Table of Contents
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended July 29, 2017.
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 001-37404
DAVIDsTEA Inc.
(Exact name of registrant as specified in its charter)
Canada
98-1048842
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
5430 Ferrier
Mount-Royal, Québec, Canada, H4P 1M2
(Address of principal executive offices) (zip code)
(888) 873-0006
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Emerging growth company ☐
Non-accelerated filer ☐
Smaller reporting 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 ☒
As of September 6, 2017, 28,816,159 common shares of the registrant were outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private issuer, the Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the United States Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers, although the Company is not required to do so.
In this quarterly report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CAD,” “CND$,” “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,” “US$” and “USD” mean U.S. dollars.
On September 1, 2017, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = $1.2372.
2
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Incorporated under the laws of Canada
INTERIM CONSOLIDATED BALANCE SHEETS
[Unaudited and in thousands of Canadian dollars]
As at
July 29,
January 28,
2017
$
ASSETS
Current
Cash
56,407
64,440
Accounts and other receivables
2,864
3,485
Inventories
[Note 5]
28,629
31,264
Income tax receivable
3,301
539
Prepaid expenses and deposits
6,706
5,659
Derivative financial instruments
[Note 15]
—
454
Total current assets
97,907
105,841
Property and equipment
[Note 6]
48,741
51,160
Intangible assets
3,264
2,958
Deferred income tax assets
[Note 10]
14,108
14,375
Total assets
164,020
174,334
LIABILITIES AND EQUITY
Trade and other payables
16,934
19,681
Deferred revenue
4,333
4,885
Current portion of provisions
[Note 7]
1,524
2,562
2,068
Total current liabilities
24,859
27,128
Deferred rent and lease inducements
7,737
7,824
Provisions
4,142
5,932
Total liabilities
36,738
40,884
Equity
Share capital
[Note 9]
111,019
263,828
Contributed surplus
8,080
8,833
Retained earnings (deficit)
7,742
(142,398)
Accumulated other comprehensive income
441
3,187
Total equity
127,282
133,450
See accompanying notes
3
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 30,
2016
Sales
[Note 14]
45,687
41,079
94,356
85,548
Cost of sales
25,482
21,171
49,969
42,485
Gross profit
20,205
19,908
44,387
43,063
Selling, general and administration expenses
[Note 11]
27,816
22,810
51,969
43,929
Results from operating activities
(7,611)
(2,902)
(7,582)
(866)
Finance costs
157
19
288
36
Finance income
(135)
(148)
(271)
(269)
Loss before income taxes
(7,633)
(2,773)
(7,599)
(633)
Provision for income tax (recovery)
(2,070)
(506)
(1,674)
120
Net loss
(5,563)
(2,267)
(5,925)
(753)
Other comprehensive income (loss)
Items to be reclassified subsequently to income:
Unrealized net gain (loss) on forward exchange contracts
(2,977)
1,678
(1,777)
(2,519)
Realized net (gain) loss on forward exchange contracts reclassified to inventory
(292)
598
(745)
(370)
Provision for income tax recovery (income tax) on comprehensive income
867
(604)
668
767
Cumulative translation adjustment
(1,614)
853
(892)
(1,469)
Other comprehensive income (loss), net of tax
(4,016)
2,525
(2,746)
(3,591)
Total comprehensive income (loss)
(9,579)
258
(8,671)
(4,344)
Net loss per share:
Basic
[Note 12]
(0.22)
(0.09)
(0.23)
(0.03)
Fully diluted
Weighted average number of shares outstanding
— basic
25,745,221
24,625,414
25,573,894
24,380,306
— fully diluted
4
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Items not affecting cash:
Depreciation of property and equipment
2,114
1,921
4,178
3,708
Amortization of intangible assets
472
169
754
329
Loss on disposal of property and equipment
24
30
Impairment of property and equipment
2,313
Deferred rent
200
366
203
646
Recovery for onerous contracts
(641)
(1,527)
Stock-based compensation expense
802
614
1,376
930
Amortization of financing fees
20
18
40
Accretion on provisions
139
251
Deferred income taxes (recovered)
(570)
189
430
22
(690)
1,010
2,123
4,918
Net change in other non-cash working capital balances related to operations
3,509
(2,793)
(5,965)
(7,489)
Cash flows related to operating activities
2,819
(1,783)
(3,842)
(2,571)
FINANCING ACTIVITIES
Proceeds from issuance of common shares pursuant to exercise of stock options
791
500
1,606
844
Cash flows related to financing activities
INVESTING ACTIVITIES
Additions to property and equipment
(2,910)
(6,876)
(4,731)
(9,722)
Additions to intangible assets
(305)
(1,066)
(461)
Cash flows related to investing activities
(3,551)
(7,181)
(5,797)
(10,183)
Increase (decrease) in cash during the period
59
(8,464)
(8,033)
(11,910)
Cash, beginning of period
56,348
69,068
72,514
Cash, end of period
60,604
Supplemental Information
Cash paid for:
Income taxes (classified as operating activity)
216
580
712
1,157
Cash received for:
Interest
127
141
287
261
26
81
425
5
INTERIM CONSOLIDATED STATEMENTS OF EQUITY
Accumulated Other Comprehensive Income
Accumulated
Derivative
Foreign
Financial
Currency
Other
Share
Contributed
Instrument
Translation
Comprehensive
Total
Capital
Surplus
Deficit
Adjustment
Income
Balance, January 30, 2016
259,205
7,094
(138,465)
2,529
3,674
6,203
134,037
Net loss for the six months ended July 30, 2016
Other comprehensive loss
(2,122)
Total comprehensive loss
Issuance of common shares
1,148
(304)
Common shares issued on vesting of restricted stock units
214
(417)
(241)
(444)
Income tax impact associated with stock options
306
Balance, July 30, 2016
260,567
7,609
(139,459)
407
2,205
2,612
131,329
Balance, January 28, 2017
333
2,854
Net loss for the six months ended July 29, 2017
(1,854)
2,434
(828)
704
(1,219)
118
(397)
(82)
Reduction of stated capital
(155,947)
155,947
Balance, July 29, 2017
(1,521)
1,962
6
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and six-month periods ended July 29, 2017 and July 30, 2016 [Unaudited]
[Amounts in thousands of Canadian dollars except share and per share amounts]
1. CORPORATE INFORMATION
The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three and six-month periods ended July 29, 2017 were authorized for issue in accordance with a resolution of the Board of Directors on September 7, 2017. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the NASDAQ Global Market under the symbol “DTEA”. The registered office is located at 5430, Ferrier St., Town of Mount-Royal, Quebec, Canada, H4P 1M2.
The Company is engaged in the retail and online sale of tea, tea accessories and food and beverages in Canada and the United States. The results of operations for the interim period are not necessarily indicative of the results of operations for the full year. Sales fluctuate from quarter to quarter. Sales are traditionally higher in the fourth fiscal quarter due to the year-end holiday season, and tend to be lowest in the second and third fiscal quarter because of lower customer traffic during the summer months.
2. STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION
These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). Accordingly, these financial statements do not include all of the financial statement disclosures required for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended January 28, 2017, 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 28, 2017. During the six-month period ended July 29, 2017, we did not implement any new accounting standards.
Gift card breakage
During the three months ended October 29, 2016, the Company determined that it had sufficient historicalredemption patterns to record breakage income associated with unredeemed gift cards, and accordingly recorded breakage income associated to gift cards issued and redeemed in prior years, when no breakage income was included. Gift card breakage is included in sales in the interim consolidated statement of income (loss). Sales for the three and six months ended July 29, 2017 include breakage income of $50 and $385, respectively [nil for the three and six months ended July 30, 2016].
3. CHANGES IN ACCOUNTING POLICIES
Information on significant new accounting standards and amendments issued but not yet adopted is described below.
IFRS 9, “Financial Instruments”. In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments” that replaces IAS 39, “Financial Instruments: Recognition and Measurement” and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and
7
measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing
comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Company plans to adopt the new standard on the required effective date. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements and related note disclosures. The Company has performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses. The Company will perform a detailed assessment in the coming quarters to determine the extent of the impact.
IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue that applies to all contracts with customers, except for contracts that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and will be effective for annual periods beginning on or after January 1, 2018. The Company is currently in the process of evaluating the impact this standard is expected to have on the consolidated financial statements. The Company in the process of assessing whether the loyalty program we currently offer could be considered a separate performance obligation. As we continue our evaluation, we will further clarify the expected impact of the adoption of the standard, which we do not believe will be material.
IFRS 16, “Leases” (“IFRS 16”) replaces IAS 17, “Leases”. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized in the statement of financial position. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019. Early application is permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its consolidated financial statements. The Company expects the adoption of IFRS 16 will have a significant impact as the Company will recognize new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of use assets and interest expense on lease liabilities. The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical expedients under the standard. The Company expects to disclose additional detailed information, including its transition method, any practical expedients elected andestimated quantitative financial effects, before the adoption of IFRS 16.
IFRIC 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of adopting the interpretation of IFRIC 22 on its consolidated financial statements.
4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.
In preparing these unaudited condensed interim consolidated financial statements, critical judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in note 5 of the consolidated financial statements for the year ended January 28, 2017, other than as those disclosed in note 6.
8
5. INVENTORIES
Finished goods
22,032
24,504
Goods in transit
4,673
5,463
Packaging
1,924
1,297
6. PROPERTY AND EQUIPMENT
For the three and six months ended July 29, 2017, an assessment of indicators was performed which caused the company to review the recoverable amount of the property and equipment for certain CGUs with an indication of impairment. CGUs reviewed included stores performing below the Company’s expectations.
As a result, for the three and six months ended July 29, 2017 an impairment loss of $3,179 [July 30, 2016 – nil] related to store leasehold improvements, furniture and equipment, and computer hardware was recognized in the U.S segment. The impairment loss was determined by comparing the carrying amount of the CGU’s net assets with their respective recoverable amounts based on value in use, and is included in selling, general and administration expenses in the consolidated statements of net income (loss) and comprehensive income (loss). Value in use of nil for the CGU’s in question was determined based on management’s best estimate of expected future cash flows from use over the remaining lease terms, considering historical experience as well as current economic conditions, and was then discounted using a pre‑tax weighted average cost of capital of 13.4%. For the three and six months ended July 29, 2017, $866 of impairment losses were reversed following a change in the expected future cash flows of certain CGUs in the U.S. segment [July 30, 2016 – nil]. Value in use for $848 for these CGU’s was determined in the same manner as described above. Impairment losses were reversed only to the extent that the carrying amounts of the CGU’s net assets do not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.
For the purpose of determining value in use as at July 29, 2017, management’s best estimate of future cash flows from use over the remaining lease terms incorporate an assumption of sales capture for CGU’s located in the same mall as one the Company`s main competitors. The Company performed a sensitivity analysis on its value in use calculations to determine how a change in its assumptions would impact its results from operations. As at July 29, 2017, a 20% decrease or increase in the expected future sales capture from the Company`s competitor, assuming that all other variables had remained the same, would have resulted in an increase of $163 or a decrease of $113 in the net impairment loss for the three and six months ended July 29, 2017, respectively.
9
7. PROVISIONS
For the
six months ended
Opening balance
8,494
Utilization
(1,248)
Additions
458
Reversals
(1,985)
Accretion expense
Ending balance
5,666
Less: Current portion
(1,524)
Long-term portion of provisions
Provisions for onerous contracts have been recognized in respect of store leases where the unavoidable costs of meeting the obligations under the lease agreements exceed the economic benefits expected to be received from the contract. The unavoidable costs reflect the present value of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract. During the six-month period ended July 29, 2017, due to changes in assumptions, additions to the onerous provisions were recorded in the amount of $458, while the provisions for other stores were partially or fully reversed by an amount of $1,985.
8. REVOLVING FACILITY
The Company has a credit agreement (the “Credit Agreement”) with the Bank of Montreal (“BMO”). The Credit Agreement provides for a three-year revolving term facility, maturing October 31, 2019, in the principal amount of $20,000 (which the Company refers to as the “Revolving Facility”) or the equivalent amount in U.S. dollars, repayable at any time. The Credit Agreement also provides for an accordion feature whereby the Company may, at any time prior to maturity and with permission from BMO, request an increase to the Revolving Facility by an amount not greater than $10,000.
The credit facility contains a number of financial and non-financial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company also cannot make any dividend payments. As at July 29, 2017, the Company is in compliance with these covenants.
As at July 29, 2017 and January 28, 2017, the Company did not have any borrowings on the Revolving Facility.
9. SHARE CAPITAL
Authorized
An unlimited number of Common shares.
Issued and outstanding
25,799,725 Common shares [January 28, 2017 - 25,330,951 shares]
10
During the three-month period ended July 29, 2017, the shareholders of the Company approved a resolution to reduce the stated capital maintained in respect of the common shares by an amount of $155,947, which resulted in a corresponding reduction of the deficit.
During the three and six-month period ended July 29, 2017, 195,773 and 412,773 stock options, respectively, were exercised for common shares for cash proceeds of $791 and $1,606 [July 30, 2016 — 282,056 and 676,571 stock options for cash proceeds of $500 and $844]. The carrying value of common shares during the three and six-month periods ended July 29, 2017 includes $175 and $828, respectively [July 30, 2016 — $178 and $304], which corresponds to a reduction in contributed surplus associated to options exercised during the period.
In addition, during the three and six-month periods ended July 29, 2017, 27,896 and 56,001 common shares, respectively, [July 30, 2016 – nil and 30,398 common shares] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $436 and $704, net of tax, respectively [July 30, 2016 – nil and $214] and a reduction in contributed surplus of $665 and $1,219 [July 30, 2016 — nil and $417].
Stock-based compensation
As at July 29, 2017, 654,236 common shares remain available for issuance under the 2015 Omnibus Plan.
The weighted average fair value of options granted of $2.39 for the six-month period ended July 29, 2017 [for the six-month period ended July 30, 2016 — $3.71] was estimated using the Black Scholes option pricing model, using the following assumptions:
Risk-free interest rate
%
Expected volatility
Expected option life
years
Expected dividend yield
Exercise price
Expected volatility was estimated using historical volatility of similar companies whose share prices were publicly available.
A summary of the status of the Company’s stock option plan and changes during the six-month period is presented below.
Weighted
average
Options
exercise
outstanding
price
#
Outstanding, beginning of period
933,195
5.63
2,146,880
3.04
Issued
161,980
9.76
172,011
14.63
Exercised
(412,773)
3.89
(676,571)
1.25
Forfeitures
(78,500)
11.81
(86,321)
5.03
Outstanding, end of period
603,902
7.12
1,555,999
5.00
Exercisable, end of period
270,906
4.46
780,234
3.42
The weighted average share price at the date of exercise for stock options exercised during the six-month period ended July 29, 2017 was $8.84 [for the six-month period ended July 30, 2016 — $15.02].
11
A summary of the status of the Company’s RSU plan and changes during the six-month period is presented below.
RSUs
fair value
per unit (1)
252,233
12.42
252,720
7.39
Granted
279,437
8.79
181,970
14.82
(26,369)
9.70
(29,910)
7.60
Vested
(56,001)
12.83
(30,398)
7.07
Vested, withheld for tax
(44,133)
11.82
(28,652)
405,167
10.10
345,730
11.42
(1)
Weighted average fair value per unit as at date of grant.
During the three and six-month periods ended July 29, 2017, the Company recognized a stock-based compensation expense of $802 and $1,376, respectively [July 30, 2016 — $614 and $930].
10. INCOME TAXES
Income tax expense is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full fiscal year.
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
Income tax recovery — statutory rate
26.5
(2,027)
(736)
(2,018)
(168)
Non-deductible items
(2.9)
223
(10.3)
286
(4.5)
347
(57.0)
360
3.5
(266)
2.0
(56)
0.0
(3)
11.5
(72)
Income tax provision (recovery) — effective tax rate
27.1
18.2
22.0
(19.0)
A breakdown of the income tax provision (recovery) on the interim consolidated statement of income (loss) is as follows:
Income tax provision (recovery)
(1,500)
(695)
(2,104)
98
Deferred
12
11. SELLING, GENERAL AND ADMINISTRATION EXPENSES
Wages, salaries and employee benefits
15,880
13,882
32,101
27,534
Other selling, general and administration
6,852
6,224
12,744
11,428
12. EARNINGS PER SHARE
Basic earnings per share (“EPS”) amounts are calculated by dividing the net income (loss) for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS amounts are calculated by dividing the net income (loss) attributable to ordinary equity holders (after adjusting for dividends) by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares, unless these would be anti‑dilutive.
The following reflects the income and share data used in the basic and diluted EPS computations:
Net loss for basic EPS
Weighted average number of shares outstanding — basic and diluted
As a result of the net loss during the three and six-month periods ended July 29, 2017, the stock options and restricted stock units disclosed in Note 9 are anti-dilutive.
13. RELATED PARTY DISCLOSURES
There have been no significant changes in related party transactions from those disclosed in the Company’s audited annual consolidated financial statements for the year ended January 28, 2017.
14. SEGMENT INFORMATION
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The Company has reviewed its operations and determined that each of its retail stores represents an operating segment. However, because its retail stores have similar economic characteristics, sell similar products, have similar types of customers, and use similar distribution channels, the Company has determined that these operating segments can be aggregated at a geographic level. As a result, the Company has concluded that it has two reportable segments, Canada and the U.S., that derive their revenues from the retail and online sale of tea, tea accessories and food and beverages. The Company’s Chief Executive Officer (the chief operating decision maker) makes decisions about resources allocation and assesses performance at the country level, and for which discrete financial information is available.
13
The Company derives revenue from the following products:
Tea
29,987
25,882
63,860
56,029
Tea accessories
11,170
10,811
21,679
20,704
Food and beverages
4,530
4,386
8,817
8,815
Property and equipment and intangible assets by country are as follows:
41,635
41,432
US
10,370
12,686
52,005
54,118
Gross profit per country, excluding intercompany profit, is used to measure performance because management believes this information is the most relevant in evaluating results. Gross profit per country is as follows:
July 29, 2017
Consolidated
37,356
8,331
77,308
17,048
20,254
5,228
39,571
10,398
17,102
3,103
37,737
6,650
July 30, 2016
33,895
7,184
70,854
14,694
16,810
4,361
33,884
8,601
17,085
2,823
36,970
6,093
15. FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, liquidity and credit.
14
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 $11.
The Company’s foreign exchange exposure is as follows:
US$
1,913
690
Accounts receivable
1,697
1,188
Accounts payable
3,839
2,461
The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.
In order to protect itself from the risk of losses should the value of the Canadian dollar decline in relation to the U.S. dollar, the Company has entered into forward contracts to fix the exchange rate of 80% to 90% of its expected U.S. dollar inventory purchasing requirements, through April 2018. A forward foreign exchange contract is a contractual agreement to buy a specific currency at a specific price and date in the future. The Company designated the forward contracts as cash flow hedging instruments under IAS 39. This has resulted in mark-to-market foreign exchange adjustments, for qualifying hedged instruments, being recorded as a component of other comprehensive income (loss) for the three and six-month periods ended July 29, 2017. As at July 29, 2017, the designated portion of these hedges was considered effective.
The nominal and contract values of foreign exchange contracts outstanding as at July 29, 2017 are as follows:
Nominal
Unrealized
Contractual
value
gain/(loss)
exchange rate
C$
Term
Purchase contracts
U.S. dollar
1.3098
16,900
22,136
July 2017 to October 2017
(1,136)
1.3050
14,700
19,183
November 2017 to April 2018
(932)
31,600
41,319
(2,068)
The nominal and contract values of foreign exchange contracts outstanding as at July 30, 2016 are as follows:
Range of
contractual
1.3060
14,800
19,329
August 2016 to October 2016
(27)
1.2696 - 1.2772
19,100
24,314
November 2016 to April 2017
581
33,900
43,643
554
15
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 with variable interest rates and consists of cash. The Company is exposed to cash flow risk on its Revolving Facility which bears interest at variable interest rates (Note 8). As at July 29, 2017, the Company did not have any borrowings on the Revolving Facility.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s approach to managing liquidity risk is to ensure, to the extent possible, that it will always have sufficient liquidity to meet liabilities when due. The Company’s liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. The Company is exposed to this risk mainly in respect of its trade and other payables.
As at July 29, 2017, the Company had $56,407 in cash. In addition, as outlined in Note 8, the Company has a Revolving Facility of $20,000, of which nil was drawn as at July 29, 2017. The Revolving Facility also provides for an accordion feature whereby the Company may, at any time prior to maturity, and with the permission of BMO, request an increase to the Revolving Facility by an amount not greater than $10,000.
The Company expects to finance its growth in store base and its store renovations through cash flows from operations, the Revolving Facility (Note 8) and cash on hand. The Company expects that its trade and other payables will be discharged within 90 days.
Credit risk
The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial obligations to the Company. The Company’s maximum exposure to credit risk at the reporting date is equal to the carrying value of accounts receivable and derivative financial instruments. Accounts receivable primarily consists of receivables from retail customers who pay by credit card, recoveries of credits from suppliers for returned or damaged products, and receivables from other companies for sales of products, gift cards and other services. Credit card payments have minimal credit risk and the limited number of corporate receivables is closely monitored.
Fair values
Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost. The disclosures in the “Financial instruments” section of Note 3 of the consolidated financial statements for the year ended January 28, 2017 describe how the categories of financial instruments are measured and how income and expenses, including fair value remeasurement gains and losses, are recognized. The fair values of derivative financial instruments have been determined by reference to forward exchange rates at the end of the reporting period and classified in Level 2 of the fair value hierarchy. There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the six months ended July 29, 2017 or the six months ended July 30, 2016.
16
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
Certain statements contained herein include statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and there are, or may be deemed to be,“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “approximately,” “intends,” “plans,” “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 and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, new store opening projections, use of cash and operating and capital expenditures, impact of new accounting pronouncements, impact of improvements to internal control and financial reporting. These risks and uncertainties include, but are not limited to the risks described under the section entitled “Risk Factors” in our Annual Report on Form 10-K dated April 12, 2017 and filed on April 13, 2017. Forward-looking statements speak only as of the date of this Quarterly Report on 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 2017” are to the Company’s fiscal year ending February 3, 2018. All references to “Fiscal 2016” are to the Company’s fiscal year ending January 28, 2017. All references to “Fiscal 2015” are to the Company’s fiscal year ended January 30, 2016.
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 ending February 3, 2018 covers a 53-week fiscal period. The years ending January 28, 2017 and January 30, 2016 cover a 52-week period.
Overview
We are a growing retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories and food and beverages, primarily through 236 company-operated DAVIDsTEA stores as of July 29, 2017, and our website, davidstea.com. We are building a brand that seeks to expand the definition of tea with innovative products that consumers can explore in an open and inviting retail environment. We strive to make tea a multi-sensory experience by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of tea as well as the ease of preparation.
Second Quarter 2017 Highlights
Compared to the second quarter of Fiscal 2016, we grew our sales from $41.1 million to $45.7 million, representing growth of 11.2% over the prior year.
17
We added 4 net new stores, increasing our store base from 232 stores as of April 29, 2017 to 236 stores as of July 29, 2017.
How we assess our performance
The key measures we use to evaluate the performance of our business and the execution of our strategy are set forth below:
Sales. Sales consist primarily of sales from our retail stores and e-commerce site. 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 quarter because of lower customer traffic in our locations in the summer months.
The specialty retail industry is cyclical, and our sales are affected by general economic conditions. Purchases of our products can be impacted by 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.
Comparable Sales. Comparable sales refer to period-over-period comparison information for comparable stores and e-commerce. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation. As a result, data regarding comparable sales may not be comparable to similarly titled data from other retailers.
Measuring the change in period-over-period comparable sales allows us to evaluate how our business is performing. Various factors affect comparable sales, including:
·
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 to our stores and online;
the customer experience we provide in our stores and online;
the level of customer traffic near our locations in which we operate;
the number of customer transactions and average ticket in our stores and online;
the pricing of our tea, tea accessories, and food and beverages;
our ability to obtain and distribute product efficiently;
our opening of new stores in the vicinity of our existing stores; and
the opening or closing of competitor stores in the vicinity of our stores.
Non-Comparable Sales. Non-comparable sales include sales from stores prior to the beginning of their thirteenth fiscal month of operation and wholesale sales, which includes sales to hotels, restaurants and institutions, office and workplace locations and food services, as well as corporate gifting. As we pursue our growth strategy, we expect that a significant percentage of our sales will continue to come from non-comparable sales.
Gross Profit. Gross profit is equal to our sales less our cost of sales. Cost of sales includes product costs, freight costs, store occupancy costs and distribution costs.
Selling, General and Administration Expenses. Selling, general and administration expenses consist of store operating expenses and other general and administration expenses, including store impairments and provision (recovery) for onerous contracts. Store operating expenses consist of all store expenses excluding 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 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 on page 21 of 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.
We present Adjusted results from operating activities as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure on page 21 of this Quarterly Report on Form 10-Q.
Finance Costs. Finance costs consist of cash and imputed non-cash charges related to our credit facility, as well as the accretion expense on the provisions for onerous contracts.
Provision for Income Tax. Provision for income tax consists of federal, provincial, state and local current and deferred income taxes.
Adjusted EBITDA. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. Specifically, Adjusted EBITDA allows for an assessment of our operating performance and our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, finance costs, deferred rent, non-cash compensation expense, costs (recovery) related to onerous contracts or contracts where we expect the costs of the obligations to exceed the economic benefit, loss on disposal of property and equipment, impairment of property and equipment, 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 on page 22 of this Quarterly Report on Form 10-Q.
Selected Operating and Financial Highlights
Results of Operations
The following table summarizes key components of our results of operations for the period indicated:
(unaudited)
Consolidated statement of income (loss) data:
Percentage of sales:
Other financial and operations data:
Adjusted EBITDA (1)
(2,234)
168
(691)
4,747
Adjusted EBITDA as a percentage of sales
Number of stores at end of period
236
208
Comparable sales growth (decline) for period (2)
For a reconciliation of Adjusted EBITDA to net income see “—Non-IFRS Metrics” below.
(2)
Comparable sales refer to period-over-period comparison information for comparable stores and e-commerce. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation.
Non-IFRS Metrics
Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA are not a presentation made in accordance with IFRS, and the use of the terms Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA may differ from similar measures reported by other companies. We believe that Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA provides investors with useful information with respect to our historical operations. Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA are not measurements of our financial performance under IFRS and should not be considered in isolation or as an alternative to net income, net cash provided by operating, investing or financing activities or any other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with IFRS. We understand that although Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as an
analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under IFRS. Some of these limitations are:
Adjusted selling, general and administration expenses, Adjusted results from operating activities 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 and Adjusted EBITDA do not reflect the cash requirements necessary to service interest or principal payments on our debt; 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, Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations.
The following tables present reconciliations of Adjusted selling, general and administration expenses, Adjusted results from operating activities and Adjusted EBITDA to our net income (loss) determined in accordance with IFRS:
Reconciliation of Adjusted selling, general and administration expenses
(in thousands)
Executive separation costs (a)
(962)
Impairment of property and equipment (b)
(2,313)
Impact of onerous contracts (c)
1,360
2,775
Adjusted selling, general and administration expenses
25,901
51,469
(a)
Executive separation costs represent salary owed to the former Chief Financial Officer of $812 for the three and six months ended July 29, 2017 as part of his separation agreement and stock-based compensation of $150 for the three and six months ended July 29, 2017 relating to the vesting of equity awards pursuant to the separation agreement.
(b)
Represents costs related to impairment of property and equipment for stores.
(c)
Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.
Reconciliation of Adjusted results from operating activities
962
(1,360)
(2,775)
Adjusted results from operating activities
(5,696)
(7,082)
21
Reconciliation of Adjusted EBITDA to our net income (loss)
Depreciation and amortization
2,586
2,090
4,932
4,037
EBITDA
(5,001)
(812)
(2,620)
3,171
Additional adjustments:
Stock-based compensation expense (a)
Executive separation costs related to salary (b)
812
Impairment of property and equipment (c)
Impact of onerous contracts (d)
Deferred rent (e)
Adjusted EBITDA
Represents non-cash stock-based compensation expense.
Executive separation costs related to salary represent salary owed to the former Chief Financial Officer as part of his separation agreement.
(d)
(e)
Represents the extent to which our annual rent expense has been above or below our cash rent payments.
Three Months Ended July 29, 2017 Compared to Three Months Ended July 30, 2016
Sales. Sales for the three months ended July 29, 2017 increased 11.2%, or $4.6 million, to $45.7 million from $41.1 million for the three months ended July 30, 2016, comprising a $0.3 million decrease in comparable sales and a $4.9 million increase in non-comparable sales. Comparable sales decreased by 0.9% and non-comparable sales increased primarily due to an additional 28 net new stores opened as at July 29, 2017 as compared to July 30, 2016. Comparable sales decreased as we faced more a challenging overall consumer retail backdrop.
Gross Profit. Gross profit increased by 1.5%, or $0.3 million, to $20.2 million for the three months ended July 29, 2017 from $19.9 million for the three months ended July 30, 2016. Gross profit as a percentage of sales decreased to 44.2% for the three months ended July 29, 2017, from 48.5% for the three months ended July 30, 2016 primarily due to the planned clearance of seasonal products and deleveraging of fixed costs due to the negative 0.9% comparable sales this quarter.
Selling, General and Administration Expenses. Selling, general and administration expenses increased by 21.9%, or $5.0 million, to $27.8 million in the three months ended July 29, 2017 from $22.8 million for the three months ended July 30, 2016. As a percentage of sales, selling, general and administration expenses increased to 60.9% for the three months ended July 29, 2017, as compared to 55.5% for the three months ended July 30, 2016. Excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts for the three months ended July 29, 2017, selling, general and administration expenses increased to $25.9 million in the three months ended July 29,
2017 from $22.8 million for the three months ended July 30, 2016 due primarily to the hiring of additional staff to support the growth of the Company, including new stores, and higher store operating expenses to support the operations of 236 stores as of July 29, 2017 as compared to 208 stores as of July 30, 2016. As a percentage of sales, selling, general and administration expenses excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts increased to 56.6% from 55.5%.
Results from Operating Activities. Results from operating activities decreased by $4.7 million, to $(7.6) million in the three months ended July 29, 2017 from $(2.9) million in the three months ended July 30, 2016. Excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts for the three months ended July 29, 2017, results from operating activities decreased by $2.8 million, to $(5.7) million from $(2.9) million for the three months ended July 30, 2016.
Provision for Income Taxes (Recovery). Recovery for income taxes increased by $1.6 million, to $2.1 million for the three months ended July 29, 2017 from a recovery for income taxes of $0.5 million for the three months ended July 30, 2016. The increase in the recovery for income taxes was due primarily to lower results from operating activities. Our effective tax rates were 27.1% and 18.2% for the three months ended July 29, 2017 and July 30, 2016, respectively. This increase in the effective tax rate is due to a decrease in non-deductible expenses, differences in foreign tax rates vs. statutory income tax rates and other items that result in an increase in income tax recovery for the three months ended July 29, 2017.
Six Months Ended July 29, 2017 Compared to Six Months Ended July 30, 2016
Sales. Sales for the six months ended July 29, 2017 increased 10.4%, or $8.9 million, to $94.4 million from $85.5 million for the six months ended July 30, 2016, comprising a $2.8 million decrease in comparable sales and a $11.7 million increase in non-comparable sales. Comparable sales decreased by 3.4% and non-comparable sales increased primarily due to an additional 28 net new stores opened as at July 29, 2017 as compared to July 30, 2016. Comparable sales decreased as we faced more a challenging overall consumer retail backdrop.
Gross Profit. Gross profit increased by 3.0%, or $1.3 million, to $44.4 million for the six months ended July 29, 2017 from $43.1 million for the six months ended July 30, 2016. Gross profit as a percentage of sales decreased to 47.0% for the six months ended July 29, 2017, from 50.3% for the six months ended July 30, 2016 primarily due to the planned clearance of seasonal products and deleveraging of fixed costs due to the negative 3.9% comparable sales for the year-to-date.
Selling, General and Administration Expenses. Selling, general and administration expenses increased by 18.5%, or $8.1 million, to $52.0 million in the six months ended July 29, 2017 from $43.9 million for the six months ended July 30, 2016. As a percentage of sales, selling, general and administration expenses increased to 55.1% for the six months ended July 29, 2017, as compared to 51.4% for the six months ended July 30, 2016. Excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts for the six months ended July 29, 2017, selling, general and administration expenses increased to $51.5 million in the six months ended July 29, 2017 from $43.9 million for the six months ended July 30, 2016 due primarily to the hiring of additional staff to support the growth of the Company, including new stores, and higher store operating expenses to support the operations of 236 stores as of July 29, 2017 as compared to 208 stores as of July 30, 2016. As a percentage of sales, selling, general and administration expenses excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts increased to 54.6% from 51.4%.
Results from Operating Activities. Results from operating activities decreased by $6.7 million, to $(7.6) million in the six months ended July 29, 2017 from $(0.9) million in the six months ended July 30, 2016. Excluding the impact of executive separation costs, impairment of property and equipment, and onerous contracts for the six months ended July 29, 2017, results from operating activities decreased by $6.2 million, to $(7.1) million from $(0.9) million for the six months ended July 30, 2016.
Provision for Income Taxes. Provision for income taxes decreased by $1.8 million, to a recovery of $1.7 million for the six months ended July 29, 2017 from a provision of $0.1 million for the six months ended July 30,
23
2016. The decrease in the provision for income taxes was due primarily to lower results from operating activities. Our effective tax rates were 22.0% and (19.0)% for the six months ended July 29, 2017 and July 30, 2016, respectively. This increase in the effective tax rate is due to non-deductible expenses, differences in foreign tax rates vs. statutory income tax rates and other items that resulted in an income tax recovery for the six months ended July 29, 2017.
Liquidity and Capital Resources
As at July 29, 2017 we had $56.4 million of cash primarily held with major Canadian financial institutions. Our working capital was $73.0 million as of July 29, 2017, compared to $78.7 million as at January 28, 2017.
Our primary sources of liquidity are cash on hand, cash flows from operations and borrowings under our revolving credit facility. Our primary cash needs are to support the increase in inventories as we expand the number of our stores, and for capital expenditures related to new stores and store renovations.
Capital expenditures typically vary depending on the timing of new stores openings and infrastructure-related investments. During fiscal 2017, we plan to spend approximately $15.0-$18.0 million on capital expenditures. We expect to construct, lease and open 10-12 new stores in Canada and up to 5 new stores in the United States, and renovate a number of existing stores. The remainder of the capital budget will be used to make continued investment in our infrastructure.
Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent and other store operating costs. Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. We funded our capital expenditures and working capital requirements from cash on hand and net cash provided by our operating activities.
We believe that our cash position, net cash provided by our operating activities and available borrowings under our revolving credit facility will be adequate to finance our planned capital expenditures and working capital requirements for the foreseeable future.
Cash Flow
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash
Cash Flows Provided by Operating Activities
Net cash flows provided by (used in) operating activities increased to $2.8 million for the three months ended July 29, 2017 from $(1.8) million for the three months ended July 30, 2016. The increase in the cash flows provided by operating activities was due primarily to a reduction in excess inventory levels from year-end, compared to the three months ended July 30, 2016, during which time inventory grew at normal levels to support sales for the third and fourth quarters of fiscal 2016.
Net cash used in operating activities increased to $(3.8) million for the six months ended July 29, 2017 from $(2.6) million for the six months ended July 30, 2016. The increase in the cash flows used in operating activities was due
primarily to lower results from operating activities, partially offset by a reduction in inventory levels from year-end, as described above.
Cash Flows Provided by Investing Activities
Capital expenditures decreased by $3.6 million, to $3.6 million for the three months ended July 29, 2017, from $7.2 million for the three months ended July 30, 2016. This decrease was primarily due to the number of new store build-outs and the timing of investments in infrastructure. We opened 5 new stores for the three months ended July 29, 2017 compared to 10 new stores for the three months ended July 30, 2016.
Capital expenditures decreased by $4.4 million, to $5.8 million for the six months ended July 29, 2017, from $10.2 million for the six months ended July 30, 2016. This decrease was primarily due to the number of new store build-outs anf the timing of investments in infrastructure. We opened 9 new stores for the six months ended July 29, 2017 compared to 15 new stores for the six months ended July 30, 2016.
Cash Flows Provided By Financing Activities
Net cash flows provided by financing activities amounted to $0.8 million for the three months ended July 29, 2017 due to proceeds from share issuances, compared to $0.5 million for the three months ended July 30, 2016.
Net cash flows provided by financing activities amounted to $1.6 million for the six months ended July 29, 2017 due to proceeds from share issuances, compared to $0.8 million for the six months ended July 30, 2016.
Credit Facility with Bank of Montreal
The Company has a credit arrangement (hereinafter referred to as “Credit Agreement”) with the Bank of Montreal (“BMO”). The Credit agreement provides for a three-year revolving term facility, maturing October 31, 2019, in the principal amount of $20.0 million (which we refers to as the “Revolving Facility”) or the equivalent amount in U.S. dollars, repayable at any time. The Credit Agreement also provides for an accordion feature whereby we may, at any time prior to the end of the term and with the permission of BMO, request an increase to the Revolving Facility by an amount not greater than $10.0 million. As at July 29, 2017, we did not have any borrowings on the Revolving Facility.
The credit facility contains a number of financial and non-financial covenants that, among other things and subject to certain exceptions, restrict our ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. We also cannot make any dividend payments. As at July 29, 2017, we are in compliance with these covenants.
Off-Balance Sheet Arrangements
Other than operating lease obligations, we have no off-balance sheet obligations.
Contractual Obligations and Commitments
There have been no significant changes to our contractual obligations as disclosed in our consolidated financial statements for the fiscal year ended January 28, 2017, other than those which occur in the normal course of business.
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 judgement 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
25
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 28, 2017 included in our Annual Report on Form 10-K dated April 12, 2017 and filed on April 13, 2017. There have been no material changes to the critical accounting policies and estimates since January 28, 2017, other than as described below.
Recently Issued Accounting Standards
IFRS 9, “Financial Instruments”. In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments” that replaces IAS 39, “Financial Instruments: Recognition and Measurement” and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Company plans to adopt the new standard on the required effective date. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements and related note disclosures. The Company has performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses. The Company will perform a detailed assessment in the coming quarters to determine the extent of the impact.
IFRIC 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. Early adoption is
permitted. The Company is in the process of evaluating the impact of adopting the interpretation of IFRIC 22 on its consolidated financial statements.
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 12, 2017 and filed on April 13, 2017.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of July 29, 2017. 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. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of July 29, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There has been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the six-month period ended July 29, 2017, that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, subject to claims and suits arising in the ordinary course of business. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of any matters in which we are currently involved will have a material adverse affect on our financial position or on our results of operations.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K dated April 12, 2017 and filed on April 13, 2017, pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”).
Item 2. Unregistered Sales of Equity Securities
Recent Sales of Unregistered Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits:
10.1
Executive Employment Agreement between DAVIDsTEA Inc. and Howard Tafler, dated September 7, 2017.
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.
28
EXHIBIT INDEX
Exhibit No.
Description
29
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.
By:
/s/ Joel Silver
Date: September 7, 2017
Name:
Joel Silver
Title:
President and Chief Executive Officer