NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three-month periods ended May 4, 2019 and May 5, 2018 [Unaudited]
[Amounts in thousands of Canadian dollars except share and per share amounts]
1. CORPORATE INFORMATION
The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three-month period ended May 4, 2019 were authorized for issue in accordance with a resolution of the Board of Directors on June18, 2019. The amended and restated unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three-month period ended May 4, 2019 were authorized for issue in accordance with a resolution of the Board of Directors on December 20, 2019. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the NASDAQ Global Market under the symbol “DTEA”. The registered office is located at 5430, Ferrier St., Town of Mount-Royal, Quebec, Canada, H4P 1M2.
The Company is engaged in the retail and online sale of tea, tea accessories and food and beverages in Canada and the United States. The results of operations for the interim period are not necessarily indicative of the results of operations for the full year. Sales fluctuate from quarter to quarter. Sales are traditionally higher in the fourth fiscal quarter due to the year-end holiday season, and tend to be lowest in the second and third fiscal quarter because of lower customer traffic during the summer months.
2. STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION
These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). Accordingly, these financial statements do not include all of the financial statement disclosures required for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended February 2, 2019, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB. In management’s opinion, the unaudited condensed interim consolidated financial statements reflect all the adjustments that are necessary for a fair presentation of the results for the interim period presented. These unaudited condensed interim consolidated financial statements have been prepared using the accounting policies and methods of computation as outlined in note 3 of the consolidated financial statements for the year ended February 2, 2019, other than as disclosed in note 3 below with respect to changes in accounting policies.
3. CHANGES IN ACCOUNTING POLICIES AND RESTATEMENT OF PREVIOUSLY-ISSUED FINANCIAL STATEMENTS
During the course of the Company’s financial statement close process for the quarter ended November 2, 2019, accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). When appropriately performing the assessment of impairment indicators with respect to the right-of-use assets (“ROU assets”) as at May 4, 2019 and August 3, 2019, impairment charges of $13,924 and $5,025 respectively were identified that would have been required to be recognized in the respective periods under the Company’s accounting policy for transition to IFRS 16, which included the use of the practical expedient for assessing impairment. Upon further review, the Company also determined that, pursuant to IFRS standards, its financial statements would be more relevant had they applied IAS 36 to assess impairment of ROU assets as of the date of initial adoption, instead of applying the available practical expedient. Accordingly, the Company elected to voluntarily change its accounting policy to perform an impairment assessment in accordance with IAS 36 at the date of transition to IFRS 16. The Company believes this change is more relevant because it more faithfully depicts the performance of the Company. Subsequent to the retrospective application of the change in accounting policy, the impairment charges were nil and $5,025 for the quarters ended May 4, 2019 and August 3, 2019, respectively.
Effects of the restatement
Based on the impairment test performed at February 3, 2019 upon the voluntary change to the Company’s method of transition to IFRS 16 to eliminate the use of the practical expedient, the Company’s ROU assets were impaired upon initial adoption by $32,487 as compared to the application of the previously recognized onerous lease provisions of $19,154 against the ROU assets. The difference that results from performing an IAS 36 impairment test at February 3, 2019 and the application of the practical expedient related to onerous leases results from a difference in the application of certain assumptions required under the two standards. The Company previously had recorded a reduction to the deficit of $1,280 on transition to IFRS 16. After the application of the voluntary change in accounting policy, the deficit increased by $14,613 to $61,293. The additional reduction in the initial value of the ROU assets resulted in a decrease in amortization expense in the three-month periods ended May 4, 2019 and August 3, 2019 of $689 and $699 respectively.
The following table illustrates the effect of the voluntary change in accounting policy on the adoption of IFRS 16 as at February 3, 2019:
|
|
|
|
|
|
|
|
February 3,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
February 2,
2019
|
|
|
IFRS 16
Adoption
|
|
|
As previously
reported
|
|
|
Change in Policy Adjustment
|
|
|
February 3,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
|
-
|
|
|
|
75,596
|
|
|
|
75,596
|
|
|
|
(14,613
|
)
|
|
|
60,983
|
|
Other assets
|
|
|
122,500
|
|
|
|
-
|
|
|
|
122,500
|
|
|
|
-
|
|
|
|
122,500
|
|
Total assets
|
|
|
122,500
|
|
|
|
75,596
|
|
|
|
198,096
|
|
|
|
(14,613
|
)
|
|
|
183,483
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liability
|
|
|
-
|
|
|
|
102,168
|
|
|
|
102,168
|
|
|
|
-
|
|
|
|
102,168
|
|
Deferred rent and lease inducements
|
|
|
8,698
|
|
|
|
(8,698
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Provisions
|
|
|
19,154
|
|
|
|
(19,154
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other liabilities
|
|
|
27,192
|
|
|
|
-
|
|
|
|
27,192
|
|
|
|
-
|
|
|
|
27,192
|
|
Total liabilities
|
|
|
55,044
|
|
|
|
74,316
|
|
|
|
129,360
|
|
|
|
-
|
|
|
|
129,360
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(47,960
|
)
|
|
|
1,280
|
|
|
|
(46,680
|
)
|
|
|
(14,613
|
)
|
|
|
(61,293
|
)
|
Other
|
|
|
115,416
|
|
|
|
-
|
|
|
|
115,416
|
|
|
|
-
|
|
|
|
115,416
|
|
Total equity
|
|
|
67,456
|
|
|
|
1,280
|
|
|
|
68,736
|
|
|
|
(14,613
|
)
|
|
|
54,123
|
|
TOTAL LIABILITIES AND EQUITY
|
|
|
122,500
|
|
|
|
75,596
|
|
|
|
198,096
|
|
|
|
(14,613
|
)
|
|
|
183,483
|
|
The following tables illustrate the impact of the error correction related to unrecognized impairment charges, and the retrospective application of the voluntary change in accounting policy:
Consolidated Balance sheet
|
|
May 4, 2019
|
|
|
|
As previously
reported
|
|
|
Correction
of error - Adjustment
|
|
|
Correction
of error - Restated
|
|
|
Change in
policy - Adjustment
|
|
|
Restated
|
|
Right-of-use assets
|
|
|
72,373
|
|
|
|
(14,165
|
)
|
|
|
58,208
|
|
|
|
—
|
|
|
|
58,208
|
|
Total assets
|
|
|
184,591
|
|
|
|
(14,165
|
)
|
|
|
170,426
|
|
|
|
—
|
|
|
|
170,426
|
|
Deficit
|
|
|
(50,540
|
)
|
|
|
(13,924
|
)
|
|
|
(64,464
|
)
|
|
|
—
|
|
|
|
(64,464
|
)
|
Accumulated other comprehensive income
|
|
|
1,241
|
|
|
|
(241
|
)
|
|
|
1,000
|
|
|
|
—
|
|
|
|
1,000
|
|
Total equity
|
|
|
64,529
|
|
|
|
(14,165
|
)
|
|
|
50,364
|
|
|
|
—
|
|
|
|
50,364
|
|
Total liabilities and equity
|
|
|
184,591
|
|
|
|
(14,165
|
)
|
|
|
170,426
|
|
|
|
—
|
|
|
|
170,426
|
|
Consolidated statement of income (loss) and comprehensive income (loss)
|
|
For the three months ended May 4, 2019
|
|
|
|
As previously
reported
|
|
|
Correction
of error - Adjustment
|
|
|
Correction
of error - Restated
|
|
|
Change in
policy - Adjustment
|
|
|
Restated
|
|
Selling, general and administration expenses
|
|
|
28,709
|
|
|
|
13,924
|
|
|
|
42,633
|
|
|
|
(14,613
|
)
|
|
|
28,020
|
|
Results from operating activities
|
|
|
(2,373
|
)
|
|
|
(13,924
|
)
|
|
|
(16,297
|
)
|
|
|
14,613
|
|
|
|
(1,684
|
)
|
Loss before income taxes
|
|
|
(4,009
|
)
|
|
|
(13,924
|
)
|
|
|
(17,933
|
)
|
|
|
14,613
|
|
|
|
(3,320
|
)
|
Net loss
|
|
|
(4,009
|
)
|
|
|
(13,924
|
)
|
|
|
(17,933
|
)
|
|
|
14,613
|
|
|
|
(3,320
|
)
|
Cumulative translation adjustment
|
|
|
(256
|
)
|
|
|
(241
|
)
|
|
|
(497
|
)
|
|
|
—
|
|
|
|
(497
|
)
|
Total comprehensive loss
|
|
|
(4,265
|
)
|
|
|
(14,165
|
)
|
|
|
(18,430
|
)
|
|
|
14,613
|
|
|
|
(3,817
|
)
|
Net loss per share
|
|
|
(0.15
|
)
|
|
|
(0.54
|
)
|
|
|
(0.69
|
)
|
|
|
0.56
|
|
|
|
(0.13
|
)
|
Consolidated statement of cash flows
|
|
For the three months ended May 4, 2019
|
|
|
|
As previously
reported
|
|
|
Correction
of error - Adjustment
|
|
|
Correction
of error - Restated
|
|
|
Change in
policy - Adjustment
|
|
|
Restated
|
|
Net loss
|
|
|
(4,009
|
)
|
|
|
(13,924
|
)
|
|
|
(17,933
|
)
|
|
|
14,613
|
|
|
|
(3,320
|
)
|
Amortization of right-of-use assets
|
|
|
3,791
|
|
|
|
—
|
|
|
|
3,791
|
|
|
|
(689
|
)
|
|
|
3,102
|
|
Impairment of right-of-use assets
|
|
|
—
|
|
|
|
13,924
|
|
|
|
13,924
|
|
|
|
(13,924
|
)
|
|
|
—
|
|
Cash flows related to operating activities
|
|
|
360
|
|
|
|
—
|
|
|
|
360
|
|
|
|
—
|
|
|
|
360
|
|
Consolidated statement of equity (deficit)
|
|
For the three months ended May 4, 2019
|
|
|
|
As previously
reported
|
|
|
Correction
of error - Adjustment
|
|
|
Correction
of error - Restated
|
|
|
Change in
policy - Adjustment
|
|
|
Restated
|
|
IFRS 16 adoption adjustment
|
|
|
1,280
|
|
|
|
—
|
|
|
|
1,280
|
|
|
|
(14,613
|
)
|
|
|
(13,333
|
)
|
Adjusted balance at beginning of period
|
|
|
68,736
|
|
|
|
—
|
|
|
|
68,736
|
|
|
|
(14,613
|
)
|
|
|
54,123
|
|
Net loss
|
|
|
(4,009
|
)
|
|
|
(13,924
|
)
|
|
|
(17,933
|
)
|
|
|
14,613
|
|
|
|
(3,320
|
)
|
Accumulated other comprehensive loss
|
|
|
(256
|
)
|
|
|
(241
|
)
|
|
|
(497
|
)
|
|
|
—
|
|
|
|
(497
|
)
|
Total comprehensive loss
|
|
|
(4,265
|
)
|
|
|
(14,165
|
)
|
|
|
(18,430
|
)
|
|
|
14,613
|
|
|
|
(3,817
|
)
|
Internal Control Considerations
IFRS 16 – Leases
IFRS 16, “Leases’’ (“IFRS 16’’) replaces IAS 17, “Leases’’ and related interpretations. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized on the balance sheet. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard is effective for annual periods beginning on or after January 1, 2019.
a) Nature of the effect of adoption of IFRS 16 (restated)
The Company has adopted IFRS 16 as at February 3, 2019. The adoption of IFRS 16 had a significant impact as the Company recognized 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 elected to apply the modified retrospective method by setting right-of-use assets based on the lease liability at the date of initial application, adjusted by the amount of any prepaid or accrued lease payments, and has applied the following practical expedients:
|
-
|
applying IFRS 16 exclusively to contracts that were previously identified as leases applying IAS 17 at the date of initial application;
|
|
|
|
|
-
|
applying a single discount rate to a portfolio of leases with reasonably similar characteristics;
|
|
|
|
|
-
|
excluding initial direct costs from the measurement of the right-of-use asset at the date of initial application; and
|
|
|
|
|
-
|
not separating the lease component and its associated non-lease component.
|
At the date of initial application of IFRS 16, the Company tested for impairment in accordance with IAS 36 Impairment of assets.
The effect of adoption of IFRS 16 as at February 3, 2019 is as follows:
|
|
|
|
|
|
|
|
February 3,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
February 2,
2019
|
|
|
IFRS 16
Adoption
|
|
|
As previously
reported
|
|
|
Change in Policy Adjustment
|
|
|
February 3,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
|
-
|
|
|
|
75,596
|
|
|
|
75,596
|
|
|
|
(14,613
|
)
|
|
|
60,983
|
|
Other assets
|
|
|
122,500
|
|
|
|
-
|
|
|
|
122,500
|
|
|
|
-
|
|
|
|
122,500
|
|
Total assets
|
|
|
122,500
|
|
|
|
75,596
|
|
|
|
198,096
|
|
|
|
(14,613
|
)
|
|
|
183,483
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liability
|
|
|
-
|
|
|
|
102,168
|
|
|
|
102,168
|
|
|
|
-
|
|
|
|
102,168
|
|
Deferred rent and lease inducements
|
|
|
8,698
|
|
|
|
(8,698
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Provisions
|
|
|
19,154
|
|
|
|
(19,154
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other liabilities
|
|
|
27,192
|
|
|
|
-
|
|
|
|
27,192
|
|
|
|
-
|
|
|
|
27,192
|
|
Total liabilities
|
|
|
55,044
|
|
|
|
74,316
|
|
|
|
129,360
|
|
|
|
-
|
|
|
|
129,360
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(47,960
|
)
|
|
|
1,280
|
|
|
|
(46,680
|
)
|
|
|
(14,613
|
)
|
|
|
(61,293
|
)
|
Other
|
|
|
115,416
|
|
|
|
-
|
|
|
|
115,416
|
|
|
|
-
|
|
|
|
115,416
|
|
Total equity
|
|
|
67,456
|
|
|
|
1,280
|
|
|
|
68,736
|
|
|
|
(14,613
|
)
|
|
|
54,123
|
|
TOTAL LIABILITIES AND EQUITY
|
|
|
122,500
|
|
|
|
75,596
|
|
|
|
198,096
|
|
|
|
(14,613
|
)
|
|
|
183,483
|
|
For leases previously classified as operating leases, the Company recorded the right-of-use assets based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. Due to this, the Company derecognized an amount of $8,698 that was previously included under deferred rent and leasehold inducements with a corresponding adjustment to the right-of-use asset.
The lease liabilities as at February 3, 2019 can be reconciled to the operating lease commitments as of February 2, 2019 as follows:
|
|
February 3,
|
|
|
|
2019
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Minimum lease payments under operating lease
|
|
|
116,772
|
|
Discounted using a weighted average incremental borrowing rate of 6.63%
|
|
|
(24,484
|
)
|
Discounted non-lease component associated with lease component pursuant to practical expedient
|
|
|
9,880
|
|
|
|
|
102,168
|
|
Operating lease payments which were previously included in cost of sales on the consolidated statement of income are replaced with depreciation expenses (included in selling, general and administrative expenses) from the right-of-use asset and interest expense (included under finance costs) from the lease liability.
b) Summary of new accounting policies
Right-of-use assets
The Company recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment. Amortization expense is recorded in selling, general and administrative expense.
Lease liabilities
At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. Interest accretion is recorded as interest expense in finance costs. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. The Company has elected to apply the practical expedient to not separate the lease component and its associated non-lease component.
Short-term leases and leases of low-value assets
The Company applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value (i.e., below US $5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.
Significant judgement in determining the lease term of contracts with renewal options
The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.
The Company has the option, under some of its leases to lease the assets for additional terms of three to five years. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal, including store performance, expected future performance and past business practice. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).
c) Amounts recognised in the statement of financial position and profit or loss
Set out below are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period:
|
|
Right-of use
|
|
|
Lease
|
|
|
|
assets
|
|
|
liability
|
|
|
|
$
|
|
|
$
|
|
|
|
(Restated - Note 3)
|
|
|
|
|
Balance, February 3, 2019
|
|
|
60,983
|
|
|
|
102,168
|
|
Amortization expense
|
|
|
(3,102
|
)
|
|
|
—
|
|
Interest Expense
|
|
|
—
|
|
|
|
1,827
|
|
Payments
|
|
|
—
|
|
|
|
(5,823
|
)
|
CTA
|
|
|
327
|
|
|
|
1,018
|
|
Balance, May 4, 2019
|
|
|
58,208
|
|
|
|
99,190
|
|
|
|
|
|
|
|
|
|
|
Presented as:
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
16,324
|
|
Non-Current
|
|
|
58,208
|
|
|
|
82,866
|
|
The Company recognizes variable lease payments of $210 for the three months ended May 4, 2019.
IFRS 23 – Uncertainty over Income Tax Treatments
IFRIC 23, “Uncertainty over Income Tax Treatments” (the “Interpretation”), was issued by the IASB in June 2017. The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. The Interpretation requires an entity to:
|
·
|
Contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution;
|
|
·
|
Reflect an uncertainty in the amount of income tax payable (recoverable) if it is probable that it will pay (or recover) an amount for the uncertainty; and
|
|
·
|
Measure a tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the amount payable (recoverable).
|
The adoption of this interpretation did not have a significant impact on the Company’s financial statements.
4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.
In preparing these unaudited condensed interim consolidated financial statements, critical judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in note 5 of the consolidated financial statements for the year ended February 2, 2019.
5. INVENTORIES
|
|
May 4,
|
|
|
February 2,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
Finished goods
|
|
|
28,978
|
|
|
|
28,991
|
|
Goods in transit
|
|
|
731
|
|
|
|
3,262
|
|
Packaging
|
|
|
1,933
|
|
|
|
2,100
|
|
|
|
|
31,642
|
|
|
|
34,353
|
|
6. REVOLVING FACILITY
On June 11, 2018, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a two year revolving facility (“Amended Revolving Facility”) in the principal amount of $15,000 or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018, with no accordion feature. Borrowings under the Amended Revolving Facility may not exceed the lesser of the total commitment for the revolving facility and the borrowing base, calculated as 75% of the face value of all eligible receivables plus 50% of the estimated value of all eligible inventory, less any priority payables.
The Amended Credit Agreement subjects the Company to certain financial covenants. Without the prior written consent of the lender, the Company’s fixed charge coverage ratio may not be less than 1.10:1.00 and the Company’s leverage ratio may not exceed 3.00:1.00. In addition, the Company’s net tangible worth may not be less than $65,000 and the Company’s minimum excess availability must not be less than $15,000. The Amended Revolving Facility bears interest based on the Company’s adjusted leverage ratio, at the bank’s prime rate, U.S. bank rate or LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility.
The credit facility also contains nonfinancial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company also cannot make any dividend payments.
As at May 4, 2019, the Company did not have any borrowings under the Amended Revolving Facility.
As at May 4, 2019, the Company is in breach of its fixed charge coverage ratio and certain nonfinancial covenants. BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement, however the Company cannot borrow under the facility.
The current lending agreement will be terminated on the earlier of (a) January 24, 2020, and (b) the company securing new financing. The Company is in good faith discussions with BMO to install an asset based lending facility that will provide a revolving facility at commercial reasonable terms.
7. SHARE CAPITAL
Authorized
An unlimited number of Common shares.
Issued and outstanding
|
|
May 4,
|
|
|
February 2,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
Share Capital - Common shares
|
|
|
112,740
|
|
|
|
112,519
|
|
During the three-month periods ended May 4, 2019 and May 5, 2018, no stock options were exercised for common shares.
In addition, during the three-month period ended May 4, 2019, 39,365 common shares [May 5, 2018 – 29,785 common shares] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $221, net of tax [May 5, 2018 — $257] and a reduction in contributed surplus of $439 [May 5, 2018 — $593].
Stock-based compensation
As at May 4, 2019, 929,053 common shares remain available for issuance under the 2015 Omnibus Plan.
No stock options were granted during the three-month periods ended May 4, 2019 and May 5, 2018.
A summary of the status of the Company’s stock option plan and changes during the three-month period is presented below.
|
|
For the three months ended
|
|
|
|
May 4,
|
|
|
May 5,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
Options
|
|
|
exercise
|
|
|
Options
|
|
|
exercise
|
|
|
|
outstanding
|
|
|
price
|
|
|
outstanding
|
|
|
price
|
|
|
|
#
|
|
|
$
|
|
|
#
|
|
|
$
|
|
Outstanding, beginning of year
|
|
|
137,540
|
|
|
|
7.17
|
|
|
|
447,779
|
|
|
|
7.18
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeitures
|
|
|
(9,020
|
)
|
|
|
6.20
|
|
|
|
(55,342
|
)
|
|
|
5.34
|
|
Outstanding, end of period
|
|
|
128,520
|
|
|
|
7.20
|
|
|
|
392,437
|
|
|
|
7.44
|
|
Exercisable, end of period
|
|
|
127,101
|
|
|
|
7.12
|
|
|
|
260,604
|
|
|
|
6.01
|
|
A summary of the status of the Company’s RSU plan and changes during the three-month period is presented below.
|
|
For the three months ended
|
|
|
|
May 4,
|
|
|
May 5,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
RSUs
|
|
|
fair value
|
|
|
RSUs
|
|
|
fair value
|
|
|
|
outstanding
|
|
|
per unit (1)
|
|
|
outstanding
|
|
|
per unit (1)
|
|
|
|
#
|
|
|
$
|
|
|
#
|
|
|
$
|
|
Outstanding, beginning of year
|
|
|
270,976
|
|
|
|
5.26
|
|
|
|
289,416
|
|
|
|
9.70
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
416,450
|
|
|
|
4.35
|
|
Forfeitures
|
|
|
(21,716
|
)
|
|
|
5.73
|
|
|
|
(10,880
|
)
|
|
|
9.49
|
|
Vested
|
|
|
(42,934
|
)
|
|
|
5.15
|
|
|
|
(29,785
|
)
|
|
|
8.61
|
|
Vested, withheld for tax
|
|
|
(33,865
|
)
|
|
|
6.44
|
|
|
|
(31,694
|
)
|
|
|
8.58
|
|
Outstanding, end of period
|
|
|
172,461
|
|
|
|
5.00
|
|
|
|
633,507
|
|
|
|
6.29
|
|
_________
(1)
|
Weighted average fair value per unit as at date of grant.
|
During the three-month period ended May 4, 2019, the Company recognized a stock-based compensation expense of $127 [May 5, 2018 — $295].
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
|
|
|
|
May 4,
|
|
|
May 5,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
|
(Restated - Note 3)
|
|
|
|
|
|
|
|
Income tax recovery — statutory rate
|
|
|
26.9
|
|
|
|
(893
|
)
|
|
|
26.9
|
|
|
|
(416
|
)
|
Increase (decrease) in provision for income tax (recovery) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible items
|
|
|
(1.0
|
)
|
|
|
33
|
|
|
|
(4.6
|
)
|
|
|
71
|
|
Unrecognized deferred income tax assets
|
|
|
(25.9
|
)
|
|
|
860
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
|
1
|
|
Income tax provision (recovery) — effective tax rate
|
|
|
—
|
|
|
|
—
|
|
|
|
22.2
|
|
|
|
(344
|
)
|
A breakdown of the income tax provision (recovery) on the interim consolidated statement of income (loss) is as follows:
|
|
For the three months ended
|
|
|
|
May 4,
|
|
|
May 5,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Income tax provision (recovery)
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
(1,300
|
)
|
Deferred
|
|
|
—
|
|
|
|
956
|
|
|
|
|
—
|
|
|
|
(344
|
)
|
9. SELLING, GENERAL AND ADMINISTRATION EXPENSES
|
|
For the three months ended
|
|
|
|
May 4,
|
|
|
May 5,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
|
(Restated - Note 3)
|
|
|
|
|
Wages, salaries and employee benefits
|
|
|
16,517
|
|
|
|
16,480
|
|
Depreciation of property and equipment
|
|
|
1,325
|
|
|
|
1,686
|
|
Amortization of intangible assets
|
|
|
399
|
|
|
|
182
|
|
Amortization right-of-use asset
|
|
|
3,102
|
|
|
|
—
|
|
Utilization of onerous contract
|
|
|
—
|
|
|
|
(1,340
|
)
|
Recovery of provision for onerous contracts
|
|
|
—
|
|
|
|
(176
|
)
|
Stock-based compensation
|
|
|
127
|
|
|
|
295
|
|
Strategic review and proxy contest
|
|
|
—
|
|
|
|
794
|
|
Other selling, general and administration
|
|
|
6,550
|
|
|
|
6,475
|
|
|
|
|
28,020
|
|
|
|
24,396
|
|
10. 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:
|
|
For the three months ended
|
|
|
|
May 4,
|
|
|
May 5,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
|
(Restated - Note 3)
|
|
|
|
|
Net loss for basic EPS
|
|
|
(3,320
|
)
|
|
|
(1,202
|
)
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and fully diluted
|
|
|
26,019,594
|
|
|
|
25,893,327
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and fully diluted
|
|
|
(0.13
|
)
|
|
|
(0.05
|
)
|
As a result of the net loss during the three-month periods ended May 4, 2019 and May 5, 2018, the stock options and restricted stock units disclosed in Note 7 are anti-dilutive.
11. 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-month period ended May 4, 2019, the Company purchased merchandise for resale amounting to $15 [May 5, 2018 - $64], and provided net infrastructure and administrative services of $18 [May 5, 2018 - $nil] from and to a company controlled by one of its executive employees, respectively.
In February 2019, the Company entered into an arrangement with a related party of the controlling shareholder for reporting and consulting services. Subsequent to quarter-end, the Company purchased the perpetual license rights to the reporting data model and associated intellectual property for $200. The Company also entered into a consulting services arrangement with a related party of the principal shareholder wherein nil charges were incurred.
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 million, amended on September 13, 2019 to reflect a maximum amount available under the facility of $2.0 million and a repayment date no later than December 31, 2019. As of November 2, 2019, $2.0 million was outstanding under the agreement. The loan bears interest, payable monthly, at a rate of 1% over Bank of Montreal’s prime rate, which currently stands at 3.95%. RDI has guaranteed all of Squish’s obligations to the Company and, as security in full for the guarantee, has given a movable hypothec (or lien) in favour of the Company on its shares of DAVIDsTEA. Squish is a company controlled by Sarah Segal, an officer of DAVIDsTEA. RDI, the principal shareholder of DAVIDsTEA, is controlled by Herschel Segal, Executive Chairman, Interim Chief Executive Officer and a director of DAVIDsTEA. 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.
12. SEGMENT INFORMATION
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The Company has reviewed its operations and determined that each of its retail stores represents an operating segment. However, because its retail stores have similar economic characteristics, sell similar products, have similar types of customers, and use similar distribution channels, the Company has determined that these operating segments can be aggregated at a geographic level. As a result, the Company has concluded that it has two reportable segments, Canada and the U.S., that derive their revenues from the retail and online sale of tea, tea accessories and food and beverages. The Company’s Chief Executive Officer (the chief operating decision maker or “CODM”) makes decisions about resources allocation and assesses performance at the country level, and for which discrete financial information is available.
The Company derives revenue from the following products:
|
|
For the three months ended
|
|
|
|
May 4,
|
|
|
May 5,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Tea
|
|
|
33,424
|
|
|
|
33,230
|
|
Tea accessories
|
|
|
7,655
|
|
|
|
8,714
|
|
Food and beverages
|
|
|
3,186
|
|
|
|
3,842
|
|
|
|
|
44,265
|
|
|
|
45,786
|
|
Property and equipment and intangible assets by country are as follows:
|
|
May 4,
|
|
|
February 2,
|
|
|
|
2019 (1)
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
|
|
(Restated - Note 3)
|
|
|
|
|
Canada
|
|
|
73,033
|
|
|
|
27,996
|
|
US
|
|
|
14,075
|
|
|
|
1,470
|
|
Total
|
|
|
87,108
|
|
|
|
29,466
|
|
_________
(1)
|
Includes Right-of-use assets of $45,589 in Canada and $12,619 in US.
|
Results from operating activities before corporate expenses per country are as follows:
|
|
For the three months ended May 4, 2019
|
|
|
|
(Restated - Note 3)
|
|
|
|
Canada
|
|
|
US
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Sales
|
|
|
34,190
|
|
|
|
10,075
|
|
|
|
44,265
|
|
Cost of sales
|
|
|
14,114
|
|
|
|
3,815
|
|
|
|
17,929
|
|
Gross profit
|
|
|
20,076
|
|
|
|
6,260
|
|
|
|
26,336
|
|
Selling, general and administration expenses (allocated)
|
|
|
14,876
|
|
|
|
4,815
|
|
|
|
19,691
|
|
Results from operating activities before corporate expenses
|
|
|
5,200
|
|
|
|
1,445
|
|
|
|
6,645
|
|
Selling, general and administration expenses (non-allocated)
|
|
|
|
|
|
|
|
|
|
|
8,329
|
|
Results from operating activities
|
|
|
|
|
|
|
|
|
|
|
(1,684
|
)
|
Finance costs
|
|
|
|
|
|
|
|
|
|
|
1,827
|
|
Finance income
|
|
|
|
|
|
|
|
|
|
|
(191
|
)
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
(3,320
|
)
|
|
|
For the three months ended
|
|
|
|
|
|
|
May 5, 2018
|
|
|
|
|
|
|
Canada
|
|
|
US
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Sales
|
|
|
36,532
|
|
|
|
9,254
|
|
|
|
45,786
|
|
Cost of sales
|
|
|
17,816
|
|
|
|
5,278
|
|
|
|
23,094
|
|
Gross profit
|
|
|
18,716
|
|
|
|
3,976
|
|
|
|
22,692
|
|
Selling, general and administration expenses (allocated)
|
|
|
13,384
|
|
|
|
4,158
|
|
|
|
17,542
|
|
Impact of onerous contracts
|
|
|
(192
|
)
|
|
|
(1,324
|
)
|
|
|
(1,516
|
)
|
Results from operating activities before corporate expenses
|
|
|
5,524
|
|
|
|
1,142
|
|
|
|
6,666
|
|
Selling, general and administration expenses (non-allocated)
|
|
|
|
|
|
|
|
|
|
|
8,370
|
|
Results from operating activities
|
|
|
|
|
|
|
|
|
|
|
(1,704
|
)
|
Finance costs
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Finance income
|
|
|
|
|
|
|
|
|
|
|
(237
|
)
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
(1,546
|
)
|
13. FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, liquidity and credit.
Currency Risk — Foreign Exchange Risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Given that some of its purchases are denominated in U.S. dollars, the Company is exposed to foreign exchange risk. The Company’s foreign exchange risk is largely limited to currency fluctuations between the Canadian and U.S. dollars. The Company is exposed to currency risk through its cash, accounts receivable and accounts payable denominated in U.S. dollars.
Assuming that all other variables remain constant, a revaluation of these monetary assets and liabilities due to a 5% rise or fall in the Canadian dollar against the U.S. dollar would have resulted in an increase or decrease to net loss in the amount of $6.
The Company’s foreign exchange exposure is as follows:
|
|
May 4,
|
|
|
February 2,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
US$
|
|
|
US$
|
|
Cash
|
|
|
810
|
|
|
267
|
|
Accounts receivable
|
|
|
736
|
|
|
1,142
|
|
Accounts payable
|
|
|
1,667
|
|
|
3,869
|
|
The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.
The Company had no foreign exchange contracts outstanding as at May 4, 2019.
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. The Company is exposed to cash flow risk under the Revolving Facility which bears interest at variable interest rates (Note 6). As at May 4, 2019, 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 May 4, 2019, the Company had $35,491 in cash. In addition, the Company has a Revolving Facility of $15,000, the full amount of which remained un-drawn as at May 4, 2019. Access to this Facility is further described in Note 6.
The Company expects to finance its working capital needs, store renovations, and investments in infrastructure through cash flows from operations 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. 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, based on the guidance provided in IFRS 9 . 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 are no outstanding derivative financial instruments at May 4, 2019.
There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the three-month periods ended May 4, 2019 and May 5, 2018.