UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2019
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
Trading Symbol
for Each Class
DTEA
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No x
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 x
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 x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
x
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
x
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. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
As of August 3, 2018, 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$37,327,359.
As of April 17, 2019, 26,018,832 common shares of the registrant were outstanding.
The brand, service or product names or marks referred to in this Annual Report are trademarks or services marks, registered
or otherwise, of DAVIDsTEA Inc. and our consolidated subsidiary.
EXPLANATORY NOTE
DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a
foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K
with the United States Securities and Exchange Commission (“SEC”) instead of filing on the reporting forms available to foreign
private issuers, although the Company is not required to do so. We are permitted to file our audited consolidated financial
statements with the SEC under International Financial Reporting Standards (“IFRS”), as issued by the International Accounting
Standards Board (“IASB”), without a reconciliation to U.S. generally accepted accounting principles (“U.S. GAAP”). As a result,
we do not prepare a reconciliation of our results to U.S. GAAP. It is possible that certain of our accounting policies could be
different from U.S. GAAP.
The Company prepares and files a management proxy circular and related material under Canadian requirements. As the
Company’s management proxy circular is not filed pursuant to Regulation 14A, the Company may not incorporate by reference
information required by Part III of this Form 10-K from its management proxy circular.
In this annual report on Form 10-K, unless otherwise specified, all monetary amounts are in Canadian dollars, all references
to “$,” “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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BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK HOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
ITEM 16.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
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Cautionary Note Regarding Forward-Looking Statements
PART I
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, competitive strengths and differentiators, strategy, long-
term Adjusted EBITDA margin potential, dividend policy, impact of the macroeconomic environment, properties, outcome of
litigation and legal proceedings, use of cash and operating and capital expenditures, impact of new accounting pronouncements,
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:
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Our ability to manage significant changes to our Board of Directors and leadership team;
Our efforts to expand beyond retail stores;
Our ability to maintain our brand image;
Significant competition within our industry;
The effect of a decrease in customer traffic to the shopping malls, centers and street locations where our stores are located;
The results of our transfer pricing audit;
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, 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, 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 costs of protecting and enforcing our intellectual property rights and defending against intellectual property claims brought by others;
Adverse publicity as a result of public disagreements with our shareholders;
Fluctuations in exchange rates; and
The seasonality of our business.
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All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. These statements
are based upon information available to us as of the date of this Form 10-K, and while we believe such information forms a
reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to
indicate that we have conducted an exhaustive inquiry into, or review of, all potentially-available relevant information. In light of
these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report on Form 10-K might not
occur, and investors are cautioned not to unduly rely upon these statements.
Forward-looking statements speak only as of the date of this Form 10-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’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 2016” are to the Company’s fiscal year ended January 28, 2017. All references to “Fiscal 2017” are to
the Company’s fiscal year ended February 3, 2018. All references to “Fiscal 2018” are to the Company’s fiscal year ended
February 2, 2019.
The Company’s fiscal year ends on the Saturday closest to the end of January, typically resulting in a 52-week year, but
occasionally giving rise to an additional week, resulting in a 53-week year. The years ended January 30, 2016, January 28, 2017
and February 2, 2019 cover a 52-week period. The year ended February 3, 2018 covers a 53-week fiscal period.
Our Company
DAVIDsTEA is a branded retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-
packaged teas, tea sachets, tea-related gifts, accessories, food and beverages primarily through 237 company-operated
DAVIDsTEA stores as of February 2, 2019, and our website, davidstea.com. We offer primarily proprietary tea blends that are
exclusive to DAVIDsTEA, as well as traditional single-origin teas and herbs. Our passion for and knowledge of tea permeates our
culture and is rooted in an excitement to explore the taste, health and lifestyle elements of tea.
In our retail stores, we strive to make the enjoyment of tea a multi‑sensory experience by facilitating customers’ interaction
with our products through education and sampling, which allows our customers the opportunity to appreciate the compelling
attributes of tea as well as the ease of preparation. We design our stores with a modern and minimalistic 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 135 premium teas
and tea blends featured on our “Tea Wall,” which is the focal point of our stores.
Our website presents customers with educational information to guide their exploration of tea, serving a similar function as
the “Tea Guides” in our retail stores. Additionally, on our website customers can purchase our full assortment of premium
loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories, as well as certain products that are exclusive to
our website.
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 and identifying new tea products designed to match customers’ tastes as they
evolve. We capitalize on our product development capabilities by rotating new tea blends each year into our offering. The product
development team also infuses innovation into our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories,
food and beverages, providing our customers with fun, inventive and convenient ways to enjoy tea.
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We intend to focus our attention on continuing to improve and develop new and innovative teas products and tea-related gift
offerings. To enhance our retail operations, we plan to reinvigorate our stores through creative merchandising that better highlights
the functional benefits of our growing wellness collection of teas. We plan to grow our latte and custom beverage experience and
offerings. We also plan to build on the investments we have already made in our website. Aiming to simulate for our online
customers the experience of our retail stores, we plan to provide customers additional expertise published by our Tea Guides, a
community-focused platform that builds on our existing customers and fans, and other features designed to facilitate our customers
in their discovery of tea. Relatedly, we also plan to continue to implement new digital marketing strategies not only to retain the
business of existing customers, but to also increase brand awareness and attractiveness to potential new customers. Finally, we
intend to expand our wholesale channel, strategically placing our tea products in specialty grocery stores, pharmacies, hotels and
restaurants, which will allow us to continue to enhance brand awareness of DAVIDsTEA throughout Canada and the United States.
Our Market and Competition
The markets for tea products in Canada and the United States are highly fragmented. We compete with a large number of
relatively small independently owned tea retailers and a number of regional 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 tea wares and related accessories.
We believe we differentiate ourselves from our competitors because we are considered by our customers as tea experts and
by the excellence of our blended and straight teas, through our distinct retail experience, our broad product offering that ranges
from loose leaf tea to beverage to ready-to-drink (“RTD”), the potential broad demographic appeal of our brand, innovative tea
products driven by customer insights, the effectiveness of our website, www.davidstea.com, and digital and community focused
marketing strategies, and our passionate customer-focused culture supported by our experienced management team and dedicated
board members.
We offer a significant variety of premium loose‑leaf teas and pre-packaged teas, tea sachets and tea-related gifts and
accessories. We also offer on‑the‑go tea beverages in our retail stores.
Our Product Offerings
Teas
Our loose‑leaf teas, pre-packaged teas, tea sachets and tea-related gifts can be enjoyed by consumers at home, on‑the‑go or
at work. Our different flavors of loose-leaf tea span eight different tea categories: white, green, oolong, black, pu’erh, mate, rooibos
and herbal tea. Our tea collection features over 30% certified organic tea, and to our knowledge makes us the largest organic loose-
leaf provider on the market. We carry only responsibly sourced and fairtrade certified blends. Our teas and ingredients used in our
tea blends are sourced from various regions around the world, including from 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. Our tea-related gifts include special edition seasonal and holiday gift packages as well as novelty
themed gifts that continue to innovate with new themes, seasonal collections and visually-appealing gift boxes designed for
entertaining. Our tea gifts are all either fully recyclable or compostable.
Tea Accessories
Our tea accessories are created to make the tea preparation process and tea experience more convenient, fun and easy at
home or on-the-go. 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 functional features to improve tea preparation and consumption as
well as with visually-appealing colors and designs consistent with our brand aesthetic.
Food and Beverages
Our retail stores offer tea beverages and food products for on‑the‑go consumption. Our beverages range from standard hot or
iced tea to our “Tea Lattes”.
Retail Stores and Operations
Our Stores
Distribution Channels
As of February 2, 2019, our retail footprint consisted of 189 stores in Canada and 48 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.
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Distinctive Retail Experience
The DAVIDsTEA experience starts with our in-store Tea Guides. Our employees’ passions for tea and wellness permeate
our culture and are rooted in a deep knowledge of, and desire to share, the compelling attributes of tea. A key element of the retail
experience is our “Tea Wall,” a focal point of the store. Our Tea Guides help to create a highly interactive and immersive multi-
sensory experience for our customers. The Tea Guides facilitate customers’ interaction with our products through education and
sampling, which allows our customers the opportunity to 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, 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 Store Portfolio
We seek to maintain our 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 regularly review our store portfolio,
identifying new store locations and monitoring existing locations for sufficient levels of customer traffic to maintain successful
stores. We actively monitor and manage the performance of our stores and increasingly seek to incorporate information learned
through the monitoring process into our analyses for future site selection and store retention 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 standards. We use store-level scorecards that report key performance
indicators, and we provide our store managers with a number of analytical tools to assist them in attaining optimum store
performance including access to the 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 individual team members, store managers and district managers to encourage
success.
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Passion for Tea. We believe our passionate 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 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. Identifying such talent integral in supporting our growth, as many of our store managers and district
managers are promoted from within our organization. In addition, we provide our employees with career development and opportunities for
individual enrichment and empowerment.
Our rewarding corporate culture allows us to attract passionate and friendly employees who share a vision of making tea fun
and accessible – which we believe is a key contributor to our success – and also reflects our belief in community engagement and
doing right by our customers and employees.
Digital Retail
Our website, www.davidstea.com, features our full assortment of premium loose‑leaf teas, pre-packaged teas, tea sachets
and tea-related gifts and accessories. To drive increased sales through our website, we utilize online‑specific marketing and
promotions in addition to employing banner advertisements, search engine optimization and pay‑per‑click arrangements to help
drive customer traffic to our website. We will be introducing new marketing and core gap features that will further enhance the
website experience and improve its accessibility for mobile users.
Through our website, we can reach customers who may not live near one of our retail locations. We believe our website and
our stores are complementary, as our website 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.
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Wholesale
We currently sell tea products to Hotel, Restaurant and Institution (“HRI”) distribution channels. In Fiscal 2018, we
launched several select pre-packaged sachet offerings with a national Canadian grocer. We believe that the broad distribution of
select tea blends helps to service not only existing customers but also attract new customers to our exclusive sachet tea offerings,
while ultimately also driving greater brand awareness and traffic to our online and retail stores where our full selection of products
including loose-leaf tea blends and packaged gifts become available.
Marketing and Advertising
We differentiate our business through a field‑based marketing approach to build brand awareness and drive customers to our
stores and website in both new and existing markets. Our events sponsorship group engages directly in the communities around our
stores, driving store visits by participating in both hyper‑local and large‑scale events where they offer product samplings and
beverage coupons. These events are customized for each of our markets and are identified and coordinated by our local store
managers and Tea Guides with support from our dedicated corporate events team.
In addition, we continue to leverage our growing digital presence, including through Facebook, Instagram, Twitter,
Google+, Pinterest, LinkedIn, YouTube, Snapchat and Yelp, to increase our website sales and drive additional store visits within
existing and new markets. Our marketing and advertising efforts are led by a strong marketing and merchandising team.
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 constantly explore distinctive ingredients, flavors and
trends that are popular in a variety of cultures, which we introduce to our customers through their incorporation in new teas. 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 offerings to attract new customers and to continue to pique the interest of existing customers. Our blending process
focuses 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. Through extensive research, we have identified key customer segments and preferences to help
evaluate our product assortment and we have developed an effective product release cadence. We believe our focus on innovation
and continual product development are key differentiating factors for our brand that drives our customers’ loyalty and supports our
efforts to attract new customers.
Our innovation also extends to creating new and exciting merchandise to make the tea consumption and experience more
convenient and stimulating at home or on-the-go. Since our merchandising team designs and develops most of our products
in‑house, we are better positioned than our competitors who do not have such an in-house function to create the unique and
proprietary designs that make consuming loose‑leaf tea easier and more fun for our customers. We believe the combination of our
product selection and our product innovation allows us to offer customers a distinctive assortment that differentiates us from other
specialty tea retailers.
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. 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. Our quality control
process includes both in-house testing and vendor testing. Therefore, in addition to bringing our designs for tea blends to fruition,
our vendors play an important role in quality control and in ensuring our teas meet applicable regulatory guidelines. Our tea
merchandise is sourced from a number of suppliers who manufacture to our unique and proprietary designs.
Warehouse and Distribution Facilities
We distribute our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories to our stores and our
online customers from distribution centers in Montréal, Québec, Sherbrooke, Québec and Champlain, New York. We use third-
party logistics facilities in Sherbrooke, Québec and Champlain, New York. The Sherbrooke facility ships to our Canadian stores
and Canadian online customers. The Champlain, New York facility ships to all our U.S. stores and to our U.S. online customers.
Our products are typically shipped to our stores and our online customers via third‑party national transportation providers multiple
times per week.
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Management Information Systems
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 website on an independent platform. We utilize a combination of
industry‑standard and customized software systems to provide various functions related to point of sales, inventory management,
warehouse management, and accounting and financial reporting.
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 the 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.
Insurance
We maintain third-party insurance for a number of risk management activities including, but not limited to, workers’
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 that we maintain adequate levels of coverage.
Trademarks and Other Intellectual Property
We regard intellectual property and other proprietary rights as important to our success. In addition to registered intellectual
property, such as our patents and marks, 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 by availing ourselves of trademark and
trade secret laws and by entering into confidentiality agreements with vendors, employees, consultants and others who have access
to our proprietary information.
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, and we own domain
names, including www.davidstea.com. In addition, we have registered or have applied to register one or more of our marks in a
number of foreign countries and expect to continue to do so in the future. However, we cannot be certain that we can obtain the
registration for the marks in every country where we apply for registration.
We must constantly protect against any infringement by competitors. If we believe a competitor has infringed or is
infringing upon our rights, we may take legal action, 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 2018, we had 2,901 associates. As of February 2, 2019, we employed a total of 487 full‑time
employees and 2,414 part‑time employees, with 467 in the United States and 2,434 in Canada. Of all those employees, 2,671 were
employed in our store network and 230 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 holiday season in November and
December. Our sales and income are generally highest in the fourth quarter, which includes the 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 holiday season, we must increase our inventory levels above those maintained
during the rest 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 holiday season. As a result of
this seasonality, and generally because of variations in consumer spending habits, we experience fluctuations in net sales, earnings
and working capital requirements during the year.
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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 telephone number at
our principal executive offices is (888) 873‑0006. Our website address is www.davidstea.com.
DAVIDsTEA Inc. owns a 100% equity interest in its sole subsidiary, DAVIDsTEA (USA) Inc., a corporation organized
under the laws of Delaware.
Available Information
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 Québec Autorité des
marchés financiers (the “AMF”). We are subject to the informational requirements of the Securities Act of 1933 (the “Securities
Act”) and the Exchange Act, and we file or furnish reports, proxy statements and other information with the SEC and/or the AMF
as required by applicable law.
Our website is located at www.davidstea.com, and our investor relations website is located at http://ir.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, on our investor relations website as soon as
reasonably practicable after we electronically file them with the SEC and the AMF. To request a printed copy of this Annual Report
on Form 10-K or consolidated financial statements and related MD&A as of and for the year ended February 2, 2019, which we
will provide without charge, please contact the Company’s Chief Financial Officer at 5430, Ferrier Street, Town of Mount-Royal,
H4P 1M2, or send an email to investors@davidstea.com. Additional information relating to the Company, including directors’ and
officers’ remuneration and indebtedness, principal holders of the Company’s securities and securities authorized for issuance under
equity compensation plans is also contained in the Company’s information circular, which will be available on SEDAR at
www.sedar.com or on EDGAR at www.sec.gov.
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
Recent significant changes to our board of directors and our executive leadership team, any future loss of directors or
executives, and the resulting transitions might harm our future operating results.
We have recently experienced significant changes to our board of directors and our leadership team. In June 2018, our
shareholders elected seven new directors, two of whom subsequently resigned and were replaced in August 2018. We have an
interim Chief Executive Officer and several other new members of our leadership team, including our Chief Financial Officer, our
VP Supply Chain, our VP Marketing and VP of eCommerce, each of whom have joined the Company recently. These types of
board and leadership changes have the potential to disrupt our operations due to the operational and administrative inefficiencies,
added costs, decreased employee morale, uncertainty and decreased productivity among our employees, increased likelihood of
turnover, and the loss of personnel with deep institutional knowledge, which could result in significant disruptions to our
operations. In addition, we must successfully integrate the new leadership team within our organization in order to achieve our
operating objectives, and changes in key leadership positions may temporarily affect our financial performance and results of
operations as new leadership becomes familiar with our business. These changes could increase the volatility of our stock price. In
addition, the loss of any of these individuals could significantly delay, prevent the achievement of, or make it more difficult for us
to pursue and execute on our business objectives, and could have an adverse effect on our business, financial condition and
operating results. If we are unable to mitigate these or other similar risks, our business, results of operations and financial condition
may be adversely affected.
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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 profits and expenses to differing jurisdictions. Our future
effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
·
·
·
changes in the valuation of our deferred tax assets and liabilities, including as a result of the tax reform bill in the United States known as the Tax
Cuts and Jobs Act;
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.
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.
Our transfer pricing policies are subject to audit, an unfavorable outcome to which could take a disproportionate share of our
management’s attention and negatively affect our financial condition.
We and our subsidiary engage in a number of intercompany transactions in various jurisdictions. Such activity subjects us to
complex transfer pricing regulations in the countries in which we operate. There is a relatively high degree of uncertainty and
inherent subjectivity in complying with these regulations. Tax examinations similarly are often complex, and tax authorities may
disagree with the treatment of items reported by us and our transfer pricing methodology.
We are currently undergoing an audit by the Canada Revenue Agency (the “CRA”) on the subject of transfer pricing. We
believe that these transactions reflect the accurate economic allocation of profit and risk and that proper contemporaneous transfer
pricing documentation is in place. However, the ultimate outcome of any examination with respect to amounts owed by us may
differ from the amounts recorded in our financial statements and might also include penalties and interest. Preliminary findings
from the transfer pricing audit indicates a difference in the interpretation of the economics of the arrangement. Appealing an
unfavorable outcome could require significant attention of senior management to the detriment of other aspects of our business. As
well, the difference between what we have reserved and what the CRA auditors may find we owe may materially affect our
financial position and financial results in the period or periods for which such determination is made.
Because our business is highly concentrated on a single, discretionary product category – tea, including loose-leaf teas, pre-
packaged teas, tea sachets, and tea-related gifts, accessories, and 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, and food and beverages. Consumers’ preferences 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 consumers’ 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, 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 discretionary in nature and are historically
affected by economic conditions such as changes in employment, salary and wage levels, and confidence in prevailing and future
economic conditions. These discretionary 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 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.
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We may not be able to obtain credit when desired on favorable terms, if at all, which may impact our ability to execute our
current or future business strategies.
We anticipate that our current cash and cash equivalents will be sufficient to meet our current and anticipated needs for
general corporate purposes during the next 12 months. However, it is possible that we may not generate sufficient cash flow from
operations or otherwise have the capital resources to meet our future capital needs. In addition, we may not have access to the funds
available under our credit agreement (the “Credit Agreement”) with the Bank of Montréal and BMO Capital Markets (collectively,
the “Lender”). We are currently renegotiating our Credit Agreement with the Lender. As our negotiations with the Lender are
ongoing, the outcome of such negotiations remains uncertain. If we are successful in renegotiating our Credit Agreement and then
breach covenants in that renegotiated credit agreement, the Lender could make the loans outstanding under that renegotiated credit
agreement immediately due and payable. If we do not generate sufficient cash flow from operations or otherwise, we may need
additional financing to execute our current or future business strategies. We cannot assure you that additional financing will be
available to us on favorable terms, if at all. To the contrary, we expect that future lending would be under more restrictive terms
than those presently upon us. If adequate funds are not available or not available on acceptable terms, if and when needed, our
ability to fund our operations, meet obligations in the normal course of business, take advantage of strategic opportunities, or
otherwise respond to competitive pressures would be significantly limited.
We have defaulted on the Credit Agreement. Although the Lender is forbearing declaring any event of default, if we do not
successfully cure our default, in the event we need funds to execute our strategy, the Lender could limit access to liquidity,
which would have negative consequences on our long-term business plan.
On April 24, 2015, we entered into the Credit Agreement with the Lender. The Credit Agreement was amended on
September 15, 2016 and June 11, 2018. The Credit Agreement contains various affirmative and negative covenants. Among the
covenants are maintenance of a coverage ratio, which requires that we maintain on a consolidated basis a minimum fixed charge
coverage ratio of 1.10:1.00; delivery of a borrower base certificate and a compliance certificate; and delivery of a quarterly
compliance certificate. Failure to abide by one of these financial and reporting covenants constitutes an event of default under the
Credit Agreement.
On February 5, 2019, we received a notice from the Lender that we were in breach of the Credit Agreement’s financial and
reporting covenants. In the same notice, the Lender indicated that it was tolerating the existence of these events of default. We have
entered into good-faith negotiations with the Lender to replace terms of the Credit Agreement with those we intend to be able to
keep. In the meantime, we are unable to make any borrowing requests until a new agreement has been entered into, or as otherwise
permitted in writing by the Lender. This could limit immediate access to liquidity, which would have a negative outcome on our
financial condition. Further, the Lender has not waived any events of default and reserved all of its rights under the Credit
Agreement. Declaration of an event of default would raise serious doubts about our ability to borrow money on terms favorable to
us, which would have negative consequences on our ability to achieve our long-term business plan or to take advantage of future
opportunities.
Expanding our focus to online sales and wholesale alongside our retail stores 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.
Growing our business in historically non-core channels 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. It may also require us to enhance our
store management systems, financial and management controls and information systems, and to hire, train and retain personnel.
Implementing new systems, controls and procedures, 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.
We have experienced a slowdown in the growth rate of our business during the past few years and negative comparable store
sales, meaning our former high levels of growth may not be achieved in future periods.
We have experienced significant fluctuation in the growth rate of our business during the last several years. Although we
have planned initiatives to support the growth of our business, such as continued investment in our online presence, increased
marketing and product development to support our wholesale business, or changes to our promotional strategy, we cannot be sure
that these initiatives will not negatively affect our gross margins in the short term depending on the timing and extent of our
realization of the costs and benefits of such initiatives.
Similarly, we may not be able to regain the levels of comparable store sales that we have experienced historically. If our
future comparable store sales continue to decline, our financial results will suffer. A variety of factors affect comparable store sales
including increasing consumer use of e-commerce online retail options, which may not be recaptured by consumers’ use of our
website, consumer tastes, competition, current economic conditions, pricing, and decreases in consumer traffic in shopping malls or
other locations in which our stores are located. These factors may cause our comparable store sales results to be materially lower
than previous 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 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 tea retailers, as well as retailers of grocery products, including
loose‑leaf teas, tea sachets and other beverages. We must spend considerable resources to differentiate our customer and product
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.
Our success depends, in part, on our ability to continue to source, develop and market new varieties of teas and tea blends, tea-
related gifts, accessories, and food and beverages that meet our high standards and customer preferences.
We currently offer approximately 135 varieties of teas and tea blends and a wide assortment of tea-related gifts, accessories
and food and beverages. 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, and food and beverages that both meet
our standards for quality and appeal to customers’ preferences. We have conducted extensive customer market research in order to
target our development, however, failure to innovate, develop, source and market new varieties of loose-leaf teas, pre-packaged
teas, tea sachets and tea-related gifts, accessories, and food and beverages that consumers want to buy could lead to a decrease in
our sales and profitability.
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 decentralized 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:
·
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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.
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, or 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, and accessories 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.
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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 and other ingredients can be affected by multiple factors in
countries that produce tea or other ingredients, 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 and other ingredients 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 ability to source our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, and food and beverage
profitably or at all could be hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.
All of our teas and ingredients used in our blends are currently grown, and a substantial majority of our pre-packaged teas,
tea sachets and tea-related gifts, and accessories are 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, and tea accessories 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.
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 are important to our business and potential future growth. We also
believe that maintaining and enhancing our brand image is important to maintaining and expanding our customer base and retaining
our employees. Our ability to successfully integrate our strategy to expand into new channels 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 continue to make substantial investments in areas such as
merchandising, marketing, store operations, 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 if we experience negative publicity or other negative
events that affect our image and reputation or as a result of communications by our shareholders. Some of these risks may be
beyond our ability to control, such as the effects of negative publicity regarding our suppliers or our shareholders. Failure to
successfully market and maintain our brand image could harm our business, results of operations and financial condition.
Our failure to accurately forecast consumer demand for our products while increasing inventory levels could adversely affect
our gross margins, cash flow and liquidity.
As we shift our focus towards tea and away from the sale of hard goods and accessories, we are increasing inventory levels
of our tea products, which are perishable. In the event we are unable to adequately manage our inventory levels, we may be forced
to either write off or sell expiring excess inventory at a discount, which could affect our financial performance. Further, if our
strategy of focusing on tea rather than hard goods and accessories does not suit customer preferences, we could have a large volume
of obsolete inventory that we may be required to write off or discount, which would negatively affect our gross margins and
operating results. If our inventory and our forecasts exceed demand, our liquidity and cash flow may be adversely affected.
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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, tea accessories, and food
and beverages, 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.
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 could 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.
Third‑party failure to adequately receive, warehouse and ship our merchandise to our stores and online customers could result
in lost sales or reduced demand for our teas, tea accessories, and food and beverages.
We currently rely upon third‑party warehouse facilities for the majority of our product receipts from vendors and shipments
to our stores and e‑commerce customers. Our utilization of third‑party warehouse services for our merchandise is subject to risks,
including employee strikes or their information technology systems failure. If we change warehousing companies, we could face
logistical difficulties that could adversely affect our receipts and delivery of merchandise 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 our
current 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.
In addition, we currently rely upon third-party transportation providers for all of our product shipments from our
distribution centers to our stores and online customers. Our utilization of third-party delivery services for our shipments is subject
to risk, including increases in fuel prices, which would increase our shipping costs, 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.
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 “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.
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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.
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 a
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. Our substantial operating lease obligations could have
significant negative consequences, including:
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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.
We are subject to customer payment-related risks that could increase operating costs or exposure to fraud or theft, subject us to
potential liability and potentially disrupt our business.
We accept payments using a variety of methods, including cash, credit and debit cards and gift cards. Acceptance of these
payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network
rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds
transfers. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase
over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of
credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us,
or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to
potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to
or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the
payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for
costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to
accept or facilitate certain types of payments may be impaired. As a result, our business and operating results could be adversely
affected.
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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 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 are dependent on third‑party hardware and software providers, including our website. We sell merchandise
over the Internet through our website, which represents a growing percentage of our overall net sales. The successful operation of
our e-commerce business depends on our ability to maintain the efficient and continuous operation of our website and our
fulfillment operations, and to provide a shopping experience that will generate orders and return visits to our site. Our e-commerce
operations are subject to numerous risks, including rapid technology change, unanticipated operating problems, credit card fraud
and system failures or security breaches and the costs to address and remedy such failures or breaches. Additionally, our website
operations as well as other information systems, 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.
For example, our stores in California and online sales to Californians subject us to the California Consumer Privacy Act, the
standards and restrictions of which are more stringent than in other U.S. states. 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 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 we 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 result in litigation against us or the imposition of significant fines or penalties and could 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. We cannot be
certain 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.
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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.
Use of social media may adversely affect our reputation or subject us to fines or other penalties.
Use of social media platforms, user review and recommendation websites and other forms of online communications
provides individuals with 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, especially with respect to advertising and consumer privacy, 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 online 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.
Fluctuations in our results of operations for the fourth fiscal quarter 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, earnings 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, ability of our supply chain to handle higher volumes, 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, and accessories 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.
We face risks from Brexit.
Although none of our suppliers or manufacturers are based the United Kingdom, a significant portion of our tea comes
suppliers in European Union countries, such as Germany. The lack of clarity about Brexit and the future laws and regulations of the
United Kingdom creates uncertainty for us, as the outcome of these negotiations may affect our business and operations.
Additionally, there also is a risk that countries where our suppliers and manufacturers are located may decide to leave the European
Union. The uncertainty surrounding Brexit not only potentially affects our business in the European Union, but may have a material
adverse effect on global economic conditions and the stability of global financial markets, which in turn could have a material
adverse effect on our business, financial condition, and results of operations.
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.
The reporting currency for our combined consolidated financial statements is the Canadian dollar. 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.
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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. From time to time, 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 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.
We currently report our financial results under IFRS, which differs in certain significant respects from U.S. GAAP.
We report our financial statements under IFRS. There have been and there may in the future certain significant differences
between IFRS and U.S. GAAP, including but not limited to differences related to revenue recognition, share-based compensation
expense, income tax, impairment of long-lived assets and earnings per share. As a result, our financial information and reported
earnings for historical or future periods could be significantly different if they were prepared in accordance with U.S. GAAP. As a
result, you may not be able to meaningfully compare our financial statements under IFRS with those companies that prepare
financial statements under U.S. GAAP.
Changes to estimates related to our property, fixtures and equipment or operating results that are lower than our current
estimates at certain store locations may cause us to incur impairment charges on certain long-lived assets, which may adversely
affect our results of operations.
In accordance with accounting guidance as it relates to the impairment of long-lived assets, we make certain estimates and
projections with regard to individual store operations, as well as our overall performance, in connection with our impairment
analyses for long-lived assets. When impairment triggers are deemed to exist for any location, the recoverable amount is compared
to its carrying value. If the carrying value exceeds the recoverable amount, an impairment charge equal to the difference between
the carrying value and recoverable amount is recorded. The projections of future cash flows used in these analyses require the use
of judgment and a number of estimates and projections of future operating results. If actual results differ from our estimates,
additional charges for asset impairments may be required in the future. We have experienced significant impairment charges in past
years and the current fiscal year. If future impairment charges are significant, our reported operating results would be adversely
affected.
Further, we have significant long-term lease obligations. If our cash flows and capital resources are insufficient to fund our
lease obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or
restructure or refinance our indebtedness.
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,
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, and 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. 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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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 Canadian federal and provincial laws and U.S. federal and state 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.
If we face labor shortages or increased labor costs, our results of operations and our growth could be adversely affected.
Labor is a significant component of the cost of operating our business. Our ability to meet labor needs while controlling
labor costs is subject to external factors, such as employment levels, prevailing wage rates, minimum wage legislation, changing
demographics, health and other insurance costs and governmental labor and employment requirements. In the event of increasing
wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, while increasing our wages
could cause our earnings to decrease. If we face labor shortages or increased labor costs because of increased competition for
employees from our competitors and other industries, higher employee-turnover rates, unionization of farm workers or increases in
the federal- or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs
(including costs associated with health insurance coverage or workers’ compensation insurance), our operating expenses could
increase and our business, financial condition and results of operations could be materially and adversely affected.
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. 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 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, 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.
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.”
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. Any such limitation on the
timing of utilizing our net operating loss carryforwards would increase the use of cash to settle our tax obligations. 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.
Risks Relating to Ownership of Our Common Shares
Our largest shareholder owns 46% of our common shares, which may limit our minority shareholders’ ability to influence
corporate matters.
Our largest shareholder, Rainy Day Investments, Ltd. (“Rainy Day”) owns 46% of our common shares. Rainy Day may
have 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.
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Rainy Day, as our largest shareholder, has significant influence in electing our directors and, consequently, has a substantial
say in the appointment of our executive officers, our management policies and strategic direction. In addition, 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.
Accordingly, should the interests of Rainy Day differ from those of other shareholders, the other shareholders are highly susceptible
to the influence of Rainy Day’s votes.
Our stock price may be volatile or may decline
Our common shares have traded as high as US$29.97 and as low as US$1.07 during the period from our IPO to April 17,
2019.
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:
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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;
loss of visibility as to investor expectations as a result of a lack of published reports from industry analysts;
actions and announcements by us or our competitors, including new product offerings, significant acquisitions, strategic partnerships or
divestitures;
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.
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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.
Shareholder activism, including public criticism of our company or our management team or litigation, may adversely affect
our stock price.
Responding to actions by activist stockholders can be costly and time-consuming and may divert the attention of
management and our employees. The review, consideration, and response to public announcements or criticism by any activist
shareholder, or litigation initiated by such shareholders, requires the expenditure of significant time and resources by us. We have
previously experienced shareholder activism, which became the subject of contention among other of our significant shareholders
and ultimately resulted in changes to our Board of Directors and management. Additional public disagreements or proxy contests
for the election of directors at our annual meeting could require us to incur significant legal fees and proxy solicitation expenses,
may negatively affect our stock price, potentially result in litigation, and may have other material adverse effects on our business.
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 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 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.
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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.
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 August 3, 2019. 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 August 3, 2019 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 2019, 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 do 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 and to report future results according to U.S.
GAAP.
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.
24
Table of Contents
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Properties
Our principal executive and administrative offices are located at 5430 Ferrier Street, Mount‑Royal, Québec, Canada, H4P
1M2. 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.
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
Executive and Administrative Offices
Distribution Center
Use
Approximate
Square Feet
Lease
Renewal Date
22,000
61,500
October 31, 2023
June 30, 2021
As of February 2, 2019, we operated 237 company-operated stores, with 189 stores in Canada and 48 stores in the United
States, consisting of approximately 220,000 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 February 2, 2019:
Locations in Canada
Alberta
British Columbia
Manitoba
Newfoundland
New Brunswick
Nova Scotia
Ontario
Prince Edward Island
Québec
Saskatchewan
Total stores in Canada
25
Number of
Stores
26
30
6
2
3
5
63
1
50
3
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Locations in the United States of America
California
Connecticut
Florida
Illinois
Indiana
Massachusetts
Maryland
Minnesota
New Jersey
New York
Ohio
Pennsylvania
Vermont
Washington
Wisconsin
Total stores in the United States of America
ITEM 3. LEGAL PROCEEDINGS
Number of
Stores
8
2
1
8
1
10
2
1
2
6
3
1
1
1
1
48
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of
business. Except as noted above, we are not presently a party to any legal proceedings, government actions, administrative actions,
investigations or claims that are pending against us or involve us that, in the opinion of our management, could reasonably be
expected to have a material adverse effect on our business, financial condition or operating results. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
26
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our common shares have been listed on the NASDAQ Global Market under the symbol “DTEA” since June 2015. Prior to
that date, there was no public trading of our common shares. As of April 17, 2019, there were approximately 13 holders of record
of our common shares.
Voting Rights
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.
Dividends
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.
We have never declared or paid regular cash dividends on our common shares. 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.
Liquidation, Dissolution or Winding-up
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.
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 4,
2015 through February 2, 2019. 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 4, 2015. The performance shown on the
graph below is not intended to forecast or be indicative of possible future performance of our common shares.
27
Table of Contents
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 and for the years ended February 2, 2019 and February 3, 2018 are derived from our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated
financial data as of and for the years ended January 28, 2017, January 30, 2016 and January 31, 2015 are derived from audited
consolidated financial statements not included 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 IFRS. 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.
February 2,
February 3,
For the year ended
January 28,
January 30,
January 31,
2019
2018
2017
2016
2015
(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 and fully diluted
Consolidated balance sheet data (at year end):
Cash
Total assets
Total liabilities
Total equity
$
$
$
$
$
$
$
212,753 $
114,774
97,979
125,722
(27,743)
1,614
(700)
-
-
-
-
(28,657)
4,882
(33,539) $
224,015 $
116,772
107,243
131,930
(24,687)
2,371
(567)
-
-
-
-
(26,491)
2,010
(28,501) $
215,984 $
107,534
108,450
114,756
(6,306)
76
(479)
-
-
-
-
(5,903)
(2,235)
(3,668) $
180,690 $
85,359
95,331
80,116
15,215
1,051
(348)
401
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
25,967,836
25,716,186
24,699,290
19,776,946
11,984,763
(1.29) $
(1.11) $
(0.15) $
(6.65) $
0.54
42,074 $
122,500 $
55,044 $
67,456 $
63,484 $
147,936 $
46,568 $
101,368 $
64,440 $
174,334 $
40,884 $
133,450 $
72,514
158,972
24,935
134,037
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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 May 2, 2019, 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 May 2, 2019.
All financial information contained in this annual MD&A and in the audited annual consolidated financial statements has
been prepared in accordance with IFRS, 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. GAAP and 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 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 of February 2, 2019 and February 3, 2018 and for the years ended February 2, 2019, February 3, 2018, and January
28, 2017 which are contained in this Annual Report on Form 10-K.
Accounting Periods
All references to “Fiscal 2018” are to the Company’s fiscal year ended February 2, 2019. All references to “Fiscal 2017” are
to the Company’s fiscal year ended February 3, 2018.
The Company’s fiscal year ends on the Saturday closest to the end of January, typically resulting in a 52-week year, but
occasionally giving rise to an additional week, resulting in a 53-week year. The year ended February 2, 2019 covers a 52-week
fiscal period, and the year ended February 3, 2018 covers a 53-week fiscal period.
Overview
We are a branded retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged
teas, tea sachets and tea-related gifts, accessories, and food and beverages primarily through 237 company-operated DAVIDsTEA
stores as of February 2, 2019, 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.
Factors Affecting Our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for
us and may pose risks and challenges, as discussed in the “Risk Factors” section of this Form 10-K.
Fiscal 2018 Highlights
During Fiscal 2018, sales declined by $11.3 million and 5% over the prior year to $212.8 million. Net loss increased by $5.0
million to $33.5 million for the year from a net loss of $28.5 million in Fiscal 2017. Adjusted EBITDA in Fiscal 2018 was a loss of
$1.3 million and compares to $12.8 million in Fiscal 2017.
How We Assess Our Performance
The key measures we use to evaluate the performance of our business and the execution of our strategy are set forth below:
Sales. Sales consist primarily of sales from our retail stores and e-commerce site. Our business is seasonal and, as a result,
our sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal quarter, which includes the holiday
sales period, and tend to be lowest in the second and third fiscal quarter because of lower customer traffic in our locations in the
summer months.
29
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 fiscal year ended February 3, 2018 included 53 weeks instead of the normal 52 weeks which are included in the fiscal
year ended February 2, 2019. As a result, changes in comparable same store sales are not consistent with changes in net sales
reported for other 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.
30
Table of Contents
Non-Comparable Sales. Non-comparable sales include sales from stores prior to the beginning of their thirteenth fiscal
month of operation and wholesale sales channel, which includes sales to grocery, 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 35 of this Annual Report on Form
10-K.
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 35 of this Annual
Report on Form 10-K.
Finance Costs. Finance costs consist of cash and imputed non-cash charges related to our credit facility, long-term debt and
finance lease obligations.
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 loss to Adjusted EBITDA, refer to page 37 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 period indicated:
For the three months ended
For the twelve months ended
February 2,
February 3,
February 2,
February 3,
2019
2018
2019
2018
Consolidated statement of loss data:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Loss before income taxes
Provision for income tax
Net loss
$
$
83,144
43,581
39,563
40,857
(1,294)
1,377
(126)
(2,545)
10,733
(13,278)
$
$
Percentage of sales:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Loss before income taxes
Provision for income tax
Net 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 (decline) for year (2)
__________
(1) For a reconciliation of Adjusted EBITDA to net income see “—Non-IFRS Metrics” below.
100.0%
52.4%
47.6%
49.1%
-1.6%
1.7%
-0.2%
-3.1%
12.9%
-16.0%
$
13.2%
237
-1.6%
10,940
$
86,662
42,178
44,484
52,926
(8,442)
1,756
(147)
(10,051)
6,040
(16,091)
$
$
100.0%
48.7%
51.3%
61.1%
-9.7%
2.0%
-0.2%
-11.6%
7.0%
-18.6%
16,397
$
18.9%
240
-6.0%
212,753
114,774
97,979
125,722
(27,743)
1,614
(700)
(28,657)
4,882
(33,539)
$
$
100.0%
53.9%
46.1%
59.1%
-13.0%
0.8%
-0.3%
-13.5%
2.3%
-15.8%
(1,272)
$
-0.6%
237
-6.1%
224,015
116,772
107,243
131,930
(24,687)
2,371
(567)
(26,491)
2,010
(28,501)
100.0%
52.1%
47.9%
58.9%
-11.0%
1.1%
-0.3%
-11.8%
0.9%
-12.7%
12,819
5.7%
240
-6.0%
(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, Adjusted EBITDA and Adjusted
Net Income are 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, Adjusted EBITDA, and Adjusted Net Income may differ from
similar measures reported by other companies. We believe that Adjusted selling, general and administration expenses, Adjusted
results from operating activities, Adjusted EBITDA, and Adjusted Net Income provide investors with useful information with
respect to our historical operations. Adjusted selling, general and administration expenses, Adjusted results from operating
activities, Adjusted EBITDA and Adjusted Net Income are not measurements of our financial performance under IFRS and should
not be considered in isolation or as an alternative to net income (loss), 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, Adjusted EBITDA and Adjusted Net Income 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, Adjusted EBITDA, and Adjusted Net Income
do not reflect changes in, or cash requirements for, our working capital needs;
32
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·
·
Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted EBITDA and Adjusted Net Income do
not reflect the cash requirements necessary to service interest or principal payments on our debt; and
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the
future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.
Because of these limitations, Adjusted selling, general and administration expenses, Adjusted results from operating activities,
Adjusted EBITDA, and Adjusted Net Income 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, Adjusted EBITDA to our net loss, Adjusted Net Income (Loss) and Adjusted Fully Diluted Income (Loss) per
common share determined in accordance with IFRS:
Reconciliation of Adjusted selling, general and administration expenses
For the three months ended
February 3,
February 2,
For the twelve months ended
February 2,
February 3,
2019
2018
2019
2018
Selling, general and administration expenses
$
Executive separation costs (a)
Impairment of property and equipment and intangible assets (b)
Impact of onerous contracts (c)
Strategic review and proxy contest costs (d)
ERP project termination (e)
40,857 $
(440)
(6,675)
(66)
(55)
(2,496)
31,125 $
52,926 $
(151)
(10,098)
(11,767)
-
-
30,910 $
125,722 $
(1,280)
(9,960)
(552)
(3,593)
(2,496)
107,841 $
131,930
(2,225)
(15,069)
(7,854)
-
-
106,782
Adjusted selling, general and administration expenses
___________
(a) Executive and employee separation costs represent salary owed to certain former executives and employees payable as part of their separation of
$
employment from the Company
(b) Represents costs related to impairment of property and equipment for stores and intangible assets.
(c) Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease
agreements are expected to exceed the economic benefits expected to be received from the contract.
(d) Represents costs related to a corporate strategic review process as well as costs related to the proxy contest which culminated at the Company’s annual
meeting held on June 14, 2018. Costs for the three and twelve months ended February 2, 2019 includes $13 and $825, respectively, related to the
strategic review process, nil and $868 for incremental directors and officers run-off insurance costs incurred prior to the annual meeting on June 14,
2018, and $42 and $1,900, respectively, for costs incurred in connection with the proxy contest, including nil and $957, respectively, paid to Rainy Day
Investments Ltd., a controlling shareholder, for third-party costs incurred by it, as approved by the independent members of the Board of Directors of the
Company.
(e) Represents cost incurred during the year to organize and establish project requirements and enterprise design that will not be reusable when the company
decides to embark on future ERP initiatives.
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Table of Contents
Reconciliation of Adjusted results from operating activities
For the three months ended For the twelve months ended
February 2,
February 3,
February 2,
February 3,
2019
2018
2019
2018
Results from operating activities
Executive separation costs (a)
Impairment of property and equipment and intangible assets (b)
Impact of onerous contracts (c)
Strategic review and proxy contest costs (d)
ERP project termination (e)
$
(1,294) $
440
6,675
66
55
2,496
8,438 $
(8,442) $
151
10,098
11,767
-
-
13,574 $
(27,743) $
1,280
9,960
552
3,593
2,496
(9,862) $
(24,687)
2,225
15,069
7,854
-
-
461
Adjusted results from operating activities
__________
(a) Executive and employee separation costs represent salary owed to certain former executives and employees payable as part of their separation of
$
employment from the Company.
(b) Represents costs related to impairment of property and equipment and intangibles assets for stores.
(c) Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease
agreements are expected to exceed the economic benefits expected to be received from the contract.
(d) Represents costs related to a corporate strategic review process as well as costs related to the proxy contest which culminated at the Company’s annual
meeting held on June 14, 2018. Costs for the three and twelve months ended February 2, 2019 includes $13 and $825, respectively, related to the
strategic review process, nil and $868 for incremental directors and officers run-off insurance costs incurred prior to the annual meeting on June 14,
2018, and $42 and $1,900, respectively, for costs incurred in connection with the proxy contest, including nil and $957, respectively, paid to Rainy Day
Investments Ltd., a controlling shareholder, for third-party costs incurred by it, as approved by the independent members of the Board of Directors of the
Company.
(e) Represents cost incurred during the year to organize and establish project requirements and enterprise design that will not be reusable when the company
decides to embark on future ERP initiatives.
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Table of Contents
Reconciliation of Adjusted EBITDA to our net loss
Net loss
Finance costs
Finance income
Depreciation and amortization
Recovery of income tax
EBITDA
Additional adjustments :
Stock-based compensation expense (a)
Executive separation costs related to salary (b)
Impairment of property and equipment and intangible assets (c)
Impact of onerous contracts (d)
Deferred rent (e)
Loss on disposal of property and equipment
Strategic review and proxy contest costs (f)
ERP project termination (g)
Adjusted EBITDA
_________
(a) Represents non-cash stock-based compensation expense.
For the three months ended For the twelve months ended
February 2,
February 3,
February 2,
February 3,
2019
2018
2019
2018
$
$
$
(13,278) $
1,377
(126)
2,105
10,733
811 $
218
440
6,675
66
42
137
55
2,496
10,940 $
(16,091) $
1,756
(147)
2,341
6,040
(6,101) $
283
151
10,098
11,767
165
34
-
-
16,397 $
(33,539) $
1,614
(700)
8,203
4,882
(19,540) $
211
1,280
9,960
552
25
151
3,593
2,496
(1,272) $
(28,501)
2,371
(567)
9,905
2,010
(14,782)
2,021
2,033
15,069
7,854
542
82
-
-
12,819
(b) Executive and employee separation costs related to salary represent salary owed to certain former executives and employees as part of their separation of
employment from the Company.
(c) Represents costs related to impairment of property and equipment and intangibles assets for stores.
(d) Represents provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease
agreements are expected to exceed the economic benefits expected to be received from the contract.
(e) Represents the extent to which our rent expense has been above or below our cash rent payments.
(f) Represents costs related to a corporate strategic review process as well as costs related to the proxy contest which culminated at the Company’s annual
meeting held on June 14, 2018. Costs for the three and twelve months ended February 2, 2019 includes $13 and $825, respectively, related to the
strategic review process, nil and $868 for incremental directors and officers run-off insurance costs incurred prior to the annual meeting on June 14,
2018, and $42 and $1,900, respectively, for costs incurred in connection with the proxy contest, including nil and $957, respectively, paid to Rainy Day
Investments Ltd., a controlling shareholder, for third-party costs incurred by it, as approved by the independent members of the Board of Directors of the
Company.
(g) Represents cost incurred during the year to organize and establish project requirements and enterprise design that will not be reusable when the company
decides to embark on future ERP initiatives. Includes $1,724 that was capitalized at November 3, 2018 and $772 that was expensed during the fourth
quarter.
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Reconciliation of reported results to Adjusted Net Income (Loss)
Net loss
Executive separation costs (a)
Impairment of property and equipment and intangible assets (b)
Impact of onerous contracts and accretion expense (c)
Strategic review and proxy contest costs (d)
ERP project termination (e)
Income tax expense adjustment (f)
Write-down of deferred income tax assets (g)
Provision for uncertain tax positions (h)
Impact of change in U.S. tax rates (i)
Adjusted net income (loss)
For the three months ended
February 3,
February 2,
2018
2019
For the twelve months ended
February 3,
February 2,
2018
2019
$
$
(13,278) $
440
6,675
140
55
2,496
(2,687)
9,500
3,060
-
6,401
$
(16,091) $
151
10,098
13,501
-
-
(6,313)
6,409
-
1,986
9,741
$
(33,539) $
1,280
9,960
803
3,593
2,496
(4,866)
9,500
4,000
-
(6,773) $
(28,501)
2,225
15,069
10,146
-
-
(7,444)
6,409
-
1,986
(110)
________
(a) Executive separation costs related to salary represent salary owed to former executives as part of their separation of employment from the Company.
(b) Represents costs related to impairment of property and equipment and intangibles assets for stores.
(c) Represents provisions, non-cash reversals, utilization and the accretion expense 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. The accretion expense on
provisions for onerous contracts is included in Finance costs on the Consolidated Statement of Comprehensive Income (Loss) for the three months and
twelve months ended February 2, 2019.
(d) Represents costs related to a corporate strategic review process as well as costs related to the proxy contest which culminated at the Company’s annual
meeting held on June 14, 2018. Costs for the three and twelve months ended February 2, 2019 includes $13 and $825, respectively, related to the
strategic review process, nil and $868 for incremental directors and officers run-off insurance costs incurred prior to the annual meeting on June 14,
2018, and $42 and $1,900, respectively, for costs incurred in connection with the proxy contest, including nil and $957, respectively, paid to Rainy Day
Investments Ltd., a controlling shareholder, for third-party costs incurred by it, as approved by the independent members of the Board of Directors of the
Company.
(e) Represents cost incurred during the year to organize and establish project requirements and enterprise design that will not be reusable when the company
decides to embark on future ERP initiatives.
(f) Removes the income tax impact of items referenced in notes (a), (b), (c) and (d).
(g) Represents a write-down of the U.S. entity's deferred income tax assets.
(h) Represents provision for uncertain tax positions regarding ongoing tax audits.
(i) Represents the impact on the U.S. entity's deferred income tax assets related to changes in the U.S. statutory income tax rates.
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Reconciliation of fully diluted loss per common share to adjusted fully diluted income (loss) per common share
For the three months ended
February 3,
February 2,
For the twelve months ended
February 2,
February 3,
2019
2018
2019
2018
Weighted average number of shares outstanding, fully diluted
26,010,544
25,874,769
25,967,836
25,716,186
Adjustment for anti-dilution (a)
-
247,008
-
-
Adjusted weighted average number of shares outstanding, fully diluted
26,010,544
26,121,777
25,967,836
25,716,186
Net loss
Adjusted net income (loss)
Net loss per share, fully diluted
Adjusted net income (loss) per share, fully diluted
$
$
$
$
(13,278) $
(16,091) $
(33,539) $
(28,501)
6,401 $
9,741 $
(6,773) $
(0.51) $
(0.62) $
(1.29) $
0.25 $
0.37 $
(0.26) $
(110)
(1.11)
(0.00)
Operating Results for the Fourth Quarter of 2018 Compared to the Operating Results for the Fourth Quarter of 2017
Sales. Sales decreased 4.1% to $83.1 million from $86.7 million in the fourth quarter of Fiscal 2017. Sales through e-
commerce and wholesale channels increased $2.5 million and 20.2% driven primarily by greater online adoption in both Canada
and the U.S., as well as our entry into grocery chain distribution earlier this year. Offsetting this was a decline in retail sales of $5.9
million, partially explained by $3.1 million from one less week in our fiscal 2018 calendar year and a decline of $3.2 million and
1.6% in comparable sales.
Gross Profit. Gross profit decreased by $4.9 million to $39.6 million and decreased as a percentage of sales to 47.6% from
51.3%, resulting from a shift in product sales mix and the deleveraging of fixed costs due to negative comparable sales.
Selling, General and Administration Expenses. Selling, general and administration expenses decreased by $12.1 million to
$40.9 million compared to the prior year quarter. As a percentage of sales, selling, general and administration expenses decreased
to 49.1% from 61.1%. Adjusted SG&A, which excludes any impact from executive separation costs, impairment of property and
equipment and intangibles assets, onerous contracts, costs related to strategic review and proxy contest and ERP project termination
costs, increased by $0.2 million to $31.1 million. As a percentage of sales, Adjusted selling, general and administration expenses
increased to 37.4% from 35.7%, due to the deleveraging of fixed costs as a result of negative comparable sales this quarter.
Results from Operating Activities. Loss from operating activities was $1.3 million as compared to $8.4 million in the fourth
quarter of Fiscal 2017. Adjusted results from operating activities, which excludes any impact from executive separation costs,
impairment of property and equipment and intangibles assets, onerous contracts, costs related to strategic review and proxy contest
and ERP project termination costs was $8.4 million compared to $13.6 million in the prior year quarter.
Finance Costs. Finance costs decreased by $0.4 million to $1.4 million in Fiscal 2018 resulting from lower accretion
expense of $1.7 million offset by an interest accrual of $1.3 million regarding uncertain tax provisions.
Finance Income. Finance income remained stable at $0.1 million in both Fiscal 2018 and Fiscal 2017, as a result of interest
income generated on cash on hand.
Provision (Recovery) for Income Tax. Provision for income tax increased by $4.7 million, to $10.7 million in Fiscal 2018.
The increase in the provision for income taxes was due primarily to a write-down of the deferred income tax assets and a provision
for uncertain tax position.
Adjusted EBITDA. Adjusted EBITDA, which excludes non-cash or other items in the current and prior periods, was $10.9
million compared to $16.4 million in the fourth quarter of Fiscal 2017.
Net Income (Loss). Net loss was $13.3 million compared to a net loss of $16.1 million in the fourth quarter of Fiscal 2017.
Adjusted net income, which excludes any impact from executive separation costs, impairment of property and equipment and
intangibles assets, onerous contracts and accretion, costs related to strategic review and proxy contest, ERP project termination
costs, and provision for uncertain tax positions, was $6.4 million compared to $9.7 million.
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Net Income (Loss) per Share. Fully diluted loss per common share was $0.51 compared to $0.62 in the fourth quarter of
Fiscal 2017. Adjusted fully diluted loss per common share, which is adjusted net income on a fully-diluted weighted average shares
outstanding basis, was $0.25 per share compared to $0.37 per share.
Cash on Hand. At the end of the quarter, the Company had cash amounting to $42.1 million. Our strong cash position
enables us to execute our strategy and invest further in our e-commerce platform.
Fiscal Year Ended February 2, 2019 Compared to Fiscal Year Ended February 3, 2018
Sales. Sales for Fiscal 2018 decreased 5%, or $11.3 million, to $212.8 million from $224.0 million in Fiscal 2017,
comprising $16.4 million in comparable sales decrease and $5.1 million increase in non‑comparable sales. For Fiscal 2018,
comparable sales decreased by 6.1% and non‑comparable sales increased primarily due to e-commerce and wholesale channel sales
driven primarily by greater online adoption in both Canada and the U.S., as well as our entry into grocery chain distribution.
Gross Profit. Gross profit decreased by 8.6%, or $9.3 million, to $98.0 million in Fiscal 2018 from $107.2 million in Fiscal
2017. Gross profit as a percentage of sales decreased to 46.1% in Fiscal 2018 from 47.9% in Fiscal 2017. The decrease in gross
profit as a percent of sales was primarily due to deleveraging of fixed costs due to the negative 6.1% comparative sales for the year.
Selling, General and Administration Expenses. Selling, general and administration expenses decreased by 4.7%, or $6.2
million, to $125.8 million in Fiscal 2018 from $131.9 million in Fiscal 2017. As a percentage of sales, selling, general and
administration expenses decreased to 59.1% in Fiscal 2018 from 58.9% in Fiscal 2017. Excluding employee separation costs,
impairment of property and equipment and intangibles assets, impact of onerous contracts, cessation of ERP project, as well as loss
on disposal of property and equipment in Fiscal 2018, selling, general and administration expenses increased 0.9% to $107.8
million in Fiscal 2018 from $106.8 million in Fiscal 2017, due primarily salaries of new 2017 stores going full year in 2018 as well
as higher for comparable stores. As a percentage of sales, selling, general and administration expenses excluding the impacts
referenced above increased to 50.7% from 47.7%.
Results from Operating Activities. Loss from operating activities increased by $3.1 million, to $(27.8) million in Fiscal 2018
from $(24.7) million in Fiscal 2017. Excluding executive separation costs, impairment of property and equipment and intangible
assets, impact of onerous contracts, ERP termination project as well as the loss on disposal of property and equipment in Fiscal
2018, results from operating activities decreased to a loss of $(9.9) million in Fiscal 2018 from $0.5 million in Fiscal 2017.
Adjusted EBITDA. Adjusted EBITDA, which excludes non-cash or other items in the current and prior periods, was
negative $1.3 million compared to $12.8 million for Fiscal 2017.
Net Loss. Net loss was $33.5 million compared to a net loss of $28.5 million for the comparable period in Fiscal 2017.
Adjusted net loss which excludes any impact from executive separation costs, impairment of property and equipment and
intangible assets, onerous contracts, costs related to strategic review and proxy contest, ERP project termination costs, and
provision for uncertain tax positions, was $6.8 million compared to an adjusted net loss $0.1 million in Fiscal 2017.
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Finance Costs. Finance costs decreased by $0.8 million to $1.6 million in Fiscal 2018 from $2.4 million in Fiscal 2017, as a
result of a lower accretion expense on the provision for onerous contracts.
Finance Income. Finance income increased by $0.1 million, or 23.5%, to $0.7 million in Fiscal 2018 from $0.6 million in
Fiscal 2017, as a result of interest income generated on cash on hand.
Provision (Recovery) for Income Tax. Provision for income tax increased by $2.9 million, to $4.9 million in Fiscal 2018.
The increase in the provision for income taxes was due primarily to a write-down of the deferred income tax assets and a provision
for uncertain tax position. Our effective tax rates were (17.0%) and (7.6%) in Fiscal 2018 and 2017, respectively. The effective tax
rate decreased as a result of the write-down of the deferred income tax assets and provision for uncertain tax position.
Net Loss per Share. Fully diluted loss per common share was $1.29 compared to $1.11 in the comparable period of Fiscal
2017. Adjusted fully diluted loss per common share, which is adjusted net loss on a fully-diluted weighted average shares
outstanding basis, was $0.26 per share compared to $0.00 per share.
Liquidity and Capital Resources
As of February 2, 2019 we had $42.1 million of cash compared to $63.5 million as of February 3, 2018. Our working
capital was $62.1 million as of February 2, 2019, compared to $77.2 million as at February 3, 2018.
Our primary cash needs are to support the increase in inventories needed to satisfy customer demand and for any capital
expenditures related to store renovations.
Our primary sources of liquidity are cash on hand and borrowings under our Revolving Facility. As of February 2, 2019, we
are in default under our Revolving Facility and, notwithstanding we have sufficient cash to operate the business, we do not
currently have access to borrowings under this Revolving Facility. BMO has temporarily agreed to forbear from exercising
remedies under the Credit Agreement.
We are in good-faith negotiations with BMO to replace the current Revolving Facility with an alternative arrangement that
will provide the Company with access to borrowings, if needed. Notwithstanding this, the Company has never drawn on any debt
facilities.
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.
Capital expenditures typically vary depending on the timing of store remodeling, store openings and infrastructure-related
investments. During Fiscal 2018, capital expenditures totaled $8.3 million. We devoted approximately 47% of our capital
expenditures to construct as well as renovate a number of existing stores. The remainder of the capital expenditures was used to
make continued investments in our infrastructure.
We believe that our cash position will be adequate to finance our planned capital expenditures and working capital
requirements for the next twelve months.
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Table of Contents
Cash Flow
A summary of our cash flows from operating, investing and financing activities is presented in the following table:
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash
Cash Flows Provided by Operating Activities
Cash flows provided by (used in) operating activities:
Net loss
Depreciation of property and equipment
Amortization of intangible assets
Loss on disposal of property and equipment
Impairment of property and equipment and intangible assets
Deferred rent
Provision for onerous contracts
Stock-based compensation expense
Amortization of financing fees
Accretion on provisions
Deferred income taxes (recovered)
Net change in other non-cash working capital balances related to operations
Cash flows provided by operating activities
For the year ended
February 2, February 3,
2019
2018
$
$
(13,228) $
(8,264)
82
(21,410) $
9,858
(12,596)
1,782
(956)
For the year ended
February 2, February 3,
2019
2018
$
$
(33,539) $
6,905
1,298
1,875
9,960
25
6,282
211
64
251
5,069
(11,628)
(13,228) $
(28,501)
8,431
1,474
82
15,069
542
10,321
2,021
79
2,292
3,585
(5,537)
9,858
Net cash provided by operating activities decreased to $(13.2) million in Fiscal 2018 from $9.9 million in Fiscal 2017. The
decrease in the cash flows provided by operating activities was due mainly to investment in working capital, primarily inventory
and to lower results from operating activities partially offset by lower impairment on property and equipment and provision on
onerous contracts.
The increase in inventories of $9.9 million in Fiscal 2018 is primarily related to sales shortfalls. The increase in trade and
other payables of $6.6 million is mainly due to increase in inventories in Fiscal 2018 compared to Fiscal 2017.
Cash Flows Used in Investing Activities
Capital expenditures decreased $4.3 million, to $8.3 million in Fiscal 2018 from $12.6 million in Fiscal 2017. This decrease
was due primarily to a reduction in new store openings costs and renovations of existing stores.
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Cash Flows Provided by Financing Activities
Cash flows provided by financing activities:
Proceeds from issuance of common shares pursuant to exercise of stock options
Cash flows provided by financing activities
For the year ended
February 2, February 3,
2019
2018
$
$
82 $
82 $
1,782
1,782
Net cash provided by financing activities decreased by $1.7 million to $0.1 million in Fiscal 2018 from $1.8 million in
Fiscal 2017 due to a decrease in the proceeds from issuance of common shares upon exercise of stock options.
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 June 11, 2020, in the principal amount of $15.0 million (which we
refer to as the “Revolving Facility”) or the equivalent amount in U.S. dollars, repayable at any time.
As at February 2, 2019, 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 1.10:1.00 and our leverage ratio may not exceed 3.00:1.00. In addition, our net tangible
worth may not be less than $65.0 million.
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 but less than 5.00:1.00, 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. If our adjusted leverage ratio is
greater than 5.00:1.00, the Revolving Facility bears interest at (a) bank’s prime rate plus 1.50% per annum, (b) the bank’s U.S. base
rate plus 2.50% per annum, (c) LIBOR plus 2.50% per annum, subject to availability, or (d) 2.50% on the face amount of each
banker’s acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of 0.50% 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, 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 is
also guaranteed by, and secured by a first lien security interest in all of the assets of, our wholly owned U.S. subsidiary,
DAVIDsTEA (USA) Inc.
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 February 23, 2018, we were in default under certain
covenants contained in our Credit Agreement, including our failure to maintain a fixed charge coverage ratio of 1.10:1.00 and
certain reporting requirements. BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement.
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Off‑Balance Sheet Arrangements
Other than operating lease obligations, we have no off‑balance sheet obligations.
Contractual Obligations and Commitments
In the normal course of business, we enter into contractual obligations that will require us to disburse cash over future
periods. All commitments have been recorded in our consolidated balance sheets, except for purchase obligations and minimum
annual lease payments under operating leases. The following table summarizes our contractual obligations as of February 2, 2019,
and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
Total
less than
1 year
Payments due by period
Between
Between
More than
5 years
Trade and other payables
Operating lease obligations (1)
Purchase obligations (2)
Total
____________
(1) Operating lease obligations under long‑term operating leases is exclusive of certain operating costs for which the Company is responsible. Certain of the
18,251 $
116,772
9,146
144,169 $
18,251 $
21,089
9,146
48,486 $
- $
28,893
-
28,893 $
1 and 3 years 3 and 5 years
- $
66,790
-
66,790 $
-
-
-
0
$
$
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.
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 (CGU)’ 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.
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Income taxes. 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.
Intercompany transfer pricing. Our intercompany transfer pricing are currently subject to audit by the CRA. We believe that
our intercompany transfer policies and tax positions are reasonable and reflect economic realities documented at the time of
implementation. However, it is possible that the final outcome of our audit may be materially different from that which is reflected
in our income tax provision.
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.
Recently Issued Accounting Standards
Information on significant new accounting standards and amendments issued but not yet adopted is described below.
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 on the balance sheet. 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 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 elected to apply the modified retrospective
method by setting right-of-use assets based on the lease liability at the date of initial application, adjusted by the amount of any
prepaid or accrued lease payments, and will benefit from the following practical expedients;
·
·
·
·
·
apply IFRS 16 exclusively to contracts that were previously identified as leases applying IAS 17,
apply a single discount rate to a portfolio of leases with reasonably similar characteristics,
rely on its assessment of whether leases are onerous applying IAS 37 immediately before the date of initial application as an alternative to
performing an impairment review of the right-of-use asset,
exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application, and
elect not to apply IFRS 16 to leases for which the underlying asset is of low value.
As of February 2, 2019, based on the information currently available, the Company estimates that it will recognize a right-
of-use asset of approximately $62,800 to $66,000 and a lease liability of approximately $90,000 to $94,600. The right-of-use asset
will be net of the provision for onerous leases and deferred rent and lease inducements relating to the leases recognised in the
consolidated balance sheet immediately before the date of initial application. The actual impacts of the initial application of IFRS
16 may vary from the estimates provided, as the Company has not finalized all its calculations.
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IFRIC 23, “Uncertainty over Income Tax Treatments”, was issued by the IASB in June 2017. The Interpretation provides
guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over
income tax treatments. The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application
is permitted. The Interpretation requires an entity to:
·
·
·
Contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better
predictions of the resolution;
Reflect an uncertainty in the amount of income tax payable (recoverable) if it is probable that it will pay (or recover) an amount for the
uncertainty; and
Measure a tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the amount payable
(recoverable).
The Company does not expect a material impact from the adoption of IFRIC 23 on its consolidated financial statements.
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$1.07 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;
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 loss and cash flows will be exposed to changes in interest rates in fiscal periods in which we have debt
outstanding. As at February 2, 2019, 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 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 $30.0
million to fix the exchange rate of 80% to 90% of our expected February 2018 to September 2018 U.S. dollar purchases in respect
of our inventory.
44
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 February 2, 2019 and February 3, 2018:
Consolidated Balance Sheets
For the years ended February 2, 2019, February 3, 2018, and January 28, 2017:
Consolidated Statements of Loss and Comprehensive Loss
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to Consolidated Financial Statements
45
Page
46
47
48
49
50
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of DAVIDsTEA Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DAVIDsTEA Inc. (the Company) as of February 2, 2019
and February 3, 2018, the related consolidated statements of loss and comprehensive loss, cash flows and equity for each of the
three years in the period ended February 2, 2019 and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company at February 2, 2019 and February 3, 2018 and the results of its operations and its cash flows for each of the three
years in the period ended February 2, 2019, in conformity with International Financial Reporting Standards as issued by the
International Accounting Standards Board.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP1
We have served as the Company’s auditor since 2011.
Montréal, Canada
May 2, 2019
_________
1 CPA, Auditor, CA, public accountancy permit no. A123806
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DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED BALANCE SHEETS
[In thousands of Canadian dollars]
ASSETS
Current
Cash
Accounts and other receivables
Inventories
Income tax receivable
Prepaid expenses and deposits
Total current assets
Property and equipment
Intangible assets
Deferred income tax assets
Total assets
LIABILITIES AND EQUITY
Current
Trade and other payables
Deferred revenue
Current portion of provisions
Derivative financial instruments
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
As at
February 2,
February 3,
2019
$
2018
$
42,074
3,681
34,353
4,107
8,819
93,034
23,788
5,678
—
122,500
20,951
6,241
3,714
—
30,906
8,698
15,440
55,044
112,519
1,400
(47,960)
1,497
67,456
122,500
63,484
3,131
24,450
2,968
7,712
101,745
36,558
4,439
5,194
147,936
14,392
5,186
4,693
229
24,500
8,608
13,460
46,568
111,692
2,642
(14,721)
1,755
101,368
147,936
[Note 6]
[Note 7]
[Note 8]
[Note 9]
[Note 17]
[Note 10]
[Note 11]
[Note 12]
[Note 22]
[Note 12]
[Note 13]
[Note 15]
See accompanying notes
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Table of Contents
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE 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
Loss before income taxes
Provision for income tax (recovery)
Net loss
Other comprehensive loss
Items to be reclassified subsequently to income:
Unrealized net gain (loss) on forward exchange contracts
Realized net (gain) loss on forward exchange contracts reclassified to inventory
Provision for income tax recovery (income tax) on comprehensive income
Cumulative translation adjustment
Other comprehensive loss, net of tax
Total comprehensive loss
Net loss per share:
Basic and fully diluted
Weighted average number of shares outstanding
Basic and fully diluted
[Note 21]
[Note 18]
[Note 16]
[Note 17]
[Note 22]
February 2,
2019
$
For the year ended
February 3,
January 28,
2018
$
2017
$
212,753
114,774
97,979
125,722
(27,743)
1,614
(700)
(28,657)
4,882
(33,539)
-
230
(63)
(425)
(258)
(33,797)
224,015
116,772
107,243
131,930
(24,687)
2,371
(567)
(26,491)
2,010
(28,501)
(992)
309
183
(932)
(1,432)
(29,933)
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)
[Note 19]
(1.29)
(1.11)
(0.15)
[Note 19]
25,967,836
25,716,186
24,699,290
See accompanying notes
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Table of Contents
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF CASH FLOWS
[In thousands of Canadian dollars]
OPERATING ACTIVITIES
Net loss
Items not affecting cash:
Depreciation of property and equipment
Amortization of intangible assets
Write-off of property and equipment
Impairment of property and equipment
Deferred rent
Provision (recovery) for onerous contracts
Stock-based compensation expense
Amortization of financing fees
Accretion on provisions
Deferred income taxes (recovered)
Net change in other non-cash working capital balances related to operations
Cash flows related to operating activities
FINANCING ACTIVITIES
Proceeds from issuance of common shares pursuant to exercise of stock options
Cash flows related to financing activities
INVESTING ACTIVITIES
Additions to property and equipment
Additions to intangible assets
Cash flows related to investing activities
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.
49
February 2,
For the year ended
February 3,
January 28,
2019
$
2018
$
2017
$
(33,539)
(28,501)
(3,668)
6,904
1,298
1,875
9,960
25
6,282
211
64
251
5,069
(1,600)
(11,628)
(13,228)
82
82
(3,898)
(4,366)
(8,264)
(21,410)
63,484
42,074
—
10
650
1,774
8,431
1,474
82
15,069
542
10,321
2,021
79
2,292
3,585
15,395
(5,537)
9,858
1,782
1,782
(9,634)
(2,962)
(12,596)
(956)
64,440
63,484
—
880
574
68
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
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DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF EQUITY
[In thousands of Canadian dollars]
Share
Capital
$
Contributed
Surplus
$
Deficit
$
Accumulated Other Comprehensive Income
Accumulated Accumulated
Foreign
Derivative
Currency
Financial
Instrument Translation Comprehensive
Adjustment Adjustment
Accumulated
Other
$
$
Income
$
Total
Equity
$
Balance, January 28, 2017
Net loss for the year ended
February 3, 2018
Other comprehensive loss
Total comprehensive loss
Issuance of common shares
Common shares issued on vesting of
restricted stock units
Write-down of deferred income tax
assets
Stock-based compensation expense
Income tax impact associated with
stock options
Impact of change in foreign tax rate
associated with stock options
Reduction of stated capital
Balance, February 3, 2018
Balance, February 3, 2018
Net loss for the year ended
February 2, 2019
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, February 2, 2019
263,828
8,833
(142,398)
333
2,854
3,187
133,450
-
-
-
2,669
-
-
-
(887)
(28,501)
-
(28,501)
-
1,142
(1,984)
231
-
-
(3,412)
2,021
-
(1,797)
-
-
-
-
(500)
(500)
-
-
-
-
-
-
(932)
(932)
-
-
-
-
-
-
(155,947)
111,692
(132)
-
2,642
-
155,947
(14,721)
-
-
(167)
-
-
1,922
-
(1,432)
(1,432)
-
-
-
-
(28,501)
(1,432)
(29,933)
1,782
(611)
(3,412)
2,021
-
(1,797)
-
-
1,755
(132)
—
101,368
111,692
2,642
(14,721)
(167)
1,922
1,755
101,368
-
-
-
164
663
-
-
-
-
(82)
(33,539)
-
(33,539)
-
(1,370)
211
300
-
-
112,519
(1)
1,400
-
(47,960)
-
167
167
-
-
-
-
-
-
(425)
(425)
-
-
-
-
1,497
-
(258)
(258)
-
(33,539)
(258)
(33,797)
82
-
-
(407)
211
-
1,497
(1)
67,456
See accompanying notes
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DAVIDsTEA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended February 2, 2019, February 3, 2018 and January 28, 2017
[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 February 2, 2019 were authorized for issue in accordance with a resolution of the Board of Directors on May 2, 2019. The
Company is incorporated and domiciled in Canada and its shares are publicly traded on the NASDAQ Global Market under the
symbol “DTEA”. The registered office is located at 5430, Ferrier 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, other than with respect to the adoption of new accounting standards as disclosed in
note 4.
The Company’s fiscal year ends on the Saturday closest to the end of January, typically resulting in a 52-week year, but
occasionally giving rise to an additional week, resulting in a 53-week year. The years ended January 28, 2017, February 2, 2019
cover a 52-week period. The year ended February 3, 2018 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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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
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 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
20% declining balance
30% declining balance
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 our consolidated statement of net loss when the asset is derecognized.
Intangible assets
Intangible assets consist of computer software, trademarks and patents.
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 out consolidated statement of 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 our consolidated statement of 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.
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 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.
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Store opening costs
Store opening costs are expensed as incurred.
Impairment
i.
Impairment of financial assets
The Company applies the “expected credit loss” model. The impairment model applies to trade receivables. It requires a
credit loss to be reflected in profit and loss immediately after an asset or receivable is acquired and subsequent changes in expected
credit losses at each reporting date reflecting the change in credit risk. The Company applies the simplified approach for trade
receivables and calculates expected credit losses based on lifetime expected credit losses.
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. 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 the lease term.
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
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 our consolidated statement of 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 22.
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.
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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
Loss (“OCI”), while any ineffective portion is recognized immediately in out consolidated statement of loss. The amounts
recognized in OCI are reclassified to inventory when such non-financial asset is recognized on the consolidated balance sheet, and
our consolidated statement of 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 our consolidated statement of 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 our consolidated statement of net loss as accrued.
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).
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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 and directors
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 one 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 is recognized when control of goods has been transferred at the amount of consideration to which the Company
expects to be entitled. 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.
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 determined in proportion to the pattern of rights exercised by the customer. Gift card breakage is
included in sales in the consolidated statement of loss.
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. The Company introduced a new Loyalty program on January 1, 2019 that
enhanced some features and removed expiry of points. Under the old program, points were redeemed for free tea or free beverages,
depending on the number of points a customer has obtained over a limited collection period, typically a three-month period. Free
tea offers were issued at the end of each collection period and redeemable within 60 days thereafter. Free beverage offers were
issued at the end of the calendar collection period and redeemable within 60 days thereafter.
Starting January 1, 2019, the Company launched a new Frequent Steeper loyalty and rewards program that allows
customers to earn points when they purchase products at the Company’s retail stores and on the Company’s website. Points are
converted into offers to receive loose-leaf teas which must be redeemed within 60 days. Free beverage offers are issued once a
customer has purchased 10 beverages which must be redeemed within 60 days.
Consideration is allocated between the loyalty program awards and the goods on which the awards were earned, based on
their relative stand-alone selling prices. The fair value of Frequent Steeper points and offers are determined based on the estimated
selling price of the loose-leaf tea, net of points and offers we expect will not be redeemed. The fair value of beverage offers is
determined based on the estimated selling price of the beverage, net of beverage offers that are not expected to be redeemed. The
relative selling price of points and offers issued are recorded as deferred revenue. Offers for loose-leaf tea and beverage offers are
recognized as revenue on the earlier of redemption and expiry. On an ongoing basis, the Company monitors historical redemption
rates. Frequent Steeper redemptions are included with total sales in our consolidated statement of net loss.
Finance income
Interest income is recognized as interest accrues using the effective interest method.
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Income taxes
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in our consolidated
statement of loss except to the extent that they relate to items recognized directly in equity or in other comprehensive loss.
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 is calculated using the weighted average number of shares outstanding during the year.
The diluted earnings per share is 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 and RSUs, 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. A financial asset or liability is recognized initially (at settlement date) at its fair value plus, in the case
of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition
or issue of the instrument. Financial assets and liabilities carried at fair value through profit or loss are initially recognized at fair
value and transaction costs are expensed in the consolidated statements of loss.
After initial recognition, financial assets are measured at amortized cost or fair value. Where assets are measured at fair
value, gains and losses are either recognized entirely in profit or loss (“FVTPL”) or recognized in other comprehensive income
(“FVOCI”).
The Company classifies its financial assets and liabilities according to their characteristics and management's choices and
intentions related thereto for the purposes of ongoing measurement.
Classifications that the Company has used for financial assets include:
(a) Amortized Cost – non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market. This includes trade receivables, and these are recorded at amortized cost with gains and losses
recognized in net income in the period that the asset is no longer recognized or becomes impaired; and
(b) FVTPL – financial assets which are classified as fair value through profit and loss. This includes cash and
derivative financial instruments
Classifications that the Company has used for financial liabilities include:
a) Amortized cost – non-derivative financial liabilities measured at amortized cost with gains and losses recognized
in net loss in the period that the liability is no longer recognized. This includes Trade and other payables; and
b) FVTPL – financial liabilities which are classified as fair value through profit and loss. This includes derivative
financial instruments
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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 our
statement of 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 OCI in the cumulative translation account and
reclassified from equity to our consolidated statement of loss on disposal of the net investment.
4. CHANGES IN ACCOUNTING PRINCIPLES
As of February 4, 2018, the Company adopted IFRS 9, “Financial Instruments” (“IFRS 9”). IFRS 9 replaces IAS 39
Financial Instruments: Recognition and Measurement for annual periods beginning on or after January 1, 2018, bringing together
all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.
With the exception of hedge accounting, which the Company applied prospectively, the Company has applied IFRS 9
retrospectively, with the initial application date of February 4, 2018.
Overall, there was no material impact on the Company’s consolidated financial statements.
a)
The following table presents the carrying amount of financial assets held by the Company at February 3, 2018 and their measurement category
under IAS 39 and the new model under IFRS 9.
February 3, 2018
IAS 39
February 3, 2018
IFRS 9
Measurement
category
Carrying
Value
$
Measurement
category
Carrying
Value
$
Cash
Credit card cash clearing receivables Amortized cost
Amortized cost
Other receivables
FVTPL
Derivative financial instruments
FVTPL
63,484 FVTPL
1,291 Amortized cost
1,840 Amortized cost
229 FVTPL
63,484
1,291
1,840
229
The classification of all financial liabilities as financial liabilities at amortized cost remains unchanged as well as their
measurement resulting from their classification.
b)
c)
Impairment. IFRS 9 requires the Company to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-
month or lifetime basis. The Company applied the simplified approach and records lifetime expected losses on all trade receivables. The
Company’s IFRS 9 expected credit loss model did not have a material impact on its consolidated financial statements.
Hedge accounting. All existing hedge relationships that are currently designated in effective hedging relationships still qualify for hedge
accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, the adoption of IFRS
9 did not have a material impact on the Company’s hedge accounting.
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As of February 4, 2018, the Company adopted IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”). 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 is effective for annual periods beginning on or after January 1, 2018. The implementation of
IFRS 15 impacts the allocation of revenue that is deferred in relation to the Company’s customer loyalty award programs. Prior to
adoption, revenue was allocated to the customer loyalty awards using the residual fair value method. Under IFRS 15, consideration
is allocated between the loyalty program awards and the goods on which the awards were earned, based on their relative stand-
alone selling prices. The change in allocation of revenue that is deferred in relation to the Company’s customer loyalty program did
not have a material impact on retained earnings as at February 4, 2018. Overall, there was not a material impact on the Company’s
consolidated financial statements.
As of February 4, 2018, the Company adopted International Financial Reporting Interpretations (“IFRIC”) 22, “Foreign
Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses
how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the
related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising
from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on
or after January 1, 2018. There was no material impact on the Company’s consolidated financial statements.
Standards issued but not yet effective
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 on the balance sheet. 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 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 elected to apply the modified retrospective
method by setting right-of-use assets based on the lease liability at the date of initial application, adjusted by the amount of any
prepaid or accrued lease payments, and will benefit from the following practical expedients;
·
·
·
·
·
apply IFRS 16 exclusively to contracts that were previously identified as leases applying IAS 17,
apply a single discount rate to a portfolio of leases with reasonably similar characteristics,
rely on its assessment of whether leases are onerous applying IAS 37 immediately before the date of initial application as an alternative to
performing an impairment review of the right-of-use asset,
exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application, and
elect not to apply IFRS 16 to leases for which the underlying asset is of low value.
As of February 2, 2019, based on the information currently available, the Company estimates that it will recognize a right-
of-use asset of approximately $62,800 to $66,000 and a lease liability of approximately $90,000 to $94,600. The right-of-use asset
will be net of the provision for onerous leases and deferred rent and lease inducements relating to the leases recognised in the
consolidated balance sheet immediately before the date of initial application. The actual impacts of the initial application of IFRS
16 may vary from the estimates provided, as the Company has not finalized all its calculations.
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IFRIC 23, “Uncertainty over Income Tax Treatments”, was issued by the IASB in June 2017. The Interpretation provides
guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over
income tax treatments. The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application
is permitted. The Interpretation requires an entity to:
·
·
·
Contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better
predictions of the resolution;
Reflect an uncertainty in the amount of income tax payable (recoverable) if it is probable that it will pay (or recover) an amount for the
uncertainty; and
Measure a tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the amount payable
(recoverable).
The Company does not expect a material impact from the adoption of IFRIC 23 on its consolidated financial statements.
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 inflows of the
stores in the group as interdependent.
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.
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6. ACCOUNTS AND OTHER RECEIVABLES
Credit card cash clearing receivables
Other receivables
7. INVENTORIES
Finished goods
Goods in transit
Packaging
February 2, February 3,
2019
$
2018
$
1,477
2,204
3,681
1,291
1,840
3,131
February 2, February 3,
2019
$
28,991
3,262
2,100
34,353
2018
$
17,600
4,608
2,242
24,450
During the year ended February 2, 2019, inventories recognized as cost of sales amounted to $63,195 [February 3, 2018 —
$64,611, January 28, 2017 - $62,995]. The cost of inventory includes a write-down of $703 [February 3, 2018 – nil, January 28,
2017 - $869] recorded as a result of net realizable value being lower than cost. Inventory write-downs of nil [February 2, 2018 -
$730, January 28, 2017 – nil] recognized in the previous years were reversed.
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8. PROPERTY AND EQUIPMENT
Cost
Balance, January 28, 2017
Acquisitions
Disposals
Cumulative translation adjustment
Balance, February 3, 2018
Acquisitions
Disposals
Cumulative translation adjustment
Balance, February 2, 2019
Accumulated depreciation and impairment
Balance, January 28, 2017
Depreciation
Impairment
Disposals
Cumulative translation adjustment
Balance, February 3, 2018
Depreciation
Impairment
Disposals
Cumulative translation adjustment
Balance, February 2, 2019
Net Carrying Value
Balance, February 3, 2018
Balance, February 2, 2019
Leasehold
improvements
$
Furniture and Computer
hardware
$
equipment
$
75,555
6,581
—
(1,503)
80,633
2,096
(68)
1,481
84,142
11,185
1,808
(187)
(167)
12,639
1,125
(32)
178
13,910
3,948
1,245
—
(49)
5,144
676
-
58
5,878
Leasehold
improvements
$
Furniture and Computer
hardware
$
equipment
$
32,342
6,394
13,491
—
(931)
51,296
5,117
8,164
—
1,297
65,874
5,048
1,357
1,148
(105)
(102)
7,346
1,134
1,411
(16)
126
10,001
2,138
680
430
—
(32)
3,216
653
351
—
47
4,267
Total
$
90,688
9,634
(187)
(1,719)
98,416
3,897
(100)
1,717
103,930
Total
$
39,528
8,431
15,069
(105)
(1,065)
61,858
6,904
9,926
(16)
1,470
80,142
29,337
18,268
5,293
3,909
1,928
1,611
36,558
23,788
For the year ended February 2, 2019, 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 $9,926 [February 3, 2018 -
$15,069, January 28, 2017 — $7,516] related to store leasehold improvements, furniture and equipment and computer hardware
was recorded in the Canada and U.S. segments for $7,686 and $2,240, respectively [February 3, 2018 - $5,114 and $9,955, January
28, 2017 —$1,116 and $6,400, 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. Value in use of nil [February 3, 2018 - $1,097, January 28,
2017 —$472] 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
discount rate of 11.9% [February 3, 2018 – 11.9%, January 28, 2017 — 13.4%]. A reversal of impairment occurs when previously
impaired CGUs see improved financial results. For the year ended February 2, 2019, no of impairment losses were reversed
[February 3, 2018 - $866, January 28, 2017 — nil]. Impairment losses were reversed only to the extent that the carrying amounts of
the CGU’s net assets do not exceed the carrying amount that would have been determined, net of depreciation, if no impairment
loss had been recognized.
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For the year ended February 2, 2019, the depreciation expense was $6,904 [February 3, 2018 - $8,431, January 28, 2017 —
$8,069 ]; with $5,825 recorded in the Canada segment [February 3, 2018 - $6,387, January 28, 2017 — $5,583], $520 recorded in
the U.S. segment [February 3, 2018 - $1,508, January 28, 2017 — $1,930], and $559 recorded in corporate selling, general and
administration expenses [February 3, 2018 - $536, January 28, 2017 — $556]. Depreciation expense and net impairment losses are
reported in the consolidated statement of loss and comprehensive loss under selling, general and administration expenses (Note 18).
9. INTANGIBLE ASSETS
Cost
Balance, January 28, 2017
Acquisitions
Cumulative translation adjustment
Balance, February 3, 2018
Acquisitions
Disposal
Cumulative translation adjustment
Balance, February 2, 2019
Accumulated amortization
Balance, January 28, 2017
Amortization
Cumulative translation adjustment
Balance, February 3, 2018
Amortization
Impairment
Disposal
Cumulative translation adjustment
Balance, February 2, 2019
Net Carrying Value
Balance, February 3, 2018
Balance, February 2, 2019
Computer
software
$
Other
$
Total
$
6,321
2,962
(4)
9,279
4,356
(1,724)
4
11,915
3,565
1,456
(2)
5,019
1,281
34
-
2
6,336
4,260
5,579
279
-
(10)
269
0
(178)
10
101
77
18
(5)
90
17
-
(111)
6
2
179
98
6,600
2,962
(14)
9,548
4,356
(1,902)
14
12,016
3,642
1,474
(7)
5,109
1,298
34
(111)
8
6,338
4,439
5,678
Amortization expense is reported in the consolidated statement of loss under selling, general and administration expenses
(Note 18).
Included in disposal is a write-off of $1,724 [February 2, 2018 – nil] related to costs incurred with respect to an ERP
upgrade which the Company no longer intends to continue.
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10. TRADE AND OTHER PAYABLES
Trade payable and accrued liabilities
Income taxes payable
Government remittances
Wages, salaries and employee benefits payable
11. DEFERRED REVENUE
Gift cards liability
Loyalty program liability
February 2, February 3,
2019
$
14,990
2,700
-
3,261
20,951
2018
$
11,221
—
186
2,985
14,392
February 2, February 3,
2019
$
2018
$
4,992
1,249
6,241
3,982
1,204
5,186
During the year, the Company recorded gift card breakage income of $242 [February 3, 2018 - $575, January 28, 2017 -
$850]. Gift card breakage is included in sales in the consolidated statement of loss.
12. PROVISIONS
Opening balance
Additions
Reversals
Utilization
Settlements
Accretion expense
Cumulative translation adjustment
Ending balance
Less: Current portion
Long-term portion of provisions
63
February 2, February 3,
2019
$
18,153
11,078
(4,796)
(5,730)
(691)
251
889
19,154
(3,714)
15,440
2018
$
8,494
14,073
(3,752)
(2,467)
(132)
2,292
(355)
18,153
(4,693)
13,460
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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. For the year ended February 2, 2019, additions to the onerous provisions were recorded in the amount of
$11,078 [February 3, 2018 - $14,073], while the provisions for other stores were fully or partially reversed in the amount of $4,796
[February 3, 2018 - $3,752].
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 February 2, 2019, the Company has recognized in the consolidated statement of loss
contingent rent amounting to $1,030 [February 3, 2018 - $1,742, January 28, 2017 — $2,312] and accrued for a contingent rent
liability of $477 [February 3, 2018 - $725, January 28, 2017 —$1,001].
Included in the cost of sales and selling, general and administration expenses for the year ended February 2, 2019 is rent
expense of $31,520 [February 3, 2018 - $31,565, January 28, 2017 — $29,173].
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
February 2, February 3,
2019
$
21,089
66,790
28,893
116,772
2018
$
19,840
86,844
28,281
134,965
On June 11, 2018, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”). The
Amended Credit Agreement provides for a two-year revolving facility (“Amended Revolving Facility”) in the principal amount of
$15.0 million or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018, with no accordion feature.
Borrowings under the Amended Revolving Facility may not exceed the lesser of the total commitment for the revolving facility and
the borrowing base, calculated as 75% of the face value of all eligible receivables plus 50% of the estimated value of all eligible
inventory, less any priority payables.
The Amended Credit Agreement subjects the Company to certain financial covenants. Without the prior written consent of
the lender, the Company’s fixed charge coverage ratio may not be less than 1.10:1.00 and the Company’s leverage ratio may not
exceed 3.00:1:00. In addition, the Company’s net tangible worth may not be less than $65,000 and the Company’s minimum excess
availability must not be less than $15.0 million. The Amended Revolving Facility bears interest based on the Company’s adjusted
leverage ratio, at the bank’s prime rate, U.S. bank rate and LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range
of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility.
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The credit facility also contains non-financial covenants that, among other things and subject to certain exceptions, restrict
the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in
the normal course of business. The Company also cannot make any dividend payments.
As at February 2, 2019, the Company did not have any borrowings under the Amended Revolving Facility.
As at February 2, 2019, the Company is in breach of its fixed charge coverage ratio and certain non-financial covenants.
BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement, however the Company cannot
borrow under the facility. The Company is in good-faith discussions with BMO to install an asset based lending facility that will
provide a revolving facility at commercial reasonable terms.
15. SHARE CAPITAL
Authorized
An unlimited number of common shares.
Issued and Outstanding
Share Capital - Common shares
Number of shares in issuance
Balance, January 28, 2017
Issuance of common shares upon exercise of options
Issuance of common shares upon vesting of restricted stock units
Balance, February 3, 2018
Issuance of common shares upon exercise of options
Issuance of common shares upon vesting of restricted stock units
Balance, February 2, 2019
February 2, February 3,
2019
$
112,519
2018
$
111,692
Common
shares
#
25,330,951
456,773
97,648
25,885,372
51,717
74,728
26,011,817
During the year ended February 2, 2019, 51,720 stock options were exercised for common shares, for cash proceeds of $82
and 36,415 common shares for a non-cash settlement of $121 [February 3, 2018 – 456,773 stock options for cash proceeds of
$1,782, January 28, 2017 — 1,236,154 stock options for cash proceeds of $2,779]. The carrying value of common shares during the
year ended February 2, 2019 includes $82 [February 3, 2018 - $887] which corresponds to a reduction in the contributed surplus
associated to options exercised during the period.
65
Table of Contents
In addition, during the year ended February 2, 2019, 74,728 common shares [February 3, 2018 – 97,648, January 28, 2017
—57,325] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $663,
net of tax [February 2, 2018 - $1,142].
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
shares of the Company not reserved for any other purpose. As at February 2, 2019, 867,882 common shares remain available for
issuance under the 2015 Omnibus Plan.
No options were granted for the year ended February 2, 2019. The weighted average fair value of options granted of $2.39
for the year ended February 3, 2018 was estimated using the Black Scholes option pricing model, using the following assumptions;
risk-free interest rate of 1.79%, expected volatility of 27.4%, expected option life of 4.0 years, expected dividend yield of nil%, and
exercise price of $9.76. 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
Outstanding, beginning of year
Issued
Exercised
Forfeitures
Outstanding, end of year
Exercisable, end of year
February 2,
2019
Weighted
average
exercise
price
$
February 3,
2018
Weighted
average
exercise
price
$
Options
outstanding
#
447,779
-
(88,135)
(222,104)
137,540
80,332
Options
outstanding
#
933,195
161,980
(456,773)
(190,623)
447,779
304,415
7.18
-
2.76
8.95
7.17
4.74
5.63
9.76
3.9
9.63
7.18
5.57
The weighted average share price at the date of exercise for options exercised during the year ended February 2, 2019 was
$4.47 [February 3, 2018 — $8.51].
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66
The following table summarizes information about the stock options outstanding at February 2, 2019 and February 3, 2018:
Number
outstanding at
February 2,
2019
#
31,100
35,000
53,225
18,215
137,540
Weighted
average
contractual
remaining
life
(years)
1.1
2.6
5.1
4.2
3.4
Weighted
average
exercise
price
$
0.77
4.29
10.28
14.51
7.17
Number of
options
exercisable at
February 2,
2019
#
31,100
35,000
-
14,232
80,332
Weighted
average
exercise
price
$
0.77
4.29
-
14.54
4.74
Range of exercise prices
$0.77
$3.33 - $4.31
$8.76 - $10.28
$14.39 - $17.99
As at February 2, 2019
Number
outstanding at
February 3,
2018
Weighted
average
contractual
remaining
life
Weighted
average
exercise
price
Number of
options
exercisable at
February 3,
2018
Weighted
average
exercise
price
Range of exercise prices
$0.77
$3.33 - $4.31
$8.76 - $10.28
$14.39 - $17.99
As at February 3, 2018
#
(years)
$
#
$
50,600
172,396
161,980
62,803
447,779
2.3
3.7
6.4
4.3
4.6
67
0.77
3.91
9.76
14.68
7.18
50,600
161,395
55,530
36,890
304,415
0.77
3.89
8.76
14.72
5.57
Table of Contents
A summary of the status of the Company’s RSU plan and changes during the year ended February 2, 2019 and February 3,
2018 is presented below.
Outstanding, beginning of year
Granted
Forfeitures
Vested
Vested, withheld for tax
Outstanding, end of year
For the year ended
February 2,
2019
Weighted
average
fair value
outstanding per unit (1)
RSUs
February 3,
2018
Weighted
average
fair value
outstanding per unit (1)
RSUs
#
289,416
491,450
(360,371)
(74,728)
(74,791)
270,976
$
9.7
4.47
6.31
8.85
8.6
5.26
#
252,233
298,897
(89,035)
(97,648)
(75,031)
289,416
$
12.42
8.59
10.03
11.85
11.28
9.7
(1) Weighted average fair value per unit as at date of grant.
During the year ended February 2, 2019, the Company recognized a stock-based compensation expense of $211 [February
3, 2018 - $2,021, January 28, 2017 — $2,264].
16. FINANCE COSTS
February 2, February 3, January 28,
2018
$
2019
$
2017
$
Financing fees on term loan and Revolving Facility [note 14]
Accretion on provisions
Interest and penalty on provision for uncertain tax position
Other finance costs
2
251
1,300
61
1,614
79
2,292
-
-
2,371
75
-
-
1
76
68
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17. INCOME TAXES
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
Income tax recovery — statutory rate
Increase (decrease) in provision for
income tax (recovery) resulting from:
Non-deductible items
Effect of substantively enacted income tax
rate changes
Unrecognized deferred income tax assets
Write-down of deferred income tax assets
Provision for uncertain tax position
Other
Income tax provision (recovery) —
effective tax rate
February 2,
2019
For the year ended
February 3,
2018
January 28,
2017
%
$
%
$
%
$
26.9
(7,700)
26.8
(7,097)
26.5
(1,564)
(1.3)
378
(1.6)
437
(10.1)
—
(15.0)
(18.2)
(9.4)
0.0
(17.0)
—
4,306
5,194
2,700
4
4,882
(7.9)
(16.7)
(7.8)
(0.4)
(7.6)
2,090
4,415
2,054
111
2,010
—
—
—
21.5
37.9
598
—
—
—
(1,269)
(2,235)
A breakdown of the income tax provision (recovery) on the consolidated statement of loss is as follows:
For the year ended
February 2, February 3, January 28,
2018
$
2019
$
2017
$
Income tax provision (recovery)
Current
Deferred
(187)
5,069
4,882
(1,575)
3,585
2,010
2,145
(4,380)
(2,235)
On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was signed into law, which reduced the U.S.
federal corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of the U.S. Tax Reform, The Company’s
net deferred taxes reported on the balance sheet were required to be re-measured using the newly enacted rates. The effect of this
re-evaluation resulted in a decrease in the net deferred tax assets in the amount of $4,892 during the year ended February 3, 2018.
The U.S. Tax Reform introduces other important changes in the U.S. corporate income tax laws that may significantly affect
the Company in future years, including the creation of a new Base Erosion Anti-Abuse Tax that subjects certain payments from
U.S. corporations to foreign related parties to additional taxes, and limitations to certain deductions for net interest expense
incurred by U.S. corporations. The U.S. Tax Reform also includes an increase in bonus depreciation from 50% to 100% for
qualified property placed in service after September 27, 2017 and before 2023. Future regulations and interpretations to be issued
by U.S. authorities may also impact the Company’s estimates and assumptions used in calculating its income tax provisions.
We are currently undergoing transfer pricing audit by the Canada Revenue Agency. While the Company believes that its
filing positions are appropriate and supportable, periodically, certain matters may be challenged by tax authorities. We believe that
our transfer pricing practices reflect the accurate economic allocation of profit and risk and that proper contemporaneous transfer
pricing documentation is in place. Preliminary findings from the transfer pricing audit indicates a difference in the interpretation of
the economics of the arrangement. Although the outcome of such matters is not predictable with assurance, we have nonetheless
recorded a provision of $4.0 million comprised of $2.7 million and $1.3 milllion for taxes and interest, respectively. While the
Company believes its tax provisions are adequate, the final determination of tax audits and any related disputes could be materially
different from historical income tax provisions and accruals. The Company intends to vigorously defend its practices and believes it
has sufficient arguments to mitigate the unfavorable outcome.
69
Table of Contents
The tax effects of temporary differences and net operating losses that give rise to deferred income tax assets and liabilities
are as follows:
Deferred income tax assets
Operating losses carried forward
Tax values of property and equipment in excess of carrying value including impairment
Deferred rent
Stock options
Financing fees and IPO-related costs
Lease inducements
Provisions for onerous contracts
Other
Total deferred income tax assets
Deferred income tax liabilities
Unrealized foreign exchange gain on derivative financial instruments
Unrealized foreign exchange gain related to intercompany advances
Deferred income tax liabilities
Net
Unrecognized deferred income tax asset
Net deferred income tax assets (liabilities)
February 2, February 3,
2019
$
2018
$
4,608
3,505
1,762
3,843
588
634
5,357
665
20,962
-
(212)
(212)
20,750
(20,750)
-
1,259
1,553
1,662
3,401
1,197
515
4,812
635
15,034
62
(113)
(51)
14,983
(9,789)
5,194
As at February 2, 2019, the Company’s Canadian operations have accumulated losses amounting to $11.9 million [February
3, 2018 — nil; January 28, 2017 — nil], which expire during the year 2039. As at February 2, 2019, the Company’s U.S. subsidiary
has accumulated losses amounting to US$14.0 million [February 3, 2018 — US$14.2 million; January 28, 2017 — US$14.9
million], which expire during the years 2033 to 2039.
Based upon the projections for future taxable income and prudent tax planning strategies, management believes it is no
longer probable the Company will realize the benefits of these operating tax losses carried forward and other deductible temporary
differences. Therefore, a full valuation allowance of $20,750 was recorded against the net deferred income tax asset.
70
Table of Contents
The changes in the net deferred income tax asset were as follows for the fiscal years:
Balance net, beginning of year
Deferred rent
Canadian and U.S. operating losses carried forward
Property and equipment, including store impairment
Stock options
Financing fees and IPO-related costs
Foreign exchange gain on derivative financial instrument
Unrealized foreign exchange gain on intercompany advances
Lease inducement
Unrecognized deferred income tax asset
Provisions for onerous contracts
Other
Deferred income tax assets net, end of year
18. SELLING, GENERAL AND ADMINISTRATION EXPENSES
Included in selling, general and administration expenses are the following expenses:
February 2, February 3,
2019
$
5,194
101
3,349
1,952
442
(609)
(62)
(99)
120
(10,961)
544
29
-
2018
$
14,375
(222)
(1,180)
3,387
(2,245)
(604)
183
196
(149)
(9,789)
1,447
(205)
5,194
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
Net Provision for onerous contracts (a)
Stock-based compensation
Executive and employee separation costs related to salary
Strategic review and proxy contest costs
ERP project termination
Other selling, general and administration
(a) Net provision for onerous contract includes additions, reversals and utilization.
71
For the year ended
February 2, February 3, January 28,
2018
$
65,888
8,431
1,474
82
15,069
7,854
2,021
2,033
-
-
29,078
131,930
2019
$
68,324
6,904
1,298
151
9,960
552
211
1,280
3,593
2,496
30,953
125,722
2017
$
61,143
8,069
758
356
7,516
8,140
2,264
835
-
-
25,675
114,756
Table of Contents
19. EARNINGS PER SHARE
The following reflects the loss and share data used in the basic and diluted EPS computations:
Net loss for basic EPS
February 2, February 3, January 28,
2018
$
(28,501)
2019
$
(33,539)
2017
$
(3,688)
Weighted average number of shares outstanding — basic and diluted
25,967,836 25,716,186 24,699,290
For the years ended February 2, 2019, February 3, 2018, and January 28, 2017, as a result of the net loss during the year, the
stock options and RSUs disclosed in Note 15 are anti‑dilutive.
20. RELATED PARTY DISCLOSURES
Transactions with related parties are measured at the exchange amount, being the consideration established and agreed to by
the related parties.
During the year ended February 2, 2019, the Company purchased merchandise from a company controlled by one of its
executive employees amounting to $241 [February 3, 2018 — $87; January 28, 2017 — nil]. Subsequent to year end, the Company
extended its relationship by entering into an agreement for the purchase and sale of administrative and infrastructure services.
In February 2019, the Company entered into an arrangement with a related party of the controlling shareholder for the
development of reporting and consulting services.
During the year ended February 2, 2019, the Company reimbursed Rainy Day Investments Ltd. (“Rainy Day Investments”),
a controlling shareholder $957 for third-party costs incurred by it in connection with the proxy contest which culminated at the
Company’s annual meeting held on June 14, 2018. This reimbursement was approved by the independent members of the Board of
Directors of the Company. This amount is included in selling, general and administration expenses.
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:
February 2, February 3, January 28,
2018
$
2019
$
2017
$
Wages, salaries ,bonus and director fees
Termination benefits
Stock-based compensation
Total compensation earned by key management personnel
2,706
1,025
101
3,832
4,071
1,485
1,809
7,365
3,434
719
1,377
5,530
72
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21. SEGMENT INFORMATION
An operating segment is a component of the Company that engages in business activities from which it may earn revenues
and incur expenses. The Company has reviewed its operations and determined that each of its retail stores represents an operating
segment. However, because its retail stores have similar economic characteristics, sell similar products, have similar types of
customers, and use similar distribution channels, the Company has determined that these operating segments can be aggregated at a
geographic level. As a result, the Company has concluded that it has two reportable segments, Canada and the U.S., that derive
their revenues from the retail and online sale of tea, tea accessories, and food and beverages. The Company’s Chief Executive
Officer (the chief operating decision maker or “CODM”) makes decisions about resources 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
73
February 2, February 3, January 28,
2018
$
156,125
49,470
18,420
224,015
2019
$
152,761
44,436
15,556
212,753
2017
$
143,280
53,807
18,897
215,984
Table of Contents
Property and equipment and intangible assets by country are as follows:
Canada
US
Total
February 2, February 3, January 28,
2018
$
37,234
3,763
40,997
2019
$
27,996
1,470
29,466
2017
$
41,432
12,686
54,118
Results from operating activities before corporate expenses per country are as follows:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses (allocated)
Impairment of property and equipment
Onerous contracts provision (recovery)
Results from operating activities before corporate expenses
Selling, general and administration expenses (non-allocated)
Results from operating activities
Finance costs
Finance income
Loss before income taxes
74
For the year ended
February 2, 2019
US
$
43,323
25,170
18,153
18,175
2,240
(1,482)
(780)
Canada
$
169,430
89,604
79,826
57,902
7,719
2,034
12,171
Consolidated
$
212,753
114,774
97,979
76,077
9,960
552
11,391
39,134
(27,743)
1,614
(700)
(28,657)
Table of Contents
Sales
Cost of sales
Gross profit
Selling, general and administration expenses (allocated)
Impairment of property and equipment
Provision for onerous contracts
Results from operating activities before corporate expenses
Selling, general and administration expenses (non-allocated)
Results from operating activities
Finance costs
Finance income
Loss before income taxes
Sales
Cost of sales
Gross profit
Selling, general and administration expenses (allocated)
Impairment of property and equipment
Provision for onerous contracts
Results from operating activities before corporate expenses
Selling, general and administration expenses (non-allocated)
Results from operating activities
Finance costs
Finance income
Loss before income taxes
75
For the year ended
February 3, 2018
US
$
38,728
23,389
15,339
18,302
9,955
6,102
(19,020)
Canada
$
185,287
93,383
91,904
54,884
5,114
1,752
30,154
Consolidated
$
224,015
116,772
107,243
73,186
15,069
7,854
11,134
35,821
(24,687)
2,371
(567)
(26,491)
For the year ended
January 28, 2017
US
$
35,604
21,061
14,543
16,584
6,400
7,713
(16,154)
Canada
$
180,380
86,473
93,907
49,466
1,116
427
42,898
Consolidated
$
215,984
107,534
108,450
66,050
7,516
8,140
26,744
33,050
(6,306)
76
(479)
(5,903)
Table of Contents
22. FINANCIAL RISK MANAGEMENT
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 loss in the amount of $123.
The Company’s foreign exchange exposure is as follows:
Cash
Accounts receivable
Accounts payable
February 2, February 3,
2019
US$
2018
US$
267
1,142
3,869
5,686
882
2,555
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 entered into forward contracts to fix the exchange rate of 80% to 90% of its expected U.S. dollar inventory
purchasing requirements, through September 2018. A forward foreign exchange contract is a contractual agreement to buy a
specific currency at a specific price and date in the future. The Company designated the forward contracts as cash flow hedging
instruments under IFRS 9. This has resulted in mark-to-market foreign exchange adjustments, for qualifying hedged instruments,
being recorded as a component of other comprehensive loss for the years ended Februay 2, 2019 and February 3, 2018. As at
February 2, 2019 and February 3, 2018, the designated portion of these hedges was considered effective.
The Company had no foreign exchange contracts outstanding as at February 2, 2019.
The nominal and contract values of foreign exchange contracts outstanding as at February 3, 2018 are as follows:
Purchase contracts
U.S. dollar
Range of
Contractual
exchange rate
Nominal
Nominal
value
US$
value
C$
1.2221 - 1.3050
24,100
30,033
Term
February 2018 to
September 2018
Unrealized
gain/(loss)
C$
(229)
Market Risk — Interest Rate Risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes
in market interest rates. Financial instruments that potentially subject the Company to cash flow interest rate risk include financial
assets and liabilities with variable interest rates and consist 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 February 2, 2019 and February 3, 2018, the Company did
not have any borrowings on the Revolving Facility.
76
Table of Contents
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 February 2, 2019, the Company had $42.1 million in cash. In addition, the Company has a Revolving Facility of
$15,000, the full amount of which remained un-drawn as at February 2, 2019. Access to this Facility is further described in Note
14.
The Company expects to finance its working capital needs, store renovations, and investments in infrastructure through cash
flows from operations and cash on hand. The Company expects that its trade and other payables will be discharged within 90 days.
The following table summarizes the obligations as of February 2, 2019 and February 3, 2018, and the effect such
obligations are expected to have on liquidity and cash flows in future periods.
February 2, 2019
Payments due by period
less than Between More than
Trade and other payables
Operating lease obligations
Purchase obligations
18,251
116,772
9,146
144,169
Total
1 year
Trade and other payables
Operating lease obligations
Purchase obligations
Credit Risk
14,392
134,965
8,820
158,177
Total
1 year
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. As a result, expected credit loss on these financial assets is not significant.
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. There were no outstanding derivative financial instruments at February 2, 2019.
77
1 and 5 years
-
66,790
-
66,790
18,251
21,089
9,146
48,486
5 years
-
28,893
-
28,893
February 3, 2018
Payments due by period
less than Between More than
1 and 5 years
—
86,844
—
86,844
14,392
19,840
8,820
43,052
5 years
—
28,281
—
28,281
Table of Contents
The classification of financial instruments at February 3, 2018, 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
Derivative financial instruments — foreign forward exchange contracts
Carrying
value
$
Fair
value
$
239
468
239
468
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 forward contracts is determined using forward exchange rates at the end of the reporting period [Level 2].
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.
23. MANAGEMENT OF CAPITAL
The Company’s capital is composed of shareholders’ equity as follows:
Cash
Shareholder s equity [excluding accumulated other comprehensive income]
Total capital under management
78
February 2, February 3,
2019
$
42,074
65,959
108,033
2018
$
63,484
99,613
163,097
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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 and capital expenditures for its
store renovation program as well as information technology and infrastructure.
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.
As of February 2, 2019, the Company was in default under certain covenants contained in our Credit Agreement, including
our failure to maintain a fixed charge coverage ratio of 1.10:1.00 and certain reporting requirements. BMO has temporarily agreed
to forbear from exercising remedies under the Credit Agreement, however the Company cannot borrow under the Credit
Agreement. During the year ended February 3, 2018 the Company also considered its access to the Revolving Facility as a source
for funding its cash requirements, although it had not drawn on the Revolving facility at February 3, 2018.
24. 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 February 3,
2018, 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.
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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
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act as a process,
designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by the
Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Internal control over
financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and
disposition of assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial
statements; providing reasonable assurance that receipts and expenditures are made only in accordance with management and board
authorizations; and providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and
even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and
presentation.
Management, with the participation of the Company’s principal executive and financial officers, assessed our internal
control over financial reporting as of February 2, 2019, the end of our fiscal year. Management based its assessment on the 2013
framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management’s assessment included evaluation of elements such as the design and operating effectiveness
of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this
assessment, management has concluded that our internal control over financial reporting was effective as of the end February 2,
2019.
Changes in Internal Control over Financial Reporting
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 February 2, 2019 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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PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following is a list of the names and ages of our directors and officers as of April 17, 2019, and a brief summary 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.
Name
Herschel Segal
Frank Zitella, CPA, CMA, CA
Sarah Segal
Pat De Marco, CPA, CA
Susan L. Burkman
Anne Darche
Emilia Di Raddo, CPA, CA
Max Ludwig Fischer, Ph.D
Peter Robinson
Age
88
54
34
58
65
63
61
68
66
Position
Interim Chief Executive Officer, Chairman of the Board and Director
Chief Financial Officer, Chief Operating Officer and Corporate Secretary
Chief Brand Officer
Lead Director
Director
Director
Director
Director
Director
Herschel Segal, Interim Chief Executive Officer and Chairman of the Board. Mr. Segal, 88, was appointed Chairman of
the Board of Directors and Interim Chief Executive Officer of the Company on June 14, 2018. Since January 1969, Herschel Segal
has been President and Chief Executive Officer of Rainy Day Investments Ltd., an investment company. In 1959, Mr. Segal
founded Le Château Inc., a clothing retailer listed on the TSX Venture Exchange, and served as its Chief Executive Officer until
September 2006. Mr. Segal served as Executive Chairman of Le Château Inc. until February 2007 and remains a director. Mr. Segal
holds a Bachelor of Arts degree from McGill University, Montreal, Québec. Mr. Segal is a founder of DAVIDsTEA and a resident
of Québec, Canada.
Frank Zitella, CPA, CMA, CA, Chief Financial Officer, Chief Operating Officer and Secretary. Mr. Zitella, 54, joined the
Company on December 10, 2018 as Chief Financial Officer and Corporate Secretary and on April 26, 2019 assumed
responsiblitieas as the Company’s Chief Operating Officer. Mr. Zitella has close to 30 years of finance, strategic planning and
corporate tax planning experience and served for over eleven years as the Vice President and Chief Financial Officer of DST Health
Solutions, LLC, a subsidiary of SS&C Technologies Holdings, Inc. (Nasdaq: SSNC), and for over eight years as the Chief Financial
Officer of International Financial Data Services, a joint venture between State Street Bank and SS&C Technologies Holdings, Inc.
Mr. Zitella received his Bachelor of Commerce degree from Concordia University, Montreal, Québec and his Graduate Diploma in
Public Accountancy from McGill University, Montreal, Québec. Mr. Zitella is a resident of Québec, Canada.
Sarah Segal, Chief Brand Officer. Ms. Segal, 34, served as the President and Head of Product Development and Tea
Department for DAVIDsTEA from December 2010 to September 2012. Since May 2013, Ms. Segal has served as the CEO of the
retail company SQUISH Candies, based in Montreal, Québec. In 2017, Ms. Segal was appointed VP, Product Development &
Innovation at DAVIDsTEA. Most recently, Ms. Segal was appointed Chief Brand Officer. Ms. Segal received a Bachelor of Arts
degree in Environmental Health from McGill University, Montreal, Québec, and an M.Sc. degree in Water Science, Policy and
Management from Oxford University, Oxford, England. Ms. Segal is a resident of Québec, Canada.
Pat De Marco, CPA, CA, Lead Director (June 14, 2018 to present). Mr. De Marco, 58, has served as President and Chief
Operating Officer of Viau Food Products Inc. of Laval, Québec, a large Canadian processor of beef and pork products, since 2008.
Prior thereto, Mr. De Marco held senior executive positions at Moores Retail Group Inc., Canada’s leading menswear retailer, from
1995 as Chief Financial Officer and from 2002 as President. Prior to that, Mr. De Marco was a partner at Ernst & Young LLP,
where for 13 years he audited and consulted for companies in the manufacturing, real estate and consumer goods sectors. Mr. De
Marco is a CPA, and holds a Bachelor of Commerce degree from Concordia University, Montreal, Québec. Mr. De Marco is a
resident of Québec, Canada.
Susan L. Burkman, Director (August 23, 2018 to present). Ms. Burkman, 65, is an experienced financial consulting
executive. Throughout her 35 years in the investment banking industry, she has successfully led equity, M&A, and valuation and
fairness opinion transactions in excess of $6 billion for Canadian companies across numerous industries. Since 2007, she has been
majority shareholder and President of Burkman Capital Corporation, an investment banking boutique located in Bromont, Québec.
From 1997 to 2007, Ms. Burkman was a partner at Griffiths McBurney and Partners and a Director at GMP Securities where she
led the Investment Banking Group in Montreal. Prior thereto, Ms. Burkman was President of Mathurin-Burkman Inc., an
investment banking boutique, a Vice-President and member of the Board of Directors of McNeil Mantha Inc., then a publicly-
traded Canadian securities brokerage firm, and held positions with Wood Gundy Securities in Toronto and with the Corporate
Banking division of Bank of Montreal. Ms. Burkman started her professional career as an auditor with KPMG at its Pittsburgh,
Pennsylvania and Toronto, Ontario offices. Since 2012, Ms. Burkman has been a member of the Board of Directors of Olameter
Inc., a provider of outsourced utility solutions in North America based in Montreal. Ms. Burkman holds both a Bachelor of Arts
degree and Masters of Business Administration degree from the University of Pittsburgh and became a Certified Public Accountant
in Pennsylvania. Ms. Burkman is a resident of Québec, Canada.
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Anne Darche, Director (August 23, 2018 to present). Ms. Darche, 63, is a marketing and consumer-trends specialist with a
20-year career in Montreal advertising agencies, primarily as a co-owner, VP for strategic planning and president. The agency she
helped build and administer, Allard Johnson, became one of Canada’s leading advertising firms. A respected speaker, she has been
heard regularly on Radio-Canada sharing her views on trends, breakthroughs and market disruptions. Ms. Darche serves as a
director of Germain Hôtels, a company based in Québec City that owns and operates hotels across Canada, KDC, a leading North
American contract manufacturer of health and beauty-care products, and 48North Cannabis Corp., a company listed on the TSX
Venture Exchange whose wholly-owned subsidiary is a licensed producer of cannabis in Canada. She is also chair of MU, a not-for-
profit organization devoted to beautifying the city of Montreal by creating murals that are anchored in local communities. Ms.
Darche holds a Bachelor of Arts degree in graphic design from Université Laval, Québec City, Québec and a Masters of Business
Administration degree from Université de Sherbrooke, Sherbrooke, Québec and is a Chartered Director. Ms. Darche is a resident of
Québec, Canada.
Emilia Di Raddo, CPA, CA, Director (2014 to present). Ms. Di Raddo, 61, has been a director of the Company since 2012,
except between January 2013 and March 2014. She has been the President of Le Château Inc., a company listed on the TSX
Venture Exchange, since 2000, has served on its Board of Directors since 2001 and was Chief Financial Officer from 1996 to 2000.
Prior thereto, Ms. 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. Ms. Di Raddo received a Bachelor of Commerce degree and a Diploma in
Accountancy from Concordia University, Montreal, Québec, and is also a chartered accountant and a CPA. Ms. Di Raddo is a
resident of Québec, Canada.
Max Ludwig Fischer, Ph.D, Director (June 14, 2018 to present). Mr. Fischer, 68, was Professor of German and
International Studies at Willamette University, Salem, Oregon, where he also held administrative positions, including Chair of the
Department of German and Russian Studies. Since 2008, Mr. Fischer has been a consultant to the President and CEO of Rancho La
Puerta in Tecate, Mexico, a consistent winner of Travel & Leisure’s “Best Spa Destination”, as well as a Bi-Annual Lecturer on
Nutrition and Natural Healing Modalities at Rancho La Puerta. In 2018, Mr. Fischer was an invited lecturer on “The Concept of
Holistic Living” at the Omega Institute, Rhinebeck, New York. Mr. Fischer holds a Ph.D. in Philosophy and a Masters of Arts
degree from the University of Colorado, Boulder, Colorado, and a Bachelor of Arts degree in English and sociology from the
University of Regensburg, Regensburg, Germany. Mr. Fischer is the author of numerous publications on 20th century literature,
exile literature and intercultural communications. In addition to his expertise in literature, Mr. Fischer has a deep interest in
psychology, holistic living and natural nutrition. Mr. Fischer is a resident of Ontario, Canada.
Peter Robinson, Director (June 14, 2018 to present). Mr. Robinson, 66, possesses diverse leadership experience spanning
more than four decades in business, government and the non-profit sectors. He was Chief Executive Officer of the David Suzuki
Foundation from 2008 to 2017 and, from 2000 to 2008, was Chief Executive Officer of Mountain Equipment Co-op, a Canadian
consumers’ cooperative that sells outdoor recreation gear and clothing exclusively to its members. From 1983 to 2000, Mr.
Robinson held a number of positions with BC Housing, a government agency, including Chief Executive Officer from 1999 to
2000. Mr. Robinson holds a Bachelor of Arts degree in geography from Simon Fraser University, Burnaby, British Columbia, and a
Master of Arts degree in Conflict Analysis and Management and a Doctor of Social Sciences degree, both from Royal Roads
University, Victoria, British Columbia. He has been extensively involved in community and humanitarian work, including serving
as a director from 2012 to 2017 of Imagine Canada, a national charitable organization, governor of the Canadian Red Cross Society
from 2010 to 2012, and Chair of the Board of Governors and Chancellor of Royal Roads University from 2007 to 2010. Mr.
Robinson is a resident of British Columbia, Canada.
Sarah Segal, the Chief Brand Officer of DAVIDsTEA, is the daughter of Herschel Segal, Chairman of the Board of
Directors and Interim Chief Executive Officer of the Company and the owner of Rainy Day Investments Ltd., which controls
approximately 46% of the outstanding shares of DAVIDsTEA.
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 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;
establishing, maintaining and overseeing the Company’s related party transaction policy, including overseeing the process for approval of all
related-party transactions involving executive officers and directors; and
providing an open avenue of communication among the independent accountants, financial and senior management and the Board.
Independence of Audit Committee Members
The members of the Audit Committee are Pat De Marco (chair), Susan L. Burkman and Peter Robinson. The Board has
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.
Audit Committee Financial Experts
The Board has determined that Pat De Marco and Susan L. Burkman are “Audit Committee financial experts”. All members
of the 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 an opinion 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 February 2, 2019 and Management’s Discussion and Analysis of Financial Condition and Results of
Operation.
The Audit Committee has also 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 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 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’s review 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 the Company’s audited consolidated financial statements for the year
ended February 2, 2019 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.
Pat De Marco, Chair
Susan L. Burkman
Peter Robinson
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Corporate Governance
Statement of Corporate Governance Practices
As a reporting issuer in the Canadian Province of Québec with securities listed on the NASDAQ, DAVIDsTEA complies
with all applicable rules adopted by the AMF and the SEC. As a Canadian issuer, DAVIDsTEA is exempt from complying with
many of the NASDAQ Corporate Governance Standards, provided that DAVIDsTEA complies with Canadian governance
requirements. Policy Statement 58-201 to Corporate Governance Guidelines of the AMF provides guidance on governance
practices for reporting issuers in the Province of Québec. Québec Regulation 58-101 respecting Disclosure of Corporate
Governance Practices requires such issuers to make prescribed disclosure regarding their governance practices. The Board is of the
view that DAVIDsTEA’s corporate governance practices satisfy the foregoing requirements of the Province of Québec, as reflected
in the disclosure made below. The Board of Directors has approved the disclosure of DAVIDsTEA’s corporate governance practices
described below, on the recommendation of the Corporate Governance and Nominating Committee (“CGNC”).
Board of Directors
Independence
The Board of Directors consists of seven directors, six of whom are non‑employee directors. Herschel Segal, Pat De Marco,
Emilia Di Raddo, Max Ludwig Fischer and Peter Robinson were elected as directors at the annual meeting of shareholders held on
June 14, 2018. Susan L. Burkman and Anne Darche were appointed as directors on August 23, 2018 to fill vacancies created by the
resignations of two directors. Directors are elected or appointed to hold office until the next annual meeting of shareholders or until
their earlier resignation or removal from office in accordance with the Company’s by-laws.
Five of the seven directors comprising the Board of Directors are considered “independent” pursuant to Section 1.4 of
Québec Regulation 52-110 respecting Audit Committees. Under that provision, Susan L. Burkman, Anne Darche, Pat De Marco,
Max Ludwig Fischer and Peter Robinson are considered independent, whereas Herschel Segal is not considered to be independent
in that he is an executive officer of the Company and Emilia Di Raddo is not considered to be independent in light of her long-
standing business relationship with Herschel Segal. 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, 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 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.
As Herschel Segal, Chairman of the Board, is not an independent director, the Board of Directors appointed Pat De Marco,
an independent director, as “Lead Director” on September 23, 2018 upon the recommendation of the CGNC.
The Board of Directors has adopted a Charter of the Board of Directors delineating its principal roles and responsibilities.
The Charter of the Board of Directors is available on our Investor Relations website at http://ir.davidstea.com under “Corporate
Governance” and on SEDAR at www.sedar.com.
Chair of the Board
Herschel Segal, Interim Chief Executive Officer and Chairman of the Board, chairs meetings of the Board of Directors. Mr.
Segal is not an independent director. As a result, on September 23, 2018, upon the recommendation of the CGNC, the Board of
Directors appointed Pat De Marco, an independent director, as “Lead Director”. As Lead Director, Mr. De Marco provides
leadership in ensuring Board effectiveness and is responsible for facilitating and encouraging open and effective communication
between management of the Company and the Board of Directors, consulting with the Chairman of the Board in setting the agenda
for Board meetings, ensuring Board committees function appropriately, chairing meetings of the independent members of the Board
of Directors and chairing Board of Directors’ meetings if the Chairman of the Board is absent.
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.
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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 is 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 committees.
Interim Chief Executive Officer
The primary responsibility of the Interim 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 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 develops yearly goals and objectives that the CEO is responsible for meeting. The corporate objectives that the
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 provide that the Board shall consist of not less than three and not more than fifteen 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.
Committees of the Board
The Board has established the Audit Committee, the Human Resources and Compensation Committee (“HRCC”) and the
CGNC 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. Independent consultants may also be periodically retained to assist the HRCC in fulfilling its responsibilities
when needed. As required in its mandate, the HRCC is composed of a majority of independent directors, including the Chairman of
the committee who must qualify as an independent director. The three current members of the HRCC are Max Ludwig Fischer
(chair), Anne Darche and Emilia Di Raddo. The HRCC Charter is available on our Investor Relations website at
http://ir.davidstea.com under “Corporate Governance” and on SEDAR at www.sedar.com.
Corporate Governance and Nominating Committee
The three current members of the CGNC are Peter Robinson (chair), Pat De Marco and Max Ludwig Fischer. The Charter
of the CGNC is available on our Investor Relations website at http://ir.davidstea.com under “Corporate Governance” and on
SEDAR at www.sedar.com.
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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
Board meeting without the presence of management. Such meetings are chaired by the Lead Director. Similarly, each of the Board
committees meets without management present under the chairmanship of the committee Chair at least annually and may meet at
each committee meeting without the presence of management.
Ethical Business Conduct
The Company’s Code of Ethics for Senior Managers and Financial Officers (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. The Code of Ethics is available on our Investor Relations website at http://ir.davidstea.com under
“Corporate Governance” 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 Head of Human Resources
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. The results of the questionnaires are
compiled by the 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 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, and our 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 members of the CGNC 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.
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The Board does not impose nor does it believe that it should establish term limits or retirement age limits for its directors, as
such limits may cause the loss of experience and expertise important to the optimal performance 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 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 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 DAVIDsTEA’s stores. Management makes presentations to the Board on a range of topics
that are relevant to the Company’s 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 are also provided with Board and Board committee materials in advance
of regularly-scheduled meetings. Directors 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 “2018 Summary Compensation Table” below. In Fiscal 2018, our “Named Executive Officers” and their positions
were as follows:
·
·
·
·
·
·
Herschel Segal, Interim Chief Executive Officer and Chairman of the Board since June 14, 2018
Joel Silver, former President and Chief Executive Officer
Frank Zitella, Chief Financial Officer since December 10, 2018 and Chief Operating Officer since April 26, 2019
Joe Bongiorno, Interim Chief Financial Officer from September 24, 2018 to December 9, 2018
Howard Tafler, former Chief Financial Officer
Sarah Segal, Chief Brand Officer since August 21, 2018
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
Processes and Procedures for Compensation Decisions
Our HRCC is responsible for the executive compensation programs for our executive officers and reports to our Board on its
discussions, decisions and other actions. Our HRCC reviews and approves corporate goals and objectives relating to the
compensation of our Chief Executive Officer, evaluates the performance of our Chief Executive Officer in light of those goals and
objectives and determines and approves the compensation of our Chief Executive Officer based on such evaluation. Our HRCC has
the sole authority to determine our Chief Executive Officer’s compensation. In addition, our HRCC, in consultation with our Chief
Executive Officer, reviews and approves all compensation for the other officers and directors. Our Chief Executive Officer also
makes compensation recommendations for our other executive officers and initially proposes the corporate and departmental
performance objectives under our Executive Incentive Compensation Plan to the HRCC.
The HRCC is authorized to retain the services of one or more executive compensation and benefits consultants or other outside
experts or advisors as it sees fit, in connection with the establishment of our compensation programs and related policies.
The Insider Trading Policy
The Company has adopted an insider trading policy that applies to the equity transactions of all of the employees, including
most notably of directors and officers, including Named Executive Officers. Under the policy, transactions by covered individuals
in the Company’s securities are authorized only during insider trading windows (which open the second full day after financial
results are released each quarter to permit market adjustments), and all transactions must be pre-approved and cleared by the
Corporate Secretary so as to avoid any 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 the
securities without the full risks and rewards of ownership, such transactions can cause the interests of such holder not to be aligned
with our 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 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 with respect to the Company.
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Table of Contents
Short-Term Incentive Plan
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. The HRCC determined that the most meaningful
measure of successful growth was Comparable Sales and selected other financial objectives in line with the Company’s short-term
corporate goals, which, together with Comparable Sales, would form the basis for the annual incentive program. The HRCC
reviews annually the weight attributed to each financial objective. Therefore, for fiscal 2018, the annual incentive formula
attributed 75% to corporate Comparable Sales growth and 25% to other 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 February 2, 2019 the Company did not meet the annual incentive program targets.
Mid- and Long-Term Incentive Plans
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. All equity and equity‑based awards, including awards to the Named Executive
Officers, are made under the 2015 Omnibus Plan. Accordingly, the RSU and option awards made in Fiscal 2018 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.
The target award values for the Named Executive Officers are indicated in the table below. Actual Fiscal 2018 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.
Name
Joel Silver (1)
Howard Tafler (2)
Notes:
(1) Joel Silver was President and Chief Executive Officer until June 14, 2018.
(2) Howard Tafler was Chief Financial Officer until September 24, 2018.
89
Target
Value
Maximum
Value
(% of salary)
100%
35%
150%
50%
Table of Contents
Summary Compensation Table
The following table illustrates the compensation paid to the Named Executive Officers for the last two 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 1.3095 for 2018, and 1.2393 for 2017 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.
Non-equity incentive
plan compensation
Stock
Salary Bonus(7) Awards(8) Awards(9) plan(10)
plan
compensation(11) Compensation
Long-
term
Option incentive incentive
Annual
All
other
Total
Name and principal
position
Herschel Segal (1)
Interim Chief Executive
Officer and
Chairman of the Board
Year
2018 190,913
($)
($)
-
($)
62,250
2017
-
-
46,500
($)
($)
($)
($)
-
-
-
-
Joel Silver (2)
Officer
2018 110,788
2017 285,521
- 300,002
- 199,969 200,126 107,480
- 101,718
Frank Zitella (3)
Chief Financial Officer
2018
2017
38,183
-
-
-
-
-
-
-
-
-
Joe Bongiorno (4)
Interim Chief
Officer
Howard Tafler (5)
Former Chief
Officer
2018 126,129
-
21,569
-
2,138
Financial
2017
109,581
-
7,991
-
-
2018 128,425
-
92,742
-
11,283
Financial
2017
194,515
14,903
55,544
-
18,953
Sarah Segal (6)
Chief Brand Officer
2018 175,640
87,084
2017
-
-
57,517
46,500
-
-
-
-
Notes:
-
-
-
-
-
-
-
-
-
-
-
-
-
-
($)
253,163
46,500
724,958
8,069
1,237,466
801,165
-
-
38,183
-
731
150,567
813
118,385
731
233,181
813
284,728
-
-
233,157
133,584
(1) Herschel Segal was appointed Interim Chief Executive Officer and Chairman of the Board on June 14, 2018.
(2) Joel Silver was appointed President and Chief Executive Officer on March 20, 2017 and held such positions until June 14, 2018.
(3) Frank Zitella was appointed Chief Financial Officer and Corporate Secretary on December 10, 2018 and Chief Operating Officer on April 26, 2019.
(4) Joe Bongiorno served as Interim Chief Financial Officer from September 24, 2018 to December 9, 2018. Mr. Bongiorno is Director of Finance of
the Company.
(5) Howard Tafler was appointed Interim Chief Financial Officer effective August 14, 2017 and Chief Financial Officer effective December 7, 2017, a
position he held until September 24, 2018.
(6) Sarah Segal was appointed Chief Brand Officer on August 21, 2018 and prior thereto was the Company’s VP Product Development and Innovation.
(7) Amounts shown represent retention bonuses
(8) Amounts shown reflect the aggregate grant date fair market value of time-vesting RSUs granted to Named Executive Officers on April 19, 2018 and
April 18, 2017 (except for grant made to Mr. Silver in fiscal 2017 whose grant was made on March 20, 2017 upon his 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
15 to the Company’s Consolidated Financial Statements for the year ended February 2, 2019.
(9) 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 two fiscal years
(10) Represents the awards earned during the year under the Short-Term Annual Incentive Program.
(11) The amounts shown represent amounts paid to Mr. Silver pursuant to his separation agreement, the monthly car allowance for Mr. Silver, and the
professional association fees for Mr. Tafler and Mr. Bongiorno.
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Table of Contents
Incentive Plan Awards
Outstanding share-based awards and option-based awards
The following table sets out information regarding outstanding awards in U.S. dollars held by the Named Executive
Officers as of February 2, 2019.
Share Awards
Option Awards
Number of
securities
Number of
securities
underlying underlying
unexercised unexercised Option
exercise
price(8)
($)
exercisable(7) unexercisable
options -
options -
(#)
(#)
-
-
-
Grant
Date
Number of
shares
of shares
Market
value
or units of or units of
stock
that
have not
vested(10)
stock
that
have not
vested(11)
(#)
15,000
($)
24,000
Option
expiration Grant
Date
- 2018-06-14
date(9)
-
Name
Herschel Segal (1)
Interim Chief Executive
Officer and
Chairman of the Board
Joel Silver (2)
Former President and Chief
Executive Officer
Frank Zitella (3)
Chief Financial Officer
Joe Bongiorno (4)
Interim Chief Financial
Officer
Howard Tafler (5)
2016-04-
15
Former Chief Financial
Officer
Sarah Segal (6)
Chief Brand Officer
Notes:
2017-03-
20
-
53,225
7.70
20
2024-03-
2018-04-19
21,803
34,885
-
-
-
-
-
-
-
-
2013-02-
22
4,500
-
0.59
22
2020-02-
2018-04-19
2017-04-18
6,270
10,032
915
360
7,545
1,464
576
12,072
2016-04-15
2019-09-
2,374
-
11.19
21
-
-
-
-
-
-
-
- 2018-04-19
16,720
26,752
(1) Herschel Segal was appointed Interim Chief Executive Officer and Chairman of the Board on June 14, 2018.
(2) Joel Silver was appointed President and Chief Executive Officer on March 20, 2017 and held such positions until June 14, 2018.
(3) Frank Zitella was appointed Chief Financial Officer and Corporate Secretary on December 10, 2018 and Chief Operating Officer on April 26, 2019.
(4) Joe Bongiorno served as Interim Chief Financial Officer from September 24, 2018 to December 10, 2018. Mr. Bongiorno is Director of Finance of
the Company.
(5) Howard Tafler was appointed Interim Chief Financial Officer effective August 14, 2017 and Chief Financial Officer effective December 7, 2017, a
position he held until September 24, 2018.
(6) Sarah Segal was appointed Chief Brand Officer on August 21, 2018 and prior thereto was the Company’s VP Product Development and Innovation.
(7) Unless earlier terminated, forfeited, relinquished or expired, the options will vest as to ¼th 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.
(8) For option awards granted after the IPO, the exercise price is equal to the closing price of our common stock on the NASDAQ Global Market on the
day the award was granted. 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 February 3, 2019,
the last business day of Fiscal 2018 of C$1 = US$1.3095. 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.
(9) All stock options have a seven‑year term.
(10) 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 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.
(11) The market value is calculated by multiplying the closing price of the Shares on the NASDAQ Global Market on February 2, 2019, being the last
business day of the fiscal year, which closing price was US$1.60 per Share, by the number of RSUs that had not vested as of such date.
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Table of Contents
Equity Compensation Plan Information
The table below illustrates the status of the shares reserved for issuance under the Company’s equity-based incentive plans.
Number of
securities
available
for future
issuance
Weighted
Number of
securities to
be
average
issued upon exercise price under equity
compensation
plans
exercise of
of
Plan Category
Equity compensation plans approved by security
holders
Plan Name
Amended and Restated Equity
Plan(1)
2015 Omnibus Equity Incentive Plan
Incentive
Total
outstanding outstanding
options,
warrants
and rights(2)
(#)
(a)
options,
warrants
and rights(3)
(4)
($USD)
(b)
(excluding
securities
reflected
in column (a))
(#)
(c)
66,100
572,118
638,218
2.01
8.68
—
867,882
867,882
(1) Since 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.
(2) Reflects outstanding stock options and RSUs.
(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 1.3095.
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Termination and Change in Control Benefits
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.
Frank Zitella
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.
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 three-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 five 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 ten 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.
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Table of Contents
Under the 2015 Omnibus Plan, upon a termination by the Company other than for Cause within twelve 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.
Compensation of Directors
Director Compensation
The Company’s compensation policy for directors is designed to enable the Company to attract and retain highly qualified
non-employee directors. Under the policy, all non-employee directors received the cash and equity compensation set forth below.
Board Chair
Annual retainer
Annual target equity grant
Interim CEO
Annual retainer
Board member
Annual retainer
Annual target equity grant
Board meeting fees
Executive Chairman
Annual retainer
Lead Director
Annual retainer
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
Corporate Governance and Nominating Committee Chair
Additional annual retainer
Corporate Governance and Nominating Committee meeting fees
Special Committee Chair(1)
Monthly retainer
Special Committee member
Monthly retainer
Notes:
C$100,000
15,000 RSUs or DSUs, at the option of the Director
C$50,000
C$50,000
7,500 RSUs or DSUs, at the option of the Director
C$1,000 for attendance in person and $500 for teleconference
C$25,000
C$25,000
C$15,000 minimum
C$1,000 for attendance in person and $500 for teleconference
C$10,000 minimum
C$1,000 for attendance in person and $500 for teleconference
C$10,000 minimum
C$1,000 for attendance in person and $500 for teleconference
C$7,800
C$3,900 (US$3,000 for US Directors)
(1) On February 26, 2018, the Board formed a Special Committee of independent directors for the purpose of reviewing
strategic alternatives on behalf of the Company.
Under our non‑employee director compensation policy, annual retainers and meeting fees are paid in quarterly cash
payments. Equity grants generally will be made in the form of RSUs or DSUs granted under the 2015 Omnibus Plan and will
generally vest in full on the first anniversary of the grant date. Equity awards under the non‑employee director compensation policy
will be made at a date following the Company’s annual meeting of shareholders.
The following table sets out information concerning the compensation earned by our non‑employee directors during the
fiscal year ending February 2, 2019. Joel Silver received no additional compensation for services as director and, consequently, is
not included in this table. The compensation received by Mr. Silver as former President and Chief Executive Officer can be found
in the Summary Compensation Table above.
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Director Compensation Table
The following table sets out information concerning all amounts of compensation provided to the directors of the Company
who are not members of the management of the Company for the fiscal year ended February 2, 2019. All compensation is disclosed
in U.S. dollars. For Directors who receive a portion of their compensation in Canadian dollars, unless otherwise indicated, an
exchange of 1.3095 for 2018, and 1.2393 for 2017 has been used to convert to U.S. dollars, which represents the exchange rate of
the U.S. Federal Reserve Bank of New York at noon on the last day of each fiscal year, and which, in the Company’s opinion, is an
appropriate reflection of exchange rates variation during the year.
Fees
earned
or paid
in cash
($)
Stock
awards
($)
Option
awards
($)
Non-equity
incentive
compensation
plan
($)
Change in
pension
value and
non-
qualified
deferred
compensation
earnings
($)
All
other
compensation
($)
21,000
38,950
35,896
44,596
34,675
21,000
11,455
3,147
19,091
11,455
12,409
5,820
9,546
9,281
24,750
31,125
31,125
31,125
31,125
24,750
-
-
-
-
-
31,125
-
31,125
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
($)
45,750
70,075
67,021
75,721
65,800
45,750
11,455
3,147
19,091
11,455
12,409
36,945
9,546
40,406
Name
Anne Darche(1)
Emilia Di Raddo(2)
Max Ludwig Fischer(3)
Pat De Marco(4)
Peter Robinson(5)
Susan L. Burkman(6)
Gary O'Connor(7)
Lorenzo Salvaggio(8)
Maurice Tousson(9)
Kathleen C. Tierney(10)
Michael J. Mardy(11)
Roland Walton(12)
Tyler Gage(13)
M. William Cleman(14)
Notes:
(1) Appointed as a director on August 23, 2018.
(2) Elected as a director in 2014 to present.
(3) Elected as a director on June 14, 2018.
(4) Elected as a director on June 14, 2018.
(5) Elected as a director on June 14, 2018.
(6) Appointed as a director on August 23, 2018.
(7) Resigned on June 14, 2018.
(8) Resigned as a director on March 5, 2018
(9) Resigned on June 14, 2018.
(10) Resigned on June 14, 2018.
(11) Resigned on June 14, 2018.
(12) Roland Walton was elected as a director on June 14, 2018 and resigned on July 9, 2018.
(13) Resigned June 14, 2018
(14) Elected as a director on June 14, 2018 and resigned on July 26, 2018.
(15) Director fees were paid in cash in Canadian dollars except for Ms. Tierney and Messrs.Gage and Mardy, who are all U.S. residents. Their respective
compensation was converted to U.S. dollars at the time of payment.
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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Table of Contents
Value vested or earned during the year for directors
The following table sets out information regarding option-based awards and share-based awards that vested in the fiscal
year ended February 2, 2019 for our directors and former directors. All share based awards that vested in Fiscal 2018 are disclosed
in U.S. dollars.
Name
Tyler Gage
Gary O'Connor
Michael J. Mardy
Lorenzo Salvaggio
Sarah Segal
Kathleen C. Tierney
Maurice Tousson
Notes:
Non-equity
incentive
plan
compensation
-
Value earned
during
Share-based
awards -
Value vested
during
the year
($)
the year
($)
Option-
based
awards -
Value vested
during
the year(1)
(2)
(US $)
-
-
-
-
-
-
-
28,875
28,875
42,896
26,250
42,896
42,896
71,771
-
-
-
-
-
-
-
(1) Herschel Segal, Susan L. Burkman, Anne Darche, Pat De Marco, Max Ludwig Fischer and Peter Robinson, all current directors of the Company, do
not hold any stock options.
(2) M. William Cleman, Tyler Gage, Michael J. Mardy, David W. McCreight, Gary O’Connor, Lorenzo Salvaggio, Kathleen C. Tierney, Maurice
Tousson and Roland Walton, all former directors of the Company, did not hold any stock options.
(3) 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 February 2, 2019, the last business day of this fiscal year,
being $1.3095. 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 March 29, 2019, 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table shows, as of March 29, 2019, 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 March 29, 2019 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,
each of our Named Executive Officers, and
all directors and executive officers as a group.
Our major shareholders do not have voting rights that are different from our shareholders in general.
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Each shareholder’s percentage ownership is based on 26,011,817 common shares outstanding as of March 29, 2019.
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 17, 2019 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 17, 2019, 33,974 shares
were owned by 3 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 AST Trust Company, Montréal.
Name of beneficial owner
Beneficial Owners of more than 5% of our common shares and/or selling shareholders:
Rainy Day Investments Ltd.(1)
Named Executive Officers and Directors:
Herschel Segal(2)
Frank Zitella
Joe Bongiorno(3)
Sarah Segal(4)
Pat De Marco(5)
Emilia Di Raddo(6)
Max Ludwig Fischer(7)
Peter Robinson(8)
Susan L. Burkman(9)
Anne Darche
All executive officers and directors as a group(10)
Notes:
*
represents less than 1%.
Shares Beneficially Owned
as at April 17, 2019
Number of
shares
(#)
Percentage
of shares
(%)
12,012,538
46.18%
20,118
-
6,732
18,870
7,500
21,243
7,500
7,500
1,000
-
90,463
*
-
*
*
*
*
*
*
*
-
*
(1) Rainy Day Investments Ltd. (“Rainy Day”) is a company controlled by Herschel Segal, Chairman of the Board and Interim Chief Executive Officer
of the Company, 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) Herschel Segal holds 18,595 DSUs and 1,523 common shares.
(3) Joe Bongiorno holds 2,232 RSUs and options to purchase 4,500 common shares.
(4) Sarah Segal holds 11,680 DSUs and 7,190 RSUs.
(5) Pat De Marco holds 7,500 DSUs.
(6) Emilia Di Raddo holds 7,500 RSUs and 13,743 common shares.
(7) Max Ludwig Fischer also holds 7,500 RSUs.
(8) Peter Robinson holds 7,500 DSUs.
(9) Susan L. Bukman holds 1,000 common shares.
(10) Includes RSUs and DSUs vesting, and options to purchase common shares exercisable, within 60 days of April 17, 2019.
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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
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, at times when we are 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 seven directors that make up our board of directors are considered independent under Canadian securities laws
and the NASDAQ rules. Under these rules, Susan L. Burkman, Anne Darche, Pat De Marco, Max Ludwig Fischer and Peter
Robinson are considered independent, whereas Herschel Segal is not considered to be independent in that he is an executive officer
of the Company and Emilia Di Raddo is not considered to be independent in light of her long-standing business relationship with
Herschel Segal. 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, the independent members of the Board of Directors
frequently meet in the absence of members of management and the non-independent directors. An in camera session is 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.
Five of our seven directors that make up the Board of Directors are considered “independent” pursuant to Section 1.4 of
Québec Regulation 52-110 respecting Audit Committees. Under these rules, Pat De Marco, Susan L. Burkman, Anne Darche, Max
Ludwig Fischer and Peter Robinson are considered independent, whereas Emilia Di Raddo and Herschel Segal are not considered
to be independent as a result of their respective relationships with the Company or their relationships with shareholders. 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.
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Family Relationships
Sarah Segal, the Chief Branding Officer of DAVIDsTEA, is the daughter of Herschel Segal, who is the owner of Rainy Day
Investments Ltd. (“Rainy Day”). Rainy Day owns approximately 46% of the outstanding shares of the company. Mr. Segal is our
Interim Chief Executive Officer and the Chairman of our Board of Directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets out the aggregate fees billed to the Company for the fiscal years ended February 2, 2019 and
February 3, 2018 by EY:
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
All other fees (4)
Notes:
For the year ended
February 2, February 3,
2019
$
2018
$
518,500
-
111,181
-
629,681
478,000
15,000
73,845
-
566,845
(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,
translation services, 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.
All fees paid and payable by the Company to EY in Fiscal 2018 and Fiscal 2017 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 Chair 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.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Form 10-K:
(a)(1) Financial Statements
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 February 2, 2019 and February 3, 2018:
Consolidated Balance Sheets
For the years ended February 2, 2019, February 3, 2018, and January 28, 2017:
Consolidated Statements of Loss and Comprehensive 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.
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(a)(3) Exhibits
Exhibit
Number
Description of Document
Incorporated by Reference
(File No. 333-203219, unless otherwise
indicated)
Form
Filing Date
Exhibit Number
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Form of Amended and Restated Articles of Incorporation of DAVIDsTEA Inc.
Amended and Restated Bylaws of DAVIDsTEA Inc.
Description of Share Capital
F-1/A
F-1
Credit Facility Letter from HSBC Bank Canada to DAVIDsTEA Inc. and DAVIDsTEA
(USA) Inc., dated August 19, 2013, as amended
F-1
F-1
Amended and Restated Equity Incentive Plan, as amended
2015 Omnibus Incentive Plan
F-1
Form of Nonstatutory Stock Option Award Agreement under 2015 Omnibus Incentive Plan F-1
F-1
Form of Restricted Stock Unit Award Agreement Under 2015 Omnibus Incentive Plan
F-1
Form of Indemnification Agreement for Directors and Officers
F-1
5/18/2015
4/2/2015
5/2/2019
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
3.1
3.2
Filed herewith
10.1
10.3
10.14
10.15
10.16
10.17
10.41
to Lease Agreement between DAVIDsTEA Inc. and Olymbec
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
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
Agreement of Sublease by and between Le Chateau Inc. and DAVIDsTEA Inc., dated April
26, 2012
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
4/2/2015
10.42
4/2/2015
10.43
4/2/2015
10.44
4/2/2015
10.45
4/2/2015
10.46
4/2/2015
10.47
4/2/2015
10.48
4/2/2015
10.49
101
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
F-1
F-1
4/2/2015
10.50
4/2/2015
10.51
Table of Contents
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
23.1
31.1
31.2
32.1
32.2
Short-Term Incentive Plan
Credit Agreement by and between DAVIDsTEA Inc., Bank of Montreal and BMO Capital
Markets, dated April 24, 2015
First Memorandum of Agreement between DAVIDsTEA (USA) Inc. and Christine Bullen,
dated January 31, 2017
Employment Agreement by and between DAVIDsTEA Inc. and Joel Silver, dated March
13, 2017
Memorandum of Agreement between DAVIDsTEA Inc. and Christine Bullen, dated May
29, 2017
Executive Employment Agreement between DAVIDsTEA Inc. and Howard Tafler, dated
September 7, 2017
Consent of Independent Registered Public Accounting Firm
Certification of Interim 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 Interim 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.
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
101.INS XBRL Instance
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation
101.LAB XBRL Taxonomy Extension Labels
101.PRE XBRL Taxonomy Extension Presentation
101.DEF XBRL Taxonomy Extension Definition
ITEM 16. FORM 10-K SUMMARY
None
102
F-1
F-1/A
4/2/2015
5/18/2015
10.52
10.56
10-K
4/13/2017
10.40
8-K
8-K
3/13/2017
10.1
6/2/2017
10.1
10.1
10-Q
9/7/2017
5/2/2019
5/2/2019
Filed herewith
Filed herewith
5/2/2019
Filed herewith
5/2/2019
Filed herewith
5/2/2019
Filed herewith
4/19/2018
4/19/2018
4/19/2018
4/19/2018
4/19/2018
4/19/2018
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Table of Contents
SIGNATURES
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.
Date: May 2, 2019
DAVIDsTEA INC.
/s/ Herschel Segal
By:
Name: Herschel Segal
Title:
Interim Chief Executive Officer and Chairman of the
Board
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/ Herschel Segal
Name: Herschel Segal
/s/ Frank Zitella
Name: Frank Zitella
/s/ Pat De Marco
Name: Pat De Marco
/s/ Emilia Di Raddo
Name: Emilia Di Raddo
/s/ Max Ludwig Fisher
Name: Max Ludwig Fischer
/s/ Anne Darche
Name: Anne Darche
/s/ Susan L. Burkman
Name: Susan L. Burkman
/s/ Peter Robinson
Name: Peter Robinson
Date: May 2, 2019
Interim Chief Executive Officer and Chairman of the Board
(principal executive officer)
Chief Financial Officer and Chief Operating Officer
(principal financial officer and principal accounting officer)
Director
Director
Director
Director
Director
Director
103
DESCRIPTION OF SHARE CAPITAL
EXHIBIT 4.1
The following is a summary of the terms of our common shares (the “Common Shares”), as set forth in our Restated
Articles of Incorporation and any amendments thereto (the “Articles”), our By-Law 2015-1 (the “Bylaws”) and certain related
sections of the Canada Business Corporations Act (the “CBCA”). The following description of our share capital is intended as a
summary only and is qualified in its entirety by reference to the Articles, the Bylaws and applicable provisions of the CBCA.
Under the Articles, our share capital consists of an unlimited number of Common Shares, each without par value.
Share Capital
Voting Rights
The holders of our Common Shares are 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 shares 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 is entitled to one vote in respect of each Common Share held by such holder.
Dividends
The holders of the Common Shares are 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.
We have never declared or paid regular cash dividends on our Common Shares. 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.
Liquidation, Dissolution or Winding-up
The holders of the Common Shares are 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.
Holders of Common Shares have no pre-emptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to our Common Shares. There are no provisions in the Articles requiring holders
of Common Shares to contribute additional capital or permitting or restricting the issuance of additional securities or any other
material restrictions. The rights, preferences and privileges of the holders of Common Shares are subject to, and may be adversely
affected by, the rights of the holders of any series of preferred shares that may be authorized and designated in the future.
Certain Important Provisions of Our Articles of Incorporation, Bylaws and the CBCA
The following is a summary of certain important provisions of the Articles, the Bylaws and certain related sections of the
CBCA. Please note that this is only a summary and is not intended to be exhaustive. This summary is subject to, and is qualified in
its entirety by reference to, the provisions of the Articles, the Bylaws and applicable provisions of the CBCA.
Stated Objects or Purposes
The Articles do not contain stated objects or purposes and do not place any limitations on the business that we may carry
on.
1
Directors
Power to vote on matters in which a director is materially interested. The CBCA states that a director must disclose to us, in
accordance with the provisions of the CBCA, the nature and extent of any interest that the director has in a material contract or
material transaction, whether made or proposed, with us, if the director is a party to the contract or transaction, is a director or an
officer or an individual acting in a similar capacity of a party to the contract or transaction, or has a material interest in a party to
the contract or transaction.
A director who holds an interest in respect of any material contract or transaction into which we have entered or propose to
enter is not entitled to vote on any directors’ resolution to approve that contract or transaction, unless the contract or transaction:
· relates primarily to the director’s remuneration as a director, officer, employee or agent of us or an affiliate;
· is for indemnity or insurance otherwise permitted under the CBCA; or
· is with an affiliate.
Borrowing. The Bylaws allow the board of directors, from time to time and on our behalf, to (a) borrow money upon the
credit of the Company, (b) issue, reissue, sell or pledge our debt obligations, (c) to the extent permitted under the CBCA, give,
directly or indirectly, financial assistance to any person by means of a loan or a guarantee to secure the performance of an
obligation or otherwise, and (d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any of our property,
owned or subsequently acquired, to secure any of our obligations.
Directors’ power to determine the remuneration of directors. The CBCA provides that the remuneration of our directors, if
any, may be determined by the board of directors subject to the Articles and the Bylaws. That remuneration may be in addition to
any salary or other remuneration paid to any of our employees who are also directors.
Retirement or non-retirement of directors under an age limit requirement. Neither the Articles nor the CBCA impose any
mandatory age-related retirement or non-retirement requirement for our directors.
Number of shares required to be owned by a director. Neither the Articles nor the CBCA provide that a director is required
to hold any of our shares as a qualification for holding his or her office. Our board of directors has discretion to prescribe minimum
share ownership requirements for directors.
Action Necessary to Change the Rights of Holders of Our Shares
Holders of our Common Shares can authorize the amendment of the Articles to create or vary the special rights or
restrictions attached to any of our shares by passing a special resolution. However, a right or special right attached to any class or
series of shares may not be prejudiced or interfered with unless the shareholders holding shares of that class or series to which the
right or special right is attached consent by a separate special resolution. A special resolution means a resolution passed by: (a) a
majority of not less than two-thirds of the votes cast by the applicable class or series of shareholders who vote in person or by
proxy at a meeting, or (b) a resolution consented to in writing by all of the shareholders entitled to vote holding the applicable class
or series of shares.
2
Shareholder Meetings
We must hold an annual meeting of our shareholders at least once every year at a time and place determined by our board of
directors, provided that the meeting must not be held later than 15 months after the preceding annual meeting. A meeting of our
shareholders may be held anywhere in Canada, or provided that all shareholders agree, anywhere outside Canada.
Our directors may, at any time, call a meeting of our shareholders. Shareholders holding not less than 5% of our issued
voting shares may also cause our directors to call a shareholders’ meeting in accordance with the CBCA.
A notice to convene a meeting, specifying the date, time and location of the meeting, and, where a meeting is to consider
special business, the general nature of the special business, must be sent to shareholders, to each director and to the auditor not less
than 21 days prior to the meeting, although, as a result of applicable securities laws, the time for notice is effectively longer. Under
the CBCA, shareholders entitled to notice of a meeting may waive or reduce the period of notice for that meeting, provided
applicable securities laws are met. The accidental omission to send notice of any meeting of shareholders to, or the non-receipt of
any notice by, any person entitled to notice does not invalidate any proceedings at that meeting.
A quorum for meetings of shareholders is that the number of persons present in person or represented by proxy, who hold
not less than one-third of the outstanding shares entitled to vote at the meeting, provided that quorum is not less than two persons.
If a quorum is not present at the opening of any meeting of shareholders, the shareholders present or represented by proxy may
adjourn the meeting to a fixed time and place but may not transact any further business.
Holders of our Common Shares are entitled to attend meetings of our shareholders. Our directors, our secretary (if any), our
auditor and any other persons invited by our Chairman or directors or with the consent of those at the meeting are entitled to attend
any meeting of our shareholders but will not be counted in the quorum or be entitled to vote at the meeting unless he or she is a
shareholder or proxyholder entitled to vote at the meeting.
Advance Notice Procedures and Shareholder Proposals
Under the CBCA, shareholders may make proposals for matters to be considered at the annual meeting of shareholders.
Such proposals must be sent to us in advance of any proposed meeting by delivering a timely written notice in proper form to our
registered office in accordance with the requirements of the CBCA. The notice must include information on the business the
shareholder intends to bring before the meeting.
In addition, the Bylaws require that shareholders provide us with advance notice of their intention to nominate any persons,
other than those nominated by management, for election to our board of directors at a meeting of shareholders.
These provisions could have the effect of delaying the nomination of certain persons for director that are favored by the
holders of a majority of our outstanding voting securities.
The Articles do not contain any change of control limitations with respect to a merger, acquisition or corporate restructuring
that involves us.
Change of Control
3
Limitation of Liability and Indemnification
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Securities Act”) may be permitted to
our directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of
the United States Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
The transfer agent and registrar for our common shares is AST Trust Company, Montréal, Québec.
Transfer Agent and Registrar
Exchange Controls
There is no limitation imposed by Canadian law or by the Articles on the right of a non-resident to hold or vote our
Common Shares, other than discussed below.
Competition Act
Limitations on the ability to acquire and hold our Common Shares may be imposed by the Competition Act (Canada).
This legislation permits the Commissioner of Competition, or Commissioner, to review any acquisition or establishment, directly or
indirectly, including through the acquisition of shares, of control over or of a significant interest in us. This legislation grants the
Commissioner jurisdiction, for up to one year after the acquisition has been substantially completed, to seek a remedial order,
including an order to prohibit the acquisition or require divestitures, from the Canadian Competition Tribunal, which order may be
granted where the Competition Tribunal finds that the acquisition substantially prevents or lessens, or is likely to substantially
prevent or lessen, competition.
This legislation also requires any person or persons who intend to acquire more than 20% of our voting shares or, if such
person or persons already own more than 20% of our voting shares prior to the acquisition, more than 50% of voting our shares, to
file a notification with the Canadian Competition Bureau if certain financial thresholds are exceeded. Where a notification is
required, unless an exemption is available, the legislation prohibits completion of the acquisition until the expiration of the
applicable statutory waiting period, unless the Commissioner either waives or terminates such waiting period.
Investment Canada Act
The Investment Canada Act requires each “non Canadian” (as defined in the Investment Canada Act) who acquires
“control” of an existing “Canadian business”, to file a notification in prescribed form with the responsible federal government
department or departments not later than 30 days after closing, provided the acquisition of control is not a reviewable transaction by
Canadian authorities. Subject to certain exemptions, a transaction that is reviewable under the Investment Canada Act may not be
implemented until an application for review has been filed and the responsible Minister of the federal cabinet has determined that
the investment is likely to be of “net benefit to Canada” taking into account certain factors set out in the Investment Canada Act.
Under the Investment Canada Act, an investment in our Common Shares by a non-Canadian who is either: (a) a WTO investor (i.e.,
controlled ultimately by nationals or permanent residents of World Trade Organization member countries, including the United
States) or (b) a trade agreement investor (i.e., controlled ultimately by nationals or permanent residents of countries with whom
Canada has a trade agreement, including the United States) but who is not a state-owned enterprise, would be reviewable only if it
were an investment to acquire control of us pursuant to the Investment Canada Act and our enterprise value was equal to or greater
than specified amounts, which vary annually. For 2019, the specified review threshold amounts for WTO investors and trade
agreement investors who are not state-owned enterprises are $1.045 billion and $1.568 billion in enterprise value, respectively.
4
The Investment Canada Act contains various rules to determine if there has been an acquisition of control. For example,
for purposes of determining whether an investor has acquired control of a corporation by acquiring shares, the following general
rules apply, subject to certain exceptions: the acquisition of a majority of the undivided ownership interests in the voting shares of
the corporation is deemed to be acquisition of control of that corporation; the acquisition of less than a majority, but one-third or
more, of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation
is presumed to be acquisition of control of that corporation unless it can be established that, on the acquisition, the corporation is
not controlled in fact by the acquirer through the ownership of voting shares; and the acquisition of less than one third of the voting
shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation is deemed not to be
acquisition of control of that corporation.
Under the national security review regime in the Investment Canada Act, review on a discretionary basis may also be
undertaken by the federal government in respect to a much broader range of investments by a non-Canadian to “acquire, in whole
or part, or to establish an entity carrying on all or any part of its operations in Canada”. No financial threshold applies to a national
security review. The relevant test is whether such investment by a non-Canadian could be “injurious to national security”. The
federal government has broad discretion to determine whether an investor is a non-Canadian and therefore subject to national
security review. Review on national security grounds is at the discretion of the Canadian government, and may occur on a pre- or
post-closing basis.
Certain transactions relating to our Common Shares will generally be exempt from the Investment Canada Act, subject to
the federal government’s prerogative to conduct a national security review, including:
a) the acquisition of our Common Shares by a person in the ordinary course of that person’s business as a trader or
dealer in securities;
b) the acquisition of control of us in connection with the realization of security granted for a loan or other financial
assistance and not for any purpose related to the provisions of the Investment Canada Act; and
c) the acquisition of control of us by reason of an amalgamation, merger, consolidation or corporate reorganization
following which the ultimate direct or indirect control in fact of us, through ownership of our Common Shares,
remains unchanged.
Other
Certain Canadian Income Tax Considerations for United States Shareholders
The following summarizes, as of the date hereof, certain Canadian federal income tax considerations generally applicable under the
Income Tax Act (Canada) and the regulations thereunder (collectively, the “Canadian Tax Act”) and the Canada-United States Tax
Convention (1980), as amended (the “Convention”) to the holding and disposition of our Common Shares.
5
This summary is restricted to beneficial owners of our Common Shares each of whom, at all relevant times and for purposes of the
Canadian Tax Act and the Convention: (i) is neither resident nor deemed to be resident in Canada; (ii) is resident solely in the
United States and is entitled to benefits of the Convention; (iii) does not use or hold, and is not deemed to use or hold, our Common
Shares in, or in the course of, carrying on a business in Canada; (iv) deals at arm’s length with and is not affiliated with the
Company; (v) holds our Common Shares as capital property; and (vi) is not an “authorized foreign bank” (as defined in the
Canadian Tax Act) or an insurer that carries on business in Canada and elsewhere (each such holder, a “US Resident Holder”).
Generally, a US Resident Holder’s Common Shares will be considered to be capital property of the holder provided that the holder
is not a trader or dealer in securities, does not acquire, hold or dispose of (or is not deemed to have acquired, held or disposed of)
our Common Shares in one or more transactions considered to be an adventure or concern in the nature of trade, and does not hold
or use (or is not deemed to hold or use) our Common Shares in the course of carrying on a business.
This summary is based upon the current provisions of the Canadian Tax Act and the Convention in effect as of the date hereof, and
the Company’s understanding of the current published administrative policies and assessing practices of the Canada Revenue
Agency (“CRA”) published in writing prior to the date hereof. This summary does not anticipate or take into account any changes
in law or in the administrative policies or assessing practices of the CRA, whether by legislative, governmental or judicial decision
or action, except only the specific proposals to amend the Canadian Tax Act publicly and officially announced by or on behalf of
the Minister of Finance (Canada) prior to the date hereof (the “Tax Proposals”). This summary assumes that the Tax Proposals will
be enacted in the form proposed. This summary does not take into account any other federal or any provincial, territorial or foreign
tax legislation or considerations, which may differ significantly from those set out herein. No assurances can be given that the Tax
Proposals will be enacted as proposed or at all, or that legislative, judicial or administrative changes will not modify or change the
statements expressed herein.
This summary is of a general nature only, is not exhaustive of all possible Canadian federal income tax considerations, and is not
intended and should not be construed as legal or tax advice to any particular US Resident Holder. No representations with respect
to the income tax consequences to any prospective purchaser or holder of our Common Shares are made herein. Accordingly,
prospective purchasers or holders of our Common Shares are urged to consult their own tax advisors with respect to their own
particular circumstances.
Taxation of Dividends
Under the Canadian Tax Act, dividends paid or credited, or deemed to be paid or credited, to a US Resident Holder on our
Common Shares will be subject to Canadian withholding tax at a rate of 25% of the gross amount of such dividends, unless the rate
is reduced under the Convention. Under the Convention, the rate of withholding tax on dividends applicable to US Resident
Holders who are entitled to benefits under the Convention and beneficially own the dividends is generally reduced to 15% (or, if
the US Resident Holder is a company that owns at least 10% of the voting shares of the Company, 5%) of the gross amount of such
dividends.
Disposition of Common Shares
Generally, a US Resident Holder will not be subject to tax under the Canadian Tax Act in respect of any capital gain realized by
such US Resident Holder on a disposition or deemed disposition of our Common Shares unless our Common Shares constitute
“taxable Canadian property” of the US Resident Holder and are not “treaty-protected property” (each as defined in the Canadian
Tax Act). Common Shares of the Company generally will not be “taxable Canadian property” to a holder provided that, at the time
of the disposition or deemed disposition, the Common Shares are listed on a “designated stock exchange” for purposes of the
Canadian Tax Act (which currently includes the NASDAQ), unless at any time during the 60-month period immediately preceding
the disposition of the Common Shares the following two conditions are met concurrently: (a) (i) the US Resident Holder,
(ii) persons with whom the US Resident Holder did not deal at arm’s length, (iii) partnerships in which the US Resident Holder or a
person described in (ii) holds a membership interest directly or indirectly through one or more partnerships, or (iv) any combination
of the persons and partnerships described in (i) through (iii), owned 25% or more of the issued shares of any class or series of the
capital stock of the Company; and (b) more than 50% of the fair market value of the Common Shares was derived directly or
indirectly, from one or any combination of real or immovable property situated in Canada, “Canadian resource properties”, “timber
resource properties” (each as defined in the Canadian Tax Act), and options in respect of or interests in, or for civil law rights in,
any such properties (whether or not such property exists). In certain circumstances set out in the Canadian Tax Act, the Common
Shares may be deemed to be “taxable Canadian property”.
Even if the Common Shares are taxable Canadian property to a US Resident Holder, any capital gain realized on the disposition or
deemed disposition of such Common Shares will not be subject to tax under the Canadian Tax Act provided that the value of such
Common Shares is not derived principally from real property situated in Canada (within the meaning of the Convention).
A US Resident Holder contemplating a disposition of our Common Shares that may constitute taxable Canadian property should
consult a tax advisor prior to such disposition.
6
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 May 2, 2019,
with respect to the consolidated financial statements of DAVIDsTEA Inc. included in this Annual Report (Form 10-K) for the year
ended February 2, 2019.
EXHIBIT 23.1
/s/ ERNST & YOUNG LLP1
Montreal, Canada
May 2, 2019
1 CPA, Auditor, CA, public accountancy permit no. A123806
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, Frank Zitella, Chief Financial Officer, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of DAVIDsTEA Inc.;
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;
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.
b.
c.
d.
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;
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
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a.
b.
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
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: May 2, 2019
/s/ Frank Zitella
Frank Zitella
Chief Financial Officer
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 31.2
I, Herschel Segal, Interim Chief Executive Officer and Chairman of the Board, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of DAVIDsTEA Inc.;
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;
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.
b.
c.
d.
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;
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
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a.
b.
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
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: May 2, 2019
/s/ Herschel Segal
Herschel Segal
Interim Chief Executive Officer and Chairman of the
Board
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 Interim Chief Executive Officer and Chairman of the Board 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 February 2, 2019 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 February 2, 2019 fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: May 2, 2019
By: /s/ Herschel Segal
Name: Herschel Segal
Title: Interim Chief Executive Officer and
Chairman of the Board
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 February 2, 2019 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 February 2, 2019 fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: May 2, 2019
By: /s/ Frank Zitella
Name: Frank Zitella
Title: Chief Financial Officer