in its ongoing review, and provided the requested information to Nasdaq. We have not received a notification of suspension or termination of the listing of our common stock from Nasdaq. Any delisting of our common stock from Nasdaq would have the consequences set out in the paragraph immediately above. In the event that Nasdaq determines to continue our listing during the Restructuring Plan, we must nevertheless satisfy all requirements for initial listing on Nasdaq. We may not have sufficient cash to maintain our operations following the Restructuring Plan. We face considerable uncertainty regarding the adequacy of our liquidity and capital resources. In addition to the cash required to fund our ongoing operations, we may incur significant professional fees and other expenses in connection with the Restructuring Plan and expect that such fees and other expenses will continue throughout the Restructuring Plan process. We cannot provide any assurance that our cash on hand and cash flow from operations will be sufficient to fund our operations and allow us to satisfy our obligations following the Restructuring Plan.
We may not be able to obtain financing. Because of our financial condition, we have heightened exposure to, and less ability to withstand, the operating risks that are customary in the retail industry, exacerbated by the COVID-19 pandemic. Any of these risks could result in our need for substantial funding. A number of factors, including the Restructuring Plan, our financial results in recent years, and the competitive environment we face, adversely affect the availability and terms of funding that might be available to us during, and upon completion of, the Restructuring Plan. As such, we may not be able to source capital at rates acceptable to us, or at all, to fund current operations on completion of the Restructuring Plan. Our inability to obtain necessary funding on acceptable terms would have a material adverse impact on us and on our ability to sustain our operations. We do not currently have a credit facility or loan with a bank or financial institution and can give no assurance that we will be able to obtain any such facility or loan on terms acceptable to us, or at all. Any Plan of Arrangement that we implement under the CCAA will be based in large part upon assumptions and analyses developed by us; if these assumptions and analyses prove to be incorrect, our Plan of Arrangement may be unsuccessful in its execution. Any Plan of Arrangement that we implement under the CCAA will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to:
The failure of any of these factors could materially adversely affect the successful restructuring of our business. In addition, any Plan of Arrangement will rely upon financial projections, including with respect to revenues, earnings, capital expenditures, payment of liabilities and cash flow. Financial projections are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial projections will not be entirely accurate. The financial projections may be even more speculative than normal in light of the COVID-19 pandemic. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any Plan of Arrangement under the CCAA we may implement will occur or, even if they do occur, that they will have the anticipated effects on us or our business or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of the Restructuring Plan.
Other Risks Substantial doubt about the Company’s ability to continue as a going concern. Our audited financial statements as of and for the year ended February 1, 2020 and our interim unaudited condensed first quarter financial statements were prepared on the assumption that we would continue as a going concern, and did not include any adjustments that might result from the outcome of this uncertainty. Our management has determined that there is a substantial doubt about our ability to continue as a going concern over the next twelve months due to uncertainty regarding how we will implement strategies relating to restructuring our North American retail footprint in order to decrease ongoing losses caused by unprofitable stores, decreasing our costs generally and accelerating the growth of our online business. 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. On March 17, 2020, we closed all of 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-9 pandemic. Initially, we temporarily furloughed all of our store-related employees and moved substantially all remaining non-essential employees to a four-day work week to reduce expenses. Although all of our retail stores remain closed, as part of our strategy to reduce our retail footprint, we have eliminated a significant number of in-store positions, resulting in the termination of 2020 employees. As we move away from a significant retail footprint 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 our 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. Although certain of the areas in the United States and Canada where our stores are located are beginning to reopen, 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 have decided to significantly decrease our retail footprint, by terminating leases for 164 of our stores in Canada and all 42 of our stores in the United States. We also cannot predict when any of our contractors, third-party transportation providers, vendors and other business partners will be able to operate at previous 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. We are still assessing the impact the COVID-19 pandemic will have on our business and results of operations, but the impacts to date 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 and will remain unknown and largely dependent upon future developments, including but not limited to information on the duration and spread of COVID-19, changes in customer demand, additional mitigation strategies proposed by Canadian and United States public authorities (including federal, state, provincial or local stay-at-home or similar orders), and restrictions on the activities of our European and other internationally-based suppliers and on the shipment of goods. In light of the COVID-19 pandemic, we suspended rent payments for our stores in order to preserve our cash position, which may affect our future dealings with landlords. On March 17, 2020, we closed all of our stores in North America, as subsequently mandated by the governments in both Canada and the United States in light of the COVID-19 pandemic. As of April 2020, we suspended rent payments for all of our stores because of the COVID-19 pandemic. Any amounts owing for rent prior to the date of the Initial Order will be dealt with, and governed by, the Plan of Arrangement. On July 10, 2020, further to obtaining the Initial Order, we sent notices to terminate leases for 82 of our stores in Canada and all 42 of our stores in the United States. Each lease termination takes effect 30 days from the date of deemed receipt of the notice of termination and we are required to pay rent for such 30-day period. On July 30, 2020, the Company sent notices to terminate leases for an additional 82 stores in Canada and continues its negotiations with landlords for our remaining 18 stores, The outcome of these discussions remains uncertain. To the extent we cannot reach agreements with the landlords on more favorable lease terms, we may terminate the leases and permanently close additional stores. Our suspension of rent payments during the COVID-19 pandemic may make future dealings with landlords more problematic.
Our ability to transition from a focus on sales through retail stores to online sales and sales through wholesale channels will require that we expand and improve our operations and could strain our operational, managerial and administrative resources, which may adversely affect our business. Our business strategy involves a transition to online sales and sales through wholesale channels of our high-quality tea and accessories, from our previous model focused on sales through our retail stores. This transition will place increased demands on our operational, managerial, administrative and other resources, which may be inadequate to 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 enhance our operational management systems, financial and management controls and information systems, and to hire, train and retain 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 resources could negatively affect our results of operations and financial condition. Risks related to material weaknesses in internal control over financial reporting.
During the course of the Company’s financial statement close process for the quarter ended November 2, 2019, accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). As a result of the
In light of Furthermore, during the The COVID-19 pandemic could also negatively affect our internal controls over financial reporting, including our ongoing process of remediating the material weaknesses in our disclosure control and procedures identified in Fiscal 2019, as a portion of our workforce is required to work remotely and standard processes are disrupted. New processes, procedures, and controls which may increase the overall inherent risk in the business, may be required to ensure an effective control environment. Accordingly, we were unable to conclude that our internal controls over financial reporting were effective as of the fiscal year ended February 1, 2020 and for the three-month period ended May 2, 2020. Failure to remediate these or future material weaknesses, or determinations that either our disclosure controls and procedures or our internal control over financial reporting are not effective may negatively affect investor confidence in our financial statements
We have experienced a slowdown in the growth rate of our business during the past few years, meaning our former high levels of growth may not be achieved in future periods without shifting our strategy away from retail sales. We have experienced significant fluctuation in the growth rate of our business during the last several years. Although we have planned initiatives to support a return to the growth of our business, such as continued investment in our online store, increased marketing and product development to support our wholesale business, and changes to our promotional strategy, the negative impact of the COVID-19 pandemic on our retail sales has accelerated our decision to shift away from a significant retail focus and to focus on our online store and wholesale business. If we are unable to execute these or other related strategies, our results of operations and financial condition will be negatively impacted.
Item 2. Unregistered Sales of Equity Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
None.
(a) Exhibits:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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