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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 31, 2021

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

For the transition period from __________ to __________

Commission file number 001-37404

DAVIDsTEA Inc.

(Exact name of registrant as specified in its charter)

Canada

98-1048842

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5430 Ferrier

Mount-Royal, Québec, Canada, H4P 1M2

(Address of principal executive offices) (zip code)

(888) 873-0006

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered		Trading Symbol for Each Class
Common shares, no par value per share		NASDAQ Global Market		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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

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 ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of September 10, 2021, 26,359,969 common shares of the registrant were outstanding.

The brand, service or product names or marks referred to in this Quarterly Report are trademarks or services marks, registered or otherwise, of DAVIDsTEA Inc. and our wholly-owned subsidiary, DAVIDsTEA (USA) Inc.

DAVIDsTEA Inc.

TABLE OF CONTENTS

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	31

Item 4.	Controls and Procedures	31

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	33

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”, “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars”, “US$” and “USD” mean U.S. dollars.

On September 10, 2021, the Bank of Canada closing average exchange rate was US$1.00 = CAD$1.2631.

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
		July 31,			January 30,
		2021			2021
		$			$
ASSETS
Current
Cash			12,051			30,197
Accounts and other receivables			6,986			6,157
Inventories			38,055			23,468
Income tax receivable			55			55
Prepaid expenses and deposits			5,580			14,470
Total current assets			62,727			74,347
Property and equipment	[Note 5]		1,566			2,309
Intangible assets			3,041			3,929
Right-of-use assets	[Note 5]		3,587			657
Total assets			70,921			81,242
LIABILITIES AND EQUITY
Current
Trade and other payables			12,533			4,152
Deferred revenue			6,476			7,080
Liabilities subject to compromise	[Note 6]		-			100,550
Current portion of lease liabilities			768			396
Total current liabilities			19,777			112,178
Non-current portion of lease liabilities			2,919			355
Total liabilities			22,696			112,533
Commitments and contingencies
Equity
Share capital	[Note 7]		113,406			113,167
Contributed surplus			1,806			1,747
Deficit			(69,862	)		(148,068	)
Accumulated other comprehensive income			2,875			1,863
Total equity (deficiency)			48,225			(31,291	)
Total liabilities and equity			70,921			81,242

See accompanying notes.

Table of Contents

DAVIDsTEA Inc.

Incorporated under the laws of Canada

INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

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

		For the three months ended						For the six months ended
		July 31,			August 1,			July 31,			August 1,
		2021 $			2020 $			2021 $			2020 $

Sales	[Note 13]		18,743			23,031			41,992			55,273
Cost of sales			10,748			14,694			23,229			32,263
Gross profit			7,995			8,337			18,763			23,010
Selling, general and administration expenses	[Note 9]		9,085			7,409			18,279			29,042
Restructuring plan activities, net	[Note 10]		(75,557	)		(3,172	)		(77,159	)		34,228
Results from operating activities			74,467			4,100			77,643			(40,260	)
Finance costs			23			1,559			33			3,226
Finance income			(34	)		(68	)		(89	)		(308	)
Net income (loss) before income taxes			74,478			2,609			77,699			(43,178	)
Recovery of income taxes	[Note 8, 10]		(1,000	)		-			(1,000	)		-
Net income (loss)			75,478			2,609			78,699			(43,178	)

Other comprehensive income (loss):
Cumulative translation adjustment			200			1,451			1,012			(18	)
Other comprehensive income (loss), net of tax			200			1,451			1,012			(18	)
Total comprehensive income (loss)			75,678			4,060			79,711			(43,196	)
Net earnings (loss) per share:
Basic	[Note 11]		2.87			0.10			3.00			(1.65	)
Fully diluted	[Note 11]		2.75			0.10			2.87			(1.65	)
Weighted average number of shares outstanding:
Basic	[Note 11]		26,299,094			26,128,971			26,270,284			26,108,499
Fully diluted	[Note 11]		27,455,005			26,925,264			27,422,066			26,108,499

See accompanying notes.

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						For the six months ended
		July 31,			August 1,			July 31,			August 1,
		2021			2020			2021			2020
		$			$			$			$
OPERATING ACTIVITIES
Net income (loss)			75,478			2,609			78,699			(43,178	)
Items not affecting cash:
Depreciation of property and equipment			407			301			795			1,544
Amortization of intangible assets			484			571			887			1,083
Amortization of right-of-use assets			135			454			294			2,693
Gain on modification of lease liabilities			-			(54,735	)		-			(54,735	)
Gain (loss) on liabilities subject to compromise	[Note 10]		(77,713	)		47,818			(79,861	)		47,818
Interest on lease liabilities			23			1,559			33			3,187
Loss on disposal of property and equipment and right-of-use assets			-			1,542			-			1,542
Impairment of property and equipment and right-of-use assets			-			-			-			39,960
Stock-based compensation expense			363			267			545			580
Sub-total			(823	)		386			1,392			494
Net change in other non-cash working capital balances related to operations			(18,256	)		(4,209	)		(19,164	)		(8,373	)
Cash flows used in operating activities			(19,079	)		(3,823	)		(17,772	)		(7,879	)
FINANCING ACTIVITIES
Proceed from issuance of common shares pursuant to exercise of stock options			-			3			-			3
Payment of lease liabilities			(139	)		(1,198	)		(322	)		(5,574	)
Cash flows used in financing activities			(139	)		(1,195	)		(322	)		(5,571	)
INVESTING ACTIVITIES
Additions to property and equipment			(52	)		(40	)		(52	)		(312	)
Additions to intangible assets			-			-			-			(317	)
Repayment of loan from a Company controlled by an executive employee			-			-			-			2,026
Cash flows provided by (used in) investing activities			(52	)		(40	)		(52	)		1,397
Decrease in cash during the period			(19,270	)		(5,058	)		(18,146	)		(12,053	)
Cash, beginning of the period			31,321			39,343			30,197			46,338
Cash, end of the period			12,051			34,285			12,051			34,285
Supplemental Information
Cash received for:
Interest			39			68			94			279
Income taxes (classified as operating activity)			-			563			-			870

See accompanying notes.

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			Total
	Share		Contributed						Comprehensive			Equity
	Capital		Surplus			Deficit			Income (loss)			(Deficiency)
	$		$			$			$			$
Balance, January 30, 2021		113,167		1,747			(148,068	)		1,863			(31,291	)
Net income for the six months ended July 31, 2021		-		-			78,699			-			78,699
Other comprehensive income		-		-			-			1,012			1,012
Total comprehensive income		-		-			78,699			1,012			79,711
Issuance of common shares		-		-			-			-			-
Common shares issued on vesting of restricted stock units		239		(486	)		(493	)		-			(740	)
Stock-based compensation expense		-		545			-			-			545
Balance, July 31, 2021		113,406		1,806			(69,862	)		2,875			48,225

Balance, February 1, 2020		112,843		1,577			(92,278	)		1,207			23,349
Net loss for the six months ended August 1, 2020		-		-			(43,178	)		-			(43,178	)
Other comprehensive loss		-		-			-			(18	)		(18	)
Total comprehensive loss		-		-			(43,178	)		(18	)		(43,196	)
Issuance of common shares		4		(1	)		-			-			3
Common shares issued on vesting of restricted stock units		272		(554	)		174			-			(108	)
Stock-based compensation expense		-		580			-			-			580
Balance, August 1, 2020		113,119		1,602			(135,282	)		1,189			(19,372	)

See accompanying notes.

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DAVIDsTEA Inc.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six-month periods ended July 31, 2021 and August 1, 2020 [Unaudited]

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

1. CORPORATE INFORMATION

The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary, DAVIDsTEA (USA) Inc., (collectively, the “Company”) for the three and six-month periods ended July 31, 2021 were authorized for issue in accordance with a resolution of the Board of Directors on September 14, 2021. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the Nasdaq Global Market under the symbol “DTEA”. The registered office is located at 5430 Ferrier St., Town of Mount-Royal, Québec , Canada, H4P 1M2.

The Company offers a specialty branded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories and gifts through its e-commerce platform at www.davidstea.com and the Amazon Marketplace, its wholesale customers which include over 2,500 grocery stores and pharmacies, and 18 company-owned stores across Canada. We offer primarily proprietary tea blends that are exclusive to the Company, as well as traditional single-origin teas and herbs. Our passion for and knowledge of tea permeates our culture and is rooted in an excitement to explore the taste, health and lifestyle elements of tea. Sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal quarter due to the year-end holiday season and tend to be lowest in the second and third fiscal quarters because of lower customer engagement during the summer months.

In March 2020, the outbreak of a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization and on March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closure of all of its retail stores in Canada and the United States. On August 21, 2020, the Company re-opened 18 stores across Canada.

The Company qualifies for the Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy under the COVID-19 Economic Response Plan of the government of Canada. The Company recognized payroll subsidies for the three and six-month periods ended July 31, 2021 of $1.7 million and $2.8 million, respectively (August 1, 2020 - $1.2 million and $2.0 million). The Company recognized rent subsidies for the three and six-month periods ended July 31, 2021 of $0.8 million and $0.8 million, respectively (August 1, 2020 – $nil and $nil). The wage and rent subsidy programs were recognized in Selling, general and administration expenses.

CCAA Proceedings

On July 8, 2020, the Company announced that it was implementing a restructuring plan (the “Restructuring Plan”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, the Company would continue to operate its online business through its e-commerce platform and the Amazon Marketplace as well as its wholesale distribution channel. 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 the formal Restructuring Plan was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.

On July 8, 2020, the Company obtained an Initial Order pursuant to the CCAA from the Québec Superior Court in order to implement the Restructuring Plan (the “Initial Order”).

On July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of the United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and enforced the Initial Order, in effect providing protection to the Company from creditor action against its assets in the United States.

As part of its Restructuring Plan and further to obtaining the Initial Order, the Company, on July 10, 2020, sent notices to terminate leases for 82 of its stores in Canada and all 42 of its stores in the United States. These lease terminations were effective on August 9, 2020.

On July 16, 2020, the Company obtained an Amended and Restated Initial Order from the Québec Superior Court, extending to September 17, 2020 the application of the Initial Order. The Amended and Restated Initial Order also dealt with certain administrative matters, particularly with regards to the lease terminations.

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On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada. These lease terminations were effective on August 29, 2020.

On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to December 15, 2020 and issued a claims process order (the “Claims Process Order”) establishing the claims procedures for the Company’s creditors under the CCAA. The Claims Process Order, among other things, set November 6, 2020 (the “Claims Bar Date”) as the time by which creditors had to submit their claims to PricewaterhouseCoopers (“PwC”), the Court-appointed Monitor.

On December 15, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to March 19, 2021. The Court also approved a retention plan for certain key employees (“KERP”) and created a priority charge over the debtors’ assets for the KERP in addition to extending the Claims Bar Date for certain Canadian employees until December 31, 2020.

On March 19, 2021, the Québec Superior Court extended the stay of all proceedings against the Company to June 4, 2021, and addressed certain administrative matters.

On May 7, 2021, the Company obtained an order from the Québec Superior Court authorizing the Company to file its plan of arrangement (the “Plan of Arrangement” or the “Plan”) under the CCAA and to call a creditors’ meeting to be held on June 11, 2021. The Court order also extended to July 16, 2021 the stay of all proceedings against the Company under the CCAA.

At the creditors’ meeting held on June 11, 2021, the Plan of Arrangement was approved by the requisite majorities of creditors of DAVIDsTEA Inc. and its subsidiary, DAVIDsTEA (USA) Inc., respectively, in accordance with the CCAA, that is, a simple majority of creditors of DAVIDsTEA Inc. and of DAVIDsTEA (USA) Inc., voting separately, whose claims were affected by the Plan of Arrangement, representing in each case at least two-thirds in dollar value of all such claims duly filed in accordance with the CCAA proceedings.

The Plan of Arrangement approved by the Company’s creditors on June 11, 2021 required that DAVIDsTEA Inc. distribute an aggregate amount of approximately $17.6 million to its creditors and those of DAVIDsTEA (USA) Inc. in full and final settlement of all claims affected by the Plan of Arrangement.

On June 16, 2021, the Company was granted a sanction order (the “Sanction Order”) for the Plan of Arrangement from the Québec Superior Court and obtained recognition of the Sanction Order from the United States Bankruptcy Court for the District of Delaware under Chapter 15 of the United States Bankruptcy Code.

On June 18, 2021, the Monitor issued a Certificate of Implementation in accordance with paragraph 16 of the Sanction Order, in which it certified that all the conditions precedent to the implementation of the Plan, as set forth in section 7.2 of the Plan, had been fulfilled or waived by the debtors;

Upon issuance of the Certificate of Implementation, the Monitor began distributing funds to the creditors who had duly proven their claims as part of the claims process. On September 9, 2021, the Monitor filed a Certificate of Termination with the Québec Superior Court in accordance with paragraph 24 of the Sanction Order and declared the CCAA proceedings were terminated without further act or formality.

2. BASIS OF PREPARATION AND GOING CONCERN UNCERTAINTY

These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). Accordingly, these financial statements do not include all of the financial statement disclosures required for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended January 30, 2021, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB. In management’s opinion, the unaudited condensed interim consolidated financial statements reflect all the adjustments that are necessary for a fair presentation of the results for the interim period presented. These unaudited condensed interim consolidated financial statements have been prepared using the accounting policies and methods of computation as outlined in Note 3 of the consolidated financial statements for the year ended January 30, 2021.

Going Concern Uncertainty

In December 2019, a novel strain of coronavirus, responsible for COVID-19, was first reported and was subsequently declared a pandemic by the World Health Organization in March 2020. The measures adopted by the federal, provincial and state governments in order to mitigate the spread of the outbreak required the Company to temporarily close all of its retail locations across North America effective March 17, 2020.

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On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under applicable laws in both Canada and the United States in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories. As part of the Restructuring Plan, in July 2020, the Company sent notices to terminate leases for 164 of its stores in Canada and all 42 of its stores in the United States. On August 21, 2020, the Company re-opened 18 of its stores throughout Canada.

Although the Company continues to offer its products directly to consumers through its online store and in supermarkets and drugstores across Canada, it is unlikely that customers will purchase its products at previous volumes through these alternative channels. Furthermore, the duration and impact of the COVID-19 pandemic is unknown and may influence consumer shopping behavior and consumer demand including online shopping.

The Plan of Arrangement required approximately $17.6 million to be paid to the Company’s creditors in order to legally emerge from the formal restructuring process. This is expected to place increased risk on the Company’s available liquidity, especially considering the Company does not currently have access to any debt or financing arrangements.

For the three and six-month periods ended July 31, 2021, the Company reported a net income of $75.5 million and $78.7 million, respectively which includes a gain on settlement of $77.7 million for the three and six-month periods ended July 31, 2021. The Company’s current liabilities total $19.8 million as at July 31, 2021. As at July 31, 2021, the Company held cash and accounts and other receivables of $19.0 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, and by focusing on how to grow its product portfolio including sales and customer service execution. The Company transitioned to a digital-first organization with a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, supported by a right-sized support organization.

Management believes that there is material uncertainty surrounding the Company’s ability to execute the strategy necessary to return to sustained profitability in the current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, and changes in consumer behavior.

As a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.

These interim condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. These interim condensed consolidated financial statements as at and for the three and six-months ended July 31, 2021 do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate. Such adjustments could be material.

3. CHANGES IN ACCOUNTING PRINCIPLES

Change in the pattern of consumption of intangible assets

Intangible assets are initially recorded at cost. Intangible assets with finite lives are amortized over their useful economic life. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates.

In the first quarter of 2021 the Company reviewed the pattern of consumption of its intangible assets. The Company previously used the declining method at the rate of 30% per annum. The Company changed the method of depreciation for intangible assets to a straight-line basis over the assets’ useful economic life to better reflect the underlying pattern of consumption.

Recently Issued Accounting Pronouncements

Costs necessary to sell inventories (IAS 2) agenda decision

At its June 2021 meeting, the IFRS Interpretations Committee finalised an agenda decision about the costs an entity includes as the “estimated costs necessary to make the sale” when determining the net realizable value of inventories. The IFRS Interpretations Committee concluded that when determining the net realizable value of inventories, an entity estimates the costs necessary to make the sale in the ordinary course of business, which requires the exercise of judgment. The Company is assessing the impact of this agenda decision on its results of operations, financial position and disclosures.

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COVID-19 related rent concessions

On May 28, 2020, the IASB issued an amendment to IFRS 16, “Leases” to make it easier for lessees to account for COVID-19-related rent concessions such as rent holidays and temporary rent reductions. In April 2021, the IASB extended the relief to cover rent concessions that reduce lease payments due on or before June 30, 2022.

The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the COVID-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modifications. It applies to COVID-19-related rent concessions that reduce lease payments due on or before June 30, 2021.

The amendment was effective as of June 1, 2020 but could be applied immediately in any financial statements; interim or annual, not yet authorized for issue. The Company applied the practical expedient to all rent concessions meeting the criteria as set out in the amendment, as of February 2, 2020. With respect to rent concessions not meeting the definition of a lease modification, the Company elected to account for such concessions by continuing to account for the lease liability and right-of-use asset using the rights and obligations of the existing lease and recognizing a separate lease payable in the period in which the allocated lease cash payment is due. As a result of the Initial Order obtained from the Québec Superior Court on July 8, 2020, any rent concessions provided by landlords were accordingly nullified.

4. SIGNIFICANT ACCOUNTING 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 judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in Note 5 of the consolidated financial statements for the year ended January 30, 2021.

5. PROPERTY AND EQUIPMENT AND RIGHT-OF-USE ASSETS

As a result of the impairment assessment and the Company’s decision to implement its Restructuring Plan and to accelerate its transition to predominately an online retailer, the Company recorded an impairment loss of $13.0 million and $nil in the first and second quarters of 2020, respectively, related to property and equipment, and $27.0 million and $nil in the first and second quarters of 2020, respectively, related to right of use assets.

Included in the amount above of $40.0 million, $37.4 million relates to the 206 stores permanently closed as a result of the Restructuring Plan, and is recorded in Restructuring Plan activities, net (Note 10) in the interim consolidated statement of income (loss) and comprehensive income (loss).

The remaining $2.6 million of impairment loss was determined by comparing the carrying amount of the cash-generating units’ net assets with their respective recoverable amounts based on value in use, and is recorded in Selling, general and administration expenses (Note 9) in the interim consolidated statement of income (loss) and comprehensive income (loss). For these stores, a value in use of $791 was determined based on management’s best estimate of expected future cash flows from use over the remaining lease terms, considering historical experience and economic conditions, including the expected reopening date and the timeframe to foot traffic recovery in those locations, and was then discounted using a pre-tax discount rate of 13.0%.

Depreciation of property and equipment for the three and six-month periods ended July 31, 2021 was $407 and $795, respectively (August 1, 2020 - $301 and $1,544, respectively), and is recorded in Selling, general and administration expenses (Note 9) in the interim consolidated statement of income (loss) and comprehensive income (loss).

Amortization of right-of-use assets for the three and six-month periods ended July 31, 2021 was $135 and $294 respectively (August 1, 2020 - $454 and $2,693, respectively), and is recorded in Selling, general and administration expenses (Note 9) in the interim consolidated statement of income (loss) and comprehensive income (loss).

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6. LIABILITIES SUBJECT TO COMPROMISE

As a result of the Initial Order obtained on July 8, 2020 and subsequent amendments (Note 1), the payment of liabilities owing as of July 8, 2020 was stayed, and the outstanding liabilities, as well as any additional outstanding claims by creditors were subject to compromise pursuant to the Company’s Plan of Arrangement.

Obligations for goods and services provided to the Company after the filing date of July 8, 2020 are discharged based on negotiated terms and are excluded from liabilities subject to compromise.

The Plan of Arrangement was approved by the Company’s creditors on June 11, 2021 and required that the Company distribute an aggregate amount of approximately $17.6 million to its creditors in full and final settlement of all claims affected by the Plan of Arrangement. On June 18, 2021, the Monitor issued a Certificate of Implementation in which it certified that all the conditions precedent to the implementation of the Plan, including, among other things, remittance of funds to the Monitor for distribution to creditors, had been fulfilled or waived by the debtors. As a result of the final settlement, the Company recorded a gain on the settlement of liabilities subject to compromise of $77.7 million and was reduced by $1.2 million of professional fees in connection with the CCAA proceedings. This net gain is presented in the interim consolidated statements of income (loss) and comprehensive income (loss) in Restructuring Plan activities, net and Recovery of income taxes as a net gain of $76.7 million and $1.0 million, respectively.

On September 9, 2021, the Monitor filed a Certificate of Termination with the Québec Superior Court in accordance with paragraph 24 of the Sanction Order and declared the CCAA proceedings were terminated without further act or formality.

As of July 31, 2021, liabilities subject to compromise are broken down as follows:

	Disclaimed and modified leases			Trade and other payables			Severance Costs			Liabilities subject to compromise
	$			$			$			$
Balance as at January 30, 2021		75,310			20,699			4,541			100,550
Reversals		(1,771	)		(377	)		-			(2,148	)
Balance as at May 1, 2021		73,539			20,322			4,541			98,402
Adjustments		(1,309	)		(2,558	)		-			(3,867	)
Additions		-			742			-			742
Reversals		(72,230	)		(18,506	)		(4,541	)		(95,277	)
Balance as at July 31, 2021		-			-			-			-

7. SHARE CAPITAL

Authorized

An unlimited number of common shares.

Issued and outstanding

	July 31,		January 30,
	2021		2021
	$		$
Share Capital - 26,359,969 Common shares (January 30, 2021 - 26,234,582)		113,406		113,167

In addition, during the three and six-month periods ended July 31, 2021, 104,200 and 125,387 common shares, respectively, (August 1, 2020 – 104,652 and 117,967 common shares, respectively) were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $70 and $239, net of tax (August 1, 2020 — $198 and $272, net of tax respectively) and a reduction in contributed surplus of $142 and $486, respectively (August 1, 2020 — $398 and $554, respectively).

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Stock-based compensation

As at July 31, 2021, 937,868 (August 1, 2020, 1,042,285) common shares remain available for issuance under the 2015 Omnibus Plan.

No stock options were granted during the three and six-month periods ended July 31, 2021 and August 1, 2020.

A summary of the status of the Company’s stock option plan and changes during the six-month periods are presented below.

For the six months ended

July 31,

August 1,

2021

2020

Weighted

average

Options

exercise

Options

exercise

outstanding

price

outstanding

price

Outstanding, beginning of year

17,490

6.32

76,350

8.96

Exercised

(4,000

)

0.77

Outstanding, end of year

17,490

6.32

72,350

9.41

Exercisable, end of year

17,490

6.32

72,350

9.41

A summary of the status of the Company’s RSU plan and changes during the six-month periods are presented below.

For the six months ended

July 31,

August 1,

2021

2020

Weighted

average

RSUs

fair value

RSUs

fair value

outstanding

per unit (1)

outstanding

per unit (1)

Outstanding, beginning of year

1,306,101

1.70

749,522

2.17

Granted

425,764

4.64

1,177,222

1.44

Forfeitures

(32,747

)

1.50

(275,162

)

1.66

Vested

(125,387

)

1.91

(117,967

)

2.22

Vested, withheld for tax

(130,562

)

1.91

(120,383

)

2.26

Outstanding, end of period

1,443,169

2.53

1,413,232

1.65

_____________

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

During the three and six-month periods ended July 31, 2021, the Company recognized a stock-based compensation expense of $363 and $545, respectively (August 1, 2020 — $267 and $580).

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8. INCOME TAXES

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

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

	For the three months ended												For the six months ended
	July 31,						August 1,						July 31,						August 1,
	2021						2020						2021						2020
	%			$			%			$			%			$			%			$
Income tax provision (recovery) — statutory rate		26.4			19,663			26.8			699			26.4			20,513			26.8			(11,572	)
Increase (decrease) in income tax provision (recovery) resulting from:
Non-deductible items		0.1			98			3.9			103			0.2			150			(0.3	)		126
Unrecognized deferred income tax assets		(26.5	)		(19,761	)		(30.7	)		(802	)		(26.6	)		(20,663	)		(26.5	)		11,446
Recovery of income taxes		(1.3	)		(1,000	)		-			-			(1.3	)		(1,000	)		-			-
Income tax provision (recovery) — effective tax rate		(1.3	)		(1,000	)		-			-			(1.3	)		(1,000	)		-			-

9. SELLING, GENERAL AND ADMINISTRATION EXPENSES

	For the three months ended						For the six months ended
	July 31,			August 1,			July 31,			August 1,
	2021			2020			2021			2020
	$			$			$			$
Wages, salaries and employee benefits		3,547			3,270			7,113			12,663
Depreciation of property and equipment		407			301			795			1,544
Amortization of intangible assets		484			571			887			1,083
Amortization right-of-use asset		135			454			294			2,693
Marketing expenses		1,419			597			2,364			1,639
Stock-based compensation		363			267			545			580
Government emergency wage and rent subsidy		(2,532	)		(1,156	)		(3,596	)		(1,999	)
Software implementation costs		1,592			-			2,454			-
IT expenses		1,231			758			2,580			1,455
Credit card fees		443			573			979			1,189
Professional fees		658			457			895			1,071
Other selling, general and administration		1,338			1,316			2,969			4,563
Impairment of property and equipment and right-of-use assets		-			-			-			2,561
		9,085			7,409			18,279			29,042

10. RESTRUCTURING PLAN ACTIVITIES

	For the three months ended						For the six months ended
	July 31,			August 1,			July 31,			August 1,
	2021			2020			2021			2020
	$			$			$			$
Liabilities subject to compromise		(76,713	)		(48,566	)		(78,861	)		(48,566	)
Professional fees		1,156			974			1,702			974
Income tax recovery		(1,000	)		-			(1,000	)		-
Lease Terminations		-			42,878			-			42,878
Loss on disposal of property and equipment and right-of-use assets		-			1,542			-			1,542
Impairment of property and equipment and right-of-use assets		-			-			-			37,400
		(76,557	)		(3,172	)		(78,159	)		34,228

Presented in:
Restructuring plan activities, net		(75,557	)		(3,172	)		(77,159	)		34,228
Recovery of income taxes		(1,000	)		-			(1,000	)		-
		(76,557	)		(3,172	)		(78,159	)		34,228

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11. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (“EPS”) amounts are calculated by dividing the net income (loss) for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS amounts are calculated by dividing the net income (loss) attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares, unless these would be anti‑dilutive.

The following reflects the earnings (loss) and share data used in the basic and diluted EPS computations:

For the three months ended

For the six months ended

July 31,

August 1,

July 31,

August 1,

2021

2020

2021

2020

Net earnings (loss) for basic EPS

75,478

2,609

78,699

(43,178

)

Weighted average number of shares outstanding:

Basic

26,299,094

26,128,971

26,270,284

26,108,499

Fully diluted

27,455,005

26,925,264

27,422,066

26,108,499

Net earnings (loss) per share:

Basic

2.87

0.10

3.00

(1.65

)

Fully diluted

2.75

0.10

2.87

(1.65

)

12. RELATED PARTY DISCLOSURES

Transactions with related parties are measured at the exchange amount, being the consideration established and agreed to by the related parties.

During the three and six-month periods ended July 31, 2021, the Company purchased merchandise for resale amounting to $153 and $199, respectively (August 1, 2020 - $3 and $26, respectively) and provided infrastructure and administrative services of $5 and $10, respectively (August 1, 2020 - $8 and $75, respectively) to a company controlled by one of its executive employees. As of July 31, 2021, an amount of $110 was outstanding and presented in Trade and other payables.

The Company also spent $nil and $nil, respectively (August 1, 2020 — $9 and $53, respectively) for consulting services from a related party of the principal shareholder.

Loan to a Company controlled by one of the Company’s executive employees

During the second quarter of 2019, the Company entered into a secured loan agreement with Oink Oink Candy Inc., doing business as “Squish,” as borrower, and Rainy Day Investments Ltd. (“RDI”), as guarantor pursuant to which the Company agreed to lend to Squish an amount of up to $4.0 million, amended on September 13, 2019 to reflect a maximum amount available under the facility of $2.0 million. RDI guaranteed all of Squish’s obligations to the Company and, as security in full for the guarantee, gave a movable hypothec (or lien) in favor of the Company on its shares of the Company. Squish is a company controlled by Sarah Segal, the Chief Executive Officer and Chief Brand Officer of the Company. RDI, the principal shareholder of the Company, is controlled by Herschel Segal, Chairman of the Board and Strategic Advisor and a director of the Company. The Company and Squish previously entered into a Collaboration and Shared Services Agreement pursuant to which they collaborate on and share various services and infrastructure.

During the first quarter of 2020, the loan of $2.0 million and accrued interest of $45, including $19 which was earned in the first quarter of 2020, was fully repaid.

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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. During the year ended January 30, 2021, the Company has reviewed its operations and determined that its operating segments are geographic components. The Company has concluded that it has two operating segments, Canada and the United States, that derive their revenues from the online, retail and wholesale sale of tea, tea accessories and food and beverages. The Company’s Chief Executive and Brand Officer and President, Chief Financial and Operations Officer (the chief operating decision makers or “CODM”) make decisions about resources to be allocated and assesses performance of these segments, and for which discrete financial information is available. In the prior year the operating segments were the retail premises, and the reportable segments were Canada and the United States (the “U.S.”). As a result, there is no impact on prior period information as reportable segments were previously Canada and the U.S.

The Company derives revenue from the following products:

	For the three months ended				For the six months ended
	July 31,		August 1,		July 31,		August 1,
	2021		2020		2021		2020
	$		$		$		$
Tea		16,117		19,921		36,586		46,016
Tea accessories		2,626		3,065		5,406		7,685
Food and beverages		-		45		-		1,572
		18,743		23,031		41,992		55,273

Property and equipment, right-of-use assets and intangible assets by country are as follows:

	July 31,		January 30,
	2021		2021
	$		$
Canada		8,194		6,895
US		-		-
		8,194		6,895

Results from operating activities before corporate expenses per country are as follows:

For the three months ended

For the six months ended

July 31, 2021

Canada

Consolidated

Canada

Consolidated

Sales

15,046

3,697

18,743

33,175

8,818

41,992

Cost of sales

8,725

2,023

10,748

18,589

4,640

23,229

Gross profit

6,321

1,674

7,995

14,586

4,178

18,763

Selling, general and administration expenses (allocated)

2,458

545

3,003

4,722

1,045

5,767

Results from operating activities before corporate expenses

3,863

1,129

4,992

9,864

3,133

12,996

Selling, general and administration expenses (non-allocated)

6,082

12,512

Restructuring plan activities, net

(75,557

)

(77,159

)

Results from operating activities

74,467

77,643

Finance costs

Finance income

(34

)

(89

)

Net income before income taxes

74,478

77,699

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	For the three months ended							For the six months ended
	August 1, 2020							August 1, 2020
	Canada		US		Consolidated			Canada		US		Consolidated
	$		$		$			$		$		$
Sales		16,773		6,258		23,031			41,033		14,240		55,273
Cost of sales		11,446		3,248		14,694			24,857		7,406		32,263
Gross profit		5,327		3,010		8,337			16,176		6,834		23,010
Selling, general and administration expenses (allocated)		2,059		865		2,924			11,658		3,389		15,047
Impairment of property and equipment and right-of-use assets		-		-		-			2,561		-		2,561
Results from operating activities before corporate expenses		3,268		2,145		5,413			1,957		3,445		5,402
Selling, general and administration expenses (non-allocated)						4,485							11,434
Restructuring plan activities, net						(3,172	)						34,228
Results from operating activities						4,100							(40,260	)
Finance costs						1,559							3,226
Finance income						(68	)						(308	)
Net Income (loss) before income taxes						2,609							(43,178	)

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 $253 (August 1, 2020 - $155).

The Company’s foreign exchange exposure is as follows:

	July 31,		January 30,
	2021		2021
	US$		US$
Cash		284		630
Accounts and other receivables		182		465
Prepaid expenses and deposits		676		5,394
Trade and other payables		6,203		750

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

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Market Risk — Interest Rate Risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial instruments that potentially subject the Company to cash flow interest rate risk include financial assets and liabilities with variable interest rates and consist primarily of cash on hand.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. 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, lease and purchase obligations.

As at July 31, 2021, the Company had $12.1 million in cash.

The Company expects to finance its working capital needs and investments in infrastructure through cash flows from operations and cash on hand. At July 31, 2021, trade and other payables amounted to $12.5 million (January 30, 2021 - $4.2 million) and purchase obligations amounted to $9.9 million, net of $0.8 million of advances (January 30, 2021 - $14.1 million, net of $6.8 million of advances). All trade and other payables are expected to be paid according to negotiated vendor terms.

Refer to Note 2 for details with respect to the going concern uncertainty.

Credit Risk

The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial obligations to the Company. The Company’s maximum exposure to credit risk at the reporting date is equal to the carrying value of receivables. Accounts receivable primarily consist of receivables from retail customers who pay by credit card, receivables from our wholesale channel sales, recoveries of credits from suppliers for returned or damaged products, and receivables from other companies for sales of products, gift cards and other services. Credit card payments have minimal credit risk and the limited number of corporate receivables is closely monitored. As a result, expected credit loss on these financial assets is not significant.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and there are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes”, “expects”, “may”, “will”, “should”, “could”, “seeks”, “projects”, “approximately”, “intend”, “plans”, “estimates” or “anticipates” or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, competitive strengths and differentiators, strategy, long-term Adjusted EBITDA margin potential, dividend policy, impact of the macroeconomic environment, properties, outcome of litigation and legal proceedings, use of cash and operating and capital expenditures, impact of new accounting pronouncements, and impact of improvements to internal control and financial reporting.

While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including the risk factors listed under Item 1A. Risk Factors, as well as other cautionary language in Form 10-K filed with the SEC on April 30, 2021.

Actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to, the following:

	☐	We may not have sufficient cash to maintain our operations following the Restructuring Plan.

	☐	Our ability to successfully pivot our business to a digital-first strategy, supported by our wholesale distribution capabilities and our retail operations, including our ability to attract and retain employees that are instrumental to growing our online and wholesale channel businesses;

	☐	The duration and impact of the global COVID-19 pandemic, which has disrupted the Company’s business and has adversely affected the Company’s financial condition and operating results, and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners;

	☐	Our ability to manage significant changes to our leadership team;

	☐	Our ability to maintain and enhance our brand image;

	☐	Significant competition within our industry;

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	☐	Our ability to attract and retain employees that embody our entrepreneurial culture;

	☐	Changes in consumer preferences and economic conditions affecting disposable income;

	☐	Our ability to source, develop and market new varieties of teas, tea accessories, and beverages;

	☐	Our reliance upon the continued retention of key personnel;

	☐	The impact from real or perceived quality or safety issues with our teas, tea accessories, and beverages;

	☐	Our ability to obtain quality products from third-party manufacturers and suppliers on a timely basis or in sufficient quantities, in particular in light of supply chain disruption due to the COVID-19 pandemic;

	☐	The impact of weather conditions, natural disasters and man-made disasters on the supply and price of tea;

	☐	Actual or attempted breaches of data security;

	☐	The costs of protecting and enforcing our intellectual property rights and defending against intellectual property claims brought by others;

	☐	Fluctuations in exchange rates; and

	☐	The seasonality of our business.

All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. These statements are based upon information available to us as of the date of this Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially-available relevant information. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur, and investors are cautioned not to unduly rely upon these statements.

Forward-looking statements speak only as of the date of this Form 10-Q. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-Q, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Form 10-Q or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

Accounting Periods

All references to “Fiscal 2021” are to the Company’s fiscal year ending January 29, 2022. All references to “Fiscal 2020” are to the Company’s fiscal year ended January 30, 2021.

The Company’s fiscal year ends on the Saturday closest to the end of January, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. The year ended January 30, 2021 and the year ending January 29, 2022 both cover a 52-week period.

Overview

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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. We are focused on effectively optimizing our retail footprint into a more sustainable physical presence that complements a growing online and wholesale 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 were 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 a restructuring plan (the “Restructuring Plan”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, the Company would continue to operate its online business through its e-commerce platform at www.davidstea.com and the Amazon Marketplace as well as its wholesale distribution channel. Following a careful review of available options to stem the losses from our brick-and-mortar footprint, the Company’s management and Board of Directors determined that the formal Restructuring Plan was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.

On July 8, 2020, the Company obtained an Initial Order pursuant to the CCAA from the Québec Superior Court in order to implement the Restructuring Plan (the “Initial Order”).

As part of the Restructuring Plan and further to obtaining the Initial Order, the Company, on July 10, 2020, sent notices to terminate leases for 82 of its stores in Canada and all 42 of its stores in the United States. These lease terminations were effective on August 9, 2020.

On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada. These lease terminations were effective on August 29, 2020.

On March 19, 2021, the Québec Superior Court extended the stay of all proceedings against the Company to June 4, 2021, and addressed certain administrative matters.

On May 7, 2021, the Company obtained an order from the Québec Superior Court authorizing the Company to file its plan of arrangement (the “Plan of Arrangement” or the “Plan”) under the CCAA and to call a creditors’ meeting to be held on June 11, 2021. The Court order also extended to July 16, 2021 the previously-announced stay of all proceedings against the Company under the CCAA.

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Management believes that there is material uncertainty surrounding our ability to execute the strategy necessary to return to profitability in the current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, and changes in consumer behavior. As a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.

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 are generated from our online store, retail stores, and from our wholesale distribution channel. Our business is seasonal and, as a result, our sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal quarter, which includes the holiday sales period, and tend to be lowest in the second and third fiscal quarters because of lower customer engagement in both our online store and physical locations in the summer months.

The specialty retail industry is cyclical, and our sales are affected by general economic conditions. A number of factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence can affect purchases of our products.

As we transition to generating sales primarily from our online store, measuring the change in period-over-period comparable same store sales, although still a valid measure within our retail sales channel, loses its significance in the overall evaluation of how our business is performing. Other measures such as sales performance in total and in our e-commerce and wholesale channels begin to influence how we direct resources and evaluate our performance. Factors affecting our performance include:

	☐	our ability to anticipate and respond effectively to consumer preference, buying and economic trends;

	☐	our ability to provide a product offering that generates new and repeat visits online and in our other channels;

	☐	the customer experience we provide online and in our other channels;

	☐	the level of customer traffic to our website and our online presence more generally;

	☐	the number of customer transactions and average ticket online;

	☐	the pricing of our tea, and tea accessories; and

	☐	our ability to obtain, manufacture and distribute product efficiently.

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Gross Profit. Gross profit is equal to our sales less our cost of sales. Cost of sales includes product costs, freight costs, certain store occupancy costs, assembly and delivery and distribution costs.

Restructuring Plan Activities. Restructuring Plan activities consist of gains on modification of lease liabilities, estimates for allowed landlord claims, loss on disposal of property and equipment and right-of-use assets, impairment of property and equipment and right-of-use assets, severance costs, interest and penalties related to unpaid occupancy charges, professional fees,store closure related costs, and the gain on settlement of liabilities subject to compromise.

Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) consist of store operating expenses and other general and administration expenses. Store operating expenses consist of all store expenses excluding certain occupancy related costs (which are included in costs of sales). General and administration costs consist of salaries and other payroll costs, travel, professional fees, stock compensation, marketing expenses, information technology, depreciation of property and equipment, amortization of intangible assets, amortization of right-of-use assets, any store or other asset impairment taken in the normal course of business and other operating costs.

General and administration costs, which are generally fixed in nature, do not vary proportionally with sales to the same degree as our cost of sales. We believe that these costs will decrease as a percentage of sales over time. Accordingly, this expense as a percentage of sales is usually higher in lower volume quarters and lower in higher volume quarters.

We present Adjusted selling, general and administration expenses as a supplemental measure because we believe it facilitates a comparative assessment of our selling, general and administration expenses under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure under “Non-IFRS Financial Measures” in this Quarterly Report on Form 10-Q.

Results from Operating Activities. Results from operating activities consist of our gross profit less our selling, general and administration expenses and Restructuring Plan activities.

We present Adjusted results from operating activities as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure under “Non-IFRS Financial Measures” in this Quarterly Report on Form 10-Q.

Finance Costs. Finance costs consist of cash and imputed non-cash charges related to any credit facility, and interest expense from lease liabilities.

Finance Income. Finance income consists of interest income on cash balances.

Adjusted EBITDA. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. Specifically, Adjusted EBITDA allows for an assessment of our operating performance and our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, finance costs, non-cash compensation expense, loss on disposal of property and equipment, impairment of property and equipment and right-of-use assets, and certain non-recurring expenses. This measure also functions as a benchmark to evaluate our operating performance. It is reconciled to its nearest IFRS measure under “Non-IFRS Financial Measures” in this Quarterly Report on Form 10-Q.

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Selected Operating and Financial Highlights

Results of Operations

Sales during the second quarter of Fiscal 2021 decreased by $4.3 million or 18.6% to $18.7 million over the prior year quarter due to a decrease in e-commerce and wholesale sales of $7.4 million, partially offset by sales of $3.1 million from brick-and-mortar. Notwithstanding the reduction in revenue, the Company recorded Net income of $75.5 million for the period compared to a Net income of $2.6 million in the prior year quarter. Excluding adjustments noted herein, Adjusted net loss for the quarter was $2.0 million compared to a loss of $1.7 million in the prior year quarter. Adjusted EBITDA in the second quarter of Fiscal 2021 was negative $0.6 million compared to $1.4 million in the prior year quarter.

The following table summarizes key components of our results of operations for the periods indicated:

	For the three months ended						For the six months ended
	July 31,			August 1,			July 31,			August 1,
	2021			2020			2021			2020
Consolidated statement of income (loss) data:
Sales	$	18,743		$	23,031		$	41,992		$	55,273
Cost of sales		10,748			14,694			23,229			32,263
Gross profit		7,995			8,337			18,763			23,010
Selling, general and administration expenses		9,085			7,409			18,279			29,042
Restructuring plan activities, net		(75,557	)		(3,172	)		(77,159	)		34,228
Results from operating activities		74,467			4,100			77,643			(40,260	)
Finance costs		23			1,559			33			3,226
Finance income		(34	)		(68	)		(89	)		(308	)
Net income (loss) before income taxes		74,478			2,609			77,699			(43,178	)
Recovery of income tax		(1,000	)		—			(1,000	)		—
Net income (loss)	$	75,478		$	2,609		$	78,699		$	(43,178	)
Percentage of sales:
Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		57.3	%		63.8	%		55.3	%		58.4	%
Gross profit		42.7	%		36.2	%		44.7	%		41.6	%
Selling, general and administration expenses		48.5	%		32.2	%		43.5	%		52.5	%
Restructuring plan activities, net		(403.1	)%		(13.8	)%		(183.7	)%		61.9	%
Results from operating activities		397.3	%		17.8	%		184.9	%		(72.8	)%
Finance costs		0.1	%		6.8	%		0.1	%		5.8	%
Finance income		(0.2	)%		(0.3	)%		(0.2	)%		(0.6	)%
Net income (loss)		402.7	%		11.3	%		187.4	%		(78.1	)%
Other financial and operations data:
Adjusted EBITDA⁽¹⁾	$	(641	)	$	1,365		$	1,864		$	430
Adjusted EBITDA as a percentage of sales		(3.4	)%		5.9	%		4.4	%		0.8	%
Adjusted SG&A⁽¹⁾	$	10,025		$	8,565		$	19,421		$	28,480
Adjusted results from operating activities ⁽¹⁾	$	(2,030	)	$	(228	)	$	(657	)	$	(5,470	)
Adjusted net loss ⁽¹⁾	$	(2,019	)	$	(1,719	)	$	(602	)	$	(8,388	)

__________

(1)	For a reconciliation of Adjusted EBITDA, Adjusted SG&A, Adjusted results from operating activities, and Adjusted net income (loss), to the most directly comparable measure calculated in accordance with IFRS, see “Non-IFRS financial measures” below.

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Non-IFRS Financial Measures

The Company uses certain non-IFRS financial measures for purposes of comparison to prior periods, to prepare annual operating budgets, and for the development of future projections. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similarly titled measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS.

We use non-IFRS financial measures to provide supplemental measures of our operating performance and thus highlight trends in our business that may not otherwise be apparent when relying solely on IFRS financial measures.

These non-IFRS financial measures include; Adjusted selling general and administrative expenses, Adjusted results from operating activities, Adjusted net income (loss), Adjusted EBITDA and Adjusted fully diluted net income (loss) per common share.

We believe that although these non-IFRS financial measures provide investors with useful information with respect to our historical operations and are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as an analytical tool. Some of these limitations are:

☐

Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net income (loss) and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

☐

Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net income (loss) and Adjusted EBITDA do not reflect the cash requirements necessary to fund capital expenditures; and

☐

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

Because of these limitations, these non-IFRS financial measures should not be considered as discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations.

The following tables provide reconciliations of our non-IFRS financial measures to the most directly comparable measure calculated in accordance with IFRS:

Reconciliation of Selling, general and administration expenses to Adjusted selling, general and administration expenses

	For the three months ended					For the six months ended
	July 31,			August 1,		July 31,			August 1,
	2021			2020		2021			2020
Selling, general and administration expenses	$	9,085		$	7,409	$	18,279		$	29,042
Impairment of property and equipment and right-of-use assets (a)		—			—		—			(2,561	)
Software implementation costs (b)		(1,592	)		—		(2,454	)		—
Government emergency wage and rent subsidy (c)		2,532			1,156		3,596			1,999
Adjusted selling, general and administration expenses	$	10,025		$	8,565	$	19,421		$	28,480

(a)	Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets.
(b)	Represents costs related to implementation and configuration of software solutions.
(c)	Represents the wages and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan.

Reconciliation of Results from operating activities to Adjusted results from operating activities

	For the three months ended						For the six months ended
	July 31,			August 1,			July 31,			August 1,
	2021			2020			2021			2020
Results from operating activities	$	74,467		$	4,100		$	77,643		$	(40,260	)
Impairment of property and equipment and right-of-use assets (a)		—			—			—			2,561
Software implementation costs (b)		1,592			—			2,454			—
Restructuring plan activities, net (c)		(75,557	)		(3,172	)		(77,159	)		34,228
Government emergency wage and rent subsidy (d)		(2,532	)		(1,156	)		(3,596	)		(1,999	)
Adjusted results from operating activities	$	(2,030	)	$	(228	)	$	(657	)	$	(5,470	)

(a)	Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets.
(b)	Represents costs related to implementation and configuration of software solutions.
(c)	Represents the costs related to the Restructuring plan activities, net.
(d)	Represents the wages and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan.

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Reconciliation of Net income (loss) to Adjusted net income (loss)

	For the three months ended						For the six months ended
	July 31,			August 1,			July 31,			August 1,
	2021			2020			2021			2020
Net income (loss)	$	75,478		$	2,609		$	78,699		$	(43,178	)
Impairment of property and equipment and right-of-use assets (a)		—			—			—			2,561
Software implementation costs (b)		1,592			—			2,454			—
Restructuring plan activities, net (c)		(75,557	)		(3,172	)		(77,159	)		34,228
Government emergency wage and rent subsidy (d)		(2,532	)		(1,156	)		(3,596	)		(1,999	)
Recovery of income taxes (e)		(1,000	)		—			(1,000	)		—
Adjusted net loss	$	(2,019	)	$	(1,719	)	$	(602	)	$	(8,388	)

(a)	Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets.
(b)	Represents costs related to implementation and configuration of software solutions.
(c)	Represents the costs related to the Restructuring plan activities, net.
(d)	Represents the wages and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan.
(e)	Represents reversal of previously accrued estimate of income tax liabilities that was compromised by the Restructuring Plan activities.

Reconciliation of fully diluted net earnings (loss) per common share to Adjusted fully diluted net earnings (loss) per common share

	For the three months ended						For the six months ended
	July 31,			August 1,			July 31,			August 1,
	2021			2020			2021			2020
Weighted average number of shares outstanding, fully diluted		26,299,094			26,128,971			26,270,284			26,108,499

Adjusted weighted average number of shares outstanding, fully diluted		27,455,005			26,925,264			27,422,066			26,108,499

Net income (loss)	$	75,478		$	2,609		$	78,699		$	(43,178	)

Adjusted net loss	$	(2,019	)	$	(1,719	)	$	(602	)	$	(8,388	)

Net earnings (loss) per share, fully diluted	$	2.75		$	0.10		$	2.87		$	(1.65	)

Adjusted net loss per share, fully diluted	$	(0.07	)	$	(0.06	)	$	(0.02	)	$	(0.32	)

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Reconciliation of Net income (loss) to Adjusted EBITDA

	For the three months ended						For the six months ended
	July 31,			August 1,			July 31,			August 1,
	2021			2020			2021			2020
Net income (loss)	$	75,478		$	2,609			78,699		$	(43,178	)
Finance costs		23			1,559			33			3,226
Finance income		(34	)		(68	)		(89	)		(308	)
Depreciation and amortization		1,026			1,326			1,976			5,320
Recovery of income taxes		(1,000	)		—			(1,000	)		—
EBITDA	$	75,493		$	5,426			79,619		$	(34,940	)
Additional adjustments:
Stock-based compensation expense (a)		363			267			545			580
Impairment of property and equipment and right-of-use assets (b)		—			—			—			2,561
Software implementation costs (c)		1,592			—			2,454			—
Restructuring plan activities, net (d)		(75,557	)		(3,172	)		(77,159	)		34,228
Government emergency wage and rent subsidy (e)		(2,532	)		(1,156	)		(3,596	)		(1,999	)
Adjusted EBITDA	$	(641	)	$	1,365			1,863		$	430

(a)	Represents non-cash stock-based compensation expense.
(b)	Represents costs related to impairment of property and equipment and right-of-use assets and intangibles assets for stores.
(c)	Represents costs related to implementation and configuration of software solutions.
(d)	Represents the costs related to the Restructuring plan activities, net.
(e)	Represents the wages and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan.

Operating results for the three months ended July 31, 2021 compared to the operating results for the three months ended August 1, 2020

Sales. Sales for the three-months ended July 31, 2021 decreased 18.6%, or $4.3 million, to $18.7 million from $23.0 million in the prior year quarter. On March 17, 2020, in response to the COVID-19 pandemic, the Company temporarily closed all its retail stores in Canada and the United States, and subsequently in the second quarter of Fiscal 2020 as part of its formal restructuring plan (“Restructuring Plan,”) pursuant to the Companies’ Creditors Arrangement Act (“CCAA”), exited all of its brick-and-mortar stores except for 18 Canadian stores which were reopened on August 21, 2020. Accordingly, brick and mortar sales for the quarter compare favorably to the prior year quarter by $3.1 million since no stores were open last year. Sales from e-commerce and wholesale channels decreased by $7.4 million or 32.2% to $15.6 million from $23.0 million in the prior year quarter with the transition from last year’s pandemic-fueled surge of online sales to serving consumers throughout our omni-channel capabilities. E-commerce and wholesale sales represented 83.4% of sales compared to 100% of sales in the prior year quarter.

Gross Profit. Gross profit of $8.0 million for the three-months ended July 31, 2021 decreased by $0.3 million or 4.1% from the prior year quarter due to a decline in sales during the period, partially offset by lower delivery and distribution costs and lower retail lease expense compared to the prior year quarter. Gross profit as a percentage of sales increased to 42.7% for the quarter compared to 36.2% in the prior year quarter.

Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) increased by $1.7 million or 22.6% to $9.1 million in the quarter compared to the prior year quarter. Excluding the impact of software implementation and configuration costs and the impact of the wage and rent subsidy received under the Canadian government COVID-19 Economic Response Plan, Adjusted SG&A increased by $1.5 million or 17.0% to $10.0 million in the quarter primarily due to increases in online marketing expenses, software costs and staffing as we continue the transformation to a digital first organization. Adjusted SG&A as a percentage of sales in the quarter increased to 53.5% from 37.2% in the prior year quarter.

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Restructuring plan activities, net. Restructuring plan activities, net amounting to a gain of $75.6 million for the quarter compares favorably to a gain of $3.2 million recorded in the prior year quarter. Included in this quarter’s gain is the impact of the Sanction Order that was granted on June 16, 2021 by the Québec Superior Court under the Company’s Restructuring Plan. Net liabilities subject to compromise amounting to $95.3 million were settled according to the Sanction Order by payment of $17.6 million through PricewaterhouseCoopers (“PwC”), the Court-appointed Monitor, to creditors who had duly proven their claims as part of the claims process. The resulting gain of $77.7 million was reduced by $1.2 million of professional fees in connection with the CCAA proceedings and presented in the interim consolidated statements of income (loss) and comprehensive income (loss) and in the condensed statement of income (loss) in management’s discussion and analysis of financial condition and results of operations under Restructuring plan activities, net and Recovery of income taxes.

Results from Operating Activities. Earnings from operating activities during the quarter were $74.5 million compared to earnings of $4.1 million in the prior year quarter. Excluding the impact of the Restructuring Plan, the wage and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan, and software implementation costs, Adjusted operating loss amounted to $2.0 million in the quarter compared to a loss of $0.2 million in the prior year quarter. The decrease in operating results is explained by the lower Gross profit and the increased SG&A in pursuit of our ongoing transformation to a digital first organization.

Finance Costs. Finance costs amounted to $23 thousand in the three-months ended July 31, 2021, a decrease of $1.5 million from the prior year quarter. The interest expense relates to the accounting for lease liabilities and has decreased from the prior year quarter.

Finance Income. Finance income of $34 thousand is derived mainly from interest on cash on hand and has decreased from the prior year quarter.

Net income (loss). Net income was $75.5 million in the quarter ended July 31, 2021 compared to a Net income of $2.6 million in the prior year quarter. Adjusted net loss, which excludes the impact of Restructuring plan activities, net, the wage and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan, software implementation costs and recovery of income taxes amounted to a net loss of $2.0 million compared to a net loss of $1.7 million in the prior year quarter.

Fully diluted earnings (loss) per common share. Fully diluted earnings per common share were $2.75 in the quarter ended July 31, 2021 compared to fully diluted earnings per common share of $0.10 in the prior year quarter. Adjusted fully diluted loss per common share, which is adjusted net loss on a fully diluted weighted average shares outstanding basis, was $0.07, compared to $0.06 in the prior year quarter.

EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was $75.5 million in the quarter ended July 31, 2021 compared to $5.4 million in the prior year quarter representing an improvement of $70.1 million over the prior year quarter. Adjusted EBITDA for the quarter ended July 31, 2021, which excludes the impact of stock-based compensation expense, the Restructuring plan activities, net, the wage and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan, and software implementation costs was negative $0.6 million compared to $1.4 million for the same period in the prior year. The decrease in Adjusted EBITDA of $2.0 million reflects the decline in sales from last year’s pandemic-fueled surge of online sales, planned increases in online marketing and staffing costs, partially offset by an improved delivery and distribution cost structure. All is an expected outcome of the continued transformation efforts resulting in the realignment of the business model to primarily an e-commerce and wholesale distribution model.

Operating results for the six months ended July 31, 2021 compared to the operating results for the six months ended August 1, 2020

Sales. Sales for the six-months ended July 31, 2021 decreased 24.0%, or $13.3 million, to $42.0 million from $55.3 million in the prior year. On March 17, 2020, in response to the COVID-19 pandemic, the Company temporarily closed all its retail stores in Canada and the United States, and subsequently in second quarter of Fiscal 2020 as part of its formal Restructuring Plan, exited all of its brick-and-mortar stores except for 18 Canadian stores which were subsequently reopened on August 21, 2020. Accordingly, brick and mortar sales for the six-month period ended July 31, 2021 declined compared to the prior year period by $8.9 million or 58.2% to $6.4 million. Sales from e-commerce and wholesale channels decreased by $4.4 million or 12.4% to $35.6 million, from $40.0 million in the prior year. For the six-month period ended July 31, 2021, e-commerce and wholesale sales represented 84.8% of total sales as opposed to 72.3% in the same period in the prior year.

Gross Profit. Gross profit of $18.8 million for the six-month period ended July 31, 2021 decreased by $4.2 million or 18.5% from the same period of the prior year due primarily to a decline in sales during the period, partially offset by lower delivery and distribution costs and lower retail lease expense compared to the same period in the prior year. Gross profit as a percentage of sales increased to 44.7% for the six-month period compared to 41.6% in the same period in the prior year.

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Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) decreased by $10.8 million or 37.1%, to $18.3 million in the six-months ended July 31, 2021 from the same period in the prior year. Excluding the impact of the impairment of property and equipment and right-of-use assets for the six-month period ended August 1, 2020, the impact of software implementation costs, and the impact of the wage and rent subsidies received under the Canadian government COVID-19 Economic Response Plan, Adjusted SG&A decreased by $9.1 million or 31.8% to $19.4 million during the six-month period ended July 31, 2021 compared to $28.5 million in the same period in the prior year. In connection with our Restructuring Plan, we terminated the leases for all of our stores in North America during the six-month period ended August 1, 2020, except for 18 Canadian stores which reopened on August 21, 2020. As a result, during the six-month period ended July 31, 2021, wages, salaries and employee benefits were reduced by $5.5 million, other store related expenses decreased by $1.9 million and we realized a reduction of $3.0 million in amortization expenses due to a lower right-of-use asset value at the beginning of the period. Adjusted SG&A as a percentage of sales in the quarter decreased to 46.2% from 51.5% in the prior year quarter.

Restructuring plan activities, net. Restructuring plan activities, net amounting to a gain of $77.2 million for the six-month period ended July 31, 2021 compares favorably to a loss of $34.2 million recorded in the same period in the prior year. Included in this period’s gain is the impact of the Sanction Order that was granted on June 16, 2021. Therein, net liabilities subject to compromise amounting to $95.3 million were settled according to the Sanction Order by payment of $17.6 million through the Monitor to creditors who had duly proven their claims as part of the claims process. The resulting gain of $79.9 million was reduced by $1.7 million of professional fees in connection with the CCAA proceedings and presented in the interim consolidated statements of income (loss) and comprehensive income (loss) and in the condensed statement of income (loss) in management’s discussion and analysis of financial condition and results of operations under Restructuring plan activities, net and Recovery of income taxes

Results from Operating Activities. Earnings from operating activities during the six-month period ended July 31, 2021 was $77.6 million compared to a loss of $40.3 million for the same period in the prior year. Excluding the impact of the impairment of property and equipment and right-of-use assets, the impact of the Restructuring Plan announced on July 8, 2020, the wage and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan, and software implementation costs, Adjusted operating loss amounted to $0.7 million in the six-month period ended July 31, 2021 compared to a loss of $5.5 million in the same period in the prior year. The improvement in operating results is partially explained by the reduced SG&A required to support approximately 84.8% of sales generated from e-commerce and wholesale and a slightly better gross profit margin.

Finance Costs. Finance costs amounted to $33 thousand in the six-months ended July 31, 2021, a decrease of $3.2 million from the prior year quarter. The interest expense relates to the accounting for lease liabilities has decreased from the prior year period due to the reduction in our store footprint.

Finance Income. Finance income of $89 thousand is derived mainly from interest on cash on hand and has decreased from the prior year period.

Net income (loss). Net income was $78.7 million in the six months ended July 31, 2021 compared to a Net loss of $43.2 million in the prior year period. Adjusted net loss, which excludes the Restructuring plan activities, the subsidies received from the Canadian government under the COVID-19 Economic Response Plan, the impairment of property and equipment and right-of-use assets, and the costs related to software implementation amounted to $0.6 million compared to a net loss of $8.4 million in the prior year period. This $7.8 million improvement is driven by the same reasons mentioned above in “Results from operating activities”.

Fully diluted earnings (loss) per common share. Fully diluted earnings per common share was $2.87 in the six months ended July 31, 2021 compared to a fully diluted loss per common share of $1.65 in the prior year period. Adjusted fully diluted loss per common share, which is adjusted net income on a fully diluted weighted average shares outstanding basis, was $0.02, compared to a fully diluted loss of $0.32 in the prior year period.

EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was $79.6 million in the six-month period ended July 31, 2021 compared to a negative $34.9 million in the same period in the prior year representing an improvement of $114.6 million over the prior year period. Adjusted EBITDA for the six-month period ended July 31, 2021, which excludes the impact of stock-based compensation expense, the impairment of property and equipment and right-of-use assets, the Restructuring Plan activities, net, the wage and rent subsidies received from the Canadian government under the COVID-19 Economic Response Plan, and costs related to software implementations amounted to $1.9 million compared to $0.4 million for the same period in the prior year. The increase in Adjusted EBITDA of $1.4 million is an outcome of the restructuring efforts resulting in the realignment of the business model to primarily an e-commerce and wholesale distribution model.

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Summary of quarterly results

Due to seasonality and the timing of holidays, the results of operations for any quarter are not necessarily indicative of the results of operations for the fiscal year. The table below presents selected consolidated financial data for the eight most recently completed quarters.

	Fiscal Year 2021					Fiscal Year 2020											Fiscal year 2019
	Second			First		Fourth			Third		Second			First			Fourth			Third
	Quarter			Quarter		Quarter			Quarter		Quarter			Quarter			Quarter			Quarter

Sales		18,743			23,249		40,189			26,225		23,031			32,242			73,538			39,493
Net income (loss)		75,478			3,221		(27,222	)		14,467		2,609			(45,788	)		(5,701	)		(10,830	)

EBITDA		75,493			4,126		(25,918	)		15,295		5,426			(40,367	)		(1,097	)		(4,548	)
Adjusted EBITDA		(641	)		2,505		5,384			3,834		1,365			(935	)		9,971			(2,241	)

Net earnings (loss) per share:
Basic		2.87			0.12		(1.04	)		0.55		0.10			(1.76	)		(0.22	)		(0.42	)
Fully diluted		2.75			0.12		(1.01	)		0.54		0.10			(1.76	)		(0.22	)		(0.42	)
Adjusted fully diluted		(0.07	)		0.05		0.15			0.11		(0.06	)		(0.26	)		0.14			(0.34	)

Weighted average number of shares outstanding:
Basic		26,299,094			26,296,690		26,128,971			26,214,573		26,128,971			26,088,127			26,080,529			26,068,435
Fully diluted		27,455,005			27,400,840		26,925,264			26,767,470		26,925,264			26,088,127			26,080,529			26,068,435

Cash		12,051			31,321		30,197			21,925		34,285			39,343			46,338			28,044
Accounts receivable		6,986			6,570		6,157			7,669		6,757			4,371			6,062			5,430
Prepaid expenses and deposits		5,580			11,578		14,470			13,400		8,476			4,928			4,542			6,906
Inventories		38,055			29,258		23,468			26,176		24,354			23,450			22,363			32,638
Trade and other payables		12,533			6,154		4,152			3,621		6,460			18,000			20,794			21,155

Liquidity and Capital Resources

As at July 31, 2021, we had $12.1 million of cash, primarily held by major Canadian financial institutions.

Working capital, excluding liabilities subject to compromise of $nil is $43.0 million as at July 31, 2021, compared to $62.7 million as at January 30, 2021. In light of implementing the Restructuring Plan, the Company used cash on hand to pay for the settlement of obligations according to the Sanction Order amounting to $17.6 million.

Our working capital requirements are for the purchase of inventory, payment of payroll and other operating costs, including software purchases and implementation costs. Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. We fund our operating and working capital requirements from a combination of cash on hand and cash provided by operating activities.

As at July 31, 2021, the Company has financial commitments in connection with the purchase of goods or services that are enforceable and legally binding on the Company, exclusive of additional amounts based on sales, taxes and other costs. Purchase obligations, net of $0.8 million of advances, amounting to $9.9 million are expected to be discharged within 12 months.

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Cash Flow

A summary of our cash flows provided by (used in) operating, financing and investing activities is presented in the following table:

	For the three months ended						For the six months ended
	July 31,			August 1,			July 31,			August 1,
	2021			2020			2021			2020
	$			$			$			$
Cash flows provided by (used in) :
Operating activities		(19,079	)		(3,823	)		(17,772	)		(7,879	)
Financing activities		(139	)		(1,195	)		(322	)		(5,571	)
Investing activities		(52	)		(40	)		(52	)		1,397
Decrease in cash		(19,270	)		(5,058	)		(18,146	)		(12,053	)

Three months ended July 31,2021 compared to three months ended August 1,2020

Cash flows used in operating activities. Net cash used in operating activities amounted to $19.1 million for the quarter ended July 31, 2021, representing a change of $15.3 million from the net cash used in operations of $3.8 million in the second quarter of the prior year. The reduction is primarily due to a $17.6 million paid to the Company’s creditors in order to legally emerge from the formal restructuring process and an increase in inventories in anticipation of our peak selling season in the fourth fiscal quarter.

Cash flows used in financing activities. Net cash flows used in financing activities of $0.1 million during the quarter ended July 31, 2021 represents a reduction of $1.1 million compared to the prior year second quarter due to a reduction of lease liabilities resulting from the termination of our store leases in Fiscal 2020.

Cash flows used in investing activities. Cash flows provided by investing activities of $52 thousand in the quarter ended July 31, 2021, compares to the $40 thousand in the quarter ended August 1, 2020.

Six months ended July 31,2021 compared to six months ended August 1,2020

Cash flows used in operating activities. Net cash used in operating activities amounted to $17.8 million for the six-month period ended July 31,2021, representing a change of $9.9 million from the net cash used in operations of $7.9 million in the second quarter of the prior year. The increase is primarily due to $17.6 million paid to the Company’s creditors in order to legally emerge from the formal restructuring process and the increased purchase of inventories in anticipation of our peak selling season.

Cash flows used in financing activities. Net cash flows used in financing activities of $0.3 million during the six-month period ended July 31,2021 represents a reduction of $5.2 million compared to the prior year second quarter due to a reduction of lease liabilities resulting from the termination of our store leases.

Cash flows provided by (used in) investing activities. Cash flows used in investing activities for the six-months ended July 31, 2021 was $52 thousand and compares against $1.4 million provided by investing activities primarily due to the repayment of a loan from a Company controlled by an executive employee.

Off-Balance Sheet Arrangements

Other than operating lease obligations, we have no off‑balance sheet obligations

Contractual Obligations and Commitments

In the normal course of business, we enter into contractual obligations that will require us to disburse cash over future periods. All commitments have been recorded in our consolidated balance sheets, except for future purchase obligations. As at July 31, 2021, the Company has financial commitments in connection with the purchase of goods or services that are enforceable and legally binding on the Company, exclusive of additional amounts based on sales, taxes and other costs. Purchase obligations, net of $0.8 million of advances, amounting to $9.9 million (January 30, 2021 - $14.1 million, net of $6.8 million of advances) are expected to be discharged within 12 months.

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Critical Accounting Policies and Estimates

Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of financial statements requires us to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard to the level of judgment involved and its potential impact on our reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period, and would materially impact our financial position, changes in financial position or results of operations. Our significant accounting policies are discussed under Note 3 to our consolidated financial statements for the year ended January 30, 2021 included in our Annual Report on Form 10-K dated April 30, 2021. There have been no material changes to the critical accounting policies and estimates since January 31, 2021, other than as disclosed in Note 3 to the condensed interim consolidated financial statements.

Recently Issued Accounting Standards

Refer to Note 3, “Changes in Accounting Principles” 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 April 30, 2021.

We are exposed to foreign currency exchange risk on purchases of our teas and tea accessories.

A significant portion of our tea and tea accessory purchases are in U.S. dollars as is our revenue from U.S. stores and U.S. e‑commerce customers. As a result, our statement of loss and cash flows could be adversely impacted by changes in exchange rates, primarily between the U.S. dollar and the Canadian dollar.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive and Brand Officer and our President, Chief Financial and Operating Officer, evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on the assessment of our disclosure controls and procedures, our management concluded that our disclosure controls and procedures were effective as of July 31, 2021.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting during our quarter ended July 31, 2021 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our Form 10-K for our fiscal year ended January 30, 2021, and as modified in our quarterly release dated June 15, 2021, other than as set out below.

Risks Associated with the Restructuring Plan

We are subject to the risks and uncertainties associated with the Restructuring Plan.

Following the completion of our Restructuring Plan we may continue to face a number of risks, such as further deterioration in economic conditions, including in light of the COVID-19 pandemic, changes in consumer habits, changes in demand for our products and increasing expenses. We cannot guarantee that our Restructuring Plan will achieve our stated goals, and there is substantial doubt regarding our ability to continue as a going concern.

We may not have sufficient cash to maintain our operations following the Restructuring Plan.

We face considerable uncertainty regarding the adequacy of our liquidity and capital resources. In addition to the cash required to fund our ongoing operations, we have incurred significant professional fees and other expenses in connection with the Restructuring Plan. 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 are available to us following 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. In the event we need funds to execute our strategy, we could have limited access to liquidity, which would have negative consequences on our long-term business plan. Our Restructuring Plan may raise serious doubts about our ability to borrow money on terms favorable to us, which would have negative consequences on our ability to achieve our long-term business plan or to take advantage of future opportunities.

Our inability to obtain necessary funding on acceptable terms would have a material adverse impact on us and on our ability to sustain our operations. We do not currently have a credit facility or loan with a bank or financial institution and can give no assurance that we will be able to obtain any such facility or loan on terms acceptable to us, or at all.

Item 2. Unregistered Sales of Equity Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

(a) Exhibits:

31.1		Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

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SIGNATURES

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.

	DAVIDsTEA INC.

Date: September 14, 2021	By:	/s/ Sarah Segal
	Name:	Sarah Segal
	Title:	Chief Executive and Brand Officer

dtea_ex311.htm

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Sarah Segal, Chief Executive and Brand Officer, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2021 of DAVIDsTEA Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 14, 2021	/s/ Sarah Segal
	Sarah Segal
	Chief Executive and Brand Officer

dtea_ex312.htm

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Frank Zitella, President, Chief Financial and Operating Officer, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2021 of DAVIDsTEA Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 14, 2021	/s/ Frank Zitella
	Frank Zitella
	President, Chief Financial and Operating Officer

dtea_ex321.htm

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DAVIDsTEA Inc. (the “Company”) on Form 10-Q for the period ended July 31, 2021, as filed with the Securities and Exchange Commission (the “Report”), I, Sarah Segal, Chief Executive and Brand Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: September 14, 2021	/s/ Sarah Segal
	Sarah Segal
	Chief Executive and Brand Officer

dtea_ex322.htm

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DAVIDsTEA Inc. (the “Company”) on Form 10-Q for the period ended July 31, 2021, as filed with the Securities and Exchange Commission (the “Report”), I, Frank Zitella, President, Chief Financial and Operating Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: September 14, 2021	/s/ Frank Zitella
	Frank Zitella
	President, Chief Financial and Operating Officer