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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 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)
Canada
(State or other jurisdiction of
incorporation or organization)
98-1048842
(I.R.S. Employer
Identification Number)
5430 Ferrier
Mount-Royal, Québec, Canada, H4P 1M2
(Address of principal executive offices)
(888) 873-0006
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common shares,
no par value per share
Name of Each Exchange on Which
Registered
NASDAQ Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
(cid:0)
(cid:0)
Accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
☑
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act). Yes ☐ No ☑
As of July 30, 2016, the last business day of our most recently completed second fiscal quarter, the aggregate market value of the registrant’s Common Shares held by non-
affiliates was US$160,772,848.
As of April 11, 2017, 25,455,510 common shares of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: N/A
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EXPLANATORY NOTE
DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign
private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private
issuer, the Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the
United States Securities and Exchange Commission (“SEC”) instead of filing on the reporting forms available to foreign private issuers, although
the Company is not required to do so. We are permitted to file our audited consolidated financial statements with the SEC under International
Financial Reporting Standards (“IFRS”), without a reconciliation to U.S. generally accepted accounting principles (“GAAP”). As a result, we do
not prepare a reconciliation of our results to U.S. GAAP. It is possible that certain of our accounting policies could be different from U.S. GAAP.
The Company prepares and files a management proxy circular and related material under Canadian requirements. As the Company’s
management proxy circular is not filed pursuant to Regulation 14A, the Company may not incorporate by reference information required by Part
III of this Form 10-K from its management proxy circular.
In this annual report on Form 10-K, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,”
“C$,” “CAD”, “CND$”, “CDN$,” “CDN,” “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,” “US$”
and “USD” mean U.S. dollars.
All references to our website contained herein do not constitute incorporation by reference of information contained on such websites
and such information should not be considered part of this document.
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PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK HOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM
OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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Exchange Rate Data
PART 1
The following table sets forth, for the periods indicated, the high and low exchange rates between the Canadian dollar and the U.S. dollar
expressed in the Canadian dollar equivalent of one U.S. dollar, and the average exchange rate for the periods indicated. Averages for year-end
periods are calculated by using the exchange rates on the last day of each full month during the relevant period and the last available exchange
rate in January during the relevant fiscal year. These rates are based on the noon buying rate certified for customs purposes by the U.S. Federal
Reserve Bank of New York set forth in the H.10 statistical release of the Federal Reserve Board.
On April 7, 2017, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 =
$1.3396.
Year Ended
January 28, 2012
January 26, 2013
January 25, 2014
January 31, 2015
January 30, 2016
January 28, 2017
Period End Rate
$1.00
$1.01
$1.11
$1.27
$1.41
$1.31
Period Average Rate
$0.99
$1.00
$1.04
$1.11
$1.30
$1.32
High Rate
$0.94
$0.97
$1.00
$1.06
$1.46
$1.40
Low Rate
$1.06
$1.04
$1.11
$1.27
$1.20
$1.25
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or
projections regarding future events or future results and there are, or may be deemed to be, “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions
of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can
generally be identified by the use of forward-looking terminology, including the terms “believes,” “expects,” “may,” “will,” “should,” “could,”
“seeks,” “projects,” “approximately,” “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 Annual 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, competitive strengths and differentiators, growth
strategy and opportunities for expansion, long-term Adjusted EBITDA margin potential, dividend policy, impact of the macroeconomic
environment, properties, outcome of litigation and legal proceedings, use of cash and operating and capital expenditures, impact of new
accounting pronouncements, impact of improvements to internal control and financial reporting.
While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are
inherently subject to risks, uncertainties and assumptions about us, including the risk factors listed under Item 1A. Risk Factors, as well as other
cautionary language in this Form 10-K.
Actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited
to, the following:
· Our ability to successfully implement our growth strategy;
· Our limited operating experience and limited brand recognition in the United States;
· Significant competition within our industry;
· Our ability to generate sufficient cash flow to meet our growth expectations;
· The possibility that our expanded store base may not be as profitable as our existing store base;
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· The effect of a decrease in customer traffic to the shopping malls, centers and street locations where our stores are located;
· Our ability to attract and retain employees that embody our culture, including Tea Guides and store and district managers and regional
directors;
· Changes in consumer preferences and economic conditions affecting disposable income;
· Our ability to source, develop and market new varieties of teas, tea accessories and food and beverages;
· Our reliance upon the continued retention of key personnel;
· The impact from real or perceived quality or safety issues with our teas, tea accessories and food and beverages;
· Our ability to obtain quality products from third-party manufacturers and suppliers on a timely basis or in sufficient quantities;
· The impact of weather conditions, natural disasters and manmade disasters on the supply and price of tea;
· Actual or attempted breaches of data security;
· The impact of a regional, national or global health epidemic;
· The costs of protecting and enforcing our intellectual property rights and defending against intellectual property claims brought by
others;
· Fluctuations in exchange rates; and
· The seasonality of our business.
All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. We will not undertake and
specifically decline any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report on Form
10-K might not occur.
Forward-looking statements speak only as of the date of this Form 10-K. 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-K, 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-K 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.
ITEM 1. BUSINESS
DAVIDsTEA is a corporation incorporated under the Canada Business Corporation Act and domiciled in Canada. DAVIDsTEA’s
common shares trade on the NASDAQ Global Market under the symbol “DTEA”. Unless the context otherwise requires, the terms “we,” “our,”
“us,” “DAVIDsTEA” and the “Company” refer to DAVIDsTEA Inc. and its subsidiary. All references to “Fiscal 2014” are to the Company’s
fiscal year ended January 31, 2015. All references to “Fiscal 2015” are to the Company’s fiscal year ended January 30, 2016. All references to
“Fiscal 2016” are to the Company’s fiscal year ended January 28, 2017. The
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Company’s fiscal year ends on the last Saturday in January. The year ended January 31, 2015 covers a 53-week fiscal period. The years ended
January 30, 2016 and January 28, 2017 cover a 52-week period.
2016 Company Highlights
· Our sales grew to $216.0 million in Fiscal 2016 from $180.7 million in Fiscal 2015, representing a 19.5% growth in sales.
· We opened 38 net new stores this year, opening 25 in Canada and 13 net in the US, for a total of 231 company-operated stores as at
January 28, 2017.
Our Company
DAVIDsTEA is a growing branded retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged
teas, tea sachets and tea-related gifts, accessories, food and beverages primarily through 231 company-operated DAVIDsTEA stores as of January
28, 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. Our passion for and knowledge of tea permeates our culture and is rooted in an
excitement to explore the taste, health and lifestyle elements of tea.
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. We design our stores with a modern and simple aesthetic
that, coupled with our teal‑colored logo, create an inviting atmosphere and stand in stark contrast to common perceptions of tea as a more
traditional product. Our in‑store “Tea Guides” help novice and experienced tea drinkers alike select from the approximately 150 premium teas and
tea blends featured on our “Tea Wall,” which is the focal point of our stores. We replicate our store experience online by engaging users with rich
content that allows them to easily explore their options amongst our many tea and tea‑related offerings.
We sell a majority of our products primarily through our company-operated retail stores and e-commerce site, giving us control of the
presentation of our brand as well as greater interaction with the customer, which increases our pace of innovation. We have a dedicated and highly
experienced product development team that is constantly creating new tea blends using high‑quality ingredients from around the world. We bring
newness and capitalize on our product development capabilities with approximately 75 new tea blends each year that we rotate into our offering
on a continuous basis. We also focus on product innovation in our pre-packaged teas, tea sachets and tea-related gifts, accessories and food and
beverages, providing our customers with fun, inventive and more convenient ways to enjoy tea. We believe that our product development
platform and level of innovation have helped us earn a strong and loyal customer following that is passionate about DAVIDsTEA.
The strong performance of our stores across geographies demonstrates the appeal of our brand and underscores our growth opportunity.
Given our retail store base, our e-commerce site and the appeal of our brand, we believe we are well positioned to take advantage of the
significant growth opportunity across North America. Consistent with our stores, davidstea.com features our innovative products while offering
expertise, community and numerous tools to aid the discovery and exploration of tea. During Fiscal 2016, approximately 66% of our revenue was
driven by the sale of loose‑leaf teas, pre-packaged teas, tea sachets and tea‑related gifts that consumers enjoy at home, on‑the‑go or at work. The
balance of our revenue was driven by tea accessories, 25%, and food and beverages, 9%. See Note 23 to our consolidated financial statements for
information regarding our revenues by product category for each of the past three fiscal years as well as information about our geographic
operating segments.
We believe our business model is based on innovation, quality and the customer experience. These attributes have resulted in strong
financial results, as evidenced by the following:
· Thirty consecutive quarters of positive comparable sales growth through the end of Fiscal 2016.
· Our comparable store sales increased by 2.2% in Fiscal 2016, 6.6% in Fiscal 2015 and 11.1% in Fiscal 2014.
· The growth of our store base from 70 stores in Fiscal 2011 to 231 stores in Fiscal 2016, representing a 27% compound annual growth
rate. As of January 28, 2017, we had a net total of 38 more stores than as at January 30, 2016.
· An increase in sales from $41.9 million in Fiscal 2011 to $216.0 million in Fiscal 2016. Sales in Fiscal 2016 were approximately 19.5%
higher than in Fiscal 2015.
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Our Market and Competition
We participate in the large and growing global tea market which, combined with the relatively low percentage of tea sales in North
America, make our market opportunity highly attractive.
The Canadian and U.S. tea markets are highly fragmented. We compete with a large number of relatively small independently owned tea
retailers and a number of regional and national tea retailers, as well as retailers of grocery products, including loose‑leaf teas, tea sachets and tea-
related beverages. We also compete with other vendors of loose‑leaf teas, tea sachets and ready‑to‑drink teas, such as club stores, wholesalers and
Internet suppliers, as well as with houseware retailers and suppliers that offer teawares and related accessories. As we continue to expand
geographically, we expect to encounter additional regional and local competitors.
We believe we differentiate ourselves from our competitors on the basis of our distinct retail experience, the broad demographic appeal
of our brand, innovative tea products, the effectiveness of our grassroots marketing strategy, our versatile store economics and our passionate
customer-focused culture supported by our experienced management team and dedicated board members.
We believe that our brand, passion for tea and breadth of offering encourage our customers to view tea as fresh and fun. The clean,
modern aesthetic of our retail concept communicates the newness and innovation behind our brand. The DAVIDsTEA retail experience is led by
our Tea Guides, who share our knowledge of tea through a highly interactive and immersive customer experience of sampling and educating.
They show our customers that tea is easy to prepare, comes in a variety of great flavors and is suitable for multiple occasions. It is this customer
interaction combined with the high‑quality teas that has allowed us to develop strong customer loyalty.
We believe that our fresh approach to tea gives us a broad, multi‑generational appeal and, coupled with several key consumer trends such
as health and wellness will help support our long‑term growth. We focus on constant innovation to improve the taste and presentation of our
existing teas and tea blends while creating new offerings that delight our customers. We seek to develop creative tea-related gifts and accessories
that are innovative and make steeping tea easy at home or on‑the‑go. We believe that our focus on innovation and design keeps existing customers
engaged while also attracting new customers to our brand.
We believe our field‑based marketing and social media approach build brand awareness and drive customers to our stores and our e-
commerce site. One aspect of this effort is our events sponsorship group, which we believe is a differentiated capability that allows us to create
excitement for our brand by engaging directly in the communities around our stores and drive store visits by offering product.
We believe there is an attractive, long-term growth opportunity for our store base in North America. Our sales are currently substantially
derived from sales in Canada, which accounted for 84%, 86%, and 91% of net sales in Fiscal 2016, Fiscal 2015 and Fiscal 2014. We generated
16%, 14%, and 9% of our net sales in the United States in Fiscal 2016, Fiscal 2015 and Fiscal 2014.
We will continue to expand our customer base and build our brand visibility and awareness, in part, through further development of our
omni-channel strategy in North America, with a focus on the alterantive sales channel. We believe that we have substantial room to grow our
alternative sales channel, by offering our products to hotels, restaurants and institutions, office and workplace locations and food services, as well
as through corporate gifting and other areas.
Our Stores
Our Stores and Operations
As of January 28, 2017, our retail footprint consisted of 181 stores in Canada and 50 stores in the United States. Our retail stores are
located primarily within malls, including lifestyle centers and outlets, and on street locations. Each store exterior prominently displays the
DAVIDsTEA teal signage. In Fiscal 2016, our average store was approximately 900 square feet. We have rapidly pursued new store growth,
having significantly increased our store base from one store in Fiscal 2008 to 231 stores as of January 28, 2017. See Note 23 to our consolidated
financial statements for information regarding our long-lived assets in Canada and the US.
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Distinctive Retail Experience
The DAVIDsTEA experience starts with our people both in stores, our Tea Guides, and at our service support center. Our people’s
knowledge and passion permeate our culture and are rooted in a deep knowledge of, and desire to share, the compelling attributes of tea. Our
modern and simple-aesthetic stores, coupled with our teal‑colored logo, create an inviting atmosphere and stand in stark contrast to common
perceptions of tea as a more traditional product. A key element of the retail experience is our “Tea Wall,” a focal point of the store, which displays
approximately 150 premium teas and tea blends. Our Tea Guides help create a highly interactive and immersive customer experience and we
strive to make tea a multi‑sensory experience. Indeed, they facilitate the 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. Every visit to our stores is designed to create a sense of
adventure for our customers, from novice and experienced tea drinkers alike, as our knowledgeable, personable and passionate Tea Guides assist
our customers in navigating the “Tea Wall” by selecting a variety of teas for customers to smell based on their taste preferences.
Site Selection and New Store Model
We seek to open stores in strategic locations that support the brand image, targeting high customer traffic locations primarily within
malls, including lifestyle centers and outlets, and on street locations. We employ a rigorous analytical process to identify new store locations. For
every store location selected, our real estate team prepares a detailed financial plan, which is evaluated by our President and Chief Executive
Officer, our Chief Financial Officer and members of our board. Our real estate team, led by our Head of Global Real Estate and Store
Development, spends considerable time evaluating prospective sites. We also actively monitor and manage the performance of our stores and seek
to incorporate information learned through the monitoring process into our analytic process and future site selection decisions.
Store Management, Culture and Training
We are guided by a philosophy that recognizes customer service and the importance of delivering optimal performance, allowing us to
identify and reward teams that meet our high performance standards. We use store-level scorecards that report key performance indicators. We
provide our store managers with a number of analytical tools to support our store operations and assist them in attaining optimum store
performance. These tools include key performance indicator reports, coaching logs for one‑on‑one meetings, weekly one‑on‑one meetings
between our store managers and district managers and annual evaluations. While our focus is on the overall performance of the team and our
stores, we provide incentives to team members, store managers and district managers.
We have developed a distinctive culture that inspires in our team members a passion for tea. Our culture is also focused on customer
service through comprehensive training, career development and individual enrichment. We believe our culture allows us to attract
knowledgeable, passionate, fun and motivated team members who are driven to succeed.
· Passion for Tea. We believe our passionate and fun Tea Guides are a major element of our retail experience. We seek to recruit, hire,
train, retain and promote qualified, knowledgeable and enthusiastic team members who share our passion for tea and strive to deliver an
extraordinary retail experience to our customers.
· Extensive Training. We have specific training and certification requirements for all new team members, including undergoing food
handlers’ certification and fifteen hours of foundational training. This process helps ensure that all team members educate our
customers and execute our standards accurately and consistently. As team members progress to the assistant manager and manager
levels, they undergo additional weeks of training in sales, operations and management.
· Career Development and Individual Enrichment. We track and reward team member performance, which we believe incentivizes
excellence and helps us identify top performers and thus maintain a sufficient talent pool to support our growth. Many of our store
managers and district managers are promoted from within our organization. We are guided by a philosophy that recognizes
performance, allowing us to identify and reward teams who meet our high performance standards.
Our core values and distinctive corporate culture allow us to attract passionate and friendly employees who share a vision of making tea
fun and accessible. We have a strong focus on community engagement, and our culture reflects our belief in doing right by our customers and our
communities. We provide our employees with extensive training, career development, individual enrichment, and empowerment, which we
believe is a key contributor for our success. In addition, the strength of our management team is supported by our dedicated board of directors that
works closely with our executives in initiatives related to developing corporate
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strategy, building our corporate culture and enhancing our sales and operations infrastructure. Our board of directors and management team’s
experience is balanced between entrepreneurial growth and large-scale operations.
Our Digital Platform
Our digital platform is primarily comprised of our website, www.davidstea.com. We launched our website just prior to opening our first
store. Our e‑commerce sales represented 10.6% of sales for Fiscal 2016, compared to 9.4% and 7.9% of sales for Fiscal 2015 and Fiscal 2014,
respectively.
Our website features our full assortment of premium loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories and
food. To drive increased sales through our digital platform, we utilize online‑specific marketing and promotions. In addition, we employ banner
advertisements, search engine optimization and pay‑per‑click arrangements to help drive customer traffic to our website.
Through our e-commerce platform, we can target a broader audience of customers who may not live near one of our retail locations. We
believe our digital platform and our stores are complementary, as our digital platform provides our store customers an additional channel through
which to purchase our teas and tea‑related products while also helping drive awareness of and customer traffic to our stores.
Our digital platform also includes our social media platform on Facebook, Instagram, Twitter, Google+, Pinterest, LinkedIn,
YouTube, Snapchat and Yelp. We will continue to leverage our growing social media presence to increase our e‑commerce site sales
and drive additional store visits within existing and new markets.
Our Product Categories
We offer approximately 150 premium loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories and food primarily
through our retail stores and e-commerce site. Additionally, we offer on‑the‑go tea beverages in our retail stores.
Teas
Our loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts that consumers can enjoy at home, on‑the‑go or at work,
represented 66% of our sales in Fiscal 2016, 66% in Fiscal 2015 and 68% in Fiscal 2014. Our different flavors of loose-leaf tea span eight
different tea categories: white, green, oolong, black, pu’erh, mate, rooibos and herbal tea. Furthermore, approximately 80% of our teas are
blended with other ingredients while approximately 20% are straight teas. Our teas and ingredients used in our tea blends are sourced from
various regions around the world, including but not limited to, China, South Korea, Japan, Taiwan, Vietnam, India, Nepal, Kenya, Sri Lanka and
South Africa. In addition to loose‑leaf teas, we sell pre‑packaged teas and tea sachets to make the tea experience more convenient for some
customers. Our tea-related gifts include special edition holiday gift packages.
Tea Accessories
Our tea accessories, representing 25% of our sales in Fiscal 2016, 24% in Fiscal 2015 and 22% in Fiscal 2014, are created to make the
tea preparation process and tea experience more convenient and fun and easy at home or on-the-go for customers. Tea accessories include tea
mugs, travel mugs, teacup sets, teapots, tea makers, kettles, infusers, filters, frothers, tins and spoons. Many of our accessories are crafted with
unique features to improve tea preparation and consumption. Most of our accessories are crafted with unique colors and designs.
Food and Beverages
Our retail stores offer tea beverages for on‑the‑go consumption and our retail stores and e-commerce site offer food products, which
together represented 9% of our sales in Fiscal 2016 and 10% in Fiscal 2015 and Fiscal 2014. Our beverages range from the standard hot or iced
tea to our Tea Lattes.
Product Development and Design
Our tea and merchandising teams travel throughout the world seeking premium teas and tea-related products. These teams consist of Tea
Blend Developers, Product Designers, Category Merchants and Quality Control Personnel, who leverage our extensive experience in selecting
and developing our product assortment. We are constantly exploring different ingredients, flavors and trends
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that are popular in a variety of cultures from which we introduce new teas to our customers. Our research and development team works with our
blenders and suppliers to create new and exciting flavors of tea, which we rotate into our product offering to attract new customers and keep
current customers coming back. Our blending process is very focused on magnifying the senses and bringing smell and taste to the forefront. We
introduce new flavors and blends each month as well as around seasonal holidays. We believe our focus on innovation and product development
is a key differentiating factor for our brand that drives our customer’s loyalty.
Our innovation also extends to creating new and exciting merchandise to make the tea consumption and experience more convenient and
easy at home or on-the-go. We have a competitive advantage in that our merchandising team designs and develops most of our products in‑house.
Therefore, we are better positioned to create unique and proprietary designs to make consuming loose‑leaf tea easier and more fun for our
customers. We believe our combination of product selection and product innovation allows us to offer customers a distinctive assortment that
differentiates us from other specialty tea retailers.
Marketing and Advertising
We differentiate our business through a unique field‑based marketing approach to build brand awareness and drive customers to our
stores and e‑commerce site in both new and existing markets. We customize our marketing mix for each of our markets and purposes through our
events sponsorship group. Our events sponsorship group engages directly in the communities around our stores and drives store visits by offering
product samplings and beverage coupons, and by participating in both hyper‑local and large‑scale events. These events are identified and
coordinated by our local store managers and Tea Guides with support from our dedicated corporate events team.
Sourcing and Manufacturing
We do not own or operate any tea estates or blending operations; instead, we work with vendors who source ingredients for our teas and
tea blends from all over the world. The majority of our tea blenders are in either Germany or the United States. We have a flexible and scalable
supply chain system. Most of our pre‑packaged teas are primarily assembled in our Montréal warehouse and then shipped to our retail stores.
Since we founded the Company in 2008, we have developed strong relationships with our vendors. These relationships are important as we
depend on our vendors to provide us with the highest quality teas and ingredients from around the world. We have a process of quality control,
which includes in-house testing and vendor testing. In addition to bringing our designs for tea blends to fruition, our vendors are important to the
quality control process and ensuring our teas meet applicable regulatory guidelines.
Warehouse and Distribution Facilities
We distribute our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories and food to our stores and our
e‑commerce customers from distribution centers in Montréal, Quebec, Sherbrooke, Quebec, Calgary, Alberta and Champlain, New York. In
Canada, our third-party Sherbrooke warehouse ships to our Canadian e‑commerce customers and our Montreal warehouse ships to Eastern
Canada stores, while our third‑party distribution centers in Calgary ships to Western Canada. Our Champlain, New York distribution center ships
to all our U.S. stores and began shipping directly to our U.S. ecommerce customers during Fiscal 2015. We operate the distribution facility in
Montréal, which is leased. Third parties operate the facilities in Calgary and Champlain, New York. Our products are typically shipped to our
stores and our e‑commerce customers via a third‑party national transportation provider multiple times per week.
Our management information systems provide a full range of business process supports to our stores, our store operations and service
support center teams. Additionally, we operate our e‑commerce site on an independent platform. We believe our information systems provide us
with enhanced operational efficiencies, scalability, increased management control and timely reporting that allow us to identify and respond to
trends in our business. We utilize a combination of industry‑standard and customized software systems to provide various functions related to:
Management Information Systems
·
·
point of sales;
inventory management;
· warehouse management, and;
·
accounting and financial reporting.
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Government Regulation
We are subject to labor and employment laws, import and trade restrictions laws, laws governing advertising, privacy and data security
laws, safety regulations and other laws, including consumer protection regulations that apply to retailers and/or the promotion and sale of
merchandise and the operation of stores and warehouse facilities. In the United States, we are subject to the regulatory authority of, among other
agencies, the Federal Trade Commission (“FTC”) and U.S. Food and Drug Administration (“FDA”). We are also subject to the laws of Canada,
including the Canadian Food Inspection Agency, as well as provincial and local regulations. We monitor changes in these laws and believe that
we are in material compliance with applicable laws.
We maintain third-party insurance for a number of risk management activities including but not limited to a worker’s compensation,
general liability, property, directors and officers, cyber insurance and employee-related health care benefits. We evaluate our insurance
requirements on an ongoing basis to ensure we maintain adequate levels of coverage.
Trademarks and Other Intellectual Property
Insurance
We regard intellectual property and other proprietary rights as important to our success. We own several trademarks and servicemarks
that have been registered with the Canadian Intellectual Property Office and the U.S. Patent and Trademark Office, including DAVIDsTEA . We
have also registered our stylized logos. We also own domain names, including davidstea.com. In addition, we have registered or made application
to register one or more of our marks in a number of foreign countries and expect to continue to do so in the future. There can be no assurance that
we can obtain the registration for the marks in every country where registration has been sought.
®
We also rely upon trade secrets and know‑how to develop and maintain our competitive position. We protect our intellectual property
rights through a variety of methods including trademark and trade secret laws, as well as confidentiality agreements with vendors, employees,
consultants and others who have access to our proprietary information.
We must constantly protect against any infringement by competitors. If a competitor infringes on our trademark rights, we may take
action to protect our rights, which could result in litigation, in which case, we may incur significant expenses and divert significant attention from
our business operations.
Employees
As of the end of Fiscal 2016, we had 3,059 employees. As of January 28, 2017, we employed a total of 477 full‑time employees and
2,582 part‑time employees, with 470 in the United States and 2,589 in Canada. Of all those employees, 2,822 were employed in our retail channel
and 237 were employed in corporate, distribution and direct channel support functions. None of our employees is represented by a labor union.
We believe we have a good relationship with our employees.
Seasonality
Our business experiences seasonal fluctuations, reflecting increased sales during the year-end holiday season. Our sales and income are
generally highest in the fourth quarter, which includes the year-end holiday sales period, and tends to be lowest in the second and third fiscal
quarters. Therefore, operating results for any fiscal quarter are not necessarily indicative of results for the full fiscal year. To prepare for the year-
end holiday season, we must order and keep in inventory more merchandise than we carry during other parts of the year. We expect inventory
levels, along with an increase in accounts payable and accrued expenses, to reach their highest levels in the third and fourth quarters in
anticipation of the increased net sales during the year-end holiday season. As a result of this seasonality, and generally because of variations in
consumer spending habits, we experience fluctuations in net sales, net income and working capital requirements during the year.
Corporate Information
DAVIDsTEA Inc. was incorporated under the Canada Business Corporations Act, or the CBCA, on April 29, 2008 and our principal
executive offices are located at 5430 Ferrier Street, Mount‑Royal, Québec, Canada, H4P 1M2. Our office in the United States is located at 400
Fifth Avenue, Suite 350, Waltham, Massachusetts, 02451. Our telephone number at our principal executive offices is (888) 873‑0006. Our website
address is www.davidstea.com.
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DAVIDsTEA Inc. owns a 100% equity interest in its sole subsidiary, DAVIDsTEA (USA) Inc., a corporation organized under the laws of
Delaware.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments to these
reports are filed with the Securities and Exchange Commission (the “SEC”) and the Autorité des Marchés Financiers (the “AMF”). We are subject
to the informational requirements of the Exchange Act and Securities Act, and file or furnish reports, proxy statements and other information with
the SEC and/or the AMF, as required by applicable law.
Available Information
For more information about us, visit our website www.davidstea.com. The contents of our website are not part of this Annual Report on
Form 10-K. Our electronic filings with the SEC and the AMF (including all annual reports on Form 10-K, quarterly reports on Form 10-Q, and
current reports on Form 8-K, and any amendments to these reports), including the exhibits, are available, free of charge, through our website as
soon as reasonably practicable after we electronically file them with the SEC and the AMF.
ITEM 1A. RISK FACTORS
You should carefully consider the risks and uncertainties described below together with all of the other information contained in this
Annual Report on Form 10-K and in our other public disclosures. If any of the following risks actually occurs, our business, prospects, operating
results and financial condition could suffer materially, the trading price of our common shares could decline and you could lose all or part of your
investment. Although we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional
risks and uncertainties that are not presently known to us or that are currently deemed immaterial that may adversely affect our business and
financial condition.
Risks Related to Our Business and Our Industry
We may not be able to successfully implement our growth strategy on a timely basis or at all, which could harm our results of operations.
Our continued growth depends, in large part, on our ability to open new stores and to operate those stores successfully. We believe there
is a significant opportunity to expand our store base in Canada and in the United States from 181 locations in Canada and 50 locations in the
United States as of January 28, 2017 to potentially add up to a total of 230 stores in Canada and up to a total of 325 stores in the United States,
based on management estimates. In fiscal 2017, we expect to open approximately 10-15 stores in Canada and approximately 5 stores in the
United States. Our U.S. growth depends, in part, on increasing consumer awareness and consumption of tea in the United States, as well as
successfully expanding our operating experience in Canada to the United States.
Our ability to successfully open and operate new stores depends on many factors, including:
· our ability to increase brand awareness in the United States and to increase tea consumption in areas where we open stores;
· the identification and availability of suitable sites for store locations, the availability of which is beyond our control;
·
the negotiation of acceptable lease terms;
· the maintenance of adequate distribution capacity, information systems and other operational system capabilities;
· integrating new stores into our existing buying, distribution and other support operations;
· the hiring, training and retention of store management and other qualified personnel;
· assimilating new store employees into our corporate culture;
·
increased competitive activity;
· the effective sourcing and management of inventory to meet the needs of our stores on a timely basis; and
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· the availability of sufficient levels of cash flow and financing to support our expansion.
Unavailability of attractive store locations, delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in
commercial development due to capital constraints, difficulties in staffing and operating new store locations or lack of customer acceptance of
stores in new market areas may negatively impact our new store growth and the costs or the profitability associated with new stores.
Additionally, some of our new stores may be located in areas where we have little experience or a lack of brand recognition, particularly
in the United States. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending
patterns than our existing markets, which may cause these new stores to be less successful than stores in our existing markets. Other new stores
may be located in areas where we have existing stores. Although we have experience in these markets, increasing the number of locations in these
markets may result in inadvertent over‑saturation of markets and temporarily or permanently divert customers and sales from our existing stores,
thereby adversely affecting our overall financial performance.
Accordingly, we may not achieve our planned growth and, even if we are able to grow our store base as planned, new stores may not
perform as planned. If we fail to successfully implement our growth strategy, we will not be able to sustain the rapid growth in sales and profits
that we expect, which would likely have an adverse impact on the price of our common shares.
Our business largely depends on a strong brand image, and if we are unable to maintain and enhance our brand image, particularly in new
markets where we have limited brand recognition, we may be unable to increase or maintain our level of sales.
We believe that our brand image and brand awareness have contributed significantly to the success of our business. We also believe that
maintaining and enhancing our brand image, particularly in newer markets, such as the United States, where we have limited brand recognition, is
important to maintaining and expanding our customer base. Our ability to successfully integrate new stores into their surrounding communities, to
expand into new markets or to maintain the strength and distinctiveness of our brand in our existing markets will be adversely impacted if we fail
to connect with our target customers. Maintaining and enhancing our brand image may require us to make substantial investments in areas such as
merchandising, marketing, store operations, community relations, store graphics and employee training, which could adversely affect our cash
flow and which may ultimately be unsuccessful. Furthermore, our brand image could be jeopardized if we fail to maintain high standards for
merchandise quality, if we fail to comply with local laws and regulations or if we experience negative publicity or other negative events that affect
our image and reputation. Some of these risks may be beyond our ability to control, such as the effects of negative publicity regarding our
suppliers. Failure to successfully market and maintain our brand image in new and existing markets could harm our business, results of operations
and financial condition.
The retail industry in the United States and Canada has changed rapidly. If we are unable to adapt our business to these changes successfully,
our results of operations may suffer.
In recent years, the retail industry has experienced consolidation and other ownership changes. In the future, retailers in the United States
and foreign markets may further consolidate, undergo restructurings or reorganizations, or realign their affiliations, any of which could decrease
the number of stores that carry our products or increase the ownership concentration within the retail industry. Also, online retail shopping is
rapidly evolving, and we expect competition in the e-commerce market will intensify. As a greater portion of consumer expenditures with retailers
occurs online and through mobile commerce applications, our brick-and-mortar retail customers who fail to successfully integrate their physical
retail stores and digital retail may experience financial difficulties, including store closures, bankruptcies or liquidations. This could, in turn,
substantially increase our credit risk and have a material adverse effect on our results of operations, financial condition and cash flows. Our future
success will be determined, in part, on our ability to identify and capitalize on retail trends, including technology, e-commerce and other process
efficiencies that will better service our customers. If we fail to compete successfully, our businesses, market share, results of operations and
financial condition will be materially and adversely affected. While such changes in the retail industry to date have not had a material adverse
effect on our business or financial condition, results of operations and liquidity, there can be no assurance as to the future effect of any such
changes.
Our limited operating experience and limited brand recognition in the United States may limit our expansion strategy and cause our business
and growth to suffer.
Our future growth depends, to a considerable extent, on our expansion efforts outside of Canada into the United States. Our current
operations are based largely in Canada. We have a limited number of customers and limited experience in operating outside of
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Canada. We also have limited experience with legal environments and market practices outside of Canada and we may not be able to penetrate or
successfully operate in any market outside of Canada. In addition, in connection with our initial expansion efforts in the United States, we have
experienced longer projected payback periods for our new stores. We may also encounter difficulty expanding in U.S. markets because of limited
brand recognition. In particular, our marketing efforts may not prove successful outside of the narrow geographic regions in which they have been
used. In addition, because tea consumption is greater in Canada than in the United States on a per capita basis, we may encounter challenges in
the United States in establishing consumer awareness and loyalty or interest in our products and our brand to a different degree than in Canada.
The expansion into the United States may also present competitive, merchandising, forecasting and distribution challenges that are different from
or more severe than those we currently face. Failure to develop new markets outside of Canada or disappointing growth outside of Canada may
harm our business and results of operations.
We face significant competition from other specialty tea and beverage retailers and retailers of grocery products, which could adversely affect
our growth plans and us.
The U.S. and Canadian tea markets are highly fragmented. We compete directly with a large number of relatively small independently
owned tea retailers and a number of regional and national tea retailers, as well as retailers of grocery products, including loose‑leaf teas, tea
sachets and other beverages. We compete with these retailers on the basis of our distinct retail experience, the broad demographic appeal of our
brand and innovative tea products, the effectiveness of our grassroots marketing strategy, our versatile store economics and our passionate
customer-focused culture supported by our experienced management team and dedicated board members. We must spend considerable resources
to differentiate our customer experience. Some of our competitors may have greater financial, marketing and operating resources than we do.
Therefore, despite our efforts, our competitors may be more successful than us in attracting customers. In addition, as we continue to drive growth
in the specialty tea retailer category in the United States and Canada, our success, combined with relatively low barriers to entry, may encourage
new competitors to enter the market. As we continue to expand geographically, we expect to encounter additional regional and local competitors.
We plan to use cash on hand and cash from operations to finance our growth strategy, and if we are unable to maintain sufficient levels of
cash flow, we may not meet our growth expectations.
We intend to finance our growth through our cash on hand, the cash flows generated by our existing stores and borrowings under our
available credit facilities. Our primary sources of financing for our growth are cash on hand and cash from operations. However, if our stores are
not profitable or if our store profits decline, we may not have the cash flow necessary in order to pursue or maintain our growth strategy. We may
also be unable to obtain any necessary financing on commercially reasonable terms to pursue or maintain our growth strategy. If we are unable to
pursue or maintain our growth strategy, the market price of our common shares could decline and our results of operations and profitability could
suffer.
The planned addition of new stores each year will require us to continue to expand and improve our operations and could strain our
operational, managerial and administrative resources, which may adversely affect our business.
Our growth strategy calls for the opening of new stores each year and our continued expansion will place increased demands on our
operational, managerial, administrative and other resources, which may be inadequate to support our expansion. Our senior management team
may be unable to effectively address challenges involved with expansion forecasts for the future. Managing our growth effectively will require us
to continue to enhance our store management systems, financial and management controls and information systems, and to hire, train and retain
regional directors, district managers, store managers and other personnel. Implementing new systems, controls and procedures, these additions to
our infrastructure and any changes to our existing operational, managerial, administrative and other resources could negatively affect our results
of operations and financial condition.
As we expand our store base, we may not experience the same increases in comparable sales or profitability that we have experienced in the
past.
We may not be able to maintain the levels of comparable sales that we have experienced historically. If our future comparable sales
decline or fail to meet market expectations, the price of our common shares could decline. In addition, the aggregate results of operations of our
stores have fluctuated in the past and can be expected to continue to fluctuate in the future. A variety of factors affect comparable sales including
consumer tastes, competition, current economic conditions, pricing, inflation and weather conditions. These factors may cause our comparable
sales results to be materially lower than recent periods and our expectations, which could harm our results of operations and result in a decline in
the price of our common shares.
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We may be unable to maintain or improve our Adjusted EBITDA margin, which could adversely affect our financial condition and ability to
grow.
Although we believe we can expand our Adjusted EBITDA margin to the high teens over the long term, reaching that target depends on
our ability to successfully manage our operating costs and capture certain efficiencies of scale that we expect to achieve from our expansion. If we
are not able to continue our cost discipline, improve our systems, maintain appropriate labor levels and capture certain efficiencies of scale, or if
increased competition imposes pricing pressures or our input prices increase, such as the price of tea, materials used in our pre-packaged teas, tea
sachets and tea-related gifts, accessories and food and labor, our Adjusted EBITDA margin may not expand as anticipated and could even
stagnate or decline, which could have a material adverse effect on our business, financial condition and results of operations.
Any decrease in customer traffic in the shopping malls or other locations in which our stores are located could cause our sales to be less than
expected.
Our stores are located in shopping malls, including lifestyle centers and outlets, and on street locations. Sales at these stores are derived,
to a significant degree, from the volume of customer traffic in those locations and in the surrounding area. Our stores benefit from the current
popularity of shopping malls and centers as shopping destinations and their ability to generate customer traffic near our stores. Our sales volume
and customer traffic may be adversely affected by, among other things:
· economic downturns in the United States, Canada or regionally;
·
·
increases in fuel prices;
changes in consumer demographics;
· a decrease in popularity of shopping malls or centers in which a significant number of our stores are located;
· the closing of a shopping mall’s or center’s “anchor” store or the stores of other key tenants, or;
· deterioration in the financial condition of shopping mall and center operators or developers that could, for example, limit their ability to
maintain and improve their facilities.
A reduction in customer traffic as a result of these or any other factors could have a material adverse effect on our business and results of
operations.
In addition, severe weather conditions and other catastrophic occurrences in areas in which we have stores may have a material adverse
effect on our results of operations. Such conditions may result in physical damage to our stores, loss of inventory, decreases in customer traffic
and closure of one or more of our stores. Any of these factors may disrupt our business and have a material adverse effect on our financial
condition and results of operations.
If we are unable to attract, train, assimilate and retain employees that embody our culture, including store personnel, store and district
managers and regional directors, we may not be able to grow or successfully operate our business.
Our success depends in part upon our ability to attract, train, assimilate and retain a sufficient number of employees, including Tea
Guides, store managers, district managers and regional directors, who understand and appreciate our culture, are able to represent our brand
effectively and establish credibility with our customers. If we are unable to hire and retain store personnel capable of consistently providing a
high-level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of the
loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, food and beverages we offer, our ability to open new stores may
be impaired, the performance of our existing and new stores could be materially adversely affected and our brand image may be negatively
impacted. In addition, the rate of employee turnover in the retail industry is typically high and finding qualified candidates to fill positions may be
difficult. Our planned growth will require us to attract, train and assimilate even more personnel. Any failure to meet our staffing needs or any
material increases in team member turnover rates could have a material adverse effect on our business or results of operations. We also rely on
temporary or seasonal personnel to staff our stores and distribution centers. We may not be able to find adequate temporary or seasonal personnel
to staff our operations when needed, which may strain our existing personnel and negatively affect our operations.
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Because our business is highly concentrated on a single, discretionary product category, loose-leaf teas, pre-packaged teas, tea sachets, and
tea-related gifts, accessories, food and beverages, we are vulnerable to changes in consumer preferences and in economic conditions affecting
disposable income that could harm our financial results.
Our business is not diversified and consists primarily of developing, sourcing, marketing and selling loose-leaf teas, pre-packaged teas,
tea sachets and tea-related gifts, accessories, food and beverages. Consumer preferences often change rapidly and without warning, moving from
one trend to another among many retail concepts. Therefore, our business is substantially dependent on our ability to educate consumers on the
many positive attributes of tea and anticipate shifts in consumer tastes. Any future shifts in consumer preferences away from the consumption of
beverages brewed from premium loose‑leaf teas would also have a material adverse effect on our results of operations. In particular, there has
been an increasing focus on health and wellness by consumers, which we believe has increased demand for products, such as our teas, that are
perceived to be healthier than other beverage alternatives. If such consumer preference trends change, or if our teas are not perceived to be
healthier than other beverage alternatives, our financial results could be adversely affected.
Consumer purchases of specialty retail products, including our products, are historically affected by economic conditions such as
changes in employment, salary and wage levels, the availability of consumer credit, inflation, interest rates, tax rates, fuel prices and the level of
consumer confidence in prevailing and future economic conditions. These discretionary consumer purchases may decline during recessionary
periods or at other times when disposable income is lower. Our financial performance may become susceptible to economic and other conditions
in regions or states where we have a significant number of stores. Our continued success will depend, in part, on our ability to anticipate, identify
and respond quickly to changing consumer preferences and economic conditions.
We rely on independent certification for a number of our products and our marketing of products marked “organic”, “fair trade” and
“Kosher”. Loss of certification within our supply chain or as related to our manufacturing process or failure to comply with government
regulations pertaining to the use of the term organic could harm our business.
We rely on independent certification, such as certifications of our products as “organic,” “Fair Trade,” or “Kosher,” to differentiate some
of our products from others. We offer one of the largest certified organic collections of tea in North America amongst branded tea retailers. We
must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. The loss of
any independent certifications could adversely affect our marketplace position, which could harm our business.
In addition, the U.S. Department of Agriculture and the Canadian Food Inspection Agency require that our certified organic products
meet certain consistent, uniform standards. Compliance with such regulations could pose a significant burden on some of our suppliers, which
could cause a disruption in some of our product offerings. Moreover, in the event of actual or alleged non‑compliance, we might be forced to find
an alternative supplier, which could adversely affect our business, results of operations and financial condition.
Our success depends, in part, on our ability to source, develop and market new varieties of teas and tea blends, tea-related gifts, accessories,
food and beverages that meet our high standards and customer preferences.
We currently offer approximately 150 varieties of teas and tea blends, including 75 new teas and tea blends each year, and a wide
assortment of tea-related gifts, accessories and food. Our success depends in part on our ability to continually innovate, develop, source and
market new varieties of loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, food and beverages that both meet our
standards for quality and appeal to customers’ preferences. Failure to innovate, develop, source and market new varieties of loose-leaf teas, pre-
packaged teas, tea sachets and tea-related gifts, accessories, food and beverages that consumers want to buy could lead to a decrease in our sales
and profitability.
We may experience negative effects to our brand and reputation from real or perceived quality or safety issues with our tea, tea accessories
and food and beverages, which could have an adverse effect on our operating results.
We believe our customers rely on us to provide them with high‑quality teas, tea accessories and food and beverages. Concerns regarding
the safety of our teas, tea accessories and food and beverages or the safety and quality of our supply chain could cause consumers to avoid
purchasing certain products from us or to seek alternative sources of tea, even if the basis for the concern has been addressed or is outside of our
control. Adverse publicity about these concerns, whether or not ultimately based on fact, and whether or not involving teas, tea accessories and
food and beverages sold at our stores, could discourage consumers from buying our teas, tea accessories and food and beverages and have an
adverse effect on our brand, reputation and operating results.
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Furthermore, the sale of teas, tea accessories and food and beverages entails a risk of product liability claims and the resulting negative
publicity. For example, tea supplied to us may contain contaminants that, if not detected by us, could result in illness or death upon their
consumption. Similarly, tea accessories and food and beverages could contain contaminants or contain design or manufacturing defects that could
result in illness, injury or death. It is possible that product liability claims will be asserted against us in the future.
We may also be subject to involuntary product recalls or may voluntarily conduct a product recall. The costs associated with any future
product recall could, individually and in the aggregate, be significant in any given fiscal year. In addition, any product recall, regardless of direct
costs of the recall, may harm consumer perceptions of our teas, tea accessories and food and beverages and have a negative impact on our future
sales and results of operations.
Any loss of confidence on the part of our customers in the safety and quality of our teas, tea accessories and food and beverages would
be difficult and costly to overcome. Any such adverse effect could be exacerbated by our position in the market as a purveyor of quality teas, tea
accessories and food and beverages and could significantly reduce our brand value. Issues regarding the safety of any teas, tea accessories and
food and beverages sold by us, regardless of the cause, could have a substantial and adverse effect on our sales and operating results.
Use of social media may adversely affect our reputation or subject us to fines or other penalties.
There has been a substantial increase in the use of social media platforms and similar devices, including blogs, social media platforms,
and other forms of Internet‑based communications, which allow individuals access to a broad audience of consumers and other interested persons.
As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at
our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely affect our reputation or subject
us to fines or other penalties.
Consumers value readily available information concerning retailers and their goods and services and often act on such information
without further investigation and without regard to its accuracy. Information concerning us may be posted on social media platforms and similar
devices by unaffiliated third parties, whether seeking to pass themselves off as us or not, at any time, which may be adverse to our reputation or
business. The harm may be immediate without affording us an opportunity for redress or correction.
Because we rely on a limited number of third‑party suppliers and manufacturers, we may not be able to obtain quality products on a timely
basis or in sufficient quantities.
We rely on a limited number of vendors to supply us with straight tea and specially blended teas on a continuous basis. Our financial
performance depends in large part on our ability to purchase tea in sufficient quantities at competitive prices from these vendors. In general, we
do not have long‑term purchase contracts or other contractual assurances of continued supply, pricing or exclusive access to products from these
vendors.
Any of our suppliers or manufacturers could discontinue supplying us with teas in sufficient quantities for a variety of reasons. The
benefits we currently experience from our supplier and manufacturer relationships could be adversely affected if they:
·
·
raise the prices they charge us;
discontinue selling products to us;
· sell similar or identical products to our competitors; or
· enter into arrangements with competitors that could impair our ability to sell our suppliers’ and manufacturers’ products, including by
giving our competitors exclusive licensing arrangements or exclusive access to tea blends or limiting our access to such arrangements
or blends.
During Fiscal 2016, our five largest vendors represented approximately 69% of our total loose‑leaf tea inventory purchases. Any
disruption to these relationships could have a material adverse effect on our business.
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Events that adversely affect our vendors could impair our ability to obtain inventory in the quantities and at the quality that we desire.
Such events include difficulties or problems with our vendors’ businesses, finances, labor relations, ability to import raw materials, costs,
production, insurance and reputation, as well as natural disasters or other catastrophic occurrences.
More generally, if we experience significant increased demand for our loose-leaf teas, pre-packaged teas, tea sachets and tea-related
gifts, accessories, food and beverages, or need to replace an existing vendor, additional supplies or additional manufacturing capacity may not be
available when required on terms that are acceptable to us, or at all, and that any new vendor may not allocate sufficient capacity to us in order to
meet our requirements, fill our orders in a timely manner or meet our strict quality requirements. In the event we are required to find new sources
of supply, we may encounter delays in production, inconsistencies in quality and added costs as a result of the time it takes to train our suppliers
and manufacturers in our methods, products and quality control standards. In particular, the loss of a tea vendor would necessitate that we work
with our new vendors to replicate our tea blends, which could result in our inability to sell such tea blends for a period of time or in a change of
quality in our tea blends. Any delays, interruption or increased costs in the supply of loose‑leaf teas or the manufacture of our pre-packaged teas,
tea sachets and tea-related gifts, accessories and food could have an adverse effect on our ability to meet customer demand for our products and
result in lower sales and profitability both in the short and long term.
A shortage in the supply, a decrease in the quality or an increase in the price of tea and ingredients used in our tea blends, as a result of
weather conditions, earthquakes, crop disease, pests or other natural or manmade causes could impose significant costs and losses on our
business.
The supply and price of tea and ingredients used in our tea blends are subject to fluctuation, depending on demand and other factors
outside of our control. The supply, quality and price of our teas can be affected by multiple factors in tea‑producing countries, including political
and economic conditions, civil and labor unrest, adverse weather conditions, including floods, drought and temperature extremes, earthquakes,
tsunamis, and other natural disasters and related occurrences. This risk is particularly true with respect to regions or countries from which we
source a significant percentage of our products. In extreme cases, entire tea harvests may be lost or may be negatively impacted in some
geographic areas. These factors can increase costs and decrease sales, which may have a material adverse effect on our business, results of
operations and financial condition.
Tea may be vulnerable to crop disease and pests, which may vary in severity and effect. The costs to control disease and pest damage
vary depending on the severity of the damage and the extent of the plantings affected. Moreover, available technologies to control such conditions
may not continue to be effective. These conditions can increase costs and decrease sales, which may have a material adverse effect on our
business, results of operations and financial condition.
Our success depends substantially upon the continued retention of our senior management.
Our future success is substantially dependent on the leadership skill of certain members of our senior management, including Joel Silver,
our President and Chief Executive Officer, and the other members of our executive team. Mr. Silver, Christine Bullen, our Managing Director,
U.S., and Luis Borgen, our Chief Financial Officer in particular, play an important role in determining our strategic direction and for executing
our growth strategy. The loss of the services of any of these executives could create circumstances where we may not be able to find suitable
individuals to replace them on a timely basis, if at all, which could have a material adverse effect on our business and prospects. In addition,
investors and analysts could view any such departure negatively, which could cause the price of our common shares to decline.
We rely significantly on information technology systems and any failure, inadequacy, interruption or security failure of those systems could
harm our ability to operate our business effectively.
We rely on our information technology systems to effectively manage our business data, communications, point‑of‑sale, supply chain,
order entry and fulfillment, inventory and warehouse and distribution centers and other business processes. The failure of our systems to perform
as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and the loss of sales, causing our business to
suffer. Despite any precautions we may take, our information technology systems may be vulnerable to damage or interruption from
circumstances beyond our control, including fire, natural disasters, systems failures, power outages, viruses, security breaches, cyber-attacks and
terrorism, including breaches of our transaction processing or other systems that could result in the compromise of confidential company,
customer or employee data. We maintain disaster recovery procedures, but there is no guarantee that these will be adequate in all circumstances.
Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice
obligations or costly litigation, harm our reputation with our customers, require us to expend significant time and expense developing,
maintaining or upgrading our information technology systems or prevent us from paying our vendors or employees, receiving payments from our
customers or performing other information
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technology, administrative or outsourcing services on a timely basis. Furthermore, our ability to conduct our website operations may be affected
by changes in foreign, state, provincial and federal privacy laws and we could incur significant costs in complying with the multitude of foreign,
state, provincial and federal laws regarding the unauthorized disclosure of personal information. Although we carry business interruption
insurance, our coverage may not be sufficient to compensate us for potentially significant losses in connection with the risks described above.
In addition, we sell merchandise over the Internet through our website. Our website operations may be affected by our reliance on
third‑party hardware and software providers, whose products and services are not within our control, making it more difficult for us to correct any
defects; technology changes; risks related to the failure of computer systems through which we conduct our website operations;
telecommunications failures; security breaches or attempts thereof; and, similar disruptions. Third‑party hardware and software providers may not
continue to make their products available to us on acceptable terms or at all and such providers may not maintain policies and practices regarding
data privacy and security in compliance with all applicable laws. Any impairment in our relationships with such providers could have an adverse
effect on our business.
Our marketing programs, digital initiatives and use of consumer information are governed by an evolving set of laws and enforcement trends
and unfavorable changes in those laws or trends, or our failure to comply with existing or future laws, could substantially harm our business
and results of operations.
We collect, maintain and use data, including personally identifiable information, provided to us through online activities and other
customer interactions in our business. Our current and future marketing programs depend on our ability to collect, maintain and use this
information, and our ability to do so is subject to evolving international and U.S. and Canadian federal, state and/or provincial laws and
enforcement trends with respect to the foregoing. We strive to comply with all applicable laws and other legal obligations relating to privacy, data
protection and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these
requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, may conflict with other rules or may
conflict with our practices. If so, we may suffer damage to our reputation and be subject to proceedings or actions against us by governmental
entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts to defend our practices, distract
our management, increase our costs of doing business and result in monetary liability.
In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we remain in compliance. If applicable
data privacy and marketing laws become more restrictive at the international, federal, state or provincial levels, our compliance costs may
increase, our ability to effectively engage customers via personalized marketing may decrease, our investment in our e‑commerce platform may
not be fully realized, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability
for security breaches may increase.
Data security breaches and attempts thereof could negatively affect our reputation, credibility and business.
We collect and store personal information relating to our customers and employees, including their personally identifiable information,
and rely on third parties for the operation of our e‑commerce site and for the various social media tools and websites we use as part of our
marketing strategy. Consumers are increasingly concerned over the security of personal information transmitted over the Internet (or through
other mechanisms), consumer identity theft and user privacy. Any perceived, attempted or actual unauthorized disclosure of personally
identifiable information regarding our employees, customers or website visitors could harm our reputation and credibility, reduce our e‑commerce
sales, impair our ability to attract website visitors, reduce our ability to attract and retain customers and could result in litigation against us or the
imposition of significant fines or penalties. We cannot assure you that any of our third‑party service providers with access to such personally
identifiable information will maintain policies and practices regarding data privacy and security in compliance with all applicable laws, or that
they will not experience data security breaches or attempts thereof which could have a corresponding adverse effect on our business.
Recently, data security breaches suffered by well‑known companies and institutions have attracted a substantial amount of media
attention, prompting new foreign, federal, provincial and state laws and legislative proposals addressing data privacy and security, as well as
increased data protection obligations imposed on merchants by credit card issuers. As a result, we may become subject to more extensive
requirements to protect the customer information that we process in connection with the purchase of our products, resulting in increased
compliance costs.
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Fluctuations in our results of operations for the fourth fiscal quarter would have a disproportionate effect on our overall financial condition
and results of operations.
Our business is seasonal and, historically, we have realized a higher portion of our sales, net income and cash flow from operations in the
fourth fiscal quarter, due to the impact of the holiday selling season. Any factors that harm our fourth fiscal quarter operating results, including
disruptions in our supply chain, adverse weather or unfavorable economic conditions, could have a disproportionate effect on our results of
operations for the entire fiscal year.
In order to prepare for our peak shopping season, we must order and maintain higher quantities of inventory than we would carry at other
times of the year. As a result, our working capital requirements also fluctuate during the year, increasing in the second and third fiscal quarters in
anticipation of the fourth fiscal quarter. Any unanticipated decline in demand for our loose‑leaf teas, pre‑packaged teas, tea sachets, tea-related
gifts, accessories and food during our peak shopping season could require us to sell excess inventory at a substantial markdown, which could
diminish our brand and reduce our sales and gross profit.
Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new
store openings and the sales contributed by new stores. As a result, historical period‑to‑period comparisons of our sales and operating results are
not necessarily indicative of future period‑to‑period results. You should not rely on the results of a single fiscal quarter, particularly the fourth
fiscal quarter holiday season, as an indication of our annual results or our future performance.
Third‑party failure to deliver merchandise from our distribution centers to our stores and e‑commerce customers could result in lost sales or
reduced demand for our teas, tea accessories and food and beverages.
We currently rely upon third‑party transportation providers for all of our product shipments from our distribution centers to our stores
and e‑commerce customers. Our utilization of third‑party delivery services for shipments is subject to risks, including increases in fuel prices,
which would increase our shipping costs, and employee strikes and inclement weather, which may affect third parties’ abilities to provide delivery
services that adequately meet our shipping needs. If we change shipping companies, we could face logistical difficulties that could adversely
affect deliveries, and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms
as favorable as those we receive from the third‑party transportation providers in Canada and the United States that we currently use, which in turn
would increase our costs and thereby adversely affect our operating results.
Our ability to source our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories and food profitably or at all could be
hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.
All of our teas are currently grown, and a substantial majority of our pre-packaged teas, tea sachets and tea-related gifts, accessories and
food is currently manufactured outside of the United States and Canada. The United States, Canada, and the countries in which our products are
produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may
adversely adjust prevailing quota, duty or tariff levels. Countries impose, modify and remove tariffs and other trade restrictions in response to a
diverse array of factors, including global and national economic and political conditions that make it impossible for us to predict future
developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards and customs
restrictions, could increase the cost or reduce the supply of teas, tea accessories and food available to us or may require us to modify our supply
chain organization or other current business practices, any of which could harm our business, financial condition and results of operations.
In addition, there is a risk that our suppliers and manufacturers could fail to comply with applicable regulations, which could lead to
investigations by the United States, Canadian or foreign government agencies responsible for international trade compliance. Resulting penalties
or enforcement actions could delay future imports or exports or otherwise negatively affect our business.
Fluctuations in foreign currency exchange rates may affect our price negotiations with our third‑party suppliers and manufacturers.
Substantially all of our suppliers and manufacturers are located outside of Canada and changes in the exchange rates between the
Canadian dollar and the U.S. dollar and Euro may have a significant, and potentially adverse, effect on our price negotiations with such parties. If
the Canadian dollar weakens against any such currencies, our suppliers and manufacturers may attempt to renegotiate the terms of their
arrangements with us, which may have a negative effect on our operating results.
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Fluctuations in foreign currency exchange rates could harm our results of operations as well as the price of common shares and any
dividends that we may pay.
Sales in the United States accounted for approximately 9%, 14% 16% of our total sales for Fiscal 2014, Fiscal 2015 and Fiscal 2016,
respectively. The reporting currency for our combined consolidated financial statements is the Canadian dollar. In the future, we expect to derive
an increasing portion of our sales and incur a significant portion of our operating costs in the United States, and changes in exchange rates
between the Canadian dollar and the U.S. dollar may have a significant, and potentially adverse, effect on our results of operations. Because we
recognize sales in the United States in U.S. dollars, if the U.S. dollar weakens against the Canadian dollar, it would have a negative impact on our
U.S. operating results upon translation of those results into Canadian dollars for the purposes of consolidation. Any hypothetical reduction in sales
could be partially or completely offset by lower cost of sales and lower selling, general and administration expenses that are generated in U.S.
dollars.
In addition, a majority of the purchases we make from our suppliers are denominated in U.S. dollars. As a result, a depreciation of the
Canadian dollar against the U.S. dollar increases the cost of acquiring those supplies in Canadian dollars, which negatively affects our gross profit
margin. During the year, we have entered into forward contracts to fix the exchange rate of our expected U.S. dollar purchases in respect to our
inventory. However, these may be inadequate in offsetting any gains and losses in foreign currency transactions, and depending upon changes in
future currency rates, such gains or losses could have a significant, and potentially adverse, effect on our results of operations.
Our earnings per share are reported in Canadian dollars, and accordingly may be translated into U.S. dollars by analysts or our investors.
Given the foregoing, the value of an investment in our common shares to a U.S. shareholder will fluctuate as the U.S. dollar rises and falls against
the Canadian dollar. Our decision to declare a dividend depends on results of operations reported in Canadian dollars, and we will declare
dividends, if any, in Canadian dollars. As a result, U.S. and other shareholders seeking U.S. dollar total returns, including increases in the share
price and dividends paid, are subject to foreign exchange risk as the U.S. dollar rises and falls against the Canadian dollar.
A widespread health epidemic could adversely affect our business.
Our business could be severely affected by a widespread regional, national or global health epidemic. A widespread health epidemic may
cause customers to avoid public gathering places such as our stores or otherwise change their shopping behaviors. Additionally, a widespread
health epidemic could adversely affect our business by disrupting production of products to our stores and by affecting our ability to appropriately
staff our stores.
Changes in accounting standards may materially affect reporting of our financial condition and results from operations.
Accounting principles as per the International Financial Reporting Standards (“IFRS”) and related accounting pronouncements,
implementation guidelines, and interpretations for many aspects of our business, such as accounting for inventories, intangible assets, store
closures, sales, leases, insurance, income taxes, stock-based compensation, are complex and involved subjective judgements. Changes in these
rules or their interpretation may significantly change or add significant volatility to our reported income or loss without a comparable underlying
change in cash flows from operations. As a result, changes in accounting standards may materially affect our reported financial condition and
results from operations.
Specifically, changes to financial accounting standards will require operating leases to be recognized on our balance sheet. We have
significant obligations relating to our current operating leases, as all our existing stores are subject to leases, which have an average remaining
terms of 6.1 years, and as of January 28, 2017, we had undiscounted operating lease commitments of approximately $148.4 million, scheduled
through 2029, related primarily to our stores, including stores that are not yet open. These commitments represent the minimum lease payments
due under our operating leases, excluding common area maintenance, insurance and taxes related to our operating lease obligations, and do not
reflect fair market value rent reset provisions in the leases. These leases are classified as operating leases and disclosed in Note 13 to our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K, but are not reflected in liabilities on our consolidated
balance sheets. During Fiscal 2016, our rent expense charged under operating leases was approximately $29.1 million.
The International Accounting Standards Board (“IASB”) released IFRS 16, “Leases” (“IFRS 16”) replacing IAS 17, “Leases”. This
standard requires lessees to recognize assets and liabilities for most leases. 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
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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.
We are subject to potential challenges relating to overtime pay and other regulations that affect our employees, which could cause our
business, financial condition, results of operations or cash flows to suffer.
Various labor laws, including U.S. federal, U.S. state and Canadian federal and provincial laws, among others, govern our relationship
with our employees and affect our operating costs. These laws include minimum wage requirements, overtime pay, unemployment tax rates,
workers’ compensation rates and citizenship requirements. These laws change frequently and may be difficult to interpret and apply. In particular,
as a retailer, we may be subject to challenges regarding the application of overtime and related pay regulations to our employees. A determination
that we do not comply with these laws could harm our brand image, business, financial condition and results of operation. Additional
government‑imposed increases in minimum wages, overtime pay, paid leaves of absence or mandated health benefits could also cause our
business, financial condition, results of operations or cash flows to suffer.
Litigation may adversely affect our business, financial condition, results of operations or liquidity.
Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, intellectual property rights holders,
shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other
litigation. The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is inherently difficult to
assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the
potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided
adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating
results if changes to our business operation are required. Regardless of the outcome or merit, the cost to defend future litigation may be significant
and result in the diversion of management and other company resources. There also may be adverse publicity associated with litigation that could
negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable.
As a result, litigation may adversely affect our business, financial condition, results of operations or liquidity.
Our failure to comply with existing or new regulations, both in the United States and Canada, or an adverse action regarding product claims
or advertising could have a material adverse effect on our results of operations and financial condition.
Our business operations, including labeling, advertising, sourcing, distribution and sale of our products, are subject to regulation by
various federal, state and local government entities and agencies, particularly the Food and Drug Administration (“FDA”), the Federal Trade
Commission (“FTC”) and the Office of Foreign Asset Control (“OFAC”) in the United States, as well as Canadian entities and agencies, including
the Canadian Food Inspection Agency. From time to time, we may be subject to challenges to our marketing, advertising or product claims in
litigation or governmental, administrative or other regulatory proceedings. Failure to comply with applicable regulations or withstand such
challenges could result in changes in our supply chain, product labeling, packaging or advertising, loss of market acceptance of the product by
consumers, additional recordkeeping requirements, injunctions, product withdrawals, recalls, product seizures, fines, monetary settlements or
criminal prosecution. Any of these actions could have a material adverse effect on our results of operations and financial condition.
In addition, consumers who allege that they were deceived by any statements that were made in advertising or labeling could bring a
lawsuit against us under consumer protection laws. If we were subject to any such claims, while we would defend ourselves against such claims,
we may ultimately be unsuccessful in our defense. Defending ourselves against such claims, regardless of their merit and ultimate outcome,
would likely result in a significant distraction for management, be lengthy and costly and could adversely affect our results of operations and
financial condition. In addition, the negative publicity surrounding any such claims could harm our reputation and brand image.
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We may not be able to protect our intellectual property adequately, which could harm the value of our brand and adversely affect our
business.
We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. We pursue
the registration of our domain names, trademarks, service marks and patentable technology in Canada, the United States and in certain other
jurisdictions. In particular, our trademarks, including our registered DAVIDsTEA and DAVIDsTEA logo design trademarks and the unregistered
names of a significant number of the varieties of specially blended teas that we sell, are valuable assets that reinforce the distinctiveness of our
brand and our customers’ favorable perception of our stores.
We also strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual
restrictions with our employees, contractors (including those who develop, source, manufacture, store and distribute our tea blends, tea
accessories and other tea‑related merchandise), vendors and other third parties. However, we may not enter into confidentiality and/or invention
assignment agreements with every employee, contractor and service provider to protect our proprietary information and intellectual property
ownership rights. Those agreements that we do execute may be breached, resulting in the unauthorized use or disclosure of our proprietary
information. Individuals not subject to invention assignments agreements may make adverse ownership claims to our current and future
intellectual property, and even the existence of executed confidentiality agreements may not deter independent development of similar intellectual
property by others. In addition, although we have exclusivity agreements with each of our significant suppliers who performs blending services
for us, or who has access to our designs, we may not be able to successfully protect the tea blends and designs to which such suppliers have
access under trade secret laws, and the periods for exclusivity governing our tea blends last for periods as brief as 18 months. Unauthorized
disclosure of or claims to our intellectual property or confidential information may adversely affect our business.
From time to time, third parties have used our trade dress and/or sold our products using our name without our consent, and, we believe,
have infringed or misappropriated our intellectual property rights. We respond to these actions on a case‑by‑case basis and where appropriate may
commence litigation to protect our intellectual property rights. However, we may not be able to detect unauthorized use of our intellectual
property or to take appropriate steps to enforce, defend and assert our intellectual property in all instances.
Effective trade secret, patent, copyright, trademark and domain name protection is expensive to obtain, develop and maintain, in terms of
both initial and ongoing registration or prosecution requirements and expenses and the costs of defending our rights. Our trademark rights and
related registrations may be challenged in the future and could be opposed, canceled or narrowed. Our failure to register or protect our trademarks
could prevent us in the future from using our trademarks or challenging third parties who use names and logos similar to our trademarks, which
may in turn cause customer confusion, impede our marketing efforts, negatively affect customers’ perception of our brand, stores and products,
and adversely affect our sales and profitability. Moreover, intellectual property proceedings and infringement claims brought by or against us
could result in substantial costs and a significant distraction for management and have a negative impact on our business. We cannot assure you
that we are not infringing or violating, and have not infringed or violated, any third‑party intellectual property rights, or that we will not be
accused of doing so in the future.
In addition, although we have also taken steps to protect our intellectual property rights internationally, the laws of certain foreign
countries may not protect intellectual property to the same extent as do the laws of the United States and Canada and mechanisms for enforcement
of intellectual property rights may be inadequate in those countries. Other entities may have rights to trademarks that contain portions of our
marks or may have registered similar or competing marks in foreign countries. There may also be other prior registrations in other foreign
countries of which we are not aware. We may need to expend additional resources to defend our trademarks in these countries, and the inability to
defend such trademarks could impair our brand or adversely affect the growth of our business internationally.
We are subject to the risks associated with leasing substantial amounts of space and are required to make substantial lease payments under
our operating leases. Any failure to make these lease payments when due would likely harm our business, profitability and results of
operations.
We do not own any real estate. Instead, we lease all of our store locations, our corporate offices in Montréal, Canada and Waltham,
Massachusetts and our distribution center in Montréal, Canada. Our store leases typically have ten‑year terms and generally require us to pay total
rent per square foot that is reflective of our small average store square footage and premium locations. Many of our lease agreements have defined
escalating rent provisions over the initial term and any extensions. As our stores mature and as we
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expand our store base, our lease expense and our cash outlays for rent under our lease agreements will increase. Our substantial operating lease
obligations could have significant negative consequences, including:
· requiring that an increased portion of our cash from operations and available cash on hand be applied to pay our lease obligations, thus
reducing liquidity available for other purposes;
· increasing our vulnerability to adverse general economic and industry conditions;
· limiting our flexibility to plan for or react to changes in our business or in the industry in which we compete; and
·
limiting our ability to obtain additional financing.
We depend on cash flow from operations to pay our lease expenses, finance our growth capital requirements and fulfill our other cash
needs. If our business does not generate sufficient cash flow from operating activities to fund these requirements, we may not be able to achieve
our growth plans, fund our other liquidity and capital needs or ultimately service our lease expenses, which would harm our business.
If an existing or future store is not profitable, and we decide to close it, we may nonetheless remain committed to perform our
obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a
lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. In addition, as our
leases expire, we may fail to negotiate renewals on commercially acceptable terms or at all, which could cause us to close stores in desirable
locations. Even if we are able to renew existing leases, the terms of such renewal may not be as attractive as the expiring lease, which could
materially and adversely affect our results of operations. Of our current stores, no store lease expires without an option to renew in Fiscal 2017
and two (2) store leases expire without an option to renew in Fiscal 2018. Our inabilities to enter into new leases, renew existing leases on terms
acceptable to us, or be released from our obligations under leases for stores that we close could materially adversely affect us.
Our ability to use our net operating loss carryforwards in the United States may be subject to limitation in the event we experience an
“ownership change.”
As of January 28, 2017, we had U.S. federal net operating loss carryforwards of US$14.9 million. Our U.S. federal net operating loss
carryforwards begin to expire during the years 2033 and 2037.
Under Section 382 of the Internal Revenue Code of 1986, as amended, our ability to utilize net operating loss carryforwards in any
taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more
shareholders or groups of shareholders who own at least 5% of our common shares increase their ownership by more than 50 percentage points
over their lowest ownership percentage within a rolling three‑year period. Our initial public offering, together with other transactions that have
occurred since our inception and that may occur in the future, could trigger such an “ownership change” pursuant to Section 382. Accordingly, the
application of Section 382 could have a material effect on the use of our net operating loss carryforwards, which could adversely affect our future
cash flow from operations.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could
adversely affect our results from operations and financial condition.
We are subject to taxes by the U.S. federal and state tax authorities as well as Canadian federal, provincial and local tax authorities, and
our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. Our future effective tax rates could be subject to
volatility or adversely affected by a number of factors, including:
tax effects of stock-based compensation;
· changes in the valuation of our deferred tax assets and liabilities;
· expected timing and amount of the release of any tax valuation allowance;
·
· changes in tax laws, regulations or interpretations thereof; or
· future earnings being lower than anticipated in jurisdictions where we have lower statutory tax rates and higher than anticipated earnings in
jurisdictions where we have higher statutory tax rates.
In addition, we may be subject to audits of our income, sales and other transaction taxes by these tax authorities. Outcomes from these
audits could have an adverse effect on our operating results and financial condition.
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Risks Relating to Ownership of Our Common Shares
We have a majority shareholder, which may limit our minority shareholder’ ability to influence corporate matters.
Rainy Day Investments Ltd., or Rainy Day, owns a majority of our common shares. Accordingly, Rainy Day has the ability to influence
the outcome of any corporate transaction or other matter submitted to shareholders for approval and the interests of Rainy Day may differ from
the interests of our other shareholders. Because we are incorporated in Canada, certain matters, such as amendments to our articles of
incorporation or votes regarding a potential merger or a sale of all or substantially all of our assets, require approval of at least two thirds of our
shareholders; Rainy Day’s approval will be required to achieve any such threshold. In addition, because we are a “controlled company,” we are
not required to have a majority of our Board of Directors be independent, and we are not required to have our director nominees approved by a
committee of independent directors. As a result, Mr. Herschel Segal, one of our directors who is also the 100% owner of Rainy Day, may exert
influence over the nomination or appointment of directors. In addition, Rainy Day, as our controlling shareholder, has the power to elect a
majority of our directors and, consequently, has a substantial say in the appointment of our executive officers, our management policies and
strategic direction. Accordingly, should the interests of Rainy Day differ from those of other shareholders, the other shareholders may not have
the same protections afforded to shareholders of companies that are subject to all of the corporate governance-rules for non-controlled issuers.
Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our common shares less
attractive to investors.
We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act, and we take
advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth
companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes‑Oxley Act, reduced
disclosure obligations regarding executive compensation and exemptions from the requirements of holding a non‑binding shareholder advisory
vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, our
shareholders may not have access to certain information that they may deem important.
We currently utilize and intend to continue to utilize the exemptions described above for so long as we are an emerging growth company.
We could be an emerging growth company for up to five years after our initial public offering, although circumstances could cause us to lose that
status earlier, including if our total annual gross revenues exceed US$1.0 billion, if we issue more than US$1.0 billion in non‑convertible debt
securities during any three‑year period, or if we are a large accelerated filer and the market value of our common shares held by non‑affiliates
exceeds US$700 million as of the end of any second quarter before that time.
Investors may find our common shares less attractive because we elect to rely on these exemptions and taking advantage of these
exemptions could result in less active trading or more volatility in the price of our common shares.
As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, which
may limit the information publicly available to our shareholders.
As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements of the
Exchange Act and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. For example, we are
not subject to the proxy rules in the United States and disclosure with respect to our annual meetings will be governed by Canadian requirements.
In addition, our officers, directors and principal shareholders are exempt from the reporting and “short‑swing” profit recovery provisions of
Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors
and principal shareholders purchase or sell our shares. Furthermore, as a foreign private issuer, we may take advantage of certain provisions in the
NASDAQ listing rules that allow us to follow Canadian law for certain governance matters.
If we are unable to implement and maintain effective internal control over financial reporting in the future, we may fail to prevent or detect
material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our
financial reports and the market price of our common shares may be negatively affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such
internal controls. In addition, beginning with our second Annual Report on Form 10-K, we are required to furnish
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a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes‑Oxley Act.
Our independent registered public accounting firm is not required to express an opinion as to the effectiveness of our internal control over
financial reporting until after we are no longer an “emerging growth company,” as defined in the JOBS Act. At such time, however, our
independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal
control over financial reporting is documented, designed or operating.
The process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation
is time‑consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to
comply with the requirements of Section 404 of the Sarbanes‑Oxley Act in a timely manner or if our management is unable to report that our
internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to
the effectiveness of our internal control over financial reporting once we are no longer an “emerging growth company,” investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our common shares could be negatively affected. We
could also become subject to investigations by the NASDAQ Global Market on which our securities are listed, the SEC, or other regulatory
authorities, which could require additional financial and management resources.
Our stock price may be volatile or may decline regardless of our operating performance.
Shares of our common shares were sold in our IPO on June 5, 2015 at a price to the public of US$19.00 per share, and our common
shares has subsequently traded as high as US$29.97 and as low as US$6.30 during the period from our IPO to January 28, 2017.
An active, liquid and orderly market for our common shares may not be sustained, which could depress the trading price of our common
shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability
to acquire other companies or technologies by using our shares as consideration. In addition, broad market and industry factors, most of which we
cannot control, may harm the price of our common shares, regardless of our actual operating performance. In addition, securities markets
worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as
general economic, market and political conditions and Canadian dollar exchange rate relative to the U.S. dollar, could subject the market price of
our shares to wide price fluctuations regardless of our operating performance. Our operating results and the trading price of our shares may
fluctuate in response to various factors, including:
· conditions or trends affecting our industry or the economy globally; in particular, in the retail sales environment;
· stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the retail industry;
· fluctuations of the Canadian dollar exchange rate relative to the U.S. dollar;
· variations in our operating performance and the performance of our competitors;
·
·
seasonal fluctuations;
our entry into new markets;
· timing of new store openings and our levels of comparable sales;
· actual or anticipated fluctuations in our quarterly financial and operating results or other operating metrics, such as comparable store
sales, that may be used by the investment community;
· changes in financial estimates by us or by any securities analysts who might cover our shares;
· issuance of new or changed securities analysts’ reports or recommendations;
· actions and announcements by us or our competitors, including new product offerings, significant acquisitions, strategic partnerships or
divestitures;
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· sales, or anticipated sales, of large blocks of our shares, including sales by our directors, officers or significant shareholders;
· additions or departures of key personnel;
· significant developments relating to our relationships with business partners, vendors and distributors;
· regulatory developments negatively affecting our industry;
· changes in accounting standards, policies, guidance, interpretation or principles;
· volatility in our share price, which may lead to higher share-based compensation expense under applicable accounting standards;
· speculation about our business in the press or investment community;
· investors’ perception of the retail industry in general and our Company in particular; and
· other events beyond our control such as major catastrophic events, weather and war.
These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our
shares to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares
and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, securities class action litigation has often
been instituted against companies following periods of volatility in their stock price. If any of our shareholders brought a lawsuit against us, we
could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business,
which could significantly harm our profitability and reputation.
Our articles, bylaws and certain Canadian legislation contain provisions that may have the effect of delaying or preventing a change in
control.
Certain provisions of our articles of amendment and bylaws, together or separately, could discourage potential acquisition proposals,
delay or prevent a change in control and limit the price that certain investors may be willing to pay for our common shares.
For instance, our bylaws contain provisions that establish certain advance notice procedures for nomination of candidates for election as
directors at shareholders’ meetings.
The Investment Canada Act requires that a “non‑Canadian,” as defined therein, file an application for review with the Minister
responsible for the Investment Canada Act and obtain approval of the Minister prior to acquiring control of a Canadian business, where
prescribed financial thresholds are exceeded. Otherwise, there are no limitations either under the laws of Canada or in our articles on the rights of
non‑Canadians to hold or vote our common shares.
Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have otherwise
presented a premium to our shareholders.
Because we are a federally incorporated Canadian corporation and the majority of our directors and officers are resident in Canada, it may
be difficult for investors in the United States to enforce civil liabilities against us based solely upon the federal securities laws of the United
States.
We are a federally incorporated Canadian corporation with our principal place of business in Canada. A majority of our directors and
officers and the auditors named herein are residents of Canada and all or a substantial portion of our assets and those of such persons are located
outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within the United States upon us or our
directors or officers or such auditors who are not residents of the United States, or to realize in the United States upon judgments of courts of the
United States predicated upon civil liabilities under the Securities Act. Investors should not assume that Canadian courts: (1) would enforce
judgments of U.S. courts obtained in actions against us or such persons predicated upon the civil liability provisions of the U.S. federal securities
laws or the securities or “blue sky” laws of any state within the United States or (2) would enforce, in original actions, liabilities against us or
such persons predicated upon the U.S. federal securities laws or any such state securities or blue sky laws.
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We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and
current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day
of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on July 29,
2017. We would lose our foreign private issuer status if, for example, more than 50% of our common shares is directly or indirectly held by
residents of the United States on July 29, 2017 and we fail to meet additional requirements necessary to maintain our foreign private issuer status.
If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on
U.S. domestic issuer forms beginning at the end of Fiscal 2017, which are more detailed and extensive than the forms available to a foreign
private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal
shareholders will become subject to the short‑swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we
will lose our ability to rely upon exemptions from certain corporate governance requirements under the listing rules of The NASDAQ Global
Market. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other
expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S.
securities exchange. These expenses will relate to, among other things, the obligation to reconcile our financial information that is reported
according to IFRS to U.S. GAAP in the future.
There could be adverse tax consequence for our shareholders in the United States if we are a passive foreign investment company.
Under United States federal income tax laws, if a company is, or for any past period was, a passive foreign investment company
(“PFIC”), it could have adverse United States federal income tax consequences to U.S. shareholders even if the company is no longer a PFIC. The
determination of whether we are a PFIC is a factual determination made annually based on all the facts and circumstances and thus is subject to
change, and the principles and methodology used in determining whether a company is a PFIC are subject to interpretation. While we do not
believe that we currently are or have been a PFIC, we could be a PFIC in the future. United States purchasers of our common shares are urged to
consult their tax advisors concerning United States federal income tax consequences of holding our common shares if we are considered to be a
PFIC.
If we are a PFIC, U.S. holders would be subject to adverse U.S. federal income tax consequences, such as ineligibility for any preferred
tax rates on capital gains or on actual or deemed dividends, interest charges on certain taxes treated as deferred, and additional reporting
requirements under U.S. federal income tax laws or regulations. Whether or not U.S. holders make a timely qualified electing fund, or QEF,
election or mark‑to‑market election may affect the U.S. federal income tax consequences to U.S. holders with respect to the acquisition,
ownership and disposition of our common shares and any distributions such U.S. holders may receive. Investors should consult their own tax
advisors regarding all aspects of the application of the PFIC rules to our common shares.
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Table of Contents
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive and administrative offices are located at 5430 Ferrier Street, Mount‑Royal, Québec, Canada, H4P 1M2. We also
lease office space outside of Boston, Massachusetts. We currently lease one warehouse and distribution center located in Montréal, Québec, which
we opened in July 2010. See “Item 1. Business — Warehouse and Distribution Facilities” above for further information.
Properties
The general location, use, approximate size and lease renewal date of our properties, none of which is owned by us, are set forth below:
Location
Montréal, Québec
Montréal, Québec
Waltham, Massachusetts
Use
Approximate
Square Feet
Lease
Renewal Date
Executive and Administrative Offices
Distribution Center
Executive and Administrative Offices
22,000 October 31, 2018
June 30, 2021
60,000
April 30, 2018
3,000
As of January 28, 2017, we operated 231 company-operated stores consisting of approximately 210,000 gross square feet. All of our
stores are leased from third parties and the leases typically have 10-year terms. Most leases for our retail stores provide for a minimum rent,
typically including rent increases, plus a percentage rent based upon sales after certain minimum thresholds are achieved. The leases generally
require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses.
The following table summarizes the locations of our stores as of January 28, 2017:
Location
Alberta, Canada
British Columbia, Canada
Manitoba, Canada
Newfoundland, Canada
New Brunswick, Canada
Nova Scotia, Canada
Ontario, Canada
Prince Edward Island, Canada
Québec, Canada
Saskatchewan, Canada
California
Connecticut
Florida
Illinois
Indiana
Massachusetts
Maryland
Minnesota
New Jersey
New York
Ohio
Pennsylvania
Vermont
Washington
28
Number of
Stores
26
30
5
2
3
5
62
1
44
3
10
3
1
9
1
10
2
1
2
7
1
1
1
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ITEM 3. 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 these matters will have a material adverse
effect on our financial position or on our results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
The shares of the Company consist of an unlimited number of Common Shares. The rights, privileges, restrictions and conditions
attaching to the Common Shares of the Company are as follows:
Voting Rights
1.
Each holder of Common Shares shall be entitled to receive notice of and to attend all meetings of shareholders of the Company and to vote
thereat, except meetings at which only holders of a specified class of shares (other than Common Shares) or specified series of share are entitled
to vote. At all meetings of which notice must be given to the holders of the Common Shares, each holder of Common Shares shall be entitled to
one vote in respect of each Common Share held by such holder.
2.
The holders of the Common Shares shall be entitled, subject to the rights, privileges, restrictions and conditions attaching to any other class of
shares of the Company, to receive any dividend declared by the Company.
Dividends
Liquidation, Dissolution or Winding-up
3.
The holders of the Common Shares shall be entitled, subject to the rights, privileges, restrictions and conditions attaching to any other class of
shares of the Company, to receive the remaining property of the Company on a liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary, or on any other return of capital or distribution of assets of the Company among its shareholders for the purpose of
winding-up its affairs.
Our common shares have been listed on the NASDAQ Global Market under the symbol "DTEA" since June 2015. The following table
sets forth, for the periods indicated, the high and low sale prices of our common shares reported by the NASDAQ Global Market for the periods
indicated:
Fiscal Year Ended January 28, 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fourth Quarter
Third Quarter
Second Quarter (1)
Fiscal Year Ended January 30, 2016
Common Share Price (US$)
(NASDAQ Stock Market)
High
Low
$
$
11.20 $
13.95
14.30
12.27
15.54 $
17.84
29.97
6.30
10.50
10.76
8.88
9.19
11.74
15.68
(1) Represents the period from June 5, 2015 through August 1, 2015, the end of our second fiscal quarter.
As of April 12, 2017, there were approximately 11 holders of record of our common shares.
We have never declared or paid regular cash dividends on our common shares. We currently expect to retain all future earnings for use in
the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. The declaration and payment of
any dividends in the future will be determined by our Board of Directors, in its discretion, and will depend on a number of factors, including our
earnings, capital requirements, overall financial condition, and contractual restrictions, including restrictions contained in any agreements
governing any indebtedness we may incur.
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Stock Performance Graph
The stock performance graph below compares cumulative total return on DAVIDsTEA common shares to the cumulative total return of the
NASDAQ Composite Index, S&P 500 Index and S&P 500 Consumer Discretionary Sector Index from June 5, 2015 through January 28, 2017.
The graph assumes an initial investment of $100 in DAVIDsTEA and the NASDAQ Composite Index, S&P 500 Index and S&P 500 Consumer
Discretionary Sector Index as of June 5, 2015. The performance shown on the graph below is not intended to forecast or be indicative of possible
future performance of our common shares.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data as of the dates and for the periods indicated. The selected
consolidated financial data as of January 28, 2017, January 30, 2016 and January 31, 2015 and for the years ended January 28, 2017, January 30,
2016, January 31, 2015, January 25, 2014 and January 26, 2013 presented in this table has been derived from our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected
for future periods. Our financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as
issued by the International Accounting Standards Board (“IASB”). These principles differ in certain respects from U.S. GAAP.
This selected consolidated financial data should be read in conjunction with the disclosures set forth under “Risk Related to Our
Business and Our Industry” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and the related notes thereto.
(in thousands, except share information)
Consolidated statements of income (loss) data:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Accretion of preferred shares
Loss from embedded derivative on Series A, A-1 and A-2
preferred shares
IPO-related costs
Settlement cost related to former option holder
Income (loss) before income taxes
Provision for income tax (recovery)
Net income (loss)
Weighted average number of shares outstanding - basic
Net income (loss) per share:
Basic
Fully diluted
Consolidated balance sheet data (at year end):
Cash
Total assets
Long-term debt and finance lease obligations, including
current portion
Loan from the controlling shareholder
Preferred shares — Series A, A-1 and A-2
Financial derivative liability embedded in preferred
shares — Series A, A-1 and A-2
Total liabilities
Total equity (deficiency)
January 28,
2017
January 30,
2016
For the year ended
January 31,
2015
January 24,
2014
January 26,
2013
$
$
215,984 $
107,534
108,450
114,756
(6,306)
76
(479)
—
180,690 $
85,359
95,331
80,116
15,215
1,051
(348)
401
—
—
—
(5,903)
(2,235)
(3,668) $
140,874
—
—
(126,763)
4,668
(131,431) $
141,883 $
64,185
77,698
66,565
11,133
2,345
(133)
1,044
380
856
520
6,121
(333)
6,454 $
108,169 $
48,403
59,766
52,369
7,397
1,967
(45)
514
8,058
—
—
(3,097)
3,067
(6,164) $
73,058
32,177
40,881
37,338
3,543
1,829
—
416
3,960
—
—
(2,662)
1,692
(4,354)
24,699,290
19,776,946
11,984,763
11,928,626
12,226,202
(0.15)
(0.15)
(6.65)
(6.65)
0.54
0.45
(0.52)
(0.52)
(0.36)
(0.36)
$
64,440 $
174,334
72,514 $
158,972
—
—
—
—
—
—
—
40,884
133,450
—
24,935
134,037
19,784
79,060
10,429
2,952
28,768
16,427
79,106
(46)
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Preface
In preparing this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), we have taken
into account all information available to us up to April 12, 2017, the date of this MD&A. The audited annual consolidated financial statements
and this MD&A were reviewed by the Company’s Audit Committee and were approved and authorized for issuance by our Board of Directors on
April 12, 2017.
All financial information contained in this annual MD&A and in the audited annual consolidated financial statements has been prepared
in accordance with International Financial Reporting Standards (“IFRS”), as issued by the IASB, except for certain non-GAAP information
discussed in this Annual Report on Form 10-K. As a foreign private issuer, we are permitted to file our audited consolidated financial statements
with the SEC under IFRS without a reconciliation to U.S. generally accepted accounting principle (“GAAP”). As a result, we do not prepare a
reconciliation of our results to GAAP. It is possible that certain of our accounting policies could be different from GAAP. All monetary amounts
in this MD&A are expressed in Canadian dollars, except for share and per share data and where otherwise indicated.
This MD&A should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company as at
January 28, 2017 and January 30, 2016 and for the years January 28, 2017, January 30, 2016 and January 31, 2015 which are contained in this
Annual Report on Form 10-K.
All references to “Fiscal 2016” are to the Company’s fiscal year ended January 28, 2017. All references to “Fiscal 2015” are to the
Company’s fiscal year ended January 30, 2016 and all references to “Fiscal 2014” are to the Company’s fiscal year ended January 31, 2015.
The Company’s fiscal year ends on the last Saturday in January. The years ended January 28, 2017 and January 30, 2016 cover a 52-
week period. The year ended January 31, 2015 covers a 53-week fiscal period.
Accounting Periods
Overview
We are a fast-growing branded retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged
teas, tea sachets and tea-related gifts, accessories, food and beverages primarily through 231 company-operated DAVIDsTEA stores as of January
28, 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.
Fiscal 2016 Highlights
During Fiscal 2016, we grew our sales from $180.7 million to $216.0 million, representing growth of 19.5% over the prior year. We
added 38 net new stores, increasing our store base from 193 to 231 stores, representing growth of 19.7%. Our Adjusted EBITDA decreased from
$24.6 million to $23.0 million. Our net cash flows relating to operating activities decreased from $15.6 million to $11.2 million due to
investments in working capital, primarily inventory.
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.
33
Table of Contents
The specialty retail industry is cyclical, and our sales are affected by general economic conditions. A number of factors that influence the
level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and
consumer confidence can affect purchases of our products.
Sales also include gift card breakage income.
Comparable Sales. Comparable sales refer to year-over-year 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.
The 53rd week in Fiscal 2015 caused a one-week shift in our fiscal calendar. As a result, comparable sales for the 52 weeks of Fiscal
2016 are calculated using the comparable 52 weeks of Fiscal 2015. We compare the 52-week period ended January 30, 2016, with the 52-week
period ended January 31, 2015. As such, changes in comparable store sales are not consistent with changes in net sales reported for the fiscal
periods.
Measuring the change in year-over-year 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 near our stores.
Non-Comparable Sales. Non-comparable sales include sales from stores prior to the beginning of their thirteenth fiscal month of
operation and alternative sales channel, 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 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 37 of this Annual Report on Form 10-K.
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Table of Contents
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 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 38 of this Annual Report on Form 10-K.
Finance Costs. Finance costs consists of cash and imputed non-cash charges related to our credit facility, long-term debt, finance lease
obligations, the loan from the controlling shareholder and the Series A, A-1 and A-2 preferred shares.
Finance Income. Finance income consists of interest income on cash balances.
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 related to onerous contracts or contracts where we expect the costs of the obligations to exceed the
economic benefit, gain (loss) on derivative financial instruments, 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. For a
reconciliation of net income (loss) to Adjusted EBITDA, refer to page 38 of this Annual Report on Form 10-K.
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Table of Contents
Results of Operations
Selected Operating and Financial Highlights
The following table summarizes key components of our results of operations for the year indicated:
$
$
Consolidated statement of income (loss) data:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Accretion of preferred shares
Loss from embedded derivative on Series A, A-1 and A-2 preferred shares
IPO-related costs
Settlement cost related to former option holder
Income (loss) before taxes
Provision for income tax (recovery)
Net income (loss)
Percentage of sales:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Accretion of preferred shares
Loss from embedded derivative on Series A, A-1 and A-2 preferred shares
IPO-related costs
Settlement cost related to former option holder
Income (loss) before taxes
Income tax recovery
Net income (loss)
Other financial and operations data :
Adjusted EBITDA (1)
Adjusted EBITDA as a percentage of sales
Number of stores at end of year
Comparable sales growth for year (2)
$
For the year ended
January 28,
2017
January 30, 2016
January 31, 2015
215,984
107,534
108,450
114,756
(6,306)
76
(479)
—
—
—
—
(5,903)
(2,235)
(3,668)
$
$
100.0%
49.8%
50.2%
53.1%
(2.9%)
0.0%
(0.2%)
0.0%
0.0%
0.0%
0.0%
(2.7%)
(1.0%)
(1.7%)
$
22,957
10.6%
231
2.2%
180,690
85,359
95,331
80,116
15,215
1,051
(348)
401
140,874
—
—
(126,763)
4,668
(131,431)
$
$
100.0%
47.2%
52.8%
44.3%
8.5%
0.6%
(0.2%)
0.2%
78.0%
0.0%
0.0%
(70.1%)
2.6%
(72.7%)
$
24,606
13.6%
193
6.6%
141,883
64,185
77,698
66,565
11,133
2,345
(133)
1,044
380
856
520
6,121
(333)
6,454
100.0%
45.2%
54.8%
46.9%
7.9%
1.7%
(0.1%)
0.7%
0.3%
0.6%
0.4%
4.3%
(0.2%)
4.5%
21,905
15.4%
154
11.1%
(1) For a reconciliation of Adjusted EBITDA to net income see “—Non-IFRS Metrics” below.
(2)Comparable sales refer to year-over-year 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 is not a presentation made in
accordance with IFRS, and the use of the term 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
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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, it has 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 does 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 does 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 a reconciliation 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)
For the year ended
January 28, 2017 January 30, 2016 January 31, 2015
Selling, general and administration expenses
Executive separation costs (a)
Impairment of property and equipment (b)
Provision for onerous contracts (c)
Loss on disposal of property and equipment (d)
Adjusted selling, general and administration expenses
$
114,756
1,267
7,516
8,140
311
97,522 $
80,116
—
—
—
292
79,824
66,565
—
2,740
805
—
63,020
(a)Executive separation costs represent salary owed to certain executives of $835 payable as part of their separation agreements and stock-based
compensation expense of $432 relating to the vesting of equity awards pursuant to the separation agreements.
(b) Represents costs related to impairment of property and equipment for stores.
(c)Represents provision 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.
(d)Represents non-cash costs related to the loss on disposal of property and equipment due to construction of a new store concept at an existing store
location in the current year period and to the closure of one store due to termination of sub-lease in the prior year period.
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Reconciliation of Adjusted results from operating activities
(in thousands)
Results from operating activities
Executive separation costs (a)
Impairment of property and equipment (b)
Provision for onerous contracts (c)
Loss on disposal of property and equipment (d)
Adjusted results from operating activities
For the year ended
January 28, 2017 January 30, 2016 January 31, 2015
(6,306)
1,267
7,516
8,140
311
10,928 $
15,215
—
—
—
292
15,507 $
11,133
—
2,740
805
—
14,678
$
(a)Executive separation costs represent salary owed to certain executives of $835 payable as part of their separation agreements and stock-based
compensation expense of $432 relating to the vesting of equity awards pursuant to the separation agreements.
(b) Represents costs related to impairment of property and equipment for stores.
(c)Represents provision 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.
(d)Represents non-cash costs related to the loss on disposal of property and equipment due to construction of a new store concept at an existing store
location in the current year period and to the closure of one store due to termination of sub-lease in the prior year period.
Reconciliation of Adjusted EBITDA to our net income (loss)
(in thousands)
Net income (loss)
Finance costs
Finance income
Depreciation and amortization
Loss on disposal of property and equipment
Provision for income tax (recovery)
EBITDA
Additional adjustments:
Stock-based compensation expense (a)
Executive separation costs related to salary (b)
Impairment of property and equipment (c)
Provision (recovery) for onerous contracts (d)
Deferred rent (e)
Loss on disposal of property and equipment (f)
Accretion of preferred shares (g)
Loss from embedded derivative on Series A, A-1 and A-2 preferred shares
(h)
IPO-related costs (i)
Settlement costs related to former option holder (j)
Adjusted EBITDA
January 28, 2017
For the year ended
January 30, 2016 January 31, 2015
$
$
$
(3,668)
76
(479)
8,827
45
(2,235)
2,566
2,264
835
7,516
8,140
1,325
311
—
—
—
—
22,957
$
$
$
(131,431)
1,051
(348)
6,445
5
4,668
(119,610)
1,749
—
—
(265)
1,165
292
401
140,874
—
—
24,606
$
$
$
6,454
2,345
(133)
5,447
31
(333)
13,811
947
—
2,740
805
802
—
1,044
380
856
520
21,905
(a)
Represents non-cash stock-based compensation expense.
(b) Executive separation costs related to salary represent salary owed to certain executives as part of their separation agreements.
(c) Represents costs related to impairment of property and equipment for stores.
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(d)Represents provision and non-cash recovery 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.
(e) Represents the extent to which our annual rent expense has been above or below our cash rent payments.
(f)Represents non-cash costs related to the loss on disposal of property and equipment due to construction of a new store concept at an existing location
in the current year and to the closure of one store due to termination of sub-lease in the prior year.
(g)Represents non-cash accretion expense on our preferred shares. In connection with the completion of our IPO on June 10, 2015, all of our
outstanding preferred shares were converted automatically into common shares.
(h)Represents non-cash market loss for the conversion feature of the Series A, A-1 and A-2 preferred shares. In connection with our IPO, this liability
was converted into equity.
(i) Represents fees and expenses incurred in connection with our IPO.
(j) Represents costs incurred to settle a dispute with a former option holder.
Fiscal Year Ended January 28, 2017 Compared to Fiscal Year Ended January 30, 2016
Sales. Sales for Fiscal 2016 increased 19.5%, or $35.3 million, to $216.0 million from $180.7 million in Fiscal 2015, comprising
$3.9 million in comparable sales and $31.4 million in non‑comparable sales. For Fiscal 2016, comparable sales increased by 2.2% and
non‑comparable sales increased primarily due to an additional 38 net stores opened as of the end of Fiscal 2016 as compared to the end of Fiscal
2015 and due to non‑comparable sales for the 39 net stores opened in Fiscal 2015.
Gross Profit. Gross profit increased by 13.9%, or $13.2 million, to $108.5 million in Fiscal 2016 from $95.3 million in Fiscal 2015.
Gross profit as a percentage of sales decreased to 50.2% in Fiscal 2016 from 52.8% in Fiscal 2015, driven by additional promotional activity, a
shift in product sales mix and the adverse impact from the stronger U.S. dollar on U.S. dollar denominated purchases.
Selling, General and Administration Expenses. Selling, general and administration expenses increased by 43.3%, or $34.7 million, to
$114.8 million in Fiscal 2016 from $80.1 million in Fiscal 2015. As a percentage of sales, selling, general and administration expenses increased
to 53.1% in Fiscal 2016 from 44.3% in Fiscal 2015. Excluding executive separation costs, impairment of property and equipment, provision for
onerous contracts and loss on disposal of property and equipment in Fiscal 2016, as well as loss on disposal of property and equipment in Fiscal
2015, selling, general and administration expenses increased 22.2% to $97.5 million in Fiscal 2016 from $79.8 million in Fiscal 2015, 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 231 stores as of January 28, 2017 as compared to 193 stores as of January 30, 2016, as well a full year of public
company costs. As a percentage of sales, selling, general and administration expenses excluding the impacts referenced above increased to 45.1%
from 44.2%
Results from Operating Activities. Results from operating activities decreased by $21.5 million, to $(6.3) million in Fiscal 2016 from
$15.2 million in Fiscal 2015. Excluding executive separation costs, impairment of property and equipment, provision for onerous contracts and
loss on disposal of property and equipment in Fiscal 2016, as well as the loss on disposal of property and equipment in Fiscal 2015, results from
operating activities decreased to $10.9 million in Fiscal 2016 from $15.5 million in Fiscal 2015.
Finance Costs. Finance costs decreased by $1.0 million, or 90.9%, to $0.1 million in Fiscal 2016 from $1.1 million in Fiscal 2015, as a
result of the repayment of the then-outstanding term loans, loan from the controlling shareholder and amounts borrowed under our Revolving
Facility and no accrued dividends due to the conversion of Series A, A-1 and A-2 preferred shares to common shares, during the second quarter of
Fiscal 2016.
Finance Income. Finance income increased by $0.2 million, or 66.7%, to $0.5 million in Fiscal 2016 from $0.3 million in Fiscal 2015,
as a result of interest income generated on cash on hand.
Provision for Income Tax. Provision (recovery) for income tax decreased by $6.9 million, to $(2.2) million in Fiscal 2016 from
$4.7 million in Fiscal 2015. The decrease in the provision for income taxes was due primarily to lower results from operating activities. Our
effective tax rates were 37.9% and (3.7%) in Fiscal 2016 and 2015, respectively. The effective tax rate increased as a result of the loss from
embedded derivative on Series A, A-1 and A-2 preferred shares not recurring in Fiscal 2016 due to their conversion and cancellation.
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Fiscal Year Ended January 30, 2016 Compared to Fiscal Year Ended January 31, 2015
Sales. Sales for Fiscal 2015 increased 27.3%, or $38.8 million, to $180.7 million from $141.9 million in Fiscal 2014, comprising $9.0
million in comparable sales and $29.8 million in non comparable sales. For Fiscal 2015, comparable sales increased by 6.6% and non comparable
sales increased primarily due to an additional 39 net stores opened as of the end of Fiscal 2015 as compared to the end of Fiscal 2014 and due to
non comparable sales for the 30 stores opened in Fiscal 2014.
Gross Profit. Gross profit increased by 22.7%, or $17.6 million, to $95.3 million in Fiscal 2015 from $77.7 million in Fiscal 2014. Gross
profit as a percentage of sales decreased to 52.8% in Fiscal 2015 from 54.8% in Fiscal 2014 driven primarily by the adverse impact from the
stronger U.S. dollar on U.S. dollar denominated purchases.
Selling, General and Administration Expenses. Selling, general and administration expenses increased by 20.3%, or $13.5 million, to
$80.1 million in Fiscal 2015 from $66.6 million in Fiscal 2014 due primarily to the hiring of additional staff to support the growth of the
Company, as well as higher store operating expenses to support the operations of 193 stores as of January 30, 2016 as compared to 154 stores as
of January 31, 2015. As a percentage of sales, selling, general and administration expenses decreased to 44.3% in Fiscal 2015 from 46.9% in
Fiscal 2014. Excluding the impact of impairment of property and equipment, provision for onerous contracts and loss on disposal of property and
equipment in Fiscal 2015 and 2014, selling, general and administration expenses increased 26.7% to $79.8 million in Fiscal 2015 from $63.0
million in Fiscal 2014. As a percentage of sales, selling, general and administration expenses excluding the impacts referenced above decreased to
44.2% from 44.4%, due primarily to leveraging of fixed expenses.
Results from Operating Activities. Results from operating activities increased by 36.9%, or $4.1 million, to $15.2 million in Fiscal 2015
from $11.1 million in Fiscal 2014. Excluding the impact of impairment of property and equipment, provision for onerous contracts and loss on
disposal of property and equipment in Fiscal 2015 and 2014, results from operating activities increased to $15.5 million from $14.7 million in
Fiscal 2014.
Finance Costs. Finance costs decreased by $1.2 million, or 52.2%, to $1.1 million in Fiscal 2015 from $2.3 million in Fiscal 2014, as a
result of the repayment of the then-outstanding term loans, loan from the controlling shareholder and amounts borrowed under our Revolving
Facility and no accrued dividends due to the conversion of Series A, A-1 and A-2 preferred shares to common shares, during the second quarter
of Fiscal 2015.
Finance Income. Finance income increased by $0.2 million, or 200.0%, to $0.3 million in Fiscal 2015 from $0.1 million in Fiscal 2014,
as a result of interest income generated on cash proceeds from our IPO.
Provision for Income Tax. Provision for income tax increased by $5.0 million, to $4.7 million in Fiscal 2015 from a recovery of $0.3
million in Fiscal 2014. The increase in the provision for income taxes was due primarily to a one-time $3.2 million recognition of previously
unrecognized U.S. tax losses in Fiscal 2014. Our effective tax rates were (3.7)% and (5.5)% in Fiscal 2015 and 2014, respectively. The effective
tax rate of (3.7)% was primarily the result of the loss from embedded derivative on Series A, A-1 and A-2 preferred shares, which is not tax
deductible.
Liquidity and Capital Resources
As of January 28, 2017 we had $64.4 million of cash primarily held with major Canadian financial institutions. Our working capital was
$78.7 million as of January 28, 2017, compared to $82.8 million as at January 30, 2016.
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
2016, capital expenditures totaled $22.0 million. We devoted approximately 85% of our capital budget to construct, lease and open 25 new stores
in Canada and 14 new stores in the United States, as well as renovate a number of existing stores. The remainder of the capital budget used to
make continued investments 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. Historically, we have
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funded our capital expenditures and working capital requirements with borrowings under our long-term debt and finance lease facilities and
revolving credit facilities. Following our IPO, we funded our capital expenditures and working capital requirements with cash from our IPO and
net cash from our operating activities.
We believe that our cash position, net cash provided by 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
Increases (decreases) in cash
Cash Flows Provided by Operating Activities
January 28, 2017
For the year ended
January 30, 2016
January 31, 2015
$
$
11,162
(22,015)
2,779
(8,074)
$
$
15,592
(18,024)
55,162
52,730
$
$
16,966
(13,153)
621
4,434
Cash flows provided by (used in) operating activities:
Net income (loss)
Depreciation of property and equipment
Amortization of intangible assets
Loss on disposal of property and equipment
Impairment of property and equipment
Deferred rent
Provision (recovery) for onerous contracts
Stock-based compensation expense
Settlement related to cashless exercise of stock options, net of income
taxes recovered
Settlement cost related to former option holder
Amortization of financing fees
Accretion of preferred shares
Loss from embedded derivative on Series A, A-1, A-2 preferred
shares
Deferred income taxes (recovered)
Net change in other non-cash working capital balances related to
operations
Cash flows provided by operating activities
$
January 28,
2017
For the year ended
January 30,
2016
January 31,
2015
(3,668) $ (131,431) $
8,069
758
356
7,516
1,325
8,140
2,264
5,832
613
297
—
1,165
(265)
1,749
—
—
75
—
(2,976)
—
241
401
6,454
4,874
573
31
2,740
802
805
947
—
345
172
1,044
—
(4,380)
140,874
1,364
380
(3,024)
$
(9,293)
11,162 $
(2,272)
823
15,592 $ 16,966
Net cash provided by operating activities decreased to $11.2 million in Fiscal 2016 from $15.6 million in Fiscal 2015. The decrease in
the cash flows provided by operating activities was due to lower results from operating activities and investments in working capital, primarily
inventory.
The increase in inventories of $13.5 million in Fiscal 2016 reflects excess inventories related to sales shortfalls, the increase in the
number of stores in our network, higher inventory costs due to higher U.S. dollar, and investment in new merchandising initiatives. The increase
in trade and other payables of $5.2 million is mainly due to the higher inventory levels and other expenses to support higher volume of sales in
Fiscal 2016 compared to Fiscal 2015.
Net cash provided by operating activities decreased to $15.6 million in Fiscal 2015 from $17.0 million in Fiscal 2014. The decrease in
the cash flows provided by operating activities was due primarily to the settlement related to cashless exercise of employee stock options and
investment in working capital to support the number of company-operated stores.
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The increase in inventories of $5.3 million in Fiscal 2015 reflects the increase in the number of stores in our network, higher inventory
costs due to higher U.S. dollar and the need to support our planned sales growth. The increase in trade and other payables of $2.0 million is
mainly due to the higher inventory levels and other expenses to support higher volume of sales in Fiscal 2015 compared to Fiscal 2014.
Cash Flows Used in Investing Activities
Capital expenditures increased $4.0 million, to $22.0 million in Fiscal 2016 from $18.0 million in Fiscal 2015. This increase was due
primarily to renovations of existing stores as well as investment in information systems.
Capital expenditures increased $4.8 million, to $18.0 million in Fiscal 2015 from $13.2 million in Fiscal 2014. This increase was due
primarily to the number of new store build outs. We opened 40 new stores in Fiscal 2015 compared to 31 new stores in Fiscal 2014.
Cash Flows Provided by Financing Activities
January 28,
2017
For the year ended
January 30,
2016
January 31,
2015
Cash flows provided by (used in) financing activities:
Repayment of finance lease obligations
Proceeds from issuance of long-term debt
Repayment of long-term debt
Repayment of loan from the controlling shareholder
Proceeds from issuance of common shares pursuant to exercise of
stock options
Proceeds from issuance of Series A-1 and A-2 preferred shares
Gross proceeds of initial public offering
Issuance costs paid on initial public offering
Financing fees
Cash flows provided by financing activities
$
— $
—
—
—
(552)
9,996
(20,010)
(2,952)
$
2,779
—
—
—
—
$
2,779
$
143
—
79,370
(10,661)
(172)
55,162
$
(314)
—
(3,375)
—
40
4,404
—
—
(134)
621
Cash flows from financing activities consist primarily of borrowing and payments on our term facilities and their related financing costs
and proceeds from share issuances.
Net cash provided by financing activities decreased by $52.4 million to $2.8 million in Fiscal 2016 from $55.2 million in Fiscal 2015
due to our initial public offering that occurred on June 10, 2015.
Net cash provided by financing activities increased by $54.6 million to $55.2 million in Fiscal 2015 from $0.6 million in Fiscal 2014
primarily due to gross proceeds from our IPO of $79.4 million, less fees of $10.7 million.
Credit Facility with Bank of Montreal
The Company has a credit arrangement (hereinafter referred to as “Credit Agreement”) with the Bank of Montreal (“BMO”) that
provides for a three-year revolving term facility, maturing October 31, 2019, in the principal amount of $20.0 million (which we refer 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 three-year term and with the permission of BMO, request an increase to the Revolving
Facility by an amount not greater than $10.0 million.
On June 11, 2015, immediately following our IPO, we fully repaid the advances under the Revolving Facility using proceeds from the
offering and cash on hand. As at January 28, 2017, we did not have any borrowings on the Revolving Facility.
The Credit Agreement subjects us to certain financial covenants. Without the prior written consent of BMO, our fixed charge coverage
ratio may not be less than 1.25:1.00 and our leverage ratio may not exceed 3.00:1.00. In addition, our net tangible worth may not be less than
$30.0 million.
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Borrowings under the Revolving Facility are available in the form of Canadian dollar advances, U.S. dollar advances, prime rate loans,
banker’s acceptances, U.S. base rate loans and LIBOR loans. Further, up to an aggregate maximum amount of $2.0 million, or the equivalent
amount in other currencies authorized by BMO, is available by way of letters of credit or letters of guarantees for terms of not more than 364
days. The Revolving Facility bears interest based on our adjusted leverage ratio. In the event our adjusted leverage ratio is equal to or less than
3.00:1.00, the Revolving Facility bears interest at (a) the bank’s prime rate plus 0.50% per annum, (b) the bank’s U.S. base rate plus 0.50% per
annum, (c) LIBOR plus 1.50% per annum, subject to availability, or (d) 1.50% on the face amount of each banker’s acceptance, letter of credit or
letter of guarantee, as applicable. A standby fee of 0.30% will be paid on the daily principal amount of the unused portion of the Revolving
Facility. Should our adjusted leverage ratio be greater than 3.00:1.00 but less than 4.00:1.00, the Revolving Facility bears interest at (a) the bank’s
prime rate plus 0.75% per annum, (b) the bank’s U.S. base rate plus 0.75% per annum, (c) LIBOR plus 1.75% per annum, subject to availability,
or (d) 1.75% on the face amount of each banker’s acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of 0.35% will be
paid on the daily principal amount of the unused portion of the Revolving Facility. If our adjusted leverage ratio is greater than 4.00:1.00, the
Revolving Facility bears interest at (a) bank’s prime rate plus 1.25% per annum, (b) the bank’s U.S. base rate plus 1.25% per annum, (c) LIBOR
plus 2.25% per annum, subject to availability, or (d) 2.25% on the face amount of each banker’s acceptance, letter of credit or letter of guarantee,
as applicable. A standby fee of 0.45% will be paid on the daily principal amount of the unused portion of the Revolving Facility.
The Credit Agreement is collateralized by a first lien security interest in all of our assets in the amount of $37.5 million, a general
security agreement, registered in each Canadian province in which we do business, creating a first priority charge on all assets.
The Credit Agreement contains a number of 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 January 28, 2017, we are in compliance with these covenants.
Term Loan with Rainy Day Investments Ltd.
On June 11, 2015, immediately following our IPO, we fully repaid the term loan with Rainy Day Investments Ltd. (referred to as “Loan
from the controlling shareholder” in this Annual Report) using proceeds from our IPO and cash on hand. As at January 28, 2017, we did not have
any borrowings with Rainy Day Investments Ltd.
Other than operating lease obligations, we have no off‑balance sheet obligations.
Off‑Balance Sheet Arrangements
Contractual Obligations and Commitments
In the normal course of business, we enter into contractual obligations that will require us to disburse cash over future periods. All
commitments have been recorded in our consolidated balance sheets, except for purchase obligations and minimum annual lease payments under
operating leases. The following table summarizes our contractual obligations as of January 28, 2017, and the effect such obligations are expected
to have on our liquidity and cash flows in future periods.
(dollars in thousands)
Trade and other payables
Operating lease obligations
Purchase obligations
Total
(2)
(1)
less than
1 year
Total
19,681 19,681
148,436 19,306
5,842
173,959
5,842
44,829
Payments due by period
Between
1 and 3 years
Between
3 and 5 years
More than
5 years
—
39,555
—
39,555
—
—
51,336 38,239
—
38,239
—
51,336
(1)Operating lease obligations under long‑term operating leases is exclusive of certain operating costs for which the Company is responsible. Certain of the
operating lease agreements provide for additional rentals based on sales.
(2) Includes amounts pertaining to agreements to purchase goods or services that are enforceable and legally binding on the Company.
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Critical Accounting Policies and Estimates
Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of
financial statements requires us to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements.
Each of these required estimates varies in regard to the level of judgment involved and its potential impact on our reported financial results.
Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely
to occur from period to period, and would materially impact our financial position, changes in financial position or results of operations. Our
significant accounting policies are discussed under Note 3 to our consolidated financial statements included elsewhere in this Annual Report.
Key sources of estimation uncertainty
Key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets
and liabilities within the next financial year are as follows:
Recoverability and impairment of non-financial assets. Leasehold improvements and furniture and equipment are reviewed for
impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. A review for impairment is conducted
by comparing the carrying amount of the cash generating units’, or CGUs’, assets with their respective recoverable amounts based on value in
use. Value in use is determined based on management’s best estimate of expected future cash flows, which includes estimates of growth rates,
from use over the remaining lease term and discounted using a pre‑tax weighted average cost of capital.
Critical judgments in applying accounting policies
We believe the following are critical judgments that management has made in the process of applying accounting policies that have the
most significant effect on the amounts recognized in our consolidated financial statements:
Impairment of non‑financial assets. Management is required to make significant judgments in determining if individual commercial
premises in which it carries out its activities are individual CGUs, or if these units should be aggregated at a district or regional level to form a
CGU. The significant judgments applied by management in determining if stores should be aggregated in a given geographic area to form a CGU
include the determination of expected customer behavior and whether customers could interchangeably shop in any of the stores in a given area
and whether management views the cash flows of the stores in the group as interdependent.
Income taxes. We may be subject to audits related to tax risks, and uncertainties exist with respect to the interpretation of tax
regulations, changes in tax laws, and the amount and timing of future taxable income. Differences arising between the actual results and the
assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income and income tax expense already
recorded. We establish provisions if required, based on reasonable estimates, for possible consequences of audits by the tax authorities. The
amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by
the entity and the responsible tax authority, which may arise on a wide variety of issues.
To determine the extent to which deferred income tax assets can be recognized, management estimates the amount of probable future
taxable profits that will be available against which deductible temporary differences and unused tax losses can be used. Such estimates are made
as part of the budget and strategic plan by tax jurisdiction. Management exercises judgment to determine the extent to which realization of future
taxable benefits is probable considering factors such as the number of years included in the forecast period and prudent tax planning strategies.
Recently Issued Accounting Standards
During the year, we implemented the following new accounting standards on the presentation of financial statements.
IAS 1, “Presentation of Financial Statements” (“IAS 1”), was modified in December 2014 when the IASB issued amendments to clarify
materiality, order of notes to financial statements, disclosure of accounting policies as well as aggregation and disaggregation of items presented
in the statement of financial position, statement of income (loss) and statement of comprehensive income (loss). These amendments shall be
applied to fiscal years beginning on or after January 1, 2016. We adopted this accounting standard effective on January 31, 2016, the first day of
Fiscal 2016. The adoption of IAS 1 has resulted in no impact to the consolidated financial statements.
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Information on significant new accounting standards and amendments issued but not yet adropted is described below.
IFRS 9, “Financial Instruments” (“IFRS 9”), partially replaces the requirements of IAS 39, “Financial Instruments: Recognition and
Measurement”. This standard is the first step in the project to replace IAS 39. The IASB intends to expand IFRS 9 to add new requirements for
the classification and measurement of financial liabilities, derecognition of financial instruments, impairment and hedge accounting to become a
complete replacement of IAS 39. These changes are applicable for annual periods beginning on or after January 1, 2018, with earlier application
permitted. We are currently assessing the impact of adopting this standard on our consolidated financial statements and related note disclosures.
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 and
estimated quantitative financial effects, before the adoption of IFRS 16.
JOBS Act Exemptions and Foreign Private Issuer Status
We qualify as an “emerging growth company” as defined in the JOBS Act. An emerging growth company may take advantage of
specified reduced reporting and other burdens that are otherwise applicable generally to public companies. This includes an exemption from the
auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes‑Oxley Act. We may take
advantage of this exemption for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an
emerging growth company if we (1) have US$1.0 billion or more in annual revenue as of the end of our fiscal year, (2) are a large accelerated filer
and have more than US$700.0 million in market value of our common shares held by non‑affiliates as of the end of our second fiscal quarter or
(3) issue more than US$1.0 billion of non‑convertible debt securities over a three‑year period. We may choose to take advantage of some but not
all of these reduced burdens.
We do not take advantage of the extended transition period provided under Section 7(a)(2)(B) of the Securities Act for complying with
new or revised accounting standards. We report under the Exchange Act as a non‑U.S. company with foreign private issuer status. Even after we
no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act we will be exempt
from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
· the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered
under the Exchange Act;
· the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for
insiders who profit from trades made in a short period of time;
45
Table of Contents
· the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10‑Q containing unaudited financial
and other specified information, or current reports on Form 8‑K, upon the occurrence of specified significant events; and
· Regulation FD, which regulates selective disclosures of material information by issuers.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in interest rates on debt and foreign currency on purchases of our teas and tea accessories.
Interest Rate Risk
Our borrowings under our Revolving Facility carry floating interest rates tied to our lender’s prime rate, and therefore, our consolidated
statements of income (loss) and cash flows will be exposed to changes in interest rates in fiscal periods in which we have debt outstanding. As at
January 28, 2017, we have no indebtedness under our Revolving Facility.
Foreign Exchange Risk
A significant portion of our tea and tea accessory purchases are in U.S. dollars as is our revenue from U.S. stores and U.S. e‑commerce
customers. As a result, our statement of income (loss) and cash flows could be adversely impacted by changes in exchange rates, primarily
between the U.S. dollar and the Canadian dollar. During the year, in order to protect ourselves from the risk of losses should the value of the
Canadian dollar decline in relation to the U.S. dollar, we entered into forward contracts of $42.4 million to fix the exchange rate of 80% to 90% of
our expected February 2017 to October 2017 U.S. dollar purchases in respect of our inventory.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
As of January 28, 2017 and January 30, 2016:
Consolidated Balance Sheets
For the years ended January 28, 2017, January 30, 2016 and January 31, 2015:
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to Consolidated Financial Statements
47
Page
48
49
50
51
52
53
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
DAVIDsTEA Inc.
We have audited the accompanying consolidated balance sheets of DAVIDsTEA Inc. (the “Company”) as of January 28, 2017 and
January 30, 2016, and the related consolidated statements of income (loss) and comprehensive income (loss), equity (deficiency) and cash flows
for each of the three years in the period ended January 28, 2017. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
DAVIDsTEA Inc. as of January 28, 2017 and January 30, 2016, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended January 28, 2017, in conformity with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
/s/ Ernst & Young LLP
1
Montréal, Canada
April 12, 2017
1
CPA, Auditor, CA, public accountancy permit no. A112179
48
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED BALANCE SHEETS
[In thousands of Canadian dollars]
Table of Contents
ASSETS
Current
Cash
Accounts and other receivables
Inventories
Income tax receivable
Prepaid expenses and deposits
Derivative financial instruments
Total current assets
Property and equipment
Intangible assets
Deferred income tax assets
Total assets
LIABILITIES AND EQUITY
Current
Trade and other payables
Deferred revenue
Income taxes payable
Current portion of provisions
Total current liabilities
Deferred rent and lease inducements
Provisions
Total liabilities
Commitments and contingencies
Equity
Share capital
Contributed surplus
Deficit
Accumulated other comprehensive income
Total equity
See accompanying notes
49
[Note 6]
[Note 7]
[Note 19]
[Note 24]
[Note 8]
[Note 9]
[Note 19]
[Note 10]
[Note 11]
[Note 19]
[Note 12]
[Note 12]
[Note 13]
[Note 17]
As at
January 28,
2017
$
As at
January 30,
2016
$
64,440
3,485
31,264
539
5,659
454
105,841
51,160
2,958
14,375
174,334
19,681
4,885
—
2,562
27,128
7,824
5,932
40,884
263,828
8,833
(142,398)
3,187
133,450
174,334
72,514
2,702
17,767
605
4,493
3,442
101,523
47,330
2,242
7,877
158,972
14,435
3,762
62
512
18,771
6,002
162
24,935
259,205
7,094
(138,465)
6,203
134,037
158,972
Table of Contents
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
[In thousands of Canadian dollars, except share information]
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Accretion of preferred shares
Loss from embedded derivative on Series A, A-1 and A-2 preferred shares
IPO-related costs
Settlement cost related to former option holder
Income (loss) before income taxes
Provision for income tax (recovery)
Net income (loss)
Other comprehensive income (loss)
Items to be reclassified subsequently to income:
Unrealized net gain (loss) on forward exchange contracts
Realized net gain on forward exchange contracts reclassified to inventory
Provision for income tax recovery (income tax) on comprehensive income
Cumulative translation adjustment
Other comprehensive income (loss), net of tax
Total comprehensive income (loss)
Net income (loss) per share:
Basic
Fully diluted
Weighted average number of shares outstanding
— basic
— fully diluted
January 28, 2017
$
For the year ended
January 30,
2016
$
January 31,
2015
$
215,984
107,534
108,450
114,756
(6,306)
76
(479)
—
—
—
—
(5,903)
(2,235)
(3,668)
(2,247)
(742)
793
(820)
(3,016)
(6,684)
(0.15)
(0.15)
180,690
85,359
95,331
80,116
15,215
1,051
(348)
401
140,874
—
—
(126,763)
4,668
(131,431)
5,253
(1,811)
(913)
1,388
3,917
(127,514)
(6.65)
(6.65)
141,883
64,185
77,698
66,565
11,133
2,345
(133)
1,044
380
856
520
6,121
(333)
6,454
—
—
—
1,475
1,475
7,929
0.54
0.45
24,699,290 19,776,946 11,984,763
24,699,290 19,776,946 19,966,846
[Note 23]
[Note 20]
[Note 18]
[Note 16]
[Note 16]
[Note 19]
[Note 24]
[Note 21]
[Note 21]
[Note 21]
[Note 21]
See accompanying notes
50
Table of Contents
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF CASH FLOWS
[In thousands of Canadian dollars]
January 28,
2017
$
For the year ended
January 30,
2016
$
January 31,
2015
$
OPERATING ACTIVITIES
Net income (loss)
Items not affecting cash:
Depreciation of property and equipment
Amortization of intangible assets
Loss on disposal of property and equipment
Impairment of property and equipment
Deferred rent
Provision (recovery) for onerous contracts
Stock-based compensation expense
Settlement related to cashless exercise of stock options, net of income taxes recovered
Settlement cost related to former option holder
Amortization of financing fees
Accretion of preferred shares
Loss from embedded derivative on Series A, A-1 and A-2 preferred shares
Deferred income taxes (recovered)
Net change in other non-cash working capital balances related to operations
Cash flows related to operating activities
FINANCING ACTIVITIES
Repayment of finance lease obligations
Proceeds from issuance of long-term debt
Repayment of long-term debt
Repayment of loan from the controlling shareholder
Proceeds from issuance of common shares pursuant to exercise of stock options
Proceeds from issuance of Series A-1 and A-2 preferred shares
Gross proceeds of initial public offering ("IPO")
IPO-related expenses
Financing fees
Cash flows related to financing activities
INVESTING ACTIVITIES
Additions to property and equipment
Additions to intangible assets
Cash flows related to investing activities
Increase (decrease) in cash during the year
Cash, beginning of year
Cash, end of year
Supplemental Information
Cash paid for:
Interest
Income taxes (classified as operating activity)
Cash received for:
Interest
Income taxes (classified as operating activity)
See accompanying notes
51
(3,668)
(131,431)
8,069
758
356
7,516
1,325
8,140
2,264
—
—
75
—
—
(4,380)
20,455
(9,293)
11,162
—
—
—
—
2,779
—
—
—
—
2,779
(20,531)
(1,484)
(22,015)
(8,074)
72,514
64,440
1
2,437
486
532
5,832
613
297
—
1,165
(265)
1,749
(2,976)
—
241
401
140,874
1,364
17,864
(2,272)
15,592
(552)
9,996
(20,010)
(2,952)
143
—
79,370
(10,661)
(172)
55,162
(16,852)
(1,172)
(18,024)
52,730
19,784
72,514
372
2,675
378
662
6,454
4,874
573
31
2,740
802
805
947
—
345
172
1,044
380
(3,024)
16,143
823
16,966
(314)
—
(3,375)
—
40
4,404
—
—
(134)
621
(12,432)
(721)
(13,153)
4,434
15,350
19,784
1,012
4,232
133
—
Table of Contents
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)
[In thousands of Canadian dollars]
Share
Capital
$
Contributed
Surplus
$
Deficit
$
Accumulated Other Comprehensive Income
Accumulated Accumulated
Derivative
Financial
Instrument
Foreign
Currency
Translation Comprehensive
Accumulated
Other
Adjustment Adjustment
$
$
Income
$
Balance, January 31, 2015
Net loss for the year ended January 30, 2016
Other comprehensive income
Total comprehensive loss
Issuance of common shares
Gross proceeds on initial public offering
Issue costs on initial public offering (net of
future tax benefit)
Issuance of common shares on conversion of
junior preferred and Series A, A-1 and A-2
preferred shares
Stock-based compensation
Income tax impact associated with stock options
Settlement related to cashless exercise of stock
options (net of income taxes recovered of
$1,076)
Balance, January 30, 2016
Balance, January 30, 2016
Net loss for the year ended January 28, 2017
Other comprehensive loss
Total comprehensive loss
Issuance of common shares
Common shares issued on vesting of
restricted stock units
Stock-based compensation expense
Income tax impact associated with stock
options
Balance, January 28, 2017
385
—
—
—
312
79,370
(7,738)
186,947
—
—
(71)
259,205
259,205
—
—
—
4,175
448
—
—
263,828
1,412
—
—
—
(169)
—
—
—
1,749
4,102
(4,129)
(131,431)
—
(131,431)
—
—
—
—
—
—
—
7,094
(2,905)
(138,465)
7,094
—
—
—
(1,396)
(922)
2,264
1,793
8,833
(138,465)
(3,668)
—
(3,668)
—
(265)
—
—
(142,398)
—
—
2,529
2,529
—
—
—
—
—
—
—
2,529
2,529
—
(2,196)
(2,196)
—
—
—
—
333
2,286
—
1,388
1,388
—
—
—
—
—
—
—
3,674
3,674
—
(820)
(820)
—
—
—
—
2,854
See accompanying notes
52
Total
Equity
(Deficiency)
$
(46)
(131,431)
3,917
(127,514)
143
79,370
2,286
—
3,917
3,917
—
—
—
(7,738)
—
—
—
186,947
1,749
4,102
—
6,203
(2,976)
134,037
6,203
—
(3,016)
(3,016)
—
134,037
(3,668)
(3,016)
(6,684)
2,779
—
—
(739)
2,264
—
3,187
1,793
133,450
Table of Contents
DAVIDsTEA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended January 28, 2017, January 30, 2016 and January 31, 2015
[Amounts in thousands of Canadian dollars except per share amounts and
where otherwise indicated]
1. CORPORATE INFORMATION
The consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the year ended January
28, 2017 were authorized for issue in accordance with a resolution of the Board of Directors on April 12, 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 Street, 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 in the United States.
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 quarters because of lower customer traffic during the summer months.
2. BASIS OF PREPARATION
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The accounting policies were consistently applied to all
periods presented.
On May 12, 2015, the Company’s Board of Directors approved a 1.6-for-1 split on common and Class AA common shares, which was
effective May 21, 2015. The accompanying financial statements have been adjusted to reflect the forward split. As a result, the historical per share
amounts and the number of shares in these consolidated financial statements have been retroactively adjusted to reflect this change.
The Company’s fiscal year ends on the last Saturday in January. The years ended January 28, 2017 and January 30, 2016 cover a
52‑week fiscal period. The year ended January 31, 2015 covers a 53‑week fiscal period.
Basis of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned U.S. subsidiary, DAVIDsTEA
(USA) Inc. The financial statements of the subsidiary are prepared for the same reporting period as the parent company, using consistent
accounting policies. All intercompany transactions, balances and unrealized gains or losses have been eliminated.
Basis of measurement
These consolidated financial statements have been prepared on the historical cost basis except for the following material items:
· Derivative financial instruments are measured at fair value; and
· Provisions for onerous contracts are measured at the present value of the expenditures expected to settle the obligations.
Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the parent Company’s functional currency.
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Table of Contents
3. SIGNIFICANT ACCOUNTING POLICIES
Cash
Cash on the consolidated balance sheet comprises cash at banks and on hand.
Inventory valuation
Inventories are measured at the lower of cost and net realizable value. Cost is determined using the weighted average cost method. Costs
include the cost of purchase and transportation costs that are directly incurred to bring the inventories to their present location, and duty. Net
realizable value is the estimated selling price of inventory in the ordinary course of business, less any estimated selling costs. Cost also includes
realized gains and losses on forward contracts designated as cash flow hedges of U.S. inventory purchases.
Property and equipment and assets under finance leases
Property and equipment are initially recorded at cost and are depreciated over their useful economic life. Cost includes expenditures that
are directly attributable to the acquisition of the asset, including any costs directly related to bringing the asset to a working condition for its
intended use. The residual values, useful lives and methods of depreciation of property and equipment are reviewed at each financial year end and
adjusted prospectively, if appropriate. All repair and maintenance costs are recognized in net income (loss) as incurred.
Depreciation of an asset begins once it becomes available for use. Depreciation is charged to income on the following bases:
Furniture and equipment
Computer hardware
% declining
balance
% declining
balance
20
30
Leasehold improvements are depreciated on a straight‑line basis over the lesser of the useful economic life and the initial term of the
leases, plus one renewal option period, not to exceed 10 years.
Any gain or loss arising on the disposal or derecognition of the asset (calculated as the difference between the net disposal proceeds and
the carrying amount of the asset) is included in net income (loss) when the asset is derecognized.
Intangible assets
Intangible assets consist of computer software, trademarks, patents and rights over leased assets.
Intangible assets are initially recorded at cost. Intangible assets with finite lives are amortized over their useful economic life. The
amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting
period. Changes in the expected useful life are considered to modify the amortization period or method, as appropriate, and are treated as changes
in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in income (loss) as the expense category that
is consistent with the function of the intangible assets.
Any gain or loss arising on the disposal or derecognition of the intangible asset (calculated as the difference between the net disposal
proceeds and the carrying amount of the intangible asset) is included in net income (loss) when the intangible asset is derecognized.
When computer software is not an integral part of a related item of computer hardware, the software is treated as an intangible.
Computer software is amortized on the basis of its estimated useful life using the declining method at the rate of 30%.
Leases
Leases are classified as either operating or finance, based on the substance of the transaction at inception of the lease. Classification is
re‑assessed if the terms of the lease are changed.
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Table of Contents
Leases in which a significant portion of the risks and rewards of ownership are not assumed by the Company are classified as operating
leases. The Company carries on its operations in premises under leases of varying terms and renewal options, which are accounted for as
operating leases. Payments under an operating lease are recognized in net income (loss) on a straight‑line basis over the term of the lease. When a
lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight‑line basis
and, consequently, records the difference between the recognized rental expense and the amounts payable under the lease as deferred rent.
Contingent (sales‑based) rentals are recognized as an expense when incurred.
Store opening costs
Store opening costs are expensed as incurred.
Impairment
i.
Impairment of financial assets
The Company assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is
impaired. An impairment exists if one or more events that has occurred since the initial recognition of the asset (an incurred “loss event”) has an
impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of
impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in
interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that
there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
ii.
Impairment of non‑financial assets
The Company assesses, at each reporting date, whether there is an indication that an item of property and equipment or an intangible
asset may be impaired. If any indication exists, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the
higher of an asset’s or cash‑generating unit’s (“CGU”) fair value less costs of disposal and its value in use. When the carrying amount of an asset
or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an
appropriate valuation model is used. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre‑tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Recoverable amount is
determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or
corporate assets. The discount rate applied to an asset or CGU is the weighted average cost of capital (“WACC”). Management considers factors
such as risk-free rate, equity risk premium, size premium, specific business risk premium and cost of debt to derive the WACC.
The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of
the Company’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of ten years or
the lease term if shorter.
Based on the management of operations, the Company has defined each of the commercial premises in which it carries out its activities
as a CGU, although where appropriate these premises are aggregated at a district or regional level to form a CGU.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no
longer exist or may have decreased and if there has been a change in the assumptions used to determine the asset’s recoverable amount. The
reversal is limited to the extent that an asset’s carrying amount does not exceed the carrying amount that would have been determined, net of
depreciation or amortization, had no impairment loss been recognized. Such reversal is recognized in net income (loss).
Derivative financial instruments and hedge accounting
The Company enters into foreign exchange forward contracts to hedge its foreign currency risks, resulting from variability in foreign
currency exchange rates on inventory purchases, as described in Note 24.
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Derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are
subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when
the fair value is negative.
For the purpose of hedge accounting, hedges are classified as cash flow hedges when hedging the exposure to variability in cash flows
that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction.
At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which it wishes to
apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of
the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of
changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to
the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an
ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were
designated.
The Company has applied hedge accounting for its foreign exchange forward contracts and has designated them as cash flow hedges.
The effective portion of the gain or loss on the hedging instrument is recognized directly in Other Comprehensive Income (“OCI”), while any
ineffective portion is recognized immediately in net income (loss). The amounts recognized in OCI are reclassified to inventory when such non-
financial asset is recognized on the balance sheet, and to net income (loss) when inventory is subsequently sold.
Provisions
Provisions are recognized when the Company has a present obligation as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. When the Company expects some or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset, but only
when the reimbursement is virtually certain. The expense relating to a provision is presented in the statement of income (loss) net of any
reimbursement. All provisions are reviewed at each reporting date and adjusted to reflect the current best estimates.
If the effect of the time value of money is material, provisions are discounted using a current pre‑tax rate that reflects, when appropriate,
the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
Deferred lease inducements
The deferred lease inducements are composed of free rent and construction allowances obtained upon signing of lease agreements for
certain retail stores. They are amortized on a straight‑line basis over the term of the related leases, plus one renewal option, to a maximum of
10 years.
Share capital
i.
Common shares
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a
deduction from equity, net of any tax effects.
Common shares are classified as equity if they are non‑redeemable or redeemable only at the Company’s option, and any dividends are
discretionary. Dividends thereon are recognized as distributions within equity on approval by the Company’s Board of Directors.
ii.
Preferred shares
Preferred shares are classified as a financial liability if they are redeemable on a specific date or at the option of the shareholders.
Dividends thereon are recognized as interest expense in net income (loss) as accrued.
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.
iii.
Hybrid financial instruments
Hybrid financial instruments issued by the Company comprise convertible preferred shares that can be converted to common shares at
the option of the holders, when the number of shares to be issued is not fixed.
The equity components on such instruments are separated from the debt host contract (preferred shares redeemable at the option of the
holders) and accounted for separately if the economic characteristics and risks of the debt host contract and the embedded derivative (equity
components) are not closely related.
iv.
Derivative and embedded derivative financial instruments
The Company issued liability‑classified derivatives and embedded derivatives over its Series A, A‑1 and A‑2 preferred shares.
Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host
contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet
the definition of a derivative and the combined instrument is not measured at fair value through income (loss).
Derivatives and separable embedded derivatives are recognized initially at fair value and attributable transaction costs are recognized in
income (loss) as incurred. Subsequent to initial recognition, derivatives and separable embedded derivatives are measured at fair value and all
changes in their fair value are recognized immediately in income (loss).
Stock‑based compensation
The Company has a stock option plan for employees and directors from which options to purchase common shares are issued (the
“Plan”). Options may not be granted with an exercise price of less than the fair value of the underlying shares at the grant date. The awards have
no cash settlement alternatives. The vesting requirements are typically service‑based and the options normally have a contractual life of seven
years.
The fair value of stock‑based compensation awards granted to employees is measured at the grant date using the Black Scholes option
pricing model. Measurement inputs include the share price of the underlying shares on the measurement date, the exercise price of the option, the
expected volatility (based on weighted average historical volatility of comparable companies adjusted for changes expected based on publicly
available information), the weighted average expected life of the option (based on historical experience), expected dividends, and the risk‑free
interest rate (based on government bonds).
The value of the compensation expense is recognized over the vesting period of the stock options as an expense included in selling and
general administration expenses, with a corresponding increase to contributed surplus in equity. The amount recognized as an expense is adjusted
to reflect the Company’s best estimate of the number of awards that will ultimately vest. No expense is recognized for awards that do not
ultimately vest.
Any consideration paid by plan participants on the exercise of stock options and the previously recognized compensation cost of the
options exercised included in contributed surplus are credited to share capital.
Under the Company’s 2015 Omnibus Equity Incentive Plan (the “2015 Omnibus Plan”), selected employees are granted RSUs where
each RSU has a value equal to one common share. The compensation expense is recorded at the fair value of the Company’s common shares at
the grant date over the vesting period (generally two to three years) with a corresponding credit to contributed surplus for equity-settled RSUs and
a corresponding credit to a liability for cash-settled RSUs. RSUs may be settled in shares, cash, or a combination of cash or shares upon vesting at
the discretion of the Company. Cash settled RSUs are revalued at each reporting date to reflect their fair value at that date. Fair value is
determined using the closing price of the Company’s common shares on the NASDAQ Global Market prior to the date of the grant. The Company
has not issued any cash settled awards to date.
Revenue recognition
Revenue from retail sales is recorded upon delivery to the customer. Revenue is recognized on e-commerce sales when merchandise is
delivered. Revenues are recorded net of discounts, rebates, estimated returns, sales taxes and amounts deferred related to the issuance of Frequent
Steeper points.
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i.
Gift card breakage
Gift cards sold are recorded as deferred revenue and revenue is recognized at the time of redemption or in accordance with the
Company’s accounting policy for breakage. Breakage income represents the estimated value of gift cards that is not expected to be redeemed by
customers and is estimated based on historical redemption patterns. During the year, the Company determined that it had sufficient historical
redemption patterns to record breakage income associated with unredeemed gift cards, and accordingly recorded an amount of $850 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 consolidated
statement of income (loss). For the years ended January 30, 2016 and January 31, 2015, no breakage income was recorded.
ii.
Loyalty program
The Frequent Steeper loyalty and rewards program allows customers to earn points when they purchase products in the Company’s retail
stores and on the Company’s website. Points can be redeemed for free tea or free beverages, depending on the number of points a customer has
obtained over a limited collection period. Free tea offers are issued at the end of each collection period and must be redeemed within 60 days from
the effective date. Free beverage offers are issued at the end of the calendar collection period and must be redeemed within 60 days from the
effective date.
The fair value of points issued is recorded as deferred revenue and recognized as revenue only when the points are redeemed for free
products or when the related points expire. The fair value of Frequent Steeper points is determined based on the estimated selling price of the
product for which the point is expected to be redeemed, net of points we do not expect to be redeemed. On an ongoing basis, the Company
monitors historical redemption rates. Points revenue is included with total sales in the consolidated statement of income (loss).
Finance income
Interest income is recognized as interest accrues using the effective interest method.
Income taxes
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income (loss) except to the
extent that they relate to items recognized directly in equity or in other comprehensive income.
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered or paid.
The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Management
periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation
and establishes provisions where appropriate.
The Company uses the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax assets
and liabilities for all temporary differences caused when the tax bases of assets and liabilities differ from their carrying amounts reported in the
consolidated financial statements. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the
temporary differences when they reverse, based on tax rates that have been enacted or substantively enacted at the end of the reporting period.
The Company recognizes deferred income tax assets for unused tax losses and deductible temporary differences only to the extent that, in
management’s opinion, it is probable that future taxable income will be available against which they can be utilized. Deferred income tax assets
are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset and when the deferred income tax
assets and liabilities relate to income taxes levied by the same taxation authority and the Company intends either to settle on a net basis or to
realize the asset and settle the liability simultaneously.
Earnings per share
Basic earnings per share are calculated using the weighted average number of shares outstanding during the period.
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The diluted earnings per share are calculated by adjusting the weighted average number of shares outstanding to include additional
shares issued from the assumed conversion of preferred shares and the exercise of stock options, if dilutive. For stock options, the number of
additional shares is calculated by assuming that the proceeds from such exercises, as well as the amount of unrecognized stock-based
compensation which is considered to be assumed proceeds, are used to purchase common shares at the average market price during the reporting
period.
Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of
another entity. Financial instruments are recognized depending on their classification with changes in subsequent measurements being recognized
in income or loss or in other comprehensive income (“OCI”).
The Company has made the following classifications:
· Cash is classified as “Fair Value through Profit or Loss”, and measured at fair value. Changes in fair value are recorded in income
(loss).
· Accounts and other receivables are classified as “Loans and Receivables”. After their initial fair value measurement, they are measured
at amortized cost using the effective interest rate method.
· Trade and other payables, Series A, A‑1 and A‑2 preferred shares, loan from the controlling shareholder, long‑term debt and finance
lease obligations are classified as “Other Financial Liabilities”. After their initial fair value measurement, they are measured at
amortized cost using the effective interest rate method.
Foreign currency translation
Revenues, expenses and non-monetary assets and liabilities denominated in foreign currencies are recorded at the rate of exchange
prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates prevailing at
the balance sheet date. Unrealized and realized translation gains and losses are reflected in net income (loss).
The assets and liabilities of the Company’s U.S. wholly owned subsidiary, whose functional currency is the U.S. dollar, are translated
into Canadian dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates for
the year. Differences arising from the exchange rate changes are included in OCI in the cumulative translation account.
Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which
is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the
foreign operation, are recognized in other comprehensive income in the cumulative translation account and reclassified from equity to net income
(loss) on disposal of the net investment.
4. CHANGES IN ACCOUNTING PRINCIPLES
IAS 1, “Presentation of Financial Statements” (“IAS 1”), was modified in December 2014 when the IASB issued amendments to clarify
materiality, order of notes to financial statements, disclosure of accounting policies as well as aggregation and disaggregation of items presented
in the consolidated balance sheets and consolidated statements of income (loss) and comprehensive income (loss). These amendments shall be
applied to fiscal years beginning on or after January 1, 2016. The Company has adopted this accounting standard effective on January 31, 2016,
the first day of its newest fiscal year. The adoption of IAS 1 has resulted in no impact to the consolidated financial statements.
Standards issued but not yet effective
IFRS 9, “Financial Instruments”(“IFRS 9”), partially replaces the requirements of IAS 39, “Financial Instruments: Recognition and
Measurement”. This standard is the first step in the project to replace IAS 39. The IASB intends to expand IFRS 9 to add new requirements for
the classification and measurement of financial liabilities, derecognition of financial instruments, impairment and hedge accounting to become a
complete replacement of IAS 39. These changes are applicable for annual periods
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beginning on or after January 1, 2018, with earlier application permitted. The Company is currently assessing the impact of adopting this standard
on the consolidated financial statements and related note disclosures.
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 and estimated
quantitative financial effects, before the adoption of IFRS 16.
5. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the consolidated financial statements in conformity with IFRS requires the Company to make judgments, apart from
those involving estimation, in applying accounting policies that affect the recognition and measurement of assets, liabilities, revenues, and
expenses. Actual results may differ from the judgments made by the Company. Information about judgments that have the most significant effect
on recognition and measurement of assets, liabilities, revenues, and expenses are discussed below. Information about significant estimates is
discussed in the following section.
Key sources of estimation uncertainty
Recoverability and impairment of non‑financial assets
Leasehold improvements and furniture and equipment are reviewed for impairment if events or changes in circumstances indicate that
the carrying amount may not be recoverable. A review for impairment is conducted by comparing the carrying amount of the CGU’s assets with
their respective recoverable amounts based on value in use. Value in use is determined based on management’s best estimate of expected future
cash flows, which includes estimates of growth rates, from use over the remaining lease term and discounted using a pre‑tax weighted average
cost of capital (Note 8).
Critical judgements in applying accounting policies
i.
Impairment of non‑financial assets
Management is required to make significant judgments in determining if individual commercial premises in which it carries out its
activities are individual CGUs, or if these units should be aggregated at a district or regional level to form a CGU. The significant judgments
applied by management in determining if stores should be aggregated in a given geographic area to form a CGU include the determination of
expected customer behavior, the allocation basis of e-commerce sales to CGUs, and whether customers could interchangeably shop in any of the
stores in a given area and whether management views the cash flows of the stores in the group as interdependent.
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ii.
Income taxes
The Company may be subject to audits related to tax risks, and uncertainties exist with respect to the interpretation of tax regulations,
changes in tax laws, and the amount and timing of future taxable income. Differences arising between the actual results and the assumptions
made, or future changes to such assumptions, could necessitate future adjustments to taxable income and income tax expense already recorded.
The Company establishes provisions if required, based on reasonable estimates, for possible consequences of audits by the tax authorities. The
amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by
the entity and the responsible tax authority, which may arise on a wide variety of issues.
To determine the extent to which deferred income tax assets can be recognized, management estimates the amount of probable future
taxable profits that will be available against which deductible temporary differences and unused tax losses can be used. Such estimates are made
as part of the budget and strategic plan by tax jurisdiction. Management exercises judgment to determine the extent to which realization of future
taxable benefits is probable considering factors such as the number of years included in the forecast period and prudent tax planning strategies.
See Note 19—Income Taxes for more details.
6. ACCOUNTS AND OTHER RECEIVABLES
Credit card cash clearing receivables
Government remittances
Other receivables
7. INVENTORIES
Finished goods
Goods in transit
Packaging
January 28,
2017
$
1,537
—
1,948
3,485
January 30,
2016
$
1,528
84
1,090
2,702
January 28,
2017
$
January 30,
2016
$
24,504
5,463
1,297
31,264
12,903
3,790
1,074
17,767
During the year ended January 28, 2017, inventories recognized as cost of sales amounted to $62,995 [January 30, 2016 —$49,815]. The
cost of inventory includes a write‑down recorded of $869 [January 30, 2016 — $164] as a result of net realizable value being lower than cost. No
inventory write-downs recognized in previous years were reversed.
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8. PROPERTY AND EQUIPMENT
Cost
Balance, January 31, 2015
Acquisitions
Disposals
Cumulative translation adjustment
Balance, January 30, 2016
Acquisitions
Disposals
Cumulative translation adjustment
Balance, January 28, 2017
Accumulated depreciation and impairment
Balance, January 31, 2015
Depreciation
Disposals
Cumulative translation adjustment
Balance, January 30, 2016
Depreciation
Impairment
Disposals
Cumulative translation adjustment
Balance, January 28, 2017
Net Carrying Value
Balance, January 30, 2016
Balance, January 28, 2017
Leasehold
Furniture and Computer
improvements
$
equipment
$
hardware
$
45,916
13,507
(393)
1,490
60,520
16,571
(404)
(1,132)
75,555
6,121
2,032
(27)
144
8,270
3,135
(104)
(116)
11,185
1,801
1,313
—
42
3,156
825
—
(33)
3,948
Leasehold Furniture and Computer
improvements
$
equipment
$
hardware
$
14,844
4,574
(109)
609
19,918
6,210
6,764
(91)
(459)
32,342
2,379
902
(14)
65
3,332
1,211
615
(61)
(49)
5,048
994
356
—
16
1,366
648
137
—
(13)
2,138
Total
$
53,838
16,852
(420)
1,676
71,946
20,531
(508)
(1,281)
90,688
Total
$
18,217
5,832
(123)
690
24,616
8,069
7,516
(152)
(521)
39,528
40,602
43,213
4,938
6,137
1,790
1,810
47,330
51,160
Depreciation expense is reported in the consolidated statement of income (loss) under selling, general and administration expenses (Note
20). For the year ended January 28, 2017, the depreciation expense is $8,069 [January 30, 2016 — $5,832 ; January 31, 2015 — $4,874].
For the year ended January 28, 2017, an assessment of impairment 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, an impairment loss of $7,516 [January 30, 2016 — nil; January 31, 2015 — $2,740] related to store leasehold improvements,
furniture and equipment, and computer hardware was recorded in the Canada and U.S. segments for $1,116 and $6,400, respectively [January 30,
2016 — nil and nil, respectively; January 31, 2015 — nil and $2,740, respectively]. These losses were 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 $472 [January 30,
2016 — nil January 31, 2015 — $492] 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% [January 30, 2016 — 13.4%; January 31, 2015 — 13.0%].
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9. INTANGIBLE ASSETS
Cost
Balance, January 31, 2015
Acquisitions
Cumulative translation adjustment
Balance, January 30, 2016
Acquisitions
Cumulative translation adjustment
Balance, January 28, 2017
Accumulated amortization
Balance, January 31, 2015
Amortization
Cumulative translation adjustment
Balance, January 30, 2016
Amortization
Cumulative translation adjustment
Balance, January 28, 2017
Net Carrying Value
Balance, January 30, 2016
Balance, January 28, 2017
Computer
software
$
Other
$
Total
$
3,681
1,172
3
4,856
1,468
(3)
6,321
2,231
595
2
2,828
739
(2)
3,565
257
—
18
275
16
(12)
279
38
18
5
61
19
(3)
77
3,938
1,172
21
5,131
1,484
(15)
6,600
2,269
613
7
2,889
758
(5)
3,642
2,028
2,756
214
202
2,242
2,958
Amortization expense is reported in the consolidated statement of income (loss) under selling, general and administration expenses.
10. TRADE AND OTHER PAYABLES
Trade payable and accrued liabilities
Government remittances
Wages, salaries and employee benefits payable
11. DEFERRED REVENUE
Gift cards liability
Loyalty program liability
January 28,
2017
$
January 30,
2016
$
13,990
1,860
3,831
19,681
10,980
—
3,455
14,435
January 28,
2017
$
3,263
1,622
4,885
January 30,
2016
$
2,812
950
3,762
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12. PROVISIONS
Opening balance
Arising during the year
Amortized during the year
Settled during the year
Cumulative translation adjustment
Ending balance
Less: Current portion
Long-term portion of provisions
For the
year ended
January 28,
2017
$
For the
year ended
January 30,
2016
$
674
8,140
—
(235)
(85)
8,494
(2,562)
5,932
874
—
(265)
—
65
674
(512)
162
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.
13. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The commercial premises at which the Company carries out its retail operations, its head office and its primary warehouse location are
leased from third parties. These rental contracts are classified as operating leases since there is no transfer of risks and rewards inherent to
ownership.
These leases have varying terms and renewal rights. In many cases, the amounts payable to the lessor include a fixed rental payment as
well as a percentage of sales obtained by the Company in the leased premises. Many leases include escalating rental payments, whereby cash
outflows increase over the lease term. Free rental periods are also sometimes included.
The minimum rentals payable under long‑term operating leases are exclusive of certain operating costs for which the
Company is responsible. For the year ended January 28, 2017, the Company has recognized in income (loss) contingent rent
amounting to $2,312 [January 30, 2016 —$1,829—$1,397] and accrued for a contingent rent liability of $1,001 [January 30,
2016 —$715].
Included in the cost of sales and selling, general and administration expenses for the year ended January 28, 2017 is rent expense of
$29,173 [January 30, 2016 —$22,679; January 31, 2015 —$16,972].
The following is a schedule of future minimum lease payments under operating leases:
Within one year
After one year but not more than five years
More than five years
14. REVOLVING FACILITY
January 28,
2017
$
January 30,
2016
$
19,306
90,891
38,239
148,436
15,647
76,106
35,316
127,069
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
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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 the end of the three-year term and with permission from BMO, request an
increase to the Revolving Facility by an amount not greater than $10,000. As at January 28, 2017 and January 30, 2016, the Company did not
have any borrowings on the Revolving Facility.
The Credit Agreement subjects the Company to certain financial covenants. Without the prior written consent of BMO, the Company’s
fixed charge coverage ratio may not be less than 1.25:1.00 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 $30,000. Borrowings under the Revolving Facility are available in the form of Canadian
dollar advances, U.S. dollar advances, prime rate loans, banker’s acceptances, U.S. base rate loans and LIBOR loans. Further, up to an aggregate
maximum amount of $2,000, or the equivalent amount in other currencies authorized by BMO, is available by way of letters of credit or letters of
guarantees for terms of not more than 364 days. The Revolving Facility bears interest based on the Company’s adjusted leverage ratio. In the
event the Company’s adjusted leverage ratio is equal to or less than 3.00:1.00, the Revolving Facility bears interest at (a) the bank’s prime rate
plus 0.50% per annum, (b) the bank’s U.S. base rate plus 0.50% per annum, (c) LIBOR plus 1.50% per annum, subject to availability, or
(d) 1.50% on the face amount of each banker’s acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of 0.30% will be
paid on the daily principal amount of the unused portion of the Revolving Facility. Should the Company’s adjusted leverage ratio be greater than
3.00:1.00 but less than 4.00:1.00, the Revolving Facility bears interest at (a) the bank’s prime rate plus 0.75% per annum, (b) the bank’s U.S. base
rate plus 0.75% per annum, (c) LIBOR plus 1.75% per annum, subject to availability, or (d) 1.75% on the face amount of each banker’s
acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of 0.35% will be paid on the daily principal amount of the unused
portion of the Revolving Facility. If the Company’s adjusted leverage ratio is greater than 4.00:1.00, the Revolving Facility bears interest at (a) the
bank’s prime rate plus 1.25% per annum, (b) the bank’s U.S. base rate plus 1.25% per annum, (c) LIBOR plus 2.25% per annum, subject to
availability, or (d) 2.25% on the face amount of each banker’s acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of
0.45% will be paid on the daily principal amount of the unused portion of the Revolving Facility. As at January 28, 2017, the bank’s prime rate
was 2.70% [January 30, 2016 — 2.70%] and the bank’s U.S base rate was 4.50% [January 30, 2016 — 4.00%].
The Credit Agreement is collateralized by a first lien security interest in all of the Company’s assets in the amount of $37,500, a general
security agreement, registered in each Canadian province in which the Company does business, creating a first priority charge on all assets. The
Revolving Facility contains a number of 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 January 28, 2017, the Company is in compliance with these covenants.
15. LOAN FROM THE CONTROLLING SHAREHOLDER
On June 11, 2015, immediately following the Company’s IPO, the advances under the loan from the controlling shareholder were fully
repaid using proceeds from the IPO and cash on hand. As at January 28, 2017, the Company did not have any borrowings from the controlling
shareholder [January 30, 2016 — nil].
16. MANDATORILY REDEEMABLE PREFERENCE SHARES
Prior to the Company’s IPO on June 10, 2015, the Series A, A-1, and A-2 redeemable preferred shares liability was being accreted to
their nominal value and the financial derivative liability embedded in the preferred shares was being measured at fair value with all changes
recognized immediately in income (loss). For the year ended January 30, 2016, the accretion on preferred shares was
65
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$401 and the changes in the carrying value of the financial derivative liability embedded in preferred shares amounted to $140,874. The amounts
were recorded as a loss in the consolidated statement of income (loss) for the year ended January 30, 2016.
Redeemable preferred shares - Issued and paid
4,003,724 Series A preferred shares
912,689 Series A-1 preferred shares
152,880 Series A-2 preferred shares
Accrued dividends
Accretion for the year
Less: unamortized financing fees
Less: conversion of Series A, A-1 and A-2 preferred shares to 8,128,805 common shares
Balance, end of year
Financial derivative liability
Balance, beginning of year
New issuances
Net change in fair value
Less: conversion of Series A, A-1 and A-2 preferred shares to common shares
Balance, end of year
January 28,
2017
$
January 30,
2016
$
—
—
—
—
—
—
—
—
17,955
6,942
1,689
3,130
401
(471)
(29,646)
—
For the year
ended
January 28,
2017
$
For the year
ended
January 30,
2016
$
—
—
—
—
—
16,427
—
140,874
(157,301)
—
On June 10, 2015, immediately prior to the completion of the Company’s IPO, the financial derivative liability embedded in preferred
shares was increased to reflect the fair market value of the IPO common shares. Subsequently, all of the Series A, A-1 and A-2 preferred shares
were converted into common shares and the financial derivative liability embedded in the Series A, A-1 and A-2 preferred shares was converted
into equity. On June 10, 2015, immediately following the IPO, the Company amended its articles to remove the Series A, A-1 and A-2 preferred
shares from its authorized capital.
17. SHARE CAPITAL
Authorized
An unlimited number of common shares.
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Table of Contents
Common
shares
#
Class AA
common
shares
#
Junior
preferred
shares
#
Number of shares in issuance
Balance, January 31, 2015
Issuance of common shares upon cashless exercise of options
Issuance of common shares upon conversion of Class AA common
shares
Issuance of 1.6 common share upon conversion of Junior preferred
shares
Issuance of 1.6045 common shares upon conversion of Series A
preferred shares
Issuance of 1.6 common shares upon conversion of Series A-1 and A-2
preferred shares
Issuance of common shares upon initial public offering
Issuance of common shares upon exercise of options
Balance, January 30, 2016
Issuance of common shares upon exercise of options
Issuance of common shares upon vesting of restricted stock units
Balance, January 28, 2017
52,022
322,739
80,000
—
7,441,341
—
80,000
(80,000)
—
11,906,145
—
(7,441,341)
6,423,901
1,704,904
3,414,261
133,500
24,037,472
1,236,154
57,325
25,330,951
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Issued and outstanding
25,330,951 Common shares [January 30, 2016 - 24,037,472 shares]
January 28,
2017
$
263,828
263,828
January 30,
2016
$
259,205
259,205
During the year ended January 28, 2017, 1,236,154 stock options were exercised for common shares, for cash proceeds of $2,779
[January 30, 2016 — 133,500 stock options for cash proceeds of $143]. The carrying value of common shares during the year ended January 28,
2017 includes $1,396 which corresponds to a reduction in the contributed surplus associated to options exercised during the period.
In addition, during the year ended January 28, 2017, 57,325 common shares [January 30, 2016 — nil] were issued in relation to the
vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $448, net of tax [January 30, 2016 — nil].
During the year ended January 30, 2016, prior to our IPO on June 10, 2015, 322,739 stock options were exercised for common shares for
a non-cash settlement of $125. On June 10, 2015, immediately prior to the completion of the Company’s IPO, all of the Junior, Series A, A-1 and
A-2 preferred shares and Class AA common shares were converted into common shares. As part of the closing of its IPO, the Company issued an
aggregate of 3,414,261 common shares for a total gross consideration of $79,370. Share issuance costs amounted to $10,661 less a deferred
income tax benefit of $2,923. On June 10, 2015, immediately following the IPO, the Company amended its articles to remove the Junior,
Series A, A-1 and A-2 preferred shares and Class AA common shares from its authorized capital.
Stock‑based compensation
The 2015 Omnibus Plan provides for awards of stock options, stock appreciation rights (“SARs”), restricted stock, unrestricted stock,
stock units (including restricted stock units, “RSUs”), performance awards, deferred share units, elective deferred share units and other awards
convertible into or otherwise based on the Company’s common shares. Eligibility for stock options intended to be incentive stock options
(“ISOs”) is limited to the Company’s employees. Dividend equivalents may also be provided in connection with an award under the 2015
Omnibus Plan. The maximum term of stock options and SARs is seven years. The options vest evenly over a period of 36 or 48 months, with
some options vesting monthly and some options vesting annually. There are no cash settlement alternatives.
The maximum number of the Company’s common shares that are available for issuance under the 2015 Omnibus Plan is 1,440,000
shares. Common shares issued under the 2015 Omnibus Plan may be shares held in treasury or authorized but unissued
67
Table of Contents
shares of the Company not reserved for any other purpose. As at January 28, 2017, 966,651 common shares remain available for issuance under
the 2015 Omnibus Plan.
The weighted average fair value of options granted of $3.72 for the year ended January 28, 2017 [January 30, 2016 — $4.76] was
estimated using the Black Scholes option pricing model, using the following assumptions:
Risk-free interest rate
Expected volatility
Expected option life
Expected dividend yield
Exercise price
For the year ended
January 30, 2016
1.15% - 1.53 %
31% - 36.5 %
For the year ended
January 28, 2017
1.23 %
29.8 %
4.0 years
0 %
$ 17.99 $ 15.64 -
3.7 - 4.0 years
0 %
$ 17.22
$ 14.39 -
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 year is presented below.
For the year ended
January 28, 2017
For the year ended
January 30, 2016
Outstanding, beginning of year
Issued
Exercised
Cancelled/expired
Forfeitures
Outstanding, end of year
Exercisable, end of year
Weighted
average
exercise
price
$
Weighted
average
exercise
price
$
Options
outstanding
#
2,146,880
174,031
(1,236,154)
—
(151,562)
933,195
624,813
Options
outstanding
#
2,905,648
33,000
(456,239)
(275,529)
(60,000)
2,146,880
1,150,149
3.04
14.67
2.25
—
6.99
5.63
4.69
2.06
16.64
0.86
0.77
3.67
3.04
2.27
The weighted average share price at the date of exercise for options exercised during the year ended January 28, 2017 was $14.24
[January 30, 2016 — $16.80].
.
The following table summarizes information about the stock options outstanding at January 28, 2017 and January 30, 2016:
Range of exercise prices
0.77
$
$
3.33 - $ 4.31
$ 14.39 - $ 17.99
As at January 28, 2017
Number
outstanding at
January 28,
2017
#
97,600
671,804
163,791
933,195
Weighted
average
contractual
remaining
life
3.1 years
4.4 years
4.6 years
4.3 years
Weighted
average
exercise
price
$
0.77
4.10
14.78
5.63
Number of
options
exercisable at
January 28,
2017
#
39,600
537,203
48,010
624,813
Weighted
average
exercise
price
$
0.77
4.08
14.70
4.69
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Range of exercise prices
0.63
$
0.77
$
$
3.33 - $ 4.31
$
$
15.64
17.22
As at January 30, 2016
Number
outstanding at
January 30,
2016
#
Weighted
average
contractual
remaining
life
Weighted
average
exercise
price
$
160,000
606,637
1,347,243
12,000
21,000
2,146,880
0.0 year
3.6 years
5.4 years
6.2 years
6.6 years
4.5 years
0.63
0.77
4.02
15.63
17.22
3.04
Number of
options
exercisable at
January 30,
2016
#
160,000
432,795
557,354
—
—
1,150,149
Weighted
average
exercise
price
$
0.63
0.77
3.90
—
—
2.27
A summary of the status of the Company’s RSU plan and changes during the year ended January 28, 2017 is presented below.
For the year ended
January 28, 2017
For the year ended
January 30, 2016
RSUs
outstanding
#
Weighted
average
fair value
per unit (1)
$
RSUs
outstanding
#
Weighted
average
fair value
per unit (1)
$
Outstanding, beginning of year
Granted
Forfeitures
Vested
Vested, withheld for tax
Outstanding, end of year
(1)
Weighted average fair value per unit as at date of grant.
252,720
194,855
(78,184)
(57,325)
(59,833)
252,233
7.39
15.11
(9.68)
(7.82)
(7.90)
12.42
—
258,480
(5,760)
—
—
252,720
—
7.38
7.07
—
—
7.39
During the year ended January 28, 2017, the Company recognized a stock-based compensation expense of $2,264 [January 30, 2016 —
$1,749; January 31, 2015 — $947].
18. FINANCE COSTS
Interest on loan from the controlling shareholder [note 15]
Interest and financing fees on term loan
Interest on finance lease
Accrued dividends on preferred shares — Series A, A-1 and A-2 [note 16]
Other finance costs
January 28,
2017
$
January 30,
2016
$
January 31,
2015
$
—
75
—
—
1
76
48
544
19
438
2
1,051
210
926
28
1,178
3
2,345
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19. INCOME TAXES
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
Income tax provision (recovery) — statutory
rate
Increase (decrease) in provision for income tax
(recovery) resulting from:
Recognition of previously unrecognized U.S. tax
losses
Unrecognized benefit on U.S. tax losses and other
temporary differences
Non-deductible items and translation adjustments
Loss from embedded derivative and accretion of
Series A, A-1, and A-2 preferred shares
Stock based compensation
Other
Income tax recovery — effective tax rate
January 28, 2017
January 30, 2016
January 31, 2015
%
$
%
$
%
$
26.5
(1,564)
26.5
(34,729) 26.5
1,628
—
—
—
(10.1)
—
—
21.5
37.9
—
—
—
598
—
—
—
—
—
(1,269)
(2,235)
(28.7)
(0.6)
(0.9)
(3.7)
—
—
—
—
(52)
(3,170)
—
—
—
—
37,506
6.2
769 16.1
(2.5)
(5.5)
1,122
4,668
—
—
377
982
(150)
(333)
A breakdown of the income tax provision (recovery) on the consolidated income statement is as follows:
Income tax provision (recovery)
Current
Deferred
January 28,
2017
$
January 30,
2016
$
2,145
(4,380)
(2,235)
3,304
1,364
4,668
The tax effects of temporary differences and net operating losses that give rise to deferred income tax assets and liabilities are as follows:
January 28,
2017
$
January 30,
2016
$
Deferred income tax assets
U.S. operating losses carried forward
Deferred rent
Stock options
Financing fees and IPO-related costs
Lease inducements
Provisions
Others
Total deferred income tax assets
Deferred income tax liabilities
Carrying values of property and equipment in excess of tax basis
Unrealized foreign exchange gain on derivative financial instruments
Unrealized foreign exchange gain related to intercompany advances
Total deferred income tax liabilities
Net deferred income tax assets (liabilities)
70
2,439
1,885
5,647
1,801
664
3,365
1,175
16,976
(2,171)
(121)
(309)
(2,601)
14,375
3,779
1,500
4,154
2,465
227
275
93
12,493
(2,725)
(914)
(977)
(4,616)
7,877
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As at January 28, 2017, the Company’s U.S. subsidiary has accumulated losses amounting to US$14.9 million [January 30, 2016 —
US$9.7 million; January 31, 2015 — US$5.8 million], which expire during the years 2033 to 2037. Based upon the projections for future taxable
income and prudent tax planning strategies, management believes it is probable the Company will realize the benefits of these operating tax losses
carried forward. See Note 5 for how the Company determines the extent to which the deferred income tax assets are recognized.
The changes in the net deferred income tax asset were as follows for the fiscal years:
Balance net, beginning of year
Deferred rent
Recognition of U.S. operating losses carried forward
Carrying value of property and equipment in excess of tax losses
Stock options
Financing fees and IPO-related costs
Foreign exchange gain on derivative financial instrument
Unrealized foreign exchange gain on intercompany advances
Lease inducement
Provisions
Others
Deferred income tax assets net, end of year
January 28,
2017
$
7,877
385
(1,340)
554
1,493
(664)
793
668
437
3,090
1,082
14,375
January 30,
2016
$
2,855
440
633
(1,532)
4,055
2,306
(914)
(428)
227
275
(40)
7,877
20. SELLING, GENERAL AND ADMINISTRATION EXPENSES
Included in selling, general and administration expenses are the following expenses:
Wages, salaries and employee benefits
Depreciation of property and equipment
Amortization of intangible assets
Loss on disposal of property and equipment
Impairment of property and equipment
Provision (recovery) for onerous contracts
Stock-based compensation
Executive separation costs related to salary
Other selling, general and administration
21. EARNINGS PER SHARE
January 28,
2017
$
61,143
8,069
758
356
7,516
8,140
2,264
835
25,675
114,756
January 30,
2016
$
January 31,
2015
$
50,671
5,832
613
297
—
(265)
1,749
—
21,219
80,116
41,181
4,874
573
31
2,740
805
947
—
15,414
66,565
Basic earnings per share (“EPS”) amounts are calculated by dividing the net income (loss) for the year attributable to ordinary equity
holders by the weighted average number of ordinary shares outstanding during the year. Diluted EPS amounts are calculated by dividing the net
income (loss) attributable to ordinary equity holders (after adjusting for dividends, accretion interest on the mandatorily redeemable preference
shares and gain/loss from embedded derivative on preferred shares) by the weighted average number of ordinary shares outstanding during the
year 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.
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The following reflects the income and share data used in the basic and diluted EPS computations:
Net income (loss) for basic EPS
– Dividends on preferred shares
– Accretion of preferred shares
– Loss from embedded derivative on Series A, A-1, and A-2 preferred
shares
Adjusted net income (loss) for diluted EPS
Weighted average number of shares outstanding — basic
Preferred shares Series A
Preferred shares Series A-1
Preferred shares Series A-2
Restricted stock units
Options
Weighted average number of shares — fully diluted
January 28,
2017
$
(3,688)
—
—
January 30,
2016
$
(131,431)
—
—
January 31,
2015
$
6,454
1,178
1,044
—
(3,688)
—
(131,431)
380
9,056
24,699,290 19,776,946 11,984,763
6,423,895
—
31,072
—
1,527,116
24,699,290 19,776,946 19,966,846
—
—
—
—
—
—
—
—
—
—
For the years ended January 30, 2016 and January 28, 2017, as a result of the net loss during the year, the stock options and RSUs
disclosed in Note 17 and the Series A, Series A‑1 and Series A‑2 preferred shares disclosed in Note 16 are anti‑dilutive. For the year ended
January 31, 2015, the Series A-1 preferred shares were deemed anti-dilutive.
22. RELATED PARTY DISCLOSURES
During the year ended January 28, 2017, the Company occupied and paid rent on a property leased from a company controlled by the
controlling shareholder amounting to nil [January 30, 2016 —$38; January 31, 2015 —$175].
During the year ended January 30, 2016 the Company paid $41 [January 31, 2015 — $83] for air travel services to a company associated
with a board member. The amount was nil for the year ended January 28, 2017.
During the year ended January 30, 2016, interest was incurred on the loan from the controlling shareholder amounting to $48, [January
31, 2015 —$210] of which $48 was paid on June 11, 2015 [January 31, 2015 — nil]. In addition, dividends on Series A, A-1 and A-2 preferred
shares were accrued for $438 [January 31, 2015 — $1,178]. On June 11, 2015, immediately following the Company’s IPO, the advances under
the loan from the controlling shareholder were fully repaid using the proceeds from the IPO and cash on hand, and the Series A, A-1 and A-2
preferred shares were converted into common shares.
The transactions referred to above are measured at the exchange amount, being the consideration established and agreed to by the related
parties.
Transactions with key management personnel
Key management of the Company includes members of the Board as well as members of the Executive Committee. The compensation
earned by key management in aggregate was as follows:
Wages, salaries and bonus
Stock-based compensation
Total compensation earned by key management personnel
23. SEGMENT INFORMATION
January 28,
2017
$
January 30,
2016
$
January 31,
2015
$
3,460
1,377
4,837
3,600
1,177
4,777
3,918
832
4,750
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
72
Table of Contents
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 to be allocated to the segments and assesses performance, and for which discrete financial information is
available.
The Company derives revenue from the following products:
Tea
Tea accessories
Food and beverages
January 28,
2017
$
143,280
53,807
18,897
215,984
January 30,
2016
$
120,022
43,191
17,477
180,690
January 31,
2015
$
95,995
31,295
14,593
141,883
Property and equipment and intangible assets by country are as follows:
Canada
US
Total
January 28,
2017
$
January 30,
2016
$
January 31,
2015
$
41,432
12,686
54,118
35,915
13,657
49,572
30,539
6,751
37,290
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:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Loss before income taxes
For the year ended
January 28, 2017
US
$
Consolidated
$
Canada
$
180,380
86,473
93,907
35,604
21,061
14,543
215,984
107,534
108,450
114,756
(6,306)
76
(479)
(5,903)
For the year ended
January 30, 2016
Canada
$
US
$
Consolidated
$
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Accretion of preferred shares
Loss from embedded derivative on Series A, A-1 and A-2 preferred
shares
Loss before income taxes
156,186
71,657
84,529
24,504
13,702
10,802
180,690
85,359
95,331
80,116
15,215
1,051
(348)
401
140,874
(126,763)
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Sales
Cost of sales
Gross profit, before unallocated items
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Accretion of preferred shares
Loss from embedded derivative on Series A, A-1 and A-2 Preferred
Shares
IPO-related costs
Settlement cost related to former option holder
Income before income taxes
24. FINANCIAL RISK MANAGEMENT
Canada
$
129,212
56,771
72,441
For the year ended
January 31, 2015
US
$
Consolidated
$
12,671
7,414
5,257
141,883
64,185
77,698
66,565
11,133
2,345
(133)
1,044
380
856
520
6,121
The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, credit, and
liquidity.
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 $29.
The Company’s foreign exchange exposure is as follows:
Cash
Accounts receivable
Accounts payable
January 28,
2017
US$
January 30,
2016
US$
690
1,188
2,461
464
1,126
2,092
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 October 2017. 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 International Accounting Standard
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 years ended January 28, 2017 and January 30, 2016. As at January 28, 2017 and January 30, 2016, the
designated portion of these hedges was considered effective.
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The nominal and contract values of foreign exchange contracts outstanding as at January 28, 2017 are as follows:
Purchase contracts
U.S. dollar
Range of
contractual
exchange rate
Nominal
value
US$
Nominal
value
C$
Term
Unrealized
gain
C$
1.2696 -
1.3098
32,700
42,404
Feburary 2017 to October
2017
454
The nominal and contract values of foreign exchange contracts outstanding as at January 30, 2016 are as follows:
Range of
contractual
exchange rate
Nominal
value
US$
Nominal
value
C$
Term
Unrealized
gain
C$
Purchase contracts
U.S. dollar
Market risk — interest rate risk
1.306
36,550
47,734
February 2016 to October
2016
3,442
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market
interest rates. Financial instruments that potentially subject the Company to cash flow interest rate risk include financial assets and liabilities with
variable interest rates and consist of cash. The Company is exposed to cash flow risk on its Revolving Facility which bears interest at variable
interest rates (see Note 14). As at January 28, 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 January 28, 2017, the Company had $64,440 in cash. In addition, as outlined in Note 14, the Company has a Revolving Facility of
$20,000, of which nil was drawn as at January 28, 2017. The Revolving Facility also provides for an accordion feature whereby the Company
may, at any time prior to the end of the three-year term, 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 14) and cash on hand. The Company expects that its trade and other payables will be discharged within 90 days.
The following table summarizes the obligations as of January 28, 2017, and the effect such obligations are expected to have on liquidity
and cash flows in future periods.
Trade and other payables
Operating lease obligations
Purchase obligations
January 28, 2017
Payments due by period
Between
less than
1 and 5 years
1 year
Total
19,681 19,681
148,436
5,842
173,959
19,306
5,842
44,829
More than
5 years
—
90,891
—
90,891
—
38,239
—
38,239
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Trade and other payables
Operating lease obligations
Purchase obligations
Credit risk
January 30, 2016
Payments due by period
Between
less than
1 and 5 years
1 year
Total
14,435 14,435
127,069
6,583
148,087
15,647
10,373
40,455
More than
5 years
—
76,106
—
76,106
—
35,316
—
35,316
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 describe how the categories of financial instruments are measured and how income and expenses,
including fair value 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.
The classification of financial instruments, as well as their carrying values and fair values, are shown in the tables below:
Financial assets
Derivative financial instruments — foreign forward exchange
contracts
Financial liabilities
January 28, 2017
Fair
value
$
Carrying
value
$
January 30, 2016
Fair
value
$
Carrying
value
$
454
—
454
—
3,442
—
3,442
—
The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies;
however, considerable judgment is required to develop these estimates. Accordingly, the estimated fair values are not necessarily indicative of the
amounts the Company could realize or would pay in a current market exchange. The estimated fair value amounts can be materially affected by
the use of different assumptions or methodologies. The methods and assumptions used to estimate the fair value of financial instruments are
described below:
· The estimated fair value of long‑term debt bearing variable rates is considered to approximate its carrying value [Level 2].
· The estimated fair value of loan from controlling shareholder was determined by discounting expected cash flows rates currently
offered to the Company for similar debt [Level 2].
· The estimated fair value of Series A, A‑1 and A‑2 preferred shares was determined by discounting expected future cash flows rates at
the discount rates which represent the cost of borrowing those cash flows [Level 3].
· The carrying value of the financial derivative liability is its fair value [Level 3].
· The estimated fair value of forward contracts is determined using forward exchange rates at the end of the reporting period [Level 2].
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The Company categorizes its financial assets and liabilities measured at fair value into one of three different levels depending on the
observability of the inputs used in the measurement.
Level 1: This level includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and
liabilities in active markets that are accessible at the measurement date.
Level 2: This level includes valuations determined using directly (i.e. as prices) or indirectly (i.e. derived from prices) observable inputs
other than quoted prices included within Level 1. Derivative instruments in this category are valued using models or other standard
valuation techniques derived from observable market inputs.
Level 3: This level includes valuations based on inputs which are less observable, unavailable or where the observable data does not
support a significant portion of the instruments’ fair value.
There were no significant transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the years ended January 28,
2017 and January 30, 2016.
Reconciliation of Level 3 fair values
Changes in fair value of Level 3 financial instruments were as follows, for the years ended January 28, 2017 and January 30, 2016.
Fair value of Level 3
financial instruments
Balance, beginning of the period
Loss from embedded derivative on Series A, A-1 and A-2 preferred shares
Less: conversion of Series A, A-1 and A-2 preferred shares to common shares
Balance, end of period
25. MANAGEMENT OF CAPITAL
January 28,
2017
$
—
—
—
—
January 30,
2016
$
16,427
140,874
(157,301)
—
As at January 28, 2017, the Company’s capital is composed of shareholders’ equity as follows:
January 28,
2017
$
Total debt
Shareholder’s equity [excluding accumulated other comprehensive income]
Total capital under management
—
130,263
130,263
January 30,
2016
$
—
127,834
127,834
The Company’s objectives in managing capital are to ensure sufficient liquidity to pursue its organic growth, to establish a strong capital
base so as to maintain investor, creditor and market confidence and to provide an adequate return to shareholders.
The Company’s primary uses of capital are to finance increases in non‑cash working capital along with capital expenditures for its store
expansion and renovation program as well as information technology and infrastructure improvements.
The Company currently funds these requirements from cash flows from operations as well as its financial resources, which include a
cash balance of $64,440 as at January 28, 2017, the Revolving Facility (Note 25 and through its issuances of common shares (Note 17. The Board
does not establish quantitative return on capital criteria for management, but rather promotes year-over-year sustainable profitable growth. The
Company is not subject to any externally imposed capital requirements.
The Company is subject to certain non‑financial covenants related to its Revolving Facility, all of which were met as at January 28, 2017
and January 30, 2016. There has been no change with respect to the overall capital risk management strategy during the years ended January 28,
2017 and January 30, 2016.
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26. GUARANTEES
Some agreements to which the Company is party, specifically those related to debt agreements and the leasing of its premises, include
indemnification provisions that may require the Company to make payments to a third party for breach of fundamental representation and
warranty terms in the agreements, with respect to matters such as corporate status, title of assets, environmental issues, consents to transfer,
employment matters, litigation, taxes payable and other potential material obligations. The maximum potential amount of future payments that the
Company could be required to make under these indemnification provisions is not reasonably quantifiable as certain indemnifications are not
subject to a monetary limitation. As at January 28, 2017, management does not believe that these indemnification provisions would require any
material cash payment by the Company, and insurance coverage, estimated by management to be reasonable and sufficient, exists in order to
minimize the previously mentioned risks.
The Company indemnifies its directors and officers against claims reasonably incurred and resulting from the performance of their
services to the Company, and maintains liability insurance for its directors and officers as well as those of its subsidiary.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our principal executive and principal financial officer, we
conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this report, or the Evaluation Date. Based
upon the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were
effective as of the Evaluation Date. Disclosure controls and procedures are controls and procedures designed to ensure that information required
to be disclosed by us in our reports filed under the Exchange Act, such as this report, 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 such information is accumulated and communicated to our management, including our principal executive and principal
financial officers as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
For Management’s Report on Internal Control over Financial Reporting, see Item 8, Financial Statements and Supplementary Data.
Changes in Internal Control over Financial Reporting
As disclosed in our Quarterly Reports on Form 10-Q for the quarters ended May 2, 2015, August 1, 2015 and October 31, 2015, we have
made changes to our internal control over financial reporting to remediate the material weakness in our internal control over financial reporting
identified prior to our initial public offering that related to our controls over the valuation process used in valuing the liability associated with the
embedded derivative related to our Series A, A-1 and A-2 preferred shares that automatically converted into common shares in connection with
our initial public offering. After completing our testing of the design and operational effectiveness of these controls, our management has
concluded that we have remediated the material weakness as of January 28, 2017. Other than those changes related to our remediation efforts,
there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the year
ended January 28, 2017 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
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ITEM 10. DIRECTORS, DIRECTOR NOMINEES, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Below is a list of the names and ages of our directors, director nominees and officers as of April 11, 2017, and a brief account of the
business experience of each of them. Unless otherwise stated, the business address for our directors and officers is c/o DAVIDsTEA Inc., 5430
Ferrier Street, Mount‑Royal, Québec, Canada H4P 1M2.
PART III.
Name
Joel Silver...................................................................
Luis Borgen.................................................................
Christine Bullen...........................................................
Doug Higginbotham.....................................................
Edmund Noonan.........................................................
Howard Tafler.............................................................
Maurice Tousson.........................................................
Emilia Di Raddo...........................................................
Tom Folliard.................................................................
David W. McCreight.....................................................
Lorenzo Salvaggio.......................................................
Herschel Segal.............................................................
Sarah Segal.................................................................
Michael J. Mardy.........................................................
Kathleen C. Tierney.....................................................
Gary O’Connor.............................................................
Tyler Gage...................................................................
Position
Chief Accounting Officer
President, Chief Executive Officer and Director
Chief Financial Officer
Age
46
47
46 Managing Director, USA
52 Head of Supply Chain
50 Head of Global Real Estate and Store Development
47
68 Director and Chairman
59 Director
54 Director
54 Director
62 Director
86
32 Director
68 Director
71 Director
69 Director Nominee
31 Director Nominee
Co‑Founder and Director
Joel Silver, President and Chief Executive Officer. Mr. Silver, 46, joined our company in March 2017. Prior to that, Mr. Silver has
served in a variety of leadership roles for various consumer goods companies. From 2011 to 2016, Mr. Silver served as General Partner and a
member of the board of directors of TrilogyGrowth, a venture capital fund he co-founded. From 2003 to 2011, Mr. Silver held several positions of
increasing responsibility at Indigo Books & Music Inc. (TSX:IDG) and has been a member of its board of directors since 2011. Mr. Silver earned
his Bachelor’s degree from Wilfrid-Laurier University in Canada and his Master’s degree of Business Administration from Harvard University.
Mr. Silver brings diverse experience with consumer-centric and lifestyle brands. Mr. Silver is a resident of Ontario, Canada.
Luis Borgen, Chief Financial Officer. Mr. Borgen, 47, became our Chief Financial Officer in May 2012. Prior to joining us,
Mr. Borgen served as Chief Financial Officer of DaVita HealthCare Partners Inc. from March 2010 to April 2012. From February 2009 to March
2010, Mr. Borgen served as Senior Vice President, Finance for the U.S. retail division of Staples, Inc. From June 2005 until January 2009,
Mr. Borgen served as the Vice President, Finance for the U.S. retail division of Staples, Inc. From July 2002 to June 2005, Mr. Borgen served as
Vice President, Corporate Financial Planning and Analysis of Staples, Inc. From February 1999 to June 2002, Mr. Borgen served in the corporate
treasury department of Staples, Inc., including as Vice President and Assistant Treasurer. Mr. Borgen received a B.S. in Business Management
from the United States Air Force Academy, a Masters in Finance from Boston College and an M.B.A. from The University of Chicago. Mr.
Borgen is a resident of Massachusetts, USA.
Christine Bullen, Managing Director, USA. Mrs. Bullen, 46, joined the Company as Managing Director, USA in May 2016. On
January 28, 2017, she was named Interim President and Chief Executive Officer and director and served in such position until Mr. Silver’s
appointment on March 12, 2017. On April 12, 2017, she was appointed Chief Operating Officer and President of DAVIDsTEA (USA). Prior to
that, Mrs. Bullen served as Vice-President, Direct-to-Consumer & Specialty Channels from January 2009 to May 2016, as Vice-President, Retail
from March 2007 to January 2009, and as Director of Merchandising and Marketing from June 2006 to March 2007, at Lindt & Sprüngli. Mrs.
Bullen has held the positions of Chief Operating Officer at Leila Rowe, a New York based fashion accessory company, and Director of New
Business Development at Elizabeth Arden, Inc. Mrs. Bullen received a Certification in Leadership Best Practices from Harvard University.
Mrs. Bullen brings significant experience in the retail industry to the Board. Mrs. Bullen is a resident of New Hamshire, USA.
Doug Higginbotham, Head of Supply Chain. Mr. Higginbotham, 52, became our Head of Supply Chain in August 2013. From 2010
to 2013, Mr. Higginbotham was with McNairn Packaging based in Ontario, Canada, in the role of Vice President of Supply Chain for North
America Operations. Prior to that, Mr. Higginbotham held various roles at Yankee Candle over a ten year
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span, including Vice President of Purchasing & Logistics, Vice President of Purchasing & Quality, and Vice President of Logistics. Mr.
Higginbotham received a BS in Business Administration/Management from the University of Phoenix and a MBA in Global Management from
the University of Phoenix. Mr. Higginbotham is a resident of Massachusetts, USA.
Edmund Noonan, Head of Global Real Estate and Store Development. Mr. Noonan, 50, became our Head of Store Development in
October 2014 and Head of Global Real Estate in March 2015. Prior to that, Mr. Noonan served in increasing roles of responsibility at
Abercrombie & Fitch, Inc. from January 2008 through September 2014, including Vice President, Real Estate for the United States & Canada,
Vice President, Capital, Real Estate Finance & Accounting and Senior Director, Corporate Finance. Mr. Noonan received a B.S. in Finance and
Political Science from Miami University and an M.B.A. in Finance from The Ohio State University. Mr. Noonan is a resident of Ohio, USA.
Howard Tafler, Chief Accounting Officer. Mr. Tafler, 47, joined our Company in January 2010 and serves as our Chief Accounting
Officer. Prior to joining the Company, Mr. Tafler worked at a national accounting firm and was the Chief Financial Officer of a manufacturing
company from 2003 to 2009. Mr. Tafler received a Bachelor of Commerce in Accounting from McGill University. Mr. Tafler is also a chartered
accountant and a CPA. Mr. Tafler is a resident of Québec, Canada.
Maurice Tousson, Chairman. Mr. Tousson, 68, has served as President and Chief Executive Officer of CDREM Group Inc., a Canada
based chain of retail stores known as Centre du Rasoir or Personal Edge from January 2000 to December 2016. Mr. Tousson has held executive
positions at well-known Canadian specialty stores, including Chateau Stores of Canada, Consumers Distributing and Sports Experts, with
responsibilities for operations, finance, marketing and corporate development. Mr. Tousson currently sits on the Board of Directors of Dorel
Industries (TSE: DII), a multinational public company where he acts as Lead Director. Mr. Tousson holds an MBA degree from Long Island
University in New York. Mr. Tousson brings valuable management and retail experience to the Board. Mr. Tousson is a resident of Toronto,
Canada.
Emilia Di Raddo, Director. Mrs. Di Raddo, 59, has been a director since 2012, except between January 2013 to March 2014. She has
been the President of Le Chateau Inc. (TSX: CTU/A) since 2000, where she has been serving on the Board of Directors since 2001, and was
Chief Financial Officer from 1996 to 2000. Prior to that, Mrs. Di Raddo was a partner at Ernst & Young LLP where she practiced for more than
15 years for companies operating in the retail and consumer products’ industry. Mrs. Di Raddo received a Bachelor of Commerce and a Diploma
in Accountancy from Concordia University and is also a chartered accountant and a CPA. Mrs. Di Raddo brings valuable retail industry
experience to the Board. Mrs. Di Raddo is a resident of Québec, Canada.
Tom Folliard, Director. Mr. Folliard, 54, became a director in 2014. He has served as the President and Chief Executive Officer of
CarMax, Inc. from 2006 until February 2016 when he ceased to serve as the President. Prior to that, Mr. Folliard served as executive vice
president of store operations from 2001 to 2006 and vice president of merchandising from 1996 to 2001. Mr. Folliard serves on the Board of
Directors of CarMax, Inc. (NYSE: KMX) and Pulte Group (NYSE: PHM). Mr. Folliard received a B.S. in Management from Florida Institute of
Technology. Mr. Folliard brings valuable management and retail experience to the Board. Mr. Folliard is a resident of Massachusetts, USA.
Michael J. Mardy, Director. Mr. Mardy, 68, has served as Executive Vice President and Director of specialty retailer, Tumi Inc. since
July 2003. Prior to joining Tumi, from 1996 to 2002, he served as Executive Vice President and CFO of Keystone Food LLC, a processor and
distributor. From 1982 to 1996, he served as Senior Vice President, Chief Financial Officer and in various other finance positions at Nabisco
Biscuit Company, a snack food and consumer products company. Mr. Mardy served on the board of directors of Keurig Green Mountain Inc.
(Nasdaq: GMCR) and ModusLink Global Solutions (Nasdaq: MLNK), Inc. acting as audit committee chair and a member of their respective
compensation committees. Mr. Mardy also served on the NYSE Advisory Board and is a trustee of the New Jersey chapter of the Financial
Executive Institute, as well as a member of the board of the Eden Institute for Autism. Mr. Mardy holds an MBA from Rutgers University and
undergraduate degree from Princeton University. He is a member of the American institute of Certified Public Accountants, and the New Jersey
Society of Certified Public Accountants. Mr. Mardy brings valuable management, retail and finance experience to the Board. Mr. Mardy is a
resident of New Jersey, USA.
David W. McCreight, Director. Mr. McCreight, 54, became in director in 2014. He has served as President of URBN Inc. and Chief
Executive Officer of Anthropologie Group since February 2016. Prior to that, Mr. McCreight was Chief Executive Officer of Anthropologie
Group from November 2011 until February 2016, President of Under Armour, Inc. from 2008 until 2010 and President of Lands’ End, Inc. from
2005 to 2008. Mr. McCreight also held the position of Senior Vice President of Merchandising at Lands’ End from 2003 to 2005 and Senior Vice
President and General Merchandising Manager of Disney Stores from 2001 to 2003. Mr. McCreight received a B.A. in Liberal Arts from the
University of Virginia. Mr. McCreight is qualified to serve on the Board given his experiences described above and his understanding of the retail
industry. Mr. McCreight is a resident of Maryland, USA.
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Gary O’Connor, Director. Mr. O’Connor, 69, was an audit partner at KPMG Barbados from September 2009 to September 2012, at
which time he retired. He has served on the Board of Investor Restaurant Group Inc. since March 2014 where he also chairs the Audit and Risks
Committee. Mr. O’Connor received a Bachelor of Commerce in Accounting from Concordia University. Mr. O’Connor brings accounting
experience to the Board. Mr. O’Connor is a resident of Québec, Canada.
Lorenzo Salvaggio, Director. Mr. Salvaggio, 62, became a director in 2014. He has close to forty years of business experience in
banking, accounting, retail and manufacturing. He serves as the Vice President, Secretary and Chief Operating Officer of Rainy Day Investments
Ltd. Prior to that, he served as Chief Financial Officer of Les Distribution Regitan Ltd., a food wholesaler, from October 2012 to May 2014 and
from July 2005 to October 2012 was a consultant at and owner of Lyceum Management Services Inc., a consulting firm focused on corporate
turn-around and M&A. Mr. Salvaggio received a Bachelor of Commerce in Accounting from Concordia University and continued his studies at
McGill University to obtain both his Diploma in Accountancy and a Certified Management Accountant (C.M.A.) accreditation.. Mr. Salvaggio is
a CPA and CMA. Mr. Salvaggio brings significant management and accounting experience to the Board. Mr. Salvaggio is a resident of Québec,
Canada.
Herschel Segal, Co-Founder and Director. Since January 1969, Mr. Segal, 86, has served as the President and Chief Executive Officer
of Rainy Day Investments Ltd., an investment company. Mr. Segal founded Le Chateau Inc. (TSX: CTU/A), a clothing retailer, in 1959 and
served as its Chief Executive Officer until September 2006, where he also served as Executive Chairman until February 2007 and where he is still
a director. Mr. Segal received a B.A. in Economics and Political Science from McGill University. Mr. Segal brings vast retail industry experience
to the Board. Mr. Segal is a resident of Québec, Canada.
Sarah Segal, Director. Ms. Segal, 32, became a director in 2012. She served as the President and Head of Product Development and Tea
Department from December 2010 to September 2012. Since May 2013, Ms. Segal has served as the Chief Exeuctive Officer of the retail company
SQUISH Candy, based in Montreal, Quebec. Ms. Segal received a B.A. in Environmental Health from McGill University and a M.Sc. in Water
Science, Policy and Management from Oxford University. Ms. Segal brings knowledge of the Company and retail experience to the Board. Ms.
Segal is a resident of Québec, Canada.
Kathleen C. Tierney, Director. Ms. Tierney, 71, has served as Chief Executive Officer of specialty retailer Sur La Table, Inc. from
August 2004 to 2008 and served as its Executive Vice Chairman from 2008 to 2011. From 2001 to 2003, she served as Chief Executive Officer of
Fitch North America. She served as an Independent Consultant with a client roster including The Home Depot, Vinquiry, Yoga Works and Hirsch
Bedner Design. Prior to this, Ms. Tierney was the Chief Executive Officer at Smith & Hawken from 1993 to 1999. During her tenure at The
Nature Company, she served as an Executive Vice President , overseeing their growth from 3 locations to 120 stores nationwide. She has a rich
background in the Retail Industry and International business and travel. Ms. Tierney earned a B.A. in English Literature from Dominican College
in California, served two years in the Peace Corps, holds a lifetime teaching credential from the State of California and a Strategic Marketing
Certificate from Harvard University. Ms. Tierney brings valuable management and retail experience to the Board. Ms. Tierney is a resident of
California, USA.
Tyler Gage, Director. Mr. Gage, 31, is the Co-Founder of Runa, LLC, a privately held organic Amazonian beverage company that
processes and sells guayusa. Prior to that, Mr. Gage served as CEO of Quito, Ecuador & Brooklyn, NY, a social venture that produces fair-trade,
organic Guayusa tea, from December 2008 until December 2016, where he now serves as Chairman of the board of since December 2016.
Mr. Gage received a Bachelor of Literary Arts from Brown University in December 2008. Mr. Gage was featured as 30 Under 30 Entrepreneurs
2013, by Forbes Magazine, as well as Big Apple Entrepreneur of the Year 2016. Mr. Gage brings valuable beverage and tea development
experience to the Board.
Our co‑founder and one of our directors, Herschel Segal, is the father of Sarah Segal, who is also currently one of our directors.
Family Relationships
Function of Audit Committee
Audit Committee
The Audit Committee of the Board of Directors (the “Audit Committee”) operates under a written charter adopted by the Board of
Directors. The charter contains a detailed description of the scope of the Audit Committee’s responsibilities and how they will be carried out. The
Audit Committee’s charter is available on our Investor Relations website at http://ir.davidstea.com under “Corporate Governance” and on SEDAR
at www.sedar.com. The Audit Committee’s primary responsibilities and duties include:
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•
•
•
•
•
•
•
appointing, compensating, retaining and overseeing the work of any registered public accounting firm engaged for the purpose of
preparing or issuing an audit report or performing other audit, review or attest services and reviewing and appraising the audit
efforts of our independent accountants;
establishing procedures for (i) the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or
auditing matters and (ii) confidential and anonymous submissions by our employees of concerns regarding questionable accounting
or auditing matters;
engaging independent counsel and other advisers, as necessary;
determining funding of various services provided by accountants or advisers retained by the committee;
reviewing our financial reporting processes and internal controls;
reviewing and approving related‑party transactions or recommending related‑party transactions for review by independent members
of our Board of Directors; and
providing an open avenue of communication among the independent accountants, financial and senior management and the Board.
Independence of Audit Committee Members
Our Audit Committee consists of Michael J. Mardy, Tom Folliard and Maurice Tousson, with Michael J. Mardy serving as Chairman of
the committee. The Board determined that each of them meets the independence requirements under the rules of The NASDAQ Global Market
and under Rule 10A-3 under the Exchange Act. Emilia Di Raddo was a member of the Audit Committee until April 12, 2016, following which
our Audit Committee consisted exclusively of independent directors.
Audit Committee Financial Expert
The Board has determined that Michael J. Mardy is an “Audit Committee financial expert.” All members of our Audit Committee meet
the requirements for financial literacy under the applicable rules and regulations of the SEC and The NASDAQ Global Market.
Audited Financial Statements Included in Annual Report
Management has the primary responsibility for establishing and maintaining adequate internal financial controls, for preparing the
financial statements and for the public reporting process. Ernst & Young LLP (“EY”), the Company’s independent registered public accounting
firm, is responsible for expressing opinions on the conformity of the Company’s audited consolidated financial statements with International
Financial Reporting Standards.
The Audit Committee has reviewed and discussed with management and EY the Company’s audited consolidated financial statements
for the year ended January 28, 2017 and Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The Audit Committee also has discussed with EY the matters required to be discussed by the Public Company Accounting Oversight
Board (“PCAOB”) AU Section 380, “Communication with Audit Committees.” The Audit Committee also received the written disclosures and
the letter from EY that are required by PCAOB Rule 3526, “Communication with Audit Committees Concerning Independence,” and has
discussed with EY its independence. The Audit Committee also considered whether EY’s provision of non-audit services to the Company is
compatible with maintaining EY’s independence. This discussion and disclosure informed the Audit Committee of EY’s independence and
assisted the Audit Committee in evaluating that independence. On the basis of the foregoing, the Audit Committee concluded that EY is
independent from the Company, its affiliates and management.
Based upon its review of the Company’s audited consolidated financial statements and the discussions noted above, the Audit Committee
recommended to the Board of Directors that our audited consolidated financial statements for the year ended January 28, 2017 be included in the
Company’s Annual Report on Form 10-K for such fiscal year for filing with the SEC. This report has been furnished by the members of the Audit
Committee.
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Michael J. Mardy, Chair
Tom Folliard
Maurice Tousson
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Statement of Corporate Governance Practices
Corporate Governance
As a Canadian reporting issuer with securities listed on the NASDAQ, DAVIDsTEA complies with all applicable rules adopted by the
Canadian Securities Administrators (the “CSA”) and the SEC. As a Canadian issuer, DAVIDsTEA is exempt from complying with many of the
NASDAQ Corporate Governance Standards (the “NASDAQ Standards”), provided that DAVIDsTEA complies with Canadian governance
requirements. DAVIDsTEA also complies with National Instrument 58-101 - Disclosure of Corporate Governance Practices (the “CSA
Disclosure Instrument”) and National Policy 58-201 (Corporate Governance Guidelines (the “CSA Governance Policy”). The CSA Governance
Policy provides guidance on governance practices for Canadian issuers. The CSA Disclosure Instrument requires issuers to make the prescribed
disclosure regarding their governance practices. The Board is of the view that DAVIDsTEA’s corporate governance practices satisfy the
requirements of the CSA Disclosure Instrument and the Corporate Governance Policy, as reflected in the disclosure made hereunder. The Board
of Directors has approved the disclosure of DAVIDsTEA’s corporate governance practices described below, on the recommendation of the Human
Resources and Compensation Committee (“HRCC”).
The Board of Directors considers corporate governance practices to be an important factor in the overall success of the Company. The
Board of Directors also intends to adopt additional corporate governance guidelines to assist it with its corporate governance responsibilities.
These guidelines will set out general guidelines relating to the responsibilities, organization and membership of the Board of Directors, the
composition and membership of the various committees, meetings of the Board, director compensation, the evaluation of management and
succession planning.
Board of Directors
Independence
The Board of Directors consists of ten directors, nine of whom are non‑employee directors. Each director was elected at the Annual
Shareholders’ meeting held on June 9, 2016 except for Mr. Silver who was appointed in replacement of Mrs. Bullen who had filled the vacancy
left by Mr. Toutant following his departure effective January 29, 2017. Our directors are appointed for a one‑year term to hold office until the next
annual general meeting of Shareholders or until their earlier resignation or removal from office in accordance with the Company’s by-laws.
Five of our ten directors that make up the Board of Directors are considered “independent” pursuant to Section 1.4 of the CSA’s Audit
Committee Rules. Under these rules, Maurice Tousson, the Chairman of the Board of Directors, Tom Folliard, David McCreight, Michael J.
Mardy, Gary O’Connor and Kathleen C. Tierney are considered independent, whereas Emilia Di Raddo, Lorenzo Salvaggio, Hershel Segal, Sarah
Segal and Joel Silver are not considered to be independent as a result of their respective relationships with the Company or their relationships
with other non‑independent members of the Board of Directors. The independence of directors is determined by the Board based on the results of
independence questionnaires completed by each director annually, as well as other factual circumstances reviewed on an ongoing basis.
To enhance the independent judgment of the Board of Directors, despite the fact that a majority of our directors are not independent, the
independent members of the Board of Directors may meet in the absence of members of management and the non‑independent directors. An in
camera session is now scheduled as part of every meeting of the Board of Directors and its committees to allow independent directors to meet
without non-independent directors and members of management, as necessary. All non‑independent directors are responsible to the Board of
Directors as a whole and have a duty of care to the Company.
The Board of Directors has a written mandate delineating its roles and responsibilities. It can be found on the Company’s website at
http://ir.davidstea.com and on SEDAR at www.sedar.com.
Chair of the Board
The Board of Directors is led by a non-executive, independent Chairman, which the Company believes contributes to the Board’s ability
to function independently of management. Mr. Maurice Tousson has been a director of the Company since 2016 at which time he also became the
Chairman of the Board. As Chairman of the Board, Mr. Maurice Tousson is responsible for overseeing the Board in carrying out its roles and
responsibilities, which includes overseeing that the Board’s duties and responsibilities are carried out independently of management. See
“Position Description” below for further detail on the role of the Chairman.
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Conflicts of Interest
In accordance with applicable law and DAVIDsTEA’s policy, each director is required to disclose to the Board any potential conflict of
interest he or she may have in a matter before the Board or a Committee thereof at the beginning of the Board or committee meeting. A director
who is in a potential conflict of interest must not attend any part of the meeting during which the matter is discussed or participate in a vote on
such matter.
Formal Position Descriptions
The Board has adopted formal position descriptions for the Chairman of the Board and the Board Committee Chairs, as well as for the
President and CEO.
Chairman of the Board
The Board of Directors has adopted a written position description for the Chairman of the Board of Directors and each of the Committee
chairs, which sets out each of the chairs’ key responsibilities, including duties relating to setting meeting agendas, chairing meetings and working
with the respective committee and management to ensure, to the greatest extent possible, the effective functioning of the committee and the Board
of Directors.
The primary responsibility of the Chairman is to provide leadership to the Board to enhance Board effectiveness. The Chair of the Board
must oversee that the relationship between the Board, management, Shareholders and other stakeholders are effective, efficient and further to the
best interests of the Company.
Committee Chairs
The position descriptions of each Committee Chair provide that each Chair’s key role is to manage his or her respective Committee and
ensure that the Committee carries out its mandate effectively. Like the Chairman of the Board, each Committee Chair is expected to provide
leadership to enhance the Committee’s effectiveness and must oversee the Committee’s discharge of its duties and responsibilities. Committee
Chairs must report regularly to the Board on the business of their respective committee.
President and CEO
The primary responsibility of the President and CEO is to lead the Company by providing strategic direction that includes the
development and implementation of plans, policies, strategies and budgets for the growth and profitable operation of the Company. The Board of
Directors has, together with the CEO, developed a written position description for the CEO which sets out the Chief Executive Officer’s key
responsibilities, including duties relating to strategic planning, operational direction, Board of Directors interaction, building an effective
management team and communication with shareholders.
The HRCC, together with the Chairman of the Board and the President and CEO, develop yearly goals and objectives that the President
and CEO is responsible for meeting. The HRCC and the Chairman of the Board evaluate the President and CEO’s performance in light of such
goals and objectives and establish his compensation based on this evaluation. The corporate objectives that the President and CEO is responsible
for meeting, with the rest of management placed under his supervision, are determined by the strategic plans and the budgets as they are approved
each year by the Board.
Election of Directors
The articles of the Company (the “Articles”) provide that the Board shall consist of not less than three (3) and not more than fifteen (15)
directors. Five (5) of the nominees are currently members of the Board of Directors and have been members since the dates indicated below.
Messrs. Folliard and Salvaggio together with Mrs. Tierney, current members of the Board, will not be standing for election. However, the Board is
nominating Gary O’Connor,as a new independent member of the Board, such that, as a result, the Board has reduced at eight (8) the number of
directors to be elected to the Board at the Meeting. Shareholders may vote for each director individually. If prior to the Meeting, any of the
nominees shall be unable or, for any reason, become unwilling to serve as a director, it is intended that the discretionary power granted by the
form of proxy or voting instruction form shall be used to vote for any other person or persons as directors. Each director is elected for a one-year
term ending at the next annual meeting of Shareholders or when his or her successor is elected, unless he or she resigns or his or her office
otherwise becomes vacant.
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Committees of the Board
The Board has established the Audit Committee, the HRCC and the Corporate Governance and Nominating Committee and has
delegated to each of these committees certain responsibilities that are set forth in their respective mandates.
Human Resources and Compensation Committee
The HRCC’s primary purpose, with respect to compensation, is to assist the Board of Directors in fulfilling its oversight responsibilities
and to make recommendations to the Board of Directors with respect to the compensation of the directors and executive officers. Although not
comprised solely of independent directors, the Board of Directors believes that the HRCC is able to carry out its mandate in the same manner as if
the committee were comprised entirely of independent directors. Independent consultants may also be periodically retained to assist the HRCC in
fulfilling its responsibilities when needed. Furthermore, the HRCC is responsible for corporate governance matters. As required in its mandate,
the HRCC is composed of a majority of independent directors, including the Chairman of the committee that must qualify as an independent
director. The five current members of the HRCC are Mrs. Tierney (Chair) and Mrs. Di Raddo, as well as Messrs. McCreight, Salvaggio and
Tousson. A copy of the charter of the HRCC is available on the Company’s website at
Corporate Governance and Nominating Committee
The five current members of the Corporate Governance and Nominating Committee are Mr. Folliard (Chair), Mssrs. Mardy, McCreight
and Segal as well as Ms. Segal. A copy of the charter of the Corporate Governance and Nominating Committee is available on the Company’s
website at http://ir.davidstea.com and on SEDAR at www.sedar.com.
Board and Committee Meetings
In Camera Sessions
To maintain independence from management, the independent Board members meet at least annually and may meet at each quarterly and
special Board meeting, without the presence of management and under the chairmanship of the independent Chairman of the Board. Similarly,
each of the Company’s committees may hold separate sessions without management present under the chairmanship of its committee Chair at
least annually and may hold one at each quarterly and special committee meeting.
Ethical Business Conduct
The Company’s Code of Ethics (the “Code of Ethics”) is applicable to all DAVIDsTEA’s directors, senior managers and financial
officers and has been developed to promote the honest and ethical conduct of our directors, senior managers and financial officers, including the
ethical handling of actual or apparent conflicts of interest between personal and professional relationships; to promote full, fair, accurate, timely
and understandable disclosure in periodic reports required to be filed by the Company; and to promote compliance with all applicable rules and
regulations that apply to the Company and its officers. A copy of the Code of Ethics is available on the Company’s website at
http://ir.davidstea.com and on SEDAR at www.sedar.com. The Code of Ethics addresses several matters, including conflicts of interest, integrity
of corporate records, confidentiality of corporate information, protection and use of corporate assets and opportunities, insider trading,
compliance with laws and reporting of unethical or illegal behaviour. No waiver has ever been granted to a director or executive officer in
connection with the Code of Ethics.
In addition to monitoring compliance with the Code of Ethics, the Board has adopted whistleblowing procedures for reporting unethical
or questionable acts by the Company or employees thereof. Complaints can be made via telephone at a confidential line called the integrity line.
Any Human Resources-related question is redirected to our Chief Human Resources Officer while any issue of misconduct or fraud is redirected
to the Chair of the Audit Committee who is responsible to oversee the whistleblowing procedures.
Board, Committees and Directors Performance Assessment
On an annual basis, the Chairman of the Board is responsible for the process of assessing the performance and effectiveness of the Board
as a whole, the Board Committees, Committee Chairs and individual directors. Questionnaires are distributed to each director for the purpose of
(i) evaluating the Board’s responsibilities and functions, its operations, how it compares with boards of other companies on which the directors
serve and the performance of the Board’s Committees and (ii) inviting directors to make suggestions for improving the performance of the
Chairman of the Board, Committee Chairs and individual directors. The questionnaire completed by the Chairman of the Board is submitted to
the Chair of the HRCC Committee. The results of the questionnaires are compiled by the
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Corporate Secretary on a confidential basis to encourage full and frank commentary. In addition, the Chairman of the Board discusses with each
Board member individually in order to discuss the questionnaires and also meets the Chair of the HRCC Committee who is responsible for his
assessment. The results of the questionnaires as well as any issues raised during individual discussions are presented and discussed at a following
meeting of the Board. At all times, Board members are free to discuss among themselves the performance of a fellow director, or submit such a
matter to the Chairman of the Board. Based on the outcome of the discussion, the Chairman of the Board then presents to the Board the
assessment’s findings and its recommendations to enhance the performance and effectiveness of the Board and its Committees.
Director Selection
Skills and Experience of Directors
The process by which the Board establishes new candidates for Board nominations lies within the discretion of the Board of Directors
with a view of the best interests of the Company and in accordance with the corporate governance guidelines. Pursuant to the governing statutes,
Articles and by‑laws, new candidates for Board nominations can be proposed by the Shareholders and will be voted on by the Shareholders at
each annual meeting of Shareholders.
Nomination of Directors
Before making a recommendation on a new director candidate, the Chairman of the Board and different Board members meet with the
candidate to discuss the candidate’s interest and ability to devote the time and commitment required to serve on the Board. In certain
circumstances, the Board may also retain an independent recruiting firm to identify director candidates and fix such firm’s fees and other retention
terms.
The Board does not impose nor does it believe that it should establish term limits or retirement age limits on its directors, as such limits
may cause the loss of experience and expertise important to the optimal operation of the Board.
Diversity and Gender Diversity
The Company does not have a formal policy on diversity on the Board of Directors or in senior management positions. The Company is,
however, mindful of the benefit of diversity of the Board of Directors and senior management, including the representation of women on the
Board and in senior management positions, and the need to maximize their effectiveness and respective decision‑making abilities. Accordingly, in
searches for new candidates, while the Company seeks to recruit or appoint the most qualified individuals for particular positions, it considers the
merit of potential candidates based on a balance of skills, background, experience and knowledge, including taking into consideration diversity
such as gender, age and geographic areas.
Director Orientation and Continuing Education
Orientation
The HRCC Committee is responsible for developing, monitoring and reviewing the Company’s orientation and continuing education
programs for directors. New directors are provided with an information package on the Company’s business, its strategic and operational business
plans, its operating performance, its governance system and its financial position. Also, new directors meet individually with the President and
Chief Executive Officer and other senior executives to discuss these matters. The Board ensures that prospective candidates fully understand the
role of the Board and its Committees and the contribution that individual directors are expected to make, including, in particular, the personal
commitment that the Company expects of its directors.
Continuing Education
All Board members have visited a few DAVIDsTEA’s stores. Management makes presentations to the Board members on a range of
topics that are relevant to the operations. Senior management makes regular presentations to the Board and its committees to educate them and
keep them informed of developments within the Company’s main areas of business and operations, as well as on key legal, regulatory and
industry developments. Directors attend an annual strategic planning meeting, where management presents the Company’s short, mid and long-
term strategic plan. Directors are also provided with Board and Board committee materials at least one week in advance of regularly scheduled
meetings. Directors also receive periodic updates between Board meetings on matters that affect the Company’s business. Finally, Board members
have full access to the Company’s senior management and employees.
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ITEM 11. EXECUTIVE COMPENSATION
This section discusses the material components of the executive compensation program for our executive officers who are named in the
"2016 Summary Compensation Table" below. In Fiscal 2016, our "named executive officers" and their positions were as follows:
· Sylvain Toutant, President and Chief Executive Officer until his departure effective January 29, 2017
· Luis Borgen, Chief Financial Officer
· Christine Bullen, Managing Director, USA
· Edmund Noonan III, Head of Global Real Estate and Store Development
· Isabelle Grisé, Chief Merchandising and Marketing Officer until her departure effective January 19, 2017
This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and
determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from the currently
planned programs summarized in this discussion. See Part I on Form 10-K "Cautionary Note Regarding Forward-Looking Statements."
Executive and Director Compensation
Summary Compensation Table
The following relates to the compensation of the named executive officers for the fiscal year ended January 28, 2017. Our “Named
Executive Officers”, being the President and Chief Executive Officer of the Company (“CEO”) until January 28, 2017, the last day of our fiscal
year, our Chief Financial Officer (“CFO”), and the three most highly compensated executive officers of the Company, including any of its
subsidiaries, who each earned total compensation that exceeded $100,000 for the fiscal year ended January 28, 2017, are:
·
·
·
·
·
Mr. Toutant, President and CEO until his departure effective January 29 2017;
Mr. Borgen, CFO;
Mrs. Bullen, Managing Director, USA;
Mr. Noonan III, Head of Global Real Estate and Store Development; and
Mrs. Grisé, Chief Merchandising and Marketing Officer until her departure effective January 19, 2017.
Each year, the HRCC reviews and determines the compensation of the Named Executive Officers.
Compensation Philosophy and Overview of Components
The objectives of the compensation program are to attract, retain and motivate highly skilled executives, to reward them for their
performance and contributions to the Company’s short‑ and long‑term success, and to align the interests of our executive officers with those of the
shareholders. The compensation of each executive officer is determined based on a number of factors, including the executive officer’s
qualifications and experience, role, responsibilities and contributions, as well as the market and our financial condition.
The compensation program includes incentive programs intended to align executive compensation with the Company’s performance, to
motivate our executive officers to work toward the achievement of our short‑ and long‑term corporate objectives, including strategic goals and
increasing shareholder value and, where appropriate, to reward superior performance. The named executive officers are also entitled to receive
benefits and executive perquisites in accordance with the Company’s policies.
The compensation program aims at striking the right balance between fixed and variable compensation so as to keep the executives
motivated to thrive in achieving the operating and financial goals, while promoting a prudent risk-taking culture.
Below are the main compensation components we use, as well as the reasoning behind their utilization.
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Fixed Compensation Component
Variable Compensation Component
Objective
and Basis
Base Salary
·
Attract and retain
qualified and
Group Insurance
Benefits
·
Provide for the
wellness of the
competent executives
·
Provide base
executives
·
Protect executives
compensation that is
and their families
competitive for each
role
Perquisites
Annual Incentive Program
Long-Term Incentives
·
Limited executive
·
Drive Company performance
·
Attract and retain executives
perquisites to
stimulate
performance
where appropriate
·
Align executive compensation
with Company performance
·
Reward superior performance
through long-term vesting and
potential wealth accumulation
·
Drive long-term Shareholder
returns, promote growth and
sustainability
·
Align executive compensation
with Shareholder interests by
making a significant portion
of compensation variable
·
Opportunity commensurate
Positioning
·
Target market
·
Target slightly below
·
Target slightly below
·
Target market median for
median; adjusted for
general market
market
design/payouts depends on
with developing, high growth
individual experience
practices
and competencies
performance
companies
Form and
Timing
·
Cash
·
Health insurance
·
Group Insurance
Program
·
Employee product
·
Cash
discount
·
Generally, (as determined
annually by the HRCC):
·
Stock options (50%) with a
7‑year term, vesting between
three and four years
depending on the award.
·
Restricted stock units (50%)
vesting over 3 years.
The table below illustrates the proportion of each compensation component comprising the total direct compensation of the named
executive officers at target level.
Name
Sylvain Toutant
Luis Borgen
Christine Bullen
Edmund Noonan III
Isabelle Grisé
Benchmarking
Base
Salary
(%)
36.4%
55.6%
60.6%
60.6%
60.6%
Target
Bonus
(%)
27.3%
22.2%
18.2%
18.2%
18.2%
Target Long-Term
Incentives
(%)
36.4%
22.2%
21.2%
21.2%
21.2%
To ensure that its compensation programs are competitive, DAVIDsTEA conducts periodic benchmarking studies based on compensation
data included in management proxy circulars and published surveys from known firms, with an objective that the target total direct compensation
for the senior management team be positioned in line with the Company’s compensation philosophy and components detailed in the above
section. The current compensation comparator group was developed from Canadian and U.S. publicly-traded companies that either specialize in
beverage and/or drinks, packaged food or specialty retail outlets following analysis done by the Company’s independent compensation
consultants. In choosing the companies, attention was also given to the size of revenues, EBITDA and market capitalization to ensure they were
in a range comparable with DAVIDsTEA. Below is the list of the 17 organizations comprising the compensation comparator group:
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U.S. Food and Beverage Sector
U.S. Specialty Retailers
Canada Food and Beverage Sector
Rocky Mountain Chocolate Factory
Inc.
Inventure Foods
Vera Bradley Inc.
Andrew Peller Ltd
Crystal Rock Holding
LifeVantage Corporation
Francesca’s Holdings
Corby Spirit and Wine Ltd
Amplify Snack Brands
Craft Bew Alliance Inc.
Bebe Stores Inc.
Ten Peaks Coffee Company
Nature’s Sunshine Products
Coffee Holding
Jamba Inc.
Compensation Risk Oversight
MTY Group
The Second Cup
The Board of Directors and the HRCC are very mindful of risks associated with the Company’s compensation policies and practices and
take into account their implications when making compensation decisions. At this time, there have been no risks identified that are likely to have
material adverse effects on the Company, its operations or finances.
In order to limit the chances of creating compensation policies that would encourage named executive officers to take excessive or
inappropriate risks, the Board and the HRCC have adopted a number of practices and policies designed to safeguard the Company’s and its
Shareholders’ interests.
The Use of an Independent Compensation Consultant
The HRCC retained the services of PCI – Perrault Consulting (“PCI”), an independent compensation consultant, in 2014, to assist the
Board and the committee with executive and other compensation matters. During the fiscal year ended January 28, 2017, PCI assisted the HRCC
with a few mandates including the review of the compensation of Board members. Most of these mandates have required in camera discussion
with the HRCC and its Chair, without the presence of management.
The table below presents the fees paid to PCI during the three most recent fiscal years:
Year
2016
2015
Consultant
PCI
% of total fees
PCI
% of total fees
Executive
Compensation
C$3,396
100%
C$36,634
100%
Other Mandates
Total Fees
─
0%
─
0%
C$3,396
100%
C$36,634
100%
The Balance between Fixed and Variable Compensation
While the HRCC believes it is important to link a significant portion of each named executive officers’ total direct compensation to goals
related to the Company’s share price and financial results, the HRCC also want to ensure that we do not create incentives to take excessive
risks to achieve such goals. As such, the HRCC make sure that the fixed portion of compensation represents a sufficient portion of the named
executive officers’ compensation program. The HRCC has approved for Fiscal 2016, a cap on the maximum amount payable under the annual
incentive program at two times target level, which limits the upside from the plan at a reasonable level to motivate the executives, while
remaining within the Company’s risk appetite framework.
The Choice of Performance Measures
The HRCC decided to apply the same performance measures and objectives to the annual awards for all of the named executive officers,
which promotes a culture of collaboration and prioritizes efforts to achieve the desired results, while reducing the risks of an individual taking
excessive risks for personal benefit. The HRCC also believes that Adjusted EBITDA is a significant measure of the Company’s growth and is
well understood by employees, shareholders and investors and therefore represents a logical choice of performance measure for the annual
incentive program.
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The Insider Trading Policy
The Company has adopted an insider trading policy that regulates the equity transactions of all of the employees but most notably of
directors and officers. In addition to being only authorized to trade the Company’s securities during insider trading windows (which open the
second full day after financial results are released each quarter to permit market adjustments), all of their transactions, must be pre-approved and
cleared by the Corporate Secretary so as to avoid even the appearance of trading based on non-public information.
Hedging Prohibition
Hedging transactions can be accomplished through a variety of mechanisms including prepaid forward contracts, equity swaps and
collars and other similar devices. Because hedging transactions permit the holder of the securities to continue to own them without the full risks
and rewards of ownership, they can cause the interests of such person not to be aligned with the other Shareholders and therefore the employees,
officers and directors are prohibited from hedging any equity-based compensation or Company shares.
Automatic Securities Disposition Plan (10b5-1 Plan)
Automatic Securities Disposition Plans are permitted under the Insider Trading Policy and must be approved by the Corporate Secretary
and meet the requirements of the Securities Act (Québec) and similar rules and regulations in other applicable Canadian securities laws as well as
with Rule 10b5-1(c)(1)(i)(B) under the Exchange Act. In general, such plans must be entered into at a time when the person entering into the plan
is not aware of any material non-public information.
Elements of Compensation Program
The following presents in greater detail the Company’s compensation components and illustrates its application for the most recently
completed financial year.
Base salaries
Base salaries of the Named Executive Officers are determined annually by the HRCC. When determining base salary each year, the
HRCC takes the following factors into account: each executive’s experience and individual performance, the Company’s performance as a whole,
cost of living adjustments and other industry conditions, but does not assign any specific weighting to any factor. As a guideline, the HRCC
targets the salary component of the compensation program at the median of our comparator group.
For the fiscal year ended January 28, 2017, the HRCC approved base salary increases varying from 0% to 12% for the Named Executive
Officers, for an average increase of 3.4%.
Name
Sylvain Toutant
Luis Borgen
Christine Bullen
Edmund Noonan III
Isabelle Grisé
Short-Term Incentive Plan
Salary as at January 28,
2017
($)
392,000
355,000
310,000
258,000
280,000
Increase during
last fiscal year
(%)
1.8%
1.4%
0.0%
2.0%
12.0%
Currency
CDN
USD
USD
USD
CDN
The annual incentive program is a cash bonus intended to compensate officers for achieving short‑term corporate goals. It is also
intended to reward the named executive officers for both the overall performance of the Company and individual performance during the year.
The Company believes that establishing cash bonus opportunities is an important factor in both attracting and retaining the services of qualified
and highly skilled executives. As DAVIDsTEA is an organization still in its early stages, it is very important for the Company to roll-out its
strategy and reap the benefits of its growth. As such, the HRCC determined that the most meaningful measure of successful growth was Adjusted
EBITDA and reviews annually the weight attributed to each financial objective. Therefore, for fiscal 2016, the formula attributed 75% to
corporate Adjusted EBITDA and 25% to other profit-base financial objectives. Notwithstanding the above formula, the HRCC may, in its sole
discretion, adjust the calculated payment, as much as to cancel payment altogether, should it determine that the calculated payment requires
adjustment.
For the fiscal year ended January 28, 2017 the Company did not meet the annual incentive program targets. As such no payment
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was made to the Named Executive Officers under the Short-Term Incentive Plan.
(expressed as a percentage of base salary)
Name
Sylvain Toutant
Luis Borgen
Christine Bullen
Edmund Noonan III
Isabelle Grisé
Mid- and Long-Term Incentive Plans
Target
Bonus
(%)
75%
40%
30%
30%
30%
Maximum
Bonus
(%)
150%
80%
60%
60%
60%
Corporate
Performance Factor
(%)
0.0%
Actual
Payout
(%)
0%
0%
0%
0%
0%
In 2015, the Board and the shareholders of the Company adopted the 2015 Omnibus Equity Incentive Plan (the “2015 Omnibus Plan”) in
connection with our IPO. Following its adoption by the Board on March 31, 2015, all equity and equity‑based awards, including awards to the
named executive officers, are made under the 2015 Omnibus Plan. Accordingly, the restricted stock unit and option awards made in Fiscal 2016
to executive officers were all made under the 2015 Omnibus Plan. As our common shares are currently traded solely on the NASDAQ Global
Market, the grant value and number of units awarded are determined based on the U.S. dollar share price and are not subject to currency
conversion.
Prior to the IPO, executive officers participated in the amended and restated equity incentive plan (the “Equity Plan”). As such, during
the fiscal year ended January 28, 2017, the annual stock option grants were made under the 2015 Omnibus Plan.
The target award values for the named executive officers are indicated in the table below. Actual Fiscal 2016 awards can be found in the
summary compensation table set out below. Under the 2015 Omnibus Plan, when calculating the number of stock options and/or restricted share
units/performance share units granted based on the target award values, the Company does not convert for U.S.-Canadian currency rates.
(expressed as a percentage of base salary)
Name
Sylvain Toutant
Luis Borgen
Christine Bullen
Edmund Noonan III
Isabelle Grisé
Fiscal 2016 Stock Options
Target Value
(%)
100%
40%
35%
35%
35%
Maximum Value
(%)
150%
60%
50%
50%
50%
Stock option awards serve to align the interests of the named executive officers with the interests of the shareholders because no value is
created unless the value of the common shares appreciates after the grant. Stock options also encourage retention through the use of time‑based
vesting, as vesting is generally subject to the executive’s continued employment. Stock options may also build share ownership among our named
executive officers if the executive retains the shares following exercise. Stock options are granted at an exercise price equal to the closing price of
our common shares on the NASDAQ Global Market on the day of the grant. Stock options are generally granted with a seven-year term and vest
in equal instalments over four years.
Fiscal 2016 Restricted Stock Units
Restricted stock units serve to align the interests of the named executive officers with the interests of the shareholders as their value is
tied to the price of our common shares. Restricted stock units with a multi-year vesting schedule also promote employee retention and, therefore,
are a valuable tool in assisting the Company roll out its strategy in the longer term. The number of units granted is calculated by dividing the
value of the award by closing price of a share of our common stock on the NASDAQ Global Market. Restricted stock units generally vest as to
25% of the units on the first and second anniversaries and 50% of the units on the third anniversary. Restricted stock units may be settled at the
HRCC’s discretion in shares of our common stock, cash or in a combination of both shares and cash.
Benefits
We provide modest benefits to the named executive officers, which are limited to participation in the basic health and welfare
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plans. These benefits are available to all salaried employees of the Company.
Perquisites
All the named executive officers are eligible to a discount on DAVIDsTEA products, which discount is offered to all of the regular
employees. In addition, the Company pays annual professional association fees and provides life insurance to certain of our named executive
officers.
Retirement Plans
We do not maintain any qualified or non‑qualified defined benefit plans or supplemental executive retirement plans that cover the named
executive officers. In addition, the executives do not participate in a defined contribution pension plan, a collective RRSP or a 401K in the U.S.,
to which the Company contributes.
Summary Compensation Table
The following table illustrates the compensation paid to the named executive officers for the last three completed fiscal years, as
applicable. All compensation is disclosed in U.S. dollars. For employees who receive all or a portion of their compensation in Canadian dollars,
unless otherwise indicated, an exchange of 1.3108 for 2016, 1.4074 for 2015, and 1.2716 for 2014 has been used to convert to U.S. dollars, which
represents the exchange rate of the U.S. Federal Reserve Bank of New York at noon on the last day of each fiscal year, and which, in the
Company’s opinion, is an appropriate reflection of exchange rates variation during the year.
Name and principal position
Year
Salary
(5)
Stock Awards Option Awards
(6)
(7)
Non-equity incentive plan
compensation
(8)
All other
compensation
(9)
Total
Compensation
(1)
Sylvain Toutant
President and Chief
Executive Officer
Luis Borgen
Chief Financial
Officer
Christine Bullen
(2)
Managing Director
U.S.
Edmund Noonan III
Head of Global Real
Estate and Store Development
Isabelle Grisé
(4)
Chief Merchandising
and Marketing Officer
(3)
($)
($)
($)
Annual incentive
plan
($)
(8)
Long-term
incentive plan
($)
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
299,054
273,554
198,494
355,000
350,000
344,451
214,615
─
─
258,000
253,000
78,846
209,502
68,320
─
244,960
376,960
—
79,897
138,245
─
232,495
─
─
51,586
58,674
—
70,049
52,863
─
121,438
—
992,147
39,590
─
35,600
109,684
─
─
25,588
—
66,000
34,705
─
─
─
288,258
235,923
─
196,700
220,449
─
─
─
─
106,640
33,333
─
31,197
─
─
—
—
─
─
─
─
─
─
─
—
—
─
─
─
($)
─
—
—
─
—
7,790
─
─
─
─
—
30,000
229,390
─
─
($)
665,452
938,772
1,426,564
474,487
684,945
608,290
556,794
—
—
335,174
418,314
208,179
543,646
152,380
—
Notes:
(1) Mr. Toutant joined the Company as President and Chief Executive Officer on June 2, 2014.Accordingly, the amounts reported in the table for 2014 reflect
compensation earned by or paid to Mr. Toutant for such year from such date. Mr. Toutant ceased to act as the President and CEO of the Company effective January
29, 2017.
(2) Mrs. Bullen joined the Company as the Managing Director, USA, on May 24, 2016. Accordingly, the amounts reported in the table for 2016 reflect compensation
earned by or paid to Mrs. Bullen for such year from such date. Mrs. Bullen was appointed interim President and CEO effective upon Mr. Toutant’s departure on
January 28, 2017.
(3) Mr. Noonan joined the Company as Head of Global Real Estate and Store Development on October 13, 2014. Accordingly, the amounts reported in the table for 2014
reflect compensation earned by or paid to Mr. Noonan for such year from such date.
(4) Mrs. Grisé joined the Company as the Chief Merchandising and Marketing Officer on September 9, 2015, a position she occupied until her departure effective
January 19, 2017.
(5) Mr. Toutant and Mrs. Grisé were paid in Canadian dollars (their base salaries in effect as of January 31, 2016 were respectively C$392,000 and C$274,615).
Mr. Borgen received a portion of his base salary and annual bonus in Canadian dollars. His base salary in effect as of January 31, 2016 was US$355,000.
(6) Amounts shown reflect the aggregate grant date fair market value of time-vesting restricted stock units granted to all Named Executive Officers on April 15, 2016
(except for Mrs. Bullen whose grant was made on May 24, 2016 upon her start date), under the 2015 Omnibus Plan, excluding the value of estimated forfeitures on
the shares. Assumptions used in the calculation of these amounts are disclosed in note 17 to the Company’s Consolidated Financial Statements for the year ended
January 28, 2017.
(7) Amounts shown reflect the aggregate grant date fair value of time-vesting stock options, using a Black-Scholes option pricing model, and exclude the value of
estimated forfeitures. Assumptions used in the calculation of these amounts are included below for grants received by the named executive officers over the last three
fiscal years and have been adjusted to reflect the May 12, 2015 1for 1.6 stock split on the Shares. Prior to the IPO, the fair
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market value of stock options was determined by an independent third party. The stock option valueused for accounting and financial statement purposes is equal to
the above-disclosed compensation value.
Exercice price ($ CDN)
Term (years)
Dividend yield (%)
Risk-free interest rate (%)
Volatility (%)
Fair market value ($ CDN)
Exchange rate
Fair market value ($ USD)
2016-03-30
11.99$ USD
7.0
0.0
1.23
29.8%
2.84$ USD
-
2.84$ USD
2015-01-14
4.30
3.65
0.0
1.15
30.6%
1.06
1.1932
0.89
2014-10-09
4.31
7.0
0.0
1.52
39.0%
1.84
1.1149
1.65
2014-07-25
4.25
7.0
0.0
1.52
39.0%
1.85
1.0814
1.71
2014-06-02
4.25
7.0
0.0
1.52
39.0%
1.85
1.0895
1.70
2013-08-12
3.33
7.0
0.0
2.03
45.0%
1.63
1.0297
1.58
2012-04-19
0.77
7.0
0.0
1.44
45.0%
0.37
1.0224
0.36
(8) Represents the awards earned during the year under the Short-Term Annual Incentive Program.
(9) The amounts shown represent signing bonuses that were made upon the hire of Mr. Noonan of US$30,000. Also included are Company-paid life insurance premiums
for Messrs. Borgen and Noonan, and payments made to Mrs. Grisé in connection with her departure.
Incentive Plan Awards
Outstanding share-based awards and option-based awards
The following table sets forth information regarding outstanding awards held by the named executive officers as of January 28, 2017. All
outstanding stock options and restricted stock units were adjusted to reflect the May 12, 2015 stock split of 1.6-for-1 on the Common Shares.
(1)
Number of
securities
underlying
unexercised
options -
exercisable
(#)
42,760
334,773
377,533
-
-
Grant date
2016-04-15
2014-06-02
2016-04-15
2015-01-14
2016-05-24
-
2016-04-15
2014-10-09
2015-09-09
-
20,000
5,250
Option Awards
Number of
securities
underlying
unexercised
options -
unexercisable
(#)
-
-
(2)
Option exercise
price
($)
11.19
3.24
13,940
20,000
33,940
38,621
9,010
20,000
29,010
-
11.19
3.28
11.76
11.19
3.29
12.99
Option
expiration date
(3)
Grant date
2017-07-27
2017-07-27
2023-04-15
2022-01-14
2016-04-15
2015-03-31
2023-05-24
2016-05-24
2023-04-15
2021-10-09
2018-01-19
2016-04-15
2015-03-31
Share Awards
Number of
shares or units
of stock that
have not
vested
(4)
(#)
-
-
Market value of
shares or units
of stock that
have not
vested
(5)
($)
-
-
7,140
20,640
27,780
19,770
4,610
8,760
13,370
-
-
47,481
137,256
184,737
131,471
30,657
58,254
88,911
-
-
Name
Sylvain Toutant
President and Chief
Executive Officer
Luis Borgen
Chief Financial
Officer
Christine Bullen
Managing Director
U.S.
Edmund Noonan III
Head of Global Real
Estate and Store Development
Isabelle Grisé
Chief Merchandising
and Marketing Officer
Notes:
(1) Unless earlier terminated, forfeited, relinquished or expired, the options will vest as to 1/4th of the Shares on each of the first four anniversaries of the grant date and the
option becoming vested as to 100% of the Shares on the final vesting date. Shares subject to the option will not vest on any vesting date unless the NEO has remained in
continuous service from the date of grant through such vesting date, unless otherwise provided in the LTIP plan further discussed in Item 11 – Executive Compensation.
(2) For option awards granted after the IPO, the exercise price is equal to the closing price on the NASDAQ on the day of the award. For option awards granted prior to the IPO,
the exercise price was determined by our Board based on an independent third party valuation and was denominated in Canadian dollars. As our shares are currently traded
only on the NASDAQ in USD, the exercise prices of the pre-IPO awards have been converted to U.S. dollars based on the U.S. dollar/Canadian dollar exchange rate in
effect as of January 27, 2017, the last business day of this fiscal year of C$1 = US$1.3108. The actual exchange rate in effect at the time of exercise for options granted with
a Canadian dollar exercise price will be used to convert the option exercise price to U.S. dollars.
(3)
(4) Unless earlier terminated, forfeited, relinquished or expired, the RSUs will vest as to one quarter of the shares on each of the first two anniversaries of the grant date and
All stock options have a seven‑year term.
remaining half of the RSUs will vest on the third anniversary of the grand date. Shares subject to the RSUs will not vest on any vesting date unless the NEO has remained in
continuous service from the date of grant through such vesting date, unless otherwise provided in the LTIP plan further discussed in Item 11 – Executive Compensation.
(5) The market value is calculated by multiplying the closing price of the Shares on the NASDAQ on January 27, 2017, being the last business day of the fiscal year, which
closing price was US$6.65 per Share, by the number of restricted stock units that had not vested as of such date.
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Value vested or earned during the year
The following table sets forth information regarding option-based awards and share-based awards that vested in the fiscal year
ended January 28, 2017 for the Named Executive Officers.
Name
Sylvain Toutant
Luis Borgen
Christine Bullen
Edmund Noonan III
Isabelle Grisé
Option-based awards -
Value vested during the
year
(1)
(US$)
1,806,341
236,550
─
93,400
─
(2)
Share-based awards -
Value vested during the
year
($)
548,121
83,317
─
35,361
62,642
(3)
Non-equity incentive plan
compensation - Value
earned during the year
($)
─
─
─
─
─
Notes:
(1) For option awards granted after the initial public offering, the exercise price is equal to the closing price on the NASDAQ on the day of the award. For option awards granted
prior to the IPO, the exercise price was determined by our Board based on an independent third party valuation and was denominated in Canadian dollars. As the Shares are
traded on the NASDAQ only, the exercise prices of the pre-IPO awards have been converted to USD based on U.S. Federal Reserve Bank of New York at noon on
January 27, 2017, the last business day of this fiscal year, being $1.3108. The actual exchange rate in effect at the time of exercise for options granted with a Canadian dollar
exercise price will be used to convert the option exercise price to US dollars.
(2) The value is calculated by multiplying the number of RSUs vested by the closing Share proce on the NASDAQ on the vesting date.
(3) The aggregate value of unexercised in the-money options is equal to the difference between the exercise price of options that have not been exercised on January 28, 2017
and the closing price of the Shares on the NASDAQ on such date, being the last business day of the fiscal year, which closing price was $6.65USD per Share. Actual gains, if
any, on exercise, will depend on the value of the Shares on the date of exercise. There is no guarantee that gains will be realized. The market value is calculated by
multiplying the closing market price of a share of our common stock on January 27, 2017, being the last trading day of this fiscal year, ($6.65USD) by the number of options
that had not vested as of such date.
Equity Compensation Plan Information
The table below illustrates the status of the shares reserved for issuance under the Company’s equity-based incentive plans.
Plan Category
Plan Name
Equity compensation plans
approved by security holders
Amended and Restated Equity Incentive Plan
2015 Omnibus Equity Incentive Plan
(1)
Equity compensation plans
not approved by security holders
N/A
Total
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
(2)
(#)
(a)
Weighted average
exercise price of
outstanding options
warrants and rights
(3)
($USD)
(b)
769,404
416,025
1,185,429
2.81
11.27
Number of securities
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(#)
©
1,023,975
1,023,975
(1) As of the adoption of the 2015 Omnibus Plan in connection with the IPO, no awards have been or will be made under the Equity Plan. Outstanding options previously
granted under the Equity Plan remain subject to the terms of the Equity Plan.
Reflects outstanding stock options and restricted stock units.
(2)
(3) Restricted stock units have no exercise price and, therefore, the weighted average price does not take these awards into account.
(4) The weighted average exercise price of outstanding options have been converted from CAD to USD at an exchange rate of 1.3108.
The Named Executive Officers would be entitled to the following payments and benefits in the event of termination of the executive’s
employment pursuant to the employment agreement between the executive and the Company.
Termination and change in control benefits
Mr. Luis Borgen
On December 7, 2016, the Company entered into an agreement which modified, in part, Mr. Luis Borgen’s existing equity and
employment agreements with the Company. The agreement provides for a term of employment until July 31, 2017, at which
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point (or earlier if he is terminated without cause or if he leaves the Company for good reason, as such terms are defined in the employment
agreement). Mr. Borgen will be entitled to receive the severance benefits under his existing employment agreement, as described below, as well as
acceleration of his options and restricted stock units. Additionally, on April 18, 2017, Mr. Borgen will receive a new equity grant comprised of a
number of restricted stock units equal to US$88,750 divided by the closing price of our common shares on the date of the grant and options to
purchase a number of shares equal to US$88,750 divided by the fair market value of a share of the Company’s common stock on the date of the
grant. In the event Mr. Borgen’s employment terminates following July 31, 2017, all of the unvested awards will become fully vested as of the
termination date. In the event a change of control were to occur prior to April 18, 2017, Mr. Borgen would receive a cash in lieu of these equity
awards. Under the amended and restated employment agreement entered into in March 2015 with Mr. Borgen, if Mr. Borgen’s employment is
terminated by the Company without cause or by him for good reason (as each term is defined in the employment agreement), he will be entitled to
continued payment of his base salary for a period of 12 months following such termination, payment of premiums under the Consolidated
Omnibus Budget Reconciliation Act (“COBRA”) for 12 months, an amount equal to the average annual cash bonus paid to him for the two years
preceding such termination and a pro rata portion of his target annual cash bonus for the year in which the termination occurs. The value of such
salary continuance was estimated at US$580,548 had termination of employment happened on January 28, 2017. Following a change in control of
the Company, the severance payments described in the preceding sentence will be paid in a single lump sum within 75 days following the
termination of employment instead of in installments and all outstanding equity awards then held by Mr. Borgen will become fully vested, and
exercisable or payable, as the case may be (an additional value of US$252,137 calculated using the closing price of our common shares on
the NASDAQ Global Market of US$6.65 as of January 28, 2017).
If Mr. Borgen’s employment is terminated by the Company for cause or by Mr. Borgen without good reason (as each term is defined in
the employment agreement), Mr. Borgen will be entitled to receive earned but unpaid base salary, any earned but unpaid annual bonus for the year
preceding the year in which such termination occurs, unreimbursed business expenses, and an amount payable for unused vacation days (together,
the Unpaid Base Compensation).
The Company’s obligation to provide Mr. Borgen with any severance payments or other benefits under his employment agreement other
than his Unpaid Base Compensation is conditioned on Mr. Borgen signing a release of claims in our favor and his continued compliance with
covenants relating to confidentiality, assignment of inventions, non‑solicitation and non‑competition.
Mrs. Christine Bullen
In May 2016, the Company entered into an employment agreement with Mrs. Bullen. Pursuant to her employment agreement, if Mrs. Bullen’s
employment is terminated by the Company without cause, she will be entitled to a severance payment equal to six months of base salary, an
amount equal to 6/12ths of the average annual cash performance bonus paid to her for the two years immediately preceding the date of such
termination of employment, and a pro rata portion of her annual cash bonus for the year in which the termination occurs paid at expected actual
payout level. The value of such salary continuance was estimated at US$155,000 had termination of employment happened on January 28, 2017.
If such termination occurs within 18 months following a change in control of the Company, the severance payments described in the preceding
sentence will be paid in a single lump sum within 75 days following the termination of employment instead of in installments and all outstanding
equity awards then held by Mrs. Bullen will become fully vested, and exercisable or payable, as the case may be (an additional value of
US$131,470 calculated using the closing price of our common shares on the NASDAQ Global Market of US$6.65 as of January 28, 2017).
Mr. Edmund Noonan III
In September 2014, the Company entered into an employment agreement with Mr. Noonan, the Head of Global Real Estate and Store
Development of the Company. Pursuant to his employment agreement, if Mr. Noonan’s employment is terminated by the Company without cause,
he will be entitled to a severance equivalent to 6 months of base salary and a pro rata portion of his annual cash bonus for the year in which the
termination occurs paid at expected actual payout level. The value of such salary continuance was estimated at $126,500 had termination of
employment happened on January 28, 2017. There is no specific change in control provision agreed upon between the Company and Mr. Noonan
in his employment agreement.
Voluntary Resignation
Unvested options granted under the Equity Incentive Plan will be forfeited upon a termination of employment due to a voluntary
resignation and vested options will remain exercisable for a period of 30 days following such termination. Under the 2015 Omnibus Plan, vested
options will remain exercisable until the earlier of the one-year anniversary of the termination of employment or the award’s normal expiration
date. Unvested awards under the 2015 Omnibus Plan will be forfeited at the time of such termination.
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Termination for Cause
Vested and unvested awards under both the Equity Incentive Plan and the 2015 Omnibus Plan will be forfeited immediately at time of
termination.
Termination Due to Death
Unvested options granted under the Equity Incentive Plan will be forfeited upon death while vested options will remain exercisable by
the estate for a period of 180 days following death. Under the 2015 Omnibus Plan, upon death, all time-based awards will immediately vest and
performance awards will vest at the target level of performance. Options will remain exercisable until the earlier of the one-year anniversary of
the executive’s death or the award’s normal expiration date.
Termination Due to Disability
Unvested options granted under the Equity Incentive Plan will be forfeited upon termination of employment while vested options will
remain exercisable for a period of 180 days following termination. Under the 2015 Omnibus Plan, upon a termination of employment due to
disability, all time-based awards will immediately vest and performance awards will remain eligible to vest to the extent the applicable
performance goals are achieved. Options will remain exercisable until the earlier of the one-year anniversary of the participant’s termination of
employment due to disability or the award’s normal expiration date.
Retirement
Unvested options granted under the Equity Incentive Plan be will be forfeited upon retirement while vested options will remain
exercisable for a period of 90 days. Awards other than stock options made under the 2015 Omnibus Plan will vest based on a pro rata of elapsed
days between the start of the performance period and the complete 3-year period. If a performance condition is attached to the vesting, the
outstanding awards will be treated as per the achievement of the performance criterion at the time of retirement. Vested options will remain
exercisable for a period of 5 years following retirement or until the original option expiry date. For purposes of the plan, retirement is defined as
65 years of age and 55 years of age with 10 years of service or more.
Involuntary Termination
Unvested options granted under the Equity Incentive Plan will be forfeited upon an involuntary termination of employment by the
Company while vested options will remain exercisable for a period of 30 days. Under the 2015 Omnibus Plan, upon an involuntary termination of
employment by the Company, options will be forfeited to the extent then unvested and vested options will remain exercisable until the earlier of
the one-year anniversary of the participant’s termination of service or the award’s normal expiration date. RSUs and performance awards will be
deemed vested pro rata based on the number of days in a specified period (i.e. the period from the date of grant to the third anniversary of the
grant date) that have elapsed from the date of grant to the six-month anniversary of the date of the termination of employment, with the vesting of
performance awards to be subject to performance assessed as of the date of such termination of employment.
Change in Control
Under the Equity Incentive Plan, upon the occurrence of a trigger event (as defined in the Equity Plan, generally a liquidation or change
of control), participants holding vested options or options that would vest upon the completion of the trigger event will have the right to exercise
such options on a basis that allows the participants to tender the common shares delivered upon such exercise in the transaction and any options
not so exercised will expire and be cancelled upon the completion of the trigger event. In the event of a trigger event in which the purchase price
in the transaction will be paid in cash, in lieu of a participant exercising his or her vested options prior to the trigger event, the participant may
require us to purchase his or her options for a purchase price per common share equal to the purchase price per common share in the transaction
times the number of common shares subject to the option, minus the aggregate exercise price for such common shares, subject to the completion
of the trigger event.
Under the 2015 Omnibus Plan, upon a termination by the Company other than for Cause within 12 months following a change in control,
to the extent granted prior to the time of the change in control and then outstanding, all time-based awards will vest and performance awards will
vest at the target level of performance. Options will remain exercisable until the earlier of the one-year anniversary of the participant’s termination
of employment or service due to disability or the award’s normal expiration date.
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Compensation of Directors
Director Compensation
In connection with the Company’s listing on the NASDAQ, the Board adopted a non-employee director compensation policy. On
February 15, 2017, the Board approved amendments to come into effect on June 8, 2017. The policy is designed to enable the Company to attract
and retain highly qualified non-employee directors. Under the policy effective on January 28, 2017, all non-employee directors received the cash
and equity compensation set forth below.
Effective as of January 28, 2017
Board Chair
Annual retainer
Annual target equity grant
Board member
Annual retainer
Annual target equity grant
Board meeting fees
Audit Committee Chair
Additional annual retainer
Audit Committee meeting fees
Human Resources and Compensation Committee Chair
Additional annual retainer
Human Resources and Compensation Committee meeting fees
C$100,000
US$85,000
C$50,000
US$85,000
C$1,000 (C$500 for teleconference) payable only after the fourth Board
meeting in a year
C$15,000 minimum
C$1,000 (C$500 for teleconference)
C$10,000 minimum
C$1,000 ($500 for teleconference)
Corporate Governance and Nominating Committee meeting fees
C$1,000 ($500 for teleconference)
Effective on June 8, 2017
Board Chair
Annual retainer
Annual target equity grant
Board member
Annual retainer
Annual target equity grant
Board meeting fees
Audit Committee Chair
Additional annual retainer
Audit Committee meeting fees
Human Resources and Compensation Committee Chair
Additional annual retainer
Human Resources and Compensation Committee meeting fees
C$100,000
15,000 RSUs or DSUs, at the option of the Director
C$50,000
7,500 RSUs or DSUs, at the option of the Director
C$500 for teleconference meetings onlu and payable after the fourth Board
meeting in a year
C$15,000 minimum
None
C$10,000 minimum
None
Corporate Governance and Nominating Committee meeting fees
None
Under our non‑employee director compensation policy in effect on January 28, 2017,, annual retainers and meeting fees are paid in
quarterly cash payments. Equity grants generally will be made in the form of restricted stock units or deferred share units granted under the 2015
Omnibus Plan and will generally vest in full on the first anniversary of the grant date. Equity awards under the non‑employee director
compensation policy will be made at a date following the Company’s annual Meeting of Shareholders.
The following table sets forth information concerning the compensation earned by our non‑employee directors during the fiscal year
ending January 28, 2017. Mr. Toutant received no additional compensation for services as director and, consequently, is not
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included in this table. The compensation received by Mr. Toutant as our former President and CEO can be found in the Summary Compensation
Table above.
Director Compensation Table
The following table sets forth information concerning all amounts of compensation provided to the directors of the Company who are not
members of the management of the Company for the fiscal year ended January 28, 2017.
Name
Fees earned of
paid in cash
(13)
($)
Stock awards
($)
(14)
Option awards
($)
Change in pension
value
and non-qualified
deferred
compensation
earnings
($)
Non-equity
incentive
compensation plan
($)
All other
compensation
($)
Total
($)
(1)
(2)
(4)
Emilia Di Raddo
Tom Folliard
Bruce Guerriero
(3)
Michael J Mardy
David W. McCreight
Pierre Michaud
Lorenzo Salvaggio
Guy Savard
Herschel Segal
Sarah Segal
Kathleen C. Tierney
Maurice Tousson
(11)
(9)
(7)
(8)
(6)
(5)
(10)
31,660
38,038
18,644
20,854
34,513
30,007
33,567
14,590
33,567
30,987
16,762
71,394
85,000
85,000
─
85,000
85,000
─
85,000
─
85,000
85,000
85,000
255,000
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
─
116,660
123,038
18,644
105,854
119,513
30,007
118,567
14,590
118,567
115,987
101,762
326,394
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
Mrs. Di Raddo ceased to be a member of the Audit Committee effective April 5, 2016 and became a member of the Human Resources and
Compensation Committee effective June 9, 2016.
Mr. Folliard ceased to be a member of the HRCC effective June 9, 2016 and became the Chair and a member of the Corporate Governance and
Nominating Committee on the same date.
Mr. Guerriero did not stand for reelection and, as such, he ceased to be a director and the Chair of the Audit committee effective June 9, 2016,
following the election of the new Board members at the Annual Shareholders’ meeting held on such date.
Mr. Mardy was elected as a director of the Board on June 9, 2016 and was appointed a member and Chair of the Governance and Nominating
committee effective June 9, 2016.
Mr. Michaud did not stand for reelection and, as such, he ceased to be a director and the Chairman of the Board effective June 9, 2016, following the
election of the new Board members at the Annual Shareholders’ meeting held on such date.
Mr. Salvaggio became a member of the Human Resources and Compensation Committee on June 9, 2016.
Mr. Savard did not stand for reelection and, as such, he ceased to be a director and a member of the Audit committee effective June 9, 2016,
following the election of the new Board members at the Annual Shareholders’ meeting held on such date.
Mr. Segal ceased to be a member of the Human Resources and Compensation Committee on June 9, 2016 and he became a member of the Corporate
Governance and Nominating Committee on such date.
Ms. Segal became a member of the Corporate Governance and Nominating Committee on June 9, 2016.
Mrs. Tierney was elected as a director of the Board on June 9, 2016 and was appointed a member of the Human Resources and Compensation
Committee effective on June 9, 2016.
Mr. Tousson was elected as a director of the Board on June 9, 2016 and was then appointed Chairman and Chair of the Human Resources and
Compensation Committee and a member of the Audit committee, effective June 9, 2016. The fees and share-based awards for Mr. Tousson incude
special equity grants approved by the Board in acknowledgement of Mr.Tousson’s additional responsibilities in his role as Chairman of the Board
mainly with regards to the transition period related to the departure of Mr. Toutant and the appointment of the new President and CEO.
Director fees were paid in cash in Canadian dollars except for Mrs. Tierney and Messrs. Folliard, Mardy and McCreight, who are all US residents.
Their respective compensation was converted to U.S. dollars at the time of payment using the noon exchange rate from the U.S. Federal Reserve
Bank of New York of on such date.
Stock awards are made based on the closing price of the shares on the NASDAQ on the grant date which price is in US dollars. For the Board
members receiving their compensation in Canadian dollars, the fair market value of stock awards was converted to Canadian dollards using the noon
exchange rate from the U.S. Federal Reserve Bank of New York of on such date.
The directors are reimbursed by the Company for the reasonable costs and expenses incurred in connection with attending meetings of
the Board of Directors and its committees including, to the extent applicable, the cost of travel on commercial or leased aircraft.
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Outstanding option-based awards for directors
In fiscal years prior to fiscal 2016, some of the Company’s directors were granted options to buy Common Shares in exchange for their
service on the Board of Directors. As of the end of the fiscal year ended January 28, 2017, these options are still outstanding and presented in the
table below.
Name
Emilia Di Raddo
Tom Folliard
David W. McCreight
Option-based Awards
(1)
Number of securities
underlying unexercised
options
(#)
48,635
48,635
49,761
(2)
Option exercise price
(C$)
3.33
3.33
4.31
Option expiration date
(3)
2021-03-03
2021-03-03
2021-12-02
(4)
Value of unexercised in-the-
money options
(US$)
199,890
199,890
167,197
Notes:
table.
be converted to USD.
(1)Mmes. Tierney and Segal, Messrs.Mardy, Salvaggio, Segal and Tousson have not been granted stock options and therefore are not represented in this
(2)The exercise price is denominated in Canadian dollars as the options were awarded prior to the IPO. Upon exercise of the options, the exercise price will
(3) All stock options have a seven-year (7) term and generally vest in 36 monthly instalments.
(4)The aggregate dollar value of the in the-money unexercised options is the positive difference between the exercise price and the closing price of the
Shares on the NASDAQ on January 27, 2017, the last business day of the fiscal year, which closing price was $6.65USD per Share. Actual gains, if any,
on exercise day will depend on the value of the Shares on the date of exercise. There is no guarantee that gains will be realized.
(5) Messrs. Michaud and Savard ceased to be directors of the Company on June 9, 2016 and, therefore, no options remain outstanding.
Value vested or earned during the year for directors
The following table sets forth information regarding option-based awards and share-based awards the vesting in the fiscal year ended
January 28, 2017 for our directors.
Name
Emilia Di Raddo
Tom Folliard
David W. McCreight
Pierre Michaud
Guy Savard
Option-based awards - Value
vested during the year
(1)(2)
(US$)
140,754
140,754
131,633
116,612
278,295
Share-based awards - Value
vested during the year ($)
─
─
─
─
─
Non-equity incentive plan
compensation - Value earned
during the year ($)
─
─
─
─
─
Notes:
(1)
(2)
Mmes. Tierney and Segal and well as Messrs. Mardy, Salvaggio, Segal and Tousson have not been granted stock options and therefore are not
represented in this table.
The value is calculated as if the stock options were exercised on the vesting date of each relevant grant. The value represents the difference between
the option’s exercise price and the closing share price on the NASDAQ on the vesting date, multiplied by the number of shares underlying the
options that vested. As the Shares are traded only on the NASDAQ in US dollars, the exercise prices of the pre-IPO awards have been converted to
USD based on the noon buying rate of the U.S. Federal Reserve Bank of New York on January 27, 2017, the last business day of this fiscal year,
being $1.3108. For vesting dates prior to the IPO, the quarterly share valuation, as determined by our Board based in part on an independent third
party valuation, was used. The actual value earned, if any, will be different and will be based on the closing price of the Shares on the actual date of
exercise.
Indebtedness of Directors and Officers
As of April 11, 2017, no executive officer, director, proposed nominee for election as a director or employee, former or present, of the
Company was indebted to the Company including in respect of indebtedness to others where the indebtedness is the subject of a guarantee,
support agreement, letter of credit or other similar arrangement provided by the Company.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table shows, as of April 11, 2017, the number of common shares beneficially owned by each director, director nominee
and executive officer named in the Summary Compensation Table in Item 11 and all directors, director nominees and executive officers as a
group.
The following table and accompanying footnotes set forth information relating to the beneficial ownership of our common shares as of
April 11, 2017 by:
· each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding common shares;
· each of our directors and director nominees;
·
· all directors and executive officers as a group.
each of our named executive officers;
Our major shareholders do not have voting rights that are different from our shareholders in general.
Each shareholder’s percentage ownership is based on 24,455,510 common shares outstanding as of April 11, 2017.
Beneficial ownership is determined in accordance with SEC rules. In general, under these rules a beneficial owner of a security includes
any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power or
investment power with respect to such security. A person is also deemed to be a beneficial owner of a security if that person has the right to
acquire beneficial ownership of such security within 60 days. Except as otherwise indicated, and subject to applicable community property laws,
the persons named in the table have sole voting and investment power with respect to all common shares held by that person. Our common shares
that a person has the right to acquire within 60 days of April 11, 2017 are deemed outstanding for purposes of computing the percentage
ownership of such person holding, but are not deemed outstanding for purposes of computing the percentage ownership of any other person,
except with respect to the percentage ownership of all directors, director nominees and executive officers as a group. As of April 11, 2017,
7,573,907 shares were owned by 4 United States holders of record.
Unless otherwise indicated below, the address for each beneficial owner listed is c/o DAVIDsTEA Inc., 5430 Ferrier, Mount‑Royal,
Québec, Canada, H4P 1M2.
Transfer Agent and Registrar
The Company’s transfer agent and registrar is CST Trust Company, Montréal.
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Table of Contents
Beneficial Owners of more than 5% of our common shares and/or selling shareholders:
Name of beneficial owner
Rainy Day Investments Ltd.
FMR LLC
Entities affiliated with Highland Consumer Partners
TDM Asset Management PTY Ltd.
(1)
(2)
Named Executive Officers, Directors and Director Nominees:
(6)
(3)
(8)
(5)
Joel Silver
Luis Borgen
Christine Bullen
Isabelle Grisé
(4)
Edmund Noonan III
Maurice Tousson
Emilia Di Raddo
(7)
Tom Folliard
Tyler Gage
David W. McCreight
Gary O'Connor
Lorenzo Salvaggio
Sylvain Toutant
(11)
Herschel Segal
(1)
Sarah Segal
Michael J. Mardy
(12)
Kathleen C. Tierney
All executive officers, directors and director nominees as a group
(10)
(9)
(13)
Shares Beneficially Owned
as at April 11, 2017
Number of
shares
(#)
Percentage
of shares
(%)
12,007,238
3,012,028
3,304,306
2,377,058
-
3,834
-
3,549
22,417
-
48,635
138,518
-
103,755
-
1,295
432,407
12,007,238
-
1,000
-
12,764,348
47.2%
11.8%
13.0%
9.3%
*
*
*
*
0.1%
*
0.2%
0.5%
*
0.4%
*
*
1.7%
47.2%
*
*
*
50.1%
Notes:
*
represents less than 1%.
(1) Rainy Day Investments Ltd. (“Rainy Day”) is a company controlled by Herschel Segal, who holds voting and investment control over the shares held by Rainy Day. The
principal business address for Rainy Day is 5695 Ferrier, Mount Royal, Québec, Canada, H4P 1N1.
(2) Consists of (i) 2,653,155 common shares held by Highland Consumer Fund I, LP (“Fund I”), (ii) 566,063 common shares held by Highland Consumer Fund I‑B, LP (“Fund
I‑B”), and (iii) 85,088 common shares held by Highland Consumer Entrepreneurs Fund I LP (“Entrepreneurs Fund”, and together with Fund I and Fund I‑B, the “Highland
Entities”). Highland Consumer GP Limited Partnership is the general partner of each of the Highland Entities. Highland Consumer GP GP LLC (“HC GP GP”) is the general
partner of Highland Consumer GP Limited Partnership. Peter Cornetta is the managing member of HC GP GP and has voting and investment power over the shares held by
the Highland Entities. The principal business address for the Highland Entities is One Broadway, 16 Floor, Cambridge, Massachusetts 02142.
th
Consists of 3,384 RSUs held by Mr. Borgen.
Consists of 3,549 RSUs held by Mrs. Grise.
Consists of 1,864 RSUs and options to purchase 22,253 common shares held by Mr. Noonan.
Consists of an estimated number of common shares to be held by Mr. Tousson following the full vesting on the grant date of April 18, 2017. The final amount will be
determined on the grant date of April 18, 2017 based on a grant value of $85,000 and which, as of April 11, 2017, represented 11,039 RSUs based on the Share closing price
on such date.
Consists of options to purchase 48,635 common shares held by Mrs. Di Raddo.
Consists of 89,883 common shares owned by Mr. Folliard through a family trust and options to purchase up to 48,635 common shares held by Mr. Folliard.
Consists of 53,994 common shares held by Mr. McCreight and options to purchase 49,761 common shares held by Mr. McCreight.
Consists of 1,295 common shares held by Mr. Salvaggio.
Consists of 409,532 common shares owned by Mr. Toutant as per the latest information we had available upon his departure effective January 29, 2017.
Consists of 1,000 common shares owned by Mr. Mardy.
Includes options to purchase common shares exercisable within 60 days of April 11, 2017.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Our audit committee reviews and approves related party transactions or recommends related party transactions for review by independent
members of our Board of Directors. Each of the transactions described below have been reviewed by our audit committee.
We have entered into an amended and restated investors’ rights agreement with certain of our shareholders.
Arrangements with Our Investors
103
Table of Contents
Investors’ Rights Agreement
In February 2014, in connection with the issuance of our Series A-1 preferred shares, we entered into an amended and restated investors’
rights agreement, which was amended in December 2014 in connection with our issuance of our Series A-2 preferred shares. The agreement
contains provisions related to registration rights, information and observation rights, rights to future share issuances and approval rights by certain
investors and/or their board designees. The information and observation rights, rights to future share issuance and approval rights terminated as a
result of our IPO.
Subject to certain conditions, holders of 20% or more of the Investor Registrable Shares or 20% or more of the Rainy Day Registrable
Securities (as those terms are defined in the agreement) have the right to demand that we register under the Securities Act or under Canadian
securities laws all or a portion of such shareholder or shareholders’ Registrable Securities at our expense. Such rights became effective as of April
3, 2015. Upon the exercise of this right, we must give notice to all other parties who then hold registrable securities, as defined in the agreement,
to permit them to participate in the offering.
In addition, if we propose to register our common shares under the Securities Act or under any Canadian securities laws, we must give
prompt notice to each holder of registrable securities of our intent to do so and each such holder has piggyback registration rights and is entitled to
include any part of its registrable securities in such registration, subject to certain conditions.
Finally, if we become eligible to use a shelf registration statement on Form S-3 or Form F-3, holders of registrable securities may
demand that we file a Form S-3, F-3 or S-10 registration statement with respect to any or a portion of such holder’s registrable securities having
an anticipated aggregate offering price, net of all underwriting discounts, selling commissions, share transfer taxes and certain other expenses, of
at least $1 million. Upon receiving notice of such a demand, we must notify all other holders to permit them to exercise piggyback registration
rights with respect to such demand.
Director Independence
Five of our ten directors that make up our board of directors are considered independent under Canadian securities laws and the
NASDAQ rules. Under these rules, Maurice Tousson, the chairman of our Board of Directors, Tom Folliard, David McCreight as well as
Kathleen C. Tierney and Michael J. Mardy, are considered independent, whereas Emilia Di Raddo, Lorenzo Salvaggio, Hershel Segal, Sarah
Segal and Joel Silver are not considered to be independent as a result of their respective relationships with the Company or their relationships
with other non‑independent members of our board of directors. The independence of directors is determined by the Board based on the results of
independence questionnaires completed by each director annually, as well as other factual circumstances reviewed on an ongoing basis.
To enhance the independent judgment of the Board of Directors, despite the fact that a majority of our directors are not independent, the
independent members of the Board of Directors may meet in the absence of members of management and the non independent directors. An in
camera session is now scheduled as part of every meeting of the Board of Directors and its committees to allow independent directors to meet
without non-independent directors and members of management, as necessary. All non-independent directors are responsible to the Board of
Directors as a whole and have a duty of care to the Company.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees billed to the Company for the fiscal years ended January 28, 2017 and January 30, 2016
by EY:
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
All other fees (4)
For the year ended
January 28, 2017
January 30, 2016
369,000
40,000
19,366
16,250
444,616
315,000
590,000
79,885
47,200
1,032,085
104
Table of Contents
Notes:
(1)Audit fees consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements and review
of the interim consolidated financial statements included in our quarterly reports, consultation concerning financial reporting and
accounting standards, and services provided in connection with statutory and regulatory filings or engagements, including consent
procedures in connection with public filings.
(2)Audit-related fees consist of fees billed for related services that are reasonably related to the performance of the audit or review of our
consolidated financial statements and that are not reported under "Audit Fees", including fees billed in relation to our initial public
offering.
(3)Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and
international). These services include assistance regarding federal, state and international tax compliance, and transfer pricing studies and
advisory services.
(4) All other fees consist of fees for all other professional services and products rendered by EY, primarily translation services.
All fees paid and payable by the Company to EY in Fiscal 2016 and Fiscal 2015 were pre-approved by the Company’s Audit Committee
pursuant to the procedures and policies set forth in the Audit Committee mandate. The Audit Committee's policy is to pre-approve all audit and
permissible non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-
related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of services. The independent registered public accounting firm and management are required to periodically report
to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this
pre-approval. The Chairperson of the Audit Committee is also authorized, pursuant to delegated authority, to pre-approve additional services on a
case-by-case basis, and such approvals are communicated to the full Audit Committee at its next meeting.
105
Table of Contents
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Form 10-K:
(a)(1) Financial Statements
PART IV
The audited consolidated financial statements of the Company filed as part of this Annual Report on Form 10-K are included in Part II,
Item 8, and include:
Report of Independent Registered Public Accounting Firm
As of January 28, 2017 and January 30, 2016:
Consolidated Balance Sheets
For the years ended January 28, 2017, January 30, 2016 and January 31, 2015:
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial
statements or notes thereto.
(a)(3) Exhibits
106
Table of Contents
Exhibit
Number
Description of Document
3.1
3.2
10.1
10.2*
10.3*
10.4*
10.6*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Form of Amended and Restated Articles of Incorporation
of DAVIDsTEA Inc.
Amended and Restated Bylaws of DAVIDsTEA Inc.
Credit Facility Letter from HSBC Bank Canada to
DAVIDsTEA Inc. and DAVIDsTEA (USA) Inc., dated
August 19, 2013, as amended
Amended and Restated Equity Incentive Plan, as amended
Equity Participation Agreement between DAVIDsTEA Inc.
and Sylvain Toutant, dated June 2, 2014, as amended
Equity Participation Agreement between DAVIDsTEA Inc.
and Luis Borgen, dated February 22, 2013
Equity Participation Agreement between DAVIDsTEA Inc.
and Edmund Noonan, dated October 9, 2014
Equity Participation Agreement between DAVIDsTEA Inc.
and Emilia Di Raddo, dated March 3, 2014, as amended
Equity Participation Agreement between DAVIDsTEA Inc.
and Tom Folliard, dated March 3, 2014, as amended
Equity Participation Agreement between DAVIDsTEA Inc.
and David W. McCreight, dated December 15, 2014
Equity Participation Agreement between DAVIDsTEA Inc.
and Guy Savard, dated December 15, 2014
2015 Omnibus Incentive Plan
Form of Nonstatutory Stock Option Award Agreement
under 2015 Omnibus Incentive Plan
Form of Restricted Stock Unit Award Agreement Under
2015 Omnibus Incentive Plan
Form of Indemnification Agreement for Directors and
Officers
Amended and Restated Employment Agreement between
DAVIDsTEA Inc. and Sylvain Toutant, dated March 30,
2015
Amended and Restated Employment Agreement between
DAVIDsTEA (USA) Inc. and Luis Borgen, dated March
30, 2015
Amended and Restated Investors' Rights Agreement
among DAVIDsTEA Inc. and the Investors named therein,
dated February 24, 2014
Amendment to the Amended and Restated Investors'
Rights Agreement among DAVIDsTEA Inc. and the
Investors named therein, dated December 15, 2014
Agreement of Lease between DAVIDsTEA Inc. and S.
Rossy Investments Inc., dated July 22, 2013
Lease Agreement between DAVIDsTEA Inc. and Olymbec
Development Inc. (f/k/a Olymbec Development (2004)
Inc.), dated April 28, 2010
First Addendum to Lease Agreement between
DAVIDsTEA Inc. and Olymbec Development Inc. (f/k/a
Olymbec Development (2004) Inc.), dated January 19,
2011
Second Addendum to Lease Agreement between
DAVIDsTEA Inc. and Olymbec Development Inc. (f/k/a
Olymbec Development (2004) Inc.), dated September 2,
2011
Third Amendment to Lease Agreement between
DAVIDsTEA Inc. and Olymbec Development Inc. (f/k/a
Olymbec Development (2004) Inc.), dated February 20,
2014
Month to Month Tenancy Agreement by and between Le
Chateau Inc. and DAVIDsTEA Inc., dated February 14,
2011
License Agreement by and between Le Chateau Inc. and
DAVIDsTEA Inc., dated June 18, 2008
License Agreement Extension by and between Le Chateau
Inc. and DAVIDsTEA Inc., dated June 3, 2013
107
Incorporated by Reference
(File No. 333-203219, unless otherwise
indicated)
Form
Filing Date
Exhibit
Number
3.1
F-1/A
5/18/2015
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
3.2
10.1
10.3
10.4
10.5
10.8
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
4/2/2015
10.19
4/2/2015
10.37
4/2/2015
10.38
4/2/2015
4/2/2015
10.14
10.42
4/2/2015
10.43
F-1
4/2/2015
10.44
F-1
4/2/2015
10.45
F-1
F-1
F-1
4/2/2015
10.46
4/2/2015
4/2/2015
10.47
10.48
Table of Contents
10.28
10.29
10.30
10.31*
10.32*
10.33
10.34
10.36
21.1
10.37
10.38
10.39
10.40
10.41
10.42
23.1
31.1
31.2
32.1
32.2
F-1
F-1
F-1
F-1
F-1
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
F-1/A
5/18/2015
F-1
4/12/2016
4/12/2016
4/2/2015
12/8/2016
4/13/2017
4/13/2017
4/13/2017
10.49
10.50
10.51
10.52
10.55
10.56
10.57
10.58
21.1
10.59
Filed
herewith
Filed
herewith
Filed
herewith
3/13/2017
10.60
4/13/2017
4/12/2017
4/12/2017
Filed
herewith
Filed
herewith
31.1
4/12/2017
31.2
4/12/2017
32.1
4/12/2017
32.2
Agreement of Sublease by and between Le Chateau Inc.
and DAVIDsTEA Inc., dated April 26, 2012
Storage Agreement by and between Le Chateau Inc. and
DAVIDsTEA Inc., dated May 28, 2012
Storage Agreement Extension by and between Le Chateau
Inc. and DAVIDsTEA Inc., dated February 14, 2014
Short-Term Incentive Plan
Equity Participation Agreement between DAVIDsTEA Inc.
and Luis Borgen, dated January 14, 2015
Credit Agreement by and between DAVIDsTEA Inc., Bank
of Montreal and BMO Capital Markets, dated April 24,
2015
Employment Agreement between DAVIDsTEA (USA) Inc.
and Edmund Noonan III, dated September 10 , 2014
Employment Agreement between DAVIDsTEA Inc. and
Marc McDonald, dated May 26 , 2015
Subsidiaries of DAVIDsTEA Inc.
Amendment Agreement regarding Luis Borgen
Employment Agreement, dated December 7, 2016
Employment Separation Agreement between DAVIDsTEA
Inc. and Isabelle Grisé, dated February 22, 2017
Executive Employment Agreement between DAVIDsTEA
(USA) Inc. and Christine Bullen, dated May 24, 2016
Addendum to the Executive Employment Agreement
between DAVIDsTEA (USA) Inc. and Christine Bullen,
dated February 2, 2017
Employment Agreement by and between DAVIDsTEA Inc.
and Joel Silver, dated March 13, 2017
Separation Letter between DAVIDsTEA Inc. and Sylvain
Toutant, dated October 20, 2016
Consent of Independent Registered Public Accounting Firm
th
th
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, relating to
DAVIDsTEA Inc.
Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, relating to
DAVIDsTEA Inc.
Certification of Chief Executive Officer pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, relating to DAVIDsTEA Inc.
Certification of Chief Financial Officer pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, relating to DAVIDsTEA Inc.
108
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: April 12, 2017
DAVIDsTEA INC.
/s/ Joel Silver
By:
Name:
Title:
109
Joel Silver
President and Chief
Executive Officer
Table of Contents
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Maurice Tousson
Name: Maurice Tousson
/s/ Joel Silver
Name: Joel Silver
/s/ Luis Borgen
Name: Luis Borgen
/s/ Christine Bullen
Name: Christine Bullen
/s/ Howard Tafler
Name: Howard Tafler
/s/ Herschel Segal
Name: Herschel Segal
/s/ Emilia Di Raddo
Name: Emilia Di Raddo
/s/ Tom Folliard
Name: Tom Folliard
/s/ Michael J. Mardy
Name: Michael J. Mardy
/s/ David W. McCreight
Name: David W. McCreight
/s/ Lorenzo Salvaggio
Name: Lorenzo Salvaggio
/s/ Sarah Segal
Name: Sarah Segal
/s/ Kathleen C. Tierney
Name: Kathleen C. Tierney
Chairman of the Board of Directors
President, Chief Executive Officer and Director
(principal executive officer)
Chief Financial Officer
(principal financial officer)
Managing Director, USA
Chief Accounting Officer
(principal accounting officer)
Co-Founder and Director
Director
Director
Director
Director
Director
Director
Director
110
Table of Contents
Date: April 12, 2017
111
Exhibit 10.38
Isabelle Grisé
February 22, 2017
Re: Separation Agreement and Release
Dear Ms. Grisé,
This letter (the “Agreement”), when signed by you, represents our agreement regarding your separation from DAVIDsTEA
Inc. (the “Company”).
1. Separation Date. As we have discussed, your employment with the Company ended January 19
th
, 2017 (the
“Separation Date”). Your pay through the Separation Date (to the extent not previously paid), including pay for any accrued but
unused vacation time less all applicable deductions, was deposited into your bank account.
2.
Severance Benefits. In return for your acceptance of the terms in this Agreement, and subject to you meeting in
full your obligations hereunder, as per your signed employment agreement, the Company will pay you a lump sum amount equal to
seven and a half (7,5) months at your regular base salary plus twenty-five thousand dollars (25,000$), the whole subject to reduction
for all appropriate withholdings and deductions and payable within five (5) business days followings the date this Agreement, signed
by you, is received by the Company. You agree that you would not otherwise be entitled to the severance benefits described in this
paragraph, and understand that you will receive these severance benefits only by signing this Agreement. You also agree that the
payments provided under paragraph 1 of this Agreement are in complete satisfaction of any and all compensation and benefits due to
you from the Company and that you are owed no other compensation, equity, or benefits of any kind from the Company.
3.
Benefits. Your medical and dental health insurance will be maintained until the earlier of (i) seven and a half (7,5)
months from the Separation Date or (ii) the date on which you become covered by another employer, and the applicable insurance
premium deductions will be withheld from your final pay. All other employee benefits provided by the Company ended as of the
Separation Date. The Company is also providing you with a professional career transition program of 6 months to assist you in your
job search.
4.
Equity Incentive Plan. All awards granted to you will be treated in compliance with the 2015 Omnibus Equity
Incentive Plan, namely with Section 11.
5.
Release. By signing this Agreement, and in exchange for the severance benefits provided to you under this
Agreement, you agree to fully and finally release, waive and settle any and all causes of action, suits, claims, demands, charges, and
obligations of any kind relating to your employment by the Company or to the termination of your employment from the Company,
including, but not limited to, any claim in contract, tort, or for wages or compensation owed to you as a result of your employment,
the wage and hour, wage payment and fair employment practices under applicable legislation, that you may or could have against
DAVIDsTEA Inc, and/or any parent, subsidiary or affiliated entity, and/or its and their officers, directors, principals, shareholders,
employees, employee benefit plans, agents, attorneys, representatives, successors and assigns, and all others connected with any of
them (together, the "Releasees") up until the date that you sign this Agreement. You understand that, to the fullest extent permitted
by law, this release includes, without limitation, any claims you may have for unpaid wages, overtime or premium pay, vacation pay
or any other compensation of any kind. You further represent that you were afforded all leave to which you may have been entitled
by law and that you are not aware of any work-related injury or illness. You recognize that the Company denies that it has any
liability or obligation to
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you for any legal claims, and that this Agreement has been reached between you and the Company as an amicable resolution of your
employment at the Company. Furthermore, you hereby agree to waive your right to recover monetary damages or other individual
relief in any charge, complaint or lawsuit filed by you or by anyone else on your behalf.
6.
Confidentiality.
(i) You agree that the terms and conditions of this Agreement and the contents of the negotiations and
discussions resulting in this Agreement shall be maintained as confidential by you, your agents and representatives, and shall not be
disclosed except to your household members and immediate family, or to the extent necessary to obtain tax or financial advice, or to
the extent required by federal or state law.
(ii) During the course of your employment with the Company, you have learned of Confidential
Information, as defined below, and may have develop Confidential Information on behalf of the Company and its affiliates. You
agree that you will not use or disclose to any person (except as required by applicable law any Confidential Information obtained by
you incident to your employment or any other association with the Company or any of its affiliates.
(iii) All documents, records and files, in any media of whatever kind and description, relating to the
business, present or otherwise, of the Company or any of its affiliates, and any copies, in whole or in part, thereof (the
“Documents”), whether or not prepared by you, are the sole and exclusive property of the Company. You agree to safeguard all
Documents and acknowledged that you have surrendered to the Company all Documents then in your possession or control. You
also acknowledged that you have disclosed to the Company all passwords necessary or desirable to obtain access to, or that would
assist in obtaining access to, any information which you have password-protected on any computer equipment, network or system of
the Company or any of its affiliates.
(iv) You acknowledged that have fully disclosed all Intellectual Property to the Company. You hereby
assign and agree to assign to the Company (or as otherwise directed by the Company) your full right, title and interest in and to all
Intellectual Property. You agree to execute any and all applications for domestic and foreign patents, copyrights or other proprietary
rights and to do such other acts (including without limitation the execution and delivery of instruments of further assurance or
confirmation) requested by the Company to assign the Intellectual Property to the Company (or as otherwise directed by the
Company) and to permit the Company to enforce any patents, copyrights or other proprietary rights to the Intellectual Property. You
will not charge the Company for time spent in complying with these obligations. You acknowledged that all copyrightable works
that you may have created during your employment is considered “work made for hire” and is, upon creation, owned exclusively by
the Corporation.
For purposes of this Section, the following definitions apply:
“Confidential Information” means any and all information of the Company and its affiliates that is not generally available to the
public. Confidential Information also includes any information received by the Company or any of its affiliates from any person with
any understanding, express or implied, that it will not be disclosed. Confidential Information does not include information that
enters the public domain, other than through your breach of your obligations under this Agreement.
“Intellectual Property” means inventions, discoveries, developments, methods, processes, compositions, works, concepts and ideas
(whether or not patentable or copyrightable or constituting trade secrets) conceived, made, created, developed or reduced to practice
by you (whether alone or with others, whether or not during normal business hours or on or off Company premises) during your
employment and during the period of 12 months immediately following termination of your employment that relate either to the
business of the Company or to any prospective activity of the Company or any of its affiliates or that result from any work
performed by you for the Company or any of its affiliates or that make use of Confidential Information or any of the equipment or
facilities of the Company or any of its affiliates.
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7.
Restricted activities
(i)
As per the original agreement you signed on or about August 8, 2015, during the 12-month period
immediately following termination of your employment, regardless of the reason therefor, you shall not, directly or indirectly,
whether as owner, partner, investor, consultant, agent, employee, co-venturer or otherwise, compete with the Company or any of its
Affiliates in any geographic area in which the Company does business or is actively planning to do business or undertake any
planning for any business competitive with the Company or any of its Affiliates. Specifically, but without limiting the foregoing,
you agree not to work or provide services, in any capacity, whether as an employee, independent contractor or otherwise, whether
with or without compensation, to any Person that is engaged in any business that is competitive with the business of the Company
for this period.
(ii)
During the same 12 month period immediately following your termination of employment, you
will not directly or indirectly (a) solicit or encourage any customer of the Company or any of its Affiliates to terminate or diminish
its relationship with them; or (b) seek to persuade any such customer or prospective customer of the Company or any of its Affiliates
to conduct with anyone else any business or activity which such customer or prospective customer conducts or could conduct with
the Company or any of its Affiliates; provided, however, that these restrictions shall apply (y) only with respect to those Persons
who are or have been a customer of the Company or any of its Affiliates at any time within the immediately preceding one (1)-year
period or whose business has been solicited on behalf of the Company or any of the Affiliates by any of their officers, employees or
agents within such one (1) year period, other than by form letter, blanket mailing or published advertisement, and (z) only if you
have performed work for such Person during your employment with the Company or one of its Affiliates or been introduced to, or
otherwise had contact with, such Person as a result of your employment or other associations with the Company or one of its
Affiliates or have had access to Confidential Information which would assist in your solicitation of such Person.
(iii)
During the same 12 month period immediately following your termination of employment you
will not, and will not assist any other Person to, (a) hire or solicit for hiring any employee of the Company or any of its Affiliates or
seek to persuade any employee of the Company or any of its Affiliates to discontinue employment or (b) solicit or encourage any
independent contractor providing services to the Company or any of its Affiliates to terminate or diminish its relationship with
them. For the purposes of this Agreement, an “employee” or an “independent contractor” of the Company or any of its Affiliates is
any person who was such at any time within the preceding two (2) years.
8.
Non-Disparagement. During the 12 month period immediately following your termination of employment you will
take no action which is intended, or would reasonably be expected, to harm the Company or any of its Affiliates or its or their
reputation or which would reasonably be expected to lead to unwanted or unfavorable publicity to the Company or any of its
Affiliates..
You further agree without reservation that these restraints are necessary for the reasonable and proper protection of the
Releases, and that each and every one of the restraints is reasonable in respect to subject matter, length of time and geographic
area. You further agree that, were you to breach any of the covenants contained in this Section 8, the damage to the Releasees would
be irreparable. You therefore agree that the Releases, in addition to any other remedies available to it, shall be entitled to preliminary
and permanent injunctive relief against any breach or threatened breach by you of any of those covenants, without having to post
bond, together with an award of its reasonable attorney’s fees incurred in enforcing its rights hereunder. So that the Releases may
enjoy the full benefit of the covenants contained in this Section 8, you further agree that the 12 month period shall be tolled, and
shall not run, during the period of any breach by you of any of the covenants contained in this Section 8. You and the Company
further agree that, in the event that any provision of this Section 8 is determined by any court of competent jurisdiction to be
unenforceable by reason of its being extended over too great a time, too large a geographic area or too great a range of activities, that
provision shall be deemed to be modified to permit its enforcement to the maximum extent permitted by law. It is also agreed that
each of the Releases shall have the right to enforce all of your obligations to that Releasee under this Agreement, including without
limitation pursuant to this Section 8. Finally, no claimed breach of this Agreement or other violation of law attributed to the
Company, or change in the nature or scope of your employment relationship with the Company, shall operate to excuse you from the
performance of your obligations under this Section 8.
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9.
Severability. Should any provision of this Agreement, other than the release contained in Section 5 and subject to
Section 8 above when applicable, be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the
validity of the remaining parts, terms, or provisions shall not be affected thereby and the illegal or invalid part, term, or provision
shall be deemed not to be a part of this Agreement.
10.
Entire Agreement. This Agreement contains the entire understanding and agreement between the Company and
you with respect to your employment and its termination and all related matters, and cancels all previous oral and written
negotiations, agreements, commitments, and writings in connection therewith. This Agreement is binding upon and shall inure to
the benefit of the parties and their respective agents, assigns, heirs, executors, successors, and administrators. This Agreement shall
be governed by the laws of the Province of Québec. This Agreement may not be modified or amended, and no breach shall be
deemed to be waived, unless agreed to in writing by you and the Legal Director of the Company. The captions and headings in this
Agreement are for convenience only and in no way define or describe the scope or content of any provision of this Agreement.
11.
Transaction. The parties acknowledge and accept that the present Receipt, Release and Transaction constitutes a
transaction within the meaning of articles 2631 et seq. of the Civil Code of Québec, and shall be and remain binding upon the parties,
their heirs, executors, successors and assigns;
12.
Consideration. You agree that you have been given adequate and reasonable time to consider the terms of this
Agreement, and to consult with persons of your choosing to whom reference is made in Paragraph 5 regarding it.
13.
Effect of Signature. Your signature on this letter indicates that you understand and agree completely to the
severance arrangement that is described above, that you have accepted this arrangement in exchange for a complete release of claims
against the Releasees and your other promises herein and that you have not relied on any promises or representations, express or
implied, that are not set forth expressly in this Agreement. If the terms of this Agreement are acceptable to you, please sign, date
and return it to me within ten (10) days of the date you receive it. At the time you sign it (the “Effective Date”), this Agreement
shall take effect as a legally binding agreement between you and the Company on the basis set forth above. The enclosed copy of
this Agreement, which you should also sign and date, is for your records.
14.
Language. The parties hereto have expressly requested that the present Seperation Agreement and Release be
drafted in English. Les parties aux présentes ont expressément requis que le présent document soit rédigé en anglais.
(signatures follow on the next page)
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On behalf of the Company, thank you for your service. We wish you the best in future endeavors.
Very truly yours,
Christine Bullen
interim President & CEO and
Managing Director USA &
I have carefully read this Agreement, understand its contents, and freely and voluntarily assent to all of the terms and conditions
described herein.
(s) Isabelle Grisé
Isabelle Grisé
February 24, 2017
Date
Initials___________
EXECUTIVE EMPLOYMENT AGREEMENT
Exhibit 10.39
BETWEEN:
DAVIDsTEA (USA) INC., a Delaware corporation
(the “Corporation”)
-and-
CHRISTINE BULLEN
(the “Executive”)
WHEREAS the Corporation and the Executive have agreed to enter into an Executive Employment Agreement effective on (date to be
confirmed in writing and be a day between May 2 and May 30, 2016), (the employment start date);
WHEREAS the Corporation wishes to employ the Executive on the terms and conditions set forth below;
AND WHEREAS the Executive wishes to be so employed by the Corporation;
NOW THEREFORE for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties agree
as follows:
1.1.
Definitions.
ARTICLE 1 - INTERPRETATION
For the purposes of this Agreement, the following definitions shall apply unless the context or subject matter is inconsistent therewith:
(a)
“Affiliate” means, with respect to any Person (the “first party”), any other Person that directs or indirectly controls, or is
controlled by, or is under common control with, such first party, and “control” as used herein (including the terms “controlled by”
and “under common control with”) means the possession, directly or indirectly, of the power to: (i) vote 50% or more of the
outstanding voting securities of such first party; or (ii) otherwise direct the management or policies of such first party by contract
or otherwise;
(b)
''Agreement'' means this Executive Employment Agreement, as amended, supplemented or modified in writing from time to time;
(c)
(d)
(e)
(f)
“Base Salary” has the meaning set forth in Section 3.1;
“Basic Payments” means an amount equal to the aggregate of the Executive’s (i) earned but unpaid Base Salary, (ii) unpaid
business expense reimbursement, (iii) amount payable for unused vacation days, and (iv) earned but unpaid performance bonus
for the year preceding the year during which the termination of the Executive’s employment occurs;
“Board” means the board of directors of DTI, as constituted from time to time;
“Business Day” means any day other than a Saturday, Sunday or any other day on which principal commercial banks are not open
for business in Montreal, Quebec or Boston, Massachusetts;
(g)
“Change in Control” means the occurrence of any of the following events:
(i)
any person (within the meaning of Section 3(a)(9) of the Exchange Act)), including any group (within the meaning of
Rule 13d-5(b) under the Exchange Act), excluding (a) the Corporation, (b) any subsidiary of the Corporation, (c) any
trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or of any subsidiary of the
Corporation, together with all affiliates and associates (as such terms are used in Rule 12b-2 under the Exchange Act) of
such person, directly or indirectly becomes the
(ii)
(iii)
(iv)
(v)
beneficial owner (within the meaning of Rule 13d- 3 under the Exchange Act) of, or acquires control or direction
directly or indirectly over, securities of the Corporation representing 50% or more of the total votes eligible to be voted
for the election of directors or trustees (“Voting Power”) attached to the Corporation’s then outstanding securities;
within any 12-month period (not including any period prior to the date the Plan was initially adopted), individuals who
constitute the Board at the beginning of such period and any new director (other than a director designated by a person
who has conducted or threatened a proxy contest, or has entered into an agreement with the Corporation to effect a
transaction described in clause (i), (iii) or (iv) of this definition) whose election to the Board or nomination for election
was approved by a majority of the directors then still in office who either (a) were directors at the beginning of the
period or (b) whose election or nomination for election was previously so approved cease to constitute at least a majority
of the Board or the board of directors of any successor to the Corporation;
the consummation of the merger, amalgamation, arrangement or consolidation of the Corporation with any other
company; or
the complete liquidation of the Corporation or the sale or disposition by the Corporation of all or substantially all of the
Corporation's assets;
provided, however, that notwithstanding clauses (i), (iii) or (iv) of this definition a Change in Control shall not be
deemed to have occurred if immediately following the transaction described in clause (i), (iii) or (iv) of this definition:
(A) the holders of voting securities of the Corporation that immediately prior to the consummation of such transaction
represented more than 50% of the combined Voting Power including any trustee or other fiduciary holding securities
under an employee benefit plan of the Corporation or of any subsidiary of the Corporation in existence prior to the
transaction hold (x) securities of the entity resulting from such transaction (the “Surviving Entity”) that represent more
than 50% of the combined Voting Power of the then outstanding securities of the Surviving Entity, or (y) if applicable,
securities of the entity that directly or indirectly has beneficial ownership of 100% of the securities eligible to elect
directors or trustees of the Surviving Entity (the “Parent Entity”) that represent more than 50% of the combined voting
power of the then outstanding securities eligible to vote for the election of directors or trustees of the Parent Entity, and
(B) no person (as defined in clause (i) of this definition), including any group (as defined in clause (i) of this definition),
excluding any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or of any
subsidiary of the Corporation in existence prior to the prior to the transaction, together with all affiliates and associates
(as those terms are defined in clause (i) of this definition), is directly or indirectly the beneficial owner (as defined in
clause (i) of this definition) of, or exercises control or direction directly or indirectly over, 50% or more of the voting
power of the Parent Entity (or, if there is no Parent Entity, the Surviving Entity) (any such transaction which satisfies all
of the criteria specified in clauses (A) and (B) above being referred to as a “Non-Qualifying Transaction” and,
following the Non-Qualifying Transaction, references in this definition of “Change in Control'' to the “Corporation”
shall mean and refer to the Parent Entity (or, if there is no Parent Entity, the Surviving Entity) and, if such entity is a
company or a trust, references to the “Board” shall mean and refer to the board of directors or trustees, as applicable, of
such entity).
(h)
(i)
“COBRA” means the Consolidated Omnibus Budget Reconciliation Act.
“DTI” means DAVIDs TEA Inc., a Canadian Corporation;
(j)
“Good Reason” means (i) a material reduction of the Executive's duties or responsibilities, including reporting responsibilities, without her
express written consent, (ii) a material reduction in the Executive's total compensation, (iii) any relocation, at the sole discretion of the
Corporation, of the Executive's principal office to a location which is more than 100 miles from the Corporation’s U.S. office in the Greater
Boston Area or any other area as determined from time to time in writing by the parties, or (iv) any other state of fact, act, omission, breach
or default, giving rise to a constructive dismissal under law; and
(k)
“Person” means an individual, partnership, unincorporated association, organization, syndicate, corporation, trustee, executor,
administrator or other legal or personal representative.
2
1.1.
Term
ARTICLE 2 - POSITION AND TERM
This Agreement will be effective as of (date to be confirmed in writing and be a day between May 2 and May 30, 2016) and will
terminate as provided in Article 4 of this Agreement.
1.2.
Title and Position.
(a)
(b)
(c)
The Corporation shall employ the Executive as the Managing Director, U.S.A.
As Managing Director, U.S.A, the Executive will be responsible for the p and 1 of all business channels (retail stores, web/e-
comm, HRI, etc.) in the territory of the U.S.A.
As Managing Director, U.S.A, the Executive shall have the powers and authority and perform the duties and functions typically
performed by the head of a country business unit / division and shall report to and be subject to the direction of the President &
Chief Executive Officer of the Corporation and DTI.
1.3.
Full and Faithful Service.
(a)
(b)
(c)
The Executive shall devote her full time and attention and her best efforts to the business and affairs of the Corporation and its
Affiliates, and will ensure that she is not at any time engaged in conduct which would constitute a conflict with the interests of
the Corporation or any of its Affiliates.
During her employment with the Corporation, except as contemplated in Subsections 2.2(b) and 2.3(c), the Executive shall
not engage in any other employment or gainful occupation, undertake any other business, or be a director, officer or agent of
any other company, firm or individual without the express prior written consent of the Board's Human Resources committee.
During the term of this Agreement, the Executive may act as a director and in a similar capacity for such other organizations
as may be agreed between the Executive and the Board's Human Resources Committee, to the extent such service is
reasonable in time and provided that such activities do not interfere with Executive's duties hereunder.
1.4.
Place of Employment.
The Executive's base for providing her services under this Agreement shall be her home at 27 Greenleaf Dr. Exeter, NH 03883, U.S.A.
unless both parties agree otherwise in writing. Notwithstanding the foregoing, the Executive shall travel from time to time to such locations as
may be necessary or desirable in connection with her duties hereunder, including DTI's principal business offices located in Canada. This position
requires regular travel across the U.S.A with regular periodic travel to our Store Support Centre in Montreal, Canada.
1.5.
Work Permit
If a work permit is required for the Executive to enter the territory of Canada for the purposes of discharging her duties as an Executive
of the Corporation, such permit shall be obtained by the Executive, with the Corporation's support. Pending obtainment of such permit, the
Executive shall discharge these duties from her base in in the U.S.A. The Executive has no reason to believe that she will be denied a work permit
to enter the territory of Canada.
1.1.
Base Salary.
ARTICLE 3 - COMPENSATION AND BENEFITS
The annual base salary (the “Base Salary”) of the Executive shall be US$310,000. The Executive's Base Salary shall be reviewed
annually by the Board (or its human resources committee, as applicable) following the Executive's annual performance review and shall be such
amount as is established by the Board (or its human resources committee, as applicable) from time to time. The Executive's Base Salary shall be
payable by the Corporation to the Executive in arrears on a regular payroll basis.
3
1.2.
Performance Bonus.
The Executive shall be eligible for an annual cash performance bonus with a target amount representing 30% of the Executive's annual
Base Salary. The annual cash performance bonus at target shall be payable to the Executive in the event that the Board (or its human resources
committee, as applicable) determines, in its sole discretion, that the performance milestones established by the Board (or its human resources
committee, as applicable) near the beginning of each fiscal year have been achieved for such year. The Executive's annual cash performance
bonus may exceed the target amount and be up to 60% of the Executive's Base Salary in the event that the Board (or its human resources
committee, as applicable) determines, in its sole discretion, that the actual performance has significantly exceeded performance milestones
determined by the Board (or its human resources committee, as applicable). The Executive's annual cash performance bonus for each year, if any,
will be determined by the Board (or its human resources committee, as applicable) following the Executive's annual performance review. For
fiscal 2016 cash performance bonus, the 30% target will be used as a minimum to calculate the payout. In addition, the fiscal 2016 bonus will be
prorated based on time worked in fiscal 2016.
1.3.
Long Term Incentives
The Executive shall be eligible to participate in the Company's Long Term Incentive Plan with an annual grant compensation value (not
face value) target amount representing approximately 35% of her base salary up to a potential maximum of 50%. The Executive’s annual Long
Term Incentive Grant for each year, if any, will be determined by the Board (or its human resources committee, as applicable).
1.4.
Vacation
The Executive shall be entitled to four (4) paid vacation weeks per year in accordance with the Corporation’s policies and practices (as
they may be amended and implemented from time to time) and the timing of vacations shall be determined with a view to the needs of the
Corporation and its Affiliates from time to time. Accumulated vacation time may not be carried forward except with the prior written approval of
the Board’s Human Resources committee. For fiscal 2016, the executive shall be entitled to two (2) paid vacation weeks.
1.5.
Expense Reimbursement.
The Corporation shall promptly reimburse the Executive for all reasonable expenses incurred by the Executive in the performance of her
day-to-day duties under this Agreement.
1.6.
Medical, Health and Insurance Benefits.
As of the effective date of this agreement, the Executive (and her eligible dependents) is eligible to participate in the corporation's
medical, health and insurance benefit program.
1.7.
Indemnification Agreement; D&O Insurance.
After commencing, DTI and the Executive will enter into an Indemnification Agreement in the form provided to the Executive in
connection with the execution of this Agreement.
The Executive will be covered by the Corporation’s D&O insurance to cover her liability, if applicable, as director and/or officer of the
Corporation and its subsidiaries.
1.8.
Special, one-time hire-on LTIP grant
The Executive shall receive a special, one-time hire on grant with an estimated target value at grant of $465,000 USD. The value of this
grant will be delivered 50% as no statutory stock options and 50% as restricted share units as per DTI’s 2015 Omnibus Equity Incentive Plan and
the related award agreements. The grant date will be the Executive’s start date and the share price will the closing price of the Corporation’s share
on the NASDAQ on the start date while the Black-Scholes value as set by DTI’s Human Resources committee of the Board will be used to
calculate the actual number of RSUs and stock options that the target value at grant provides. Vesting for the stock option portion of this grant will
be 25% after each of the yearly anniversaries from the grant date. Vesting for the RSU award will be: 25% after 1 year from the grant date, 25%
after 2 years, and the remaining 50% at the expiry of the 3rd year after the grant date.
4
1.9.
No Other Benefits.
The Executive is not entitled to any other benefit or perquisite other than as specifically set out in this Agreement or as agreed to in
writing by the Corporation.
1.1.
Termination of Employment.
ARTICLE 4 - TERMINATION
The Executive is employed by the Corporation at will and her employment may be terminated by the Corporation at any time by written
notice to the Executive, subject only to the severance entitlements provided in this Agreement.
1.2.
Termination by the Corporation for Cause.
The Corporation may immediately terminate the employment of the Executive at any time for Cause by written notice to the Executive.
Without limiting the foregoing, any one or more of the following events shall constitute “Cause”:
(a)
fraud, misappropriation, embezzlement or reckless or willful destruction of the Corporation's property or other similar behavior
by the Executive;
(b)
(c)
material violation by the Executive of applicable securities legislation or stock exchange rules, provided, however, that where
such violation is of such a nature that it can be cured, such violation shall not constitute Cause if it is cured within 20 days of the
Executive becoming aware of its occurrence;
any material neglect of duty or misconduct of the Executive in discharging any of the Executive's duties and responsibilities
hereunder that is not cured within 20 days of the Executive becoming aware of its occurrence;
(d)
any conduct of the Executive which is materially prejudicial to the business of the Corporation or its Affiliates;
(e)any material breach of Executive's obligations under this Agreement or any breach of any of the Corporation's or DTI's policies that is
not cured within 20 days of written notification thereof to the Executive by the Corporation;
(f)any failure of or refusal by the Executive to comply with the lawful policies, rules and regulations of the Corporation or its Affiliates
that is not cured by the Executive within 20 days of written notification thereof to the Executive by the Corporation; or
(g)any material breach of any statutory or common law duty of loyalty to the Corporation or its Affiliates; or
(h)
conviction (treating a nolo contendere plea as a conviction) of a felony (whether or not any right to appeal has been or may be
exercised).
For purposes of the above definition of “Cause”, no act or omission to act shall be “willful” if conducted in good faith or with a
reasonable belief that such act or omission was in the best interests of the Corporation.
If the Corporation terminates the employment of the Executive for Cause under this Section 4.2, neither the Corporation nor any of its
Affiliates shall be obligated to make any further payments under this Agreement except for the Basic Payments, which shall be paid to the
Executive within thirty (30) days of the date of such termination of employment.
1.3.
Termination by the Corporation Without Cause.
The Corporation may terminate the employment of the Executive at any time without Cause. In such event, subject to Section 4.8 and
Section 7.7 below and subject to the Corporation receiving from the Executive a resignation from all positions then held, the Corporation shall
pay to the Executive, in addition to the Basic Payments, the following payments (the “Severance Payments”) (a) six months’ Base Salary, (b) an
amount equal to 6/12ths of the average annual cash performance bonus paid to the Executive for the two years immediately preceding the date of
such termination of employment, and (c) an amount determined by multiplying the Executive’s target annual cash performance bonus for the year
in which the Executive’s employment is terminated, by a fraction, the numerator of which is the number of days in such year that the Executive
was employed by the Corporation and the denominator of which is 365. The Basic Payments shall be paid within thirty (30) days following the
date of such termination of employment and, subject to Sections 4.8 and Section 7.7 below, the Severance Payments shall be paid by bi-weekly
installments over the 6-month period following such
5
termination of employment. In addition, subject to the Executive's timely election to continue participation in the Corporation’s group insurance
plans (other than disability insurance plans) under COBRA, the Corporation shall pay to the Executive, on a monthly basis, an amount equal to
the monthly premium cost of such participation for a period of 6 months following the termination of the Executive's employment or until the
Executive commences employment with another employer, if earlier (together with the Severance Payments, the “Severance”). The Severance
paid to the Executive hereunder shall be in lieu of any notice of such termination, and shall satisfy all of the Corporation’s obligations (except
with respect to any outstanding equity awards then held by the Executive) arising from the termination of the Executive’s employment.
1.4.
Termination by the Executive for Good Reason.
In the event that the Executive resigns from her employment with the Corporation in accordance with Section 4.6 within ninety (90) days
following the occurrence of an event constituting Good Reason, subject to Section 4.8 and Section 7.7 below and subject to the Corporation
receiving from the Executive a resignation from all positions then held, the Corporation shall be required to pay to the Executive, in addition to
the Basic Payments, the Severance. The Basic Payments shall be paid within thirty (30) days following the date of such termination of
employment and, subject to Sections 4.8 and Section 7.7 below, the Severance shall be paid at the same times set forth in Section 4.3 above,
which Severance shall satisfy all of the Corporation's obligations (except with respect to any outstanding equity awards then held by the
Executive) arising from the Executive's resignation of employment.
1.5.
No Further Entitlement upon Termination.
If the employment of the Executive is terminated under this Article 4, the Executive's employment with the Corporation shall cease and
neither the Corporation nor any of its Affiliates shall be obligated to make any payments to the Executive, other than as expressly provided for in
this Article 4.
1.6.
Resignation by Executive.
The Executive shall give the Corporation 30 days’ notice of the resignation of the Executive’s employment hereunder and, subject to the
following sentence, the Executive’s employment shall terminate on the date specified in the notice. Upon receipt of the Executive’s notice of
resignation, or at any time thereafter, the Corporation shall have the right to waive the notice period, in which event the Executive’s employment
shall terminate on the date of such waiver or such other date within the notice period as may be specified by the Corporation. In the event of a
waiver by the Corporation of all or any portion of the notice period, the Executive shall only be entitled to receive her salary for the portion of the
notice period up to the date of termination specified in such waiver and a reasonable amount in lieu of the Executive’s benefits for that period, and
the rest of the Basic Payments, which amounts shall be paid to the Executive within thirty (30) days of the date of such termination of
employment.
1.7.
Termination following a Change in Control.
In the event that the Executive’s employment is terminated by the Corporation without Cause in accordance with Section 4.3 or that the
Executive resigns from her employment with the Corporation for Good Reason in accordance with Section 4.4 within ninety (90) days following
the occurrence of an event constituting Good Reason, provided that, in either case, such termination occurs within the 18-month period following
a Change in Control of the Corporation, in lieu of installment payments provided for in Section 4.3 or 4.4, as applicable, the Severance shall be
paid in a single lump sum within seventy-five (75) days following the date of such termination of employment, which shall satisfy all of the
Corporation’s obligations (except with respect to any outstanding equity awards then held by the Executive) arising from such termination of
employment. In addition, all outstanding stock options and other equity awards then held by the Executive will become fully vested, and
exercisable or payable, as the case may be (provided that any such payment will be made no earlier than the date permitted under Section 409A),
and otherwise shall remain subject to the terms and conditions thereof.
1.8.
Release and Restrictive Covenants.
(a)Any obligation of the Corporation to provide the Executive the Severance or other benefits, including accelerated vesting of stock
options and other equity awards, (for the avoidance of doubt, other than the Basic Payments) is conditioned (i) on the Executive
signing and his continued compliance with the Restrictive Covenant Agreement (as defined below) in accordance with Article 5
below, (ii) on the Executive signing a release of claims in favor of the Corporation, its subsidiaries, their shareholders and their
directors and officers in a form satisfactory to the Corporation, (the “Release”) following the termination of the Executive’s
employment within a period of time not to exceed 45 days from the date of such termination of employment, and (iii) on the
Executive not revoking the Release within the revocation period provided therein following the Executive's execution of the
Release. Except as otherwise provided in Section 7.7 of this Agreement, any payments to be made in installments pursuant to the
terms of this
6
Agreement shall be payable in accordance with the normal payroll practices of the Corporation, with the first such payment
(which shall be retroactive to the day immediately following the date of the Executive’s termination of employment) due and
payable as soon as administratively practicable following the date the Release becomes effective, but not later than the date that is
60 days following the date the Executive's employment terminates. Notwithstanding the foregoing, if the date the Executive's
employment terminates occurs in one taxable year and the date that is 60 days following such termination date occurs in a second
taxable year, to the extent required by Section 409A, such first payment shall not be made prior to the first day of the second
taxable year. For the avoidance of doubt, if the Executive does not execute a Release within the period specified in this Section
4.9, or if the Executive revokes the executed Release within the time period permitted by law, the Executive will not be entitled to
any Severance or other benefits (including the accelerated vesting of stock options or other equity awards) set forth in this Article
4 (other than the Basic Payments), any stock options and other equity awards that vested on account of such termination as
provided for in this Agreement shall be cancelled with no consideration due to the Executive, and neither the Corporation nor any
of its subsidiaries will have any further obligations to the Executive under this Agreement or otherwise.
(b)The parties agree that the provisions of Sections 4.3, 4.4 and 4.7 are fair and reasonable and that the amounts payable by the
Corporation to the Executive pursuant to Sections 4.3, 4.4 and 4.7 are reasonable estimates of the damages which will be suffered by
the Executive in the event of the termination of his employment in the circumstances described therein and shall not be construed as
a penalty. The Executive acknowledges and agrees that the payments pursuant to this Article 4 shall be in full satisfaction of all
terms of termination of his employment. Except as otherwise provided in this Article 4, the Executive shall not be entitled to any
further termination payments, notice, pay in lieu of notice, severance pay, damages or any compensation whatsoever.
1.9.
Return of Property.
Upon the termination of her employment with the Corporation, the Executive shall promptly deliver or cause to be delivered to the
Corporation all books, documents (including all copies), money, securities or other property of the Corporation or its Affiliates which are in
the possession, charge, control or custody of the Executive.
ARTICLE 5 - CONFIDENTIAL INFORMATION, DISCOVERIES AND NON SOLICITATION
5.1. Non-Competition, Confidential Information, Discoveries and Non-Solicitation.
It shall be a condition to this Employment Agreement, that the Executive execute and comply with the terms of the Restrictive Covenant
agreement attached hereto as a schedule, pursuant to which the Executive (a) shall not disclose confidential information of the Corporation, (b)
shall not disparage the Corporation, and (c) for a period of 6 months following the Executive's termination of employment, shall not (i) solicit the
employees, customers, and suppliers of the Corporation and (ii) engage in activity competitive with the business of the Corporation, it being
understood that the business of the Corporation is the tea beverage specialty retail business (such agreement the “Restrictive Covenant
Agreement”).
6.1. Representations and Warranties.
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES
The Executive represents and warrants to the Corporation that the execution and performance of this Agreement will not result in or
constitute a default, breach, or violation, or an event that, with notice or lapse of time or both, would be a default, breach, or violation, of any
understanding, agreement or commitment, written or oral, express or implied, to which the Executive is a party or by which the Executive or the
Executive’s property is bound. The Executive shall defend, indemnify and hold the Corporation and its Affiliates harmless from any liability,
expense or claim (including solicitors' fees incurred in respect thereof) by any Person in any way arising out of, relating to, or in connection with
any incorrectness or breach of the representations and warranties in this Section 6.1.
1.1.
Governing Law.
ARTICLE 7 - GENERAL CONTRACT PROVISIONS
This Agreement and the agreements contemplated herein shall be construed and interpreted in accordance with the laws of the
Commonwealth of Massachusetts. Any dispute concerning the terms of this Agreement and/or the employment relationship between the
Corporation and the Executive, including the termination of that relationship, shall be resolved by arbitration, with arbitrator selection and
arbitration procedures governed by the rules of the American Arbitration Association then in effect. Such arbitration shall be the
7
exclusive means of resolving any disputes between the parties, and the Executive expressly waives her right to a trial by jury. The decision of the
arbitrator shall be final and binding upon the parties, subject to normal judicial review of arbitrator decisions as provided by law. The cost of any
arbitration shall be divided equally between the Executive and the Corporation.
1.2.
Entire Agreement.
This Agreement, together with the Restrictive Covenant Agreement, the Release and the Indemnification Agreement, constitutes the
entire agreement between the parties with respect to the matter herein and supersedes all prior agreements relating to the subject matter hereof,
if any. The execution of this Agreement has not been induced by, nor do any of the parties rely upon or regard as material, any representations,
promises, agreements or statements whatsoever not incorporated herein and made a part hereof. This Agreement shall not be amended, altered or
qualified except by a memorandum in writing signed by the parties.
1.3.
Severability.
Wherever possible, each provision of this Agreement and each related document shall be interpreted in such manner as to be effective
and valid under applicable law, but if any word, phrase, clause, sentence, article or paragraph contained in this Agreement is deemed
unenforceable by any court of competent jurisdiction, such word, phrase, clause, sentence, article or paragraph shall be severed from this
Agreement and the remaining words, phrases, clauses, sentences, articles and paragraphs of this Agreement shall remain in full force and effect.
1.4.
Notice.
Any notice required to be given hereunder shall be deemed to have been properly given if delivered personally, by a nationally
recognized courier service, or sent by prepaid registered mail or sent via facsimile transmissions as follows:
To the Executive:
27 Greenleaf Dr.
Exeter, NH 03883
To the Corporation:
5430, rue Ferrier
Mont-Royal, QC
H4P 1M2
If delivered personally or by courier service, the notice shall be deemed to have been received on the date of delivery; if sent by
registered mail, the notice shall be deemed to have been received on the fourth day of uninterrupted postal service following the date of mailing;
or if sent by facsimile, the notice shall be deemed to have been received on the date of transmission, unless, in any such case, such day is not a
Business Day, in which case the notice shall be deemed to have been received on the next following Business Day. Either party may change its
address for notice at any time, by giving notice to the other party pursuant to this Section 7.4.
1.5.
Successors.
Neither party shall have the right to assign this Agreement without the consent of the other. This Agreement and all rights of the
Executive hereunder shall enure to the benefit of and be enforceable by the Executive and his personal or legal representatives, heirs and
executors and shall be binding upon the Corporation and its successors.
1.6.
Taxes.
The Executive acknowledges and agrees that all payments, perquisites or benefits under this Agreement shall be subject to withholding
of such amounts, if any, relating to tax or other payroll deductions as the Corporation may reasonably determine that it should withhold pursuant
to any applicable law or regulation. Nothing in this Agreement shall be construed to obligate the Corporation to compensate the Executive for
adverse tax consequences associated with his compensation.
8
1.7.
Section 409A
(a) The Executive and the Corporation agree that this Agreement shall be interpreted to comply with or be exempt from Section 409A
of the Internal Revenue Code of 1986, as amended. and the regulations and guidance promulgated thereunder (“Section 409A”) to
the extent applicable, and all provisions of this Agreement shall be construed in a manner consistent with the requirements for
avoiding taxes or penalties under Section 409A, to the extent applicable.
(b) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for
the payment of any amounts or benefits considered “nonqualified deferred compensation” under Section 409A, to the extent
applicable, upon or following a termination of employment unless such termination is also a “separation from service” within the
meaning of Section 409A (after giving effect to the presumptions contained therein) and, for purposes of any such provision of this
Agreement, references to a “termination”, “termination of employment” or like terms shall mean “separation from service”. If the
Executive is deemed on the date of termination to be a “specified employee” within the meaning of that term under Section
409A(a)(2)(B), to the extent applicable, then with regard to any payment or the provision of any benefit that is considered
nonqualified deferred compensation under Section 409A payable on account of a “separation from service”, such payment or
benefit shall be made or provided at the date which is the earlier of (a) the expiration of the six-month period measured from the
date of such “separation from service”, and the date of the Executive's death (the “Delay Period”). Upon the expiration of the
De1ay Period, all payments and benefits delayed pursuant to this Section 7.8(b) (whether they would have otherwise been payable
in a single sum or in installments in the absence of such delay) shall be paid or reimbursed on the first Business Day following the
expiration of the Delay Period to the Executive in a lump sum, and any remaining payments and benefits due under this
Agreement shall be paid in accordance with the normal payment dates specified for them herein.
(c) With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits, except as permitted
by Section 409A, to the extent applicable, (i) the right to reimbursement or in-kind benefits shall not be subject to liquidation or
exchange for another benefit; (ii) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any
taxable year shall not affect the expenses eligible for reimbursement, or in-kind benefits, to be provided in any other taxable year;
and (iii) such payments shal1 be made on or before the last day of the Executive's taxable year following the taxable year in which
the expense occurred.
(d) For purposes of Section 409A, the Executive's right to receive any installment payments pursuant to this Agreement shall be
treated as a right to receive a series of separate and distinct payments.
(e)
In no event shall the Corporation or any of its affiliates have any liability relating to the failure or alleged failure of any payment
or benefit under this Agreement to comply with, or be exempt from, the requirements of Section 409A.
1.7.
Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
{Signature page to follow.]
9
IN WITNESS WHEREOF the parties have duly executed this Agreement.
SIGNED, SEALED & DELIVERED
in the presence of:
/s/ ILLEGIBLE
Witness
)
)
)
)
)
Executive
/s/ Christine Bullen
Christine Bullen
DAVIDsTEA
By: Marc Macdonald
Name: Marc Macdonald
Title: Chief HR Officer
By: Sylvain Toutant
Name: Sylvain Toutant
Title: President & CEO
10
DAVIDsTEA INC.
CODE OF ETHICS
FOR SENIOR MANAGERS AND FINANCIAL OFFICERS
I.
Purpose of Code of Ethics
The purpose of this Code of Ethics for Senior Managers and Financial Officers (the “Code of Ethics”) is to promote the honest and ethical
conduct of our Senior Managers and Financial Officers (described below), including the ethical handling of actual or apparent conflicts of interest
between personal and professional relationships; to promote full, fair, accurate, timely and understandable disclosure in periodic reports required
to be filed by DAVIDsTEA Inc. (the “Company”); and to promote compliance with all applicable rules and regulations that apply to the Company
and its officers. The text of the Code of Ethics may also be found at www.davidstea.com.
II.
Introduction
This Code of Ethics is applicable to the Company's President, Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer,
Treasurer and Corporate Secretary ((or any persons performing similar functions), together, the “Senior Managers and Financial Officers”).
Senior Managers and Financial Officers are also subject to the Code of Conduct and Business Ethics applicable to all employees. References in
this Code of Ethics to the Company means the Company or any of its subsidiaries.
While we expect honest and ethical conduct in all aspects of our business from all of our employees, we expect the highest possible honest and
ethical conduct from our Senior Managers and Financial Officers. In this role, you are an example for other employees. Your actions, behavior
and leadership should display integrity and ethical values that have not been compromised, and will therefore foster a culture of integrity and
honesty on your team and throughout the entire Company. In addition, it is your responsibility to ensure that all employees with whom you work
are familiar with the Employee Code of Conduct in the Staff Handbook.
Compliance with this Code is a condition to your employment and any violations of the Code of Ethics may result in disciplinary action, up to
and including termination of your employment.
Waivers of this Code may be made only by the Board of Directors or a Board committee and will be disclosed in accordance with applicable law
and rules under the Nasdaq Global Market.
III.
Conflicts of Interest
A conflict of interest occurs when your private interests interfere, or appear to interfere, in any way, with the interests of the Company as a whole.
Conflicts of interest can also arise when you take action or you or a member of your family have interests that may make it difficult for you to
perform your duties to the Company effectively or when an employee, officer or director, or a member of his or her family, receives improper
personal benefits as a result of his or her position in the Company. Although we cannot list every conceivable conflict, following are some
common examples that illustrate actual or apparent conflicts of interest that should be avoided:
Improper Personal Benefits from the Company
Conflicts of interest arise when an officer or a member of his or her family receives improper personal benefits as a result of his or her position in
the Company. You may not accept any benefits from the Company that have not been duly authorized and approved pursuant to Company policy
and procedure, including any Company loans or guarantees of your personal obligations.
Financial Interests in Other Businesses
You should avoid having an ownership interest in any other enterprise if that interest compromises or appears to compromise your loyalty to the
Company. For example, you may not own an interest in a company that competes with the Company or that does business with the Company
{such as a supplier) unless you obtain the written approval of the Company's Corporate Secretary before making any such investment. However,
it is not typically considered, and the Company does not consider it, a conflict of interest (and therefore prior written approval is not required) to
make investments in competitors, clients or suppliers that are listed on a national or international securities exchange so long as the total value of
the investment is less than one tenth of one percent (0.1%) of the outstanding stock of the corporation and the amount of the investment is not so
significant that it would affect your business judgment on behalf of the Company.
Business Arrangements with the Company
Without the prior written approval of the Company's Corporate Secretary, you may not participate in a joint venture, partnership or other business
arrangement with the Company.
Corporate Opportunities
If you learn of a business or investment opportunity through your position at the Company or information you gain as a result of your position,
such as from a competitor or actual or potential supplier or business associate of the Company (including a principal, officer, director or employee
of any of the above), you may not participate in the business or make the investment without the prior written approval of the Company's
Corporate Secretary. Such an opportunity should be considered an investment opportunity for the Company in the first instance.
Outside Employment or Activities With a Competitor
Simultaneous employment with or serving as a director of a competitor of the Company is strictly prohibited, as is any activity that is intended to
or that you should reasonably expect to advance a competitor's interests at the expense of the Company's interests. You may not market products
or services in competition with the Company's current or potential business activities. It is your responsibility to consult with the Company's
Compliance Officer to determine whether a planned activity will compete with any of the Company's business activities before you pursue the
activity in question.
Outside Employment With a Supplier
Without the prior written approval of the Company's Corporate Secretary, you may not be a supplier or be employed by, serve as a director of or
represent a supplier to the Company. Without the prior written approval of the Company's Corporate Secretary, you may not accept money or
benefits of any kind from a third party as compensation or payment for any advice or services that you may provide a client, supplier or anyone
else in connection with its business with the Company.
Family Members Working In The Industry
If your spouse or domestic partner, your children, parents or in-laws, or someone else with whom you have a financial relationship is a competitor
or supplier of the Company or is employed by one, you must disclose the situation to the Company's Corporate Secretary so that the Company
may assess the nature and extent of any concern and how it can be resolved. You must carefully guard against inadvertently disclosing the
Company's confidential information and being involved in decisions on behalf of the Company that involve the other enterprise.
Fair Dealing
You should always endeavor to deal fairly with Company customers, suppliers, competitors and employees. You should not take unfair advantage
of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair-dealing
practices.
If you have any doubt as to whether or not conduct would be considered a conflict of interest, please consult with the Company's Corporate
Secretary.
IV.
Accurate Periodic Reports and Other Public Communications
Accuracy of Company Records and Reporting
As you are aware, full, fair, accurate, timely and understandable disclosures in our periodic reports and in our other communications is required
and is essential to our continued success. Please exercise the highest standard of care in preparing such materials. We have established the
following guidelines in order to ensure the quality of our periodic reports.
· All Company accounting records, as well as reports produced from those records, must be kept and presented in accordance with the laws
of each applicable jurisdiction.
· All records must fairly and accurately reflect the transactions or occurrences to which they relate.
· All records must fairly and accurately reflect in reasonable detail the Company's assets, liabilities, revenues and expenses.
· The Company's accounting records must not contain any false or intentionally misleading entries.
· No transaction may be intentionally misclassified as to accounts, departments or accounting periods or in any other manner.
· All transactions must be supported by accurate documentation in reasonable detail and recorded in the proper account and in the proper
accounting period.
· No information may be concealed from the internal auditors or the independent auditors.
· Compliance with International Financial Reporting Standards and the Company's system of internal accounting controls is required at all
times.
2
Confidential Information
You may be entrusted with the Company's confidential business information. You are required to safeguard and use such information only for the
Company's purposes. Confidential information includes all non-public information that might be of use to competitors, or harmful to the
Company or its customers, if disclosed. You are expected to maintain the confidentiality of any and all such information entrusted to you by the
Company or our customers.
Failure to observe this duty of confidentiality may compromise our competitive advantage over competitors and may additionally result in a
violation of securities, antitrust or employment laws. It may also violate agreements providing for the protection of such confidential information.
You should not discuss confidential company information outside the company with anyone, including your family.
Insider Trading Prohibited
It is illegal and against this Code of Ethics for any person, either personally or on behalf of others, to buy or sell securities while in possession of
material nonpublic information or communicate (or “tip”} material nonpublic information to another person who trades in the securities on the
basis of the information or who in turn passes the information on to someone who trades. Please see the Company’s Insider Trading Policy for
additional details and responsibilities.
V.
Compliance with Laws and Ethics Code
You are expected to comply with both the letter and spirit of all applicable governmental rules and regulations and this Code of Ethics, and to
report any suspected violations of applicable governmental rules and regulations or this Code of Ethics to the Company’s Corporate Secretary. No
one will be subject to retaliation because of a good faith report of a suspected violation. If you fail to comply with this Code of Ethics or any
applicable laws or regulations, you may be subject to disciplinary measures, up to and including discharge.
No Rights Created
This Code is a statement of certain fundamental principles, policies and procedures that govern the Company's Senior Managers and Financial
Officers in the conduct of the Company's business. It is not intended to and does not create any rights in any employee, customer, supplier,
competitor, shareholder or any other person or entity.
CODE OF ETHICS ACKNOWLEDGMENT FORM
I have received and read the Code of Ethics for Senior Managers and Financial Officers, and I understand its contents. I agree to comply fully
with the standards contained in the Code of Ethics and the Company's related policies and procedures. I understand that I have an obligation to
report to the Company's Corporate Secretary any suspected violations of the Code of Ethics.
I also acknowledge that I have reported any areas of non-compliance with this policy to the Compliance Officer and have summarized such areas,
if any, in the section below.
Date
/s/ C Bullen
Printed Name
/s/ C Bullen
Signature
4/18/16
Date
Identification and explanation of any areas of non-compliance with the Code of Ethics for Senior Management and Financial Officers:
3
Non-disparagement, confidentiality, non-compete, and non-solicitation clauses to be
added to Christine Bullen's Employment Agreement
1.
Confidential Information and Restricted Activities.
(a)
Confidential Information. During the course of your employment with the Corporation, you will learn of
Confidential Information, as defined below, and you may develop Confidential Information on behalf of the Corporation and its Affiliates. You
agree that you will not use or disclose to any Person (except as required by applicable law or for the proper performance of your regular duties
and responsibilities for the Corporation) any Confidential Information obtained by you incident to your employment or any other association with
the Corporation or any of its Affiliates. You agree that this restriction shall continue to apply after your employment terminates, regardless of the
reason for such termination.
(b)
Protection of Documents. All documents, records and files, in any media of whatever kind and description, relating
to the business, present or otherwise, of the Corporation or any of its Affiliates, and any copies, in whole or in part, thereof (the
“Documents”),whether or not prepared by you, shall be the sole and exclusive property of the Corporation. You agree to safeguard all Documents
and to surrender to the Corporation, at the time your employment terminates or at such earlier time or times as the Board or its designee may
specify, all Documents then in your possession or control. You also agree to disclose to the Corporation, at the time your employment terminates
or at such earlier time or times as the Board or its designee may specify, all passwords necessary or desirable to obtain access to, or that
would assist in obtaining access to, any information which you have password-protected on any computer equipment, network or system of the
Corporation or any of its Affiliates.
(c)
Assignment of Rights to Intellectual Property. You shall promptly and fully disclose all Intellectual Property to the
Corporation. You hereby assign and agree to assign to the Corporation (or as otherwise directed by the Corporation) your full right,
title and interest in and to all Intellectual Property. You agree to execute any and all applications for domestic and foreign patents, copyrights or
other proprietary rights and to do such other acts (including without limitation the execution and delivery of instruments of further assurance or
confirmation) requested by the Corporation to assign the Intellectual Property to the Corporation (or as otherwise directed by the Corporation)
and to permit the Corporation to enforce any patents, copyrights or other proprietary rights to the Intellectual Property. You will not charge the
Corporation for time spent in complying with these obligations. All copyrightable works that you create during your employment shall be
considered “work made for hire” and shall, upon creation, be owned exclusively by the Corporation.
Restricted Activities. You agree that the following restrictions on your activities during and after your employment
are necessary to protect the good will, Confidential Information, trade secrets and other legitimate interests of the Corporation and its Affiliates:
(d)
(i)
While you are employed by the Corporation and during the 6-month period immediately
following termination of your employment, regardless of the reason therefor (in the aggregate, the “Restricted Period”), you shall not, directly or
indirectly, whether as owner, partner, investor, consultant, agent, employee, co-venturer or otherwise, compete with the Corporation or any of its
Affiliates in any geographic area in which the Corporation does business or is actively planning to do business during your employment or, with
respect to the portion of the Restricted Period that follows the termination of your employment, at the time your employment terminates (the
“Restricted Area”) or undertake any planning for any business competitive with the Corporation or any of its Affiliates in the Restricted Area.
Specifically, but without limiting the foregoing, you agree not to work or provide services, in any capacity, whether as an employee, independent
contractor or otherwise, whether with or without compensation, to any Person that is engaged in any business that is competitive with the
business of the Corporation or its Affiliates, as conducted or in planning during your employment with the Corporation, in the Restricted Area.
By business that is competitive with the business of the Corporate, we mean the specialty tea retail and/or tea beverage business.
(ii)
During the Restricted Period, you will not directly or indirectly (a) solicit or encourage any customer of the
Corporation or any of its Affiliates to terminate or diminish its relationship with them; or (b) seek to persuade any such customer or prospective
customer of the Corporation or any of its Affiliates to conduct with anyone else any business or activity which such customer or prospective
customer conducts or could conduct with the Corporation or any of its Affiliates; provided, however, that these restrictions shall apply (y) only
with respect to those Persons who are or have been a customer of the Corporation or any of its Affiliates at anytime within the immediately
preceding one (1)-year period or whose business has been solicited on behalf of the Corporation or any of the Affiliates by any of their officers,
employees or agents within such one (1) year period, other than by form letter, blanket mailing or published advertisement, and (z) only if you
have performed work for such Person during your employment with the Corporation or one of its Affiliates or been introduced to,
or otherwise had contact with, such Person as a result of your employment or other associations with the Corporation or one of its Affiliates or
have had access to Confidential Information which would assist in your solicitation of such Person.
4
(iii)
During the Restricted Period, you will not, and will not assist any other Person to, (a) hire or solicit for
hiring any employee of the Corporation or any of its Affiliates or seek to persuade any employee of the Corporation or any of its Affiliates to
discontinue employment or (b) solicit or encourage any independent contractor providing services to the Corporation or any of its Affiliates to
terminate or diminish its relationship with them. For the purposes of this Agreement, an “employee” or an “independent contractor” of the
Corporation or any of its Affiliates is any person who was such at any time within the preceding two (2) years.
In signing this Agreement, you give the Corporation assurance that you have carefully read and considered all the terms and conditions of this
Agreement, including the restraints imposed on you under this Section 1. You agree without reservation that these restraints are necessary for the
reasonable and proper protection of the Corporation and its Affiliates, and that each and every one of the restraints is reasonable in respect to
subject matter, length of time and geographic area. You further agree that, were you to breach any of the covenants contained in this Section 1, the
damage to the Corporation and its Affiliates would be irreparable. You therefore agree that the Corporation, in addition to any other remedies
available to it, shall be entitled to preliminary and permanent injunctive relief against any breach or threatened breach by you of any of those
covenants, without having to post bond, together with an award of its reasonable attorney's fees incurred in enforcing its rights hereunder. So that
the Corporation may enjoy the full benefit of the covenants contained in this Section 1, you further agree that the Restricted Period shall be tolled,
and shall not run, during the period of any breach by you of any of the covenants contained in this Section 1. You and the Corporation further
agree that, in the event that any provision of this Section 1 is determined by any court of competent jurisdiction to be unenforceable by reason of
its being extended over too great a time, too large a geographic area or too great a range of activities, that provision shall be deemed to be
modified to permit its enforcement to the maximum extent permitted by law. It is also agreed that each of the Corporation's Affiliates
shall have the right to enforce all of your obligations to that Affiliate under this Agreement, including without limitation pursuant to this
Section 1. Finally, no claimed breach of this Agreement or other violation of law attributed to the Corporation, or change in the nature or scope of
your employment relationship with the Corporation, shall operate to excuse you from the performance of your obligations under this Section 1.
2.
Non-Disparagement. During the course of your employment with the Corporation and during the Restricted Period, you agree to take no
action which is intended, or would reasonably be expected, to harm the Corporation or any of its Affiliates or its or their reputation or which
would reasonably be expected to lead to unwanted or unfavorable publicity to the Corporation or any of its Affiliates.
3.
Definitions. For purposes of this Agreement, the following definitions apply:
(a)
“Affiliates” means all persons and entities directly or indirectly controlling, controlled by or under common control with the
Corporation, where control may be by management authority, equity interest or otherwise.
(b)
“Confidential Information” means any and all information of the Corporation and its Affiliates that is not generally available to
the public. Confidential Information also includes any information received by the Corporation or any of its Affiliates from any Person with any
understanding, express or implied, that it will not be disclosed. Confidential Information does not include information that enters the public
domain, other than through your breach of your obligations under this Agreement.
(c)
“Intellectual Property” means inventions, discoveries, developments, methods, processes, compositions, works, concepts and
ideas (whether or not patentable or copyrightable or constituting trade secrets) conceived, made, created, developed or reduced to practice by you
(whether alone or with others, whether or not during normal business hours or on or off Corporation premises) during your employment and
during the period of 12 months immediately following termination of your employment that relate either to the business of the Corporation or to
any prospective activity of the Corporation or any of its Affiliates or that result from any work performed by you for the Corporation or any of its
Affiliates or that make use of Confidential Information or any of the equipment or facilities of the Corporation or any of its Affiliates.
(d)
“Person” means an individual, a corporation, a limited liability Corporation, an association, a partnership, an estate, a trust
or any other entity or organization, other than the Corporation or any of its Affiliates.
/s/ Christine Bullen
Christine Bullen
/s/ ILLEGIBLE
Witness
4/18/2016
Date
4.18.16
Date
5
MEMORANDUM OF AGREEMENT
Exhibit 10.40
BY AND BETWEEN:
DAVIDsTEA (USA) INC.,
AND:
(the "Employer")
CHRISTINE BULLEN
(the "Executive")
WHEREAS the Employer and the Executive entered into an Employment Agreement effective on May
24, 2016 (the "Employment Agreement");
WHEREAS the Employer and the Executive have agreed to a temporary change in the Executive’s role
and compensation in accordance with the terms and conditions of the present Memorandum of Agreement (the
"Agreement");
NOW, THEREFORE for good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties agree as follows:
ARTICLE I
TITLE and POSITION
1.1
Title and Position
a)In addition to her position as Managing Director USA under the terms and conditions of the
Employment Agreement, effective as of January 31, 2017 ("Start Date"), the Executive will act, on a
temporary basis, as interim President and CEO of DavidsTEA Inc. ("Interim President and CEO").
b)As Interim President and CEO, the Executive shall be a member of the Board of Directors of the
Employer and DavidsTEA Inc. ("DT"), and have the powers and authority and perform the duties and
functions typically performed by the President and CEO of a publicly listed company and shall report to
and be subject to the direction of the Board of Directors of DT and its non-Executive Chairman.
Travel
While acting as the Interim President and CEO in accordance with this Agreement, the Executive agrees to
travel to DT's Montreal office on a weekly basis from Monday through Thursday inclusively.
Work Permit
A work permit will likely be required for the Executive to enter the territory of Canada for the purposes of
discharging her duties for the purposes of this Agreement. Such work permit shall be obtained by the
Executive, with the Employer's and DT's support, and at the expense of the Employer. The Executive has
no reason to believe that she will be denied a work permit to enter the territory of Canada and understands
that she must obtain and hold a valid work permit at all times during this Agreement.
2.1
2.2
- 2 -
ARTICLE II
BONUS AND BENEFITS
2.1
2.2
Signing Bonus
Subject to the execution of the present Agreement, and conditional on complying with the terms provided
herein, the Employer shall pay to the Executive a signing bonus equal to ten thousand US dollars
(US$10,000), less applicable deductions, payable within fifteen (15) days following the Start Date.
Monthly Bonus
During this Agreement, and conditional on complying with the terms provided herein, the Employer shall
pay to the Executive a monthly bonus equal to five thousand US dollars (US$5,000), less applicable
deductions, payable within fifteen (15) days following the end of the month in which the bonus relates
("Monthly Bonus"); it being understood that the Monthly Bonus shall be pro-rated for any partial month
worked by the Executive under the terms of this Agreement, as the case may be.
2.3
Expense Reimbursement
The Employer shall reimburse the Executive for all reasonable expenses incurred by the Executive in the
performance of her day-to day duties under this Agreement, including expenses related to travel to the
Montreal office and temporary living accommodations in Montreal, as well as other reasonable business
related expenses.
2.4
No Other Benefits
The Executive is not entitled to any other additional benefits or perquisite for this temporary assignment as
interim President and CEO other than as specifically set out in this Agreement, unless otherwise agreed to
in writing between the parties.
ARTICLE III
terms of temporary assignment
3.1
Termination by the Employer
The Executive hereby agrees and understands that the assignment of the role of Interim President and
CEO, and the Executive's entitlement to the Monthly Bonus are temporary. In that context, the Agreement
may be terminated by the Employer at any time, the whole without any notice, payment in lieu of notice or
indemnity whatsoever.
3.2
Termination by the Executive
The Executive may also terminate this Agreement by providing ninety (90) days’ written notice to the
Employer. Upon receipt of such notice, or at any time thereafter, the Employer shall have the right to
waive the notice period, in whole or in part, in which case this Agreement, and payment of the Monthly
Bonus shall terminate on the date of such waiver or such other date within the notice period as may be
specified by the Employer.
For greater clarity, the parties hereby agree and understand the termination of the Agreement as provided
herein shall not be construed as a termination of the Employment Agreement, which shall continue in full
force and effect, unless terminated in accordance with the terms provided therein.
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ARTICLE IV
general provisions
4.1
Entire Agreement
4.2
4.3
4.4
This Agreement, together with the Employment Agreement and the other agreements to which the
aforementioned agreements refer, constitute the entire agreement between the parties with respect to the
matter herein and supersede all prior agreements relating to the subject matter hereof. For greater clarity,
the parties hereby agree that, except as provided herein, all other terms and conditions of the Executive's
employment pursuant to the Employment Agreement shall remain unchanged. The execution of this
Agreement has not been induced by, nor do any of the parties rely upon or regard as material, any
representations, promises, agreements or statements whatsoever not incorporated herein and made a part
hereof. This Agreement shall not be amended, altered or qualified except by a memorandum in writing
signed by the parties.
Taxes
The Executive acknowledges and agrees that all payments, perquisites or benefits under this Agreement
shall be subject to withholding of such amounts, if any, relating to tax or other payroll deductions as the
Employer may reasonably determine that it should withhold pursuant to any applicable law or legislation.
Nothing in this Agreement shall be construed to obligate the Employer to compensate the Executive for
adverse tax consequences associated with her compensation, as the case may be.
Counterparts
This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all
of which together shall constitute one and the same instrument.
Governing Law
This Agreement shall be construed and interpreted in accordance with the laws of the Commonwealth of
Massachusetts. Any dispute concerning the terms of this Agreement and/or the employment relationship
between the Employer and the Executive, including the termination of that relationship, shall be finally
resolved by arbitration, with arbitrator selection and arbitration procedures governed by the rules of the
American Arbitration Association then in effect. Such arbitration shall be the exclusive means of resolving
any disputes between the parties, and the Executive expressly waives her right to a trial by jury. The
decision of the arbitrator shall be final and binding upon the parties, subject to normal judicial review of
arbitrator decisions as provided by law. The cost of any arbitration shall be divided equally between the
Executive and the Corporation.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on January ___, 2017.
- 4 -
SIGNED, SEALED AND DELIVERED
In the presence of:
(s) Louise Poirier
Witness
)
)
)
)
)
)
(s) Christine Bullen
Christine Bullen
DAVIDsTEA (USA) Inc.
By: (s) Maurice Tousson
Name: Maurice Tousson
Title: Chair, Board of Directors
By: (s) Lorenzo Salvaggio
Name: Lorenzo Salvaggio
Title: Director (Board)
Exhibit 10.42
PRIVATE & CONFIDENTIAL
October 20, 2016
Sylvain Toutant
1177 Place Henri-Gauthier
Montreal, Québec
H2M 2S1
Dear Sylvain,
Further to our discussions, this letter confirms our agreement regarding the cessation of your employment with DAVIDsTEA Inc.
(the “Company”) and its subsidiaries, effective as of January 28, 2017 (being the last day of the Company’s 2016 fiscal year), or at
an earlier date, as determined by the Chairman of the Board of Directors of the Company (the “Board”), on behalf of Board, in
consultation with Sylvain Toutant, (the “Effective Date”), the whole as more fully described below.
I.
1.
2.
Interests in THE COMPANY
Severance Payment. Subject to the conditions set forth in this letter, the Company shall continue to pay to Sylvain Toutant, in
accordance with and subject to usual deductions at source, (a) the Basic Payments (as defined in Sylvain Toutant’s amended
and restated executive employment agreement (the “Employment Agreement”) dated March 30, 2015) and (b) his salary (at a
rate of CDN$392,000 per annum) for eighteen months, inclusive of all outstanding accrued vacation days, from the Effective
Date.
Performance Bonus. In accordance with the Employment Agreement, Sylvain Toutant is eligible for an annual cash
performance bonus in the event the Board or its human resources and compensation committee (the “Committee”) determines,
in their sole discretion, that the performance milestones established by the Board (or the Committee) near the beginning of each
fiscal year have been achieved for such year. The 2016 bonus payment (the “2016 Bonus”) will be determined by the Board
(or the Committee) based on the 2016 audited fiscal year-end results of the Company to be filed publicly. The 2016 Bonus, if
any, shall be paid to Sylvain Toutant within 30 days following the date on which the audited fiscal year-end results are filed and
in accordance with the conditions set forth in this letter and subject to the usual deductions at source. For greater certainty, the
2016 Bonus shall be paid in one payment.
3. Common Shares. Sylvain Toutant currently holds the following common shares in the capital of the Company (“Common
Shares”) including 78,170 Common Shares (being the “Restricted Shares”) which are subject to the Company’s 2015
Omnibus Equity Incentive Plan (the “LTIP”) dated March 31, 2015 and Restricted Stock Agreements (the “RSAs”) between
the Company and Sylvain Toutant dated March 31, 2015 and April 15, 2016. The number of Common Shares underlying the
Restricted Shares that are unvested as of the Effective Date will immediately vest in an amount equal to (i) the product
obtained by multiplying (A) the total number of Common Shares underlying the award by (B) a fraction, the numerator of
which is the number of days in the period beginning on the Date of Grant (as such term is defined in the LTIP) and ending on
the six-month anniversary of the Effective Date, and the denominator of which is the number of days in the period beginning
on the Date of Grant and ending on the third anniversary of the Date of Grant, minus (ii) the number of Common Shares
underlying the award that had vested pursuant to the vesting schedule as of the Effective Date. The portion of any Restricted
Share that is unvested and does not vest after application of the preceding sentence will be immediately forfeited upon the
Effective Date without any payment or consideration due by the Company.
4. Vested Options. Sylvain Toutant was granted: (i) an option to purchase 583,616 Common Shares (the “2014 Option
Shares”) pursuant to an amended and restated equity incentive plan dated April 3, 2012, as amended from time to time (the
“Equity Plan”) and a stock option agreement (the “2014 Option Agreement”) dated June 2, 2014, as amended, and, (ii) an
option to purchase 42,760 Common Shares (the “2016 Option Shares” and, together with
- 2 -
the 2014 Option Shares, the “Options”) in accordance with the LTIP and a stock option agreement (the “2016 Option
Agreement”) dated April 15, 2016, as amended.
(a) As of the date of execution of this agreement, 42,843 of the 2014 Option Shares have been exercised by Sylvain
Toutant, 297,605 of the remaining 2014 Option Shares have vested (the “Vested 2014 Options”) and 243,168 of the
2014 Options Shares remain unvested (the “Unvested 2014 Options”). Notwithstanding the terms of the 2014 Option
Agreement and the Equity Plan, the Vested 2014 Options shall remain exercisable for a period of 180 days following
the Effective Date and all Unvested 2014 Options shall be fully accelerated and vested as at the Effective Date and be
exercisable for a period of 180 days following the Effective Date.
(b) As of the date of execution of this agreement, none of the 2016 Option Shares have vested and 42,760 of the 2016
Options Shares remain unvested (the “Unvested 2016 Options”). Notwithstanding the terms of the 2016 Option
Agreement and as authorized under the LTIP, the Board approved that all of the Unvested 2016 Options shall be
deemed fully accelerated and vested as at the Effective Date and be exercisable for a period of 180 days following the
Effective Date.
In accordance with the terms of the Equity Plan and the LTIP, as applicable, the options (together, the “Options”) to
purchase the 2014 Option Shares and the 2016 Option Shares shall immediately expire and be cancelled on the day that
is 180 days plus one day following the Effective Date.
Sylvain Toutant further agrees that he shall not, without the Company’s prior written approval, directly or indirectly, sell
any number of Common Shares (whether such Common Shares are currently held or become held by him as a result of the
exercise of Options or upon the vesting of Restricted Shares in accordance with paragraphs I.3 and I.4 above) that exceeds,
in any given day, 15% of the 30-day average daily volume of the Common Shares traded on the NASDAQ Stock Exchange.
The amounts and concessions mentioned in paragraphs I. 1 to I. 4 above include all amounts and benefits to which Sylvain
Toutant may be entitled pursuant to any consulting agreement, any benefit package, any employment agreement, any other
contract (verbal or written) existing between Sylvain Toutant and the Company and its subsidiaries, and their respective
officers, directors, shareholders, successors, predecessors and affiliates and all applicable laws.
End of Employment Relationship
5.
II.
1. Cessation of employment relationship. As of the Effective Date, Sylvain Toutant and the Company agree to end their
employment relationship, and Sylvain Toutant agrees to resign from every office and directorship held with the Company or
any of its subsidiaries. Sylvain Toutant and the Company agree to execute any and all documents appropriate to evidence such
cessation of employment. The Company will complete a Record of employment stating “end of employment contract”.
2. Group Benefits. The existing group benefit coverage shall continue in accordance with the terms of the policies (other than
disability insurance plans which shall terminate immediately) until the earlier of: (i) the date that is eighteen (18) months after
the Effective Date, or (ii) the date Sylvain Toutant accepts alternate employment providing group benefit insurance coverage.
3. Computer and Phone. Subject to paragraph II.4 below, the Company hereby agrees that Sylvain Toutant can retain ownership
of the laptop computer and can retain ownership of the cellular telephone acquired for and used by him in connection with his
employment with the Company following the transfer of the contract relating to said cellular telephone from the Company’s
name to Sylvain Toutant’s name.
4. Office Transition. As discussed, the transition out of your office at the Company will be completed by the end of the Effective
Date, and by then, you will have returned all equipment, documents and confidential information
LEGAL_1:41371699.10
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- 3 -
belonging to the Company or its affiliates used or possessed by you, or under your control, in the course of your
employment with the Company, other than those items for which you shall retain ownership pursuant to paragraph II. 3. To
the extent that any Company data (the “Company Data”) resides on your personal computer hardware or software, you
agree to make a copy of such property and deliver it to the Company, and immediately following the Effective Date, you
will permanently destroy such Company Data so that it is irretrievable.
5.
Post-Employment Obligations. You acknowledge and agree to comply with the obligations set forth in Schedule “B”.
6. Non-Disclosure. You agree to keep the terms of this letter in strict confidence and not to disclose the fact, terms or nature of
this letter to any person, except to your immediate family and, to the extent that such disclosure may permit you to obtain tax
planning, legal or similar advice, to your legal and financial advisers, and as may be required by law. You will cause your
immediate family and advisors to keep this letter confidential. Reciprocally, the Company, agrees to keep the terms of this
letter in strict confidence and not to disclose the fact, terms or nature of this letter to any person, except to its legal and
financial advisers, and as may be required by law.
7. Mutual Non-Disparagement and Communications. You agree not to engage in any conduct that involves the making or
publishing of written or oral statements or remarks (including, without limitation, the repetition or distribution of derogatory
rumours, allegations, negative reports or comments) which are disparaging, deleterious or damaging to the integrity, reputation
or goodwill of the Company, its affiliates, its present and former officers, directors, employees, representatives and agents, or
the products or services they provide (“Disparaging Conduct”). You further agree not to authorize or assist others to engage in
Disparaging Conduct.
Reciprocally, the Company will instruct its executive officers and board members not to engage in any Disparaging Conduct
in respect of you and will instruct its executive officers and board members not to authorize or assist others to engage in
Disparaging Conduct with respect to Sylvain Toutant.
The Company and you agree to work together in good faith to establish a mutually acceptable plan with respect to any
communications with third parties by either the Company or yourself in respect of the cessation of your business
relationship with the Company.
8. Release Form. In addition to the above conditions, all payments under this letter are conditional upon you signing a copy of
this letter, signing the full and final release form attached as Schedule “A” in the presence of a witness and returning original
signed copies of both the letter and release form on the date hereof.
9. Ongoing Compliance. The obligation to pay the payments in this letter is conditional upon your ongoing compliance with
your obligations in this letter. If you materially breach any of your obligations to the Company, the terms of this letter and the
release will continue to be binding however, all payments under this letter will cease and the Company will be under no
obligation to make any further payments.
10.
III.
Legal Fees and Reimbursement for Costs. The Company agrees to pay your reasonable legal fees and any out of pocket
expenses (following receipt by the Company of adequate documentation of such expenses) you reasonably incurred in
connection with end of the employment relationship, including the negotiation and the review of this letter up to a maximum
of $10,000 before taxes and disbursements.
General Provisions
1. Currency and Withholdings. All payments under this letter are in Canadian dollars, will be made in accordance with
paragraph I.1 and I.2 hereof and are subject to any applicable withholding taxes and statutory or authorized deductions.
2. Acknowledgement. You agree that the arrangements set out in this letter fully satisfy the Company’s and all of its affiliates’
obligations to you in respect of the cessation of your employment and the cessation of your relationship
LEGAL_1:41371699.10
LEGAL_1:41371699.10
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with the Company, and you will not be entitled to further notice of termination, indemnification or severance pay under the
Civil Code of Québec (the “CCQ”) or contract.
3.
4.
Severability. If any provision of this letter or its application in a circumstance is restricted, prohibited or unenforceable, the
provision shall be ineffective only to the extent of the restriction, prohibition or unenforceability without invalidating the
remaining provisions of this letter and without affecting its application to other circumstances.
Enurement. This letter, which includes the full and final release attached hereto as Schedule “A”, shall enure to the benefit of
and be binding upon you, the Company and each of our respective successors and assigns, including, without limitation, your
heirs, executors, administrators and personal representatives.
5. No Admission of Liability. You understand and agree that nothing in this letter shall be deemed to be an admission of liability
on the part of the Company and, in fact, such liability is specifically denied by the Company. Similarly, we understand and
agree that nothing in this letter shall be deemed to be an admission of liability on your part or any of your affiliates, and, in fact
such liability is specifically denied by you and your affiliates.
6.
7.
Entire Agreement. This letter is the full agreement of the parties, replaces any prior agreement between the parties hereto and
may not be modified except in writing and executed by all parties.
Legal. The present document constitutes a transaction pursuant to Section 2631 and following of the CCQ. The parties have
expressly requested that the present document be drafted in English. Les parties ont expressément demandé que le présent
document soit rédigé en anglais.
LEGAL_1:41371699.10
LEGAL_1:41371699.10
[Signature page follows.]
On behalf of everyone at the Company, let us once again thank you for your service. We wish you well in your
future endeavours.
Sincerely yours,
DAVIDSTEA INC.
Per: (s) Maurice Tousson
Maurice Tousson, Chairman of the Board
And
Per: (s) Lorenzo Salvaggio
Lorenzo Salvaggio, Board member
The undersigned has read and understands and agrees to the terms of the agreement set forth in this letter. Sylvain
Toutant also agrees to sign and to be bound by the terms of the attached release form. The undersigned
acknowledges that he has been given the opportunity to obtain independent legal advice with respect to this letter
and attached release form.
October 20, 2016
Date
(s) Sylvain Toutant
Sylvain Toutant
Schedule “A”
Full and Final Release
I, Sylvain Toutant, on my own behalf and on behalf of all of my related persons and entities (including
9222-2116 Québec Inc.), in exchange for the consideration of the terms described in the attached agreement dated
October 20, 2016 (the “Letter Agreement”), and other good and valuable consideration the sufficiency of which
is hereby expressly acknowledged, agree, represent and warrant that:
1.
2.
I remise, release, acquit and forever discharge DavidsTea Inc. and all of its predecessor, subsidiary, parent,
related, affiliated and successor entities, companies or partnerships (collectively, the “Companies”) and all
present and former shareholders, officers, directors, employees, representatives and agents of the Companies
(collectively, the “Released Individuals”) (the Companies and the Released Individuals are collectively
referred to as the “Releasees”) of and from all actions, causes of action, applications, suits, complaints,
liabilities, debts, demands, damages, costs, torts (both intentional and unintentional), dues, bonds, accounts,
covenants, contracts, statutory rights and all or any claims whatsoever that exist or may exist which I or we
ever had, now have or which I can, shall or may hereafter have for or by reason of any cause, matter or thing
whatsoever (collectively, “Claims”), including without limitation, all or any Claims in respect of: (a) my
hiring, engagement, relationship or employment by any of the Releasees; (b) the cessation of such
employment, engagement or relationship; (c) any benefits provided to me or which should have been
provided to me during my employment, engagement or relationship or subsequent to the cessation of my
employment, engagement or relationship; and (d) all past, present or future payments from any and all
compensation or incentive programs of the Companies save and except for (i) the obligations and
undertakings of the Companies towards Sylvain Toutant set out in the Letter Agreement (including the
schedules thereto) and (ii) to the extent the applicability of such release of Claims may in any way invalidate
the Companies’ directors and officers liability insurance policy as it pertains to Sylvain Toutant. For greater
certainty, other than the options or the shares described in paragraphs I.3 and I.4 of the Letter Agreement, I
neither own nor have any interest in any shares, options, securities or other equity interest in the Companies.
Except for (i) the obligations and undertakings of the Companies towards Sylvain Toutant set out in the Letter
Agreement (including the schedules thereto) and (ii) to the extent the applicability of such release of Claims
may in any way invalidate the Companies’ directors and officers liability insurance policy as it pertains to
Sylvain Toutant, I have no further Claim against the Releasees in respect of my employment, engagement or
relationship or the cessation thereof including, without limitation, any complaints of reprisal or retaliation or
claims for specific performance, damages, reinstatement, wages, notice of termination, pay in lieu of such
notice, severance pay, perquisites, expenses, pension contributions, retirement savings account contributions,
allowances, benefits, retirement benefits, arrangements in respect of equity in the Companies, bonus or other
incentive compensation, interest, vacation pay, overtime pay, holiday pay or any other Claims whether under
contract, the common law, the civil law, equity, any policy of any of the Companies, regulation or statute,
including without limitation: any applicable employment standards legislation, as amended or replaced,
including the Act Respecting Labour Standards (Québec) (all such legislation referred to as the “ARLS”), the
Civil Code of Québec, the Pay Equity Act (Québec), the Supplemental Pension Plans Act (Québec), the
Workers Compensation Act (Québec), the Act Respecting Occupational Health and Safety (Québec), or any
other similar legislation. I specifically have no further claims, rights to arbitration, complaints or recourse
under Sections 122, 122.1, 123, 123.1, 123.6 and 124 of the ARLS.
3.
4.
5.
6.
7.
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I have had the opportunity to discuss or otherwise canvass with my legal counsel any and all human rights
complaints, concerns, issues or potential applications arising out of or in respect of my employment and the
cessation of my employment and I and we hereby release the Releasees from any and all claims under the
Charter of Human Rights and Freedoms (Québec) (the “Québec Charter”) in respect of my employment,
engagement or relationship and/or the cessation thereof, and I am aware of my rights under the Québec
Charter and I hereby represent and acknowledge that I am not asserting any rights or advancing a human
rights claim, application or complaint.
Provided (i) the Companies do not breach their obligations and undertakings towards Sylvain Toutant set out
in the Letter Agreement (including the schedules thereto), and (ii) to the extent the applicability of such
release of Claims may invalidate the Companies’ directors and officers liability insurance policy as it pertains
to Sylvain Toutant, I will not make any Claim or threaten, commence, participate in, take or continue any
proceedings in any jurisdiction against the Releasees in respect of any matter covered by this Full and Final
Release. I also agree not to make any Claim or threaten, commence, participate in, take or continue any
proceedings in any jurisdiction against any person, corporation or other entity who or which might claim
contribution, indemnity or any other relief from any of the Releasees.
If I make any Claim or threaten, commence, participate in, take or continue any proceedings in any
jurisdiction against the Releasees in respect of any Claim for or by reason of any cause, matter or thing, this
Full and Final Release may be raised as a complete bar to any such Claim or proceedings. I further agree that
commencing any proceedings against any of the Releasees, including any complaint under the ARLS or the
Québec Charter, would contravene my representations in this Full and Final Release and cause irreparable
harm to my relationship of trust with the Companies, provided, in all cases set forth above, (i) the Companies
have not breached their obligations and undertakings towards Sylvain Toutant set out in the Letter
Agreement (including the schedules thereto), and (ii) to the extent the applicability of such release of Claims
may invalidate the Companies’ directors and officers liability insurance policy as it pertains to Sylvain
Toutant.
I will indemnify and save harmless the Releasees from and against all Claims, charges, penalties, interest or
income or other taxes made or assessed by any Canadian federal, provincial or other governmental or public
department, agency or entity, including without limitation the Receiver General for Canada, the Canada
Revenue Agency, Revenu Québec and the Regie des rentes du Québec, under the Income Tax Act (Canada),
the Taxation Act (Québec), the Canada Pension Plan (Canada), the Employment Insurance Act (Canada) or
any other statute or regulation, in respect of any failure on the part of the Releasees to withhold any taxes,
premiums, payments, benefit overpayments, levies or other amounts from all or any part of the payments set
out in the Letter Agreement or any wages or other amounts paid to me during my employment or in respect
of any amounts including penalties and interest payable by the Releasees in respect of my employment,
engagement or relationship or under the Letter Agreement.
I will maintain the terms of the Letter Agreement and this Full and Final Release in strict confidence and will
not disclose such terms to any person, except to my immediate family and to the extent that such disclosure
may be required by law or to permit me to obtain tax planning, legal or similar advice. I covenant that any of
the members of my immediate family and my advisors to whom I disclose the terms of the Letter Agreement
and/or this Full and Final Release will in turn agree to be bound by this same non-disclosure obligation and
that any disclosure of the terms of this Letter Agreement and/or Full and Final Release by any of them will be
considered a breach of the Letter Agreement and Full and Final Release by me.
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8. All of the foregoing shall enure to the benefit of the Releasees, their successors and assigns, and be binding
upon me and my respective heirs, executors, administrators, successors and assigns.
9.
The present document constitutes a transaction pursuant to Section 2631 and following of the Civil Code of
Québec. I acknowledge and agree that the present release was drafted in the English language at the wish of
all the parties thereto. Je reconnais et accepte que la présente convention a été rédigée en langue anglaise à
la demande expresse de toutes les parties y afférentes.
I, on my own behalf and on behalf of all of my related persons and entities (including 9222-2116 Québec Inc.),
represent that I have had an opportunity to obtain independent legal advice in respect of the Letter Agreement and
this Full and Final Release. I, on my own behalf and on behalf of all of my related persons and entities (including
9222-2116 Québec Inc.), represent that I understand that this Full and Final Release contains a full and final
release of all claims that I have or may have against the Releasees and that there is no admission of liability on the
part of the Releasees and that any such liability is denied. I, on my own behalf and on behalf of all of my related
persons and entities (including 9222-2116 Québec Inc.), represent that I am executing this Full and Final Release
freely and voluntarily.
SIGNED in the presence of:
(s) Louise Poirier
WITNESS SIGNATURE
Louise Poirier
PRINT NAME OF WITNESS
LEGAL_1:41371699.10
LEGAL_1:41371699.10
(s) Sylvain Toutant
Sylvain Toutant
DATE
October 20, 2016
9222-2116 QUÉBEC INC.
Per: (s) Sylvain Toutant
Sylvain Toutant
DATE : October 20, 2016
Schedule “B”
CONFIDENTIALITY
(a) General. Sylvain Toutant agrees not to use, sell, circulate or otherwise distribute or divulge to any
person or entity, or in any way disclose to any person, entity or the public in general, any
Confidential Information (as defined below) for a period of 24 months after the Effective Date.
“Confidential Information” means all information, howsoever received by Sylvain Toutant
relating directly or indirectly to the business of the Company, whether from, through or pertaining
to the Company or any of its affiliates, and in whatever form (whether oral, written, machine
readable, digital, electronic or otherwise); provided, however, that the term “Confidential
Information” will not include information which: (i) is, demonstrably, in the public domain,
without any fault or responsibility on Sylvain Toutant’s part; (ii) after disclosure to him, is
lawfully received by Sylvain Toutant from another person who is lawfully in possession of such
Confidential Information and such other person was not restricted from disclosing said
information to Sylvain Toutant; (iii) is, demonstrably, independently developed by Sylvain Toutant
through persons who have not had access to, or knowledge of, the Confidential Information; or
(iv) is approved by the Company for disclosure prior to its actual disclosure.
(b) Trade Secrets. Notwithstanding Section 1(a), Sylvain Toutant shall not, at any time, whether
during the term of, or following the termination for any reason of, this Letter Agreement, disclose a
trade secret of the Company or of any of its affiliates.
(c) Works. Any document or work assembled or composed by Sylvain Toutant which contains
Confidential Information shall constitute and be treated as Confidential Information. He shall not
publish or divulge, or allow the publication or disclosure, of any material containing Confidential
Information without the prior written consent to such effect of the Company.
(d) Property. Confidential Information and the documents, works, instruments or other medium
containing Confidential Information shall remain the property of the Company and be returned
immediately to the Company upon request.
(e)
Intellectual Property. To the extent not already done, Sylvain Toutant hereby assigns and transfers
to the Company, all right, title and interest in and to all inventions, works, discoveries, improvements
and innovations developed or created by Sylvain Toutant either alone or jointly with others, in the
course of Sylvain Toutant’s employment with the Company and in any way relating to the business
and/or the operations and affairs of the Company and its affiliates, together with all intellectual
property rights residing therein or related thereto including, without limitation, patents, copyrights,
industrial designs, trademarks and trade secrets as well as any applications or registrations filed or
obtained thereon (the “Intellectual Property”) and hereby waives any and all author’s, moral, and
proprietary rights that Sylvain Toutant may now or in the future have in any such Intellectual
Property developed in the course of his employment with the Company or its predecessors.
(f) Ongoing Cooperation. For a period of 18 months after the Effective Date, Sylvain Toutant shall,
upon reasonable notice by the Company, furnish such information and proper
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- 5 -
assistance to the Company as may be reasonably required by the Company in order to effect an
efficient and orderly transition or otherwise as may be necessary for the Company’s business and
operations and, in doing so, shall be reasonably compensated by the Company for his time and for
any out of pocket expenses (following receipt by the Company of adequate documentation of such
expenses) reasonably incurred in connection therewith.
(g) Governmental Request. Nothing in this Letter Agreement shall prevent the disclosure of
Confidential Information where such disclosure must be made in response to the formal request of a
governmental body, agency or a court of law; in each case, of competent jurisdiction, but Sylvain
Toutant shall inform the Company of such request immediately, and in any case prior to any such
disclosure, in order, thereby, to allow the Company to take the appropriate measures to contest such
request for disclosure if it so decides. Sylvain Toutant shall fully cooperate with the Company in its
efforts to contest such request for disclosure and, in doing so, shall be reasonably compensated by
the Company for his time and for any out of pocket expenses (following receipt by the Company of
adequate documentation of such expenses) reasonably incurred in connection therewith.
NON-COMPETITION
(h) Prohibition. Sylvain Toutant shall not, for a period of 18 months after the Effective Date, on his
own behalf or on behalf of any other person or entity, whether directly or indirectly, in any material
capacity, alone, through or in connection with any person or entity, carry on, be engaged in or
employed by, or have any material financial or other interest in, anywhere in North America, the
United Kingdom, France, Germany or India, (i) any endeavour, activity, or business, which is (in
whole or in part) in direct competition with the Business of the Company, or (ii) any current or past
suppliers of the Company in respect of the Business of the Company.
For the purposes of this Letter Agreement, the term “Business” shall mean the tea business.
OBLIGATION OF NON-SOLICITATION
(i) Prohibition. Sylvain Toutant shall not, for a period of 18 months after the Effective Date on his own
behalf or on behalf of any other person or entity, whether directly or indirectly, in any capacity
whatsoever, alone, through or in connection with any person or entity:
A.
B.
offer employment to or solicit the employment, services or other engagement of any
individual who is employed or engaged by the Company or of any of its affiliates; or
persuade or attempt to persuade any customers or suppliers of the Company or of any of its
affiliates existing as at the Effective Date, to discontinue or materially alter the relationship
with any of the foregoing of such person or entity.
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-205058)
pertaining to the Amended and Restated Equity Incentive Plan and 2015 Omnibus Equity Incentive Plan of
DAVIDsTEA Inc. of our report dated April 12, 2017 with respect to the consolidated financial statements of
DAVIDsTEA Inc. included in this Annual Report (Form 10-K) for the year ended January 28, 2017.
Exhibit 23.1
/s/Ernst & Young LLP
Montreal, Canada
April 12, 2017
(1)
CPA auditor, CA, public accountancy permit no. A112179
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I have reviewed this annual report on Form 10-K of DAVIDsTEA Inc.;
I, Joel Silver, President and Chief Executive Officer, certify that:
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and the other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
c.
c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
4.
d
5.
Date
April 12, 2017
/s/ Joel Silver
Joel Silver
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I have reviewed this annual report on Form 10-K of DAVIDsTEA Inc.;
I, Luis Borgen, Chief Financial Officer, certify that:
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and the other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
4.
d
5.
Date
April 12, 2017
/s/ Luis Borgen
Luis Borgen
Chief Financial Officer
-2-
55780830_1
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, the undersigned, as Chief Executive Officer of DAVIDsTEA Inc. (the “Company”), does hereby certify
that to my knowledge:
8
1.
2.
the Company’s Form 10-K for the fiscal year ended January 28, 2017 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Company’s Form 10-K for the fiscal year ended January 28, 2017 fairly presents, in
all material respects, the financial condition and results of operations of the Company.
/s/ Joel Silver
Name:
Title:
Joel Silver
President and Chief Executive Officer
Dated: April 12, 2017
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, the undersigned, as Chief Financial Officer of DAVIDsTEA Inc. (the “Company”), does hereby certify
that to my knowledge:
1.
2.
the Company’s Form 10-K for the fiscal year ended January 28, 2017 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Company’s Form 10-K for the fiscal year ended January 28, 2017 fairly presents, in
all material respects, the financial condition and results of operations of the Company.
/s/ Luis Borgen
Name: Luis Borgen
Title:
Chief Financial Officer
Dated: April 12, 2017