dtea_Current_Folio_10Q

Table of Contents

 

 

 

FORM 10-Q

 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

For the quarterly period ended April 30, 2016.

 

 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

For the transition period from            to         

 

Commission file number 001-37404

 


 

 

DAVIDsTEA Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

 

Canada

 

98-1048842

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

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)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 


 

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   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   NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES   NO

 

As of June 7, 2016, 24,507,558 common shares of the registrant were outstanding.

 

 

 

 


 

Table of Contents

DAVIDsTEA Inc.

 

TABLE OF CONTENTS

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Consolidated Financial Statements

3

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4. 

Controls and Procedures

26

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings

27

 

 

 

Item 1A. 

Risk Factors

27

 

 

 

Item 2. 

Unregistered Sales of Equity Securities

27

 

 

 

Item 3. 

Defaults Upon Senior Securities

27

 

 

 

Item 4. 

Mine Safety Disclosures

27

 

 

 

Item 5. 

Other Information

27

 

 

 

Item 6. 

Exhibits

27

 

DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private issuer, the Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the United States Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers, although the Company is not required to do so.

 

In this quarterly report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CAD,” “CND$,” “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,” “US$” and “USD” mean U.S. dollars.

 

On June 3, 2016, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = $1.2947.

 

 

 

2


 

Table of Contents

Part 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

    

As at

 

 

 

 

 

April 30, 

2016

 

January 30, 2016

 

 

 

 

 

$

 

$

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

Cash

 

 

 

69,068

 

72,514

 

Accounts and other receivables

 

 

 

2,463

 

2,702

 

Inventories

 

[Note 5]

 

17,554

 

17,767

 

Income tax receivable

 

 

 

 —

 

605

 

Prepaid expenses and deposits

 

 

 

6,454

 

4,493

 

Derivative financial instruments

 

[Note 15]

 

 —

 

3,442

 

Total current assets

 

 

 

95,539

 

101,523

 

Property and equipment

 

 

 

46,976

 

47,330

 

Intangible assets

 

 

 

2,221

 

2,242

 

Deferred income tax assets

 

[Note 10]

 

8,816

 

7,877

 

Total assets

 

 

 

153,552

 

158,972

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

Trade and other payables

 

 

 

12,052

 

14,435

 

Deferred revenue

 

 

 

3,326

 

3,762

 

Income taxes payable

 

 

 

13

 

62

 

Current portion of provisions

 

[Note 6]

 

512

 

512

 

Derivative financial instruments

 

[Note 15]

 

1,723

 

 —

 

Total current liabilities

 

 

 

17,626

 

18,771

 

Deferred rent and lease inducements

 

 

 

6,075

 

6,002

 

Provisions

 

[Note 6]

 

91

 

162

 

Total liabilities

 

 

 

23,792

 

24,935

 

Equity

 

 

 

 

 

 

 

Share capital

 

[Note 9]

 

259,889

 

259,205

 

Contributed surplus

 

 

 

7,024

 

7,094

 

Deficit

 

 

 

(137,240)

 

(138,465)

 

Accumulated other comprehensive income

 

 

 

87

 

6,203

 

Total equity

 

 

 

129,760

 

134,037

 

 

 

 

 

153,552

 

158,972

 

 

See accompanying notes

3


 

Table of Contents

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)

 

AND COMPREHENSIVE INCOME (LOSS)

 

[Unaudited and in thousands of Canadian dollars, except share information]

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

 

 

April 30, 

2016

 

May 2, 

2015

 

 

 

 

 

$

 

$

 

 

 

 

 

 

 

 

 

Sales

    

[Note 14]

    

44,469

    

35,844

 

Cost of sales

 

 

 

21,314

 

16,755

 

Gross profit

 

 

 

23,155

 

19,089

 

Selling, general and administration expenses

 

[Note 11]

 

21,119

 

16,991

 

Stock-based compensation related to cashless exercise

 

 

 

 —

 

4,052

 

Results from operating activities

 

 

 

2,036

 

(1,954)

 

Finance costs

 

 

 

17

 

792

 

Finance income

 

 

 

(121)

 

(51)

 

Accretion of preferred shares

 

[Note 8]

 

 —

 

314

 

Loss from embedded derivative on Series A, A-1 and A-2 preferred shares

 

[Note 8]

 

 —

 

90,705

 

Income (loss) before income taxes

 

 

 

2,140

 

(93,714)

 

Provision for income tax (recovery)

 

[Note 10]

 

626

 

(488)

 

Net income (loss)

 

 

 

1,514

 

(93,226)

 

Other comprehensive loss

 

 

 

 

 

 

 

Items to be reclassified subsequently to income:

 

 

 

 

 

 

 

Unrealized net loss on forward exchange contracts

 

[Note 15]

 

(4,197)

 

 —

 

Realized net gain on forward exchange contracts reclassified to inventory

 

 

 

(968)

 

 —

 

Provision for income tax recovery on comprehensive loss

 

 

 

1,371

 

 —

 

Cumulative translation adjustment

 

 

 

(2,322)

 

(574)

 

Other comprehensive loss, net of tax

 

 

 

(6,116)

 

(574)

 

Total comprehensive loss

 

 

 

(4,602)

 

(93,800)

 

Net income (loss) per share:

 

 

 

 

 

 

 

Basic

 

[Note 12]

 

0.06

 

(7.73)

 

Fully diluted

 

[Note 12]

 

0.06

 

(7.73)

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

— basic

 

[Note 12]

 

24,134,285

 

12,057,474

 

— fully diluted

 

[Note 12]

 

25,892,598

 

12,057,474

 

 

See accompanying notes

4


 

Table of Contents

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

[Unaudited and in thousands of Canadian dollars]

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

April 30, 

2016

 

May 2, 

2015

 

 

 

$

 

$

 

 

 

 

 

 

 

OPERATING ACTIVITIES

    

 

    

 

 

Net income (loss)

 

1,514

 

(93,226)

 

Items not affecting cash:

 

 

 

 

 

Depreciation of property and equipment

 

1,787

 

1,298

 

Amortization of intangible assets

 

161

 

123

 

Deferred rent

 

280

 

198

 

Provision (recovery) for onerous contracts

 

 —

 

(74)

 

Stock-based compensation expense

 

316

 

325

 

Amortization of financing fees

 

18

 

166

 

Accretion of preferred shares

 

 —

 

314

 

Loss from embedded derivative on Series A, A-1 and A-2 preferred shares

 

 —

 

90,705

 

Deferred income taxes (recovered)

 

(30)

 

15

 

 

 

4,046

 

(156)

 

Net change in other non-cash working capital balances related to operations

 

(4,834)

 

(6,501)

 

Cash flows related to operating activities

 

(788)

 

(6,657)

 

FINANCING ACTIVITIES

 

 

 

 

 

Repayment of finance lease obligations

 

 —

 

(552)

 

Proceeds from issuance of long-term debt

 

 —

 

9,996

 

Repayment of long-term debt

 

 —

 

(10,014)

 

Proceeds from issuance of common shares pursuant to exercise of stock options

 

344

 

 —

 

IPO-related expenses

 

 —

 

(552)

 

Financing fees

 

 —

 

(119)

 

Cash flows related to financing activities

 

344

 

(1,241)

 

INVESTING ACTIVITIES

 

 

 

 

 

Additions to property and equipment

 

(2,846)

 

(1,840)

 

Additions to intangible assets

 

(156)

 

(268)

 

Cash flows related to investing activities

 

(3,002)

 

(2,108)

 

Decrease in cash during the period

 

(3,446)

 

(10,006)

 

Cash, beginning of period

 

72,514

 

19,784

 

Cash, end of period

 

69,068

 

9,778

 

Supplemental Information

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

 —

 

273

 

Income taxes (classified as operating activity)

 

577

 

811

 

Cash received for:

 

 

 

 

 

Interest

 

120

 

51

 

Income taxes (classified as operating activity)

 

344

 

 —

 

 

See accompanying notes

5


 

Table of Contents

 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)

 

[Unaudited and in thousands of Canadian dollars]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

Accumulated Other Comprehensive Income

    

 

 

 

 

 

 

 

 

 

 

Accumulated

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

 

Derivative

    

Foreign

    

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Financial

 

Currency

 

Other

 

Total

 

 

 

Share

 

Contributed

 

 

 

Instrument

 

Translation

 

Comprehensive

 

Equity

 

 

 

Capital

 

Surplus

 

Deficit

 

Adjustment

 

Adjustment

 

Income

 

(Deficiency)

 

 

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 31, 2015

 

385

 

1,412

 

(4,129)

 

 —

 

2,286

 

2,286

 

(46)

 

Net loss for the three months ended May 2, 2015

 

 —

 

 —

 

(93,226)

 

 —

 

 —

 

 —

 

(93,226)

 

Other comprehensive loss

 

 —

 

 —

 

 —

 

 —

 

(574)

 

(574)

 

(574)

 

Total comprehensive loss

 

 —

 

 —

 

(93,226)

 

 —

 

(574)

 

(574)

 

(93,800)

 

Issuance of subordinate voting shares upon exercise of options

 

125

 

(125)

 

 —

 

 —

 

 —

 

 —

 

 —

 

Stock-based compensation

 

 —

 

325

 

 —

 

 —

 

 —

 

 —

 

325

 

Balance, May 2, 2015

 

510

 

1,612

 

(97,355)

 

 —

 

1,712

 

1,712

 

(93,521)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 30, 2016

 

259,205

 

7,094

 

(138,465)

 

2,529

 

3,674

 

6,203

 

134,037

 

Net income for the three months ended April 30, 2016

 

 —

 

 —

 

1,514

 

 —

 

 —

 

 —

 

1,514

 

Other comprehensive loss

 

 —

 

 —

 

 —

 

(3,794)

 

(2,322)

 

(6,116)

 

(6,116)

 

Total comprehensive loss

 

 —

 

 —

 

1,514

 

(3,794)

 

(2,322)

 

(6,116)

 

(4,602)

 

Proceeds on issuance of common shares

 

470

 

(126)

 

 —

 

 —

 

 —

 

 —

 

344

 

Common shares issued on vesting of restricted stock units

 

214

 

(417)

 

(289)

 

 —

 

 —

 

 —

 

(492)

 

Stock-based compensation expense

 

 —

 

316

 

 —

 

 —

 

 —

 

 —

 

316

 

Income tax impact associated with stock options

 

 —

 

157

 

 —

 

 —

 

 —

 

 —

 

157

 

Balance, April 30, 2016

 

259,889

 

7,024

 

(137,240)

 

(1,265)

 

1,352

 

87

 

129,760

 

 

See accompanying notes

 

 

6


 

Table of Contents

DAVIDsTEA Inc.

 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

For the three-month period ended April 30, 2016 and May 2, 2015 [Unaudited]

 

[Amounts in thousands of Canadian dollars except per share amounts and where otherwise indicated]

 

1. CORPORATE INFORMATION

 

The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three-month period ended April 30, 2016 were authorized for issue in accordance with a resolution of the Board of Directors on June 8, 2016. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the NASDAQ Global Market under the symbol “DTEA”. The registered office is located at 5430, Ferrier St., Town of Mount-Royal, Quebec, Canada, H4P 1M2.

 

The Company is engaged in the retail and online sale of tea, tea accessories and food and beverages in Canada and the United States. 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 quarter because of lower customer traffic during the summer months.

 

2. STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION

 

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 January 30, 2016, 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.

 

On May 12, 2015, the Company’s Board of Directors approved a 1.6-for-1 split on common and Class AA common shares, which was effective May 21, 2015. The accompanying financial statements have been adjusted to reflect the forward split. As a result, the historical per share amounts and the number of shares in these unaudited condensed interim consolidated financial statements have been retroactively adjusted to reflect this change.

 

Basis of consolidation

 

The unaudited condensed interim consolidated financial statements include the accounts of the Company and its wholly-owned U.S. subsidiary, DAVIDsTEA (USA) Inc. The unaudited condensed interim financial statements of the subsidiary are prepared for the same reporting period as the parent company, using consistent accounting policies. All intercompany transactions, balances and unrealized gains or losses have been eliminated. The Company has no interests in special purpose entities.

 

Basis of measurement

 

These unaudited condensed interim consolidated financial statements have been prepared on the historical cost basis except for the following material items:

 

·

Derivative financial instruments are measured at fair value; and

·

Provisions for onerous contracts are measured at the present value of the expenditures expected to settle the obligations.

7


 

Table of Contents

 

Functional and presentation currency

 

These unaudited condensed interim consolidated financial statements are presented in Canadian dollars, which is the parent Company’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand, except per share amounts.

 

Comparative figures

 

The Company has reclassified the comparative figure related to stock-based compensation related to cashless exercise on the statement of income (loss) to make selling, general and administration expenses comparable.

 

3. SIGNIFICANT ACCOUNTING POLICIES

 

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 January 30, 2016. During the three-month period ended April 30, 2016, we implemented the following new accounting standard on the presentation of financial statements.

 

IAS 1, “Presentation of Financial Statements” (“IAS 1”), was modified in December 2014 when the IASB issued amendments to clarify materiality, order of notes to financial statements, disclosure of accounting policies as well as aggregation and disaggregation of items presented in the consolidated balance sheets and consolidated statements of income (loss) and comprehensive income (loss). These amendments shall be applied to fiscal years beginning on or after January 1, 2016. The Company has adopted this accounting standard effective on January 31, 2016, the first day of its newest fiscal year. The adoption of IAS 1 has resulted in no impact to the consolidated financial statements.

 

There were no other new accounting standards implemented during the three-month period ended April 30, 2016.

 

Information on significant new accounting standards and amendments issued but not yet adopted is described below.

 

IFRS 9, “Financial Instruments”(“IFRS 9”), partially replaces the requirements of IAS 39, “Financial Instruments: Recognition and Measurement”. This standard is the first step in the project to replace IAS 39. The IASB intends to expand IFRS 9 to add new requirements for the classification and measurement of financial liabilities, derecognition of financial instruments, impairment and hedge accounting to become a complete replacement of IAS 39. These changes are applicable for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Company is currently assessing the impact of adopting this standard on the Company’s consolidated financial statements and related note disclosures.

 

IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue that applies to all contracts with customers, except for contracts that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and will be effective for annual periods beginning on or after January 1, 2018. The Company is currently assessing the impact of adopting this standard on the Company’s consolidated financial statements and related note disclosures.

 

8


 

Table of Contents

IFRS 16, “Leases” (“IFRS 16”) replaces IAS 17, “Leases”. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized in the statement of financial position. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019. Early application is permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company is currently assessing the impact of adopting this standard on our consolidated financial statements and related note disclosures.

 

 

4. SIGNIFICANT ACCOUNTING JUDGEMENTS, 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 judgements 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 January 30, 2016.

 

5. INVENTORIES

 

 

 

 

 

 

 

 

    

April 30, 

2016

    

January 30,

2016

 

 

 

$

 

$

 

Finished goods

 

14,318

 

12,903

 

Goods in transit

 

1,886

 

3,790

 

Packaging

 

1,350

 

1,074

 

 

 

17,554

 

17,767

 

 

For the three-month period ended April 30, 2016, $256 [May 2, 2015 —$151] was written-down as a result of the net realizable value being lower than the cost of the inventory. No inventory write-downs recognized in previous years were reversed in the period.

 

6. PROVISIONS

 

 

 

 

 

 

 

 

For the

three months

ended

 

For the

year ended

 

 

    

April 30, 

2016

    

January 30, 2016

 

 

 

$

 

$

 

Opening balance

 

674

 

874

 

Amortized during the period

 

 —

 

(265)

 

Cumulative translation adjustment

 

(71)

 

65

 

Ending balance

 

603

 

674

 

Less: Current portion

 

(512)

 

(512)

 

Long-term portion of provisions

 

91

 

162

 

 

Provisions for onerous contracts have been recognized in respect of store leases where the unavoidable costs of meeting the obligations under the lease agreements exceed the economic benefits expected to be received from the contract. The unavoidable costs reflect the present value of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract.

 

9


 

Table of Contents

7. REVOLVING FACILITY

 

The Company has a credit agreement (the “Credit Agreement”) with the Bank of Montreal (“BMO”). The Credit Agreement provides for a revolving term facility, maturing April 24, 2018, in the principal amount of $20,000 (which the Company refers to as the “Revolving Facility”) or the equivalent amount in U.S. dollars, repayable at any time. The Credit Agreement also provides for an accordion feature whereby the Company may, at any time prior to maturity and with permission from BMO, request an increase to the Revolving Facility by an amount not greater than $10,000.

 

The credit facility contains a number of financial and non-financial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company cannot make any dividend payments. As at April 30, 2016, the Company is in compliance with these covenants.

 

As at April 30, 2016 and January 30, 2016, the Company did not have any borrowings on the Revolving Facility.

 

8. MANDATORILY REDEEMABLE PREFERENCE SHARES

 

Prior to the Company’s initial public offering (“IPO”) on June 10, 2015, the Series A, A-1, and A-2 redeemable preferred shares liability was being accreted to their nominal value and the financial derivative liability embededded in the preferred shares was being measured at fair value with all changes recognized immediately in income (loss). For the three-month period ended May 2, 2015, the accretion on preferred shares was $314 and the changes in the carrying value of the financial derivative liability embedded in preferred shares amounted to $90,705. The amounts were recorded as a loss in the unaudited condensed interim consolidated statements of income (loss) and comprehensive income (loss) for the three months ended May 2, 2015.

 

On June 10, 2015, immediately prior to the completion of the Company’s IPO, the financial derivative liability embedded in preferred shares was increased to reflect the fair market value of the IPO common shares. Subsequently, all of the Series A, A-1 and A-2 preferred shares were converted into common shares and the financial derivative liability embedded in the Series A, A-1 and A-2 preferred shares was converted into equity. On June 10, 2015, immediately following the IPO, the Company amended its articles to remove the Series A, A-1 and A-2 preferred shares from its authorized capital.

 

 

 

9. SHARE CAPITAL

 

Authorized

 

An unlimited number of common shares.

 

Issued and outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

    

April 30, 

2016

    

January 30, 2016

 

 

 

$

 

$

 

24,462,385 Common shares [January 30, 2016 - 24,037,472 shares]

 

259,889

 

259,205

 

 

 

259,889

 

259,205

 

 

During the three-month period ended April 30, 2016, 394,515 stock options were exercised for common shares. The carrying value of common shares includes $126 [May 2, 2015 — $125] which corresponds to a reduction in contributed surplus representing the value of accumulated stock-based compensation expense associated to options exercised during the period. In addition, during the three-month period ended April 30, 2016, 30,398 of common shares were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $214 [May 2, 2015 – nil].

 

10


 

Table of Contents

Stock-based compensation

 

As at April 30, 2016, 1,017,620 common shares remain available for issuance under the 2015 Omnibus Plan.

 

The weighted average fair value of options granted of $3.65 for the three-month period ended April 30, 2016 [for the three-month period ended May 2, 2015 — $6.15] was estimated using the Black Scholes option pricing model, using the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the three months ended

 

 

    

April 30, 2016

    

May 2, 2015

 

Risk-free interest rate

 

 

 

 

1.23

%  

 

 

 

 

 

 

1.15

%  

 

 

 

Expected volatility

 

 

 

 

29.8

%  

 

 

 

 

 

 

31.0

%  

 

 

 

Expected option life

 

 

 

 

4.0

years

 

 

 

 

 

 

3.65

years

 

 

 

Expected dividend yield

 

 

 

 

0

%  

 

 

 

 

 

 

0

%  

 

 

 

Exercise price

 

 

 

$

14.39

 

 

 

 

 

 

$

15.64

 

 

 

 

 

Expected volatility was estimated using historical volatility of similar companies whose share prices were publicly available.

 

A summary of the status of the Company’s stock option plan and changes during the three-month period is presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the three months ended

 

 

 

April 30, 2016

 

May 2, 2015

 

 

    

 

    

Weighted

    

 

    

Weighted

 

 

 

 

 

average

 

 

 

average

 

 

 

Options

 

exercise

 

Options

 

exercise

 

 

 

outstanding

 

price

 

outstanding

 

price

 

 

 

#

 

$

 

#

 

$

 

Outstanding, beginning of period

 

2,146,880

 

3.04

 

2,905,648

 

2.06

 

Issued

 

131,500

 

14.39

 

12,000

 

15.64

 

Exercised

 

(394,515)

 

0.87

 

(322,739)

 

0.77

 

Cancelled/expired

 

 —

 

 —

 

(275,529)

 

0.77

 

Forfeitures

 

(51,322)

 

5.94

 

(40,000)

 

2.67

 

Outstanding, end of period

 

1,832,543

 

4.24

 

2,279,380

 

2.82

 

Exercisable, end of period

 

910,283

 

2.85

 

780,500

 

1.22

 

 

The weighted average share price at the date of exercise for stock options exercised during the three-month period ended April 30, 2016 was $14.50 [for three three-month period ended May 2, 2015 — $15.64].

 

The following table summarizes information about the Company’s RSU.

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the three months ended

 

 

 

April 30, 2016

 

May 2, 2015

 

 

    

 

    

Weighted

    

 

    

Weighted

 

 

 

 

 

average

 

 

 

average

 

 

 

RSUs

 

fair value

 

RSUs

 

fair value

 

 

 

outstanding

 

per unit (1)

 

outstanding

 

per unit (1)

 

 

 

#

 

$

 

#

 

$

 

Outstanding, beginning of period

 

252,720

 

7.39

 

 —

 

 —

 

Granted

 

96,520

 

14.39

 

235,120

 

7.07

 

Forfeitures

 

(20,310)

 

7.07

 

 —

 

 —

 

Vested

 

(59,050)

 

7.07

 

 —

 

 —

 

Outstanding, end of period

 

269,880

 

9.99

 

235,120

 

7.07

 

 

(1)

Weighted average fair value per unit as at date of grant.

11


 

Table of Contents

 

During the three-month period ended April 30, 2016, the Company recognized a stock-based compensation expense of $316 [May 2, 2015 — $325] and a stock-based compensation expense related to cashless exercise of options by former employees of nil [May 2, 2015 — $4,052].

 

10. INCOME TAXES

 

Income tax expense is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full fiscal year.

 

A reconciliation of the statutory income tax rate to the effective tax rate is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

April 30, 2016

 

May 2, 2015

 

 

 

%

 

$

 

%

 

$

 

Provision for income tax (recovery) — statutory rate

    

26.5

    

568

 

26.5

    

(24,880)

 

Loss from embedded derivative and accretion of Series A, A-1, and A-2 preferred shares

 

 —

 

 —

 

(25.8)

 

24,165

 

Other non-deductible items

 

3.5

 

74

 

(0.2)

 

207

 

Other

 

(0.7)

 

(16)

 

 —

 

20

 

Provision for income tax (recovery) — effective tax rate

 

29.3

 

626

 

0.5

 

(488)

 

 

A breakdown of the income tax provision (recovery) on the interim consolidated income statement is as follows:

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

April 30, 2016

    

May 2, 2015

    

 

 

$

 

$

 

Income tax provision (recovery)

 

 

 

 

 

Current

 

793

 

(365)

 

Deferred

 

(167)

 

(123)

 

 

 

626

 

(488)

 

 

As at April 30, 2016, the Company’s U.S. subsidiary has accumulated losses amounting to US$10.6 million [January 30, 2016 — US$9.7 million], the tax benefit of which has been fully recorded as a deferred income tax asset, which expire during the years 2033 to 2036.

 

11. SELLING, GENERAL AND ADMINISTRATION EXPENSES

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

April 30, 2016

    

May 2, 2015

 

 

 

$

 

$

 

Wages, salaries and employee benefits

 

13,327

 

11,327

 

Depreciation of property and equipment

 

1,787

 

1,298

 

Amortization of intangible assets

 

161

 

123

 

Provision (recovery) for onerous contracts

 

 —

 

(74)

 

Stock-based compensation

 

316

 

325

 

Other selling, general and administration

 

5,528

 

3,992

 

 

 

21,119

 

16,991

 

 

 

 

12


 

Table of Contents

12. EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) amounts are calculated by dividing the net income (loss) for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS amounts are calculated by dividing the net income (loss) attributable to ordinary equity holders (after adjusting for dividends, accretion interest on the mandatorily redeemable preference shares and any gain or loss from embedded derivative on preferred shares) by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares, unless these would be anti‑dilutive.

 

The following reflects the income and share data used in the basic and diluted EPS computations:

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

April 30, 2016

    

May 2, 2015

 

 

 

$

 

$

 

Net income (loss) for basic EPS

 

1,514

 

(93,226)

 

 

 

 

 

 

 

Weighted average number of shares outstanding — basic

 

24,134,285

 

12,057,474

 

Restricted stock units

 

213,275

 

 —

 

Options

 

1,545,038

 

 —

 

Weighted average number of shares — fully diluted

 

25,892,598

 

12,057,474

 

 

As a result of the net loss during the three-month period ended May 2, 2015, the stock options and restricted stock units disclosed in Note 9 and the Series A, Series A-1 and Series A-2 preferred shares disclosed in Note 8 are anti-dilutive.

 

13. RELATED PARTY DISCLOSURES

 

For the three-month period ended May 2, 2015, interest was incurred on the loan from the controlling shareholder amounting to $33 and dividends on Series A, A-1 and A-2 preferred shares were accrued for $322. As a result of the repayment of the loan from the controlling shareholder and the conversion of the Series A, A-1 and A-2 preferred shares during the year ended January 30, 2016, there were no such amounts for the three-month period ended April 30, 2016.

 

14. SEGMENT INFORMATION

 

An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The Company has reviewed its operations and determined that each of its retail stores represents an operating segment. However, because its retail stores have similar economic characteristics, sell similar products, have similar types of customers, and use similar distribution channels, the Company has determined that these operating segments can be aggregated at a geographic level. As a result, the Company has concluded that it has two reportable segments, Canada and the U.S., that derive their revenues from the retail and online sale of tea, tea accessories and food and beverages. The Company’s Chief Executive Officer (the chief operating decision maker) makes decisions about resources to be allocated to the segments and assesses performance, and for which discrete financial information is available.

 

13


 

Table of Contents

The Company derives revenue from the following products:

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

April 30, 

2016

    

May 2, 

2015

 

 

 

$

 

$

 

Tea

 

30,147

 

24,644

 

Tea accessories

 

9,893

 

7,242

 

Food and beverages

 

4,429

 

3,958

 

 

 

44,469

 

35,844

 

 

Property and equipment and intangible assets by country are as follows:

 

 

 

 

 

 

 

 

    

April 30, 

2016

    

January 30,

2016

 

 

 

$

 

$

 

Canada

 

35,747

 

35,915

 

US

 

13,450

 

13,657

 

Total

 

49,197

 

49,572

 

 

Gross profit per country is used to measure performance because management believes this information is the most relevant in evaluating results. Gross profit per country is as follows:

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

April 30, 2016

 

 

 

Canada

 

US

 

Consolidated

 

 

 

$

 

$

 

$

 

Sales

    

36,959

    

7,510

    

44,469

    

Cost of sales

 

17,074

    

4,240

    

21,314

 

Gross profit

 

19,885

 

3,270

 

23,155

 

Selling, general and administration expenses

 

 

 

 

 

21,119

 

Results from operating activities

 

 

 

 

 

2,036

 

Finance costs

 

 

 

 

 

17

 

Finance income

 

 

 

 

 

(121)

 

Income before income taxes

 

 

 

 

 

2,140

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

May 2, 2015

 

 

 

Canada

 

US

 

Consolidated

 

 

 

$

 

$

 

$

 

Sales

    

31,803

    

4,041

    

35,844

    

Cost of sales

 

14,412

 

2,343

 

16,755

 

Gross profit

 

17,391

 

1,698

 

19,089

 

Selling, general and administration expenses

 

 

 

 

 

16,991

 

Stock-based compensation related to cashless exercise

 

 

 

 

 

4,052

 

Results from operating activities

 

 

 

 

 

(1,954)

 

Finance costs

 

 

 

 

 

792

 

Finance income

 

 

 

 

 

(51)

 

Accretion of preferred shares

 

 

 

 

 

314

 

Loss from embedded derivative on Series A, A-1 and A-2 preferred shares

 

 

 

 

 

90,705

 

Loss before income taxes

 

 

 

 

 

(93,714)

 

 

 

14


 

Table of Contents

15. FINANCIAL RISK MANAGEMENT

 

The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, liquidity and credit.

 

Currency risk — foreign exchange risk

 

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Given that some of its purchases are denominated in U.S. dollars, the Company is exposed to foreign exchange risk. The Company’s foreign exchange risk is largely limited to currency fluctuations between the Canadian and U.S. dollars. The Company is exposed to currency risk through its cash, accounts receivable and accounts payable denominated in U.S. dollars.

 

Assuming that all other variables remain constant, a revaluation of these monetary assets and liabilities due to a 5% rise or fall in the Canadian dollar against the U.S. dollar would have resulted in an increase or decrease to net income (loss) in the amount of $56.

 

The Company’s foreign exchange exposure is as follows:

 

 

 

 

 

 

 

 

    

April 30, 

2016

    

January 30,

2016

 

 

 

US$

 

US$

 

Cash

 

661

 

464

 

Accounts receivable

 

1,279

 

1,126

 

Accounts payable

 

3,051

 

2,092

 

 

The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.

 

In order to protect itself from the risk of losses should the value of the Canadian dollar decline in relation to the U.S. dollar, the Company has entered into forward contracts to fix the exchange rate of its expected U.S. dollar inventory purchasing requirements, through April 2017. A forward foreign exchange contract is a contractual agreement to buy a specific currency at a specific price and date in the future. The Company designated the forward contracts as cash flow hedging instruments under International Accounting Standard 39. This has resulted in mark-to-market foreign exchange adjustments, for qualifying hedged instruments, being recorded as a component of other comprehensive income for the three-month period ended April 30, 2016. As at April 30, 2016, the designated portion of these hedges was considered effective.

 

The nominal and contract values of foreign exchange contracts outstanding as at April 30, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Range of

 

 

 

 

 

 

 

Unrealized

 

 

 

contractual

 

Nominal value

 

Nominal value

 

 

 

loss

 

 

 

exchange rate

 

US$

 

C$

 

Term

 

C$

 

Purchase contracts

 

 

 

 

 

 

 

 

 

 

 

U.S. dollar

 

1.3060

 

26,350

 

34,413

 

May 2016 to October 2016

 

1,364

 

U.S. dollar

 

1.2696 - 1.2772

 

19,100

 

24,314

 

November 2016 to April 2017

 

359

 

 

 

 

 

45,450

 

58,727

 

 

 

1,723

 

 

The Company did not use any forward contracts to manage foreign exchange risk for the three-month period ended May 2, 2015, but rather satisfied its U.S dollar requirements primarily through spot rate purchases.

 

15


 

Table of Contents

Market risk — interest rate risk

 

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial instruments that potentially subject the Company to cash flow interest rate risk include financial assets and liabilities with variable interest rates and consist of cash. The Company is exposed to cash flow risk on its Revolving Facility which bears interest at variable interest rates (note 7). As at April 30, 2016, the Company did not have any borrowings on the Revolving Facility.

 

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 payables.

 

As at April 30, 2016, the Company had $69,068 in cash. In addition, as outlined in note 7, the Company has a Revolving Facility of $20,000, of which nil was drawn as at April 30, 2016. The Revolving Facility also provides for an accordion feature whereby the Company may, at any time prior to maturity, and with the permission of BMO, request an increase to the Revolving Facility by an amount not greater than $10,000.

 

The Company expects to finance its growth in store base and its store renovations through cash flows from operations, the Revolving Facility (note 7) and cash on hand.

 

The Company expects that its trade and other payables will be discharged within 90 days.

 

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 accounts receivable and derivative financial instruments. Accounts receivable primarily consists of receivables from retail customers who pay by credit card, recoveries of credits from suppliers for returned or damaged products, and receivables from other companies for sales of products, gift cards and other services. Credit card payments have minimal credit risk and the limited number of corporate receivables is closely monitored.

 

Fair values

 

Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost. The disclosures in the “Financial instruments” section of note 3 of the consolidated financial statements for the year ended January 30, 2016 describe how the categories of financial instruments are measured and how income and expenses, including fair value remeasurement gains and losses, are recognized. The fair values of derivative financial instruments have been determined by reference to forward exchange rates at the end of the reporting period and classified in Level 2 of the fair value hierarchy.

 

16


 

Table of Contents

Reconciliation of Level 3 fair values

 

Changes in fair value of Level 3 financial instruments were as follows, for the three-month period ended April 30, 2016 and for the year ended January 30, 2016:

 

 

 

 

 

 

 

 

 

Fair value of Level 3

 

 

 

financial instruments

 

 

    

April 30, 

2016

    

January 30, 2016

 

 

 

$

 

$

 

Balance, beginning of the period