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 1, 2020
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 has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued its audit report. ☐
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, 2019, 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$21,070,086.
As of June 1, 2020, 26,099,477 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.
On March 4, 2020, the SEC issued an order (Release No. 34-88318) under Section 36 of the Exchange Act, granting
exemptions from specified provisions of the Exchange Act and certain rules thereunder. On March 25, 2020, the order was
modified and superseded by a new SEC order (Release No. 34-88465) that provides conditional relief to public companies that
are unable to timely comply with their filing obligations as a result of the COVID-19 outbreak (the “Order”).
The Company is filing this Annual Report on Form 10-K for the fiscal year ended February 1, 2020 (the “Annual
Report”) in reliance on the Order due to circumstances related to the COVID-19 pandemic. In particular, the Company could not
file this Annual Report within the time period specified under the Exchange Act due to significant disruption of its business by
the COVID-19 pandemic and related mitigation efforts, such as instituting remote work arrangements, which has negatively
impacted the Company’s ability to prepare its Annual Report.
Pursuant to the requirements of the Order, the Company filed a Current Report on Form 8-K with the SEC on April 27,
2020 indicating our intention to rely upon the Order with respect to the filing of this Annual Report, which would have otherwise
been required to have been filed by May 1, 2020. This Annual Report is being filed within the 45-day extension period provided
by the SEC Order.
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.
2
PART I
TABLE OF CONTENTS
BUSINESS
RISK FACTORS
ITEM 1.
ITEM 1A.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
ITEM 6.
ITEM 7.
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
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES
DISCLOSURE
CONTROLS AND PROCEDURES
ITEM 9A.
ITEM 9B. OTHER INFORMATION
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
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
ITEM 15.
ITEM 16.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
Table of Contents
3
PART I
Cautionary Note Regarding Forward-Looking Statements
Page
6
13
32
32
33
33
34
35
36
52
53
90
90
90
91
101
110
112
114
115
116
117
including
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
terms “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “projects,”
terminology,
“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, including our ability to continue as a going concern, long-term Adjusted EBITDA margin potential,
dividend policy, impact of the COVID-19 pandemic on macroeconomic environment, ability to renegotiate our leases, compliance
with Nasdaq’s listing requirements, 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.
the
While we believe these expectations and projections are based on reasonable assumptions, such forward-looking
statements are inherently subject to risks, uncertainties and assumptions about us, including the risk factors listed under Item 1A.
Risk Factors, as well as other cautionary language in this Form 10-K.
Actual results may differ materially from those in the forward-looking statements as a result of various factors, including
but not limited to, the following:
·
·
·
·
·
·
·
·
·
·
Our ability to decrease losses, primarily by optimizing our North American retail footprint through termination or renegotiation of a
significant number of our retail store leases and the uncertainty on how we will achieve the optimization, raises substantial doubt about our
ability to continue as a going concern. As a result, the Board of Directors of the Company may pursue a formal restructuring, reorganization or
other similar actions under applicable Canadian and/or United States laws;
The duration and impact of global COVID-19 pandemic, which has disrupted the Company’s business and has adversely affected the
Company’s financial condition and operating results, and may further impact our workforce and operations, the operations of our customers,
and those of our respective vendors, suppliers, and partners;
Our efforts to renegotiate terms of our retail store leases;
Our ability to regain and maintain compliance with Nasdaq’s listing requirements;
Our ability to manage significant changes to our Board of Directors and leadership team;
Our efforts to expand beyond retail stores, including our ability to attract and retain employees that are instrumental to growing our online
and wholesale channel businesses;
Our ability to maintain and enhance 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;
Our ability to attract and retain employees that embody our culture, including Tea Guides and store and district managers and regional
directors;
Table of Contents
4
·
·
·
·
·
·
·
·
·
·
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;
Fluctuations in exchange rates; and
The seasonality of our business.
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.
Table of Contents
ITEM 1. BUSINESS
5
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 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. All references to “Fiscal 2019” are to the Company’s fiscal year
ended February 1, 2020.
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,
February 2, 2019 and February 1, 2020 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 231 company-operated
DAVIDsTEA stores as of February 1, 2020, our online store at www.davidstea.com, and in over 2,500 grocery stores and
drugstores across Canada. 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
150 premium teas and tea blends featured on our “Tea Wall,” which is the focal point of our stores.
Our online store 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 online store.
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 distinctly creative, inventive and convenient ways to enjoy tea.
We intend to focus our attention on continuing to improve and develop new and innovative teas products and tea-related
gift offerings. We also plan to build on the investments we have already made in our online store. Aiming to simulate virtually 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.
Table of Contents
6
Recent Developments
In December 2019, a novel strain of coronavirus, known as COVID-19, was first reported and was subsequently declared
a pandemic by the World Health Organization in March 2020. The measures adopted by the Federal, provincial and State
governments in order to mitigate the spread of the outbreak required the Company to close all of its retail locations across North
America effective March 17, 2020 until further notice.
As the Company adapts its business strategy to the current environment, it has taken decisive actions, subsequent to year-
end, to align expenses with its continuing online and wholesale sales channel revenues. This includes temporarily furloughing all
of its store related employees and non-essential head office staff and moving substantially all remaining employees to a four-day
work week. In addition, management and members of the Board have agreed to reduced compensation during this crisis. These
measures, among others, are intended to better align the Company’s cost structure with its current sales and help preserve its
financial position.
Although we continue to offer our products directly to consumers through our online store and in supermarkets and
drugstores across Canada, there is no assurance that customers will purchase our products at previous volumes through these
alternative channels. Furthermore, the duration and impact of the outbreak is unknown and may influence consumer shopping
behavior and consumer demand including online shopping.
As retailers in North America begin to re-emerge from the government mandated lockdown, we are cautiously balancing
the safety of our employees and customers with the desire to re-open select stores in our network. Accordingly, we have not
remitted rental payments for the months of April, May and June at this time. We expect to test the re-opening of a few stores;
however, until we have a clearer vision of how the pandemic unfolds, the impact of any government and landlord programs on
our business, and the manner in which we address the operational constraints placed before us as part of government
deconfinement measures, we expect to take a more cautious approach to store re-openings, and at this time, the Company is
unable to predict when, and how many of its retail locations it will reopen.
For the year ended February 1, 2020, the Company incurred a net loss of $31.2 million. The Company’s current liabilities
total $44.1 million as at February 1, 2020. As at February 1, 2020, the Company held cash and accounts and other receivables of
$52.4 million. The Company does not currently have any third-party financing available with which to meet any future financial
obligations.
Based on its current projections, the Company has sufficient cash and accounts and other receivables to discharge its
current liabilities in the next 12 months; however, it has experienced significant net losses in Fiscal Years 2017 to 2019 of $28.5
million, $33.5 million and $31.2 million, respectively.
The Company’s ability to continue as a going concern is dependent on its ability to stabilize its business from unfavorable
trend lines, strengthening its business by focusing on how to grow its product portfolio including sales and customer service
execution, and effectively optimizing its North American retail footprint to emerge as a leaner, more sustainable physical
presence that complements a growing world-class online and grocery business, all supported by a right-sized support
organization.
Management believes that there is material uncertainty surrounding the Company’s ability to execute the strategy
necessary to return to profitability in the current environment, including the unpredictability surrounding the recovery from the
COVID-19 outbreak and changes in consumer behavior. If the Company is unable to execute these or other related strategies, the
Board of Directors of the Company may pursue a formal restructuring, reorganization or other similar actions under applicable
Canadian and/or United States laws.
As of June 15, 2020, we have received notices of default for unpaid rents from 37 landlords representing 53 of our retail
stores. We also received rent deferral notices from 13 landlords representing 60 of our retail stores. With regard to both the
defaulted leases and rent deferral notices, we have either determined to terminate the lease or are in the process of discussing
resolution of the current situation regarding rent payments with the landlords. We can provide no assurances that an agreement or
resolution regarding the defaulted leases will be reached or any forbearance of our lease obligations will be provided to us
regarding our other lease agreements.
For further disclosures regarding the impact of the COVID-19 pandemic on our business, see “Part II, Item 7 —
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Table of Contents
7
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 in-store craft beverages, the potential broad demographic appeal of our brand, innovative tea products
driven by customer insights, the effectiveness of our online store, www.davidstea.com, and digital and community focused
events, and our passionate customer-focused culture supported by our experienced management team and dedicated board
members.
Our Product Offerings
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 craft tea beverages in our retail stores.
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, South Africa and Thailand. 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 Craft Beverages
Our retail stores offer tea beverages and food products for on-the-go consumption. Our craft beverages range from
standard hot or iced tea to our “Tea Lattes”.
Distribution Channels
Retail Stores and Operations
Our Stores
As of February 1, 2020, our retail footprint consisted of 186 stores in Canada and 45 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.
Table of Contents
Distinctive Retail Experience
8
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.
Store Portfolio
Our stores are located in locations that support our 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 and monitor existing
locations for sufficient levels of customer traffic to maintain successful stores. We continue to experience a secular decline in
retail foot traffic, exacerbated by COVID-19, as we pivot towards a growing North American online and wholesale business. We
expect to significantly rebalance our portfolio of stores as we restructure our North American retail footprint.
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.
·
·
·
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 online store, 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. The use of influencers and affiliates with like-mined brands are also helping to attract
customers to our online store. We continually enhance our online store with new features and functionality to improve our
customers’ experience and accessibility for mobile users.
Through our online store, we can reach customers who may not live near one of our retail locations. We believe our online
and physical stores are complementary, as our online store provides our brick and mortar 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.
Table of Contents
9
Over the past several years, our online store has represented a significant and increasing portion of our revenues due to
changes in consumer shopping preferences and habits. Additionally, the disparity in the profitability of our online store versus
certain of our physical stores is heightened in light of the closure of all of our physical stores due to the COVID-19 pandemic.
This heightened disparity has caused us to accelerate our reevaluation of the emphasis placed on our online store versus our
physical stores.
Wholesale
We sell our tea and related products to premium grocery and drugstore chains throughout Canada as well as Hotel,
Restaurant and Institution (“HRI”) distribution channels. 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.
In Fiscal 2019, the grocery channel represented the majority of the wholesale sales. New grocery and pharmacy accounts
were added in the fall of Fiscal 2019 that helped fuel continued sales in that channel. Office distributors became our second
largest channel of our wholesale sales, and the HRI and other independents represented the smallest amount.
Marketing and Advertising
COVID-19 is expected to temporarily impact our in-store marketing efforts as we address the social distancing and other
regulatory requirements and protocols. Notwithstanding this, 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 build brand awareness. Our
marketing and advertising efforts are led by a strong marketing and merchandising team.
Product Development and Design
Our tea and merchandising teams seek premium teas and tea-related products from around the world. 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 seasonal holidays blends. 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.
Travel restrictions brought on by COVID-19 is not expected to impact our ability to develop new products and innovate,
due primarily to strong relationships built over the years with our suppliers, including our significant library of untapped new
blends and products that we can bring to market as required.
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 enjoyable 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.
Table of Contents
10
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 Sherbrooke, Québec and Champlain, New York. We use third-party logistics
facilities in Sherbrooke, Québec and Champlain, New York. The Sherbrooke, Québec facility ships to all our Canadian
customers. The Champlain, New York facility ships to all our U.S. customers. Our products are typically shipped to our
customers via third-party national transportation providers multiple times per week. COVID-19 has heighted the importance of
our health and safety protocols on our production, warehouse and distribution facilities. Social distancing and other health and
safety requirements has put constraints on our production capacity which we have addressed with a myriad of additional
cleanliness protocols, additional operating shifts and automating manual processes where possible.
Management Information Systems
Our management information systems provide a full range of business process supports to our online and retail 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 regulatory authority of Canadian Food
Inspection Agency, as well as provincial and local regulations. We monitor changes in these laws and believe that we are in
material compliance with applicable laws.
We maintain third-party insurance for a number of risk management activities including, but not limited to, 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.
Insurance
Table of Contents
11
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 2019, we had 2,523 associates. As of February 1, 2020, we employed a total of 468 full‑time
employees and 2,055 part‑time employees, with 380 in the United States and 2,143 in Canada. Of all those employees, 2,311
were employed in our store network and 212 were employed in corporate, distribution and direct channel support functions. None
of our employees is represented by a labor union.
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/(losses) and working capital requirements during the year.
Corporate Information
DAVIDsTEA Inc. was incorporated under the Canada Business Corporations Act, or the CBCA, on April 29, 2008, and
our principal executive offices are located at 5430 Ferrier Street, Mount‑Royal, Québec, Canada, H4P 1M2. Our 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 1, 2020,
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.
Table of Contents
ITEM 1A. RISK FACTORS
12
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.
Substantial doubt about the Company’s ability to continue as a going concern.
Risks Related to Our Business and Our Industry
Our audited financial statements as of and for the year ended February 1, 2020 were prepared on the assumption that we
would continue as a going concern, and did not include any adjustments that might result from the outcome of this uncertainty.
Our management has determined that there is a substantial doubt about our ability to continue as a going concern over the next
twelve months due to uncertainty regarding how we will implement strategies relating to restructuring our North American retail
footprint in order to decrease ongoing losses caused by unprofitable stores, decreasing our costs generally and accelerating the
growth of our online store. If we are unable to execute these or other related strategies, the Board of Directors of the Company
may pursue a formal restructuring, reorganization or other similar actions under applicable Canadian and/or United States laws.
We face business disruption and related risks resulting from the COVID-19 pandemic, which could have a material adverse
effect on our business and results of operations.
On March 17, 2020, we closed all of our stores in North America, as subsequently mandated by the governments in both
Canada and the United States, to protect our employees, customers and communities. We have also temporarily furloughed all of
our store related employees and have moved substantially all remaining non-essential employees to a four-day work week to
reduce expenses. Although we continue to offer our products directly to consumers through our online store and our products are
available in supermarkets and drugstores across Canada, there is no assurance that the customers will purchase our products at
previous volumes through these alternative channels.
Additionally, we rely on our employees, contractors, third-party transportation providers, vendors and other business
partners to perform our and their respective responsibilities and obligations relative to the conduct of our business. Although
certain of the areas in the United States and Canada where our stores are located are beginning to reopen, at this time, we do not
have an estimated time for reopening our stores, nor can we predict when any of our contractors, third-party transportation
providers, vendors and other business partners will able to operate at previous levels. Nor can we predict the duration of the
COVID-19 pandemic and whether existing restrictions may be extended or new restrictions will be put in place.
The COVID-19 pandemic could also negatively affect our internal controls over financial reporting, including our ongoing
process of remediating the material weaknesses in our disclosure control and procedures identified in Fiscal 2019, as a portion of
our workforce is required to work from home and standard processes are disrupted. New processes, procedures, and controls
which may increase the overall inherent risk in the business, may be required to ensure an effective control environment.
We are still assessing the impact the COVID-19 pandemic will have on our business and results of operations, but
anticipate that its impact will be significant. The exact impact is and will remain unknown and largely dependent upon future
developments, including but not limited to information on the duration and spread of COVID-19, changes in customer demand,
additional mitigation strategies proposed by Canadian and United States public authorities (including federal, state, provincial or
local stay at home or similar orders), and restrictions on the activities of our European and other internationally based suppliers
and shipment of goods.
Table of Contents
13
Failure to make lease payments under our operating leases 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:
·
·
·
·
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 and our other cash needs. If our business does not
generate sufficient cash flows from operating activities to fund these requirements, we may not be able to service our lease
expenses, which would harm our business. As the stores have been closed due to the COVID-19 pandemic, we have not remitted
rental payments for the months of April, May and June.
In light of the COVID-19 pandemic, we have taken and may need to take certain actions with respect to some or all of our
existing leases to preserve our cash position during the COVID-19 pandemic, which may create legal and financial risk for
us.
On March 17, 2020, we closed all of our stores in North America, as subsequently mandated by the governments in both
Canada and the United States. In light of the closures of many of the malls, street and outlet stores in which we operate resulting
from the COVID-19 pandemic, we have taken certain actions with respect to some or all of our existing leases during the
COVID-19 pandemic, such as discontinuing payment, attempting to negotiate rent abatement, or terminating certain leases,
which may subject us to legal, reputational and financial risks. We have suspended rent payments due for the three month period
ended June 2020 for all of our stores that have been closed because of the COVID-19 pandemic.
We expect to negotiate with the counterparties under those leases to defer or abate the applicable rent during the store
closure period, to modify the terms (including rent) of our leases going forward after the stores reopen, or in certain instances to
terminate the leases and permanently close some of the stores. However, there can be no assurance that we will be able to
negotiate rent deferrals or rent abatements, or terminate the leases, on commercially reasonable terms or at all. If we are unable to
renegotiate the leases and continue to suspend rent payments, the landlords under a majority of the leases for our stores could
allege that we are in default under the leases and attempt to terminate our lease and accelerate our future rents due thereunder.
Although we believe that strong legal grounds exist to support our claim that we are not obligated to pay rent for the stores that
have been closed because of the governmental and public health authority orders, mandates, guidelines and recommendations,
there can be no assurance that such arguments will succeed and any dispute under these leases may result in litigation with the
respective landlord, and any such dispute could be costly and have an uncertain outcome.
As of June 15, 2020, we have received notices of default for unpaid rents from 37 landlords representing 53 of our retail
stores. We also received rent deferral notices from 13 landlords representing 60 of our retail stores. With regard to both the
defaulted leases and rent deferral notices, we have either determined to terminate the lease or are in the process of discussing
resolution of the current situation regarding rent payments with the landlords. We can provide no assurances that an agreement or
resolution regarding the defaulted leases will be reached or any forbearance of our lease obligations will be provided to us
regarding our other lease agreements.
Risks related to material weaknesses in internal control over financial reporting
During the course of the Company’s financial statement close process for the quarter ended November 2, 2019,
accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis
under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). As a result of the
error, a material weakness in the design of the monitoring of impairment triggers upon completing the store impairment analysis
under IAS 36, subsequent to the adoption of IFRS 16 was identified. In light of this, management reassessed their evaluation of
the effectiveness of the design and operation of its disclosure controls over financial reporting as of May 4, 2019 and concluded
that the Company did not maintain effective disclosure control and procedures due to a material weakness in the Company’s
internal control over financial reporting that existed at that date in the monitoring of impairment triggers upon completing a store
impairment analysis under IAS 36 subsequent to the adoption of IFRS 16. Certain remedial efforts were undertaken during the
third and fourth quarter financial statement close process that resulted in effective design of the monitoring of impairment
triggers under IAS 36 subsequent to the adoption of IFRS 16; however, we are unable to conclude that this control was
operationally effective due to lack of sufficient extent of samples for testing.
14
Table of Contents
Furthermore, during the fourth quarter, we identified material weaknesses in our internal controls related to the
Company’s process for evaluating and testing non-financial assets for impairment in connection with the review over the
projected financial information used to support management’s impairment of non-financial assets, was not sufficiently precise to
ensure that the estimates are reasonable and supportable considering the existence of both corroborative and contrary evidence
and the related application to the accounting literature.
Accordingly, we were unable to determine that our internal controls over financial reporting were effective as of the fiscal
year ended February 1, 2020. Failure to remediate these or future material weaknesses, or determinations that either our
disclosure controls and procedures or our internal control over financial reporting are not effective may negatively affect investor
confidence in our financial statements and adversely impact our stock price.
Recent 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 experienced continuing changes to our Board of Directors and our leadership team over the last two years that
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 new leadership team members 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.
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 believe that these transactions reflect the accurate economic allocation of profit and risk; 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 CRA 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.
Table of Contents
15
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 craft 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 craft 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 and non-economic conditions such as geopolitical issues, trade restrictions, unseasonable weather,
pandemics, including the current COVID-19 pandemic and other factors that are outside of our control. These discretionary
purchases may decline during recessionary periods or at other times when disposable income is lower. Further, with the store
closings due to the COVID-19 pandemic, our financial performance may become more susceptible to economic and other
conditions, as the consumer is limited to purchasing our products through the on-line store and a selection of products through
grocery stores and pharmacies. We have already seen significant decreases in consumer spending as a result of COVID-19,
particularly in our industry, and such trends may continue. If periods of decreased consumer spending persist, our sales could
decrease, and our financial condition and results of operations could be adversely affected.
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.
If we do not generate sufficient cash flows from operations or otherwise, we may need additional financing to execute our
current or future business strategies. We cannot be assured that additional financing will be available to us on favorable terms, if
at all, given our default under our prior credit agreement and the impact of the COVID-19 pandemic on the macroeconomic
environment, the scope and extent of which is unknown at this time. To the contrary, we expect that future lending, if any, would
be under more restrictive terms than our prior credit agreement, which terminated due to a breach of the financial covenants in
November 2018. 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.
Table of Contents
16
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 places 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
operational 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 a return to 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 reverse the decline in revenues and contribute to a return to growth.
If our future comparable store sales continue to decline, our financial results will suffer. A variety of factors affect
comparable store sales including COVID-19, increasing consumer use of e-commerce online retail options, which may not be
captured by consumers’ use of our website, consumer tastes, competition, current economic conditions, pricing, and decreases in
consumer traffic in shopping malls or other locations where our stores are located, and which are anticipated due to COVID-19.
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. If we cannot reverse the
decline in comparable store sales, we will have to undertake a restructuring of our North American retail footprint in order to
decrease ongoing losses caused by unprofitable stores, in addition to decreasing our costs generally and accelerating the growth
of our online store. If we are unable to execute these or other related strategies, the Board of Directors of the Company may
pursue a formal restructuring, reorganization or other similar actions under applicable Canadian and/or United States laws.
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 150 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 efforts, 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.
Table of Contents
17
Any of our suppliers or manufacturers could discontinue supplying us with teas in sufficient quantities for a variety of
reasons. The benefits we currently experience from our supplier and manufacturer relationships could be adversely affected if
they:
·
·
·
·
raise the prices they charge us;
discontinue selling products to us;
sell similar or identical products to our competitors; or
enter into arrangements with competitors that could impair our ability to sell our suppliers’ and manufacturers’ products, including by giving
our competitors exclusive licensing arrangements or exclusive access to tea blends or limiting our access to such arrangements or blends.
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,
such as the COVID-19 pandemic.
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.
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, pandemic, epidemic 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,
pandemic, epidemic and adverse weather conditions such as 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.
Table of Contents
18
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, existing trade restrictions become more
burdensome or environmental regulations become more stringent.
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, environmental regulations 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, retail and online store operations, wholesale 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 and delivery to our online and wholesale customers, 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 our sales mix pivots towards tea related products 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.
Table of Contents
19
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, wholesale 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 our wholesale and online customers. Our utilization of third‑party warehouse services for our
merchandise is subject to risks, including employee strikes, information technology systems failure, and their implementation of
appropriate measures to ensure the safety of their employees due to COVID-19. 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, wholesale 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, unexpected limitations
on expected activities, employee strikes and inclement weather, which may affect third parties’ abilities to provide delivery
services that adequately meet our shipping needs. For example, the COVID-19 pandemic has adversely impacted third-party
transportation providers and their ability to operate at expect levels. Our operations may be further materially adversely affected
by the temporary closure of our suppliers or third party delivery services, restrictions on the shipment of our products, and travel
restrictions that may be requested or mandated by public authorities.
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.
Table of Contents
20
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.
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 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.
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.
Table of Contents
21
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.
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 the data privacy laws 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.
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.
Table of Contents
22
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, unfavorable economic conditions or lesser than anticipated sales of our holiday-specific product assortment, 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
seasonality of our business. 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
from 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.
Table of Contents
23
Fluctuations in foreign currency exchange rates could harm our results of operations as well as the price of common shares.
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.
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, we have not entered into such contract during
fiscal 2019 and have none outstanding at this time. Any forward contracts 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 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, including right-of-use assets 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. Considering the negative impact caused by the COVID-19 pandemic
to our results of operations, we expect future non-cash impairment charges to likely be significant, and our operating results could
be adversely affected.
We identified material weaknesses in our internal controls related to the Company’s process for evaluating and testing
non-financial assets for impairment in connection with the review over the projected financial information and the discount used
to support management’s impairment of non-financial assets. The analysis was not sufficiently precise to ensure that the estimates
are reasonable and supportable considering the existence of both corroborative and contrary evidence and the related application
to the accounting literature. Furthermore, remedial efforts were undertaken to address the material weakness in the monitoring of
impairment triggers upon completing a store impairment analysis under IAS 36 subsequent to the adoption of IFRS 16, however,
we are unable to conclude that this control was operationally effective due to lack of sufficient extent of samples for testing.
Table of Contents
24
If we are unable to attract, train, assimilate and retain employees that embody our culture, we may not be able to grow or
successfully operate our business.
Our success is partly due to our ability to attract, train, assimilate and retain a sufficient number of employees, 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 and other 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, the performance of our existing
stores, online experience and other aspects of our business 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.
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.
Table of Contents
25
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.
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.
Table of Contents
26
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
If we fail to comply with the continued listing requirements of the Nasdaq Stock Market, it could result in our common stock
being delisted, which could adversely affect the market price and liquidity of our securities and could have other adverse
effects.
Our common stock is currently listed for trading on The Nasdaq Global Select Market (“Nasdaq”). We must satisfy
Nasdaq’s continued listing requirements, including, among others, a minimum bid price for our common stock of $1.00 per share,
or risk possibly delisting, which would have a material adverse effect on our business. On April 21, 2020, the Company was
notified by Nasdaq that the Company was not in compliance with the minimum bid price requirement under Nasdaq Listing Rule
5450(a)(1). The notification has no immediate effect on the listing of the Company’s common stock on Nasdaq and the Company
has until December 28, 2020 to regain compliance. There can be no assurance that we will be able to regain compliance with
Nasdaq’s continued listing requirements. The failure to regain compliance prior to December 28, 2020 may result in the
Company’s common stock being delisted from Nasdaq and it could be more difficult to buy or sell our securities and to obtain
accurate quotations, and the price of our common stock could suffer a material decline. In addition, a delisting would impair our
ability to raise capital through the public markets, could deter broker-dealers from making a market in or otherwise seeking or
generating interest in our securities and might deter certain institutions and persons from investing in our securities at all.
Table of Contents
27
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.
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$0.32 during the period from our IPO to June 1,
2020.
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:
·
·
·
·
·
·
·
·
·
·
·
·
·
inability to regain and maintain compliance with Nasdaq’s listing requirements;
conditions or trends affecting our industry or the economy globally, such as the COVID-19 pandemic; which in particular, has impacted our
industry;
investors’ perceptions due to our independent accountants’ inclusion of a “going concern” explanatory paragraph in their report on our
financial statements as of and for the year ended February 1, 2020;
inability to quickly remediate material weaknesses or the continued identification of material weaknesses;
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 the reopening of our stores and the 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;
Table of Contents
28
·
·
·
·
·
·
·
·
·
·
·
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.
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.
Table of Contents
29
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 additional 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 Nasdaq, the SEC, or other regulatory authorities, which could require additional financial and
management resources.
Our articles and bylaws 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.
Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have
otherwise presented a premium to our shareholders.
Because we are a federally incorporated Canadian corporation and the majority of our directors and officers are resident in
Canada, it may be difficult for investors in the United States to enforce civil liabilities against us based solely upon the federal
securities laws of the United States.
We are a federally incorporated Canadian corporation with our principal place of business in Canada. A majority of our
directors and officers 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.
30
Table of Contents
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 1, 2020. 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 1, 2020 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 2020, 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.
Table of Contents
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
31
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 1, 2020, we operated 231 company-operated stores, with 186 stores in Canada and 45 stores in the United
States, consisting of approximately 215,000 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.
Our stores are located in locations that support our 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 and monitor existing
locations for sufficient levels of customer traffic to maintain successful stores. We continue to experience a secular decline in
retail foot traffic, exacerbated by COVID-19, as we pivot towards a growing North American online and wholesale business. We
expect to rebalance our portfolio of stores as this transition occurs over time.
The Company continues to review its store network and may choose to accelerate the exit of underperforming stores.
Subsequent to year end, the Company did not renew three store leases in Canada and exited one store early in the US. As at June
15, 2020, the Company is in negotiations for the exit of eight additional stores.
As of June 15, 2020, we have received notices of default for unpaid rents from 37 landlords representing 53 of our retail
stores. We also received rent deferral notices from 13 landlords representing 60 of our retail stores. With regard to both the
defaulted leases and rent deferral notices, we have either determined to terminate the lease or are in the process of discussing
resolution of the current situation regarding rent payments with the landlords. We can provide no assurances that an agreement or
resolution regarding the defaulted leases will be reached or any forbearance of our lease obligations will be provided to us
regarding our other lease agreements.
The following table summarizes the locations of our stores as of February 1, 2020:
32
Locations in Canada
Alberta
British Columbia
Manitoba
Newfoundland
New Brunswick
Nova Scotia
Ontario
Prince Edward Island
Québec
Saskatchewan
Total stores in Canada
Table of Contents
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
26
28
6
2
3
5
63
1
49
3
186
Number of
Stores
7
2
1
8
1
8
2
1
2
6
3
1
1
1
1
45
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.
Table of Contents
33
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 June 1, 2020, there were approximately 13 holders of
record of our common shares. Excluded from the number of stockholders of record are stockholders who hold shares in
“nominee” or “street” name. The closing price per share of the Company’s common shares as of June 1, 2020, as reported under
the NASDAQ Global Market Exchange, was $0.87.
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 1, 2020. 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.
Table of Contents
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
34
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 1, 2020 and February 2, 2019 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 February 3, 2018, January 28, 2017 and January 30, 2016 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 1,
February 2,
For the year ended
February 3,
January 28,
January 30,
2020
2019
2018
2017
2016
(in thousands, except share information)
Consolidated statements of loss:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Results from operating activities
Finance costs
Finance income
Accretion of preferred shares
Loss from embedded derivative on Series A, A-1 and A-2
preferred shares
Loss before income taxes
Provision for income tax (recovery)
Net 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
$
$
$
$
$
$
$
196,462 $
87,886
108,576
135,306
(26,730)
6,751
(784)
-
-
(32,697)
(1,500)
(31,197) $
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)
26,056,332
25,967,836
25,716,186
24,699,290
19,776,946
(1.20) $
(1.29) $
(1.11) $
(0.15) $
(6.65)
46,338 $
139,659 $
116,310 $
23,349 $
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
35
Table of Contents
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 June 15, 2020, 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 June 15, 2020.
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 1, 2020 and February 2, 2019 and for the years ended February 1, 2020, February 2, 2019, and February
3, 2018 which are contained in this Annual Report on Form 10-K.
Business Update
In December 2019, a novel strain of coronavirus, known as COVID-19, was first reported and was subsequently declared
a pandemic by the World Health Organization in March 2020. The measures adopted by the Federal, provincial and State
governments in order to mitigate the spread of the outbreak required the Company to close all of its retail locations across North
America effective March 17, 2020 until further notice.
The consequences of the outbreak and impact to the economy continues to evolve and the full extent of the impact is
uncertain as of the date of this filing. As we continue to monitor the evolving COVID-19 pandemic and the impact on our
business, we have taken decisive actions across our businesses such as temporarily furloughing all store related employees,
moving all non-essential remaining employees to a four-day work week, reducing compensation for Board and management
during the crisis. These measures, among others, are intended to better align the Company’s cost structure with its current sales
and help preserve its financial position.
Although we continue to offer our products directly to consumers through our online store and in supermarkets and
drugstores across Canada, there is no assurance that customers will purchase our products at previous volumes through these
alternative channels. Furthermore, the duration and impact of the outbreak is unknown and may influence consumer shopping
behavior and consumer demand including online shopping.
As retailers in North America begin to re-emerge from the government mandated lockdown, we are cautiously balancing
the safety of our employees and customers with the desire to re-open select stores in our network. Accordingly, we have not
remitted rental payments for the months of April, May and June at this time. We expect to test the re-opening of a few stores;
however, until we have a clearer vision of how the pandemic unfolds, the impact of any government and landlord programs on
our business, and the manner in which we address the operational constraints placed before us as part of government
deconfinement measures, we expect to take a more cautious approach to store re-openings, and at this time, the Company is
unable to predict when, and if, it will reopen its retail locations.
For the year ended February 1, 2020, the Company incurred a net loss of $31.2 million. The Company’s current liabilities
total $44.1 million as at February 1, 2020. As at February 1, 2020, the Company held cash and accounts and other receivables of
$52.4 million. The Company does not currently have any third-party financing available with which to meet any future financial
obligations.
Based on its current projections, the Company has sufficient cash and accounts and other receivables to discharge its
current liabilities in the next 12 months; however, it has experienced significant net losses in Fiscal Years 2017 to 2019 of $28.5
million, $33.5 million and $31.2 million, respectively.
The Company’s ability to continue as a going concern is dependent on its ability to stabilize its business from unfavorable
trend lines, strengthening its business by focusing on how to grow its product portfolio including sales and customer service
execution, and effectively optimizing its North American retail footprint to emerge as a leaner, more sustainable physical
presence that complements a growing world-class online and grocery business, all supported by a right-sized support
organization.
Management believes that there is material uncertainty surrounding the Company’s ability to execute the strategy
necessary to return to profitability in the current environment, including the unpredictability surrounding the recovery from the
COVID-19 outbreak and changes in consumer behavior. If the Company is unable to execute these or other related strategies, the
Board of Directors of the Company may pursue a formal restructuring, reorganization or other similar actions under applicable
Canadian and/or United States laws.
As of June 15, 2020, we have received notices of default for unpaid rents from 37 landlords representing 53 of our retail
stores. We also received rent deferral notices from 13 landlords representing 60 of our retail stores. With regard to both the
defaulted leases and rent deferral notices, we have either determined to terminate the lease or are in the process of discussing
resolution of the current situation regarding rent payments with the landlords. We can provide no assurances that an agreement or
resolution regarding the defaulted leases will be reached or any forbearance of our lease obligations will be provided to us
regarding our other lease agreements.
Accounting Periods
All references to “Fiscal 2019” are to the Company’s fiscal year ended February 1, 2020. 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 February 1, 2020 and February 2,
2019 covers a 52-week fiscal period.
Table of Contents
36
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 231 company-operated DAVIDsTEA
stores as of February 1, 2020, 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.
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.
Factors Affecting Our Performance
Fiscal 2020 Highlights
During Fiscal 2019, sales declined by $16.3 million and 8% over the prior year to $196.5 million. Net loss decreased by
$2.3 million to $31.2 million for the year from a net loss of $33.5 million in Fiscal 2018. Excluding the impact of IFRS 16, net
loss would have amounted to $35.4 million representing a increase of $1.9 million. Adjusted EBITDA in Fiscal 2019 was of
$11.1 million and compares to a loss of $1.3 million in Fiscal 2018. Excluding the impact of IFRS 16, Adjusted EBITDA would
have amounted to a negative $11.9 million, representing a decrease of $10.3 million.
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, e-commerce site and our wholesale distribution channels. Our
business is seasonal and, as a result, our sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal
quarter, which includes the holiday sales period, and tend to be lowest in the second and third fiscal quarter because of lower
customer traffic in our locations in the summer months.
The specialty retail industry is cyclical, and our sales are affected by general economic conditions. 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. 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.
37
Table of Contents
Measuring the change in year-over-year comparable sales allows us to evaluate how our business is performing. Various
factors affect comparable sales, including:
·
·
·
·
·
·
·
·
·
our ability to anticipate and respond effectively to consumer preference, buying and economic trends;
our ability to provide a product offering that generates new and repeat visits to our stores and online;
the customer experience we provide in our stores and online;
the level of customer traffic near our locations in which we operate;
the number of customer transactions and average ticket in our stores and online;
the pricing of our tea, tea accessories, and food and beverages;
our ability to obtain and distribute product efficiently;
our opening of new stores in the vicinity of our existing stores; and
the opening or closing of competitor stores near our stores.
Non-Comparable Sales. Non-comparable sales include sales from stores prior to the beginning of their thirteenth fiscal
month of operation and wholesale sales channel, which includes sales to grocery, hotels, restaurants and institutions, office and
workplace locations and food services, as well as corporate gifting.
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, store recoveries and provision for onerous
contracts. Store operating expenses consist of all store expenses. General and administration costs consist of salaries and other
payroll costs, travel, professional fees, stock compensation, marketing expenses, information technology, depreciation of
property, plant and equipment, amortization of intangible, amortization of right-of-use assets 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 Part II - Item 7, in 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 in Part II – Item 7,
in 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,
finance lease obligations, and interest on lease liabilities.
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.
Table of Contents
38
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 and recoveries 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, equipment and right-of-use
assets 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 Part II – Item 7, in this Annual Report on Form 10-K.
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
February
1, 2020
Excluding
impact
of IFRS
16
February
2,
2019
February
1,
2020
For the year ended
February
1, 2020
Excluding
impact
of IFRS
16
February
1,
2020
February
2,
2019
$
$
$
73,538
40,321
33,217
42,153
(8,936)
(212)
(213)
(8,511)
(1,500)
(7,011)
73,538
34,457
39,081
45,050
(5,969)
1,446
(214)
(7,201)
(1,500)
(5,701)
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 recovery
Net loss
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 recovery
Net loss
Other financial and operations data:
Adjusted EBITDA (1)
Adjusted EBITDA as a percentage of sales
Number of stores at end of period
Comparable sales decline for period (2)
_____________
(1) For a reconciliation of Adjusted EBITDA to net income see “—Non-IFRS Metrics” below.
100.0%
46.9%
53.1%
61.3%
(8.1%)
2.0%
(0.3%)
(9.8%)
(2.0%)
(7.8%)
$
9,721
13.2%
231
(17.3%)
100.0%
54.8%
45.2%
57.3%
(12.2%)
(0.3%)
(0.3%)
(11.6%)
(2.0%)
(9.5%)
$
5.2%
231
(17.3%)
3,857
$
$
$
83,144
43,581
39,563
40,857
(1,294)
1,377
(126)
(2,545)
10,733
$ (13,278)
$ 196,462
87,886
108,576
135,306
(26,730)
6,751
(784)
(32,697)
(1,500)
$ (31,197)
$ 196,462
111,092
85,370
123,255
(37,885)
(211)
(784)
(36,890)
(1,500)
$ (35,390)
$ 212,753
114,774
97,979
125,722
(27,743)
1,614
(700)
(28,657)
4,882
$ (33,539)
100.0%
52.4%
47.6%
49.1%
(1.6%)
1.7%
(0.2%)
(3.1%)
12.9%
(16.0%)
10,940
$
13.2%
237
(1.6%)
100.0%
44.7%
55.3%
68.9%
(13.6%)
3.4%
(0.4%)
(16.6%)
(0.8%)
(15.9%)
100.0%
56.5%
43.5%
62.7%
(19.3%)
(0.1%)
(0.4%)
(18.8%)
(0.8%)
(18.0%)
11,109
$ (12,097)
5.65%
231
(12.7%)
$
(6.2%)
231
(12.7%)
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%)
(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.
Table of Contents
Non-IFRS Metrics
39
Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted EBITDA and
Adjusted Net Income, before and after adjustments for the impact of IFRS 16, 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 (Loss), before and after adjustments for the impact of IFRS 16, 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, before and after adjustments for the impact of
IFRS 16, 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, before and
after adjustments for the impact of IFRS 16, 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, before and after adjustments for the impact of IFRS 16, 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;
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, before and after adjustments for the impact of IFRS 16, 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, before and after adjustments for the impact of IFRS 16, to our net loss, Adjusted Net
Income (Loss) and Adjusted Fully Diluted Income (Loss) per common share determined in accordance with IFRS:
Table of Contents
Reconciliation of Adjusted selling, general and administration expenses
40
For the three months ended
February
1, 2020
Excluding
impact
of IFRS
16
2020
February
1,
2019
February
2,
For the year ended
February
1, 2020
Excluding
impact
of IFRS
16
February
1,
2020
February
2,
2019
Selling, general and administration expenses
$
Executive separation costs related to salary (a)
Impairment of property, equipment and right-of-use assets (b)
Impact of onerous contracts (c)
Strategic review and proxy contest costs (d)
ERP project termination (e)
45,050 $
—
(10,704)
—
—
—
34,346 $
42,153 $
—
(10,704)
—
—
—
31,449 $
40,857 $ 135,306 $ 123,255 $ 125,722
(1,280)
(440)
(9,960)
(6,675)
(552)
(66)
(3,593)
(55)
(2,496)
(2,496)
31,125 $ 117,526 $ 105,475 $ 107,841
—
(17,780)
—
—
—
—
(17,780)
—
—
—
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, equipment and right-of-use assets 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.
Table of Contents
Reconciliation of Adjusted results from operating activities
41
For the three months ended
February
1, 2020
For the year ended
February
1, 2020
February Excluding February February Excluding February
1,
2020
impact
of IFRS
16
2,
1,
2019
2020
impact
of IFRS
16
2,
2019
Results from operating activities
Executive separation costs related to salary (a)
Impairment of property, equipment and right-of-use assets (b)
Impact of onerous contracts (c)
Strategic review and proxy contest costs (d)
ERP project termination (e)
$
(5,969) $
—
10,704
—
—
(8,936) $
—
10,704
—
—
(1,294) $ (26,730) $ (37,885) $ (27,743)
1,280
9,960
552
3,593
2,496
(9,862)
440
6,675
66
55
2,496
8,438 $
—
17,780
—
—
—
17,780
—
—
(8,950) $ (20,105) $
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
4,735 $
1,768 $
$
employment from the Company.
(b) Represents costs related to impairment of property, equipment and right-of-use assets 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.
Table of Contents
Reconciliation of Adjusted EBITDA to our net loss
42
For the three months ended
February
1, 2020
Excluding
impact
of IFRS
16
2019
February
1,
2019
February
2,
For the year ended
February
1, 2020
Excluding
impact
of IFRS
16
February
1,
2020
February
2,
2019
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, equipment and right-of-use 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.
$
$
$
(5,701) $
1,445
(213)
4,872
(1,750)
(1,347) $
286
—
10,704
—
—
78
—
—
9,721 $
(7,011) $ (13,278) $ (31,197) $ (35,390) $ (33,539)
1,614
6,751
(700)
(784)
8,203
19,396
(1,750)
4,882
(7,584) $ (30,790) $ (19,540)
1,377
(126)
2,105
10,733
811 $
(212)
(213)
1,975
(1,750)
(7,211) $
(211)
(784)
7,345
(1,750)
286
—
10,704
—
—
78
—
—
3,857 $
218
440
6,675
66
42
137
55
2,496
10,940 $
813
—
17,780
—
—
100
—
—
813
—
17,780
—
—
100
—
—
11,109 $ (12,097) $
211
1,280
9,960
552
25
151
3,593
2,496
(1,272)
(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 right-of-use assets 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.
Table of Contents
Reconciliation of reported results to Adjusted Net Income (Loss)
43
For the three months ended
February
1, 2020
Excluding
impact
of IFRS
16
2020
February
1,
2019
February
2,
For the year ended
February
1, 2020
Excluding
impact
of IFRS
16
February
1,
2020
February
2,
2019
Net loss
$
Executive separation costs (a)
Impairment of property, equipment and right-of-use assets (b)
Impact of onerous contracts (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)
(5,701) $
—
10,704
—
—
—
—
—
(1,750)
3,253 $
(7,011) $ (13,278) $ (31,197) $ (35,390) $ (33,539)
1,280
9,960
803
3,593
2,496
(4,866)
9,500
4,000
(6,773)
—
—
440
17,780
17,780
6,675
—
—
140
—
—
55
—
—
2,496
—
—
(2,687)
—
—
9,500
(1,750)
(1,750)
3,060
6,401 $ (15,167) $ (19,360) $
—
10,704
—
—
—
—
—
(1,750)
1,943 $
Adjusted net income (loss)
____________
(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 right-of-use assets 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 revised provision for uncertain tax position as a result of a settlement reached with the taxation authorities.
Table of Contents
44
Reconciliation of fully diluted loss per common share to adjusted fully diluted income (loss) per common share
For the three months ended
February 1,
2020
Excluding
impact
of IFRS 16
February 1,
2020
For the year ended
February 1,
2020
Excluding
impact
of IFRS 16
February 2,
2019
February 1,
2020
February 2,
2019
Weighted average number of shares outstanding, basic
and fully diluted
Adjusted weighted average number of shares
outstanding, fully diluted
Net loss
Adjusted net income (loss)
Net loss per share, fully diluted
Adjusted net income (loss) per share, fully diluted
26,080,529 26,080,529 26,010,544 26,056,332 26,056,332 25,967,836
26,769,190
26,769,190
26,033,353
26,056,332
26,056,332
25,967,836
$
$
$
$
(5,701) $
(7,011) $
(13,278) $
(31,197) $
(35,390) $
(33,539)
3,253 $
1,943 $
6,401 $
(15,167) $
(19,360) $
(6,773)
(0.21) $
(0.26) $
(0.51) $
(1.20) $
(1.36) $
(1.29)
0.12 $
0.07 $
0.25 $
(0.58) $
(0.74) $
(0.26)
Operating Results for the Fourth Quarter of Fiscal 2019 Compared to the Operating Results for the Fourth Quarter of Fiscal
2018
Sales. Sales decreased 11.6% to $73.5 million from $83.1 million in the fourth quarter of Fiscal 2018. Sales through e-
commerce and wholesale channels increased $2.8 million and 18.5% driven primarily by greater online adoption in both Canada
and the U.S., as well as by increased demand in our grocery chain distribution channel. Offsetting this was a decline in retail sales
of $12.4 million, and a decline of $11.5 million and 17.3% in comparable same-store sales.
Gross Profit. Gross profit decreased by 1.2%, or $0.5 million, to $39.1 million for the three months ended February 1,
2020, from the prior year quarter. IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-
of-use assets and interest expense on lease liabilities. Accordingly, straight-line operating lease expense is no longer included in
cost of sales in arriving at gross profit. Prior to the adoption of IFRS 16, straight-line operating lease expense amounting to $5.9
million would have been included in arriving at gross profit. Excluding the impact of IFRS 16, gross profit decreased by $6.3
million to $33.2 million, representing a gross profit of 45.2% for the three months ended February 1, 2020, a decrease of 2.4%
from the prior year quarter resulting from a shift in product sales mix and the deleveraging of fixed costs due to negative
comparable store sales.
Selling, General and Administration Expenses (“SG&A”). SG&A expenses increased by $4.0 million, or 10.2%, to $45.1
million for the three months ended February 1, 2020 from the prior year quarter. Under IFRS 16, SG&A includes $2.9 million of
depreciation in connection with our right-of-use assets. Excluding the impact of IFRS 16, SG&A would have amounted to $42.2
million, a decrease of $1.3 million, or 3.2%, from the prior year quarter and as a percentage of sales would have amounted to
57.3% representing an increase of 8.2% over the prior year quarter. Excluding the impact of IFRS 16 and impairment of property,
equipment and right-of-use assets for the three months ended February 1, 2020 and the impact of onerous contracts, impairment
of property, equipment, executive separation cost related to salary, costs related to the strategic review and proxy contest and ERP
project termination costs for the three months ended February 2, 2019, Adjusted SG&A increased by $0.3 million for the three
months ended February 1, 2020. As a percentage of sales and excluding the impact of IFRS 16, Adjusted SG&A increased to
42.8% from 37.4% due to the decline in retail sales.
Table of Contents
45
Results from Operating Activities. Loss from operating activities was $6.0 million as compared to a loss of $1.3 million in
the prior year quarter. Excluding the impact of IFRS 16, loss from operating activities would have amounted to $8.9 million, an
increase of $7.6 million from the prior year quarter. This increase is mainly explained by the increase in the impairment of
property, equipment and right-of-use assets in 2019. Adjusted operating income, which excludes any impact of executive
separation cost related to salary, impairment of property, equipment and right-of-use assets, impact from onerous contracts, costs
related to the strategic review and proxy contest, and ERP project termination, was $1.8 million compared to $8.4 million in the
prior year quarter.
Finance Costs. Finance costs remained stable at $1.4 million in the three months ended February 1, 2020 as compared to
the prior year quarter. Finance costs under IFRS 16 includes interest expense from lease liabilities measured at the present value
of lease payments to be made over the lease term. Excluding the impact of IFRS 16, and primarily due to the revision of an
estimate for interest on an uncertain tax position, interest earnings of $0.3 million compares favorably to an expense of $1.4
million in the prior year quarter.
Finance Income. Finance income of $0.2 million is derived primarily from interest on cash on hand and has increased
slightly from prior year quarter.
Provision (Recovery) for Income Tax. Recovery for income tax amounted to $1.5 million compared to a provision of
$10.7 million in the prior year quarter. The recovery is due to the adjustment of the provision for uncertain tax provision taken in
the prior year quarter. The provision taken in the prior year quarter was due primarily to a write-down of the deferred income tax
assets and a provision for uncertain tax position.
EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was
negative $1.3 million in the quarter ended February 1, 2020 compared to a $0.8 million in the prior year quarter. Excluding the
impact of IFRS 16, EBITDA would have amounted to a negative $7.2 million, representing a decrease of $8.0 million over the
prior year quarter. Adjusted EBITDA for the quarter amounted to $9.7 million compared to $10.9 million in the prior year
quarter. Excluding the impact of IFRS 16, impairment of property, equipment and right-of-use assets, stock-based compensation
and loss on disposal of property and equipment for the three months ended February 1, 2020 and the impact of stock-based
compensation, executive separation costs related to salary, impairment of property, equipment, onerous contracts, deferred rent,
loss on disposal of property and equipment, costs related to the strategic review and proxy contest, and ERP project termination
costs for the three months ended February 2, 2019, Adjusted EBITDA decreased by $7.0 million to $3.9 million.
Net Loss. Net loss was $5.7 million in the quarter ended February 1, 2020 compared to a net loss of $13.3 million in the
prior year quarter. Excluding the impact of IFRS 16, Net loss would have amounted to $7.0 million, representing a decrease in
net loss of $6.3 million over the prior year quarter. Adjusted net income, which excludes the impact from executive separation
cost related to salary, impairment of property, equipment and right-of-use assets, impact of onerous contracts, ERP project
termination costs and costs related to strategic review and proxy contest, write-down of deferred income tax assets and the setup
of deferred income tax assets resulting from the probability of using operating tax loss carry forwards, was $1.9 million
compared to $6.4 million in the prior year quarter.
Fully Diluted Net Loss per Share. Fully diluted net loss per common share was $0.21 compared to a net loss of $0.51 in
the fourth quarter of Fiscal 2018. Adjusted fully diluted net income per common share, which is adjusted net income on a fully-
diluted weighted average shares outstanding basis, was $0.12 per share compared to $0.25 per share in the same quarter of prior
year.
Cash on Hand. At the end of the fourth quarter of Fiscal 2019, the Company had cash amounting to $46.3 million. Our
cash position enables us to execute our strategy and invest further in funding working capital, transformative technology
improvements and related infrastructure.
Table of Contents
46
Fiscal Year Ended February 1, 2020 Compared to Fiscal Year Ended February 2, 2019
Sales. Sales for Fiscal 2019 decreased by 7.7%, or $16.3 million, to $196.5 million from $212.8 million in Fiscal 2018.
Sales from our e-commerce and wholesale channels increased by $7.3 million and 20.9%, driven primarily by greater online
adoption as well as by increased demand in our grocery distribution channel. Offsetting this was a decline in retail sales of $23.6
million and a decline of $22.1 million, or 12.7%, in comparable same-store sales.
Gross Profit. Gross profit increased by 10.8% and $10.6 million, to $108.6 million in Fiscal 2019 in comparison to Fiscal
2018. IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest
expense on lease liabilities. Accordingly, straight-line operating lease expense is no longer included in cost of sales in arriving at
gross profit. Prior to the adoption of IFRS 16, straight-line operating lease expense amounting to $23.2 million would have been
included in arriving at gross profit. Excluding the impact of IFRS 16, gross profit decreased by $12.6 million to $85.4 million,
representing a gross profit of 43.5% for Fiscal 2019, a decrease of 2.6% compared to Fiscal 2018 driven by a shift in product
sales mix and the deleveraging of fixed costs due to negative comparable store sales.
Selling, General and Administration Expenses. SG&A increased by 7.6% and $9.6 million, to $135.3 million in Fiscal
2019, compared to Fiscal 2018. Under IFRS 16, SG&A includes $12.1 million of depreciation in connection with our right-of-
use assets. Excluding the impact of IFRS 16, SG&A would have amounted to $123.3 million, a decrease of $2.5 million and
2.0%, from Fiscal 2018 and as a percentage of sales would have amounted to 62.7% representing an increase of 3.6% over Fiscal
2018. Excluding the impact of IFRS 16 and impairment of property, equipment and right-of-use assets for Fiscal 2019 and the
impact of executive separation cost related to salary, impairment of property, equipment and right-of-use assets, onerous
contracts, costs related to the strategic review and proxy contest and the ERP project termination for Fiscal 2018, Adjusted
SG&A decreased by $2.3 million for Fiscal 2019. As a percentage of sales, Adjusted SG&A increased to 53.7% from 50.7% due
to the decline in retail sales.
Results from Operating Activities. Loss from operating activities was $26.7 million as compared to a loss of $27.7 million
in the same period in 2018. Excluding the impact of IFRS 16, loss from operating activities would have amounted to $37.9
million, an increase of $10.1 million from the same period in 2018. This is mainly due to the impairment of property, equipment
and right-of-use assets in 2019. Adjusted operating loss, which excludes any impact from executive separation costs related to
salary, impairment of property, equipment and right-of-use assets, onerous contracts, costs related to the strategic review and
proxy contest, and ERP project terminations was $20.1 million compared to a loss of $9.9 million in the same period in the prior
year, explained substantially by the decline in revenue compared to the prior year .
EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was
negative $7.6 million in Fiscal 2019 compared to negative $19.5 million in Fiscal 2018. Excluding the impact of IFRS 16,
EBITDA would have amounted to a negative $30.8 million, representing an increase of $11.3 million over Fiscal 2018. Adjusted
EBITDA for Fiscal 2019 amounted to $11.1 million compared to a negative $1.3 million in Fiscal 2018. Excluding the impact of
IFRS 16, impairment of property, equipment and right-of-use assets, stock-based compensation and loss on disposal of property
and equipment for Fiscal 2019 and the impact of stock-based compensation, executive separation costs related to salary,
impairment of property and equipment, onerous contracts, loss on disposal of property and equipment, deferred rent, costs related
to the strategic review and proxy contest, and ERP project termination for Fiscal 2018, Adjusted EBITDA decreased by $10.8
million, to negative $12.1 million, and explained substantially by the decline in revenue compared to the prior year.
Net Loss. Net loss was $31.2 million in Fiscal 2019 compared to a net loss of $33.5 million in Fiscal 2018. Excluding the
impact of IFRS 16, Net loss would have amounted to $35.4 million, representing an increase of $1.9 million in net loss over
Fiscal 2018. Adjusted net loss, which excludes the impact from executive separation cost related to salary, impairment of
property, equipment and right-of-use assets, impact of onerous contracts, ERP project termination costs and costs related to
strategic review and proxy contest, write-down of deferred income tax assets and the setup of deferred income tax assets resulting
from the probability of using operating tax loss carry forwards, was $19.4 million compared to $6.8 million in the prior year
period, and explained substantially by the decline in revenue compared to the prior year.
Finance Costs. Finance costs amounted to $6.7 million in Fiscal 2019, an increase of $5.1 million from Fiscal 2018.
Finance costs under IFRS 16 includes interest expense from lease liabilities measured at the present value of lease payments to be
made over the lease term. The Company recognized a lease liability of $102.2 million on initial application of IFRS 16.
Excluding the impact of IFRS 16, interest expense would have been positive $0.3 million due to the adjustment on the interest
and penalty on provision for uncertain tax position as compared to $1.6 million in Fiscal 2018.
Table of Contents
47
Finance Income. Finance income of $0.7 million in Fiscal 2019 is derived primarily from interest on cash on hand and has
increased slightly from Fiscal 2018.
Provision (Recovery) for Income Tax. Recovery for income tax amounted to $1.5 million compared to a provision of $4.9
million in Fiscal 2018. The recovery is due to the adjustment of the provision for uncertain tax provision taken in the prior year.
Our effective tax rates were 4.9% and (17.0%) in Fiscal 2019 and 2018, respectively. The effective tax rate increased primarily
from the write-down of prior year deferred income tax assets and an adjustment to the provision for uncertain tax position in the
current year.
Net Loss per Share. Fully diluted net loss per common share was $1.20 in Fiscal 2019 compared to $1.29 in Fiscal 2018.
Adjusted fully diluted loss per common share, which is adjusted net loss on a fully-diluted weighted average shares outstanding
basis, was $0.58 per share in Fiscal 2019 compared to $0.26 per share in Fiscal 2018.
Liquidity and Capital Resources
As at February 1, 2020, we had $46.3 million of cash primarily held by major Canadian financial institutions. Total
current assets less the sum of trade and other payables and deferred revenue was $52.9 million and $65.8 million, for Fiscal 2019
and Fiscal 2018, respectively.
Our primary source of liquidity is cash on hand. Our primary cash needs are to finance non-cash working capital,
transformative investments in infrastructure and information technology and exiting leases on favorable terms.
Capital expenditures typically vary depending on the timing of infrastructure-related and technology investments. During
Fiscal 2019, capital expenditures totaled $3.6 million. We devoted approximately 72% of our capital expenditures to make
continued investments in our technology infrastructure. The remainder of the capital expenditures was used to renovate and
enhance existing stores.
Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent and other
store operating costs. Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as
we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. We funded
our capital expenditures and working capital requirements from cash on hand and net cash provided by our operating activities.
Although we generally anticipate that, based on our current forecasts, we have sufficient cash and cash equivalents meet
our current and anticipated near-term needs, we are in the process of reevaluating our business and implementing new strategies.
If we are unable to implement our strategies related to optimizing our North American retail footprint in order to decrease losses
caused by unprofitable stores, decreasing our costs generally and accelerating the growth of our online store, our Board of
Directors may pursue a formal restructuring, reorganization or other similar actions under applicable Canadian and/or United
States laws.
Table of Contents
48
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
Financing activities
Investing activities
Decrease in cash
Cash Flows Provided by Operating Activities
OPERATING ACTIVITIES
Net loss
Items not affecting cash:
Depreciation of property and equipment
Amortization of intangible assets
Amortization of right-of-use assets
Loss on disposal of property and equipment
Impairment of property, equipment and right-of-use assets
Interest on lease liabilities
Deferred rent
Recovery for onerous contracts
Stock-based compensation expense
Amortization of financing fees
Accretion on provisions
Deferred income taxes
Sub-total
Net change in other non-cash working capital balances related to operations
Cash flows related to operating activities
For the year ended
February 1,
2020
Excluding
impact
of IFRS 16
February 1,
2020
February 2,
2019
$
$
33,108 $
(23,192)
(5,652)
4,264 $
9,902 $
14
(5,652)
4,264 $
(13,228)
82
(8,264)
(21,410)
For the year ended
February 1,
February 2,
2020
$
2019
$
(31,197)
(33,539)
5,411
6,904
1,934
12,051
100
17,780
6,962
—
—
813
—
—
—
13,854
1,298
—
1,875
9,960
—
25
6,282
211
64
251
5,069
(1,600)
19,254
33,108
(11,628)
(13,228)
Cash Flows Provided in Operating Activities. Net cash provided by operating activities amounted to $33.1 million for
Fiscal 2019 from net cash used of $13.2 million for Fiscal 2018. Excluding the impact of IFRS 16, net cash provided by
operating activities amounted to $9.9 million, an improvement of $23.1 million from Fiscal 2018. Net change in other non-cash
working capital balances related to operations improved by $30.3 million primarily from a reduction in cash used for inventories,
the decrease in prepaid and deposits and in collection of income tax receivables, and the increase in deferred revenue partially
offset by an increase in accounts receivables.
Table of Contents
Cash Flows Used in Investing Activities
49
INVESTING ACTIVITIES
Additions to property and equipment
Additions to intangible assets
Loan advance to a Company controlled by an executive employee
Cash flows related to investing activities
For the year ended
February 1,
February 2,
2020
$
2019
$
(1,032)
(2,594)
(2,026)
(5,652)
(3,898)
(4,366)
—
(8,264)
Cash Flows Used in Investing Activities. Cash flows used in investing activities was $5.7 million for Fiscal 2019,
compared to $8.3 million for Fiscal 2018. The decrease in net cash used in investing activities relates to the decrease in capital
expenditures partially offset by the loan advance made in the second quarter.
Cash Flows Provided by Financing Activities
FINANCING ACTIVITIES
Proceed from issuance of common shares pursuant to exercise of stock options
Payment of lease liabilities
Cash flows related to financing activities
For the year ended
February 1,
February 2,
2020
$
2019
$
14
(23,206)
(23,192)
82
—
82
Cash Flow Provided in Financing Activities. Net cash flows used in financing activities was $23.2 million for Fiscal
2019, compared to net cash provided of $0.1 million for 2018. Excluding the impact of IFRS 16, net cash used in financing
activities amounted to nil.
Table of Contents
50
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. As at Feb 1,
2020, the Company has financial commitments in connection with the purchase of goods or services that are enforceable and
legally binding on the Company, exclusive of additional amounts based on sales, taxes and other costs are payable in the amount
of $11,450. The payments on these commitments are due in less than a year.
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 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
Non-financial assets, including property and equipment, and right-of-use assets 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).
Estimating the incremental borrowing rate of leases
The Company cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing
rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Company would have to pay to borrow over a
similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a
similar economic environment. The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation
when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. The
Company estimates the IBR using observable inputs (such as market interest rates) when available and is required to make
certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating).
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:
i. Going concern uncertainty
In assessing whether the going concern assumption is appropriate and whether there are material uncertainties that raise
substantial doubt about the Company’s ability to continue as a going concern, management must estimate future cash flows for a
period of at least twelve months following the end of the reporting period by considering relevant available information about the
future. In addition, management must make assumptions about what actions it will take to right-size the business. Given the
inherent uncertainties, the extent of the impact of the COVID-19 pandemic on the Company’s results of operations and cash
flows is difficult to estimate, and required actions difficult to predict. Management has concluded that there are material
uncertainties related to events or conditions that raise substantial doubt upon the Company's ability to continue as a going
concern for at least the next twelve months.
ii.
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.
Table of Contents
iii. Income taxes
51
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.
iv. Determination of the lease term of leases with renewal options
The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an
option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if
it is reasonably certain not to be exercised.
The Company has the option, under some of its leases to lease the assets for additional terms of three to five years. The
Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all
relevant factors that create an economic incentive for it to exercise the renewal, including store performance, expected future
performance and past business practice. After the commencement date, the Company reassesses the lease term if there is a
significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the
option to renew (e.g., a change in business strategy).
Recently Issued Accounting Standards
On May 28, 2020, the IASB issued an amendment to IFRS 16, Leases to make it easier for lessees to account for COVID-
19-related rent concessions such as rent holidays and temporary rent reductions.
The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions
occurring as a direct consequence of the COVID-19 pandemic are lease modifications and allows lessees to account for such rent
concessions as if they were not lease modifications. It applies to COVID-19-related rent concessions that reduce lease payments
due on or before 30 June 2021. The amendment does not affect lessors.
The amendment is effective as of June 1, 2020 but can be applied immediately in any financial statements—interim or
annual—not yet authorised for issue. The Company is in the process of assessing the impact on its 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 foreign currency exchange risk on purchases of our teas and tea accessories.
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.
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
As of February 1, 2020 and February 2, 2019:
Consolidated Balance Sheets
For the years ended February 1, 2020, February 2, 2019, 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
53
Page
54
55
56
57
58
59
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 1,
2020 and February 2, 2019, the related consolidated statements of loss and comprehensive loss, cash flows and equity for each of
the three years in the period ended February 1, 2020 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 1, 2020 and February 2, 2019 and the results of its operations and its cash flows for each of the three
years in the period ended February 1, 2020, in conformity with International Financial Reporting Standards as issued by the
International Accounting Standards Board.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from
operations, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Adoption of New Accounting Standard
As discussed in Note 4 to the consolidated financial statements, effective February 3, 2019, the Company changed its
method of accounting for its leases due to the adoption of IFRS 16, Leases, and subsequently changed its transition methodology
during the year.
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 audit provides a reasonable basis for our
opinion.
/s/ Ernst & Young LLP1
We have served as the Company’s auditor since 2011.
Montréal, Canada
June 15, 2020
_________
1 CPA, Auditor, CA, public accountancy permit no. A123806
54
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED BALANCE SHEETS
[In thousands of Canadian dollars]
Table of Contents
ASSETS
Current
Cash
Accounts and other receivables
Inventories
February 1,
As at
February 2,
2020
$
2019
$
[Note 6]
[Note 7]
46,338
6,062
22,363
42,074
3,681
34,353
[Note 8]
[Note 9]
[Note 4, 10]
[Note 11]
[Note 12]
[Note 13]
[Note 10]
[Note 4]
[Note 13]
[Note 10]
[Note 14]
[Note 15]
1,196
4,542
80,501
17,737
6,339
35,082
139,659
20,794
6,852
—
16,434
44,080
—
—
72,230
116,310
112,843
1,577
(92,278)
1,207
23,349
139,659
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
Income tax receivable
Prepaid expenses and deposits
Total current assets
Property and equipment
Intangible assets
Right-of-use assets
Total assets
LIABILITIES AND EQUITY
Current
Trade and other payables
Deferred revenue
Current portion of provisions
Current portion of lease liabilities
Total current liabilities
Deferred rent and lease inducements
Provisions
Non-current portion of lease liabilities
Total liabilities
Commitments and contingencies
Equity
Share capital
Contributed surplus
Deficit
Accumulated other comprehensive income
Total equity
Total liabilities and equity
Table of Contents
See accompanying notes
55
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 on forward exchange contracts
Realized net loss on forward exchange contracts reclassified to inventory
Provision for income tax recovery
Cumulative translation adjustment
Other comprehensive income (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]
February 1,
For the year ended
February 2 February 3,
2020
$
2019
$
2018
$
196,462
87,886
108,576
135,306
(26,730)
6,751
(784)
(32,697)
(1,500)
(31,197)
—
—
—
(290)
(290)
(31,487)
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)
[Note 19]
(1.20)
(1.29)
(1.11)
[Note 19]
26,056,332
25,967,836
25,716,186
See accompanying notes
Table of Contents
56
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
Amortization of right-of-use assets
Loss on disposal of property and equipment
Impairment of property, equipment and right-of-use assets
Interest on lease liabilities
Deferred rent
Recovery for onerous contracts
Stock-based compensation expense
Amortization of financing fees
Accretion on provisions
Deferred income taxes
Sub-total
Net change in other non-cash working capital balances related to operations
Cash flows from (used in) operating activities
FINANCING ACTIVITIES
Proceed from issuance of common shares pursuant to exercise of stock options
Payment of lease liabilities
Cash flows from (used in) financing activities
INVESTING ACTIVITIES
Additions to property and equipment
Additions to intangible assets
Loan to a Company controlled by an executive employee
Cash flows used in investing activities
Increase (decrease) in cash during the period
Cash, beginning of the period
Cash, end of the period
Supplemental Information
Cash paid for:
Interest
Income taxes (classified as operating activity)
Cash received for:
Interest
Income taxes (classified as operating activity)
February 1,
For the year ended
February 2 February 3,
2020
$
2019
$
2018
$
(31,197)
(33,539)
(28,501)
5,411
1,934
12,051
100
17,780
6,962
—
—
813
—
—
—
13,854
19,254
33,108
14
(23,206)
(23,192)
(1,032)
(2,594)
(2,026)
(5,652)
4,264
42,074
46,338
50
—
778
2,948
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
Table of Contents
See accompanying notes.
57
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF EQUITY
[In thousands of Canadian dollars]
Accumulated Other Comprehensive Income
Accumulated Accumulated
Derivative
Accumulated
Foreign
Share
Capital
$
111,692
Contributed
Surplus
$
Deficit
Balance, February 3, 2018
Net loss for the twelve months 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
—
—
—
164
663
—
—
112,519
112,519
Balance, February 2, 2019
IFRS 16 adoption adjustment (1)
—
Adjusted balance at beginning of period 112,519
Net loss for the twelve months ended
February 1, 2020
Other comprehensive loss
Total comprehensive loss
Issuance of common shares
Common shares issued on vesting of
restricted stock units
Stock-based compensation expense
Balance, February 1, 2020
303
—
112,843
—
—
—
21
Financial
Currency
Instrument Translation Comprehensive
Adjustment Adjustment
Other
Income
$
Total
Equity
$
$
$
$
2,642
(14,721)
(167)
1,922
1,755 101,368
—
—
—
(82)
(33,539)
—
(33,539)
—
(1,370)
211
300
—
(1)
1,400
—
(47,960)
1,400
—
1,400
(47,960)
(13,333)
(61,293)
—
—
—
(7)
(31,197)
—
(31,197)
—
(629)
813
1,577
212
—
(92,278)
—
167
167
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(425)
(425)
—
—
—
—
1,497
1,497
—
1,497
—
(290)
(290)
—
—
—
1,207
—
(258)
(258)
—
(33,539)
(258)
(33,797)
82
—
—
(407)
211
—
1,497
(1)
67,456
1,497
—
1,497
67,456
(13,333)
54,123
—
(290)
(290)
—
(31,197)
(290)
(31,487)
14
—
—
1,207
(114)
813
23,349
(1) Restated – note 4.
Table of Contents
See accompanying notes
58
DAVIDsTEA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended February 1, 2020, February 2, 2019 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 1, 2020 were authorized for issue in accordance with a resolution of the Board of Directors on June 15, 2020.
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 and GOING CONCERN UNCERTAINTY
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. Certain prior year amounts have been reclassified for consistency with the current year presentation. These
reclassifications had no effect on the reported results of operations.
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 February 2, 2019 and February 1,
2020 cover a 52-week period. The year ended February 3, 2018 covers a 53-week fiscal period.
Going Concern Uncertainty
In December 2019, a novel strain of coronavirus, known as COVID-19, was first reported and was subsequently declared
a pandemic by the World Health Organization in March 2020. The measures adopted by the Federal, provincial and State
governments in order to mitigate the spread of the outbreak required the Company to close all of its retail locations across North
America effective March 17, 2020 until further notice.
As the Company adapts its business strategy to the current environment, it has taken decisive actions, subsequent to year-
end, to align expenses with its continuing online and wholesale sales channel revenues. This includes temporarily furloughing all
of its store related employees and non-essential head office staff and moving substantially all remaining employees to a four-day
work week. In addition, management and members of the Board have agreed to reduced compensation during this crisis. These
measures, among others, are intended to better align the Company’s cost structure with its current sales and help preserve its
financial position.
Although the Company continues to offer its products directly to consumers through its online store and in supermarkets
and drugstores across Canada, it is unlikely that customers will purchase its products at previous volumes through these
alternative channels. Furthermore, the duration and impact of the outbreak is unknown and may influence consumer shopping
behavior and consumer demand including online shopping.
Table of Contents
59
For the year ended February 1, 2020, the Company incurred a net loss of $31.2 million. The Company’s current liabilities
total $44.1 million as at February 1, 2020. As at February 1, 2020, the Company held cash and accounts and other receivables of
$52.4 million. The Company does not currently have any third-party financing available with which to meet any future financial
obligations. Based on its current projections, the Company has sufficient cash and accounts and other receivables to discharge its
current liabilities in the next 12 months; however, it has experienced significant net losses in Fiscal Years 2017 to 2019 of $28.5
million, $33.5 million and $31.2 million, respectively. The Company’s ability to continue as a going concern is dependent on its
ability to stabilize its business from unfavorable trend lines, strengthening its business by focusing on how to grow its product
portfolio including sales and customer service execution, and effectively optimizing its North American retail footprint to emerge
as a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, all
supported by a right-sized support organization. Management believes that there is material uncertainty surrounding the
Company’s ability to execute the strategy necessary to return to profitability in the current environment, including the
unpredictability surrounding the recovery from the COVID-19 outbreak and changes in consumer behavior. If the Company is
unable to execute these or other related strategies, the Board of Directors of the Company may pursue a formal restructuring,
reorganization or other similar actions under applicable Canadian and/or United States laws.
As a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt about the
Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course
of business.
These consolidated financial statements have been prepared on a going concern basis, which assumes the Company will
continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and
commitments in the normal course of business. These consolidated financial statements as at and for the year ended February 1,
2020 do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that
may otherwise be required if the going concern basis was not appropriate. Such adjustments could be material.
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.
Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the parent Company’s functional
currency.
3. SIGNIFICANT ACCOUNTING POLICIES
Cash
Cash on the consolidated balance sheet comprises cash at banks and on hand.
Trade receivables
Trade receivables primarily represent amounts due from wholesale customers and are accounted for at amortized cost, less
any provision for doubtful accounts which is based on management’s best estimate of expected credit losses.
Table of Contents
Inventory valuation
60
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, if any.
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 the 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 the 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%.
Leased assets
Right-of-use assets
The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available
for use). Right-of-use assets are initially measured at cost, which includes the initial amount of lease liabilities adjusted for any
initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received.
Table of Contents
61
The right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term
unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term. In addition the
right-of-use assets are subject to impairment and adjusted for any remeasurement of lease liabilities, to the extent that there is a
balance of right-of-use asset at the time the change in lease liability occurs. Amortization expense is recorded in selling, general
and administrative expense.
Lease liabilities
At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments
to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any
lease incentives receivable, variable lease payments that depend on an index or a rate. The lease payments also include the
exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating
a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend
on an index or a rate are recognized as expense in the period on which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement
date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease
liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. Interest accretion is recorded
as interest expense in finance costs. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a
change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the
underlying asset. The Company has elected to apply the practical expedient to not separate the lease component and its associated
non-lease component.
Short-term leases and leases of low-value assets
The Company applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those
leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also
applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value (i.e.,
below US $5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-
line basis over the lease term.
Impairment
i.
Impairment of financial assets
The Company applies the expected credit loss model to its 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 all non-financial assets, at each reporting date, for indications that the carrying amount may not be
recoverable. 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.
Table of Contents
62
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. For non-financial assets that can be reasonably and consistently allocated to individual stores, the store level is used as the
CGU for impairment testing. For all other non-financial assets, the corporate level is used as the group of CGUs.
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 the consolidated statement of loss.
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.
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.
Stock‑based compensation
The Company has a stock option plan for employees and directors from which options to purchase common shares are
issued (the “Plan”). Options may not be granted with an exercise price of less than the fair value of the underlying shares at the
grant date. The awards have no cash settlement alternatives. The vesting requirements are typically service‑based and the options
normally have a contractual life of seven years.
The fair value of stock‑based compensation awards granted to employees is measured at the grant date using the Black
Scholes option pricing model. Measurement inputs include the share price of the underlying shares on the measurement date, the
exercise price of the option, the expected volatility (based on weighted average historical volatility of comparable companies
adjusted for changes expected based on publicly available information), the weighted average expected life of the option (based
on historical experience), expected dividends, and the risk‑free interest rate (based on government bonds).
The value of the compensation expense is recognized over the vesting period of the stock options as an expense included
in selling and general administration expenses, with a corresponding increase to contributed surplus in equity. The amount
recognized as an expense is adjusted to reflect the Company’s best estimate of the number of awards that will ultimately vest. No
expense is recognized for awards that do not ultimately vest.
Table of Contents
63
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.
The new program launched on January 1, 2019, 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.
64
Table of Contents
Store opening costs
Store opening costs are expensed as incurred.
Finance income
Interest income is recognized as interest accrues using the effective interest method.
Income taxes
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in 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.
Table of Contents
Classifications that the Company has used for financial assets include:
65
(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 the loan to a Company controlled by one of the Company’s executive employees, 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
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
Recently Adopted Accounting Pronouncements
IFRS 16 – Leases
IFRS 16, “Leases’’ (“IFRS 16’’) replaces IAS 17, “Leases’’ and related interpretations. The standard introduces a single on-
balance sheet recognition and measurement model for lessees, eliminating the distinction between operating and finance leases.
The lessee recognizes a right-of-use asset representing its control of and right to use the underlying asset and a lease liability
representing its obligation to make future lease payments. Lessors continue to classify leases as finance and operating leases.
Certain exemptions will apply for short-term leases and leases of low value assets. The new standard became effective for annual
periods beginning on or after January 1, 2019.
Nature of the effect of adoption of IFRS 16
The Company has adopted IFRS 16 as at February 3, 2019. Substantially all of the Company’s existing leases are real estate
leases for its retail stores, warehouse and corporate head office. The adoption of IFRS 16 had a significant impact as the
Company recognized new assets and liabilities. 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 with
no restatement of the prior comparative period. Upon adoption of IFRS 16, the Company has applied the following practical
expedients:
-
-
-
-
applying IFRS 16 exclusively to contracts that were previously identified as leases applying IAS 17 at the date of initial application;
applying a single discount rate to a portfolio of leases with reasonably similar characteristics;
excluding initial direct costs from the measurement of the right-of-use asset at the date of initial application; and
not separating the lease component and its associated non-lease component.
Table of Contents
66
During the course of the Company’s financial statement close process for the quarter ended November 2, 2019, accounting errors
were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36,
Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). When appropriately performing
the assessment of impairment indicators with respect to the right-of-use assets (“ROU assets”) as at May 4, 2019 and August 3,
2019, impairment charges of $13,924 and $5,025 respectively were identified that would have been required to be recognized in
the respective periods under the Company’s accounting policy for transition to IFRS 16, which included the use of the practical
expedient for assessing impairment. Upon further review, the Company also determined that, pursuant to IFRS standards, its
financial statements would be more relevant had they applied IAS 36 to assess impairment of ROU assets as of the date of initial
adoption, instead of applying the available practical expedient. Accordingly, the Company elected to voluntarily change its
accounting policy to perform an impairment assessment in accordance with IAS 36 at the date of transition to IFRS 16. The
Company believes this change is more relevant because it more faithfully depicts the performance of the Company. Subsequent
to the retrospective application of the change in accounting policy, the impairment charges were nil and $5,025 for the quarter
ended May 4, 2019 and the two quarters ended August 3, 2019, respectively.
Effects of the restatement
Based on the impairment test performed at February 3, 2019 upon the voluntary change to the Company’s method of transition to
IFRS 16 to eliminate the use of the practical expedient, the Company’s ROU assets were impaired upon initial adoption by
$32,487 as compared to the application of the previously recognized onerous lease provisions of $19,154 against the ROU assets.
The difference that results from performing an IAS 36 impairment test at February 3, 2019 and the application of the practical
expedient related to onerous leases results from a difference in the application of certain assumptions required under the two
standards. The Company previously had recorded a reduction to the deficit of $1,280 on transition to IFRS 16. After the
application of the voluntary change in accounting policy, the deficit increased by $14,613 to $61,293. The additional reduction in
the initial value of the ROU assets resulted in a decrease in amortization expense in the three-month periods ended May 4, 2019
and August 3, 2019 of $689 and $699 respectively.
The following table illustrates the effect of the voluntary change in accounting policy on the adoption of IFRS 16 as at February
3, 2019:
ASSETS
Right-of-use assets
Other assets
Total assets
LIABILITIES
February 2,
2019
IFRS 16
Adoption
February 3,
2019
As previously
reported
Change in
policy
Adjustment
February 3,
2019
Restated
—
122,500
122,500
75,596
—
75,596
75,596
122,500
198,096
(14,613)
—
(14,613)
60,983
122,500
183,483
Lease liability
Deferred rent and lease inducements
Provisions
Other liabilities
Total liabilities
EQUITY
Deficit
Other
Total equity
TOTAL LIABILITIES AND EQUITY
Table of Contents
102,168
(8,698)
(19,154)
—
74,316
1,280
—
1,280
75,596
102,168
—
—
27,192
129,360
(46,680)
115,416
68,736
198,096
—
—
—
—
—
(14,613)
—
(14,613)
(14,613)
102,168
—
—
27,192
129,360
(61,293)
115,416
54,123
183,483
—
8,698
19,154
27,192
55,044
(47,960)
115,416
67,456
122,500
67
For leases previously classified as operating leases, the Company recorded the right-of-use assets based on the amount equal to
the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. Due to this, the Company
derecognized an amount of $8,698 that was previously included under deferred rent and leasehold inducements with a
corresponding adjustment to the right-of-use asset.
The lease liabilities as at February 3, 2019 can be reconciled to the operating lease commitments as of February 2, 2019 as
follows:
Minimum lease payments under operating lease
Discounted using a weighted average incremental borrowing rate of 6.63%
Discounted non-lease component associated with lease component pursuant to practical expedient
February 3,
2019
116,772
(24,484)
9,880
102,168
Operating lease payments, which were previously included in cost of sales on the consolidated statement of income, are replaced
with depreciation expenses (included in selling, general and administrative expenses) from the right-of-use asset and interest
expense (included under finance costs) from the lease liability.
IFRIC 23 – Uncertainty over Income Tax Treatments
IFRIC 23, “Uncertainty over Income Tax Treatments” (the “Interpretation”), was issued by the IASB in June 2017. The
Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which
there is uncertainty over income tax treatments. The Interpretation requires an entity to:
·
·
·
Contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better
predictions of the resolution;
Reflect an uncertainty in the amount of income tax payable (recoverable) if it is probable that it will pay (or recover) an amount for the
uncertainty; and
Measure a tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the amount
payable (recoverable).
The adoption of this Interpretation did not have an impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
On May 28, 2020, the IASB issued an amendment to IFRS 16, Leases to make it easier for lessees to account for COVID-19-
related rent concessions such as rent holidays and temporary rent reductions.
The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions
occurring as a direct consequence of the COVID-19 pandemic are lease modifications and allows lessees to account for such rent
concessions as if they were not lease modifications. It applies to COVID-19-related rent concessions that reduce lease payments
due on or before 30 June 2021. The amendment does not affect lessors.
The amendment is effective as of June 1, 2020 but can be applied immediately in any financial statements–interim or annual–not
yet authorised for issue. The Company is in the process of assessing the impact 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 as
well as information about significant estimates are discussed in the following section.
68
Table of Contents
Key sources of estimation uncertainty
Recoverability and impairment of non‑financial assets
Non-financial assets, including property and equipment, and right-of-use assets 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).
Estimating the incremental borrowing rate of leases
The Company cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing
rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Company would have to pay to borrow over a
similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a
similar economic environment. The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation
when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. The
Company estimates the IBR using observable inputs (such as market interest rates) when available and is required to make
certain entity and asset-specific estimates (such as the subsidiary’s stand-alone credit rating).
Critical judgements in applying accounting policies
i.
Going concern uncertainty
In assessing whether the going concern assumption is appropriate and whether there are material uncertainties that raise
substantial doubt about the Company’s ability to continue as a going concern, management must estimate future cash flows for a
period of at least twelve months following the end of the reporting period by considering relevant available information about the
future. In addition, management must make assumptions about what actions it will take to right-size the business. Given the
inherent uncertainties, the extent of the impact of the COVID-19 pandemic on the Company’s results of operations and cash
flows is difficult to estimate, and required actions difficult to predict. Management has concluded that there are material
uncertainties related to events or conditions that raise substantial doubt upon the Company’s ability to continue as a going
concern for at least the next twelve months.
ii.
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.
iii.
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.
iv.
Determination of the lease term of leases with renewal options
The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an
option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if
it is reasonably certain not to be exercised.
The Company has the option, under some of its leases to lease the assets for additional terms of three to five years. The
Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all
relevant factors that create an economic incentive for it to exercise the renewal, including store performance, expected future
performance and past business practice. After the commencement date, the Company reassesses the lease term if there is a
significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the
option to renew (e.g., a change in business strategy).
Table of Contents
6. ACCOUNTS AND OTHER RECEIVABLES
69
Credit card cash clearing receivables
Trade receivables
Loan to a Company controlled by one of the Company executive employees
Other receivables
7. INVENTORIES
Finished goods
Goods in transit
Packaging
February 1,
February 2,
2020
$
2019
$
849
2,072
2,026
1,115
6,062
1,477
420
—
1,784
3,681
February 1,
February 2,
2020
$
2019
$
18,590
2,059
1,714
22,363
28,991
3,262
2,100
34,353
During the year ended February 1, 2020, inventories recognized as cost of sales amounted to $56,310 [February 2, 2019 —
$63,195, February 3, 2018 - $64,611]. The cost of inventory includes a write-down of nil [February 2, 2019 – $703, February 3,
2018 - nil] recorded as a result of net realizable value being lower than cost. Inventory write-downs of $406 [February 2, 2019 -
nil, February 3, 2018 – $730] recognized in the previous years were reversed.
Table of Contents
8. PROPERTY AND EQUIPMENT
70
Cost
Balance, February 3, 2018
Acquisitions
Disposals
Cumulative translation adjustment
Balance, February 2, 2019
Acquisitions
Disposals
Cumulative translation adjustment
Balance, February 1, 2020
Accumulated depreciation and impairment
Balance, February 3, 2018
Depreciation
Impairment
Disposals
Cumulative translation adjustment
Balance, February 2, 2019
Depreciation
Impairment
Disposals
Leasehold Furniture and Computer
equipment
improvements
$
$
hardware
$
Total
$
80,633
2,096
(68)
1,481
84,142
746
—
285
85,173
12,639
1,125
(32)
178
13,910
211
(131)
32
14,022
5,144
676
—
58
5,878
75
—
11
5,964
98,416
3,897
(100)
1,717
103,930
1,032
(131)
328
105,159
Leasehold Furniture and Computer
equipment
improvements
$
$
hardware
$
Total
$
51,296
5,117
8,164
—
1,297
65,874
4,032
1,587
—
7,346
1,134
1,411
(16)
126
10,001
854
—
(31)
3,216
653
351
—
47
4,267
525
—
—
61,858
6,904
9,926
(16)
1,470
80,142
5,411
1,587
(31)
Cumulative translation adjustment
Balance, February 1, 2020
Net Carrying Value
Balance, February 2, 2019
Balance, February 1, 2020
Table of Contents
278
71,771
29
10,853
6
4,798
313
87,422
18,268
13,402
3,909
3,169
1,611
1,166
23,788
17,737
71
For the year ended February 1, 2020, an assessment of impairment indicators was performed which caused the Company
to review the recoverable amount 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 $1,587 related to store leasehold improvements was
recorded [February 2, 2019 - $9,926, February 3, 2018 — $15,069 related to store leasehold improvements, furniture and
equipment and computer hardware]. The impairment was recorded in the Canada and U.S. segments for $1,535 and $52,
respectively [February 2, 2019 – $7,686 and $2,240, February 3, 2018 - $5,114 and $9,955, respectively].
The Company also recorded an impairment loss of $16,193 related to the Company’s right-of-use assets [February 2,
2019 - nil, February 3, 2018 - nil]. The impairment was recorded in the Canada and U.S. segments for $10,552 and $5,641,
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 $6,466 [February 2, 2019 – nil , February 3, 2018 —$1,097] 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
12.1% [February 2, 2019 – 11.9%, February 3, 2018 — 11.9%].
A reversal of impairment occurs when previously impaired CGUs see improved financial results. For the year ended
February 1, 2020, no impairment losses were reversed [February 2, 2019 - nil, February 3, 2018 - $866]. Impairment losses were
reversed only to the extent that the carrying amounts of the CGU’s net assets do not exceed the carrying amount that would have
been determined, net of depreciation, if no impairment loss had been recognized.
For the year ended February 1, 2020, the depreciation expense was $5,411 [February 2, 2019 - $6,904, February 3, 2018
—$8,431 ]; with $4,659 recorded in the Canada segment [February 2, 2019 - $5,825, February 3, 2018 — $6,387], $219 recorded
in the U.S. segment [February 2, 2019 - $520, February 3, 2018 — $1,508], and $533 recorded in corporate selling, general and
administration expenses [February 2, 2019 - $559, February 3, 2018 — $536]. 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).
72
Table of Contents
9. INTANGIBLE ASSETS
Cost
Balance, February 3, 2018
Acquisitions
Disposal
Cumulative translation adjustment
Balance, February 2, 2019
Acquisitions
Cumulative translation adjustment
Balance, February 1, 2020
Accumulated amortization
Balance, February 3, 2018
Amortization
Impairment
Disposal
Cumulative translation adjustment
Balance, February 2, 2019
Amortization
Cumulative translation adjustment
Balance, February 1, 2020
Computer
software
$
Other
$
Total
$
9,279
4,356
(1,724)
4
11,915
2,594
2
14,511
5,019
1,281
34
—
2
6,336
1,934
3
8,273
269
—
(178)
10
101
—
—
101
90
17
—
(111)
6
2
—
(2)
—
9,548
4,356
(1,902)
14
12,016
2,594
2
14,612
5,109
1,298
34
(111)
8
6,338
1,934
1
8,273
Net Carrying Value
Balance, February 2, 2019
Balance, February 1, 2020
5,579
6,238
99
101
5,678
6,339
Amortization expense is reported in the consolidated statement of loss and comprehensive loss under selling, general and
administration expenses (Note 18).
Included in disposal is a write-off of – nil [February 2, 2019 - $1,724; February 3, 2018 – nil,] related to costs incurred
with respect to an ERP upgrade which the Company no longer intends to continue.
10. LEASES
Set out below are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the
year:
Balance, February 3,2019
Additions
Amortization expense
Impairment of right-of-use assets
Interest expense
Payments
CTA
Balance, February 1, 2020
Presented as:
Current
Non-Current
Right-of
use assets
$
60,983
2,179
(12,051)
(16,193)
—
—
164
35,082
Lease
Liability
$
102,168
2,179
—
—
6,962
(23,206)
561
88,664
—
35,082
16,434
72,230
Depreciation expense is reported in the consolidated statement of loss and comprehensive loss under Selling, general and
administration expenses. Impairment losses related to right-of-use assets have been recorded in Selling, general and
administration expenses in the amount of $16,193. Refer to note 8 for further details.
Table of Contents
73
The following table presents a maturity analysis of future contractual undiscounted cash flows from lease liabilities:
Within one year
After one year but not more than five years
More than five years
February 1,
2020
$
22,378
78,035
9,511
109,924
The Company recognized variable lease payments of $1,274 for the year ended February 1, 2020. In addition, expenses related to
leases of low-value assets were $18. These expenses are recorded in Selling, general and administrative expenses.
11. TRADE AND OTHER PAYABLES
Trade payable and accrued liabilities
Income taxes payable
Wages, salaries and employee benefits payable
12. DEFERRED REVENUE
Gift cards liability
Loyalty program liability
February 1,
February 2,
2020
$
2019
$
16,582
1,244
2,968
20,794
14,990
2,700
3,261
20,951
February 1,
February 2,
2020
$
2019
$
4,899
1,953
4,992
1,249
During the year, the Company recorded gift card breakage income of $1,294 [February 2, 2019 - $242, February 3, 2018 -
$575]. Gift card breakage is included in sales in the consolidated statement of loss.
6,852
6,241
74
Table of Contents
13. PROVISIONS
Opening balance
Impact of adoption of IFRS 16 [Note 4]
Additions
Reversals
Utilization
Settlements
Accretion expense
Cumulative translation adjustment
Ending balance
Less: Current portion
Long-term portion of provisions
February 1,
February 2,
2020
$
2019
$
19,154
(19,154)
—
—
—
—
—
—
—
—
—
18,153
—
11,078
(4,796)
(5,730)
(691)
251
889
19,154
(3,714)
15,440
During the year ended February 2, 2019, provisions for onerous contracts were recognized in respect of store leases where
the unavoidable costs of meeting the obligations under the lease agreements exceeded 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. Additions to the onerous provisions were recorded in the
amount $11,078, while the provisions for other stores were fully or partially reversed in the amount of $4,796.
14. COMMITMENTS AND CONTINGENCIES
As at Feb 1, 2020, the Company has financial commitments in connection with the purchase of goods or services that are
enforceable and legally binding on the Company, exclusive of additional amounts based on sales, taxes and other costs are
payable in the amount of $11,450. The payments on these commitments are due in less than a year.
75
Table of Contents
15. SHARE CAPITAL
Authorized
An unlimited number of common shares.
Issued and Outstanding
Share Capital - 26,086,162 Common shares (February 2, 2019 - 26,011,817)
Number of shares in issuance
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
Issuance of common shares upon exercise of options
Issuance of common shares upon vesting of restricted stock units
Balance, February 1, 2020
February 1,
February 2,
2020
$
112,843
2019
$
112,519
Common
shares
#
25,885,372
51,717
74,728
26,011,817
18,500
55,845
26,086,162
During the year ended February 1, 2020, 18,500 stock options were exercised for common shares, for cash proceeds of
$14 [February 2, 2019 – 51,720 stock options 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]. The carrying value of common shares during the
year ended February 1, 2020 includes $7 [February 2, 2019 - $82] which corresponds to a reduction in the contributed surplus
associated to options exercised during the period.
In addition, during the year ended February 1, 2020, 55,845 common shares [February 2, 2019 – 74,728, February 3, 2018
—97,648] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $303,
net of tax [February 2, 2019 - $663, February 3, 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
2,940,000 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 1, 2020, 1,823,962 common shares remain available
for issuance under the 2015 Omnibus Plan.
Table of Contents
76
No options were granted for the year ended February 1, 2020 [February 2, 2019 – nil].
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 period
Exercisable, end of period
February 1,
2020
Weighted
average
exercise
price
$
February 2,
2019
Weighted
average
exercise
price
$
Options
outstanding
#
137,540
—
(18,500)
(42,690)
76,350
75,475
Options
outstanding
#
447,779
—
(88,135)
(222,104)
137,540
80,332
7.17
—
0.77
6.72
8.96
8.90
7.18
—
2.76
8.95
7.17
4.74
The weighted average share price at the date of exercise for options exercised during the year ended February 1, 2020 was
$2.28 [February 2, 2019 — $4.47].
The following table summarizes information about the stock options outstanding at February 1, 2020 and February 2,
2019:
Number
outstanding
at
February 1,
Weighted
average
contractual
remaining
Number of
options
at
February 1,
Weighted
average
exercise
price
$
0.4
1.8
4.1
3.2
3.4
0.77
4.30
10.28
13.39
8.96
exercisable Weighted
average
exercise
price
$
0.73
4.30
10.28
14.39
8.90
2020
#
4,000
14,000
53,225
4,250
75,475
Range of exercise prices
$0.77
$3.33 - $4.31
$8.76 - $10.28
$14.39 - $17.99
As at February 1, 2020
Table of Contents
2020
#
life
(years)
4,000
14,000
53,225
5,125
76,350
77
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 2,
Weighted
average
contractual
remaining
2019
#
life
(years)
Weighted
average
exercise
price
$
31,100
35,000
53,225
18,215
137,540
1.1
2.6
5.1
4.2
3.4
0.77
4.29
10.28
14.51
7.17
Number of
options
at
February 2,
exercisable Weighted
average
exercise
price
$
0.77
4.29
—
14.54
4.74
2019
#
31,100
35,000
—
14,232
80,332
A summary of the status of the Company’s RSU plan and changes during the years ended February 1, 2020 and February
2, 2019 is presented below.
Outstanding, beginning of year
Granted
Forfeitures
Vested
Vested, withheld for tax
Outstanding, end of period
For the year ended
February 1,
2020
Weighted
average
fair value
RSUs
February 2,
2019
Weighted
average
fair value
RSUs
outstanding per unit (1) outstanding per unit (1)
#
270,976
804,710
(188,685)
(78,465)
(59,014)
749,522
$
5.26
1.93
3.17
5.41
5.51
2.17
#
289,416
491,450
(360,371)
(74,728)
(74,791)
270,976
$
9.70
4.47
6.31
8.85
8.60
5.26
(1) Weighted average fair value per unit as at date of grant.
During the year ended February 1, 2020, the Company recognized a stock-based compensation expense of $813 [February
2, 2019 - $211, February 3, 2018 — $2,021].
Table of Contents
16. FINANCE COSTS
78
Accretion on provisions
Interest and penalty on provision for uncertain tax position
Interest on lease liabilities
Other finance costs
17. INCOME TAXES
February 1,
For the year ended
February 2,
February 3,
2020
$
2019
$
2018
$
-
(250)
6,962
39
6,751
251
1,300
-
63
1,614
2,292
-
-
79
2,371
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
February 1,
2020
For the year ended
February 2,
2019
February 3,
2018
Income tax recovery — statutory rate
Increase (decrease) in provision for income tax (recovery) resulting
%
26.8
$
(8,747)
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
(0.7)
(1.2)
(25.2)
—
4.6
0.3
4.6
232
394
8,232
—
(1,500)
(111)
(1,500)
26.9
(1.3)
—
(15.0)
(18.2)
(9.4)
—
(17.0)
378
—
4,306
5,194
2,700
4
4,882
%
%
$
(7,700)
26.8
(1.6)
(7.9)
(16.7)
(7.8)
—
(0.4)
(7.6)
$
(7,097)
437
2,090
4,415
2,054
—
111
2,010
Table of Contents
79
A breakdown of the income tax provision (recovery) on the consolidated statement of loss is as follows:
Income tax provision (recovery)
Current
Deferred
February 1,
For the year ended
February 2,
February 3,
2020
$
2019
$
2018
$
(1,500)
—
(1,500)
(187)
5,069
4,882
(1,575)
3,585
2,010
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.
In fiscal 2018, in connection with a Canada Revenue Agency transfer pricing audit, the Company recorded a provision of
$4.0 million comprised of $2.7 million and $1.3 million for taxes and interest, respectively. The Company revised its estimate for
this uncertain tax position to $1.2 million and $1.0 million for taxes and interest, respectively, as a result of a settlement reached
with the taxation authorities after year-end.
The tax effects of temporary differences and net operating losses that give rise to deferred income tax assets and lease
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
Lease liability
Provisions for onerous contracts
Other
Total deferred income tax assets
Deferred income tax liabilities
Right of use assets
Unrealized foreign exchange gain related to intercompany advances
Deferred income tax liabilities
Net
Unrecognized deferred income tax asset
Net deferred income tax assets (liabilities)
Table of Contents
80
February 1,
February 2,
2020
$
2019
$
7,893
2,330
-
3,763
5
-
23,942
-
953
38,886
(9,444)
(109)
(9,553)
29,333
(29,333)
-
1,417
3,505
1,762
3,843
588
634
-
5,357
665
17,771
-
(212)
(212)
17,559
(17,559)
-
As at February 1, 2020, the Company’s Canadian operations have accumulated losses amounting to $19.5 million
[February 2, 2019 — $11.9 million; February 3, 2018 — nil], which expire during the year 2040. As at February 1, 2020, the
Company’s U.S. subsidiary has accumulated losses amounting to US$17.2 million [February 2, 2019 — US$14.0 million;
February 3, 2018 — US$14.2 million], which expire during the years 2033 to 2040.
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 $29,333 was recorded against the net deferred income tax asset.
During the year, $3,542 of previously unrecognized deferred tax assets were written off to retained earnings as a result of
the adoption of IFRS 16.
The changes in the net deferred income tax asset were as follows for the fiscal year:
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
Right of use asset
Lease liabities
Lease inducement
Unrecognized deferred income tax asset
Provisions for onerous contracts
Other
Deferred income tax assets net, end of year
81
Table of Contents
18. SELLING, GENERAL AND ADMINISTRATION EXPENSES
Included in selling, general and administration expenses are the following expenses:
February 1,
February 2,
2020
$
2019
$
-
(1,762)
6,476
(1,175)
(80)
(583)
0
103
(9,444)
23,942
(634)
(11,774)
(5,357)
288
-
5,194
101
158
1,952
442
(609)
(62)
(99)
-
-
120
(7,770)
544
29
-
Wages, salaries and employee benefits
Marketing Expenses
Stores Supplies
Depreciation of property and equipment
Amortization of intangible assets
Amortization right-of-use asset
Loss on disposal of property and equipment
Impairment of property, equipment and right-of-use assets
Recovery of provision for onerous contracts
Stock-based compensation
Executive separation cost related to salary
Strategic review and proxy contest
ERP project termination
Other selling, general and administration
February 1,
For the year ended
February 2,
February 3,
2020
$
2019
$
2018
$
65,288
7,282
5,768
5,411
1,934
12,051
100
17,780
—
813
—
—
—
18,879
135,306
68,324
6,248
5,101
6,904
1,298
—
151
9,960
552
211
1,280
3,593
2,496
19,604
125,722
65,888
4,560
5,437
8,431
1,474
—
82
15,069
7,854
2,021
2,033
—
—
19,081
131,930
Table of Contents
19. EARNINGS PER SHARE
82
The following reflects the loss and share data used in the basic and diluted EPS computations:
Net loss for basic EPS
Weighted average number of shares outstanding:
Basic and fully diluted
Net loss per share:
Basic and fully diluted
February 1,
For the year ended
February 2,
February 3,
2020
$
(31,197)
2019
$
(33,539)
2018
$
(28,501)
26,056,332
25,967,836
25,716,186
(1.20)
(1.29)
(1.11)
For the years ended February 1, 2020, February 2, 2019, and February 3, 2018, 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
Loan to a Company controlled by one of the Company’s executive employees
During the second quarter of 2019, the Company entered into a secured loan agreement with Oink Oink Candy Inc., doing
business as “Squish”, as borrower, and Rainy Day Investments Ltd. (“RDI”), as guarantor pursuant to which the Company agreed
to lend to Squish an amount of up to $4 million, amended on September 13, 2019 to reflect a maximum amount available under
the facility of $2.0 million. RDI has guaranteed all of Squish’s obligations to the Company and, as security in full for the
guarantee, has given a movable hypothec (or lien) in favour of the Company on its shares of DAVIDsTEA. Squish is a company
controlled by Sarah Segal, an officer of DAVIDsTEA. RDI, the principal shareholder of DAVIDsTEA, is controlled by Herschel
Segal, Executive Chairman, Interim Chief Executive Officer and a director of DAVIDsTEA. The Company and Squish
previously entered into a Collaboration and Shared Services Agreement pursuant to which they collaborate on and share various
services and infrastructure.
As of February 1, 2020, $2.0 million was outstanding under the agreement at an effective interest rate of 5%. Subsequent
to year-end, the $2.0 million loan and outstanding interest were fully repaid.
Other 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 1, 2020, the Company purchased merchandise for resale from a company controlled by
one of its executive employees amounting to $124 [February 2, 2019 — $241; February 3, 2018 — 87]. As of February 1, 2020,
an amount of $48 was outstanding and presented in Trade and other payables.
The Company also provided infrastructure and administrative services of $312 [February 2, 2019 — nil; February 3, 2018
— nil] to a company controlled by one of its executive employees. As of February 1, 2020, the amount of $312 was outstanding
and presented in Accounts and other receivables. Subsequent to year-end, the amount was fully paid.
During the year-ended February 1, 2020, the Company purchased perpetual license rights to a reporting data model and
associated intellectual property for $200 [February 2, 2019 — nil] and spent $237 [February 2, 2019 — nil; February 2018 —
nil] for consulting services from a related party of the principal shareholder. As of February 1, 2020, an amount of $28 was
outstanding and presented in Trade and other payables.
Table of Contents
83
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:
Wages, salaries ,bonus and director fees
Termination benefits
Stock-based compensation
Total compensation earned by key management personnel
21. SEGMENT INFORMATION
February 1,
For the year ended
February 2,
February 3,
2020
$
2019
$
2018
$
2,784
110
669
3,563
2,706
1,025
101
3,832
4,071
1485
1,809
7,365
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
Table of Contents
February 1,
For the year ended
February 2,
February 3,
2020
$
148,846
34,003
13,613
196,462
2019
$
152,761
44,436
15,556
212,753
2018
$
156,125
49,470
18,420
224,015
84
Property and equipment, right-of-use assets and intangible assets by country are as follows:
Canada
US
Total
February 1,
February 2,
February 3,
2020 (1)
$
2019
$
52,116
7,042
59,158
27,996
1,470
29,466
2018
$
37,234
3,763
40,997
(1) Includes right-of-use assets of $35,082 as a result of the adoption of IFRS 16 on February 3, 2019. Refer to Note 4.
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, equipment and right-of-use assets
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
Table of Contents
85
Sales
Cost of sales
Gross profit
Selling, general and administration expenses (allocated)
Impairment of property, equipment and right-of-use assets
Impact of onerous contracts
Results from operating activities before corporate expenses
Selling, general and administration expenses (non-allocated)
Results from operating activities
Finance costs
Finance income
Canada
$
152,892
68,958
83,934
65,536
12,087
6,311
Canada
$
169,430
89,604
79,826
57,901
7,720
2,034
12,171
For the year
ended
February 1,
2020
US
$
43,570
18,928
24,642
19,520
5,693
(571)
Consolidated
$
196,462
87,886
108,576
85,056
17,780
5,740
32,470
(26,730)
6,751
(784)
(32,697)
For the year
ended
February 2,
2019
US
$
43,323
25,170
18,153
18,175
2,240
(1,482)
(780)
Consolidated
$
212,753
114,774
97,979
76,076
9,960
552
11,391
39,134
(27,743)
1,614
(700)
Loss before income taxes
(28,657)
Canada
$
185,287
93,383
91,904
54,884
5,114
1,752
30,154
Sales
Cost of sales
Gross profit
Selling, general and administration expenses (allocated)
Impairment of property, equipment and right-of-use assets
Impact of 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
Table of Contents
22. FINANCIAL RISK MANAGEMENT
86
For the year
ended
February 3,
2018
US
$
38,728
23,389
15,339
18,302
9,955
6,102
(19,020)
Consolidated
$
224,015
116,772
107,243
73,186
15,069
7,854
11,134
35,821
(24,687)
2,371
(567)
(26,491)
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
$169.
The Company’s foreign exchange exposure is as follows:
Cash
Accounts receivable
Accounts payable
February 1,
February 2,
2020
US$
2019
US$
1,928
778
6,090
267
1,142
3,869
The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.
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, and the secured loan receivable from Squish.
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, lease and purchase obligations.
As at February 1, 2020, the Company had $46.3 million in cash.
The Company expects to finance its working capital needs and investments in infrastructure through cash flows from
operations and cash on hand. The Company expects that its trade and other payables, amounting to $20.4 million (2019 - $18.3
million), and it purchase obligations amounting to $11.5 million (2018 - $9.1 million), will be discharged within 90 days. Refer to
note 2 for details with respect to the going concern uncertainty.
Table of Contents
Credit Risk
87
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 receivables and derivative financial instruments. Accounts receivable primarily consists of receivables from retail customers
who pay by credit card, receivables from our wholesale channel sales, recoveries of credits from suppliers for returned or
damaged products, receivables from other companies for sales of products, gift cards and other services, and a loan made to a
Company controlled by one of the Company’s executive employees (“related party loan”). Credit card payments have minimal
credit risk and the limited number of corporate receivables is closely monitored. Subsequent to year end, we received all amounts
due under the related party loan. 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.
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
February 1,
February 2,
2020
$
46,338
22,142
68,480
2019
$
42,074
65,959
108,033
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 non‑cash working capital and transformative investments in
infrastructure and information technology.
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.
Table of Contents
24. GUARANTEES
88
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 1,
2020, 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.
25. SUBSEQUENT EVENTS
Subsequent to February 1, 2020, the COVID-19 pandemic and the closure of all of its stores has had a material adverse
impact on the Company’s business, liquidity, financial condition, and results of operations. The Company cannot predict whether,
when or the manner in which the conditions surrounding the COVID-19 pandemic will change including the timing of lifting any
restrictions or closure requirements, when its stores will reopen, staffing levels for reopened stores, and customer re-engagement
with its brand.
The preparation of the consolidated financial statements requires management to make judgements, estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures.
Areas of significant estimation with respect to future performance of the Company include primarily impairment testing of non-
financial assets, particularly cash flows generated by CGUs as a result of store closures, and the measurement of lease liabilities.
Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying
amount of assets or liabilities affected in future periods. The Company cannot estimate the financial effects of these events at this
time. Additional impacts to the business may arise that the Company is not aware of currently.
Subsequent to year-end and as of June 15, 2020, the Company has received notices of default for unpaid rents from 37
landlords representing 53 of its retail stores for which rent was not paid for the months of April, May and June as a result of the
closure of all of its retail locations as disclosed in note 2. We also received rent deferral notices from 13 landlords representing 60
of our retail stores. With regard both the defaulted leases and rent deferral notices, the Company has either determined to
terminate the lease or is in the process of discussing resolution of the current situation regarding rent payments with the
landlords. The Company can provide no assurances that an agreement or resolution regarding the defaulted leases will be reached
or any forbearance of its lease obligations will be provided regarding its other lease agreements.
In addition, subsequent to year end, the Company did not renew three store leases in Canada and exited one store early in
the US. As at June 15, 2020, the Company is in negotiations for the exit of eight additional stores
Table of Contents
89
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chairman and Interim Chief Executive Officer and Chief Financial Officer
and Chief Operating Officer, evaluated the effectiveness of our disclosure controls and procedures as of February 1, 2020. The
term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.
Based on assessment of our disclosure controls and procedures, as a result of the identification of a new material
weaknesses in connection with our non-financial asset impairment testing processes, as well as the material weakness identified
in the Company’s financial statement close process for the quarter ended November 2, 2019 related to accounting errors
identified in the assessment of impairment indicators upon the adoption of IFRS 16, Leases, as previously described in Part I,
Item 1A “Risk Factors”, our management concluded that our disclosure controls and procedures were not effective as of February
1, 2020.
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.
As previously described in Part I, Item 1A “Risk Factors,” we have identified two material weaknesses in our internal
controls.
The most recently identified material weakness relates to the Company’s process for evaluating and testing non-financial
assets for impairment in connection with the review over the projected financial information used to support management’s
impairment of non-financial assets. There is a design deficiency as the controls were not sufficiently precise to ensure that the
estimates are reasonable and supportable considering the existence of both corroborative and contrary evidence and the related
application to the accounting literature. In light of the material weaknesses, management is taking steps to remediate the design
issues that contributed to these material weaknesses, these would include a more thorough documentation of the rationale for
significant assumptions and independent reviews of analysis and conclusions. We also anticipate that we will add additional staff
to assist with the implementation and reporting of non-routine financial reporting standards. We will continue evaluating what
additional steps will be necessary to remediate these material weaknesses.
The other material weakness, which was identified in the Company’s financial statement close process for the quarter
ended November 2, 2019 related to accounting errors identified in the assessment of impairment indicators upon the adoption of
IFRS 16, Leases. This material weakness was previously disclosed in the Company’s Form 10-Q for the fiscal quarter ended
November 2, 2019.
Although remedial efforts to address this material weakness have been undertaken, we are unable to conclude that this
control was operationally effective due to lack of sufficient extent of samples for testing.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of the Company’s annual or interim statements will not be prevented
or detected on a timely basis.
Management, with the participation of our Chairman and Interim Chief Executive Officer and Chief Financial Officer and
Chief Operating Officer, assessed our internal control over financial reporting as of February 1, 2020, 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 not effective as of February 1, 2020.
Changes in Internal Control over Financial Reporting
The COVID-19 pandemic could negatively affect our internal controls over financial reporting, including our ongoing
process of remediating the material weakness in our disclosure control and procedures, as a portion of our workforce is required
to work from home and standard processes are disrupted. New processes, procedures, and controls which may increase the
overall inherent risk in the business, may be required to ensure an effective control environment.
With the exception of the material weaknesses identified and related remediation efforts, there were no other changes in
our internal control over financial reporting during our fiscal quarter ended February 1, 2020 that materially affected, or were
reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
Table of Contents
90
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 June 10, 2020, 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
Age
89
55
35
59
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
Susan L. Burkman
Emilia Di Raddo, CPA, CA
Ludwig Max Fischer, Ph.D
Peter Robinson
66
62
69
67
Director
Director
Director
Director
Herschel Segal, Interim Chief Executive Officer and Chairman of the Board. Mr. Segal, 89, 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 Chateau 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 Chateau 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, 55, joined
the Company on December 10, 2018 as Chief Financial Officer and Corporate Secretary and on April 26, 2019 assumed
responsibilities 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, 35, 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 and August 21, 2018 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.
Table of Contents
91
Pat De Marco, CPA, CA, Lead Director (June 14, 2018 to present). Mr. De Marco, 59, 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, 66, 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.
Emilia Di Raddo, CPA, CA, Director (2014 to present). Ms. Di Raddo, 62, has been a director of the Company since
2012, except between January 2013 and March 2014. She has been the President of Le Chateau 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.
Ludwig Max Fischer, Ph.D, Director (June 14, 2018 to present). Mr. Fischer, 69, 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 British Columbia, Canada. Mr. Fischer is not
standing for re-election and his term will end at the annual meeting of shareholders.
Peter Robinson, Director (June 14, 2018 to present). Mr. Robinson, 67, 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
Table of Contents
Function of Audit Committee
92
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, but are not limited to:
·
·
·
·
·
·
·
·
·
·
Assisting the Board in fulfilling its oversight responsibilities as they relate to the Company’s accounting policies and internal controls,
financial reporting practices and legal and regulatory compliance;
reviewing the Company’s compliance with certain legal and regulatory requirements;
overseeing the process by which management shall design, implement, amend, maintain, and enforce a comprehensive system of financial
controls (including the right internal and external people and resources, policies, processes and enforcement) and reviewing our financial
reporting processes and internal controls;
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;
discussing the Company’s major business, operational, and financial risk exposures and the guidelines, policies and practices regarding risk
assessment and risk management, including derivative policies, insurance programs and steps management has taken to monitor and control
major business, operational and financial risks;
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 Audit Committee;
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.
Table of Contents
Audit Committee Financial Experts
93
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 1, 2020 and Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
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 1, 2020 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
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 six directors, five of whom are non-employee directors. Herschel Segal, Pat De Marco,
Emilia Di Raddo, Ludwig Max Fischer and Peter Robinson were initially elected as directors at the annual meeting of
shareholders held on June 14, 2018. Susan L. Burkman was appointed as a director on August 23, 2018. All six directors were
elected at the Company’s annual and special meeting of shareholders held on July 10, 2019. 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.
Table of Contents
94
Four of the six 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, Pat De Marco, Ludwig Max
Fischer and Peter Robinson are considered independent, while 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 the Company’s 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 the Company’s policy, each director is required to disclose to the Board any
potential conflict of interest he or she may have in a matter before the Board or a committee thereof at the beginning of the Board
or committee meeting. A director who is in a potential conflict of interest must not attend any part of the meeting during which
the matter is discussed or participate in a vote on such matter.
Formal Position Descriptions
The Board has not adopted formal position descriptions for the Chairman of the Board or the Board Committee Chairs.
The Board has adopted a formal position description the CEO.
Chairman of the Board
The Board of Directors has not adopted a written position description for the Chairman of the Board of Directors. The
primary responsibilities of the Chairman of the Board are to provide leadership to the Board in order to enhance Board
effectiveness and to oversee that the relationship among the Board, management, shareholders and other stakeholders is effective,
efficient and further to the best interests of the Company, chair meetings of the Board of Directors, and ensure Board meetings
function appropriately.
Table of Contents
Committee Chairs
95
The Board of Directors has not adopted a written position description for the Chair of each Board Committee. The primary
role and responsibility of the Chair of each Committee of the Board of Directors is to: (i) in general, ensure that the Committee
fulfills its mandate, as determined by the Board of Directors; (ii) chair meetings of the Committee; (iii) report thereon to the
Board of Directors; and (iv) act as liaison between the Committee and the Board of Directors and, if necessary, management of
the Company.
Chief Executive Officer
The Board of Directors has adopted a written position description for the CEO. The position description provides that the
CEO will report to the Board of Directors and that the prime responsibility of the CEO is to lead the Company by providing a
strategic direction that includes the development and implementation of plans, policies, strategies and budgets for the growth and
profitable operation of the Company. In fulfilling such responsibilities, the Chief Executive Officer will, among other things: (i)
see that the day-to-day business affairs of the Company are appropriately managed; (ii) work with key stakeholders to develop
the Company’s strategic plan that is aligned with the Board of Directors; (iii) recommend to the Board of Directors and,
following their approval by the Board, consistently strive to achieve the Company’s financial and operating goals and objectives;
(iv) formulate policies and proposed actions and present to the Board of Directors for approval the long-term business plan,
strategies and policies that lead to the creation of shareholder value; (v) develop and recommend to the Board of Directors annual
business plans and budgets that support the Company’s long-term business plan and strategies; and (f) oversee the Company’s
achievement and maintenance of a satisfactory competitive position within its industry.
The Human Resources and Compensation Committee (“HRCC”) reviews and approves corporate goals and objectives
relating to the compensation of the CEO, evaluates the performance of the CEO in light of those goals and objectives and
determines and approves the compensation of the CEO based on such evaluation.
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 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 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 members of the HRCC are Ludwig Max Fischer (chair), Susan
L. Burkman 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 primary purpose of the CGNC is to assist the Board of Directors in fulfilling its corporate governance and oversight
responsibilities in connection with; monitoring the composition and performance of the Board and its committees, developing
and implementing a Board succession planning process, overseeing corporate governance matters, and evaluating the
performance of the Governance Committee.
The three members of the CGNC are Peter Robinson (chair), Pat De Marco and Ludwig Max 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.
Table of Contents
Board and Committee Meetings
96
During the period from February 2, 2019 to the date hereof, inclusively, the Board of Directors held ten meetings, the
Audit Committee held four meetings, the HRCC held four meetings and the CGNC held four meetings. The Company does not
have an Executive Committee. Attendance of directors at the meetings is set out in the table below.
Board Meetings
Audit Committee
Meetings
HRCC Meetings
CGNC Meetings
Hershel Segal
Susan L. Burkman
10/10
10/10
––
7/7
––
––
––
––
Total
10/10
17/17
Anne Darche(1)
Pat De Marco
Emilia Di Raddo
Ludwig Max Fischer
4/5
10/10
10/10
10/10
Peter Robinson
_________________
(1) Resigned as a director on September 11, 2019.
10/10
In Camera Sessions
––
7/7
––
––
7/7
3/4
––
7/7
7/7
––
––
5/5
––
5/5
5/5
7/9
22/22
17/17
22/22
22/22
To enhance the independent judgment of the Board of Directors, the independent members of the Board of Directors may
meet in the absence of the non-independent directors and members of management. Such meetings are chaired by the Lead
Director. 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.
Other Directorships
The following directors are currently directors of other issuers that are reporting issuers (or the equivalent) in a jurisdiction
of Canada or a foreign jurisdiction:
Name of Director
Herschel Segal
Emilia Di Raddo
Issuer
Le Chateau Inc.
Le Chateau Inc.
Ethical Business Conduct
The Company’s Code of Ethics for Senior Managers and Financial Officers (the “Code of Ethics”) is applicable to all of
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.
Table of Contents
97
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 directed to our Head of Human Resources
while any issue of misconduct or fraud is directed to the Chair of the Audit Committee who is responsible to oversee the
whistleblowing procedures.
Board Mandate
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 the Company’s Investor Relations website at http://ir.davidstea.com under
“Corporate Governance” and on SEDAR at www.sedar.com. As set out in the Charter of the Board of Directors, the
responsibilities of the Board include the following:
(i)
adopting a strategic planning process, and approving, on at least an annual basis, the principal business objectives for the Company;
(ii)
identifying the principal risks applicable to the Company, ensuring that procedures are in place for the management of those risks with a view
to the long-term viability of the Company and its assets, and conducting an annual review of such risks;
(iii)
overseeing the Company’s corporate governance policies and practices and their disclosure in public disclosure documents;
(iv)
adopting a Code of Business Ethics and Conduct applicable to directors, officers and employees of the Company;
(v)
(vi)
satisfying itself of the integrity of the Chief Executive Officer and the other executive officers and ensuring that they create a culture of
integrity throughout the organization;
appointing the Chief Executive Officer and, together with the Chief Executive Officer, developing the corporate goals and objectives that the
Chief Executive Officer is responsible for meeting, and reviewing the performance of the Chief Executive Officer against such goals and
objectives;
(vii)
reviewing and approving the Company’s financial statements, management’s discussion and analysis, earnings press releases and other
disclosure material filed with the securities commissions;
(viii) reviewing and approving annual operating plans, budgets and significant capital allocations and expenditures and periodically receive an
analysis of actual results versus approved budgets;
(ix)
(x)
serving as an advisor to management and reviewing and approving major business decisions including material transactions outside the
ordinary course of business and those matters which the Board is required to approve under the Company’s governing statute, including the
payment of dividends, the issuance, purchase and redemption of securities, and acquisitions and dispositions of material capital assets;
reviewing and monitoring, with the assistance of the Audit Committee (a) the adequacy and effectiveness of the Company’s internal controls
and management information systems over financial reporting, including significant deficiencies and significant changes in internal controls,
(b) the quality and integrity of the Company’s external financial reporting processes, and (c) related procedures and reporting; and
(xi)
overseeing, in consultation with management, compliance with disclosure requirements applicable to the Company, including disclosure of
material information in accordance with applicable securities laws and stock exchange rules.
Table of Contents
Board, Committees and Directors Performance Assessment
98
On an annual basis, the CGNC 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 results
of the questionnaires are compiled by the CGNC on a confidential basis to encourage full and frank commentary. The CGNC can
meet with Board members individually in order to discuss the questionnaires. 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 to submit such matter to the CGNC.
Based on the outcome of the discussion, the CGNC 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 Company’s 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.
Term Limits
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, Aboriginal peoples, persons with disabilities and members of visible minorities 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.
99
Table of Contents
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.
Table of Contents
ITEM 11. EXECUTIVE COMPENSATION
100
This section discusses the material components of the executive compensation program for our executive officers who are
named in the “2019 Summary Compensation Table” below. In Fiscal 2019, our “Named Executive Officers” and their positions
were as follows:
·
·
·
Herschel Segal, Interim Chief Executive Officer and Chairman of the Board
Frank Zitella, Chief Financial Officer and Chief Operating Officer
Sarah Segal, Chief Brand Officer
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 this Form 10-K “Cautionary Note Regarding
Forward-Looking Statements”.
Executive and Director Compensation
Processes and Procedures for Compensation Decisions
The HRCC is responsible for the executive compensation programs for our executive officers and reports to our Board on
its discussions, decisions and other actions. The 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 shares of the Company.
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.
Table of Contents
Short-Term Incentive Plan
101
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 2019, 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 1, 2020 the Company did not meet the annual
incentive program targets.
Mid- and Long-Term Incentive Plans
In 2015, 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 2019 to executive officers were 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 2019 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.
Name
Herschel Segal
Frank Zitella
Sarah Segal
Nathalie Binda
Martin Hillcoat
Target
Value
Maximum
Value
(% of salary)
75%
40%
40%
25%
25%
150%
80%
80%
50%
50%
Table of Contents
Summary Compensation Table
102
The following table illustrates the compensation paid to the Named Executive Officers for the last two completed fiscal years, as
applicable.
Non-equity
incentive
plan compensation
All
Annual
Long-
term
other
Stock Option incentive incentive compensation
Salary Bonus Awards(5) Awards(6) plan(7)
($)
- 240,000
Year
2019 400,000
-
($)
($)
($)
($)
-
2018
250,000
-
-
-
-
plan
($)
(8)
($)
-
-
Total
Compensation
($)
640,000
-
-
250,000
2019 382,981
- 160,000
-
-
-
1,154
544,135
Name and principal position
Herschel Segal (1)
Interim Chief Executive Officer
and Chairman of the Board
Frank Zitella (2)
Chief Financial and Operating
Officer
2018
50,000
-
-
Sarah Segal (3)
Chief Brand Officer
2019 230,000
2018 230,000
-
-
92,000
72,661
Nathalie Binda (4)
Former VP Marketing &
Ecommerce
2019 231,241
5,000
53,750
2018
83,519
10,000
-
Martin Hillcoat (5)
VP Supply Chain
2019 215,000
5,000
2018 86,000 10,000
53,750
-
Notes:
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
50,000
322,000
302,661
289,991
93,519
273,750
96,000
(1) Herschel Segal was appointed Interim Chief Executive Officer and Chairman of the Board on June 14, 2018.
(2)
(3)
Frank Zitella was appointed Chief Financial Officer and Corporate Secretary on December 10, 2018 and Chief Operating Officer on April 26,
2019.
Sarah Segal was appointed Chief Brand Officer on August 21, 2018 and prior thereto was the Company’s VP Product Development and
Innovation.
(4) Nathalie Binda was appointed VP Marketing & Ecommerce on September 7, 2018 and held such position until January 22, 2020.
(5) Martin Hillcoat was appointed VP Supply Chain on September 4, 2018.
(6) Amounts shown reflect the aggregate grant date fair market value of time-vesting RSUs granted to Named Executive Officers on June 20, 2019
and April 19, 2018, 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 fiscal year ended February 1,
2020.
(7) No option awards were granted during the last two fiscal years.
(8) Represents the awards earned during the year under the Short-Term Annual Incentive Program.
(9)
The amount shown represents professional association fees paid for Mr. Zitella.
103
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 1, 2020.
Name
Herschel Segal (1)
Interim Chief Executive Officer and Chairman of the Board
Share Awards
Number of
shares
or units
of
stock that
have not
vested(6)
(#)
137,657
Market
value of
shares or
units of
stock that
have not
vested(7)
($)
198,226
Grant
Date
6/20/2019
Frank Zitella (2)
6/20/2019
91,772
132,152
Chief Financial and Operating Officer
Sarah Segal (3)
Chief Brand Officer
Nathalie Binda (4)
Former VP Marketing & Ecommerce
Martin Hillcoat (5)
VP Supply Chain
Notes:
6/20/2019
4/19/2018
52,769
12,540
65,309
75,987
18,058
94,045
-
-
-
7/12/2019
26,092
37,572
(1) Herschel Segal was appointed Interim Chief Executive Officer and Chairman of the Board on June 14, 2018.
(2)
(3)
Frank Zitella was appointed Chief Financial Officer and Corporate Secretary on December 10, 2018 and Chief Operating Officer on April 26,
2019.
Sarah Segal was appointed Chief Brand Officer on August 21, 2018 and prior thereto was the Company’s VP Product Development and
Innovation.
(4) Nathalie Binda was appointed VP Marketing & Ecommerce on September 7, 2018 and held such position until January 22, 2020
(5) Martin Hillcoat was appointed VP Supply Chain on September 4, 2018.
(6) Unless terminated, forfeited, relinquished or expired earlier, one quarter of the RSUs will vest on each of the first two anniversaries of the grant
date and the remaining half of the RSUs will vest on the third anniversary of the grant 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.
(7)
The market value is calculated by multiplying the closing price of the Shares on the NASDAQ Global Market on February 1, 2020, being the
last day of the fiscal year, which was US$1.44 per Share, by the number of RSUs that had not vested as of such date.
Table of Contents
Equity Compensation Plan Information
104
The table below illustrates the status of the shares reserved for issuance under the Company’s equity-based incentive plans.
(a)
Number
of
Securities
to be
Issued
Upon
Exercise
of
Options
(1)
(#)
Weighted
Average
Exercise
Price of
Outstanding
Options
$
Weighted
Average
Remaining
Term of
Outstanding
Options
(years)
(b)
Number
of
Securities
to be
Issued
Upon
Vesting of
Restricted
Stock
Units(#)
Weighted
Average
Fair
Value
Price of
Restricted
Stock
Units
Number of
Securities
Remaining
Available for
Future
Issuance
Under Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column
(a,b)) (#)
18,000
58,350
-
76,350
2.66
8.04
1.46
-
4.05
749,522
1.64
1,823,962
-
749,522
-
1,823,962
Plan Category
Equity compensation
plans approved by
security holders
Plan Name
Amended and Restated Equity
Incentive Plan ("Equity Plan")(1)
2015 Omnibus Equity Incentive
Plan (2)
Equity compensation
plans not approved by
security holders
Total
n/a
(1)
(2)
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.
The maximum number of the Company’s common shares that are available for issuance under the 2015 Omnibus Plan increased by 1,500,000
shares to 2,940,000 shares in the current year
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.
105
Table of Contents
Frank Zitella
Voluntary Resignation
The Company has entered into an employment agreement with Frank Zitella, Chief Financial Officer and Chief Operating
Officer of the Company. If Mr. Zitella remains a full-time employee of the Company for a period of six months following a
change of control of the Company, as that term is defined in his employment agreement, and he resigns within a period of 15
days thereafter, Mr. Zitella will be entitled to an amount equal to a prorated portion of the performance bonus (if any) which
becomes payable for the year during which the termination of employment occurs, and payment of any awarded but unpaid
performance bonus for the year preceding the year during which the termination of employment occurs. In addition, any stock
options, RSUs, stock units or other long-term incentive grants held by Mr. Zitella will be deemed vested on the date of his
resignation.
Within a six-month period after the appointment of any new Chief Executive Officer, Mr. Zitella may resign at his
discretion and be entitled to an amount equal to a prorated portion of the performance bonus (if any) which becomes payable for
the year during which the resignation occurs, and payment of any awarded but unpaid performance bonus for the year preceding
the year during which the resignation occurs. In addition, any stock options, RSUs, stock units or other long-term incentive grants
held by Mr. Zitella will be deemed vested on the date of his resignation.
Termination Without Cause
Mr. Zitella’s employment agreement provides that if his employment is terminated by the Company without cause, Mr.
Zitella will be entitled to a severance payment equivalent to twelve months of base salary, an amount equal to a prorated portion
of the performance bonus (if any) which becomes payable for the year during which the termination of employment occurs, and
payment of any awarded but unpaid performance bonus for the year preceding the year during which the termination of
employment occurs. In addition, any stock options, RSUs, stock units or other long-term incentive grants held by Mr. Zitella will
be deemed vested on the date of his termination.
Termination Due to 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. 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.
Termination Due to Disability
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. 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.
Retirement
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. 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.
Table of Contents
Involuntary Termination
106
Unvested options granted under the Equity Incentive Plan will be forfeited upon an involuntary termination of
employment by the Company while vested options will remain exercisable for a period of 30 days. Under the 2015 Omnibus
Plan, upon an involuntary termination of employment by the Company, options will be forfeited to the extent then unvested and
vested options will remain exercisable until the earlier of the one-year anniversary of the participant’s termination of service or
the award’s normal expiration date. RSUs and performance awards will be deemed vested pro rata based on the number of days
in a specified period (i.e. the period from the date of grant to the third anniversary of the grant date) that have elapsed from the
date of grant to the six-month anniversary of the date of the termination of employment, with the vesting of performance awards
to be subject to performance assessed as of the date of such termination of employment.
Change in Control
Under the Equity Incentive Plan, upon the occurrence of a trigger event (as defined in the Equity Plan, generally a
liquidation or change of control), participants holding vested options or options that would vest upon the completion of the
trigger event will have the right to exercise such options on a basis that allows the participants to tender the common shares
delivered upon such exercise in the transaction and any options not so exercised will expire and be cancelled upon the completion
of the trigger event. In the event of a trigger event in which the purchase price in the transaction will be paid in cash, in lieu of a
participant exercising his or her vested options prior to the trigger event, the participant may require us to purchase his or her
options for a purchase price per common share equal to the purchase price per common share in the transaction times the number
of common shares subject to the option, minus the aggregate exercise price for such common shares, subject to the completion of
the trigger event.
Under the 2015 Omnibus Plan, upon a termination by the Company other than for Cause within 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.
Table of Contents
Compensation of Directors
107
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, directors received the cash and equity compensation set forth below. At a meeting of the
Board of Directors held on April 17, 2020, the directors agreed to a reduction of 20% in all annual retainers for the balance of
2020.
Board Chair
Annual retainer
Annual target equity grant
Board member
Annual retainer
Annual target equity grant
Board meeting fees
Lead Director
Annual retainer
Audit Committee Chair
Additional annual retainer
Audit Committee meeting fees
$125,000
15,000 RSUs or DSUs, at the option of the director
$50,000
7,500 RSUs or DSUs, at the option of the director
$1,000 for attendance in person and $500 for teleconference
$25,000
$15,000 minimum
$1,000 for attendance in person and $500 for teleconference
Human Resources and Compensation Committee Chair
Additional annual retainer
$10,000 minimum
Human Resources and Compensation Committee meeting fees
$1,000 for attendance in person and $500 for teleconference
Corporate Governance and Nominating Committee Chair
Additional annual retainer
$10,000 minimum
Corporate Governance and Nominating Committee meeting fees
$1,000 for attendance in person and $500 for teleconference
Under the Corporation’s director compensation policy, the Board of Directors retains discretion with respect to annual
retainers, equity grants, and meeting fees. Annual retainer and meeting fees are paid in quarterly cash payments. Equity grants
generally will be made in the form of RSUs or DSUs granted under the 2015 Omnibus Plan and will generally vest in full on the
first anniversary of the grant date. At a meeting of the Board of Directors held on April 17, 2020, the directors agreed to a
reduction of 20% in all annual retainers for the balance of 2020.
Table of Contents
Director Compensation Table
108
The following table sets out information concerning all amounts of compensation provided to the directors of the
Company for their services in that capacity for the fiscal year ended February 1, 2020.
Change in
pension
value and
Fees
earned
or paid
Stock Option compensation compensation
Non-equity
incentive
non-
qualified
deferred
plan
($)
earnings
($)
All
other
compensation
($)
Total
($)
Name
Herschel Segal
Susan L. Burkman
Anne Darche(1)
Pat De Marco
Emilia Di Raddo
Ludwig Max Fischer
Peter Robinson
Notes:
in cash awards awards
($)
($)
143,500
64,000
38,278
108,000
59,000
76,000
75,500
($)
26,152
13,076
13,076
13,076
13,076
13,076
13,076
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- 169,652
-
77,076
51,354
-
- 121,076
72,076
-
89,076
-
88,576
-
(1) Resigned as a director on September 11, 2019
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
aircraft.
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 1, 2020 for our directors. All share based awards that vested in Fiscal 2019 are disclosed in U.S. dollars.
Name
Herschel Segal
Susan L. Burkman
Anne Darche
Pat De Marco
Emilia Di Raddo
Ludwig Max Fischer
Peter Robinson
Notes:
Non-equity
incentive
plan
compensation
-
Option-based Share-based
awards -
awards -
Value vested Value vested Value earned
during
the year
($)
during
the year(1)
($)
during
the year
($)
-
-
-
-
-
-
-
19,950
12,737
13,650
9,975
9,975
9,975
9,975
-
-
-
-
-
-
-
(1) The directors do not hold any stock options. Anne Darche, a former director, did not hold any stock options.
Indebtedness of Directors and Officers
As of June 1, 2020, 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.
109
Table of Contents
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table and accompanying footnotes set forth information relating to the beneficial ownership of our common
shares as of June 1, 2020 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.
Each shareholder’s percentage ownership is based on 26,099,477 common shares outstanding as of June 1, 2020.
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 June 1, 2020 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 June 1, 2020,
1,485 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.
Table of Contents
Transfer Agent and Registrar
110
The Company’s transfer agent and registrar is AST Trust Company (Canada), Montréal.
Name of beneficial owner
Shares Beneficially Owned
as at June 1, 2020
Number of
shares
(#)
Percentage
of shares
(%)
Beneficial Owners of more than 5% of our common shares and/or selling shareholders:
Rainy Day Investments Ltd.(1)
12,012,538
46.03%
Named Executive Officers and Directors:
Herschel Segal(2)
Frank Zitella(3)
Sarah Segal(4)
Pat De Marco(5)
Emilia Di Raddo(6)
Ludwig Max Fischer(7)
Peter Robinson(8)
Susan L. Burkman(9)
All executive officers and directors as a group
Notes:
*
represents less than 1%.
176,681
91,772
67,459
15,000
28,743
15,000
15,000
12,001
421,656
*
*
*
*
*
*
*
*
*
(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 Street, Mount Royal, Québec, Canada, H4P 1N1.
(2) Herschel Segal holds 37,500 DSUs, 137,658 RSUs and 1,523 common shares.
(3)
Frank Zitella holds 91,772 RSUs.
(4)
Sarah Segal holds 7,500 DSUs and 59,959 RSUs.
(5)
Pat De Marco holds 15,000 DSUs.
(6)
Emilia Di Raddo holds 15,000 RSUs and 13,743 common shares.
(7)
Ludwig Max Fischer also holds 7,500 DSUs and 7,500 RSUs.
(8)
Peter Robinson holds 15,000 RSUs.
(9)
Susan L. Burkman holds 7,500 DSUs and 4,501 common shares.
Table of Contents
111
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.
Related party transactions are fully described in Note 20 – Related party transactions, in this Annual Report and excerpts
included herein.
Loan to a company controlled by one of the Company’s executive employees
During the second quarter of 2019, the Company entered into a loan agreement with Oink Oink Candy Inc., doing
business as “Squish”, as borrower, and Rainy Day, as guarantor, pursuant to which the Company agreed to lend to Squish an
amount of up to $4.0 million. The loan agreement was amended on September 13, 2019 to reflect a maximum amount of $2.0
million. The interest rate on the loan was equal to the prime rate of the Bank of Montreal plus 1%, and was payable monthly.
Rainy Day guaranteed all of Squish’s obligations to the Company under the loan agreement and, as security in full for the
guarantee, granted a movable hypothec (or lien) in favour of the Company on its shares of the Company. Squish is a company
controlled by Sarah Segal, an officer of DAVIDsTEA. Rainy Day, the principal shareholder of DAVIDsTEA, is controlled by
Herschel Segal, Chairman, Interim Chief Executive Officer and a director of DAVIDsTEA. The Company and Squish previously
entered into a Collaboration and Shared Services Agreement pursuant to which they collaborate on and share various services and
infrastructure.
As of February 1, 2020, $2.0 million was outstanding under the agreement at an effective interest rate of 5%. Subsequent
to year end, the loan in the amount of $2.0 million and outstanding interest thereon were repaid in full.
Purchase of merchandise for resale from a company controlled by an executive of the Company
During the year ended February 1, 2020, the Company purchased merchandise for resale from a company controlled by
one of its executive officers amounting to $124 [February 2, 2019 — $241; February 3, 2018 — 87]. As of February 1, 2020, an
amount of $48 was outstanding and presented in Trade and other payables.
Infrastructure and administrative services provided to a company controlled by an executive of the Company
The Company also provided infrastructure and administrative services of $312 [February 2, 2019 — nil; February 3, 2018
— nil] to a company controlled by one of its executive officers. As of February 1, 2020, the amount of $312 was outstanding and
presented in Accounts and other receivables. Subsequent to year end, the amount was fully paid.
Purchase of perpetual license rights to a reporting data model, associated intellectual property and consulting services
from a related party of the principal shareholder
During the year-ended February 1, 2020, the Company purchased a perpetual license rights to a reporting data model and
associated intellectual property for $200 [February 2, 2019 — nil] and spent $237 [February 2, 2019 — nil; February 2018 —
nil] for consulting services from a related party of the principal shareholder. As of February 1, 2020, an amount of $28 was
outstanding and presented in Trade and other payables.
Table of Contents
112
Director Independence
After giving effect to the resignation on September 11, 2019 of Anne Darche, four of our six directors that make up our
board of directors are considered “independent” pursuant to Section 1.4 of Québec Regulation 52-110 respecting Audit
Committees under Canadian securities laws and the NASDAQ rules. Under these rules, Susan L. Burkman, Pat De Marco,
Ludwig Max 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.
Family Relationships
Sarah Segal, Chief Branding Officer of DAVIDsTEA, is the daughter of Herschel Segal, who is the owner of Rainy Day.
Rainy Day owns approximately 46% of the outstanding shares of the Company. Mr. Segal is our Interim Chief Executive Officer
and Chairman of our Board of Directors.
Table of Contents
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
113
The following table sets out the aggregate fees billed to the Company for the fiscal years ended February 1, 2020 and
February 2, 2019 by EY:
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
All other fees (4)
Notes:
For the year ended
February 1,
February 2,
2020
$
2019
$
583,000
-
132,521
715,521
518,500
-
111,181
-
629,681
(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 2019 and Fiscal 2018 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.
Table of Contents
114
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 1, 2020, and February 2, 2019:
Consolidated Balance Sheets
For the years ended February 1, 2020, February 2, 2019, and February 3, 2018:
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.
Table of Contents
(a)(3) Exhibits
Exhibit
Number
115
Description of Document
3.1
3.2
4.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.24
10.25
10.26
23.1
31.1
31.2
32.1
32.2
Form of Amended and Restated Articles of Incorporation of DAVIDsTEA Inc.
Amended and Restated Bylaws of DAVIDsTEA Inc.
Description of Share Capital
Amended and Restated Equity Incentive Plan, as amended
2015 Omnibus Incentive Plan
Form of Nonstatutory Stock Option Award Agreement under 2015 Omnibus Incentive Plan
Form of Restricted Stock Unit Award Agreement Under 2015 Omnibus Incentive Plan
Form of Indemnification Agreement for Directors and Officers
Agreement of Lease between DAVIDsTEA Inc. and S. Rossy Investments Inc., dated July 22,
2013
Lease Agreement between DAVIDsTEA Inc. and Olymbec Development Inc. (f/k/a Olymbec
Development (2004) Inc.), dated April 28, 2010
First Addendum to Lease Agreement between DAVIDsTEA Inc. and Olymbec Development
Inc. (f/k/a Olymbec Development (2004) Inc.), dated January 19, 2011
Second Addendum to Lease Agreement between DAVIDsTEA Inc. and Olymbec Development
Inc. (f/k/a Olymbec Development (2004) Inc.), dated September 2, 2011
Third Amendment to Lease Agreement between DAVIDsTEA Inc. and Olymbec Development
Inc. (f/k/a Olymbec Development (2004) Inc.), dated February 20, 2014
Loan Agreement, effective May 7, 2019, as amended September 13, 2019, between
DAVIDsTEA Inc. and Oink Oink Candy Inc.
Incorporated by Reference
Exhibit
Filing Date
Number
5/18/2015 3.1
3.2
4/2/2015
4.1
5/2/2019
10.3
4/2/2015
10.14
4/2/2015
10.15
4/2/2015
10.16
4/2/2015
10.17
4/2/2015
10.41
4/2/2015
4/2/2015
10.42
4/2/2015
10.43
4/2/2015
10.44
4/2/2015
10.45
Form
F-1/A
F-1
10-K
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
F-1
8-K
9/17/2019 10.1
Movable Hypothec on Securities between DAVIDsTEA Inc. and Rainy Day Investments LTD.
8-K
9/17/2019 10.2
Collaboration and Shared Services Agreement, effective February 21, 2019, between
DAVIDsTEA Inc. and Oink Oink Candy Inc.
8-K
9/17/2019 10.3
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.
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
ITEM 16. FORM 10-K SUMMARY
None
Table of Contents
116
SIGNATURES
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
Filed
herewith
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: June 15, 2020
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/ Ludwig Max Fischer
Name: Ludwig Max Fischer
/s/ Susan L. Burkman
Name: Susan L. Burkman
/s/ Peter Robinson
Name: Peter Robinson
Date: June 15, 2020
Interim Chief Executive Officer and Chairman of the
Board
(principal executive officer)
Chief Financial and Operating Officer
(principal financial officer and principal accounting
officer)
Director
Director
Director
Director
Director
117
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
June 15, 2020, with respect to the consolidated financial statements of DAVIDsTEA Inc. included in this Annual Report (Form
10-K) for the year ended February 1, 2020, filed with the Securities and Exchange Commission.
EXHIBIT 23.1
/s/ ERNST & YOUNG LLP1
Montreal, Canada
June 15, 2020
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: June 15, 2020
/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: June 15, 2020
/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 1, 2020 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 1, 2020 fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: June 15, 2020
/s/ Herschel Segal
By:
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 1, 2020 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 1, 2020 fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: June 15, 2020
/s/ Frank Zitella
By:
Name: Frank Zitella
Title: Chief Financial Officer