Form 10-Q DAVIDsTEA Inc. For: Oct 28

 

 

 

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 October 28, 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)

 

 

 

 

 

5430 Ferrier

Mount-Royal, Québec, Canada, H4P 1M2

(Address of principal executive offices) (zip code)

 

(888) 873-0006

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.

 

 

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

 

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

 

As of December 6, 2017,  25,844,615 common shares of the registrant were outstanding.

 

 

 

 

DAVIDsTEA Inc.

 

TABLE OF CONTENTS

 

 

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

 

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

 

On December  1, 2017, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = $1.2705.

 

 

 

Part I. FINANCIAL INFORMATION

 

Item 1.    Consolidated Financial Statements

 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED BALANCE SHEETS

 

[Unaudited and in thousands of Canadian dollars]

 

 

See accompanying notes

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)

 

AND COMPREHENSIVE INCOME (LOSS)

 

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

 

 

See accompanying notes

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

[Unaudited and in thousands of Canadian dollars]

 

 

See accompanying notes

 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

 

[Unaudited and in thousands of Canadian dollars]

 

 

See accompanying notes

 

DAVIDsTEA Inc.

 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

For the three and nine-month periods ended October 28, 2017 and October 29, 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 nine-month periods ended October 28, 2017 were authorized for issue in accordance with a resolution of the Board of Directors on December 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 nine-month period ended October 28, 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 historical
redemption 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 nine months ended October 28, 2017 include breakage income of  $100 and  $485, respectively  [$850 for the three and nine months ended October 29, 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”, for which the final version was issued in July 2014 by the IASB, 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. 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 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 expects that the implementation of IFRS 15 will impact the allocation of revenue that is deferred in relation to its customer loyalty award programs. Revenue is currently allocated to the customer loyalty awards using the residual fair value method. Under IFRS 15, consideration will be allocated between the loyalty program awards and the goods on which the awards were earned, based on their relative stand-alone selling prices. The Company is currently assessing the impact of this change on its consolidated financial statements. 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 and
estimated 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.

 

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

- 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 Company is in the process of evaluating the impact of adopting the interpretation of IFRIC 23 on its consolidated financial statements.

 

 

4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

 

The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.

 

In preparing these unaudited condensed interim consolidated financial statements, critical judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in note 5 of the consolidated financial statements for the year ended January 28, 2017, other than as those disclosed in note 6.

 

5. INVENTORIES

 

 

 

6. PROPERTY AND EQUIPMENT

 

For the three and nine months ended October 28, 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 nine month periods ended October 28, 2017 an impairment loss of $2,658 and $5,837, respectively,  [$2,516 for the three and nine month periods ended October 29, 2016] related to store leasehold improvements, furniture and equipment, and computer hardware was recognized in the Canadian and U.S segments.  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 $635 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 nine months ended October 28, 2017, nil and $866, respectively, of impairment losses were reversed  following a change in the expected future cash flows of certain CGUs in the U.S. segment  [October 29, 2016 – nil and nil]. Value in use of  $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 did 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 October 28, 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 October 28, 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 nil and $163 or a decrease of nil and $113 in the net impairment loss for the three and nine month periods ended October 28, 2017, respectively. 

 

7. 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 nine-month period ended October 28, 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 $2,031.

 

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 October 28, 2017,  the Company is in compliance with these covenants.

 

As at October 28, 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

 

 

In June 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 nine-month periods ended October 28, 2017, 24,000 and 436,773 stock options, respectively, were exercised for common shares for cash proceeds of $90 and $1,696  [October 29, 2016 —  273,078 and 949,649 stock options for cash proceeds of  $962 and $1,806]. The carrying value of common shares during the three and nine-month periods ended October 28, 2017 includes $22 and $850, respectively [October 29, 2016 — $595 and $899], which corresponds to a reduction in contributed surplus associated to options exercised during the period.

 

In addition, during the three and nine-month periods ended October 28,  2017, 19,819 and 75,820 common shares, respectively, [October 29, 2016 – 2,043 and 32,441 common shares] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $208 and $912, net of tax, respectively  [October 29, 2016 – $25 and $239] and a reduction in contributed surplus of $433  and $1,652  [October 29, 2016 —  $53 and $470].

 

 

Stock-based compensation

 

As at October 28, 2017,  664,479 common shares remain available for issuance under the 2015 Omnibus Plan.

 

The weighted average fair value of options granted of $2.39 for the nine-month period ended October 28, 2017 [for the nine-month period ended October 29, 2016 — $3.72] was estimated using the Black Scholes option pricing model, using the following assumptions:

 

 

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

 

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

 

 

The weighted average share price at the date of exercise for stock options exercised during the nine-month period ended October 28, 2017 was $8.68  [October 29, 2016 — $15.64].

 

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

 

During the three and nine-month periods ended October 28, 2017, the Company recognized a stock-based compensation expense of $362 and $1,738, respectively [October 29, 2016 — $643 and $1,573].

 

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:

 

 

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

 

 

 

11. SELLING, GENERAL AND ADMINISTRATION EXPENSES

 

 

 

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.