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 May 5, 2018.

 

 

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)

 

 

 

 

 

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, 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.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒ 

 

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

 

As of June  11, 2018,  25,935,377 common shares of the registrant were outstanding.

 

 

 

 

DAVIDsTEA Inc.

 

TABLE OF CONTENTS

 

 

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

 

In this quarterly report, 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 8, 2018, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = $1.2956.

 

 

 

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]

 

 

See accompanying notes

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)

 

AND COMPREHENSIVE INCOME (LOSS)

 

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

 

 

See accompanying notes

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

[Unaudited and in thousands of Canadian dollars]

 

See accompanying notes

 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

 

[Unaudited and in thousands of Canadian dollars]

 

 

See accompanying notes

 

DAVIDsTEA Inc.

 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

For the three-month periods ended May 5, 2018 and April 29, 2017 [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-month period ended May 5, 2018 were authorized for issue in accordance with a resolution of the Board of Directors on June 13, 2018.  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 February 3, 2018, 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 3, 2018.  

 

3. CHANGES IN ACCOUNTING POLICIES

 

During the three-month period ended May 5, 2018, the Company adopted IFRS 9, “Financial Instruments” (“IFRS 9”). IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.

 

With the exception of hedge accounting, which the Company applied prospectively, the Company has applied IFRS 9 retrospectively, with the initial application date of February 4, 2018.

 

Overall, there was not a material impact on the Company’s consolidated financial statements.

 

 

 

There has been no significant impact caused by the new classification of financial assets under IFRS 9. The classification of all financial liabilities as financial liabilities at amortized cost remains unchanged as well as their measurement resulting from their classification.

 

 

 

During the three-month period ended May 5, 2018, the Company adopted IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”). IFRS 15 replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue 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 is effective for annual periods beginning on or after January 1, 2018. The implementation of IFRS 15 impacts the allocation of revenue that is deferred in relation to its customer loyalty award programs. Prior to adoption, revenue was allocated to the customer loyalty awards using the residual fair value method. Under IFRS 15, consideration is allocated between the loyalty program awards and the goods on which the awards were earned, based on their relative stand-alone selling prices. The change in allocation of revenue that is deferred in relation to its customer loyalty program does not have a material impact on retained earnings as at February 4, 2018. Overall, there was not a material impact on the Company’s consolidated financial statements.

 

During the three-month period ended May 5, 2018, the Company adopted IFRIC 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. There was no material impact on the Company’s consolidated financial statements.

 

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

 

IFRS 16, “Leases” (“IFRS 16”) replaces IAS 17, “Leases”. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized on the balance sheet. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019 with early application permitted. The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its consolidated financial

statements. The Company expects the adoption of IFRS 16 will have a significant impact as the Company will recognize new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of use assets and interest expense on lease liabilities. The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical expedients under the standard. The Company expects to disclose additional detailed information, including its transition method, any practical expedients elected and estimated quantitative financial effects, before the adoption of IFRS 16.

 

IFRIC 23, “Uncertainty over Income Tax Treatments”, was issued by the IASB in June 2017. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. The Interpretation requires an entity to:

 

The Company does not expect a material impact from the adoption of IFRIC 23 on its consolidated financial statements.

 

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 February 3, 2018. 

 

5. INVENTORIES

 

 

 

6. PROVISIONS

 

 

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.

 

 

7. REVOLVING FACILITY

 

On June 11, 2018, the Company amended its existing Credit Agreement with BMO (“Amended Credit Agreement”). The Amended Credit Agreement provides for a two-year revolving facility (“Amended Revolving Facility”) in the principal amount of $15.0 million or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018, with no accordion feature. Borrowings under the Amended Revolving Facility may not exceed the lesser of the total commitment for the New Revolving Facility and the borrowing base, calculated as 75% of the face value of all eligible receivables plus 50% of the estimated value of all eligible inventory, less any priority payables.

 

The Amended Credit Agreement subjects the Company to certain financial covenants entered into between the Company and BMO. Without the prior written consent of BMO, the Company’s fixed charge coverage ratio may not be less than 1.10:1.00 and the Company’s leverage ratio may not exceed 3.00:1:00. In addition, the Company’s net tangible worth may not be less than $65,000 and the Company’s minimum excess availability must not be less than $15.0 million. The Amended Revolving Facility bears interest based on the Company’s adjusted leverage ratio, at the bank’s prime rate, U.S. bank rate and LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility. Prior to the amendment of the credit agreement on June 11, 2018, the Company was in breach of one of its financial covenants as at May 5, 2018, which also constituted an event of default under the derivative contracts.

 

The credit facility also contains non-financial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company also cannot make any dividend payments.

 

As at May 5, 2018 and February 3, 2018, the Company did not have any borrowings on the Revolving Facility.

 

 

8. SHARE CAPITAL

 

Authorized

 

An unlimited number of Common shares.

 

Issued and outstanding

 

 

During the three-month period ended May 5, 2018, no stock options were exercised for common shares [April 29, 2017 —  217,000 stock options for cash proceeds of $815]. During the three-month period ended April 29, 2017, the carrying value of common shares included $653, which corresponds to a reduction in contributed surplus associated to options exercised during the period.

 

In addition, during the three-month period ended May 5, 2018, 29,785 common shares [April 29, 2017 – 28,105 common shares] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $257, net of tax [April 29, 2017 —  $268] and a reduction in contributed surplus of $593 [April 29, 2017 —  $554].

 

Stock-based compensation

 

As at May 5, 2018, 402,532 common shares remain available for issuance under the 2015 Omnibus Plan.

 

No stock options were granted during the three-month period ended May 5, 2018. For the three-month period ended April 29, 2017, the weighted average fair value of options granted of $2.39 was estimated using the Black Scholes option pricing model, using the following assumptions:

 

 

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.

 

 

No stock options were exercised during the three-month period ended May 5, 2018. For the three-month period ended April 29, 2017, the weighted average share price at the date of exercise for stock options exercised was $9.47.

 

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

 

During the three-month period ended May 5, 2018, the Company recognized a stock-based compensation expense of $295 [April 29, 2017 — $574].

 

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:

 

 

A breakdown of the income tax provision (recovery) on the interim consolidated statement of income (loss) 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 income (loss) for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS amounts are calculated by dividing the net income (loss) attributable to ordinary equity holders (after adjusting for dividends) by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares, unless these would be anti‑dilutive.

 

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

 

 

As a result of the net loss during the three-month period ended May 5, 2018 and April 29, 2017, the stock options and restricted stock units disclosed in Note 8 are anti-dilutive.

 

12. RELATED PARTY DISCLOSURES

 

There have been no significant changes in related party transactions from those disclosed in the Company’s audited annual consolidated financial statements for the year ended February 3, 2018.

 

During the three-month period ended May 5, 2018, the Company purchased merchandise from a company controlled by one of its executive employees amounting to $64 [April 29, 2017 — nil].

 

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 and intangible assets by country are as follows:

 

 

During the fourth quarter of fiscal 2017, the Company changed the measure of profit used by the CODM in measuring performance. Management believes that the new measure, being results from operating activities before corporate expenses by country, excluding intercompany profit, is the most relevant in evaluating results. The Company has retroactively revised the results by segment for the three-month period ended April 29, 2017. 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 income (loss) in the amount of $76.